10-Q 1 g65148e10-q.txt FIRST TENNESSEE NATIONAL CORPORATION 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------- Commission file number 000-4491 -------- FIRST TENNESSEE NATIONAL CORPORATION ---------------------------------------- (Exact name of registrant as specified in its charter) Tennessee 62-0803242 ------------------------------ ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 165 Madison Avenue, Memphis, Tennessee 38103 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (901) 523-4212 ---------------------------------------------------- (Registrant's telephone number, including area code) None ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.625 par value 128,812,864 ----------------------------- ------------------------------- Class Outstanding at October 31, 2000 2 FIRST TENNESSEE NATIONAL CORPORATION INDEX Part I. Financial Information Part II. Other Information Signatures Exhibit Index 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. 4
CONSOLIDATED STATEMENTS OF CONDITION First Tennessee National Corporation ---------------------------------------------------------------------------------------------------------------- September 30 December 31 ------------------------------- ------------ (Dollars in thousands)(Unaudited) 2000 1999 1999 ------------------------------------------------------------------------------------------------- ------------ ASSETS: Cash and due from banks $ 804,330 $ 860,519 $ 956,077 Federal funds sold and securities purchased under agreements to resell 196,671 297,398 279,537 ------------------------------------------------------------------------------------------------- ------------ Total cash and cash equivalents 1,001,001 1,157,917 1,235,614 ------------------------------------------------------------------------------------------------- ------------ Investment in bank time deposits 4,430 1,598 3,263 Capital markets securities inventory 582,226 502,796 147,041 Mortgage loans held for sale 2,137,079 2,910,874 2,049,945 Securities available for sale 2,104,990 1,953,055 2,332,356 Securities held to maturity (market value of $630,320 at September 30, 2000; $785,065 at September 30, 1999; and $734,853 at December 31, 1999) 667,291 810,394 768,936 Loans, net of unearned income 10,168,459 8,956,320 9,363,158 Less: Allowance for loan losses 145,923 139,426 139,603 ------------------------------------------------------------------------------------------------- ------------ Total net loans 10,022,536 8,816,894 9,223,555 -------------------------------------------------------------------------------------------------- ------------ Premises and equipment, net 289,574 304,553 305,519 Real estate acquired by foreclosure 15,669 17,065 17,870 Mortgage servicing rights, net 859,022 868,589 826,210 Intangible assets, net 125,156 131,162 133,568 Capital markets receivables and other assets 1,410,656 1,627,100 1,329,513 ------------------------------------------------------------------------------------------------- ------------ TOTAL ASSETS $ 19,219,630 $ 19,101,997 $ 18,373,390 ================================================================================================= ============ LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Interest-bearing $ 10,259,580 $ 9,674,515 $ 8,560,462 Noninterest-bearing 2,918,584 2,748,857 2,798,239 ------------------------------------------------------------------------------------------------- ------------ Total deposits 13,178,164 12,423,372 11,358,701 ------------------------------------------------------------------------------------------------- ------------ Federal funds purchased and securities sold under agreements to repurchase 2,730,729 1,979,934 2,856,282 Commercial paper and other short-term borrowings 494,003 1,494,301 1,550,229 Capital markets payables and other liabilities 996,828 1,480,796 908,048 Term borrowings 409,803 376,877 358,663 ------------------------------------------------------------------------------------------------- ------------ Total liabilities 17,809,527 17,755,280 17,031,923 ------------------------------------------------------------------------------------------------- ------------ Guaranteed preferred beneficial interests in First Tennessee's junior subordinated debentures 100,000 100,000 100,000 ------------------------------------------------------------------------------------------------- ------------ SHAREHOLDERS' EQUITY: Preferred stock - no par value (5,000,000 shares authorized, but unissued) -- -- -- Common stock - $.625 par value (shares authorized - 400,000,000; shares issued - 128,081,182 at September 30, 2000; 130,681,481 at September 30, 1999; and 129,878,459 at December 31, 1999) 80,051 81,676 81,174 Capital surplus 104,868 159,144 130,636 Undivided profits 1,129,144 1,018,112 1,053,722 Accumulated other comprehensive income (4,513) (9,157) (21,752) Deferred compensation on restricted stock incentive plans (4,400) (6,245) (5,674) Deferred compensation obligation 4,953 3,187 3,361 ------------------------------------------------------------------------------------------------- ------------ Total shareholders' equity 1,310,103 1,246,717 1,241,467 ------------------------------------------------------------------------------------------------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 19,219,630 $ 19,101,997 $ 18,373,390 ================================================================================================= ============ See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF INCOME First Tennessee National Corporation ----------------------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 -------------------------------- ------------------------------ (Dollars in thousands except per share data)(Unaudited) 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $235,407 $189,399 $ 670,309 $ 552,229 Interest on investment securities: Taxable 47,401 46,001 148,854 127,250 Tax-exempt 484 602 1,482 2,093 Interest on mortgage loans held for sale 54,541 55,458 157,778 179,570 Interest on capital markets securities inventory 9,073 7,746 21,805 25,057 Interest on other earning assets 5,676 4,006 15,772 10,456 -------------------------------------------------------------------------------------------------------------------------------- Total interest income 352,582 303,212 1,016,000 896,655 -------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on deposits: Savings 1,370 1,450 4,219 4,317 Checking interest and money market account 27,058 25,900 83,043 78,547 Certificates of deposit under $100,000 and other time 33,467 30,326 95,114 93,431 Certificates of deposit $100,000 and more 76,447 38,878 179,392 115,056 Interest on short-term borrowings 58,160 53,155 188,964 144,403 Interest on term borrowings 5,931 6,176 17,769 19,041 -------------------------------------------------------------------------------------------------------------------------------- Total interest expense 202,433 155,885 568,501 454,795 -------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 150,149 147,327 447,499 441,860 Provision for loan losses 16,593 14,110 49,167 43,915 -------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 133,556 133,217 398,332 397,945 -------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Mortgage banking 116,406 158,919 350,474 503,393 Capital markets 37,598 27,832 80,935 102,397 Deposit transactions and cash management 30,631 27,431 86,775 77,255 Trust services and investment management 17,086 15,715 49,138 45,059 Merchant processing 12,958 12,880 36,298 37,805 Cardholder fees 7,683 7,084 21,658 18,098 Equity securities gains/(losses) (269) 1,871 206 1,863 Debt securities gains/(losses) 35 (12) 1,245 (76) All other income and commissions 39,074 34,592 107,696 81,302 -------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 261,202 286,312 734,425 867,096 -------------------------------------------------------------------------------------------------------------------------------- ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 394,758 419,529 1,132,757 1,265,041 -------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Employee compensation, incentives and benefits 156,305 154,175 442,500 490,461 Amortization of mortgage servicing rights 21,366 22,784 57,749 83,619 Occupancy 17,947 19,706 58,055 52,408 Operations services 17,151 16,886 51,682 49,449 Equipment rentals, depreciation and maintenance 15,476 14,618 48,237 41,731 Communications and courier 11,875 13,816 36,171 38,853 Amortization of intangible assets 2,833 2,629 8,170 7,806 All other expense 67,283 69,826 202,204 217,601 -------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 310,236 314,440 904,768 981,928 -------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 84,522 105,089 227,989 283,113 Applicable income taxes 18,575 35,671 67,096 99,694 -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 65,947 $ 69,418 $ 160,893 $ 183,419 ================================================================================================================================ EARNINGS PER SHARE $ .51 $ .53 $ 1.24 $ 1.41 -------------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE $ .50 $ .52 $ 1.22 $ 1.37 -------------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING 129,494,136 131,128,788 130,164,417 130,546,944 -------------------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY First Tennessee National Corporation -------------------------------------------------------------------------------------------- (Dollars in thousands)(Unaudited) 2000 1999 -------------------------------------------------------------------------------------------- BALANCE, JANUARY 1 $1,241,467 $1,099,534 Net income 160,893 183,419 Other comprehensive income: Unrealized market adjustments, net of tax and reclassification adjustment 17,238 (22,029) -------------------------------------------------------------------------------------------- Comprehensive income 178,131 161,390 -------------------------------------------------------------------------------------------- Cash dividends declared (85,462) (74,285) Common stock issued: Elliot Ames, Inc. acquisition 1,385 -- Keystone Mortgage, Inc. acquisition -- (66) Cambridge Mortgage Company acquisition -- 704 For exercise of stock options 6,813 29,933 Tax benefit from non-qualified stock options -- 11,320 Common stock repurchased (48,476) (2,908) Amortization on restricted stock incentive plans 1,503 1,579 Common stock adjustment McGuire Mortgage Co. acquisition -- (259) Other 14,742 19,775 -------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30 $1,310,103 $1,246,717 ============================================================================================ See accompanying notes to consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF CASH FLOWS First Tennessee National Corporation -------------------------------------------------------------------------------------------- Nine Months Ended September 30 ------------------------------ (Dollars in thousands)(Unaudited) 2000 1999 -------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 160,893 $ 183,419 Adjustments to reconcile net income to net cash provided/(used) by operating activities: Provision for loan losses 49,167 43,915 Provision for deferred income tax 32,213 83,665 Depreciation and amortization of premises 43,904 38,329 and equipment Amortization of mortgage servicing rights 57,749 83,619 Amortization of intangible assets 8,170 7,806 Net other amortization and accretion 31,138 42,615 Market value adjustment on foreclosed property 5,961 4,240 Loss on sale of securitized loans 1,315 -- Equity securities gains (206) (1,863) Debt securities (gains)/losses (1,245) 76 Net (gains)/losses on disposal of fixed assets 1,402 (232) Gain on sale of bank branches -- (4,245) Gain on sale of HomeBanc division (40,921) -- Net (increase)/decrease in: Capital markets securities inventory (435,185) (134,976) Mortgage loans held for sale 8,990 1,316,569 Capital markets receivables (78,544) (278,343) Interest receivable (2,650) 3,483 Other assets (145,373) (477,836) Net increase/(decrease)in: Capital markets payables 108,938 381,491 Interest payable 695 (947) Other liabilities (53,539) 2,937 -------------------------------------------------------------------------------------------- Total adjustments (408,021) 1,110,303 -------------------------------------------------------------------------------------------- Net cash (used)/provided by operating activities (247,128) 1,293,722 -------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Held to maturity securities: Maturities 102,640 174,341 Purchases (500) -- Available for sale securities: Sales 356,905 32,056 Maturities 414,520 568,600 Purchases (578,837) (697,010) Premises and equipment: Sales 723 9,301 Purchases (33,007) (91,822) Proceeds from loan securitizations 184,379 -- Net increase in loans (1,041,935) (853,938) Net increase in investment in bank time deposits (1,167) (387) Divestiture of HomeBanc division 57,565 -- Sale of bank branches, net of cash and cash equivalents -- (4,778) Acquisitions, net of cash and cash equivalents acquired -- (8,505) -------------------------------------------------------------------------------------------- Net cash used by investing activities (538,714) (872,142) -------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Common stock: Exercise of stock options 6,831 32,027 Cash dividends (85,777) (73,857) Repurchase of shares (48,542) (2,908) Term borrowings: Issuance 101,200 52,421 Payments (50,288) (90,273) Net increase/(decrease) in: Deposits 1,809,584 747,874 Short-term borrowings (1,181,779) (865,067) -------------------------------------------------------------------------------------------- Net cash (used)/provided by financing activities 551,229 (199,783) -------------------------------------------------------------------------------------------- Net increase/(decrease) in cash and cash equivalents (234,613) 221,797 -------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 1,235,614 936,120 -------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 1,001,001 $ 1,157,917 ============================================================================================ Total interest paid $ 567,278 $ 455,527 Total income taxes paid 86,228 18,472 -------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
8 NOTE 1 - FINANCIAL INFORMATION The unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles. In the opinion of management, all necessary adjustments have been made for a fair presentation of financial position and results of operations for the periods presented. The operating results for the three month and nine month periods ended September 30, 2000, are not necessarily indicative of the results that may be expected going forward. For further information, refer to the audited consolidated financial statements and footnotes included in First Tennessee National Corporation's 1999 Annual Report. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the instrument's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows the instrument's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Upon adoption of SFAS 133, all freestanding derivative instruments will be remeasured at fair value with differences between the previous book value and fair value reported as a one-time accounting adjustment. Likewise, offsetting gains and losses on hedged assets, liabilities and firm commitments will be recognized as adjustments of their respective book values at the adoption date as part of this accounting adjustment. Except to the extent that they relate to hedges of the variable cash flow exposure of forecasted transactions, a portion of the net accounting adjustment (net of hedge difference and hedged item difference) will be reported in net income in the period of adoption. To the extent the adoption adjustment relates to hedges of the variable cash flow exposure of a forecasted transaction, the remainder of the accounting adjustments will be reported as a cumulative effect adjustment of comprehensive income. SFAS 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133", is effective for fiscal years beginning after June 15, 2000. First Tennessee will adopt SFAS 133 on January 1, 2001. Management has not yet finalized the effects SFAS 133 may have on its financial statements including the offsetting gains or losses that may be recognized on hedged assets, liabilities and firm commitments. However, if plans to reposition certain mortgage banking hedges (see revenue and expense enhancement plans in the Subsequent Events and Other Forward-Looking Information Section of the MD&A) at an after-tax cost estimated to be between $35 million and $40 million had been completed at September 30, 2000, it is estimated that the impact of adopting SFAS 133 at September 30, 2000, would have resulted in an estimated net transition adjustment of between $0 and $5 million in after-tax loss. Changes in the fair value of existing and future freestanding derivative instruments, hedged assets, liabilities and firm commitments, changes in the book value, including normal amortization, of these instruments and hedged assets and liabilities could have a substantial impact on the amount of the one-time accounting adjustment and its impact on net income. In addition, management is in the process of evaluating the methods and instruments currently used in hedging market exposure and changes in hedging practices could also significantly influence the impact of adopting SFAS 133. The impact of adopting SFAS 133 could be material at the adoption date and could be substantially different than the estimate described above. SFAS 133 could also increase the volatility of earnings and other comprehensive income in the future. On January 1, 1999, First Tennessee adopted SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This Statement amends SFAS No. 65, which required that retained securities be classified as trading securities. SFAS No. 134 allows these securities to be classified as trading, held to maturity or available for sale based on the intent and ability of the enterprise. On January 1, 1999, First Tennessee adopted Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." This Statement requires that the costs of start-up activities, including organization costs, be expensed as incurred. The impact of adopting this standard was immaterial to First Tennessee. 9 NOTE 2 - DIVESTITURE On April 28, 2000, First Tennessee sold HomeBanc Mortgage, a division of First Horizon Home Loan Corporation. The sales price for the division was approximately $57.6 million in cash with a gain of approximately $40.9 million being recognized in mortgage banking noninterest income. On October 18, 2000, First Tennessee sold its corporate and municipal trust business to The Chase Manhattan Bank. A pre-tax gain of approximately $33 million will be recognized in fourth quarter 2000. 10 NOTE 3 - EARNINGS PER SHARE The following table shows a reconciliation of earnings per share to diluted earnings per share.
Three Months Ended Nine Months Ended September 30 September 30 -------------------------------- ------------------------------ (Dollars in thousands, except per share data) 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE COMPUTATION: Net income $65,947 $69,418 $160,893 $183,419 Weighted average shares outstanding 128,880,550 130,685,907 129,626,781 130,153,949 Shares attributable to deferred compensation 613,586 442,881 537,636 392,995 -------------------------------------------------------------------------------------------------------------------------------- Total weighted average shares per income statement 129,494,136 131,128,788 130,164,417 130,546,944 Earnings per share $ .51 $ .53 $ 1.24 $ 1.41 ================================================================================================================================ DILUTED EARNINGS PER SHARE COMPUTATION: Net income $65,947 $69,418 $160,893 $183,419 Weighted average shares outstanding 129,494,136 131,128,788 130,164,417 130,546,944 Dilutive effect due to stock options 1,521,154 3,046,877 1,634,388 3,661,797 -------------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding, as adjusted 131,015,290 134,175,665 131,798,805 134,208,741 Diluted earnings per share $ .50 $ .52 $ 1.22 $ 1.37 ================================================================================================================================
11 NOTE 4 - LOANS The composition of the loan portfolio at September 30 is detailed below:
(Dollars in thousands) 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- Commercial $ 4,740,921 $ 4,330,516 Consumer 3,617,927 3,136,311 Permanent mortgage 634,808 470,550 Credit card receivables 548,521 578,370 Real estate construction 585,066 407,882 Nonaccrual - Regional banking group 15,527 11,476 Nonaccrual - Mortgage banking 25,689 21,215 -------------------------------------------------------------------------------------------------------------------------------- Loans, net of unearned income 10,168,459 8,956,320 Allowance for loan losses 145,923 139,426 -------------------------------------------------------------------------------------------------------------------------------- Total net loans $ 10,022,536 $ 8,816,894 ================================================================================================================================
The following table presents information concerning nonperforming loans at September 30:
(Dollars in thousands) 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- Impaired loans $ 15,736 $ 12,599 Other nonaccrual loans 25,480 20,092 -------------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans $ 41,216 $ 32,691 ================================================================================================================================
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:
Three Months Ended Nine Months Ended September 30 September 30 --------------------------- ------------------------- (Dollars in thousands) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------------------- Total interest on impaired loans $ 118 $ 50 $ 312 $ 365 Average balance of impaired loans 12,351 12,792 9,203 13,027 ---------------------------------------------------------------------------------------------------------------------------
An allowance for loan losses is maintained for all impaired loans. Activity in the allowance for loan losses related to non-impaired loans, impaired loans, and for the total allowance for the nine months ended September 30, 2000 and 1999, is summarized as follows:
(Dollars in thousands) Non-impaired Impaired Total ------------------------------------------------------------------------------------------------------------------------------ Balance on December 31, 1998 $ 133,572 $ 2,441 $ 136,013 Provision for loan losses 36,492 7,423 43,915 Securitization adjustment (1,790) -- (1,790) Adjustment due to divestiture (893) -- (893) Charge-offs 37,416 6,593 44,009 Less loan recoveries 4,885 1,305 6,190 ------------------------------------------------------------------------------------------------------------------------------ Net charge-offs 32,531 5,288 37,819 ------------------------------------------------------------------------------------------------------------------------------ Balance on September 30, 1999 $ 134,850 $ 4,576 $ 139,426 ============================================================================================================================== Balance on December 31, 1999 $ 136,978 $ 2,625 $ 139,603 Provision for loan losses 45,660 3,507 49,167 Securitization adjustment (2,173) -- (2,173) Charge-offs 43,185 3,798 46,983 Less loan recoveries 4,987 1,322 6,309 ------------------------------------------------------------------------------------------------------------------------------ Net charge-offs 38,198 2,476 40,674 ------------------------------------------------------------------------------------------------------------------------------ BALANCE ON SEPTEMBER 30, 2000 $ 142,267 $ 3,656 $ 145,923 ==============================================================================================================================
12 NOTE 5 - BUSINESS SEGMENT INFORMATION First Tennessee provides traditional retail/commercial banking and other financial services to its customers. These products and services are categorized into two broad groups: a regional banking group and national lines of business. The regional banking group provides a comprehensive package of financial services including traditional banking, trust services, investments, asset management, insurance, and credit card services to its customers. The national lines of business include mortgage banking, capital markets and transaction processing. The Other segment is used to isolate corporate items such as expense related to guaranteed preferred beneficial interests in First Tennessee's junior subordinated debentures and securities gains or losses which include any venture capital gains or losses and related incentive costs. Total revenue, expense and asset levels reflect those which are specifically identifiable or which are allocated based on an internal allocation method. Because the allocations are based on internally developed assignments and allocations, they are to an extent subjective. This assignment and allocation has been consistently applied for all periods presented. The following table reflects the approximate amounts of consolidated revenue, expense, tax,and assets for the quarterly and year to date periods ending September 30, 2000 and 1999.
Regional Banking Mortgage Capital Transaction (Dollars in thousands) Group Banking Markets Processing Other Consolidated ------------------------------------------------------------------------------------------------------------------------------- 3Q00 Interest income $ 261,409 $ 75,162 $ 11,598 $ 4,413 $ -- $ 352,582 Interest expense 127,672 63,579 10,643 539 -- 202,433 ------------------------------------------------------------------------------------------------------------------------------- Net interest income 133,737 11,583 955 3,874 -- 150,149 Other revenues 75,997 118,743 37,598 29,098 (234) 261,202 Other expenses* 137,387 133,312 27,750 26,257 2,123 326,829 ------------------------------------------------------------------------------------------------------------------------------- Pre-tax income 72,347 (2,986) 10,803 6,715 (2,357) 84,522 Income taxes 25,197 (12,335) 4,057 2,552 (896) 18,575 ------------------------------------------------------------------------------------------------------------------------------- Net income $ 47,150 $ 9,349 $ 6,746 $ 4,163 $(1,461) $ 65,947 =============================================================================================================================== Average assets $13,033,152 $ 5,237,054 $765,528 $540,145 $ -- $19,575,879 ------------------------------------------------------------------------------------------------------------------------------- 3Q99 Interest income $ 223,409 $ 66,222 $ 9,112 $ 4,469 $ -- $ 303,212 Interest expense 94,527 52,727 8,183 448 -- 155,885 ------------------------------------------------------------------------------------------------------------------------------- Net interest income 128,882 13,495 929 4,021 -- 147,327 Other revenues 66,842 161,135 27,845 28,631 1,859 286,312 Other expenses* 127,134 153,710 20,886 24,285 2,535 328,550 ------------------------------------------------------------------------------------------------------------------------------- Pre-tax income 68,590 20,920 7,888 8,367 (676) 105,089 Income taxes 21,718 8,057 2,973 3,179 (256) 35,671 ------------------------------------------------------------------------------------------------------------------------------- Net income $ 46,872 $ 12,863 $ 4,915 $ 5,188 $ (420) $ 69,418 =============================================================================================================================== Average assets $12,206,651 $ 5,182,985 $749,903 $493,788 $ -- $18,633,327 ------------------------------------------------------------------------------------------------------------------------------- *Includes loan loss provision.
Regional Banking Mortgage Capital Transaction (Dollars in thousands) Group Banking Markets Processing Other Consolidated ------------------------------------------------------------------------------------------------------------------------------- YEAR TO DATE 2000 Interest income $ 754,393 $ 220,004 $ 29,229 $ 12,374 $ -- $ 1,016,000 Interest expense 352,897 186,915 27,164 1,525 -- 568,501 ------------------------------------------------------------------------------------------------------------------------------- Net interest income 401,496 33,089 2,065 10,849 -- 447,499 Other revenues 206,653 359,168 81,774 85,379 1,451 734,425 Other expenses* 402,549 403,799 64,831 76,387 6,369 953,935 ------------------------------------------------------------------------------------------------------------------------------- Pre-tax income 205,600 (11,542) 19,008 19,841 (4,918) 227,989 Income taxes 69,889 (15,534) 7,070 7,540 (1,869) 67,096 ------------------------------------------------------------------------------------------------------------------------------- Net income $ 135,711 $ 3,992 $ 11,938 $ 12,301 $(3,049) $ 160,893 =============================================================================================================================== Average assets $12,873,594 $ 5,256,025 $683,808 $559,715 $ -- $19,373,142 ------------------------------------------------------------------------------------------------------------------------------- Year To Date 1999 Interest income $ 646,449 $ 205,725 $ 30,845 $ 13,636 $ -- $ 896,655 Interest expense 268,388 157,870 26,911 1,626 -- 454,795 ------------------------------------------------------------------------------------------------------------------------------- Net interest income 378,061 47,855 3,934 12,010 -- 441,860 Other revenues 183,232 508,807 102,411 70,859 1,787 867,096 Other expenses* 374,285 507,808 77,569 59,586 6,595 1,025,843 ------------------------------------------------------------------------------------------------------------------------------- Pre-tax income 187,008 48,854 28,776 23,283 (4,808) 283,113 Income taxes 62,784 19,040 10,849 8,847 (1,826) 99,694 ------------------------------------------------------------------------------------------------------------------------------- Net income $ 124,224 $ 29,814 $ 17,927 $ 14,436 $(2,982) $ 183,419 =============================================================================================================================== Average assets $11,887,829 $ 5,342,462 $841,211 $494,518 $ -- $18,566,020 ------------------------------------------------------------------------------------------------------------------------------- *Includes loan loss provision.
13 FIRST TENNESSEE NATIONAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL INFORMATION ------------------- First Tennessee National Corporation (First Tennessee) is headquartered in Memphis, Tennessee, and is a nationwide, diversified financial services institution which provides banking and other financial services to its customers through various regional and national business lines. The Regional Banking Group includes the retail/commercial bank, the credit card division, and the trust division. The National Lines of Business include First Horizon Home Loan Corporation (formerly FT Mortgage Companies and also referred to as First Horizon Home Loans and mortgage banking), First Tennessee Capital Markets (also referred to as capital markets), and transaction processing (credit card merchant processing, automated teller machine network, payment processing operation, and check clearing). Certain revenue and expenses are allocated and equity is assigned to the various business lines to reflect the inherent risk in each business line, based on management's best estimates. These allocations are periodically reviewed and may be revised from time to time to more accurately reflect current business conditions and risks; the previous history is restated to ensure comparability. For the purpose of this management discussion and analysis (MD&A), noninterest income (also called fee income) and total revenue exclude securities gains and losses. Net interest income has been adjusted to a fully taxable equivalent (FTE) basis for certain tax-exempt loans and investments included in earning assets. Earning assets, including loans, have been expressed as averages, net of unearned income. First Tennessee Bank National Association, the primary bank subsidiary, is also referred to as FTBNA in this discussion. The following is a discussion and analysis of the financial condition and results of operations of First Tennessee for the three month and nine month periods ended September 30, 2000, compared to the three month and nine month periods ended September 30, 1999. To assist the reader in obtaining a better understanding of First Tennessee and its performance, this discussion should be read in conjunction with First Tennessee's unaudited consolidated financial statements and accompanying notes appearing in this report. Additional information including the 1999 financial statements, notes, and management's discussion and analysis is provided in the 1999 Annual Report. FORWARD-LOOKING STATEMENTS -------------------------- Management's discussion and analysis may contain forward-looking statements with respect to First Tennessee's beliefs, plans, goals, expectations, and estimates. These statements are contained in certain sections that follow such as Noninterest Income, Net Interest Income and Other. Forward-looking statements are statements that are not based on historical information but rather are related to future operations, strategies, financial results or other developments. The words "believe", "expect", "anticipate", "intend", "estimate", "should", "is likely", "going forward", and other expressions which indicate future events and trends identify forward-looking statements. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond a company's control, and many of which, with respect to future business decisions and actions (such as acquisitions and divestitures), are subject to change. Examples of uncertainties and contingencies include, among other important factors, general and local economic and business conditions; expectations of the timing and amount of interest rate movements (which can have a significant impact on a financial services institution); market and monetary fluctuations; inflation; competition within and outside the financial services industry; technology; and new products and services in the industries in which First Tennessee operates. Other factors are those inherent in originating and servicing loans, including prepayment risks and fluctuation of collateral values and changes in customer profiles. Additionally, the policies of the Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System, unanticipated regulatory and judicial proceedings, and changes in laws 14 and regulations applicable to First Tennessee and First Tennessee's success in executing its business plans and strategies and managing the risks involved in the foregoing, could cause actual results to differ. First Tennessee assumes no obligation to update any forward-looking statements that are made from time to time. FINANCIAL SUMMARY (COMPARISON OF THIRD QUARTER 2000 TO THIRD QUARTER 1999) Earnings for third quarter 2000 were $66.0 million, a decline of 5 percent from last year's third quarter earnings of $69.4 million. Diluted earnings per share were $.50 in 2000, a decline of 4 percent from the $.52 earned in 1999. Basic earnings per share were $.51 in 2000, a decline of 4 percent from the $.53 earned in 1999. Return on average shareholders' equity was 20.6 percent in 2000 compared with 22.6 percent in 1999. Return on average assets was 1.34 percent in 2000 compared with 1.48 percent in 1999. On September 30, 2000, First Tennessee ranked as one of the top 50 bank holding companies nationally in market capitalization and total assets. On September 30, 2000, total assets were $19.2 billion and shareholders' equity was $1.3 billion. On September 30, 1999, total assets were $19.1 billion and shareholders' equity was $1.2 billion. Total revenues declined 5 percent from third quarter 1999, with a 2 percent increase in net interest income and an 8 percent decline in fee income. NONINTEREST INCOME ------------------ Fee income provides the majority of First Tennessee's revenue. In third quarter 2000, fee income contributed approximately 64 percent to total revenues compared with approximately 66 percent for the same period in 1999. During third quarter 2000, fee income declined 8 percent to $261.5 million, down from $284.4 million in third quarter 1999. The decline in fee income was related to the mortgage banking segment which has been operating under market conditions which include a challenging interest rate environment and the continuing impact of competitive pricing within the industry. Conversely, all other sources of fee income have realized growth over the previous year, led by double-digit growth in capital markets, deposit transactions and cash management, and other income. A more detailed discussion follows. MORTGAGE BANKING First Horizon Home Loan Corporation, a subsidiary of FTBNA, originates and services residential mortgage loans. Following origination, the mortgage loans, primarily first-lien, are sold to investors in the secondary market while the rights to service such loans are usually retained. Various hedging strategies are used to mitigate changes in the market value of the loan during the time period beginning with a price commitment to the customer and ending when the loan is delivered to the investor. Closed loans held during this time period are referred to as the mortgage warehouse. Origination fees and gains or losses from the sale of loans are recognized at the time a mortgage loan is sold into the secondary market. Secondary marketing activities include gains or losses from mortgage warehouse hedging activities, product pricing decisions, gains or losses from the sale of loans into the secondary market, and the capitalized value of mortgage servicing rights. Servicing rights permit the collection of fees for gathering and processing monthly mortgage payments for the owner of the mortgage loans. First Horizon Home Loans employs hedging strategies intended to maintain the value of its mortgage servicing rights through changing interest rate environments. Miscellaneous income includes the net gains or losses related to rebalancing hedges of mortgage servicing rights, income from the foreclosure repurchase program and other miscellaneous items. 15 Mortgage banking fee income declined 27 percent to $116.4 million from $158.9 million for third quarter 1999 as shown in Table 1. TABLE 1 - MORTGAGE BANKING
Third Quarter Nine Months ------------------------- Growth ------------------------ Growth (Dollars in millions) 2000 1999 Rate (%) 2000 1999 Rate (%) --------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Loan origination fees $ 36.1 $ 38.9 (7.1) $ 96.6 $ 140.9 (31.5) Secondary marketing activities 38.1 73.0 (47.9) 83.4 213.5 (61.0) --------------------------------------------------------------------------------------------------------------------------- Mortgage origination function 74.2 111.9 (33.7) 180.0 354.4 (49.2) --------------------------------------------------------------------------------------------------------------------------- Servicing fees 41.5 43.4 (4.4) 119.3 126.0 (5.4) Sale of mortgage servicing rights (1.1) .2 NM 12.6 3.9 226.1 Miscellaneous 1.8 3.4 (46.0) 38.6 19.1 102.7 --------------------------------------------------------------------------------------------------------------------------- Total noninterest income $ 116.4 $ 158.9 (26.8) $ 350.5 $ 503.4 (30.4) =========================================================================================================================== Refinance originations $ 632.7 $ 852.5 (25.8) $ 1,945.6 $ 6,368.8 (69.5) Home purchase related originations 3,062.3 3,534.6 (13.4) 9,544.4 9,626.1 (.8) --------------------------------------------------------------------------------------------------------------------------- Mortgage loan originations $ 3,695.0 $ 4,387.1 (15.8) $11,490.0 $15,994.9 (28.2) =========================================================================================================================== Servicing portfolio $47,326.1 $46,917.8 .9 $47,326.1 $46,917.8 .9 --------------------------------------------------------------------------------------------------------------------------- NM = not meaningful
Total origination volume, consisting of home purchase-related mortgages and refinanced mortgages, fell 16 percent to $3.7 billion in third quarter 2000 compared with $4.4 billion in the previous year. The decline in volume was due to higher interest rates, pricing competition throughout the industry, and a reduction in the number of production offices. Home purchase-related mortgage originations fell 13 percent to $3.1 billion from $3.5 billion, while refinance volume declined 26 percent to $.6 billion from $.9 billion. Fees from the mortgage origination process (loan origination fees, profits from the sale of loans and secondary marketing activities) decreased 34 percent to $74.2 million, down from $111.9 million in third quarter 1999. This decline was due primarily to less production; lower margins related to competitive pricing pressures and a shift in product mix; and a decrease in the results of hedging and other loan sale activities compared with third quarter 1999. The mortgage servicing portfolio totaled $47.3 billion on September 30, 2000, compared to $46.9 billion on September 30, 1999. The change in the portfolio since third quarter 1999 and year-end 1999 is shown in Table 2. Mortgage servicing fees for third quarter 2000 were $41.5 million compared with $43.4 million for the same period in 1999, a decrease of 4 percent. The lower level of fees was primarily due to the 1999 classification of excess mortgage servicing rights to "interest-only" strips held in the investment securities portfolio which resulted in an increase in interest income on securities while reducing servicing fees. There were no bulk sales or purchases of servicing in third quarter 2000 or 1999. For third quarter 2000 miscellaneous mortgage income totaled $1.8 million compared with $3.4 million in third quarter 1999. The decrease was due to losses of $2.7 million related to the de-designation of certain servicing hedges in third quarter 2000. 16 TABLE 2 - SERVICING PORTFOLIO
Activity for Activity for 9 Months Ending 12 Months Ending (Dollars in billions) September 30, 2000 September 30, 2000 ---------------------------------------------------------------------------------------------------------------- Servicing portfolio at beginning of period $44.6 $46.9 Loans added to servicing system 12.8 16.3 Servicing released originations (1.5) (2.0) Bulk sales of servicing released (2.1) (3.6) Principal reductions (from payments and payoffs received in the normal course of business) (3.8) (5.0) ---------------------------------------------------------------------------------------------------------------- Subtotal 50.0 52.6 Change in bulk sales of servicing not yet transferred (1.0) (5.3) Change in purchased servicing not yet transferred (1.7) -- ---------------------------------------------------------------------------------------------------------------- Servicing portfolio at end of period $47.3 $47.3 ================================================================================================================
Near term profitability of the mortgage banking segment is expected to remain under pressure due to expected seasonal declines in origination volumes, continued pressure on retail and wholesale pricing margins and the transition to a downsized operation. While the transition will continue into the fourth quarter and seasonal weakness in production will affect first quarter 2001, initiatives are underway to improve the profitability of mortgage banking next year, even with the continuation of the current pricing environment. Refinance activity is expected to remain low as mortgage interest rates fluctuate near current levels. Excluding the effect from the reduction in production offices and short-term seasonality, home purchase-related mortgage originations should be reflective of the strength of the economy; however, current competitive pricing pressures and the overall market environment may lead to changes in product mix which may affect total margin. Actual results could differ as mortgage banking performance is affected by numerous factors including the volume and mix of loans produced and sold, loan pricing decisions, interest rate levels and volatility, the creditworthiness of applicants, the current and future estimated levels of prepayments, the effectiveness of hedging activities, the timing of purchases and sales of bulk servicing rights, as well as other factors referred to in the Forward-Looking Statements section of the MD&A. CAPITAL MARKETS First Tennessee Capital Markets generates fee income primarily from the purchase and sale of securities as both principal and agent. Inventory positions are limited to the procurement of securities solely for distribution to customers by the sales staff. Inventory is hedged to protect against movements in interest rates. Capital markets fee income increased 35 percent to $37.6 million during third quarter 2000, up from $27.8 million in 1999. Much of the increase in fee income was the result of new revenue initiatives. However, excluding the new initiatives, capital markets still had its highest quarterly revenues since the same period last year. As rates fell and markets stabilized in the third quarter, some investors shifted their focus to secondary market purchases of agencies and mortgage-backed securities. Capital markets has traditionally generated much of its revenues from these two product areas. Total securities bought and sold were $197.4 billion, an increase of 53 percent from $128.8 billion for the same period in 1999. Activity levels continued to grow as customers, primarily nondepository, invested principally in short-term securities. Conversely, volumes from depository customers were negatively affected as these bank customers experienced strong loan growth and limited deposit growth, which led to a reduced need for securities. Total underwritings during third quarter 2000 were $2.9 billion compared with $5.9 billion for the same period in 1999. Going forward, capital markets anticipates a more stable interest rate environment and a continuation of the market conditions experienced in the third quarter but expects a more moderate impact on future earnings from the new revenue initiatives implemented during the quarter. Initially these new business initiatives will likely produce inconsistent revenues from quarter to quarter. With this in mind, management has paid careful attention to making a portion of the expenses associated with these businesses variable as well. While the market 17 expectation for further increases in interest rates has waned, capital markets expects a gradual return in customers' demand for longer-term securities. Until then, capital markets' customers are likely to continue to invest in shorter-term securities. Strong loan growth will also affect depository customers if loan growth continues to exceed deposit growth. These conditions have adversely affected capital markets' ability to generate fee income resulting in declining fee income for the year 2000 compared with the levels achieved in 1999. Actual results could differ because of several factors, including those presented in the Forward-Looking Statements section of the MD&A. OTHER FEE INCOME Noninterest income from deposit transactions and cash management increased 12 percent to $30.7 million from $27.4 million for third quarter 1999 due primarily to increased cash management fees, returned check charges, and debit card access fees. Since third quarter 1999, trust and investment management fees grew 9 percent to $17.0 million up from $15.7 million while assets under management also grew 9 percent to $9.9 billion compared with $9.0 billion in 1999. Merchant processing fee income increased to $13.0 million from $12.9 million in third quarter 1999. This growth was affected by special assessments received from customers in third quarter 1999 which restrained the fee income growth rate to 1 percent. Merchant processing volume increased 8 percent to 35.6 million transactions processed in third quarter 2000 compared with 32.9 million transactions in third quarter 1999. Cardholder fees increased 8 percent in third quarter 2000 to $7.7 million up from $7.1 million in 1999 due to higher interchange collections. All other income and commissions grew 13 percent to $39.1 million from $34.6 million in third quarter 1999. In 1999 a gain of $4.2 million (pre-tax) was recognized for the sale of a bank branch in Tunica, Mississippi. Excluding this transaction, other income and commissions would have increased 29 percent in 2000 with this growth being spread over several categories. NET INTEREST INCOME ------------------- Net interest income increased 2 percent to $150.8 million in third quarter 2000, up from $148.1 million in 1999 primarily due to a 6 percent increase in earning assets; the effect of which was lessened by a tightening in the spread between yields on earning assets and rates paid on interest-bearing liabilities. The consolidated net interest spread for third quarter 2000 was 3.04 percent compared with 3.30 percent for 1999. Rising interest rates reduced the impact of the narrowing in net interest spread by increasing the benefit from interest free funding. The consolidated net interest margin (margin) decreased to 3.68 percent for third quarter 2000 compared with 3.82 percent in third quarter 1999. Strong loan growth and the change in loan mix compared with third quarter 1999 helped mitigate higher funding costs in the regional banking group. Table 3 details the computation of the net interest margin for the regional banking group and the impact that the other business lines had on the consolidated margin for the third quarters of 2000 and 1999. 18 TABLE 3 - NET INTEREST MARGIN
Third Quarter ------------------------ 2000 1999 ------------------------------------------------------------------------------------------------ REGIONAL BANKING GROUP: Yields on earning assets 8.63% 7.98% Rates paid on interest-bearing liabilities 4.95 3.90 ------------------------------------------------------------------------------------------------ Net interest spread 3.68 4.08 ------------------------------------------------------------------------------------------------ Effect of interest-free sources .97 .74 Loan fees .14 .15 FRB interest and penalties .01 -- ------------------------------------------------------------------------------------------------ Net interest margin - Regional banking group 4.80% 4.97% MORTGAGE BANKING (.97) (1.00) CAPITAL MARKETS (.15) (.17) TRANSACTION PROCESSING -- .02 ------------------------------------------------------------------------------------------------ Net interest margin 3.68% 3.82% ================================================================================================
As shown in Table 3, the margin is affected by the activity levels and related funding for First Tennessee's national lines of business as these nonbank business lines typically produce different margins than traditional banking activities. Mortgage banking can affect the overall margin based on a number of factors, including the size of the mortgage warehouse, the time it takes to deliver loans into the secondary market, the amount of custodial balances, and the level of mortgage servicing rights. Capital markets tends to compress the margin because of its strategy to reduce market risk by hedging its inventory in the cash markets which effectively eliminates net interest income on these positions. As a result, First Tennessee's consolidated margin cannot be readily compared to that of other bank holding companies. Going forward, based on no additional interest rate action by the Federal Reserve, First Tennessee expects the margin in the near term to remain relatively stable. However, the margin will continue to be influenced by the activity levels in the nonbanking lines of business, especially mortgage banking. Actual results could differ because of several factors, including those presented in the Forward-Looking Statements section of the MD&A discussion. NONINTEREST EXPENSE ------------------- Total noninterest expense (operating expense) for third quarter 2000 decreased 1 percent to $310.2 million from $314.4 million for the same period in 1999. Expenses in mortgage banking and capital markets fluctuate based on the type and level of activity. Excluding mortgage banking and capital markets, total operating expense increased 5 percent. Employee compensation, incentives and benefits (personnel expense), the largest component of noninterest expense, increased 1 percent. The percent of change in personnel expense is affected by the level of activity and type of product sold/originated in mortgage banking and capital markets. Excluding these two business lines, total personnel expense increased 2 percent. Additional business line information related to expenses is provided in Table 4 and the discussion that follows. 19 TABLE 4 - OPERATING EXPENSE COMPOSITION
Third Quarter Nine Months -------------------- Growth -------------------- Growth (Dollars in millions) 2000 1999 Rate (%) 2000 1999 Rate (%) -------------------------------------------------------------------------------------------------------------------------- Regional banking group $ 120.8 $ 114.7 5.4 $ 353.4 $ 336.7 4.9 Mortgage banking 133.3 152.1 (12.4) 403.8 501.5 (19.5) Capital markets 27.7 20.8 32.9 64.8 77.5 (16.4) Transaction processing 26.2 24.3 8.1 76.4 59.6 28.2 Other 2.2 2.5 (16.3) 6.4 6.6 (3.4) -------------------------------------------------------------------------------------------------------------------------- Total operating expense $ 310.2 $ 314.4 (1.3) $ 904.8 $ 981.9 (7.9) ==========================================================================================================================
Mortgage banking expenses decreased 12 percent from the previous year. Personnel expense fell 9 percent to $58.6 million for third quarter 2000 from $64.6 million in 1999 due to lower activity levels. Amortization expense from hedge instruments fell 36 percent, or $5.0 million, from third quarter 1999 primarily due to the de-designation in second quarter 2000 of hedge instruments associated with the mortgage servicing rights. Amortization of capitalized mortgage servicing rights declined 6 percent to $21.3 million from $22.8 million primarily due to the classification of excess mortgage servicing rights to interest-only strips and rising interest rates which have slowed mortgage prepayments. Due to the closing and consolidation of offices over the last several quarters, occupancy expense fell 27 percent, or $2.6 million, from third quarter 1999. Expenses for the regional banking group increased 5 percent from the previous year. Expenses in transaction processing grew 8 percent from the previous year. Capital markets experienced a 33 percent increase in expenses from third quarter of 1999 due to higher commissions and incentives recognized in third quarter 2000 which caused total personnel expense to increase 41 percent, or $6.9 million from 1999. INCOME TAX EXPENSE ------------------ The effective tax rate for third quarter 2000 was 22.0 percent, down from 33.9 percent for third quarter 1999. This variance was primarily the result of a tax benefit related to the issuance by an affiliate of FTBNA of cumulative preferred stock mandatorily redeemable after 30 years (preferred stock) which resulted in approximately a 14 percentage point reduction in the effective tax rate for third quarter 2000. PROVISION FOR LOAN LOSSES/ASSET QUALITY --------------------------------------- The provision for loan losses is the charge to operating earnings that management determines to be necessary to maintain the allowance for loan losses at an adequate level reflecting management's estimate of the risk of loss inherent in the loan portfolio. The provision for loan losses increased 18 percent to $16.5 million from $14.1 million for third quarter 1999, primarily due to a change in the loan mix related to growth in loans with higher risk/reward profiles. Additional asset quality information is provided in Table 5 - Asset Quality Information and Table 6 - Charge-off Ratios. 20 TABLE 5 - ASSET QUALITY INFORMATION
September 30 --------------------------- (Dollars in thousands) 2000 1999 --------------------------------------------------------------------------------------------------------------------- Nonperforming loans $ 41,216 $32,691 Foreclosed real estate 15,669 17,065 Other assets 94 85 --------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 56,979 $49,841 ===================================================================================================================== Loans and leases 90 days past due $ 36,365 $24,004 Potential problem assets* $110,651 $68,532 Third Quarter --------------------------- 2000 1999 --------------------------- ALLOWANCE FOR LOAN LOSSES: Beginning balance at June 30 $142,722 $138,595 Provision for loan losses 16,593 14,110 Adjustment due to divestiture -- (893) Charge-offs (15,574) (14,366) Loan recoveries 2,182 1,980 --------------------------------------------------------------------------------------------------------------------- Ending balance on September 30 $145,923 $139,426 ===================================================================================================================== September 30 --------------------------- 2000 1999 --------------------------- Allowance to total loans 1.44% 1.56% Nonperforming loans to total loans .41 .37 Nonperforming assets to total loans, foreclosed real estate and other assets .56 .56 Allowance to nonperforming assets 256 280 --------------------------------------------------------------------------------------------------------------------- * Includes loans and leases 90 days past due.
21 An analytical model is used based on historical loss experience, current trends, and reasonably foreseeable events to determine the amount of provision to be recognized and to test the adequacy of the loan loss allowance. The ratio of allowance for loan losses to total loans, net of unearned income, was 1.44 percent on September 30, 2000 down from 1.56 percent on September 30, 1999. The ratio of net charge-offs to average loans decreased to .53 percent for third quarter 2000 from .56 percent for third quarter 1999. This decrease was primarily due to lower commercial loan net charge-offs ($.1 million in 2000 compared with $1.1 million in 1999). The credit card receivables charge-off ratio increased to 4.39 percent for third quarter 2000 from 3.55 percent for third quarter 1999. The ratio of nonperforming loans to total loans increased to .41 percent for third quarter 2000 compared with .37 percent for the same period in 1999. On September 30, 2000, First Tennessee had no concentrations of 10 percent or more of total loans in any single industry. TABLE 6 - CHARGE-OFF RATIOS
Third Quarter ---------------------- 2000 1999 ----------------------------------------------------------------------------------------------------------------------- Commercial and commercial real estate .01% .10% Consumer .77 .74 Credit card receivables 4.39 3.55 Permanent mortgage .28 .46 Total net charge-offs .53 .56 -----------------------------------------------------------------------------------------------------------------------
Going forward, asset quality ratios will be affected by loan sales, other balance sheet strategies and shifts in loan mix to and from products with higher risk/return profiles. Asset quality levels are likely to increase from the historically low levels achieved in recent periods as the growth in the economy begins to slow. Actual results could differ because of several factors, including those presented in the Forward-Looking Statements section of the MD&A. 22 BALANCE SHEET REVIEW EARNING ASSETS -------------- Earning assets, consisting primarily of loans, mortgage loans held for sale and investment securities, increased 6 percent in third quarter 2000 and averaged $16.4 billion compared with $15.5 billion for third quarter 1999. The increase in earning assets was due to strong loan growth partially offset by a decrease in mortgage loans held for sale and capital markets securities inventory. On September 30, 2000, First Tennessee reported total assets of $19.2 billion compared with $19.1 billion on September 30, 1999. Average total assets grew 5 percent to $19.6 billion from $18.6 billion for third quarter 1999. LOANS Average loans increased 14 percent for third quarter 2000 to $10.1 billion from $8.8 billion. Average commercial loans increased 10 percent to $4.7 billion from $4.3 billion in 1999, and average consumer loans increased 16 percent to $3.6 billion from $3.0 billion. First Horizon Equity Lending, a division of FTBNA, is active in originating first and second mortgages and contributed 72 percent of the increase in consumer loans. Additional loan information is provided in Table 7 - Average Loans. TABLE 7 - AVERAGE LOANS
Three Months Ending September 30 ----------------------------------------------------------------------- PERCENT Percent GROWTH (Dollars in millions) 2000 OF TOTAL 1999 of Total RATE --------------------------------------------------------------------------------------------------------- Commercial $ 4,731.4 47% $ 4,304.1 49% 9.9% Consumer 3,550.2 35 3,048.6 35 16.4 Permanent mortgage 622.9 6 460.2 5 35.4 Credit card receivables 546.7 6 572.8 7 (4.6) Real estate construction 570.1 6 385.3 4 48.0 Nonaccrual 32.0 -- 32.2 -- (.6) -------------------------------------------------------------------------------------------- Total loans, net of unearned $10,053.3 100% $ 8,803.2 100% 14.2% ============================================================================================
During second quarter 2000, approximately $190 million of indirect automobile loan receivables were securitized and sold. During 1999 certain consumer real estate loans and permanent mortgage loans were securitized with the majority of these securities being retained by subsidiaries of First Tennessee, including FTBNA. If these transactions had been included in the growth rate calculation, total average loans would have grown 13 percent, and average consumer loans would have grown 15 percent from third quarter 1999. Average permanent mortgage loans increased 35 percent to $.6 billion from $.5 billion and average real estate construction loans increased 48 percent to $.6 billion from $.4 billion. Growth in both of these loan categories came primarily from mortgage banking activities. MORTGAGE LOANS HELD FOR SALE/INVESTMENT SECURITIES The decline in mortgage originations led to an 11 percent decrease in mortgage loans held for sale to $2.7 billion for third quarter 2000 compared with $3.0 billion in 1999. Average investment securities remained relatively flat with last year and averaged $2.8 billion in third quarter 2000. 23 DEPOSITS AND OTHER SOURCES OF FUNDS ----------------------------------- Since third quarter 1999, average core deposits declined 2 percent to $8.9 billion from $9.1 billion while interest-bearing core deposits declined 5 percent to $5.9 billion from $6.2 billion as customers shifted their investments from traditional deposit products to off-balance sheet investment products such as mutual funds. Noninterest-bearing deposits increased 4 percent to $3.0 billion from $2.9 billion over this period. Short-term purchased funds were up 15 percent to $8.2 billion compared with $7.1 billion for the previous year and were primarily used to fund growth in loans. CAPITAL ------- Total capital (shareholders' equity plus qualifying capital securities) on September 30, 2000, was $1.4 billion, up 5 percent from $1.3 billion on September 30, 1999. Shareholders' equity (excluding the qualifying capital securities) was $1.3 billion on September 30, 2000, an increase of 5 percent from $1.2 billion on September 30, 1999. Average shareholders' equity increased 5 percent for third quarter 2000 to $1.3 billion from $1.2 billion for 1999, reflecting internal capital generation. The average total capital to average assets ratio was 7.01 percent and the average shareholders' equity to average assets ratio was 6.50 percent for third quarter 2000. This compares with 7.07 percent and 6.53 percent, respectively, for third quarter 1999. On September 30, 2000, the corporation's Tier 1 capital ratio was 8.10 percent, the total capital ratio was 11.07 percent and the leverage ratio was 6.41 percent. On September 30, 2000, First Tennessee's bank affiliates had sufficient capital to qualify as well-capitalized institutions. The initial sale of preferred stock by an affiliate of FTBNA, which occurred early in the fourth quarter of 2000, resulted in approximately an additional $33 million of regulatory capital. 24 OFF BALANCE SHEET ACTIVITY In the normal course of business, First Tennessee is a party to financial instruments that are not required to be reflected on a balance sheet. First Tennessee enters into transactions involving these instruments to meet the financial needs of its customers and manage its own exposure to fluctuations in interest rates. These instruments are categorized into "Lending related," "Mortgage banking," "Interest rate risk management" and "Capital markets" as noted in Table 8. TABLE 8 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS ON SEPTEMBER 30, 2000
(Dollars in millions) Notional Value -------------------------------------------------------------------------------------------------------------------------- LENDING Commitments to extend credit: RELATED: Consumer credit card lines $ 2,162.5 Consumer home equity 712.6 Commercial real estate and construction and land development 951.6 Mortgage banking 840.9 Other 1,537.5 Other commitments: Standby letters of credit 311.8 Other 215.0 -------------------------------------------------------------------------------------------------------------------------- MORTGAGE Mortgage pipeline and warehouse hedging: BANKING: Interest rate contracts: Forward contracts - commitments to sell $ 2,242.2 Caps - purchased* 1,900.0 Servicing portfolio hedging: Interest rate contracts*: Forward contracts - purchased 600.0 Caps - purchased 500.0 Floors - purchased 13,750.0 Swaptions - purchased 1,200.0 Swaps 975.0 Principal only swaps 144.9 Interest rate floors - purchased 7,025.0 -------------------------------------------------------------------------------------------------------------------------- INTEREST Interest rate contracts: RATE RISK Swaps - receive fixed/pay floating $ 200.0 MANAGEMENT: Swaps - receive floating/pay floating 200.0 Caps - purchased 20.0 Caps - written 20.0 Equity contracts: Purchased options 1.9 -------------------------------------------------------------------------------------------------------------------------- CAPITAL Forward contracts: MARKETS: Commitments to buy $ 1,377.1 Commitments to sell 1,475.3 Option contracts: Purchased 390.0 Written 390.0 Swaps: Purchased 61.5 Written 61.5 -------------------------------------------------------------------------------------------------------------------------- * Mortgage banking contracts had a net book value of $162.0 million on September 30, 2000.
25 FINANCIAL SUMMARY (COMPARISON OF FIRST NINE MONTHS OF 2000 TO FIRST NINE MONTHS OF 1999) Earnings for the first nine months of 2000 were $160.9 million, a decline of 12 percent from last year's $183.4 million. Diluted earnings per share were $1.22 in 2000, a decline of 11 percent from the $1.37 earned in 1999. Basic earnings per share were $1.24 in 2000 and $1.41 in 1999. Return on average shareholders' equity was 17.0 percent in 2000 compared with a return of 20.9 percent in 1999. Return on average assets was 1.11 percent in 2000 compared with 1.32 percent in 1999. Total revenue declined 10 percent with a 15 percent decline in fee income and a 1 percent increase in net interest income. Fee income contributed 62 percent to total revenue in 2000 compared with 66 percent in 1999. INCOME STATEMENT REVIEW ----------------------- Noninterest income, excluding securities gains and losses, declined 15 percent to $733.0 million from $865.3 million for the same period last year. Fee income represented 62 percent of total revenues during the first nine months of 2000 and 66 percent for the same period in 1999. Mortgage banking fee income declined 30 percent to $350.5 million for the first nine months of 2000, down from $503.4 million in 1999. The reasons for the year-to-date trends in origination and servicing fees are similar to the quarterly trend information. Miscellaneous mortgage fee income increased 103 percent from 1999, primarily due to the second quarter sale of the HomeBanc Mortgage division that resulted in a $40.9 million pre-tax gain. Fees from the sale of mortgage servicing increased 226 percent in 2000 due to bulk sales of servicing of approximately $3.7 billion in 2000 (principally in first quarter) compared with bulk sales of approximately $1.9 billion in second quarter 1999. See Table 1 - Mortgage Banking for a breakout of noninterest income as well as mortgage banking origination volume and servicing portfolio levels. Fee income from capital markets for the nine month period decreased 21 percent to $80.9 million from $102.4 million in 1999 due to the negative impact of rising interest rates and lack of liquidity in the financial services during the first half of 2000. For the first nine months of 2000, fee income in deposit transactions and cash management grew 12 percent to $86.8 million from $77.2 million. Trust services and investment management fees increased 9 percent to $49.1 million from $45.1 million for the nine month period. The reasons for the year-to-date trends in these two categories were similar to the quarterly trend information already discussed. Merchant processing fees decreased 4 percent to $36.3 million from $37.8 million due to special assessments received in 1999, while cardholder fees increased 20 percent to $21.7 million from $18.1 million due to higher interchange collections and price increases. All other income and commissions grew 32 percent to $107.7 million from $81.3 million. Growth in this category was positively affected in 2000 by the revenues generated from the remittance processing operation acquired June 1999 from National Processing Co. (NPC). Excluding NPC, the growth in other income and commissions would have been 24 percent for the first nine months of 2000. The remaining growth was spread over several categories, including First Tennessee's investment in company-owned life insurance, other service charges and fees related to the reinsurance program. Net interest income increased 1 percent in 2000 to $449.4 million from $444.1 million for the first nine months of 1999, while earning assets increased 3 percent to $16.1 billion from $15.6 billion over the same period. Year-to-date consolidated margin declined in 2000 to 3.72 percent from 3.80 percent in 1999. In the regional banking group the year-to-date margin declined to 4.86 percent from 4.95 percent in 1999. The reasons for the year-to-date trends were similar to the quarterly trend information already discussed. Noninterest expense decreased 8 percent for the first nine months of 2000 to $904.8 million from $981.9 million in 1999. See Table 4 - Operating Expense Composition for a breakdown of total expenses by business line. Mortgage banking expenses declined 19 percent for the first nine months of 2000 as compared to the same period in 1999 to $403.8 million from $501.5 million. During this period, amortization of capitalized mortgage servicing rights decreased 31 percent to $57.7 million from $83.6 million. Capital markets expenses declined 16 percent over this same period to $64.8 million from $77.5 million. Expense growth for mortgage banking and capital markets varies with the volume and type of activity. The regional banking group experienced moderate expense growth of 5 percent from the previous year. Transaction processing expenses grew 28 percent for the nine month period primarily due to the acquisition of NPC. The reasons for the year-to-date trends were similar to the quarterly trend information 26 already discussed. The provision for loan losses increased 12 percent to $49.1 million from $43.9 million for the previous year. The increase reflects the change in inherent risk caused by loan mix, loss experience and current trends. BALANCE SHEET REVIEW -------------------- Average total assets grew 4 percent to $19.4 billion from $18.6 billion and average loans grew 13 percent to $9.8 billion from $8.7 billion for the first nine months of 1999. Average commercial loans increased 9 percent to $4.6 billion from $4.2 billion, average consumer loans grew 15 percent to $3.5 billion from $3.0 billion and average credit card receivables fell 2 percent while averaging $.6 billion for the first nine months of 2000. The permanent mortgage portfolio increased 31 percent to $.6 billion from $.4 billion and real estate construction loans increased 42 percent to $.5 billion from $.4 billion primarily from mortgage banking activities. Average investment securities increased 9 percent in the first nine months of 2000 to $2.9 billion from $2.6 billion in 1999. The decline in mortgage originations led to a 22 percent decrease in mortgage loans held for sale to $2.6 billion from $3.4 billion in 1999. For the first nine months of 2000, average core deposits decreased 3 percent to $8.9 billion from $9.2 billion and interest-bearing core deposits decreased 4 percent to $6.1 billion from $6.3 billion. Noninterest-bearing deposits increased 1 percent in 2000 to $2.9 billion from $2.8 billion in 1999. Short-term purchased funds increased 14 percent to $8.0 billion from $7.0 billion for the nine month period. 27 OTHER ----- SUBSEQUENT EVENTS AND OTHER FORWARD-LOOKING INFORMATION As a part of First Tennessee's efforts to enhance growth and business mix, several slower growing businesses have been or are being considered for divestiture. To date these efforts have resulted in the divestiture of corporate and municipal trust which was acquired by The Chase Manhattan Bank on October 18, 2000, and resulted in a fourth quarter pre-tax gain of approximately $33 million. First Tennessee estimates that divestiture of this and other businesses could result in gains of approximately $100 million in the fourth quarter. First Tennessee will also proceed with various revenue and expense enhancement plans, including repositioning certain mortgage banking hedges and certain components of the bank investment portfolio. The total cost of these plans is estimated to be approximately $85 million in the fourth quarter. The implementation of these initiatives could impact future trends in various performance ratios (i.e. earnings, margin, or asset quality). The net result of implementing these potential divestitures and revenue and expense enhancements is not expected to have a significant impact on current market estimates for First Tennessee's fourth quarter 2000 earnings. These initiatives along with the recently adopted strategic plans should position First Tennessee to meet or exceed earnings expectations in 2001. Actual results could differ because of several factors, including those presented in the Forward-Looking Statements section of the MD&A. FINANCIAL MODERNIZATION LEGISLATION The Gramm-Leach-Bliley Act (the Act) was enacted into law on November 12, 1999. The Act repeals or modifies a number of significant provisions of current laws, which impose restrictions on banking organizations' ability to engage in certain types of activities. The Act generally allows bank holding companies such as First Tennessee broad authority to engage in activities that are financial in nature or incidental to such financial activity, including insurance underwriting and brokerage; merchant banking; and securities underwriting, dealing and market-making. A bank holding company may engage in these activities directly or through subsidiaries by qualifying as a "financial holding company." To qualify, a bank holding company must file a declaration with the Federal Reserve and certify that all of its subsidiary depository institutions are well-managed and well-capitalized. On March 13, 2000, the Federal Reserve acted to approve First Tennessee's election to become a financial holding company. The Act also permits national banks to engage in certain of these activities through financial subsidiaries. To control or hold an interest in a financial subsidiary, a national bank must meet the following requirements: (1) the national bank must receive approval from the Comptroller for the financial subsidiary to engage in the activities, (2) the national bank and its depository institution affiliates must each be well-capitalized and well-managed, (3) the aggregate consolidated total assets of all of the national bank's financial subsidiaries must not exceed 45 percent of the national bank's consolidated total assets or, if less, $50 billion, (4) the national bank must have in place adequate policies and procedures to identify and manage financial and operational risks and to preserve the separate identities and limited liability of the national bank and the financial subsidiary, and (5) if the financial subsidiary will engage in principal transactions and the national bank is one of the one hundred largest banks, the national bank must have outstanding at least one issue of unsecured long-term debt that is currently rated in one of the three highest investment grade rating categories or meet alternative criteria as may be specified for the second fifty largest banks. First Tennessee has two subsidiaries that have met all of the above requirements to become financial subsidiaries. No new financial activity may be commenced under the Act unless the national bank and all of its depository institution affiliates have at least "satisfactory" Community Reinvestment Act (CRA) ratings. In addition, the Act contains a number of other provisions that may affect operations, including functional regulation of First Tennessee's securities and investment management operations by the Securities and Exchange Commission, limitations on the insurance powers of the national banks, and limitations on the use and the disclosure to the third parties of customer information. The Act was effective March 11, 2000, although certain provisions take effect later. First Tennessee cannot predict at this time the potential effect that the Act will have on its business and operations, although management expects that the general effect of the Act will be to increase competition in the financial services industry. SFAS NO. 133 - "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including 28 certain instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the instrument's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows the instrument's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Upon adoption of SFAS 133, all freestanding derivative instruments will be remeasured at fair value with differences between the previous book value and fair value reported as a one-time accounting adjustment. Likewise, offsetting gains and losses on hedged assets, liabilities and firm commitments will be recognized as adjustments of their respective book values at the adoption date as part of this accounting adjustment. Except to the extent that they relate to hedges of the variable cash flow exposure of forecasted transactions, a portion of the net accounting adjustment (net of hedge difference and hedged item difference) will be reported in net income in the period of adoption. To the extent the adoption adjustment relates to hedges of the variable cash flow exposure of a forecasted transaction, the remainder of the accounting adjustments will be reported as a cumulative effect adjustment of comprehensive income. SFAS 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133", is effective for fiscal years beginning after June 15, 2000. First Tennessee will adopt SFAS 133 on January 1, 2001. In Note 23 - Financial Instruments with Off-Balance Sheet Risk presented in the 1999 Form 10-K, the Mortgage Banking and Interest Rate Risk Management sections present the year-end book values and fair values of freestanding derivative instruments that would be required to be recognized in First Tennessee's balance sheet as assets or liabilities at their fair value. Management has not yet finalized the effects SFAS 133 may have on its financial statements including the offsetting gains or losses that may be recognized on hedged assets, liabilities and firm commitments. However, if plans to reposition certain mortgage banking hedges (see revenue and expense enhancement plans in the Subsequent Events and Other Forward-Looking Information section) at an after-tax cost estimated to be between $35 million and $40 million had been completed at September 30, 2000, it is estimated that the impact of adopting SFAS 133 at September 30, 2000, would have resulted in an estimated net transition adjustment of between $0 and $5 million in after-tax loss. Changes in the fair value of existing and future freestanding derivative instruments, hedged assets, liabilities and firm commitments, changes in the book value, including normal amortization, of these instruments and hedged assets and liabilities could have a substantial impact on the amount of the one-time accounting adjustment and its impact on net income. In addition, management is in the process of evaluating the methods and instruments currently used in hedging market exposure, and changes in hedging practices could also significantly influence the impact of adopting SFAS 133. The impact of adopting SFAS 133 could be material at the adoption date and could be substantially different than the estimate described above. SFAS 133 could also increase the volatility of earnings and other comprehensive income in the future. The actual result of the adoption of SFAS 133 could also be affected by interest rate movements, ability of management to execute its business strategies, various actions management may take to reduce the impact of SFAS 133, ongoing interpretation and amendment activity by the FASB related to SFAS 133, and other factors, including those presented in the Forward-Looking Statements section at the beginning of the MD&A. 29 Item 3. Quantitative and Qualitative Disclosures About Market Risk ------------------------------------------------------------------------------- The information called for by this item is incorporated herein by reference to Management's Discussion and Analysis included as Item 2 of Part I of this report and to Notes 1 and 23 of the Consolidated Financial Statements and the "Risk Management-Interest Rate Risk Management" Subsection of the Management's Discussion and Analysis section contained in the Corporation's 1999 Annual Report to Shareholders. 30 Part II. OTHER INFORMATION Items 1, 2, 3, 4 and 5. ----------------------- As of the end of the third quarter, 2000, the answers to Items 1, 2, 3, 4 and 5 were either inapplicable or negative, and therefore, these items are omitted. Item 6 - Exhibits and Reports on Form 8-K. ------------------------------------------ (a) Exhibits. Exhibit No. Description ----------- ----------- 4 Instruments defining the rights of security holders, including indentures.* 27 Financial Data Schedule (for SEC use only). [FN] * The Corporation agrees to furnish copies of the instruments, including indentures, defining the rights of the holders of the long-term debt of the Corporation and its consolidated subsidiaries to the Securities and Exchange Commission upon request. (b) Reports on Form 8-K. A report on Form 8-K was filed on July 19, 2000 (with a Date of Report of July 18, 2000) disclosing under Item 5 a press release, announcing earnings for the quarter ended June 30, 2000, and the earnings outlook for 2000. 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST TENNESSEE NATIONAL CORPORATION ------------------------------------ (Registrant) DATE: 11/13/00 By: /s/ Elbert L. Thomas Jr. --------------------- ---------------------------- Elbert L. Thomas Jr. Executive Vice President and Chief Financial Controller (Duly Authorized Officer and Principal Financial Officer) 32 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 4 Instruments defining the rights of security holders, including indentures.* 27 Financial Data Schedule (for SEC use only). [FN] *The Corporation agrees to furnish copies of the instruments, including indentures, defining the rights of the holders of the long-term debt of the Corporation and its consolidated subsidiaries to the Securities and Exchange Commission upon request.