<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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) 523-4027
----------------------------------------------
(Registrant's telephone number, including area code)
None
---------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.625 par value 129,681,012
----------------------------- ----------------------------
Class Outstanding at July 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
---------------------------------------------------------------------------------------------------------------------
June 30 December 31
------------------------------ -------------
(Dollars in thousands)(Unaudited) 2000 1999 1999
-------------------------------------------------------------------------------------------------- -------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 844,741 $ 764,018 $ 956,077
Federal funds sold and securities
purchased under agreements to resell 250,891 228,032 279,537
--------------------------------------------------------------------------------------------------- -------------
Total cash and cash equivalents 1,095,632 992,050 1,235,614
--------------------------------------------------------------------------------------------------- -------------
Investment in bank time deposits 1,096 1,497 3,263
Capital markets securities inventory 374,211 461,674 147,041
Mortgage loans held for sale 2,950,272 2,868,885 2,049,945
Securities available for sale 2,069,712 1,965,893 2,332,356
Securities held to maturity (market value of
$652,941 at June 30, 2000; $855,060 at
June 30, 1999; and $734,853 at December 31, 1999) 702,144 871,283 768,936
Loans, net of unearned income 9,877,149 8,661,277 9,363,158
Less: Allowance for loan losses 142,722 138,595 139,603
--------------------------------------------------------------------------------------------------- -------------
Total net loans 9,734,427 8,522,682 9,223,555
--------------------------------------------------------------------------------------------------- -------------
Premises and equipment, net 293,219 297,121 305,519
Real estate acquired by foreclosure 17,877 16,968 17,870
Mortgage servicing rights, net 844,317 898,428 826,210
Intangible assets, net 126,662 133,731 133,568
Capital markets receivables and other assets 1,595,047 1,593,438 1,329,513
--------------------------------------------------------------------------------------------------- -------------
TOTAL ASSETS $ 19,804,616 $ 18,623,650 $ 18,373,390
=================================================================================================== =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing $ 9,576,327 $ 8,633,781 $ 8,560,462
Noninterest-bearing 2,979,094 2,882,834 2,798,239
--------------------------------------------------------------------------------------------------- -------------
Total deposits 12,555,421 11,516,615 11,358,701
--------------------------------------------------------------------------------------------------- -------------
Federal funds purchased and securities
sold under agreements to repurchase 3,217,788 2,228,111 2,856,282
Commercial paper and other short-term borrowings 1,149,036 1,736,261 1,550,229
Capital markets payables and other liabilities 1,120,789 1,521,718 908,048
Term borrowings 359,830 326,860 358,663
--------------------------------------------------------------------------------------------------- -------------
Total liabilities 18,402,864 17,329,565 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 - 130,232,828 at
June 30, 2000; 130,558,709 at June 30, 1999;
and 129,878,459 at December 31, 1999) 81,396 81,599 81,174
Capital surplus 140,854 147,284 130,636
Undivided profits 1,091,374 973,534 1,053,722
Accumulated other comprehensive income (10,712) (4,690) (21,752)
Deferred compensation on restricted stock incentive plans (4,884) (6,829) (5,674)
Deferred compensation obligation 3,724 3,187 3,361
--------------------------------------------------------------------------------------------------- -------------
Total shareholders' equity 1,301,752 1,194,085 1,241,467
--------------------------------------------------------------------------------------------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 19,804,616 $ 18,623,650 $ 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 Six Months Ended
June 30 June 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 $ 225,531 $ 181,582 $ 434,902 $ 362,830
Interest on investment securities:
Taxable 47,977 43,021 101,453 81,249
Tax-exempt 493 737 998 1,491
Interest on mortgage loans held for sale 57,869 55,377 103,237 124,112
Interest on capital markets securities inventory 6,790 8,614 12,732 17,311
Interest on other earning assets 5,459 3,846 10,096 6,450
----------------------------------------------------------------------------------------------------------------------------------
Total interest income 344,119 293,177 663,418 593,443
----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Savings 1,428 1,439 2,849 2,867
Checking interest and money market account 28,452 26,078 55,985 52,647
Certificates of deposit under $100,000 and other time 31,284 30,726 61,647 63,105
Certificates of deposit $100,000 and more 57,650 33,869 102,945 76,178
Interest on short-term borrowings 67,746 48,627 130,804 91,248
Interest on term borrowings 5,703 6,072 11,838 12,865
----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 192,263 146,811 366,068 298,910
----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 151,856 146,366 297,350 294,533
Provision for loan losses 17,077 14,979 32,574 29,805
----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 134,779 131,387 264,776 264,728
----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 134,196 175,696 234,068 344,474
Capital markets 18,973 30,177 43,337 74,565
Deposit transactions and cash management 29,731 26,608 56,144 49,824
Trust services and investment management 16,058 14,753 32,052 29,344
Merchant processing 12,310 14,216 23,340 24,925
Cardholder fees 6,942 6,052 13,975 11,014
Equity securities gains/(losses) -- -- 475 (8)
Debt securities gains/(losses) 84 (38) 1,210 (64)
All other income and commissions 32,532 26,757 68,622 46,710
----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 250,826 294,221 473,223 580,784
----------------------------------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 385,605 425,608 737,999 845,512
----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives and benefits 146,201 162,391 286,195 336,286
Amortization of mortgage servicing rights 17,954 29,937 36,383 60,835
Occupancy 21,721 17,051 40,108 32,702
Operations services 17,170 16,861 34,531 32,563
Equipment rentals, depreciation and maintenance 17,283 13,644 32,761 27,113
Communications and courier 12,277 12,670 24,296 25,037
Amortization of intangible assets 2,666 2,601 5,337 5,177
All other expense 66,381 75,536 134,921 147,775
----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 301,653 330,691 594,532 667,488
----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 83,952 94,917 143,467 178,024
Applicable income taxes 28,529 33,945 48,521 64,023
----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 55,423 $ 60,972 $ 94,946 $ 114,001
==================================================================================================================================
EARNINGS PER SHARE $ .42 $ .47 $ .73 $ .88
----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ .42 $ .45 $ .72 $ .85
----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 130,612,102 130,710,221 130,503,240 130,251,199
----------------------------------------------------------------------------------------------------------------------------------
<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 94,946 114,001
Other comprehensive income:
Unrealized market adjustments, net of tax and
reclassification adjustment 11,040 (17,562)
--------------------------------------------------------------------------------------------------
Comprehensive income 105,986 96,439
--------------------------------------------------------------------------------------------------
Cash dividends declared (57,294) (49,445)
Common stock issued:
Elliot Ames, Inc. acquisition 1,385 --
Cambridge Mortgage Company acquisition -- 704
For exercise of stock options 4,822 26,421
Tax benefit from non-qualified stock options -- 9,823
Common stock repurchased (5,474) --
Amortization on restricted stock incentive plans 1,019 994
Common stock adjustment McGuire Mortgage Co. acquisition -- (259)
Other 9,841 9,874
--------------------------------------------------------------------------------------------------
BALANCE, JUNE 30 $ 1,301,752 $ 1,194,085
==================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS First Tennessee National Corporation
---------------------------------------------------------------------------------------------
Six Months Ended June 30
----------------------------
(Dollars in thousands)(Unaudited) 2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 94,946 $ 114,001
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Provision for loan losses 32,574 29,805
Provision for deferred income tax 7,039 58,092
Depreciation and amortization of premises 29,187 24,107
and equipment
Amortization of mortgage servicing rights 36,383 60,835
Amortization of intangible assets 5,337 5,177
Net other amortization and accretion 21,994 28,154
Market value adjustment on foreclosed property 2,983 3,199
Loss on sale of securitized loans 1,315 --
Equity securities (gains)/losses (475) 8
Debt securities (gains)/losses (1,210) 64
Net (gains)/losses on disposal of fixed assets 140 (265)
Gain on sale of HomeBanc division (40,921) --
Net (increase)/decrease in:
Capital markets securities inventory (227,170) (103,370)
Mortgage loans held for sale (800,919) 1,358,558
Capital markets receivables (227,336) (312,480)
Interest receivable (3,515) 5,536
Other assets (121,608) (317,858)
Net increase/(decrease) in:
Capital markets payables 233,229 355,377
Interest payable (11,005) (15,790)
Other liabilities (18,564) 96,278
---------------------------------------------------------------------------------------------
Total adjustments (1,082,542) 1,275,427
---------------------------------------------------------------------------------------------
Net cash (used)/provided by operating activities (987,596) 1,389,428
---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Held to maturity securities:
Maturities 67,596 118,216
Purchases (500) --
Available for sale securities:
Sales 279,536 18,979
Maturities 282,099 415,320
Purchases (362,611) (609,411)
Premises and equipment:
Sales 4,171 2,831
Purchases (23,909) (64,964)
Proceeds from loan securitizations 184,379 --
Net increase in loans (733,511) (515,872)
Net (increase)/decrease in investment in bank time deposits 2,167 (286)
Divestiture of HomeBanc division 57,565 --
Acquisitions, net of cash and cash equivalents acquired -- (8,505)
---------------------------------------------------------------------------------------------
Net cash used by investing activities (243,018) (643,692)
---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Common stock:
Exercise of stock options 4,961 28,403
Cash dividends (57,142) (49,067)
Repurchase of shares (5,486) --
Term borrowings:
Issuance 51,200 2,421
Payments (50,185) (90,209)
Net increase/(decrease) in:
Deposits 1,186,971 (206,424)
Short-term borrowings (39,687) (374,930)
---------------------------------------------------------------------------------------------
Net cash (used)/provided by financing activities 1,090,632 (689,806)
---------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents (139,982) 55,930
---------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 1,235,614 936,120
---------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,095,632 $ 992,050
=============================================================================================
Total interest paid $ 376,812 $ 314,412
Total income taxes paid 82,239 18,026
---------------------------------------------------------------------------------------------
<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 six month periods ended June 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 derivative 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 derivative instrument's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative 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 derivatives' 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 adjustment
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 quantified the
effects SFAS 133 will have on its financial statements including the offsetting
gains or losses that may be recognized on hedged assets, liabilities and firm
commitments. Changes in the fair value of existing and future freestanding
derivative instruments, hedged assets, liabilities and firm commitments,
changes in the carrying value, including normal amortization, of derivative
instruments and hedged assets and liabilities, and changes in hedging practices
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. The impact of adopting SFAS 133 could be material at the
adoption date. 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.
<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 Six Months Ended
June 30 June 30
------------------------------ ------------------------------
(Dollars in thousands, except per share data) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE COMPUTATION:
Net income $ 55,423 $ 60,972 $ 94,946 $ 114,001
Weighted average shares outstanding 130,091,044 130,308,530 130,003,997 129,883,561
Shares attributable to deferred compensation 521,058 401,691 499,243 367,638
---------------------------------------------------------------------------------------------------------------------------------
Total weighted average shares per income statement 130,612,102 130,710,221 130,503,240 130,251,199
Earnings per share $ .42 $ .47 $ .73 $ .88
=================================================================================================================================
DILUTED EARNINGS PER SHARE COMPUTATION:
Net income $ 55,423 $ 60,972 $ 94,946 $ 114,001
Weighted average shares outstanding 130,612,102 130,710,221 130,503,240 130,251,199
Dilutive effect due to stock options 1,232,741 3,972,396 1,691,628 3,974,353
---------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding, as adjusted 131,844,843 134,682,617 132,194,868 134,225,552
Diluted earnings per share $ .42 $ .45 $ .72 $ .85
=================================================================================================================================
</TABLE>
<PAGE> 11
NOTE 4 - LOANS
The composition of the loan portfolio at June 30 is detailed below:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $ 4,653,494 $ 4,295,676
Consumer 3,484,894 2,954,702
Permanent mortgage 608,827 454,364
Credit card receivables 553,255 576,377
Real estate construction 550,117 351,651
Nonaccrual - Regional banking group 5,973 11,633
Nonaccrual - Mortgage banking 20,589 16,874
------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 9,877,149 8,661,277
Allowance for loan losses 142,722 138,595
------------------------------------------------------------------------------------------------------------------
Total net loans $ 9,734,427 $ 8,522,682
==================================================================================================================
</TABLE>
The following table presents information concerning nonperforming loans at
June 30:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans $ 6,337 $ 12,428
Other nonaccrual loans 20,225 16,079
------------------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 26,562 $ 28,507
==================================================================================================================
</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 Six Months Ended
June 30 June 30
----------------------- ---------------------------
(Dollars in thousands) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest on impaired loans $ 99 $ 32 $ 194 $ 315
Average balance of impaired loans 7,686 13,290 7,612 13,146
-------------------------------------------------------------------------------------------------------------------
</TABLE>
An allowance for loan losses is maintained for all impaired loans. Activity in
the allowance for loan losses related to non-impaired loans, impaired loans,
and for the total allowance for the six months ended June 30, 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 22,767 7,038 29,805
Securitization adjustment (1,790) -- (1,790)
Charge-offs 24,627 5,016 29,643
Less loan recoveries 3,298 912 4,210
------------------------------------------------------------------------------------------------------------------
Net charge-offs 21,329 4,104 25,433
------------------------------------------------------------------------------------------------------------------
Balance on June 30, 1999 $ 133,220 $ 5,375 $ 138,595
==================================================================================================================
Balance on December 31, 1999 $ 136,978 $ 2,625 $ 139,603
Provision for loan losses 30,770 1,804 32,574
Securitization adjustment (2,173) -- (2,173)
Charge-offs 28,323 3,086 31,409
Less loan recoveries 3,321 806 4,127
------------------------------------------------------------------------------------------------------------------
Net charge-offs 25,002 2,280 27,282
------------------------------------------------------------------------------------------------------------------
BALANCE ON June 30, 2000 $ 140,573 $ 2,149 $ 142,722
==================================================================================================================
</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 June 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>
2Q00
Interest income $ 253,799 $ 77,042 $ 9,124 $ 4,154 $ -- $ 344,119
Interest expense 118,180 64,968 8,614 501 -- 192,263
-------------------------------------------------------------------------------------------------------------------------
Net interest income 135,619 12,074 510 3,653 -- 151,856
Other revenues 64,640 137,367 19,727 29,008 84 250,826
Other expenses* 131,985 141,496 17,178 25,948 2,123 318,730
-------------------------------------------------------------------------------------------------------------------------
Pre-tax income 68,274 7,945 3,059 6,713 (2,039) 83,952
Income taxes 22,722 2,927 1,104 2,551 (775) 28,529
-------------------------------------------------------------------------------------------------------------------------
Net income $ 45,552 $ 5,018 $ 1,955 $ 4,162 $ (1,264) $ 55,423
=========================================================================================================================
Average assets $12,960,731 $ 5,415,659 $ 637,580 $ 557,135 $ -- $19,571,105
-------------------------------------------------------------------------------------------------------------------------
2Q99
Interest income $ 214,177 $ 63,474 $ 11,220 $ 4,306 $ -- $ 293,177
Interest expense 87,188 49,061 10,034 528 -- 146,811
-------------------------------------------------------------------------------------------------------------------------
Net interest income 126,989 14,413 1,186 3,778 -- 146,366
Other revenues 61,834 177,606 30,178 24,641 (38) 294,221
Other expenses* 126,834 173,073 24,078 19,655 2,030 345,670
-------------------------------------------------------------------------------------------------------------------------
Pre-tax income 61,989 18,946 7,286 8,764 (2,068) 94,917
Income taxes 21,304 7,357 2,740 3,330 (786) 33,945
-------------------------------------------------------------------------------------------------------------------------
Net income $ 40,685 $ 11,589 $ 4,546 $ 5,434 $ (1,282) $ 60,972
=========================================================================================================================
Average assets $11,900,026 $ 5,122,155 $ 928,856 $ 490,440 $ -- $18,441,477
-------------------------------------------------------------------------------------------------------------------------
<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 $ 492,984 $ 144,842 $ 17,631 $ 7,961 $ -- $ 663,418
Interest expense 225,225 123,336 16,521 986 -- 366,068
--------------------------------------------------------------------------------------------------------------------------
Net interest income 267,759 21,506 1,110 6,975 -- 297,350
Other revenues 130,656 240,425 44,176 56,281 1,685 473,223
Other expenses* 265,162 270,487 37,081 50,130 4,246 627,106
--------------------------------------------------------------------------------------------------------------------------
Pre-tax income 133,253 (8,556) 8,205 13,126 (2,561) 143,467
Income taxes 44,692 (3,199) 3,013 4,988 (973) 48,521
--------------------------------------------------------------------------------------------------------------------------
Net income $ 88,561 $ (5,357) $ 5,192 $ 8,138 $ (1,588) $ 94,946
==========================================================================================================================
Average assets $12,792,939 $ 5,265,614 $ 642,498 $ 569,608 $ -- $19,270,659
--------------------------------------------------------------------------------------------------------------------------
Year To Date 1999
Interest income $ 423,040 $ 139,503 $ 21,733 $ 9,167 $ -- $ 593,443
Interest expense 173,861 105,143 18,728 1,178 -- 298,910
--------------------------------------------------------------------------------------------------------------------------
Net interest income 249,179 34,360 3,005 7,989 -- 294,533
Other revenues 116,390 347,672 74,566 42,228 (72) 580,784
Other expenses* 247,151 354,098 56,683 35,301 4,060 697,293
--------------------------------------------------------------------------------------------------------------------------
Pre-tax income 118,418 27,934 20,888 14,916 (4,132) 178,024
Income taxes 41,066 10,983 7,876 5,668 (1,570) 64,023
--------------------------------------------------------------------------------------------------------------------------
Net income $ 77,352 $ 16,951 $ 13,012 $ 9,248 $ (2,562) $ 114,001
==========================================================================================================================
Average assets $11,725,776 $ 5,423,522 $ 887,621 $ 494,889 $ -- $18,531,808
--------------------------------------------------------------------------------------------------------------------------
<FN>
* Includes loan loss provision.
</FN>
</TABLE>
<PAGE> 13
Item 2.
-------
FIRST TENNESSEE NATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
GENERAL INFORMATION
-------------------
First Tennessee National Corporation (First Tennessee) is headquartered in
Memphis, Tennessee, and is a nationwide, diversified financial services
institution which provides banking and other financial services to its
customers through various regional and national business lines. The Regional
Banking Group includes the retail/commercial bank, the credit card division,
and the trust division. The National Lines of Business include First Horizon
Home Loan Corporation (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 six month
periods ended June 30, 2000, compared to the three month and six month periods
ended June 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.
<PAGE> 14
Other factors are those inherent in originating and servicing loans, including
prepayment risks and fluctuation of collateral values and changes in customer
profiles. Additionally, the policies of the Office of the Comptroller of the
Currency (OCC) and the Board of Governors of the Federal Reserve System,
unanticipated regulatory and judicial proceedings, and changes in laws and
regulations applicable to First Tennessee and First Tennessee's success in
executing its business plans and strategies and managing the risks involved in
the foregoing, could cause actual results to differ. First Tennessee assumes no
obligation to update any forward-looking statements that are made from time to
time.
FINANCIAL SUMMARY (COMPARISON OF SECOND QUARTER 2000 TO SECOND QUARTER 1999)
Earnings for the second quarter of 2000 were $55.4 million, a decline of 9
percent from last year's second quarter earnings of $61.0 million. Diluted
earnings per share were $.42 in 2000, a decline of 7 percent from the $.45
earned in 1999. Basic earnings per share were $.42 in 2000, a decline of 11
percent from the $.47 earned in 1999. Return on average shareholders' equity
was 17.4 percent in 2000 compared with 20.9 percent in 1999. Return on average
assets was 1.14 percent in 2000 compared with 1.33 percent in 1999.
On June 30, 2000, First Tennessee ranked as one of the top 50 bank holding
companies nationally in market capitalization and total assets. As of June 30,
2000, total assets were $19.8 billion and shareholders' equity was $1.3
billion. As of June 30, 1999, total assets were $18.6 billion and shareholders'
equity was $1.2 billion.
Total revenue declined 9 percent from the second quarter of 1999, with a 4
percent increase in net interest income and a 15 percent decline in fee income
(noninterest income excluding securities gains and losses).
NONINTEREST INCOME
------------------
Fee income provides the majority of First Tennessee's revenue. In the second
quarter of 2000, fee income contributed approximately 62 percent to total
revenues compared with approximately 67 percent for the same period in 1999.
During the second quarter of 2000, fee income declined 15 percent (from $294.3
million to $250.7 million). The decline in fee income was related to a
significant shift in the operating environment which has created challenges in
mortgage banking and capital markets, compared with their strong performance in
last year's second quarter. Conversely, most other sources of fee income have
realized growth over the past year, led by double-digit growth in deposit
transactions and cash management, cardholder fees and other income, which
includes such items as insurance and commissions, and check clearing fees. A
more detailed discussion follows.
MORTGAGE BANKING
First Horizon Home Loan Corporation (formerly FT Mortgage Companies), 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 to mitigate the loss of
value of its mortgage servicing rights in a declining interest rate
environment. 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.
Mortgage banking fee income declined 24 percent (from $175.7 million to $134.2
million) from the second quarter of 1999 as shown in Table 1.
<PAGE> 15
TABLE 1 - MORTGAGE BANKING
<TABLE>
<CAPTION>
Second Quarter Six Months
------------------------ Growth ----------------------- Growth
(Dollars in millions) 2000 1999 Rate (%) 2000 1999 Rate (%)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NONINTEREST INCOME:
Loan origination fees $ 34.8 $ 48.1 (27.7) $ 60.5 $ 102.0 (40.7)
Secondary marketing activities 28.7 68.2 (57.9) 45.3 140.5 (67.8)
---------------------------------------------------------------------------------------------------------------------------
Mortgage origination function 63.5 116.3 (45.4) 105.8 242.5 (56.4)
---------------------------------------------------------------------------------------------------------------------------
Servicing fees 38.6 43.7 (11.7) 77.8 82.7 (5.9)
Sale of mortgage servicing rights (.2) 3.7 NM 13.7 3.7 274.8
Miscellaneous 32.3 12.0 168.0 36.8 15.6 135.1
---------------------------------------------------------------------------------------------------------------------------
Total noninterest income $ 134.2 $ 175.7 (23.6) $ 234.1 $ 344.5 (32.1)
===========================================================================================================================
Refinance originations $ 656.5 $ 2,018.9 (67.5) $ 1,312.9 $ 5,516.3 (76.2)
Home purchase related originations 3,630.1 3,620.4 .3 6,482.1 6,091.5 6.4
---------------------------------------------------------------------------------------------------------------------------
Mortgage loan originations $ 4,286.6 $ 5,639.3 (24.0) $ 7,795.0 $11,607.8 (32.8)
===========================================================================================================================
Servicing portfolio $45,774.3 $44,281.2 3.4 $45,774.3 $44,281.2 3.4
---------------------------------------------------------------------------------------------------------------------------
<FN>
NM = not meaningful
</FN>
</TABLE>
Total origination volume, consisting of home purchase-related mortgages and
refinanced mortgages, declined 24 percent to $4.3 billion in the second quarter
of 2000 compared with $5.6 billion in the previous year. Despite higher
interest rates, pricing competition throughout the industry, and the reduction
in the number of production offices, home purchase-related mortgage
originations remained relatively flat with 1999 at $3.6 billion. The decline in
origination activity was due to the impact that rising interest rates had on
refinance activity, which declined $1.4 billion from the second quarter of
1999. Mortgage rates in the second quarter of 2000 were substantially higher
than the average rate on existing mortgage loans, making it economically
impractical for most customers to refinance. Fees from the mortgage origination
function (loan origination fees and secondary marketing activities) declined 45
percent from the second quarter of 1999 (from $116.3 million to $63.5 million).
This decline came from fewer loans sold into the secondary market due to less
production and a smaller beginning warehouse, lower margins related to
competitive pricing pressures and a shift in product mix, and losses of
approximately $4.4 million on certain loans affected by the volatility of
interest rate movements.
The mortgage servicing portfolio totaled $45.8 billion on June 30, 2000,
compared to $44.3 billion on June 30, 1999. The change in the portfolio since
second quarter 1999 and year-end 1999 is shown in Table 2. Mortgage servicing
fees declined 12 percent from the second quarter of 1999 (from $43.7 million to
$38.6 million). The lower level of fees was due to the classification of excess
mortgage servicing rights to "interest-only" strips held in the investment
securities portfolio and the portfolio's lower weighted average service fee due
to a change in mix driven by prior period bulk sales. Bulk servicing sales of
only $.3 billion were transacted in the second quarter of 2000, compared with
$1.9 billion in the second quarter of 1999. In addition, approximately $.5
billion of bulk servicing was purchased during the second quarter of 2000,
compared with no purchases in the same period in 1999. Fee income from sales of
mortgage servicing rights declined $3.9 million from 1999.
For the second quarter of 2000 miscellaneous mortgage income totaled $32.3
million compared with $12.0 million in the second quarter of 1999. During the
second quarter of 2000 the HomeBanc Mortgage division was sold resulting in a
$40.9 million gain, which was reduced by the recognition of $13.9 million of
losses on hedge instruments associated with the mortgage servicing rights
portfolio.
<PAGE> 16
TABLE 2 - SERVICING PORTFOLIO
<TABLE>
<CAPTION>
Activity for Activity for
6 Months Ending 12 Months Ending
(Dollars in billions) June 30, 2000 June 30, 2000
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Servicing portfolio at beginning of period $ 44.6 $ 44.3
Loans added to servicing system 8.9 16.6
Servicing released originations (.8) (1.5)
Bulk sales of servicing released (.5) (2.0)
Principal reductions (from payments and
payoffs received in the normal course of business) (2.4) (5.0)
---------------------------------------------------------------------------------------------------------------------------
Subtotal 49.8 52.4
Change in bulk sales of servicing not yet transferred (2.8) (7.1)
Change in purchased servicing not yet transferred (1.2) .5
---------------------------------------------------------------------------------------------------------------------------
Servicing portfolio at end of period $ 45.8 $ 45.8
===========================================================================================================================
</TABLE>
Refinance activity is expected to remain low with interest rates higher than
one year ago. Excluding the effect from the reduction in production offices,
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. In periods of increasing interest rates, the value of mortgage
servicing rights generally increases and the value of hedges related to the
servicing rights generally declines. 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 this 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 was negatively impacted during the second quarter of 2000
by the rapid rise in interest rates since the second quarter of 1999, the
persistent expectation that interest rates were going to continue to rise, and
lack of liquidity in the financial services industry. Capital markets fee income
decreased 37 percent from the $30.2 million achieved during the second quarter
of 1999 to $18.9 million in 2000. Total securities bought and sold were $188.2
billion for the second quarter of 2000, up from $138.8 billion in 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 the second quarter
of 2000 were $4.1 billion compared with $8.0 billion for the same period in
1999.
Going forward, once the expectation of rising interest rates lessens, capital
markets customers' demand for longer-term securities should return. 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 from the second quarter of 1999 (from $26.6 million to $29.7 million)
due primarily to increased customer service charges. Since the second quarter of
1999, trust and investment management fees grew 9 percent (from $14.8 million to
$16.1 million) and assets under management grew 4 percent (from $9.4 billion to
$9.8 billion). Merchant processing fee income growth was affected by a special
assessment received from a large customer in the second quarter of 1999 which
was the primary reason for the 13 percent decline in the second quarter of 2000
(from $14.2 million to $12.3 million). Due to reduced emphasis on lower-margin
indirect transactions, overall merchant processing volume declined (from 43.1
million transactions in second quarter 1999 to 35.1 million transactions in
second quarter 2000). However, direct volume increased approximately 19 percent
from the previous year. Cardholder fees increased 15 percent (from $6.1 million
to $7.0 million) during this same period due to higher interchange collections
and price increases.
<PAGE> 17
All other income and commissions grew 22 percent from the second quarter of 1999
(from $26.7 million to $32.5 million). Growth in the other category was
positively affected by the revenues generated from the remittance processing
operation acquired in June 1999 from National Processing Co. (NPC). Excluding
NPC, the growth in other income and commissions would have been 9 percent. This
remaining growth was spread over several categories, including earnings from
First Tennessee's investment in bank-owned life insurance, other service
charges, fees related to the reinsurance program, insurance premiums and
commissions, automated teller machine access fees, and check clearing fees.
NET INTEREST INCOME
-------------------
Net interest income grew 4 percent (from $147.1 million to $152.5 million) from
the second quarter of 1999, primarily due to a 5 percent increase in earning
assets (from $15.5 billion to $16.3 billion). The consolidated net interest
margin (margin) decreased to 3.74 percent for the second quarter of 2000
compared with 3.81 percent in the second quarter of 1999. Strong loan growth and
the change in loan mix compared with second quarter 1999 helped mitigate higher
funding costs in the regional banking group, while the lower volumes experienced
in capital markets minimized compression on the consolidated margin. 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 second quarters of 2000 and 1999.
TABLE 3 - NET INTEREST MARGIN
<TABLE>
<CAPTION>
Second Quarter
----------------
2000 1999
----------------------------------------------------------------------------
<S> <C> <C>
REGIONAL BANKING GROUP:
Yields on earning assets 8.46% 7.80%
Rates paid on interest-bearing liabilities 4.60 3.73
----------------------------------------------------------------------------
Net interest spread 3.86 4.07
----------------------------------------------------------------------------
Effect of interest-free sources .86 .77
Loan fees .17 .13
FRB interest and penalties -- .01
----------------------------------------------------------------------------
Net interest margin - Regional banking group 4.89% 4.98%
MORTGAGE BANKING (1.03) (.99)
CAPITAL MARKETS (.13) (.20)
TRANSACTION PROCESSING .01 .02
----------------------------------------------------------------------------
Net interest margin 3.74% 3.81%
============================================================================
</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, the consolidated margin will continue to be influenced by the
activity levels in the nonbanking lines of business, especially from mortgage
banking as the level of origination volume is strongly tied to refinance
activity. Information in this section includes forward-looking statements.
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 the second quarter of 2000
decreased 9 percent (from $330.7 million to $301.7 million) over 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. This growth rate was
impacted by the purchase acquisition of NPC which has created additional
ongoing costs since June 1999. Excluding NPC, mortgage banking and capital
markets, the total operating expense would have increased 1 percent.
Employee compensation, incentives and benefits (personnel expense), the largest
component of noninterest expense, decreased 10 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 6 percent. Excluding NPC and
these two business lines, personnel expense would have increased 1 percent.
Additional business line information related to expenses is provided in Table 4
and the discussion that follows.
<PAGE> 18
TABLE 4 - OPERATING EXPENSE COMPOSITION
<TABLE>
<CAPTION>
Second Quarter Six Months
-------------------- Growth ------------------- Growth
(Dollars in millions) 2000 1999 Rate (%) 2000 1999 Rate (%)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Regional banking group $ 114.9 $ 114.6 .2 $ 232.6 $ 222.0 4.7
Mortgage banking 141.5 170.3 (16.9) 270.5 349.4 (22.6)
Capital markets 17.2 24.1 (28.7) 37.1 56.7 (34.6)
Transaction processing 26.0 19.7 32.0 50.2 35.3 42.0
Other 2.1 2.0 4.6 4.2 4.1 4.6
---------------------------------------------------------------------------------------------------------------------------
Total operating expense $ 301.7 $ 330.7 (8.8) $ 594.6 $ 667.5 (10.9)
===========================================================================================================================
</TABLE>
Mortgage banking expenses decreased 17 percent from the previous year. The
decrease was largely in personnel expense which fell 18 percent (from $74.2
million to $60.5 million) due to lower activity levels in the second quarter of
2000. Amortization of capitalized mortgage servicing rights declined 40 percent
(from $29.9 million to $18.0 million) due to the increase in interest rates
which led to lower prepayments and the classification of excess mortgage
servicing rights to interest-only strips in the third quarter of 1999. During
the second quarter of 2000, approximately $5.9 million of expenses were incurred
related to closing and consolidating offices such as lease abandonment costs,
fixed asset writeoffs and severance packages. Without these costs, the decline
in expenses from the second quarter of 1999 would have been greater.
Expenses for the regional banking group remained level with the previous year.
Expenses in transaction processing grew 32 percent from the previous year.
Virtually all of this expense growth was related to operation of the locations
acquired from NPC. Capital markets experienced a 29 percent decline in expenses
from second quarter of 1999 primarily because of lower commissions and
incentives recognized in the second quarter of 2000.
PROVISION FOR LOAN LOSSES / ASSET QUALITY
-----------------------------------------
The provision for loan losses increased 14 percent (from $15.0 million to $17.1
million) from the second quarter of 1999, due to increased inherent risk in the
loan portfolio and a change in the loan mix related to growth in loans with
higher risk/reward profiles. 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. Additional asset quality
information is provided in Table 5 - Asset Quality Information and Table 6 -
Charge-off Ratios.
TABLE 5 - ASSET QUALITY INFORMATION
<TABLE>
<CAPTION>
June 30
-------------------------
(Dollars in thousands) 2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming loans $ 26,562 $ 28,507
Foreclosed real estate 17,877 16,968
Other assets 90 202
----------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 44,529 $ 45,677
==========================================================================================================
Loans and leases 90 days past due $ 38,013 $ 23,593
Potential problem assets* $ 83,872 $ 66,842
Second Quarter
-------------------------
2000 1999
-------------------------
<S> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Beginning balance at March 31 $ 140,736 $ 139,387
Provision for loan losses 17,077 14,979
Securitization adjustments (2,173) (1,790)
Charge-offs (14,922) (16,102)
Loan recoveries 2,004 2,121
----------------------------------------------------------------------------------------------------------
Ending balance on June 30 $ 142,722 $ 138,595
==========================================================================================================
June 30
-------------------------
2000 1999
-------------------------
<S> <C> <C>
Allowance to total loans 1.44% 1.60%
Nonperforming loans to total loans .27 .33
Nonperforming assets to total loans, foreclosed real estate and other assets .45 .53
Allowance to nonperforming assets 321 303
----------------------------------------------------------------------------------------------------------
<FN>
* Includes loans and leases 90 days past due.
</FN>
</TABLE>
<PAGE> 19
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 at June 30, 2000. As of June 30, 1999, the ratio of allowance for loan
losses to total loans, net of unearned income, was 1.60 percent.
The ratio of net charge-offs to average loans decreased to .52 percent for the
second quarter of 2000 from .65 percent for the second quarter of 1999. This
decrease was primarily due to lower commercial loan net charge-offs ($2.8
million in 1999 compared with $1.1 million in 2000). The credit card
receivables charge-off ratio increased to 4.05 percent for the second quarter
of 2000 from 3.51 percent for the second quarter of 1999, as the credit card
portfolio remained relatively flat.
The ratio of nonperforming loans to total loans decreased to .27 percent for
the second quarter of 2000 compared with .33 percent for the same period in
1999. On June 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>
Second Quarter
---------------------
2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial and commercial real estate .08% .24%
Consumer .66 .77
Credit card receivables 4.05 3.51
Permanent mortgage .24 .41
Total net charge-offs .52 .65
--------------------------------------------------------------------------------------------
</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 to
more normal levels from the historically low levels achieved in recent periods
as the growth in the economy begins to slow.
BALANCE SHEET REVIEW
EARNING ASSETS
--------------
Earning assets primarily consist of loans, mortgage loans held for sale and
investment securities. For second quarter 2000, earning assets averaged $16.3
billion compared with $15.5 billion for second 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 June
30, 2000, First Tennessee reported total assets of $19.8 billion compared with
$18.6 billion on June 30, 1999. Average total assets grew 6 percent (from $18.4
billion to $19.6 billion) from the second quarter of 1999.
LOANS
Average loans increased 14 percent (from $8.7 billion to $9.9 billion) with
growth in all of the primary categories. Average commercial loans increased 9
percent (from $4.2 billion to $4.6 billion) and average consumer loans
increased 19 percent (from $3.0 billion to $3.6 billion). First Horizon Equity
Lending, a division of FTBNA, is active in originating second mortgages and
contributed 59 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 June 30
------------------------------------------------------------
PERCENT Percent GROWTH
(Dollars in millions) 2000 OF TOTAL 1999 of Total RATE
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 4,614.8 47% $ 4,249.1 49% 8.6%
Consumer 3,556.2 36 2,999.7 35 18.6
Permanent mortgage 580.1 6 448.3 5 29.4
Credit card receivables 552.3 6 567.1 7 (2.6)
Real estate construction 541.2 5 376.4 4 43.8
Nonaccrual 29.7 -- 29.2 -- 1.6
----------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned $ 9,874.3 100% $ 8,669.8 100% 13.9%
============================================================================================================================
</TABLE>
<PAGE> 20
During the second quarter of 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 12 percent, and
average consumer loans would have grown 16 percent from the second quarter of
1999.
Average permanent mortgage loans increased 29 percent (from $.4 billion to $.6
billion) and average real estate construction loans increased 44 percent (from
$.4 billion to $.5 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 a 9 percent decrease in mortgage
loans held for sale (from $3.2 billion to $2.9 billion). Average investment
securities increased 3 percent from second quarter 1999 (from $2.7 billion to
$2.8 billion) principally from the classification in the third quarter of 1999
of excess mortgage servicing rights to interest-only strips held in the
investment securities portfolio.
DEPOSITS AND OTHER SOURCES OF FUNDS
-----------------------------------
Since the second quarter of 1999, average core deposits declined 2 percent (from
$9.2 billion to $9.0 billion) and interest-bearing core deposits declined 4
percent (from $6.4 billion to $6.1 billion) as customers shifted their
investments from traditional deposit products to off-balance sheet investment
products such as mutual funds. Noninterest-bearing deposits increased 2 percent
(from $2.8 billion to $2.9 billion) over this period. Short-term purchased funds
were up 18 percent (from $6.9 billion to $8.1 billion) from the previous year
and were primarily used to fund growth in loans.
CAPITAL
-------
Total capital (shareholders' equity plus qualifying capital securities) on June
30, 2000, was $1.4 billion, up 8 percent from $1.3 billion on June 30, 1999.
Shareholders' equity (excluding the qualifying capital securities) was $1.3
billion on June 30, 2000, an increase of 9 percent from $1.2 billion on June
30, 1999.
Average shareholders' equity increased 9 percent (from $1.2 billion to $1.3
billion) since the second quarter of 1999, reflecting internal capital
generation. The average total equity to average assets ratio was 7.06 percent
and the average shareholders' equity to average assets ratio was 6.55 percent
for the second quarter of 2000. This compares with 6.89 percent and 6.35
percent, respectively, for the second quarter of 1999. Excluding the effects of
unrealized market valuations had no material effect on the ratios during the
second quarter of 2000.
On June 30, 2000, the corporation's Tier 1 capital ratio was 8.22 percent, the
total capital ratio was 11.19 percent and the leverage ratio was 6.44 percent.
On June 30, 2000, First Tennessee's bank affiliates had sufficient capital to
qualify as well-capitalized institutions.
OFF BALANCE SHEET ACTIVITY
In the normal course of business, First Tennessee is a party to financial
instruments that are not required to be reflected on a balance sheet. First
Tennessee enters into transactions involving these instruments to meet the
financial needs of its customers and manage its own exposure to fluctuations in
interest rates. These instruments are categorized into "Lending related,"
"Mortgage banking," "Interest rate risk management" and "Capital markets" as
noted in Table 8.
<PAGE> 21
TABLE 8 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS ON JUNE 30, 2000
<TABLE>
<CAPTION>
(Dollars in millions) Notional Value
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
LENDING Commitments to extend credit:
RELATED: Consumer credit card lines $ 2,328.4
Consumer home equity 668.1
Commercial real estate and construction and land development 821.7
Mortgage banking 1,209.2
Other 1,348.6
Other commitments:
Standby letters of credit 306.0
Commercial letters of credit 8.7
-----------------------------------------------------------------------------------------------------------
MORTGAGE Mortgage pipeline and warehouse hedging:
BANKING: Interest rate contracts:
Forward contracts - commitments to sell $ 3,133.5
Caps - purchased* 1,900.0
Servicing portfolio hedging:
Interest rate contracts*:
Caps - purchased 500.0
Floors - purchased 14,050.0
Swaptions - purchased 1,000.0
Swaps 600.0
Interest rate floors - purchased 6,225.0
-----------------------------------------------------------------------------------------------------------
INTEREST Interest rate contracts:
RATE RISK Swaps - receive fixed/pay floating $ 150.0
MANAGEMENT: Swaps - receive floating/pay floating 50.0
Caps - purchased 20.0
Caps - written 20.0
Equity contracts:
Purchased options 1.9
-----------------------------------------------------------------------------------------------------------
CAPITAL Forward contracts:
MARKETS: Commitments to buy $ 943.2
Commitments to sell 1,016.0
Option contracts:
Purchased 100.0
Written 100.0
Swaps:
Purchased 10.0
Written 10.0
-----------------------------------------------------------------------------------------------------------
<FN>
* Mortgage banking option contracts had a net book value of $139.7 million on June 30, 2000.
</FN>
</TABLE>
FINANCIAL SUMMARY (COMPARISON OF FIRST SIX MONTHS OF 2000 TO FIRST SIX MONTHS
OF 1999)
Earnings for 2000 were $94.9 million, a decline of 17 percent from last year's
$114.0 million. Diluted earnings per share were $.72 in 2000, a decline of 15
percent over the $.85 earned in 1999. Basic earnings per share were $.73 in
2000 and $.88 in 1999. Return on average shareholders' equity was 15.2 percent
in 2000 compared with a return of 20.0 percent in 1999. Return on average
assets was .99 percent in 2000 compared with 1.24 percent in 1999.
Total revenue declined 12 percent with a 19 percent decline in fee income and a
1 percent increase in net interest income. Fee income contributed 61 percent to
total revenue in 2000 compared with 66 percent in 1999.
INCOME STATEMENT REVIEW
-----------------------
Noninterest income, excluding securities gains and losses, declined 19 percent
(from $580.9 million to $471.5 million) over the same period last year. Fee
income represented 61 percent of total revenues during the first six months of
2000 and 66 percent for the same period in 1999. Mortgage banking fee income
declined 32 percent (from $344.5 million to $234.1 million). See Table 1 -
Mortgage Banking for a breakout of noninterest income as well as mortgage
banking origination volume and servicing portfolio levels. Fee income from
capital markets decreased 42 percent (from $74.6 million to $43.3 million) from
1999. For the first six months of 2000, fee income in deposit transactions and
cash management grew 13 percent (from $49.8 million to $56.1 million). Trust
services and investment service fees increased 9 percent (from $29.4 million to
$32.1 million) and merchant processing fees decreased 6 percent (from $24.9
million to $23.3 million). Cardholder fees increased 27 percent (from $11.0
million to $14.0 million). All other income and commissions grew 47 percent
(from $46.7 million to $68.6 million). This growth was spread over a number of
categories, with other service charges increasing 29 percent (from $9.2 million
to $11.9 million). Insurance premiums and commissions increased 14 percent
(from $4.8 million to $5.5 million) and check clearing fees increased 13
percent (from $5.2 million to $5.8 million). The other category increased 65
percent (from $27.5 million to $45.4 million). The reasons for the year-to-date
trends were similar to the quarterly trend information already discussed.
Net interest income increased 1 percent (from $296.1 million to $298.7 million)
from the first six months of 1999 while earning assets increased 2 percent (from
$15.7 billion to $16.0 billion) over the same period. Year-to-date consolidated
margin declined from 3.78 percent in 1999 to 3.74 percent in 2000. In the
regional banking group the year-to-date margin declined from 4.94 percent in
1999 to 4.89 percent in 2000. The reasons for the year-to-date trends were
similar to the quarterly trend information already discussed.
<PAGE> 22
Noninterest expense decreased 11 percent (from $667.5 million to $594.6
million). See Table 4 - Operating Expense Composition for a breakdown of total
expenses by business line. Mortgage banking expenses declined 23 percent for
the first six months of 2000 as compared to the same period in 1999 (from
$349.4 million to $270.5 million). During this period, amortization of
capitalized mortgage servicing rights decreased 40 percent (from $60.8 million
to $36.4 million). Capital markets expenses declined 35 percent over this same
period (from $56.7 million to $37.1 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 42 percent for the six
month period primarily due to the acquisition of NPC. The reasons for the
year-to-date trends were similar to the quarterly trend information already
discussed. The provision for loan losses increased 9 percent (from $29.8
million to $32.6 million) from the previous year. The increase reflects the
inherent risk in the loan portfolio from loan growth and a change in the loan
mix partially due to securitizations.
BALANCE SHEET REVIEW
--------------------
Average total assets grew 4 percent (from $18.5 billion to $19.3 billion) and
average loans grew 12 percent (from $8.7 billion to $9.7 billion) from the
first six months of 1999. Average commercial loans increased 8 percent (from
$4.2 billion to $4.5 billion), average consumer loans grew 14 percent (from
$3.0 billion to $3.5 billion) and average credit card receivables remained
level at $.6 billion. The permanent mortgage portfolio increased 28 percent
(from $.4 billion to $.6 billion) and real estate construction loans increased
39 percent (from $.4 billion to $.5 billion) primarily from mortgage banking
activities. Average investment securities increased 15 percent (from $2.6
billion to $2.9 billion) from 1999. The decline in mortgage originations led to
a 27 percent decrease in mortgage loans held for sale (from $3.5 billion to
$2.6 billion).
For the first six months of 2000, average core deposits decreased 3 percent
(from $9.2 billion to $9.0 billion) and interest-bearing core deposits
decreased 4 percent (from $6.4 billion to $6.1 billion). Noninterest-bearing
deposits remained level at $2.8 billion in 2000. Short-term purchased funds
increased 13 percent (from $6.9 billion to $7.8 billion) for the six month
period.
OTHER
-----
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.
<PAGE> 23
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
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 quantified 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. 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, and
changes in hedging practices 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. The impact of adopting SFAS 133 could be
material at the adoption date. 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> 24
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> 25
Part II.
OTHER INFORMATION
Items 1, 2, 3 and 5
-------------------
As of the end of the second quarter, 2000, the answers to Items 1, 2, 3 and 5
were either inapplicable or negative, and therefore, these items are omitted.
Item 4 - Submission of Matters to a Vote of Security Holders.
-------------------------------------------------------------
(a) The Corporation's Annual Meeting of Shareholders was held April 18,
2000.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation
14 under the Securities Exchange Act of 1934. There were no
solicitations in opposition to management's nominees for election to
Class I (Martin, Orgill, and Sansom and Mrs. Palmer). The Class I
nominees were elected for a three-year term or until their respective
successors are duly elected and qualified. Directors continuing in
office are Messrs. Blattberg, Cantu, Cates, Glass, Haslam, Horn,
Kelley, and Rose.
(c) At the Annual Meeting, the shareholders also approved the 2000
Non-Employee Directors' Deferred Compensation Stock Option Plan,
approved the 2000 Employee Stock Option Plan, and ratified the
appointment of Arthur Andersen LLP as independent auditors for the
year 2000. The shareholder vote was as follows:
<TABLE>
<CAPTION>
Nominees Class I For Withheld
---------------- ----------- ----------
<S> <C> <C>
R. Brad Martin 105,676,369 1,982,114
Joseph Orgill, III 106,727,040 931,443
Vicki R. Palmer 106,651,607 1,006,876
William B. Sansom 106,640,803 1,017,680
</TABLE>
<TABLE>
<CAPTION>
For Withheld Abstained
----------- ---------- ---------
<S> <C> <C> <C>
2000 Non-Employee Director Plan 85,375,663 20,780,995 1,501,825
2000 Employee Plan 87,853,978 18,929,864 874,641
Ratification of Auditors 105,920,974 1,278,407 459,102
</TABLE>
There were no "broker non-votes" with respect to any of the nominees or plans
or the ratification of auditors and no abstentions with respect to any of the
nominees.
<PAGE> 26
Item 6 - Exhibits and Reports on Form 8-K.
------------------------------------------
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
4 Instruments defining the rights of security holders,
including indentures.*
**10(c) 1997 Employee Stock Option Plan, as amended and
restated.
**10(l) 1995 Employee Stock Option Plan, as amended and
restated.
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.
** This is a management contract or compensatory plan required to be
filed as an exhibit.
</FN>
</TABLE>
(b) Reports on Form 8-K.
A report on Form 8-K was filed on May 2, 2000 (with a Date of Report of April
28, 2000) disclosing under Item 5 a press release, announcing the sale of the
HomeBanc Mortgage Corporation division of its subsidiary, First Horizon Home
Loan Corporation.
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST TENNESSEE NATIONAL CORPORATION
------------------------------------
(Registrant)
DATE: 8/11/00 By: Elbert L. Thomas Jr.
--------------------- --------------------------
Elbert L. Thomas Jr.
Executive Vice President and
Chief Financial Controller
(Duly Authorized Officer and
Principal Financial Officer)
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
4 Instruments defining the rights of security holders, including indentures.*
10(c) 1997 Employee Stock Option Plan, as amended and restated.
10(l) 1995 Employee Stock Option Plan, as amended and
restated.
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>
</TABLE>
