|First Tennessee Achieves Third Quarter ``Operating'' Earnings Per Share of $.66 and Reports $.68 Diluted Earnings Per Common Share After Nonoperating Items
MEMPHIS, Tenn.--(BUSINESS WIRE)--Oct. 17, 2001--First Tennessee National Corporation ('First Tennessee' NYSE: FTN) announced today third quarter ``operating'' earnings of $86.1 million or $.66 ``operating'' earnings per share, which excludes a net positive $.02 per share effect of servicing rights net value changes under SFAS No. 133 (see A-16). ``Reported'' earnings for third quarter 2001, which include the servicing rights net value changes, were $89.0 million or $.68 diluted earnings per common share. Last year's third quarter ``reported'' earnings were $66.0 million or $.50 diluted earnings per common share.
``As we forecasted with our news release of September 6, third quarter earnings came in strong and well above the original and current market consensus,'' said First Tennessee Chairman and CEO Ralph Horn. ``Our counter-cyclical business mix continues to perform as we expected during this slowing economy. These strong results put First Tennessee firmly back on the high performing track we had established before 2000's anomaly. We remain extremely upbeat about our prospects and expect to exceed current consensus earnings estimates for both the fourth quarter and 2002.''
Based on ``operating'' earnings, return on average shareholders' equity was 24.6 percent and return on average assets was 1.81 percent for third quarter 2001. On a ``reported'' earnings basis, return on average shareholders' equity was 25.4 and return on average assets was 1.87 for third quarter 2001. Return on average shareholders' equity and return on average assets were 20.6 percent and 1.34 percent, respectively, on a ``reported'' earnings basis for the same period in 2000. Total assets were $19.7 billion, shareholders' equity was $1.4 billion and market capitalization was $4.7 billion on September 30, 2001. On September 30, 2000, total assets were $19.2 billion, shareholders' equity was $1.3 billion and market capitalization was $2.6 billion.
For the first nine months of 2001, ``operating'' earnings totaled $212.3 million, or $1.61 earnings per share. Year-to-date 2001 ``reported'' earnings, including nonoperating gains and losses, servicing rights net value changes under SFAS No. 133, the effect of debt restructurings and the cumulative effect of changes in accounting principles related to derivatives (SFAS No. 133 and EITF 99-20), were $229.0 million or $1.74 diluted earnings per common share. For the first nine months of 2000, ``reported'' earnings were $160.9 million or $1.22 per diluted common share. Based on ``operating'' earnings, return on average shareholders' equity was 20.5 percent and return on average assets was 1.49 percent for the first nine months of 2001. On a ``reported'' earnings basis, return on average shareholders' equity was 22.2 percent and return on average assets was 1.61 percent for the first nine months of 2001. Return on average shareholders' equity and return on average assets were 17.0 percent and 1.11 percent, respectively, on a ``reported'' earnings basis for the same period in 2000.
Total revenues grew 33 percent from third quarter 2000, with an increase in fee income (noninterest income excluding securities gains and losses) of 44 percent and an increase in net interest income of 15 percent. In third quarter 2001, fee income contributed 69 percent to total revenues compared with 64 percent for the same period in 2000. For the first nine months of 2001, total revenues increased 33 percent over the previous year, primarily due to a 48 percent increase in fee income. Fee income contributed approximately 69 percent to total revenues for the first nine months of 2001 compared with 62 percent in 2000.
Fee income was $376.4 million for third quarter 2001 compared with $261.5 million for the same period in 2000. For the nine-month comparison, fee income was $1,082.3 million in 2001 compared with $733.0 million in 2000. A discussion of major line items follows.
Fee income for First Horizon Home Loans (mortgage banking) during third quarter 2001 was $189.7 million, an increase of 63 percent from the $116.4 million earned in the same period one year ago. Mortgage banking fee income consists of various revenue streams from the origination process, servicing and other activities such as bulk sales of servicing.
Total origination volume, consisting of home purchase-related mortgages and refinanced mortgages, increased 51 percent to $5.6 billion for third quarter 2001 compared with $3.7 billion in 2000. This increase was primarily due to the impact of declining interest rates on refinance activity, which increased $2.3 billion in 2001. Home purchase-related mortgage originations decreased $.4 billion over the same period in 2000 primarily due to the closing or other disposition of less profitable production offices in 2000. Fees from the mortgage origination process (loan origination fees, profits from the sale of loans, flow sales of mortgage servicing rights, and other secondary marketing activities) increased 74 percent to $129.0 million from $74.2 million in third quarter 2000. This increase was primarily the result of more loans sold into the secondary market due to increased production, improved margin management, and an improvement in the results in hedging and other loan sale activities, as well as the recognition this year of the value of interest rate lock commitments. While the growth in refinance activity produced increased fee income, the impact of increased expenses from amortization and write-downs of mortgage servicing rights (see Noninterest Expense section) offset much of this revenue. Going forward, based upon a continuation of the trend in declining interest rates, the origination volume from refinanced mortgages is expected to continue. Home purchase-related mortgage originations should reflect the relative strength of the economy but should decrease from third quarter levels due to the seasonality of homebuyers' buying habits.
On September 30, 2001, the servicing portfolio totaled $44.2 billion, compared with $47.3 billion on September 30, 2000. Servicing fees for third quarter 2001 were $40.3 million compared with $41.5 million for the same period in 2000. In third quarter 2001 there were no bulk purchases or bulk sales of mortgage servicing rights.
For third quarter 2001 mortgage banking income included a net gain of $1.9 million related to market value adjustments on interest-only strips that were classified as trading securities in first quarter 2001 and related hedges. Miscellaneous mortgage income totaled $18.5 million in third quarter 2001, which included $13.2 million of net gains on hedges associated with write-downs of mortgage servicing rights (see Noninterest Expense section) of which $4.5 million is servicing rights net value changes under SFAS No. 133 (see A-16). This compares to miscellaneous mortgage income of $1.8 million in third quarter 2000, which included $2.7 million in losses on hedge instruments associated with the mortgage servicing rights portfolio.
Due to the increase in fees from the mortgage origination process (reduced by the increase in amortization and write-down of mortgage servicing rights expense) discussed above, the more effective hedging of mortgage servicing rights and efficiency and overhead reduction initiatives, pre-tax operating income in mortgage banking increased to $23.3 million in third quarter 2001 from a pre-tax loss of $3.0 million in third quarter 2000.
For the first nine months of 2001, mortgage banking fee income was $481.4 million compared with $309.6 million for the same period in 2000.
First Tennessee Capital Markets fee income increased 140 percent during third quarter 2001 to $90.3 million from $37.6 million in 2000. Securities bought and sold increased 72 percent, growing to $339 billion from $197 billion in third quarter last year. This increased activity reflects continued growth and penetration into our targeted institutional customer base and changes in product mix. New product initiatives implemented by capital markets in the second half of 2000 continued to have a favorable impact on capital markets fee income in third quarter 2001. These sources of revenue for capital markets include portfolio advisory, underwriting for financial institutions, various other investment banking services, and the acquisition in first quarter 2001 of MidWest Research Group. This quarter's results included $25.9 million in revenues related to these new products and services, compared to $7.8 million in third quarter 2000. Additionally, capital markets 2001 fee income has benefited from an improvement from last year's distressed market conditions. Going forward, market conditions are likely to stabilize, and new products and services will continue to impact revenues favorably.
Primarily due to the increases in the fee income discussed above, pre-tax income in capital markets increased to $30.3 million in third quarter 2001 from $10.9 million in 2000.
For the first nine months of 2001, capital markets fee income was $234.8 million, of which $54.6 million was related to new products and services, compared with $80.9 million in 2000, of which $7.8 million was related to new products and services.
Other fee income
For third quarter 2001, deposit transactions and cash management fees grew 15 percent to $35.3 million from $30.7 million. Merchant processing fee income declined 9 percent to $11.7 million from $13.0 million in third quarter 2000 primarily due to a further slowdown in the hospitality industry. Cardholder fees decreased 30 percent, to $5.4 million from $7.7 million, principally due to the sales of certain credit card accounts in fourth quarter 2000 and first quarter 2001. Trust services and investment management fees decreased 20 percent to $13.8 million from $17.0 million primarily due to divestiture of the corporate and municipal trust business in fourth quarter 2000 and the decrease in market values of managed portfolios. Other income and commissions decreased 23 percent to $30.2 million from $39.1 million. Going forward, other fee income will be affected by the relative strength of the economy.
For the first nine months of 2001, fee income from divestitures increased 99 percent due to divestiture gains from the sale of Check Solutions Company, Peoples and Union Bank, a portfolio of student loans and certain credit card accounts in the first half of 2001, none of which is included in operating earnings. Fees from deposit transactions and cash management increased 9 percent, merchant processing fees declined 4 percent, cardholder fees decreased 31 percent, trust and investment management fees decreased 12 percent and other income and commissions decreased 10 percent. The reasons for these year-to-date trends are similar to the quarterly trends discussed above.
Net Interest Income
Net interest income (on a fully taxable equivalent basis) increased 15 percent to $173.5 million in third quarter 2001 from $150.8 million in third quarter 2000 due primarily to lower funding costs. The consolidated net interest margin (margin) increased to 4.39 percent for third quarter 2001 from 3.68 percent for the same period in 2000. The margin was positively impacted by the lower funding costs. The regional banking group's margin increased to 5.19 percent in third quarter 2001 from 4.80 percent in third quarter 2000. Going forward, if short-term rates remain at current levels or continue to decline and the slope of the yield curve does not decrease, the margin is likely to remain stable or increase. However, the margin will continue to be influenced by the activity levels in the nonbanking lines of business, especially mortgage banking.
For the first nine months of 2001, net interest income increased 10 percent to $492.8 million compared with $449.4 million for the same period in 2000. For this same period, earning assets remained relatively flat at $15.9 billion compared to $16.1 billion in 2000. The year-to-date consolidated net interest margin was 4.12 percent compared with 3.72 percent for the same period in 2000.
Total noninterest expense increased 27 percent to $395.2 million for third quarter 2001 from $310.2 million in 2000. The type and level of activity in mortgage banking and capital markets affect changes in personnel and total noninterest expense. Excluding mortgage banking and capital markets, total noninterest expense decreased 4 percent. Going forward, capital markets, mortgage banking and investments in efficiency and revenue enhancement programs will influence the level of noninterest expense.
Employee compensation, incentives and benefits (personnel expense), the largest component of noninterest expense, increased 28 percent in third quarter 2001, primarily due to higher activity levels in mortgage banking and capital markets. Excluding mortgage banking and capital markets, personnel expense decreased 1 percent.
Amortization of mortgage servicing rights increased 38 percent to $29.5 million in third quarter 2001 from $21.3 million in 2000 primarily due to faster projected prepayment speeds associated with lower mortgage interest rates. Occupancy expense (occupancy, equipment rentals, depreciation, and maintenance expense) remained flat at $33.3 million for third quarter 2001 compared to $33.4 million in 2000. Other expenses increased 35 percent to $129.9 million from $96.4 million. Included in other expenses during third quarter 2001 is a $21.9 million write-down of the book value of mortgage servicing rights due primarily to the increase in actual mortgage prepayments over the projected level as a result of the decrease in mortgage interest rates since third quarter 2000. Also included in third quarter 2001 other expenses is $22.7 million in loss from the establishment of a mortgage servicing rights impairment valuation reserve primarily due to the increase in expected future prepayment speeds (see Noninterest Income, Mortgage banking section for increase in refinance origination volume). These write-downs and valuation losses related to mortgage servicing rights are included in operating expenses. Going forward, the levels of amortization and write-downs of mortgage servicing rights will be influenced by the volume of mortgages refinanced from the servicing portfolio.
For the first nine months of 2001, noninterest expenses increased 27 percent and personnel expense increased 29 percent. Amortization of mortgage servicing rights increased 43 percent for the nine-month period and other expenses, principally related to capital markets, mortgage banking and second quarter nonoperating expenses, increased 30 percent.
Income Tax Expense
The effective tax rate for third quarter 2001 was 32.2 percent, up from 22.0 percent for third quarter 2000. This variance was primarily due to a tax benefit last year related to the issuance of cumulative preferred stock by an affiliate of First Tennessee in third quarter 2000.
Average Balance Sheet
For third quarter 2001, total average assets decreased 4 percent to $18.8 billion. Total loans decreased 1 percent due to a 7 percent decrease in retail loans which primarily resulted from the sale of student and single-relationship credit card loan portfolios and the divestiture of People's and Union Bank. Excluding the impact of these divestitures, retail loans grew 8 percent. Commercial loans increased 5 percent from third quarter 2000. Mortgage loans held for sale declined 18 percent from third quarter 2000. Interest-bearing core deposits remained relatively flat while total core deposits increased 3 percent. Purchased funds decreased 21 percent during this same period. Average shareholders' equity increased 9 percent from third quarter 2000.
An analytical model based on historical loss experience, current trends and economic conditions, and reasonably foreseeable events is used to determine the amount of provision to be recognized and to test the adequacy of the loan loss allowance. The provision for loan losses increased during third quarter 2001 to $22.8 million from $16.5 million in third quarter 2000, reflecting economic conditions. Nonperforming assets of the regional banking group decreased to $54.9 million on September 30, 2001, from $57.8 million on June 30, 2001. Nonperforming assets for mortgage banking decreased to $33.5 million on September 30, 2001 from $36.8 million on June 30, 2001. (See the table on A-10 for an analysis of the allowance for loan losses and details on nonperforming assets and the table on A-11 for asset quality ratios.) Recent acts of terrorism have had a negative financial impact on the passenger airline and property and casualty insurance industries. First Tennessee does not have a material credit exposure in these industries. Going forward, asset quality indicators should reflect the relative strength of the economy.