1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark one) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 -------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------- Commission file number 0-4491 ------- FIRST TENNESSEE NATIONAL CORPORATION ---------------------------------------- (Exact name of registrant as specified in its charter) Tennessee 62-0803242 - ---------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 165 Madison Avenue, Memphis, Tennessee 38103 - --------------------------------------- --------- (Address of principal executive offices) (Zip Code) (901) 523-4027 --------------------------------------------------- (Registrant's telephone number, including area code) None ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.625 par value 127,809,119 - ----------------------------- ---------------------------- Class Outstanding at April 30, 1998
2 FIRST TENNESSEE NATIONAL CORPORATION INDEX Part I. Financial Information Part II. Other Information Signatures Exhibit Index Exhibit 10(i) Exhibit 27
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 <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CONDITION First Tennessee National Corporation - ----------------------------------------------------------------------------------------------------------------------- March 31 December 31 ------------------------------- ----------- (Dollars in thousands)(Unaudited) 1998 1997 1997 - --------------------------------------------------------------------------------------------------- ----------- <S> <C> <C> <C> ASSETS: Cash and due from banks $ 758,601 $ 525,059 $ 775,760 Federal funds sold and securities purchased under agreements to resell 89,850 234,045 225,861 - --------------------------------------------------------------------------------------------------- ----------- Total cash and cash equivalents 848,451 759,104 1,001,621 - --------------------------------------------------------------------------------------------------- ----------- Investment in bank time deposits 12,711 1,963 2,522 Capital markets inventory 368,727 286,371 253,240 Mortgage loans held for sale 2,248,053 698,800 1,240,648 Securities available for sale 1,914,152 2,137,711 2,133,303 Securities held to maturity (market value of $53,203 at March 31, 1998; $63,454 at March 31, 1997; and $54,323 at December 31, 1997) 52,127 63,068 53,230 Loans, net of unearned income 8,488,358 7,764,724 8,311,350 Less: Allowance for loan losses 130,026 121,688 125,859 - --------------------------------------------------------------------------------------------------- ----------- Total net loans 8,358,332 7,643,036 8,185,491 - --------------------------------------------------------------------------------------------------- ----------- Premises and equipment, net 207,634 191,029 206,895 Real estate acquired by foreclosure 11,575 14,631 12,202 Mortgage servicing rights, net 456,837 305,620 408,921 Intangible assets, net 127,925 115,682 112,411 Capital markets receivables and other assets 1,291,038 758,498 777,413 - --------------------------------------------------------------------------------------------------- ----------- TOTAL ASSETS $ 15,897,562 $ 12,975,513 $14,387,897 =================================================================================================== =========== LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Interest bearing $ 8,041,821 $ 7,030,948 $ 7,135,733 Noninterest bearing 2,772,951 2,160,270 2,536,046 - --------------------------------------------------------------------------------------------------- ----------- Total deposits 10,814,772 9,191,218 9,671,779 - --------------------------------------------------------------------------------------------------- ----------- Federal funds purchased and securities sold under agreements to repurchase 1,685,000 1,517,706 2,085,679 Commercial paper and other short-term borrowings 802,122 394,640 702,388 Capital markets payables and other liabilities 1,251,451 721,818 705,062 Term borrowings 266,577 208,269 168,893 - --------------------------------------------------------------------------------------------------- ----------- Total liabilities 14,819,922 12,033,651 13,333,801 - --------------------------------------------------------------------------------------------------- ----------- Guaranteed preferred beneficial interests in First Tennessee's junior subordinated debentures 100,000 100,000 100,000 - --------------------------------------------------------------------------------------------------- ----------- SHAREHOLDERS' EQUITY: Preferred stock - no par value (5,000,000 shares authorized, but unissued) -- -- -- Common stock - $.625 par value (shares authorized - 400,000,000; shares issued - 128,197,715 at March 31, 1998; 127,878,044 at March 31, 1997; and 128,209,142 at December 31, 1997) 80,123 79,924 80,131 Capital surplus 53,975 44,574 49,536 Undivided profits 830,453 729,141 811,396 Accumulated other comprehensive income 15,093 (8,564) 15,333 Deferred compensation on restricted stock incentive plans (2,004) (3,213) (2,300) - --------------------------------------------------------------------------------------------------- ----------- Total shareholders' equity 977,640 841,862 954,096 - --------------------------------------------------------------------------------------------------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,897,562 $ 12,975,513 $14,387,897 =================================================================================================== =========== </TABLE> [FN] See accompanying notes to consolidated financial statements. </FN>
5 <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF INCOME First Tennessee National Corporation - --------------------------------------------------------------------------------------------- Three Months Ended March 31 ------------------------------- (Dollars in thousands except per share data)(Unaudited) 1998 1997 - --------------------------------------------------------------------------------------------- <S> <C> <C> INTEREST INCOME: Interest and fees on loans $ 182,831 $ 166,958 Interest on investment securities: Taxable 33,209 34,588 Tax-exempt 991 1,206 Interest on mortgage loans held for sale 30,850 14,875 Interest on capital markets inventory 6,242 2,579 Interest on other earning assets 2,918 2,120 - --------------------------------------------------------------------------------------------- Total interest income 257,041 222,326 - --------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on deposits: Savings 1,821 2,096 Checking interest and money market account 29,015 22,252 Certificates of deposit under $100,000 and other time 37,709 40,491 Certificates of deposit $100,000 and more 17,653 10,585 Interest on short-term borrowings 40,045 26,956 Interest on term borrowings 3,658 4,437 - --------------------------------------------------------------------------------------------- Total interest expense 129,901 106,817 - --------------------------------------------------------------------------------------------- NET INTEREST INCOME 127,140 115,509 Provision for loan losses 13,515 12,526 - --------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 113,625 102,983 - --------------------------------------------------------------------------------------------- NONINTEREST INCOME: Mortgage banking 92,557 64,714 Capital markets 37,997 20,465 Deposit transactions and cash management 20,035 19,224 Trust services and investment management 12,121 9,270 Merchant processing 7,209 6,749 Cardholder fees 4,512 4,524 Equity securities gains 7 23 Debt securities gains 22 6 All other income and commissions 15,517 14,101 - --------------------------------------------------------------------------------------------- Total noninterest income 189,977 139,076 - --------------------------------------------------------------------------------------------- ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 303,602 242,059 - --------------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Employee compensation, incentives, and benefits 113,643 93,896 Operations services 14,035 10,961 Occupancy 11,395 10,663 Equipment rentals, depreciation, and maintenance 9,736 9,158 Amortization of mortgage servicing rights 17,300 8,835 Communications and courier 9,331 8,686 Advertising and public relations 5,689 4,932 Amortization of intangible assets 2,640 2,407 All other 47,139 30,788 - --------------------------------------------------------------------------------------------- Total noninterest expense 230,908 180,326 - --------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 72,694 61,733 Applicable income taxes 26,339 23,170 - --------------------------------------------------------------------------------------------- NET INCOME $ 46,355 $ 38,563 ============================================================================================= EARNINGS PER SHARE $ .36 $ .30 - --------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE $ .35 $ .29 - --------------------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING 128,148,972 129,165,314 - --------------------------------------------------------------------------------------------- </TABLE> [FN] See accompanying notes to consolidated financial statements. </FN>
6 <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY First Tennessee National Corporation - ----------------------------------------------------------------------------------------------- (Dollars in thousands) 1998 1997 - ----------------------------------------------------------------------------------------------- <S> <C> <C> BALANCE, JANUARY 1 $ 954,096 $ 954,526 Comprehensive income: Net income 46,355 38,563 Other comprehensive income, net of tax: Unrealized market adjustments, net of reclassification adjustment (240) (11,261) ------------ ------------ Comprehensive income 46,115 27,302 ------------ ------------ Cash dividends declared (21,158) (19,758) Common stock issued for exercise of stock options 3,900 6,588 Tax benefit from non-qualified stock options 1,245 -- Common stock repurchased (12,117) (128,298) Amortization of deferred compensation on restricted stock incentive plans 295 362 Other 5,264 1,140 - --------------------------------------------------------------------------------------------- BALANCE, MARCH 31 $ 977,640 $ 841,862 ============================================================================================= </TABLE> [FN] See accompanying notes to consolidated financial statements. </FN>
7 <TABLE> CONSOLIDATED STATEMENTS OF CASH FLOWS First Tennessee National Corporation - --------------------------------------------------------------------------------------------- Three Months Ended March 31 ------------------------------- (Dollars in thousands)(Unaudited) 1998 1997 - --------------------------------------------------------------------------------------------- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 46,355 $ 38,563 Adjustments to reconcile net income to net cash provided/(used) by operating activities: Provision for loan losses 13,515 12,526 Provision for deferred income tax 8,976 7,811 Depreciation and amortization of premises and equipment 8,634 7,803 Amortization of mortgage servicing rights 17,300 8,835 Amortization of intangible assets 2,640 2,407 Net other amortization and accretion 2,325 1,171 Market value adjustment on foreclosed property 5,700 -- Equity securities gains (7) (23) Debt securities gains (22) (6) Net (gain)/loss on disposal of fixed assets (309) 19 Net (increase)/decrease in: Capital markets securities inventory (115,487) (135,969) Mortgage loans held for sale (1,007,405) 88,562 Capital markets receivables (379,449) (168,582) Interest receivable (16,211) (3,863) Other assets (195,578) (42,760) Net increase/(decrease) in: Capital markets payables 345,208 166,278 Interest payable 19,138 9,706 Other liabilities 180,056 (31,233) - --------------------------------------------------------------------------------------------- Total adjustments (1,110,976) (77,318) - --------------------------------------------------------------------------------------------- Net cash used by operating activities (1,064,621) (38,755) - --------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Held to maturity securities: Maturities 1,101 2,830 Purchases -- -- Available for sale securities: Sales 4,775 22,706 Maturities 226,701 104,012 Purchases (11,753) (108,684) Premises and equipment: Sales 891 111 Purchases (9,060) (12,862) Net increase in loans (191,686) (51,463) Increase in investment in bank time deposits (10,189) (41) Acquisitions, net of cash and cash equivalents acquired (9,719) -- - --------------------------------------------------------------------------------------------- Net cash provided/(used) by investing activities 1,061 (43,391) - --------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Common stock: Exercise of stock options 3,994 6,183 Cash dividends (21,165) (20,131) Repurchase shares (12,127) (128,298) Term Borrowings: Issuance 99,218 Payments (1,578) (26,419) Issuance of guaranteed preferred beneficial interests in First Tennessee's junior subordinated debentures -- 100,000 Net increase/(decrease) in: Deposits 1,142,993 158,156 Short-term borrowings (300,945) (346,210) - --------------------------------------------------------------------------------------------- Net cash provided/(used) by financing activities 910,390 (256,719) - --------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents (153,170) (338,865) - --------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 1,001,621 1,097,969 - --------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 848,451 $ 759,104 ============================================================================================= Total interest paid $ 110,679 $ 97,025 Total income taxes paid 2,500 15,359 - --------------------------------------------------------------------------------------------- </TABLE> [FN] See accompanying notes to consolidated financial statements. </FN>
8 NOTE 1 - FINANCIAL INFORMATION The unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles. In the opinion of management, all necessary adjustments have been made for a fair presentation of financial position and results of operations for the periods presented. The operating results for the three month period ended March 31, 1998, are not necessarily indicative of the results that may be expected going forward. For further information, refer to the audited consolidated financial statements and footnotes included in the 1998 Proxy Statement & 1997 Financial Information. Earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for each period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted to include the number of additional common shares that would have been outstanding if the dilutive potential common shares resulting from options granted under First Tennessee's stock option plans had been issued. First Tennessee utilizes the treasury stock method in this calculation. All per share amounts have been restated for the effect of the February 20, 1998, two-for-one stock split. Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," establishes standards for reporting comprehensive income and its components in the financial statements. Comprehensive income is the total of net income and all other nonowner changes in equity. The only component of comprehensive income for First Tennessee is unrealized holding gains/(losses) on available-for-sale securities. First Tennessee adopted this standard beginning with the first quarter of 1998. Comparative financial statements for earlier periods have been adjusted to reflect application of the provisions of this statement. In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The new Statement revises the required disclosures for employee benefit plans, but it does not change the measurement or recognition of such plans. First Tennessee will adopt this standard in the 1998 annual financial statements.
9 NOTE 2 -- COMPONENTS OF OTHER COMPREHENSIVE INCOME AND RELATED TAX <TABLE> <CAPTION> Gain/(Loss) Before-Tax Tax (Expense) Net-of-Tax (Dollars in thousands) Amount or Benefit Amount - ------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Other comprehensive income: Unrealized market adjustments for the period $(18,408) $ 7,165 $(11,243) Less: reclassification adjustment for gains included in net income 29 (11) 18 - ----------------------------------------------------------------------------------------------- OTHER COMPREHENSIVE INCOME FOR THE QUARTER ENDING MARCH 31, 1997 $(18,437) $ 7,176 $(11,261) =============================================================================================== Other comprehensive income: Unrealized market adjustments for the period $ (365) $ 143 $ (222) Less: reclassification adjustment for gains included in net income 29 (11) 18 - ----------------------------------------------------------------------------------------------- OTHER COMPREHENSIVE INCOME FOR THE QUARTER ENDING MARCH 31, 1998 $ (394) $ 154 $ (240) =============================================================================================== </TABLE>
10 NOTE 3 - EARNINGS PER SHARE The following table shows a reconciliation of earnings per share to diluted earnings per share. All share and per share data have been adjusted to reflect the 1998 two-for-one stock split. <TABLE> <CAPTION> Three Months Ended March 31 ------------------------------- (Dollars in thousands, except per share data) 1998 1997 - --------------------------------------------------------------------------------------------- <S> <C> <C> EARNINGS PER SHARE COMPUTATION: Net income $ 46,355 $ 38,563 Weighted average shares outstanding 128,148,972 129,165,314 Earnings per share $ .36 $ .30 - --------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE COMPUTATION: Net income $ 46,355 $ 38,563 Weighted average shares outstanding 128,148,972 129,165,314 Dilutive effect due to stock options 4,052,867 3,344,752 - --------------------------------------------------------------------------------------------- Weighted average shares outstanding, as adjusted 132,201,839 132,510,066 Diluted earnings per share $ .35 $ .29 - --------------------------------------------------------------------------------------------- </TABLE>
11 NOTE 4 -- LOANS The composition of the loan portfolio at March 31 is detailed below: <TABLE> <CAPTION> (Dollars in thousands) 1998 1997 - --------------------------------------------------------------------------------------------- <S> <C> <C> Commercial $ 3,900,827 $ 3,558,389 Consumer 2,912,412 2,710,766 Permanent mortgage 676,584 636,384 Credit card receivables 551,059 529,197 Real estate construction 407,279 287,266 Nonaccrual - Regional banking group 10,914 11,613 Nonaccrual - Mortgage banking 29,283 31,109 - --------------------------------------------------------------------------------------------- Loans, net of unearned income 8,488,358 7,764,724 Allowance for loan losses 130,026 121,688 - --------------------------------------------------------------------------------------------- Total net loans $ 8,358,332 $ 7,643,036 ============================================================================================= </TABLE> The following table presents information concerning nonperforming loans at March 31: <TABLE> <CAPTION> (Dollars in thousands) 1998 1997 - --------------------------------------------------------------------------------------------- <S> <C> <C> Impaired loans $ 10,405 $ 12,424 Other nonaccrual loans 29,792 30,298 - --------------------------------------------------------------------------------------------- Total nonperforming loans $ 40,197 $ 42,722 ============================================================================================= </TABLE> [FN] Restructured impaired loans at March 31, 1998 and 1997, were $117,000 and $196,000, respectively. </FN> Nonperforming loans consist of impaired loans, other nonaccrual loans and certain restructured loans. An impaired loan is a loan that management believes the contractual amount due probably will not be collected. Impaired loans are generally carried on a nonaccrual status. Nonaccrual loans are loans on which interest accruals have been discontinued due to the borrower's financial difficulties. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to recover the principal balance and accrued interest. Generally, interest payments received on impaired loans are applied to principal. Once all principal has been received, additional payments are recognized as interest income on a cash basis. The following table presents information concerning impaired loans: <TABLE> <CAPTION> Three Months Ended March 31 ------------------------------- (Dollars in thousands) 1998 1997 - --------------------------------------------------------------------------------------------- <S> <C> <C> Total interest on impaired loans $ 132 $ 151 Average balance of impaired loans 9,384 11,849 - --------------------------------------------------------------------------------------------- </TABLE> An allowance for loan losses is maintained for all impaired loans. Activity in the allowance for loan losses related to non-impaired loans, impaired loans, and for the total allowance for the three months ended March 31, 1998 and 1997, is summarized as follows: <TABLE> <CAPTION> (Dollars in thousands) Non-impaired Impaired Total - ----------------------------------------------------------------------------------------------- <S> <C> <C> <C> Balance at December 31, 1996 $114,217 $ 3,531 $117,748 Provision for loan losses 10,908 1,618 12,526 Charge-offs 10,227 426 10,653 Less loan recoveries 2,057 10 2,067 - ----------------------------------------------------------------------------------------------- Net charge-offs 8,170 416 8,586 - ----------------------------------------------------------------------------------------------- Balance at March 31, 1997 $116,955 $ 4,733 $121,688 =============================================================================================== Balance at December 31, 1997 $122,107 $ 3,752 $125,859 Provision for loan losses 12,896 619 13,515 Charge-offs 11,776 600 12,376 Less loan recoveries 2,579 449 3,028 - ----------------------------------------------------------------------------------------------- Net charge-offs 9,197 151 9,348 - ----------------------------------------------------------------------------------------------- BALANCE AT MARCH 31, 1998 $125,806 $ 4,220 $130,026 =============================================================================================== </TABLE>
12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION First Tennessee National Corporation (First Tennessee) is headquartered in Memphis, Tennessee, and is a nationwide, diversified financial services institution which provides banking and other financial services to its customers through various national and regional business lines. The Regional Banking Group includes the retail/commercial bank, the credit card division and the trust division. The National Lines of Business include FT Mortgage Companies and affiliates (also referred to as mortgage banking), First Tennessee Capital Markets (also referred to as capital markets) and transaction processing (credit card merchant processing, automated teller machine network and check clearing operations). Certain revenues and expenses are allocated and equity is assigned to the various business lines to reflect the inherent risk in each business line, based on management's best estimates. These allocations are periodically reviewed and may be revised from time to time to more accurately reflect current business conditions and risks. In addition, certain reclassifications of accounts may occur to reflect current reporting standards within the industry. In each case the previous history is restated to ensure comparability. For purposes of this discussion, noninterest income and total revenues exclude securities gains and losses. Net interest income has been adjusted to a fully taxable equivalent (FTE) basis for certain tax-exempt loans and investments included in earning assets. Earning assets, including loans, have been expressed as averages, net of unearned income. The following is a discussion and analysis of the financial condition and results of operations of First Tennessee for the three month period ended March 31, 1998, compared to the three month period ended March 31, 1997. To assist the reader in obtaining a better understanding of First Tennessee and its performance, this discussion should be read in conjunction with First Tennessee's unaudited consolidated financial statements and accompanying notes appearing in this report. Additional information including the 1997 financial statements, notes, and management's discussion and analysis is provided as an appendix to the 1998 proxy statement. OVERVIEW (1998 FIRST QUARTER COMPARED WITH 1997 FIRST QUARTER) * Earnings for 1998 were $46.4 million, up 20 percent from last year's earnings of $38.6 million. * Diluted earnings per share (adjusted for the 1998 two-for-one stock split) were $.35 in 1998, up 21 percent over the $.29 earned in 1997. Earnings per share were $.36 in 1998 and $.30 in 1997, an increase of 20 percent. * Return on average shareholders' equity was 19.6 percent in 1998 compared with a return of 18.1 percent in 1997 and return on average assets was 1.26 percent in 1998 compared with 1.23 percent in 1997. * Total revenues grew 25 percent with growth in fee income of 37 percent and growth in net interest income of 10 percent. Mortgage banking and capital markets led the increase in fee income with growth of 43 percent and 86 percent, respectively. * The consolidated net interest margin was 4.03 percent in 1998. * Asset quality remained strong with improvement in nonperforming assets from the prior year. * At March 31, 1998, First Tennessee was ranked in the top 50 bank holding companies nationally in market capitalization ($4.1 billion) and assets ($15.9 billion). INCOME STATEMENT ANALYSIS NONINTEREST INCOME - ------------------ Noninterest income, also called fee income, provides the majority of First Tennessee's revenue. During the first quarter of 1998, fee income increased 37 percent (from $139.0 million to $189.9 million) and contributed 60 percent to total revenue. Fee income contributed 55 percent to total revenue for the first quarter of 1997.
13 Mortgage banking fee income, First Tennessee's largest contributing business line to noninterest income, grew 43 percent (from $64.7 million to $92.6 million) from the first quarter of 1997 as shown in Table 1. The increase came primarily from mortgage origination (loan origination and secondary marketing) activity which surged during the quarter. Table 1 - Mortgage Banking <TABLE> <CAPTION> 1st Quarter ------------------------- Growth (Dollars in millions) 1998 1997 Rate (%) - ----------------------------------------------------------------------------------- <S> <C> <C> <C> Noninterest income: Loan origination fees $ 22.5 $ 17.7 26.8 Secondary marketing activities 40.7 21.2 92.3 Servicing fees 25.3 23.7 6.7 Sale of mortgage servicing rights -- 1.6 (100.0) Miscellaneous 4.1 .5 673.6 - ---------------------------------------------------------------------- Total noninterest income $ 92.6 $ 64.7 43.0 ====================================================================== Mortgage loan originations $ 4,676.7 $ 1,949.5 139.9 Servicing portfolio $29.452.0 $ 23,383.5 26.0 - ---------------------------------------------------------------------------------- </TABLE> Income derived from the loan origination process (loan origination fees plus secondary marketing activities) increased 62 percent from the first quarter of 1997 (from $38.9 million to $63.2 million), as FT Mortgage Companies originated a record $4.7 billion of mortgage loans in the first quarter of 1998. This level of originations ranked FT Mortgage Companies as one of the top retail mortgage originators in the nation. During the first quarter of 1997, $1.9 billion of mortgage loans were originated. A more favorable interest rate environment led to the increased mortgage refinance activity, accounting for approximately 60 percent of total loan originations in the first quarter of 1998, as compared with 28 percent in the first quarter of 1997. The servicing portfolio totaled $29.5 billion at March 31, 1998, up 26 percent from March 31, 1997, when the portfolio totaled $23.4 billion. Due to the favorable balance between mortgage loan origination capacity and the mortgage servicing portfolio, the servicing portfolio grew 9 percent from the year-end period, despite heavy prepayments during the quarter. Since the first quarter of 1997, the portfolio has grown due to originations of $13.4 billion, reduced by servicing released sales of $2.2 billion and principal reductions of $5.1 billion from payments received in the normal course of business. Mortgage servicing fees increased 7 percent from the first quarter of 1997 (from $23.7 million to $25.3 million). Servicing fees were negatively impacted by the increase in payoffs and resulting disbursements to investors, as many investors require a full month's interest on loans paid off during the month. Servicing income was also affected by an accounting change adopted in the first quarter of 1997 which converted late fees to an accrual basis adding approximately $2 million to mortgage servicing income. No servicing rights were sold during the first quarter of 1998 and only a minimal amount was sold in the first quarter of 1997. The growth in mortgage miscellaneous income related to gains from repositioning servicing hedges and income generated from a strategy of early repurchase of delinquent loans. First Tennessee Capital Markets generates fee income primarily from the purchase and sale of securities as both principal and agent. Inventory positions are limited to the procurement of securities solely for distribution to customers by the sales staff. Inventory is hedged to protect against movements in interest rates. During the first quarter of 1998, capital markets achieved a record level of fee income, an 86 percent increase over first quarter of 1997 (from $20.5 million to $38.0 million). Total securities bought and sold increased 79 percent over the same period in 1997 (from $47.3 billion to $84.7 billion). Total underwritings during the first quarter of 1998 were $11.3 billion compared with $6.0 billion for the same period in 1997. For the first quarter of 1998, capital markets ranked in the top ten in underwriting U.S. government agency debt. The increase in fee income came from a slowdown in national loan growth resulting in increased investment needs by customers, and strong underwriting activity which led to a record level of customer transactions. In addition, increases in the customer base through market expansion as well as increased activity through First Tennessee Capital Assets Corporation, a subsidiary that deals primarily in whole loan transactions, were contributing factors to this fee income growth.
14 Noninterest income from deposit transactions and cash management increased 4 percent from the first quarter of 1997 (from $19.2 million to $20.0 million). Since the first quarter of 1997, trust and investment management fees grew 31 percent. This growth was primarily due to the acquisition of Martin & Company, L.P. in the first quarter of 1998 which added approximately $.9 billion to assets under management and the strong performance in the managed accounts at Highland Capital Management Corp., a wholly owned subsidiary. Fee income from merchant processing grew 7 percent from the first quarter of 1997 (from $6.7 million to $7.2 million) and cardholder fees remained relatively flat at $4.5 million. All Other noninterest income increased 10 percent from the first quarter of 1997 (from $14.1 million to $15.5 million). Check clearing fees declined 46 percent (from $4.0 million to $2.2 million) due to the continuing impact of industry consolidations. Other service charges increased 12 percent (from $2.6 million to $2.9 million), insurance premiums and commissions increased 14 percent (from $1.5 million to $1.7 million) and the other category increased 45 percent (from $6.0 million to $8.7 million) from the first quarter of 1997 and was spread over several categories. NET INTEREST INCOME - ------------------- Net interest income increased 10 percent (from $116.6 million to $128.2 million) from the first quarter of 1997, primarily due to the 16 percent increase in earning assets (from $11.1 billion to $12.8 billion). The consolidated net interest margin (margin) declined from 4.24 percent in the first quarter of 1997 to 4.03 percent in the first quarter of 1998, primarily from the build-up of the mortgage warehouse which produced 54 percent of the increase in earning assets. Table 2 details the computation of the net interest margin for the first quarters of 1998 and 1997. Table 2 - Net Interest Margin Computation <TABLE> <CAPTION> First Quarter ----------------------- 1998 1997 - -------------------------------------------------------------------------- <S> <C> <C> Yields on earning assets 8.05% 8.06% Rates paid on interest-bearing liabilities 4.85 4.65 - -------------------------------------------------------------------------- Net interest spread 3.20 3.41 - -------------------------------------------------------------------------- Effect of interest-free sources .74 .77 Loan fees .11 .09 FRB(F1) interest and penalties (.02) (.03) - -------------------------------------------------------------------------- Net interest margin 4.03% 4.24% ========================================================================== </TABLE> [FN] (F1) Federal Reserve Bank </FN> The margin is affected by the activity levels and related funding for First Tennessee's specialty lines of business, as these nonbank business lines typically produce different margins than traditional banking activities. For example, in mortgage banking because the spread between the rates on mortgage loans temporarily in the warehouse and the related short-term funding rates is less than the comparable spread earned in the regional banking group, the overall margin is compressed. Consequently, as the warehouse volume increases, the margin also compresses. Capital markets tends to compress the margin because of its strategy to reduce market risk by hedging its inventory in the cash markets which effectively eliminates net interest income on these positions. As a result, First Tennessee's consolidated margin cannot be readily compared to that of other bank holding companies. Table 3 - Net Interest Margin Composition provides a breakdown by business line of the consolidated margin for the first quarters of 1998 and 1997. The regional banking group's margin improved from 4.60 percent for the first quarter of 1997 to 4.77 percent for the first quarter of 1998 as earning asset growth was primarily funded with low cost deposits.
15 Table 3 - Net Interest Margin Composition <TABLE> <CAPTION> First Quarter --------------------- 1998 1997 - --------------------------------------------------------- <S> <C> <C> Regional banking group 4.77% 4.60% Mortgage banking (.61) (.28) Capital markets (.13) (.09) Transaction processing -- .01 - --------------------------------------------------------- Net interest margin 4.03% 4.24% ========================================================= </TABLE> NONINTEREST EXPENSE - ------------------- Total noninterest expense (operating expense) for the first quarter of 1998 increased 28 percent (from $180.3 million to $230.9 million) over the same period in 1997. Employee compensation, incentives, and benefits (personnel expense), the largest category increased 21 percent (from $93.9 million to $113.6 million). Personnel expense includes commissions paid in several lines of business such as capital markets and mortgage banking. As sales and/or origination volumes increase or decrease or the product mix changes in these business lines, the commissions change accordingly. Table 4 provides a breakdown of total expenses by business line. Table 4 - Operating Expense Composition <TABLE> <CAPTION> 1st Quarter -------------------- Growth (Dollars in millions) 1998 1997 Rate (%) - --------------------------------------------------------------- <S> <C> <C> <C> Regional banking group $ 91.7 $ 85.8 6.9 Mortgage banking 95.4 62.3 53.1 Capital markets 27.8 16.1 73.0 Transaction processing 14.0 14.1 (1.2) Corporate 2.0 2.0 -- - ------------------------------------------------------ Total operating expense $ 230.9 $ 180.3 28.1 ====================================================== </TABLE> Operating expense in the mortgage banking division increased 53 percent (from $62.3 million to $95.4 million) and accounted for 65 percent of the overall expense growth. Mortgage banking expense growth was driven by a larger servicing portfolio and increased loan production volume. In capital markets, operating expense increased 73 percent (from $16.1 million to $27.8 million) and accounted for 23 percent of the overall expense growth. Excluding mortgage banking and capital markets, overall operating expenses increased 6 percent from the first quarter of 1997. Personnel expense increased 16 percent in mortgage banking and 94 percent in capital markets comparing the first quarter of 1997 to the first quarter of 1998. As a result of a larger servicing portfolio and increased payoffs, amortization of capitalized mortgage servicing rights increased 96 percent (from $8.8 million to $17.3 million). All Other expense consists of many smaller expense categories such as contract employment, supplies, travel and entertainment, Fed service fees, foreclosed real estate expenses, deposit insurance premiums, contributions, and other. Since the first quarter of 1997, All Other expense increased 53 percent (from $30.8 million to $47.1 million), and all of this growth was related to mortgage banking. PROVISION FOR LOAN LOSSES/ASSET QUALITY The provision for loan losses increased 8 percent (from $12.5 million to $13.5 million) from March 31, 1997. The increase in provision reflected a higher amount of allowance for loan losses commensurate with loan growth; inherent losses in the consumer loan portfolios reflecting the national trend in consumer asset quality; and inherent losses in the commercial loan portfolio. The ratio of allowance for loan losses to loans, was 1.53 percent at March 31, 1998, compared with 1.57 percent at March 31, 1997. The ratio of net charge-offs to average loans increased slightly from .44 percent for the first quarter of 1997 to .45 percent for the first quarter of 1998, however, the credit card net charge-offs ratio improved from 4.59 percent at March 31, 1997, to 4.29 percent at March 31, 1998. At March 31, 1998, First Tennessee had no concentrations of 10 percent or more of total loans in any single industry. Additional asset quality information is provided in Table 5 and Table 6.
16 Table 5 - Asset Quality Information <TABLE> <CAPTION> March 31 ----------------------------- (Dollars in thousands) 1998 1997 - --------------------------------------------------------------------------- <S> <C> <C> Nonperforming loans (F1) $ 40,197 $ 42,722 Foreclosed real estate(F2) 11,575 14,631 Other assets 225 194 - --------------------------------------------------------------------------- Total nonperforming assets $ 51,997 $ 57,547 =========================================================================== Loans and leases 90 days past due $ 29,062 $ 36,038 Potential problem assets(F3) $ 70,652 $ 80,719 ALLOWANCE FOR CREDIT LOSSES: Beginning balance at December 31 $ 125,859 $ 117,748 Provision for loan losses 13,515 12,526 Charge-offs (12,376) (10,653) Loan recoveries 3,028 2,067 - --------------------------------------------------------------------------- Ending balance at March 31 $ 130,026 $ 121,688 =========================================================================== Allowance to total loans .53% 1.57% Nonperforming loans to total loans .47% .55% Nonperforming assets to total loans, foreclosed real estate and other assets .61% .74% Allowance to nonperforming assets 250% 211% - --------------------------------------------------------------------------- </TABLE> [FN] (F1) Includes $29.3 million and $31.1 million in 1998 and 1997, respectively, in mortgage banking (F2) Includes $7.3 million and $8.8 million in 1998 and 1997, respectively, in mortgage banking (F3) Includes loans and leases 90 days past due </FN> Table 6 - Charge-off Ratios <TABLE> <CAPTION> First Quarter --------------- 1998 1997 - ----------------------------------------------------------------------------- <S> <C> <C> Total net charge-offs excluding repurchased mortgages .41% .44% Impact of repurchased mortgages .04 -- - ----------------------------------------------------------------------------- Total net charge-offs .45 .44 ============================================================================= Breakdown by loan category: Commercial and commercial real estate (.03)% --% Consumer .39 .35 Credit card receivables 4.29 4.59 Permanent mortgage(F1) (.02) (.02) - ------------------------------------------------------------------------------ </TABLE> [FN] (F1) Excludes repurchased mortgages </FN> BALANCE SHEET LOANS AND DEPOSITS - ------------------ At March 31, 1998, First Tennessee reported total assets of $15.9 billion compared with $13.0 billion at March 31, 1997. Period end loans increased 9 percent (from $7.8 billion to $8.5 billion); mortgage loans held for sale (mortgage warehouse) increased 222 percent (from $.7 billion to $2.2 billion); and investment securities decreased 11 percent (from $2.2 billion to $2.0 billion). The growth in the period end balance sheet was funded by an increase in core deposits of 10 percent (from $8.4 billion to $9.2 billion) and a 47 percent increase in purchased funds (from $3.0 billion to $4.4 billion). Comparing average balances to first quarter 1997, total assets grew 17 percent (from $12.8 billion to $14.9 billion) and loans grew 8 percent (from $7.7 billion to $8.4 billion). Commercial loans increased 8 percent (from $3.5 billion to $3.8 billion) and consumer loans grew 7 percent (from $2.7 billion to $2.9 billion). Commercial loans represented 46 percent and consumer loans represented 34 percent of total loans during the first quarter of 1998. The 38 percent increase (from $.3 billion to $.4 billion) in real estate construction loans was reflective of economic growth in Tennessee, favorable market conditions, and growth in residential construction loans primarily originated
17 by mortgage banking. The permanent mortgage portfolio increased 6 percent (from $.6 billion to $.7 billion) from the first quarter of 1997. Average investment securities declined 5 percent from the first quarter of 1997. With the surge in mortgage origination activity, the mortgage warehouse grew 122 percent (from $.8 billion to $1.7 billion) during this same period. Since the first quarter of 1997, average core deposits grew 7 percent (from $8.3 billion to $8.9 billion) and interest-bearing core deposits grew 4 percent (from $6.2 billion to $6.4 billion). Noninterest-bearing deposits grew 16 percent (from $2.1 billion to $2.5 billion) over this same period. Purchased funds were up 44 percent (from $3.1 billion to $4.4 billion) from the previous year. This increase was primarily due to loan growth continuing to outpace deposit growth and a higher balance of nonearning assets. CAPITAL - ------- Total capital (shareholders' equity plus qualifying capital securities) at March 31, 1998, was $1,077.6 million, up 14 percent from March 31, 1997. Shareholders' equity (excluding the qualifying capital securities) was $977.6 million at March 31, 1998, an increase of 16 percent from $841.9 million at March 31, 1997. Average shareholders' equity increased 11 percent (from $864.5 million to $957.0 million) since the first quarter of 1997. The average total capital to average assets ratio was 7.08 percent and the average shareholders' equity to average assets ratio was 6.41 percent for the first quarter of 1998. This compares with 7.52 percent and 6.78 percent, respectively for the first quarter of 1997. Excluding the effects of unrealized market valuations the average total capital to average assets ratio would have been 6.98 percent and the average shareholders' equity to average assets ratio would have been 6.31 percent for the first quarter of 1998. At March 31, 1998, the corporation's Tier 1 capital ratio was 8.50 percent, the total capital ratio was 11.88 percent and the leverage ratio was 6.44 percent. On March 31, 1998, First Tennessee's bank affiliates had sufficient capital to qualify as well-capitalized institutions. OFF-BALANCE SHEET ACTIVITY In the normal course of business, First Tennessee is a party to financial instruments that are not required to be reflected on a balance sheet. First Tennessee enters into transactions involving these instruments to meet the financial needs of its customers and manage its own exposure to fluctuations in interest rates. These instruments are categorized into "Lending related," "Mortgage banking," "Interest rate risk management" and "Capital markets" as noted in Table 7.
18 Table 7 - Off-Balance Sheet Financial Instruments at March 31, 1998 <TABLE> <CAPTION> (Dollars in billions) Notional Value - -------------------------------------------------------------------------------------- <S> <C> LENDING RELATED: Commitments to extend credit: Consumer credit card lines $1,901.8 Consumer home equity 460.5 Commercial real estate and construction and land development 317.3 Mortgage banking 1,657.0 Other 1,817.1 Other commitments: Commercial and standby letters of credit 516.1 Foreign exchange contracts - net position .1 MORTGAGE BANKING: Mortgage pipeline and warehouse hedging: Interest rate contracts: Forward contracts - commitments to sell 3,204.8 Option contracts - put options purchased (F1) 56.0 Servicing portfolio hedging: Interest rate contracts: Floors - purchased(F1) 6,000.0 Options contracts - call options purchased(F1) 400.0 Caps - purchased (F1) 400.0 Caps - written 400.0 INTEREST RATE RISK MANAGEMENT: Interest rate contracts: Swaps - receive fixed/pay floating 435.0 Swaps - receive floating/pay floating 100.0 Caps: Purchased 20.0 Written 20.0 CAPITAL MARKETS: Forward contracts: Commitments to buy 3,036.7 Commitments to sell 3,262.4 Securities underwriting commitments .9 - ------------------------------------------------------------------------------------ </TABLE> [FN] (F1) Mortgage banking purchased interest rate contracts had a value of $35.2 million recognized in the Consolidated Statements of Condition at March 31, 1998. </FN>
19 Part II. ----------------- OTHER INFORMATION Items 1, 2, 3, 4, and 5. - ------------------------ As of the end of the first quarter, 1998, 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 furnished in accordance with the provisions of the Exhibit Table of Item 601 of Regulation S-K are included as described in the Exhibit Index which is a part of this report. Exhibits not listed in the Exhibit Index are omitted because they are inapplicable. (b) No reports on Form 8-K were filed during the first quarter of 1998.
20 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: 5/13/98 By: Elbert L. Thomas Jr. --------------------- -------------------------- Elbert L. Thomas Jr. Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)
21 EXHIBIT INDEX <TABLE> <CAPTION> Exhibit No. Exhibit Description Page No. - ----------- ------------------- -------- <S> <C> <C> 3(i) Restated Charter of the Corporation, as amended, attached as Exhibit 3(i) to the Corporation's Annual Report on Form 10-K for the year ended 12-31-97, and incorporated herein by reference. 3(ii) Bylaws of the Corporation, as amended and restated, attached as Exhibit 3(ii) to the Corporation's Annual Report on Form 10-K for the year ended 12-31-97, and incorporated herein by reference. 10(i) Amended and Restated Pension Restoration Plan. Filed Herewith 27 Financial Data Schedule (for SEC use only). Filed Herewith </TABLE>