<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 March 31, 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 130,002,907
----------------------------- -----------------------------
Class Outstanding at April 30, 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
- -------------------------------------------------------------------------------------------------------------------------------
March 31 December 31
-------------------------------- -------------
(Dollars in thousands)(Unaudited) 2000 1999 1999
- ------------------------------------------------------------------------------------------------------------ -------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 799,641 $ 589,789 $ 956,077
Federal funds sold and securities
purchased under agreements to resell 359,556 91,701 279,537
- ------------------------------------------------------------------------------------------------------------ -------------
Total cash and cash equivalents 1,159,197 681,490 1,235,614
- ------------------------------------------------------------------------------------------------------------ -------------
Investment in bank time deposits 947 1,416 3,263
Capital markets securities inventory 351,135 420,133 147,041
Mortgage loans held for sale 2,914,024 3,201,792 2,049,945
Securities available for sale 2,190,683 1,882,113 2,332,356
Securities held to maturity (market value of
$684,103 at March 31, 2000; $544,529 at
March 31, 1999; and $734,853 at December 31, 1999) 736,691 546,844 768,936
Loans, net of unearned income 9,582,450 8,782,802 9,363,158
Less: Allowance for loan losses 140,736 139,387 139,603
- ------------------------------------------------------------------------------------------------------------ -------------
Total net loans 9,441,714 8,643,415 9,223,555
- ------------------------------------------------------------------------------------------------------------ -------------
Premises and equipment, net 304,738 272,736 305,519
Real estate acquired by foreclosure 18,414 16,870 17,870
Mortgage servicing rights, net 800,521 814,827 826,210
Intangible assets, net 132,276 130,925 133,568
Capital markets receivables and other assets 2,021,235 1,712,443 1,329,513
- ------------------------------------------------------------------------------------------------------------ -------------
TOTAL ASSETS $ 20,071,575 $ 18,325,004 $ 18,373,390
============================================================================================================ =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing $ 9,837,514 $ 9,381,365 $ 8,560,462
Noninterest-bearing 2,851,753 2,816,442 2,798,239
- ------------------------------------------------------------------------------------------------------------ -------------
Total deposits 12,689,267 12,197,807 11,358,701
- ------------------------------------------------------------------------------------------------------------ -------------
Federal funds purchased and securities
sold under agreements to repurchase 2,507,361 1,615,831 2,856,282
Commercial paper and other short-term borrowings 1,465,142 1,318,451 1,550,229
Capital markets payables and other liabilities 1,688,619 1,535,425 908,048
Term borrowings 359,857 400,501 358,663
- ------------------------------------------------------------------------------------------------------------ -------------
Total liabilities 18,710,246 17,068,015 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 - 129,920,110 at
March 31, 2000; 129,908,808 at March 31, 1999;
and 129,878,459 at December 31, 1999) 81,200 81,193 81,174
Capital surplus 138,453 133,857 130,636
Undivided profits 1,064,599 937,339 1,053,722
Accumulated other comprehensive income (20,958) 9,604 (21,752)
Deferred compensation on restricted stock incentive plans (5,370) (7,441) (5,674)
Deferred compensation obligation 3,405 2,437 3,361
- ------------------------------------------------------------------------------------------------------------ -------------
Total shareholders' equity 1,261,329 1,156,989 1,241,467
- ------------------------------------------------------------------------------------------------------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 20,071,575 $ 18,325,004 $ 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
March 31
-----------------------------------
(Dollars in thousands except per share data)(Unaudited) 2000 1999
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 209,371 $ 181,248
Interest on investment securities:
Taxable 53,476 38,228
Tax-exempt 505 754
Interest on mortgage loans held for sale 45,368 68,735
Interest on capital markets securities inventory 5,942 8,697
Interest on other earning assets 4,637 2,604
- ------------------------------------------------------------------------------------------------------------
Total interest income 319,299 300,266
- ------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Savings 1,421 1,428
Checking interest and money market account 27,533 26,569
Certificates of deposit under $100,000 and other time 30,363 32,379
Certificates of deposit $100,000 and more 45,295 42,309
Interest on short-term borrowings 63,058 42,621
Interest on term borrowings 6,135 6,793
- ------------------------------------------------------------------------------------------------------------
Total interest expense 173,805 152,099
- ------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 145,494 148,167
Provision for loan losses 15,497 14,826
- ------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 129,997 133,341
- ------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 99,872 168,778
Capital markets 24,364 44,388
Deposit transactions and cash management 26,413 23,216
Trust services and investment management 15,994 14,591
Merchant processing 11,030 10,709
Cardholder fees 7,033 4,962
Equity securities gains/(losses) 475 (8)
Debt securities gains/(losses) 1,126 (26)
All other income and commissions 36,090 19,953
- ------------------------------------------------------------------------------------------------------------
Total noninterest income 222,397 286,563
- ------------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 352,394 419,904
- ------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives and benefits 139,994 173,895
Amortization of mortgage servicing rights 18,429 30,898
Occupancy 18,387 15,651
Operations services 17,361 15,702
Equipment rentals, depreciation and maintenance 15,478 13,469
Communications and courier 12,019 12,367
Amortization of intangible assets 2,671 2,576
All other expense 68,540 72,239
- ------------------------------------------------------------------------------------------------------------
Total noninterest expense 292,879 336,797
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 59,515 83,107
Applicable income taxes 19,992 30,078
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 39,523 $ 53,029
============================================================================================================
EARNINGS PER SHARE $ .30 $ .41
- ------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ .30 $ .40
- ------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 130,394,379 129,787,078
- ------------------------------------------------------------------------------------------------------------
<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 39,523 53,029
Other comprehensive income:
Unrealized market adjustments, net of tax and
reclassification adjustment 794 (3,267)
- ------------------------------------------------------------------------------------------------------------
Comprehensive income 40,317 49,762
- ------------------------------------------------------------------------------------------------------------
Cash dividends declared (28,646) (24,668)
Common stock issued:
Elliot Ames, Inc. acquisition 1,385 --
Cambridge Mortgage Company acquisition -- 421
For exercise of stock options 2,056 13,995
Tax benefit from non-qualified stock options -- 7,850
Common stock repurchased (5,474) --
Amortization on restricted stock incentive plans 533 382
Other 9,691 9,713
- ------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31 $ 1,261,329 $ 1,156,989
============================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS First Tennessee National Corporation
- ------------------------------------------------------------------------------------------------------------
Three Months Ended March 31
-----------------------------------
(Dollars in thousands)(Unaudited) 2000 1999
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 39,523 $ 53,029
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Provision for loan losses 15,497 14,826
Provision for deferred income tax 7,980 32,927
Depreciation and amortization of premises and equipment 14,740 11,801
Amortization of mortgage servicing rights 18,429 30,898
Amortization of intangible assets 2,671 2,576
Net other amortization and accretion 11,454 11,649
Market value adjustment on foreclosed property 1,477 2,400
Equity securities (gains)/losses (475) 8
Debt securities (gains)/losses (1,126) 26
Net (gains)/losses on disposal of fixed assets (21) 219
Net (increase)/decrease in:
Capital markets securities inventory (204,094) (61,829)
Mortgage loans held for sale (762,507) 1,025,651
Capital markets receivables (649,148) (401,084)
Interest receivable 1,429 1,029
Other assets (54,030) (210,960)
Net increase in:
Capital markets payables 692,476 446,833
Interest payable 6,378 8,612
Other liabilities 82,610 8,538
- ------------------------------------------------------------------------------------------------------------
Total adjustments (816,260) 924,120
- ------------------------------------------------------------------------------------------------------------
Net cash (used)/provided by operating activities (776,737) 977,149
- ------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Held to maturity securities - maturities 32,394 62,436
Available for sale securities:
Sales 133,734 5,504
Maturities 153,538 238,034
Purchases (239,423) (313,098)
Premises and equipment:
Sales 849 96
Purchases (11,970) (28,931)
Net increase in loans (237,448) (241,096)
Increase in investment in bank time deposits 2,316 (205)
Acquisitions, net of cash and cash equivalents acquired -- (1,755)
- ------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (166,010) (279,015)
- ------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Common stock:
Exercise of stock options 2,109 15,950
Cash dividends (28,562) (24,411)
Repurchase of shares (5,486) --
Term borrowings:
Issuance 51,200 1,099
Payments (50,082) (15,150)
Net increase/(decrease) in:
Deposits 1,331,159 474,768
Short-term borrowings (434,008) (1,405,020)
- ------------------------------------------------------------------------------------------------------------
Net cash (used)/provided by financing activities 866,330 (952,764)
- ------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (76,417) (254,630)
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 1,235,614 936,120
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $1,159,197 $ 681,490
============================================================================================================
Total interest paid $ 167,296 $ 143,342
Total income taxes paid 44,951 17,460
- ------------------------------------------------------------------------------------------------------------
<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 period ended March 31, 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 forecasted
transactions, 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", 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 - EARNINGS PER SHARE
The following table shows a reconciliation of earnings per share to diluted
earnings per share.
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------------------
(Dollars in thousands, except per share data) 2000 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
EARNINGS PER SHARE COMPUTATION:
Net income $ 39,523 $ 53,029
Weighted average shares outstanding 129,916,950 129,453,871
Shares attributable to deferred compensation 477,429 333,207
- -----------------------------------------------------------------------------------------------------------
Total weighted average shares per income statement 130,394,379 129,787,078
Earnings per share $ .30 $ .41
===========================================================================================================
DILUTED EARNINGS PER SHARE COMPUTATION:
Net income $ 39,523 $ 53,029
Weighted average shares outstanding 130,394,379 129,787,078
Dilutive effect due to stock options 2,150,514 3,976,333
- -----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding, as adjusted 132,544,893 133,763,411
Diluted earnings per share $ .30 $ .40
===========================================================================================================
</TABLE>
<PAGE> 10
NOTE 3 - LOANS
The composition of the loan portfolio at March 31 is detailed below:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $4,469,783 $4,212,886
Consumer 3,459,704 3,163,967
Permanent mortgage 552,222 444,666
Credit card receivables 555,732 560,674
Real estate construction 513,341 369,814
Nonaccrual - Regional banking group 7,047 12,629
Nonaccrual - Mortgage banking 24,621 18,166
- -----------------------------------------------------------------------------------------------------------
Loans, net of unearned income 9,582,450 8,782,802
Allowance for loan losses 140,736 139,387
- -----------------------------------------------------------------------------------------------------------
Total net loans $9,441,714 $8,643,415
===========================================================================================================
</TABLE>
The following table presents information concerning nonperforming loans at
March 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans $ 7,435 $ 13,169
Other nonaccrual loans 24,233 17,626
- -----------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 31,668 $ 30,795
===========================================================================================================
</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
March 31
----------------------------------
(Dollars in thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total interest on impaired loans $ 95 $ 283
Average balance of impaired loans 7,538 13,000
- -----------------------------------------------------------------------------------------------------------
</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 three months ended March 31, 2000 and 1999, is
summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Non-impaired Impaired Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1998 $133,572 $2,441 $136,013
Provision for loan losses 11,799 3,027 14,826
Charge-offs 11,768 1,773 13,541
Less loan recoveries 1,669 420 2,089
- ----------------------------------------------------------------------------------------------------------------
Net charge-offs 10,099 1,353 11,452
- ----------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 $135,272 $4,115 $139,387
================================================================================================================
Balance at December 31, 1999 $136,978 $2,625 $139,603
Provision for loan losses 14,474 1,023 15,497
Charge-offs 14,771 1,716 16,487
Less loan recoveries 1,631 492 2,123
- ----------------------------------------------------------------------------------------------------------------
Net charge-offs 13,140 1,224 14,364
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT March 31, 2000 $138,312 $2,424 $140,736
================================================================================================================
</TABLE>
<PAGE> 11
NOTE 4 - 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 year to date periods ending March 31, 1999 and 2000.
<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 00
Interest income $ 239,185 $ 67,800 $ 8,507 $ 3,807 $ -- $ 319,299
Interest expense 107,045 58,368 7,907 485 -- 173,805
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 132,140 9,432 600 3,322 -- 145,494
Other revenues 66,016 103,058 24,449 27,273 1,601 222,397
Other expenses* 133,177 128,991 19,903 24,182 2,123 308,376
- --------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 64,979 (16,501) 5,146 6,413 (522) 59,515
Income taxes 21,970 (6,126) 1,909 2,437 (198) 19,992
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 43,009 $ (10,375) $ 3,237 $ 3,976 $ (324) $ 39,523
================================================================================================================================
Average assets $12,625,146 $ 5,115,569 $ 647,417 $ 582,081 $ -- $18,970,213
- --------------------------------------------------------------------------------------------------------------------------------
Year To Date 99
Interest income $ 208,863 $ 76,029 $ 10,513 $ 4,861 $ -- $ 300,266
Interest expense 86,673 56,082 8,694 650 -- 152,099
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 122,190 19,947 1,819 4,211 -- 148,167
Other revenues 54,556 170,066 44,388 17,587 (34) 286,563
Other expenses* 120,317 181,025 32,605 15,646 2,030 351,623
- --------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 56,429 8,988 13,602 6,152 (2,064) 83,107
Income taxes 19,762 3,626 5,136 2,338 (784) 30,078
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 36,667 $ 5,362 $ 8,466 $ 3,814 $ (1,280) $ 53,029
================================================================================================================================
Average assets $11,549,590 $ 5,728,237 $ 845,929 $ 499,387 $ -- $18,623,143
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
* Includes loan loss provision.
</FN>
</TABLE>
<PAGE> 12
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 period ended March
31, 2000, compared to the three month period ended March 31, 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 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
<PAGE> 13
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 FIRST QUARTER 2000 TO FIRST QUARTER 1999)
Earnings for the first quarter of 2000 were $39.5 million, compared with last
year's first quarter earnings of $53.0 million. Diluted earnings per share were
$.30 in 2000, compared to $.40 earned in 1999. Basic earnings per share were
$.30 in 2000 and $.41 in 1999. Return on average shareholders' equity was 13.0
percent in 2000 compared with a return of 19.1 percent in 1999. Return on
average assets was .84 percent in 2000 compared with 1.15 percent in 1999.
At March 31, 2000, First Tennessee was ranked as one of the top 50 bank holding
companies nationally in market capitalization ($2.6 billion) and total assets
($20.1 billion). At March 31, 1999, market capitalization was $4.8 billion and
total assets were $18.3 billion.
Total revenues declined 16 percent from the first quarter of 1999, with a 23
percent decline in fee income (noninterest income excluding securities gains
and losses) and a 2 percent decrease in net interest income. In the first
quarter of 2000, fee income contributed approximately 60 percent to total
revenues compared with approximately 66 percent for the same period in 1999.
NONINTEREST INCOME
- ------------------
Fee income provides the majority of First Tennessee's revenue. During the first
quarter of 2000, fee income declined 23 percent (from $286.6 million to $220.8
million). The decline in fee income was related to a drastic shift in the
operating environment which has created several challenges for mortgage banking
and capital markets, compared with their strong performance in last year's
first quarter. Conversely, all other fee income line items have realized growth
over the past year, led by double-digit increases 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, 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 different interest rate environments. The gains related to rebalancing
hedges of mortgage servicing rights as well as income from the foreclosure
repurchase program are reported in miscellaneous income.
Mortgage banking fee income declined 41 percent (from $168.8 million to $99.9
million) from the first quarter of 1999 as shown in Table 1.
<PAGE> 14
Table 1 - Mortgage Banking
<TABLE>
<CAPTION>
Three Months Ended
---------------------------- Growth
(Dollars in millions) 2000 1999 Rate(%)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest income:
Loan origination fees $ 25.7 $ 53.9 (52.4)
Secondary marketing activities 16.6 72.3 (77.1)
- ------------------------------------------------------------------------------------------------------------------
Mortgage origination function 42.3 126.2 (66.5)
- ------------------------------------------------------------------------------------------------------------------
Servicing fees 39.2 39.0 .7
Sale of mortgage servicing rights 13.9 -- NM
Miscellaneous 4.5 3.6 25.5
- ------------------------------------------------------------------------------------------------------------------
Total noninterest income $ 99.9 $ 168.8 (40.8)
==================================================================================================================
Refinance originations $ 656.4 $ 3,497.4 (81.2)
Home purchase related originations 2,852.0 2,471.1 15.4
- ------------------------------------------------------------------------------------------------------------------
Mortgage loan originations $ 3,508.4 $ 5,968.5 (41.2)
==================================================================================================================
Servicing portfolio $ 43,070.4 $ 42,883.5 .4
- ------------------------------------------------------------------------------------------------------------------
<FN>
NM = not meaningful
</FN>
</TABLE>
Origination activity fell 41 percent due to the impact that rising interest
rates had on refinance activity, which declined $2.8 billion. Total origination
volume, consisting of home purchased-related mortgages and refinances, was $3.5
billion compared with $6.0 billion in the previous year. Despite higher interest
rates, home purchase-related mortgage originations increased 15 percent.
Although total origination volume declined 41 percent, loans sold into the
secondary market decreased 63 percent due to the smaller mortgage warehouse at
the start of the first quarter of 2000. Fees from the mortgage origination
function (loan origination fees and secondary marketing activities) declined 67
percent from the first quarter of 1999 (from $126.2 million to $42.3 million).
This decline came from less production and fewer loans sold into the secondary
market, pricing pressures especially related to wholesale originations, a change
in product mix and losses of approximately $5 million on certain loans affected
by the volatility of recent interest rate movements.
The mortgage servicing portfolio (which includes servicing for ourselves and
others) totaled $43.1 billion at March 31, 2000, compared to $42.9 billion at
March 31, 1999. The change in the portfolio since first-quarter 1999 and
year-end 1999 is shown in Table 2. Mortgage servicing fees were relatively flat
compared to the previous year, with $39.2 million in the first quarter of 2000
and $39.0 million for the first quarter of 1999. This growth rate was impacted
by the slowing growth of originations, a higher percentage of service-released
products, bulk sales of mortgage servicing rights, and a reclass of mortgage
servicing rights to interest-only servicing strips in the investment securities
portfolio. Fee income from other activities increased 409 percent (from $3.6
million to $18.4 million). This increase was primarily due to increased gains
from the bulk sales of mortgage servicing rights.
Table 2 - Servicing Portfolio
<TABLE>
<CAPTION>
Activity for Activity for
3 Months Ending 12 Months Ending
(Dollars in billions) March 31, 2000 March 31, 2000
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Servicing portfolio at beginning of period $ 44.6 $ 42.9
Loans added to servicing system 3.2 16.3
Servicing released originations (.3) (1.4)
Bulk sales of servicing released (.2) (1.7)
Principal reductions (from payments and
payoffs received in the normal course of business) (1.0) (5.5)
- ----------------------------------------------------------------------------------------------------------------
Subtotal 46.3 50.6
Bulk sales of servicing not yet transferred (3.2) (9.2)
Purchased servicing not yet transferred -- 1.7
- ----------------------------------------------------------------------------------------------------------------
Servicing portfolio at end of period $ 43.1 $ 43.1
================================================================================================================
</TABLE>
<PAGE> 15
Going forward, the growth rate in certain mortgage banking line items will be
affected by the HomeBanc sale in the second quarter (see Subsequent Event
section). Refinance activity is expected to remain low as interest rates
continue to rise. Excluding the HomeBanc sale, the growth in home
purchase-related mortgages should continue as the real estate markets are
expected to remain strong; however, the current market environment may lead to a
change in product mix, resulting in a lower total margin. Rising interest rates
and changing markets should continue to put pressure on the profit margin of
originated loans and could make it more difficult to make the necessary
adjustments to hedge positions in order to mitigate losses in the value of
originated loans. 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. During the first quarter of 2000, capital markets
fee income decreased 45 percent from the record $44.4 million achieved during
the first quarter of 1999 to $24.4 million. Total securities bought and sold
were a record $148.0 billion for the first quarter of 2000, up from $145.9
billion in the same period in 1999. However, revenues decreased due to the shift
in product mix related to customers' expectations of rising interest rates. The
growth in volume was affected as bank customers demanded less investment
securities due to loan growth continuing to outpace deposit growth across the
banking industry. Total underwritings during first quarter of 2000 were $4.4
billion compared with $18.4 billion for the same period in 1999.
Going forward, if the widespread expectation of rising interest rates
continues, capital markets' customers are likely to remain liquid, investing in
shorter-term securities. Strong loan growth will also affect depository
customers if loan growth continues to exceed deposit growth. This trend is
expected to put pressure on achieving annual growth in fee income over 1999.
Once the expectation of rising interest rates lessens, customers' demand for
longer-term securities should return, favorably impacting future revenue
production. 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 14
percent from the first quarter of 1999 (from $23.2 million to $26.4 million)
due to increased customer service charges and sales of various cash management
products and services. Since the first quarter of 1999, trust and investment
management fees grew 10 percent (from $14.6 million to $16.0 million) as assets
under management grew 9 percent (from $9.1 billion to $9.8 billion). Fee income
from merchant processing grew 3 percent from the first quarter of 1999 (from
$10.7 million to $11.0 million). This growth rate was affected by a special
assessment received from a large indirect customer in the first quarter of
1999. Due to reduced emphasis on lower-margin indirect transactions, overall
merchant processing volume declined (from 40.2 million transactions in first
quarter 1999 to 31.1 million transactions in first quarter 2000). However,
direct volume increased approximately 20 percent from the previous year.
Cardholder fees increased 42 percent (from $5.0 million to $7.0 million) during
this same period due to higher interchange collections and price increases.
All other income and commissions grew 81 percent from the first quarter of 1999
(from $20.0 million to $36.1 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 47 percent.
This remaining growth was spread over several categories, including earnings
from First Tennessee's investment in bank owned life insurance, the sale of
<PAGE> 16
properties, other service charges, fees related to the reinsurance program,
insurance premiums and commissions, check clearing fees and brokerage fees.
NET INTEREST INCOME
- -------------------
Net interest income declined slightly (from $148.9 million to $146.1 million)
from the first quarter of 1999, primarily due to a decline in earning assets
(from $15.9 billion to $15.6 billion). The consolidated net interest margin
(margin) remained relatively stable at 3.74 percent for the first quarter of
2000 compared with 3.76 percent in the first quarter of 1999. Strong loan
growth and the change in loan mix compared with first quarter 1999 helped
mitigate higher funding costs in the regional banking group, while the
incremental impacts on the consolidated margin from mortgage banking and
capital markets remained flat. 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 first quarters of 2000
and 1999.
TABLE 3 - NET INTEREST MARGIN
<TABLE>
<CAPTION>
First Quarter
----------------------------
2000 1999
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REGIONAL BANKING GROUP:
Yields on earning assets 8.23% 7.84%
Rates paid on interest-bearing liabilities 4.25 3.89
- ------------------------------------------------------------------------------------------------------------
Net interest spread 3.98 3.95
- ------------------------------------------------------------------------------------------------------------
Effect of interest-free sources .76 .80
Loan fees .15 .15
FRB interest and penalties .01 .01
- ------------------------------------------------------------------------------------------------------------
Net interest margin - Regional banking group 4.90% 4.91%
MORTGAGE BANKING (1.04) (1.03)
CAPITAL MARKETS (.13) (.13)
TRANSACTION PROCESSING .01 .01
- ------------------------------------------------------------------------------------------------------------
Net interest margin 3.74% 3.76%
============================================================================================================
</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.
<PAGE> 17
NONINTEREST EXPENSE
- -------------------
Total noninterest expense (operating expense) for the first quarter of 2000
decreased 13 percent (from $336.8 million to $292.9 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 16 percent. This growth rate was
impacted by the purchase acquisition of NPC which has created additional ongoing
costs since June of 1999. Excluding NPC, mortgage banking and capital markets,
the total operating expense would have increased 9 percent.
Employee compensation, incentives and benefits (personnel expense), the largest
component of noninterest expense, decreased 20 percent from the previous year
due to significantly lower activity levels in mortgage banking and capital
markets in the first quarter of 2000. Excluding these two business lines, total
personnel expense increased 17 percent. Excluding NPC and these two business
lines, personnel expense would have increased 9 percent. Additional business
line information related to expenses is provided in Table 4 and the discussion
that follows.
TABLE 4 - OPERATING EXPENSE COMPOSITION
<TABLE>
<CAPTION>
Three Months
-------------------------- Growth
(Dollars in millions) 2000 1999 Rate (%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Regional banking group $ 117.7 $ 107.4 9.6
Mortgage banking 129.0 179.1 (28.0)
Capital markets 19.9 32.6 (39.0)
Transaction processing 24.2 15.6 54.6
Other 2.1 2.1 4.5
- --------------------------------------------------------------------------------------------------------------------------
Total operating expense $ 292.9 $ 336.8 13.0
==========================================================================================================================
</TABLE>
Mortgage banking expenses decreased 28 percent from the previous year. Expense
growth for this business line varies with the volume and type of activity. The
decrease was mainly in personnel expense due to lower activity levels in the
first quarter of 2000. With the increase in interest rates and lower
prepayments, amortization of capitalized mortgage servicing rights declined 40
percent (from $30.9 million to $18.4 million).
Expenses for the regional banking group increased 10 percent from the previous
year. This increase was due to continuing investments to expand insurance and
investment management, new branches that have been opened in targeted growth
markets, and amortization of costs associated with new systems.
Transaction processing expenses grew 55 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 decline of 39 percent in
expenses from first quarter of 1999 primarily because of lower commissions and
incentives recognized in the first quarter of 2000.
PROVISION FOR LOAN LOSSES/ASSET QUALITY
- ---------------------------------------
The provision for loan losses increased 5 percent (from $14.8 million to $15.5
million) from the first 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.
<PAGE> 18
TABLE 5 - ASSET QUALITY INFORMATION
<TABLE>
<CAPTION>
March 31
--------------------------------
(Dollars in thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming loans $ 31,668 $ 30,795
Foreclosed real estate 18,414 16,870
Other assets 91 189
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 50,173 $ 47,854
============================================================================================================================
Loans and leases 90 days past due $ 31,259 $ 28,006
Potential problem assets* $ 79,519 $ 64,974
<CAPTION>
First Quarter
--------------------------------
2000 1999
--------------------------------
ALLOWANCE FOR LOAN LOSSES:
Beginning balance at December 31 $ 139,603 $ 136,013
Provision for loan losses 15,497 14,826
Charge-offs (16,487) (13,541)
Loan recoveries 2,123 2,089
- ----------------------------------------------------------------------------------------------------------------------------
Ending balance at March 31 $ 140,736 $ 139,387
============================================================================================================================
<CAPTION>
March 31
--------------------------------
2000 1999
--------------------------------
Allowance to total loans 1.47% 1.59%
Nonperforming loans to total loans .33 .35
Nonperforming assets to total loans, foreclosed real estate and other assets .52 .54
Allowance to nonperforming assets 281 291
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
* Includes loans and leases 90 days past due.
</FN>
</TABLE>
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 1.47
percent at March 31, 2000. At March 31, 1999, the ratio of allowance for loan
losses to total loans, net of unearned income, was 1.59 percent.
The ratio of net charge-offs to average loans increased from .53 percent for the
first quarter of 1999 to .61 percent for the first quarter of 2000. This
increase was due to higher consumer loan charge-offs which included those
consumer loan products with higher risk/return profiles. The credit card
receivables charge-off ratio increased to 3.90 percent for the first quarter of
2000 from 3.65 percent for the first quarter of 1999.
The ratio of nonperforming loans to total loans decreased to .33 percent for the
first quarter of 2000 compared with .35 percent for the same period in 1999. At
March 31, 2000, First Tennessee had no concentrations of 10 percent or more of
total loans in any single industry.
<PAGE> 19
TABLE 6 - CHARGE-OFF RATIOS
<TABLE>
<CAPTION>
First Quarter
--------------------------
2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial and commercial real estate .10% .12%
Consumer .85 .53
Credit card receivables 3.90 3.65
Permanent mortgage .05 .03
Total net charge-offs .61 .53
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
BALANCE SHEET REVIEW
EARNING ASSETS
- --------------
Earning assets primarily consist of loans, mortgage loans held for sale and
investment securities. For first quarter 2000, earning assets averaged $15.6
billion compared with $15.9 billion for first quarter 1999. The decline in
earning assets was due to the reduction in mortgage loans held for sale
partially offset by strong loan growth and an increase in investment securities.
At March 31, 2000, First Tennessee reported total assets of $20.1 billion
compared with $18.3 billion at March 31, 1999. Average total assets grew 2
percent (from $18.6 billion to $19.0 billion) from the first quarter of 1999.
LOANS
Average loans increased 9 percent (from $8.7 billion to $9.5 billion) with
growth in all of the primary categories. Average commercial loans increased 8
percent (from $4.2 billion to $4.5 billion) and average consumer loans increased
9 percent (from $3.1 billion to $3.4 billion). First Horizon Equity Lending, a
division of FTBNA, is active in originating second mortgages and contributed 82
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
----------------------------------------------------------------
PERCENT Percent GROWTH
(Dollars in millions) 2000 OF TOTAL 1999 of Total RATE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 4,462.7 47% $ 4,150.9 48% 7.5%
Consumer 3,356.7 36 3,090.4 36 8.6
Permanent mortgage 538.5 6 424.3 5 26.9
Credit card receivables 575.8 6 572.9 7 .5
Real estate construction 508.9 5 380.5 4 33.7
Nonaccrual 30.9 -- 34.2 -- (9.6)
- ----------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned $ 9,473.5 100% $ 8,653.2 100% 9.5%
============================================================================================================================
</TABLE>
During 1999 certain consumer real estate loans and permanent mortgage loans were
securitized. The majority of these securities are owned by subsidiaries of First
Tennessee, including FTBNA. If these transactions had been included in the
growth rate calculation, total average loans would have grown 11 percent, and
average consumer loans would have grown 15 percent from the first quarter of
1999.
Average permanent mortgage loans increased 27 percent (from $.4 billion to $.5
billion) and average real estate construction loans increased 34 percent (from
$.4 billion to $.5 billion). Growth in both of these loan categories came
primarily from mortgage banking activities.
<PAGE> 20
MORTGAGE LOANS HELD FOR SALE/INVESTMENT SECURITIES
The decline in mortgage originations led to a 41 percent decrease in mortgage
loans held for sale (from $3.9 billion to $2.3 billion). Average investment
securities increased 28 percent from first quarter 1999 (from $2.4 billion to
$3.1 billion) principally from securitization activity. Excluding these
transactions, investment securities would have increased 9 percent.
DEPOSITS AND OTHER SOURCES OF FUNDS
- -----------------------------------
Since the first quarter of 1999, average core deposits declined 3 percent (from
$9.3 billion to $8.9 billion) and interest-bearing core deposits declined 4
percent (from $6.4 billion to $6.2 billion). Noninterest-bearing deposits
remained relatively flat at $2.8 billion over this period. Short-term purchased
funds were up 8 percent (from $7.0 billion to $7.6 billion) from the previous
year.
CAPITAL
- -------
Total capital (shareholders' equity plus qualifying capital securities) at March
31, 2000, was $1.4 billion, up 8 percent from $1.3 billion at March 31, 1999.
Shareholders' equity (excluding the qualifying capital securities) was $1.3
billion at March 31, 2000, an increase of 9 percent from $1.2 billion at March
31, 1999.
Average shareholders' equity increased 9 percent (from $1.1 billion to $1.2
billion) since the first quarter of 1999, reflecting internal capital
generation. The average total equity to average assets ratio was 7.00 percent
and the average shareholders' equity to average assets ratio was 6.47 percent
for the first quarter of 2000. This compares with 6.58 percent and 6.05 percent,
respectively for the first quarter of 1999. Unrealized market valuations had no
material effect on the ratios during first quarter of 2000.
On March 31, 2000, the corporation's Tier 1 capital ratio was 8.25 percent, the
total capital ratio was 11.28 percent and the leverage ratio was 6.48 percent.
On March 31, 2000, First Tennessee's bank affiliates had sufficient capital to
qualify as well-capitalized institutions.
<PAGE> 21
OFF BALANCE SHEET ACTIVITY
In the normal course of business, First Tennessee is a party to financial
instruments that are not required to be reflected on a balance sheet. First
Tennessee enters into transactions involving these instruments to meet the
financial needs of its customers and manage its own exposure to fluctuations in
interest rates. These instruments are categorized into "Lending related,"
"Mortgage banking," "Interest rate risk management" and "Capital markets" as
noted in Table 8.
TABLE 8 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AT MARCH 31, 2000
<TABLE>
<CAPTION>
(Dollars in millions) Notional Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LENDING Commitments to extend credit:
RELATED: Consumer credit card lines $ 2,350.7
Consumer home equity 624.1
Commercial real estate and construction and land development 770.8
Mortgage banking 1,426.5
Other 1,394.4
Other commitments:
Standby letters of credit 260.5
Commercial letters of credit 21.9
- --------------------------------------------------------------------------------------------------------------------------
MORTGAGE Mortgage pipeline and warehouse hedging:
BANKING: Interest rate contracts:
Forward contracts - commitments to sell $ 3,373.7
Option contracts - purchased caps* 1,900.0
Servicing portfolio hedging:
Interest rate contracts*:
Caps - purchased 500.0
Caps - written 500.0
Floors - purchased 20,275.0
Swaptions - purchased 1,000.0
Swaps 625.0
- --------------------------------------------------------------------------------------------------------------------------
INTEREST Interest rate contracts:
RATE RISK Swaps - receive fixed/pay floating $ 255.0
MANAGEMENT: Swaps - receive floating/pay floating 641.7
Caps - purchased 20.0
Caps - written 20.0
Equity contracts:
Purchased options 1.9
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL Forward contracts:
MARKETS: Commitments to buy $ 1,104.2
Commitments to sell 1,102.1
Option contracts:
Written 5.0
Purchased 5.0
Securities underwriting commitments 16.6
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*Mortgage banking option contracts had a net book value of $154.7 million at March 31, 2000.
</FN>
</TABLE>
<PAGE> 22
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. Subsequent to year-end 1999,
First Tennessee has filed such a declaration.
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 filed notifications with the OCC and currently meet all
of the other above requirements. 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" CRA (Community Reinvestment Act)
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
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
<PAGE> 23
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 forecasted transaction, the remainder of
the accounting adjustments will be reported as a cumulative effect adjustment of
comprehensive income.
SFAS 133, as amended, 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 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.
SUBSEQUENT EVENT
- ----------------
SALE OF HOMEBANC MORTGAGE
On April 28, 2000, First Tennessee sold HomeBanc Mortgage, a division of First
Horizon Loan Corporation. The sales price for the division was approximately
$57.5 million in cash and is expected to result in a one-time gain of about $42
million. This gain gives First Tennessee the opportunity to evaluate various
alternatives, which are expected to improve future profitability. The result of
implementing these alternatives coupled with the effect of the HomeBanc sale is
not expected to have a significant impact on First Tennessee's 2000 earnings
expectations. However, growth rates in individual line items may be affected by
these actions.
<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, 3, 4 and 5
- -------------------
As of the end of the first quarter, 2000, the answers to Items 1, 3, 4 and 5
were either inapplicable or negative, and therefore, these items are omitted.
Item 2 - Changes in Securities.
- -------------------------------
On February 7, 2000, an additional 49,391 shares of the Corporation's common
stock, $0.625 par value, were issued to the former shareholders of Elliot Ames,
Inc., Los Altos, California, in addition to the 242,423 shares of the
Corporation's common stock issued in the fourth quarter of 1999 at the closing
of the Elliot Ames acquisition. The issuance of shares at the closing was
described in Item 5 of the Corporation's 1999 Form 10-K.
<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.*
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>
(b) Reports on Form 8-K.
A report on Form 8-K was filed on February 29, 2000 (with a Date of Report of
February 28, 2000) disclosing under Item 5 a press release, announcing revised
earnings for 1999 and the earnings outlook for 2000.
<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.
<TABLE>
<S> <C>
FIRST TENNESSEE NATIONAL CORPORATION
------------------------------------
(Registrant)
DATE: 5/12/00 By: Elbert L. Thomas Jr.
--------------------- --------------------------
Elbert L. Thomas Jr.
Executive Vice President and
Chief Financial Controller
(Duly Authorized Officer and
Principal Financial Officer)
</TABLE>
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
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>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST
TENNESSEE NATIONAL CORPORATION'S MARCH 31, 2000, FINANCIAL STATEMENTS FILED IN
ITS 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCES TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 799,641
<INT-BEARING-DEPOSITS> 947
<FED-FUNDS-SOLD> 359,556
<TRADING-ASSETS> 351,135
<INVESTMENTS-HELD-FOR-SALE> 2,190,683
<INVESTMENTS-CARRYING> 736,691
<INVESTMENTS-MARKET> 684,103
<LOANS> 12,496,474
<ALLOWANCE> 140,736
<TOTAL-ASSETS> 20,071,575
<DEPOSITS> 12,689,267
<SHORT-TERM> 3,972,503
<LIABILITIES-OTHER> 1,688,619
<LONG-TERM> 359,857
100,000
0
<COMMON> 81,200
<OTHER-SE> 1,180,129
<TOTAL-LIABILITIES-AND-EQUITY> 20,071,575
<INTEREST-LOAN> 254,739
<INTEREST-INVEST> 53,981
<INTEREST-OTHER> 10,579
<INTEREST-TOTAL> 319,299
<INTEREST-DEPOSIT> 104,612
<INTEREST-EXPENSE> 173,805
<INTEREST-INCOME-NET> 145,494
<LOAN-LOSSES> 15,497
<SECURITIES-GAINS> 1,601
<EXPENSE-OTHER> 292,879
<INCOME-PRETAX> 59,515
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,523
<EPS-BASIC> .30
<EPS-DILUTED> .30
<YIELD-ACTUAL> 3.74
<LOANS-NON> 31,668
<LOANS-PAST> 32,666
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 48,261
<ALLOWANCE-OPEN> 139,603
<CHARGE-OFFS> 16,487
<RECOVERIES> 2,123
<ALLOWANCE-CLOSE> 140,736
<ALLOWANCE-DOMESTIC> 140,736
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
