0000950144-95-002318.txt : 19950815
0000950144-95-002318.hdr.sgml : 19950815
ACCESSION NUMBER: 0000950144-95-002318
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19950630
FILED AS OF DATE: 19950814
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: FIRST TENNESSEE NATIONAL CORP
CENTRAL INDEX KEY: 0000036966
STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021]
IRS NUMBER: 620803242
STATE OF INCORPORATION: TN
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-04491
FILM NUMBER: 95562945
BUSINESS ADDRESS:
STREET 1: 165 MADISON AVE
CITY: MEMPHIS
STATE: TN
ZIP: 38103
BUSINESS PHONE: 9015234444
MAIL ADDRESS:
STREET 1: P O BOX 84
CITY: MEMPHIS
STATE: TN
ZIP: 38101-0084
FORMER COMPANY:
FORMER CONFORMED NAME: FIRST TENNESSEE BANKS INC
DATE OF NAME CHANGE: 19600201
10-Q
1
FORM 10-Q OF FIRST TENNESSEE NATIONAL CORP.
1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
-------------
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, $2.50 par value 33,674,552
----------------------------- ----------------------------
Class Outstanding at July 31, 1995
2
FIRST TENNESSEE NATIONAL CORPORATION
INDEX
Part I. Financial Information
Part II. Other Information
Signatures
Exhibit Index
Exhibit 11
Exhibit 27
3
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
The Consolidated Statements of Condition
The Consolidated Statements of Income
The 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
q
CONSOLIDATED First Tennessee
STATEMENTS OF National
CONDITION Corporation
---------------------------------------------------------------------------------------------------------------
June 30 December 31
-------------------------- ------------
(Dollars in thousands)(Unaudited) 1995 1994 1994
---------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 657,666 $ 668,502 $ 724,828
Federal funds sold and securities purchased under
agreements to resell 182,778 197,566 253,124
---------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 840,444 866,068 977,952
---------------------------------------------------------------------------------------------------------------
Investment in bank time deposits 1,744 5,978 2,534
Trading securities inventory 227,458 227,447 170,031
Mortgage warehouse loans held for sale 735,268 631,733 515,407
Securities available for sale 1,195,327 1,298,756 1,166,738
Securities held to maturity (market value of $977,857
at June 30, 1995, $912,164 at June 30, 1994, and
$951,444 at December 31, 1994) 985,010 920,815 1,004,177
Loans, net of unearned income 6,882,044 5,998,772 6,498,042
Less: Allowance for loan losses 110,747 110,342 109,859
---------------------------------------------------------------------------------------------------------------
Total net loans 6,771,297 5,888,430 6,388,183
---------------------------------------------------------------------------------------------------------------
Premises and equipment, net 165,621 148,686 159,036
Real estate acquired by foreclosure 13,732 31,931 19,215
Intangible assets 101,131 88,519 91,725
Mortgage servicing rights 94,437 76,402 72,722
Bond division receivables and other assets 482,541 532,948 365,229
---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $11,614,010 $10,717,713 $10,932,949
===============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 1,775,417 $ 1,680,143 $ 1,733,336
Checking/Interest 485,986 511,243 508,741
Savings 603,518 715,352 605,388
Money market account 1,867,453 1,743,437 1,819,825
Certificates of deposit under $100,000 and other time 2,866,162 2,542,144 2,771,012
Certificates of deposit $100,000 and more 514,797 414,712 442,004
---------------------------------------------------------------------------------------------------------------
Total deposits 8,113,333 7,607,031 7,880,306
Federal funds purchased and securities sold under
agreements to repurchase 1,558,908 1,073,544 1,457,517
Commercial paper and other short-term borrowings 377,137 661,158 352,522
Bond division payables and other liabilities 535,562 502,841 353,928
Term borrowings 202,320 111,765 113,771
---------------------------------------------------------------------------------------------------------------
Total liabilities 10,787,260 9,956,339 10,158,044
---------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock - no par value (5,000,000 shares authorized,
but unissued) - - -
Common stock - $2.50 par value (shares authorized -100,000,000;
shares issued -
33,900,290 at June 30, 1995; 34,357,610 at June 30, 1994;
and 34,073,958 at December 31, 1994) 84,751 85,894 85,185
Capital surplus 82,467 106,010 91,558
Undivided profits 660,738 583,140 625,231
Unrealized market adjustment on available for sale securities 1,140 (10,279) (24,273)
Deferred compensation on restricted stock incentive plan (2,346) (3,391) (2,796)
---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 826,750 761,374 774,905
---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,614,010 $10,717,713 $10,932,949
===============================================================================================================
5
CONSOLIDATED First Tennessee
STATEMENTS OF National
INCOME Corporation
-------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------------ -------------------------
(Dollars in thousands except per share data)(Unaudited) 1995 1994 1995 1994
-------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 162,185 $ 133,214 $ 311,840 $ 262,736
Interest on investment securities:
Taxable 33,166 31,068 66,837 62,175
Tax-exempt 1,152 1,384 2,240 2,746
Interest on trading securities inventory 3,477 3,020 6,974 5,646
Interest on other earning assets 2,772 1,510 6,245 3,131
-------------------------------------------------------------------------------------------------------------
Total interest income 202,752 170,196 394,136 336,434
-------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Checking/Interest 2,063 2,340 4,209 4,693
Savings 2,739 3,361 5,667 6,739
Money market account 21,823 12,774 43,147 23,215
Certificates of deposit under $100,000 and other time 42,747 28,013 81,254 54,328
Certificates of deposit $100,000 and more 7,701 4,390 14,478 8,465
Interest on short-term borrowings 25,942 17,590 49,163 34,934
Interest on term borrowings 4,384 2,264 8,547 4,523
-------------------------------------------------------------------------------------------------------------
Total interest expense 107,399 70,732 206,465 136,897
-------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 95,353 99,464 187,671 199,537
Provision for loan losses 3,216 2,928 7,364 8,687
-------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 92,137 96,536 180,307 190,850
-------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 42,896 47,780 89,665 103,952
Bond division 22,602 19,967 41,021 46,197
Deposit transactions and cash management 17,576 16,234 35,412 31,070
Trust services 8,212 7,963 18,535 13,861
Bank card 9,302 7,470 17,407 14,114
Equity securities gains/(losses) (106) 8,194 92 23,183
Debt securities gains/(losses) 131 (520) 395 (841)
All other 14,182 11,039 26,423 22,116
-------------------------------------------------------------------------------------------------------------
Total noninterest income 114,795 118,127 228,950 253,652
-------------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 206,932 214,663 409,257 444,502
-------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives, and benefits 81,637 91,567 160,961 189,096
Operations services 9,097 8,341 18,108 16,563
Occupancy 8,679 8,387 17,789 16,260
Equipment rentals, depreciation, and maintenance 7,425 7,200 15,613 13,965
Communications and courier 7,156 8,148 14,490 15,926
Deposit insurance premium 4,393 4,167 8,751 8,318
Legal and professional fees 2,394 3,230 7,590 8,217
Amortization of mortgage servicing rights 2,951 3,658 5,769 8,960
Amortization of intangible assets 1,940 1,597 3,737 3,196
All other 19,842 29,095 40,610 54,371
-------------------------------------------------------------------------------------------------------------
Total noninterest expense 145,514 165,390 293,418 334,872
-------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 61,418 49,273 115,839 109,630
Applicable income taxes 20,665 12,522 40,479 33,075
-------------------------------------------------------------------------------------------------------------
NET INCOME $ 40,753 $ 36,751 $ 75,360 $ 76,555
=============================================================================================================
NET INCOME PER COMMON SHARE $ 1.20 $ 1.07 $ 2.21 $ 2.23
-------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 34,241,312 34,330,157 34,175,346 34,309,837
-------------------------------------------------------------------------------------------------------------
6
CONSOLIDATED First Tennessee
STATEMENTS National
OF CASH FLOWS Corporation
----------------------------------------------------------------------------------------------------
Six Months Ended June 30
(Dollars in thousands)(Unaudited) 1995 1994
------------------------------------ --------------------------
OPERATING ACTIVITIES:
Net income $ 75,360 $ 76,555
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 7,364 8,687
Depreciation and amortization of premises and equipment 11,877 9,807
Amortization of intangibles 3,737 3,196
Amortization of mortgage servicing rights 5,769 8,960
Net amortization of premiums and accretion of discount 8,787 7,095
Market value adjustment on foreclosed property 1,409 1,080
Securities contributed to charitable trust 0 8,338
Equity securities gains (92) (23,183)
Debt securities losses (gains) (395) 841
Net loss on disposal of fixed assets 1,294 261
Deferred income tax provision (benefit) 14,708 (8,990)
Net (increase) decrease in:
Trading securities inventory (57,427) (48,784)
Mortgage warehouse loans held for sale (219,861) 631,485
Bond division receivables (53,716) (159,990)
Interest receivable 0 334
Other assets (134,582) 2,449
Net increase (decrease) in:
Bond division payables 87,588 111,948
Interest payable 6,015 1,319
Other liabilities 84,579 (33,432)
----------------------------------------------------------------------------------------------------
Total adjustments (232,946) 521,421
----------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (157,586) 597,976
----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of:
Held to maturity securities 38,300 312,878
Available for sale securities 62,897 189,401
Proceeds from sale of:
Available for sale securities 65,787 289,928
Premises and equipment 1,449 725
Payments for purchase of:
Held to maturity securities (5,064) (365,617)
Available for sale securities (87,513) (278,440)
Premises and equipment (19,405) (18,924)
Net increase in loans (343,571) (444,864)
Decrease in investment in bank time deposits 790 1,659
Acquisitions, net of cash and cash equivalents acquired 12,691 0
----------------------------------------------------------------------------------------------------
Net cash used by investing activities (273,639) (313,254)
----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 2,282 1,383
Proceeds from the issuance of long-term debt 90,000 14,000
Payments for:
Capital lease obligations (73) (73)
Long-term debt (1,499) (342)
Cash dividends (31,102) (13,622)
Equity distributions related to acquisitions (20) (600)
Stock repurchase (30,573) (1,300)
Net increase (decrease) in:
Deposits 138,696 4,361
Short-term borrowings 126,006 (217,094)
----------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 293,717 (213,287)
----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (137,508) 71,435
----------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 977,952 794,633
----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 840,444 $ 866,068
====================================================================================================
Total interest paid $ 199,839 $ 135,696
Total income taxes paid 22,666 50,813
7
NOTE 1 - FINANCIAL INFORMATION
The accounting and reporting policies of First Tennessee National Corporation
(First Tennessee) and its subsidiaries conform to generally accepted accounting
principles and, as to its banking subsidiaries, with general practice within the
banking industry. These unaudited interim consolidated financial statements
reflect all adjustments which are, in the opinion of management, necessary for a
fair presentation of financial position and results of operations for the
interim periods presented. These unaudited interim financial statements should
be read in conjunction with the audited consolidated financial statements and
related notes included in First Tennessee's 1994 Annual Report to shareholders.
Effective January 1, 1995, First Tennessee changed the method of recognition of
Trust services income from cash basis to accrual basis. Also effective January
1, 1995, as discussed in Note 5, "Capitalized Mortgage Servicing Rights," First
Tennessee adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights an
amendment of FASB Statement No. 65." Term borrowings on the financial
statements consist of borrowings with maturities greater than one year.
8
NOTE 2 -- BUSINESS COMBINATIONS
The following acquisitions have occurred since the first quarter of 1994 and
were accounted for as poolings of interests; therefore, the financial
statements for all periods presented reflect the combined companies.
On August 9, 1994, First Tennessee acquired for approximately 334,000
shares of its common stock all of the outstanding shares of Planters Bank
(Planters) of Tunica, Mississippi. Planters became a wholly owned
subsidiary of First Tennessee. On January 3, 1995, First Tennessee
acquired for approximately 863,000 shares of its common stock all of the
outstanding capital stock of Carl I. Brown and Company (Carl I. Brown) of
Kansas City, Missouri. Carl I. Brown became a wholly owned subsidiary of
First Tennessee Bank National Association (FTBNA). On February 24, 1995,
First Tennessee acquired for approximately 1,421,000 shares of its common
stock all of the outstanding capital stock of Community Bancshares, Inc.
(CBI), of Germantown, Tennessee. CBI, the parent company of Community First
Bank, merged into First Tennessee, and Community First Bank merged into
FTBNA.
The following presents certain financial data pertaining to the combination
of First Tennessee with Planters, Carl I. Brown, and CBI for the second quarter
of 1994 and for the six months ended June 30, 1994:
Three Months Six Months
(Dollars in thousands, Ended Ended
except per share data) June 30, 1994 June 30, 1994
---------------------------------------------------------------------------
TOTAL REVENUE:*
First Tennessee, as originally reported $191,394 $399,908
Planters 746 1,425
Carl I. Brown 22,239 45,716
CBI 3,235 6,178
Eliminations (23) (38)
------------------------------------------------------------------------
First Tennessee $217,591 $453,189
========================================================================
NET INCOME:
First Tennessee, as originally reported $ 35,588 $ 72,218
Planters 114 272
Carl I. Brown 346 2,754
CBI 703 1,311
------------------------------------------------------------------------
First Tennessee $ 36,751 $76,555
========================================================================
NET INCOME PER SHARE:
First Tennessee, as originally reported $ 1.12 $ 2.27
Planters 1.92 4.54
Carl I. Brown 2.00 15.94
CBI 0.22 0.41
First Tennessee 1.07 2.23
------------------------------------------------------------------------
*Total revenue is net interest income and noninterest income.
On April 1, 1995, First Tennessee acquired for approximately 421,000 shares
of its common stock all of the outstanding shares of Peoples Commercial
Services Corporation (Peoples), parent company of Peoples Bank, headquartered
in Senatobia, Mississippi. Peoples Bank became a wholly-owned subsidiary
of First Tennessee, and the acquisition was accounted for as a purchase.
The following presents on a proforma basis certain financial data pertaining
to the Peoples transaction as if it had been acquired at the beginning of the
period. The proforma results presented are not necessarily indicative of the
future results of operations of the combined company or the results of
operations that would have actually occurred had the merger been in effect for
the period presented.
9
Six Months
(Dollars in thousands, Ended
except per share data) June 30, 1995
-----------------------------------------------------------
TOTAL REVENUE:*
First Tennessee, as originally reported $416,621
Peoples 1,232
---------------------------------------------------------
First Tennessee proforma $417,853
=========================================================
NET INCOME:
First Tennessee, as originally reported $ 75,360
Peoples 430
Purchase accounting adjustments (97)
---------------------------------------------------------
First Tennessee proforma $ 75,693
=========================================================
NET INCOME PER SHARE:
First Tennessee, as originally reported $ 2.21
Peoples Commercial Services 3.23
First Tennessee proforma 2.20
---------------------------------------------------------
*Total revenue is net interest income and noninterest income.
On February 21, 1995, First Tennessee and Financial Investment Corp. (FIC)
signed a definitive agreement for First Tennessee to acquire FIC, parent
company of First National Bank of Springdale (FNB), headquartered in
Springdale, Arkansas. Pursuant to the agreement, First Tennessee will
acquire for approximately $70,000,000 of its common stock all of the
outstanding shares of FIC. The acquisition will be accounted for as a purchase.
The First Tennessee Board of Directors has approved the repurchase of the
shares to be issued in this transaction, and as of June 30, 1995, approximately
725,000 shares had been repurchased. Following the acquisition, FNB will
become a wholly-owned subsidiary of First Tennessee. The acquisition is
expected to be completed before the end of 1995 following approval by
regulators and FIC shareholders.
10
NOTE 3 - OTHER INCOME AND OTHER EXPENSE
Following is detail concerning "Other income" and "Other expense" as
presented in the Consolidated Statements of Income:
Three Months Ended Six Months Ended
June 30 June 30
------------------- ------------------
(Dollars in thousands) 1995 1994 1995 1994
-----------------------------------------------------------------------------------------
ALL OTHER INCOME:
Check clearing fees $ 4,148 $ 3,929 $ 8,395 $ 7,895
Other service charges 1,992 1,834 3,864 3,951
Other 8,042 5,276 14,164 10,270
-----------------------------------------------------------------------------------------
Total $14,182 $11,039 $26,423 $22,116
=========================================================================================
ALL OTHER EXPENSE:
Contribution to charitable foundation $ - $ 8,338 $ - $ 8,338
Advertising and public relations 2,990 3,038 6,890 6,395
Supplies 2,710 3,153 5,589 6,125
Fed service fees 2,245 2,063 4,835 4,060
Travel and entertainment 1,949 2,789 3,766 5,188
Foreclosed real estate 840 598 1,781 1,290
Other 9,108 9,116 17,749 22,975
-----------------------------------------------------------------------------------------
Total $19,842 $29,095 $40,610 $54,371
=========================================================================================
11
NOTE 4 - INTANGIBLE ASSETS
Following is a summary of intangible assets, net of accumulated
amortization, included in the Consolidated Statements of Condition:
Premium on
Purchased
Deposits
(Dollars in thousands) Goodwill and Assets
--------------------------------------------------------------
December 31, 1993 $62,565 $28,972
Amortization expense (1,499) (1,697)
Acquisitions/divestitures 178 -
--------------------------------------------------------------
June 30, 1994 $61,244 $27,275
==============================================================
December 31, 1994 $66,086 $25,639
Amortization expense (1,684) (2,053)
Acquisitions/divestitures 7,322 5,821
--------------------------------------------------------------
June 30, 1995 $71,724 $29,407
==============================================================
12
NOTE 5: CAPITALIZED MORTGAGE SERVICING RIGHTS
In May 1995, the Financial Accounting Standards Board issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights," which is an amendment to SFAS No.
65, "Accounting for Certain Mortgage Banking Activities." First Tennessee
elected in the second quarter to adopt this statement as of January 1, 1995.
Accordingly, first quarter results of operations have been restated for an
increase of approximately $5 million pre-tax. SFAS No. 122 prohibits
retroactive application to 1994. Therefore, First Tennessee's financial
statement reporting for the first and second quarters of 1994 were accounted
for under the original SFAS No. 65.
The primary difference between SFAS No. 122 and SFAS No. 65 as they relate to
First Tennessee is the accounting treatment for in-house originated mortgage
servicing rights (OMSRs). Substantially all of First Tennessee's originations
are in-house, whereby the underlying loans are funded and closed by First
Tennessee. SFAS No. 122, among other provisions, requires the recognition of
OMSRs, as well as purchased mortgage servicing rights (PMSRs), as assets by
allocating the total cost incurred between the loan and the servicing rights
based on their relative fair values. Under SFAS No. 65, the cost of OMSRs was
included with the cost of the related loans and written off against income when
the loans were sold. PMSRs were previously recorded as assets under SFAS No.
65.
Also under the new Statement, all capitalized mortgage servicing rights are
evaluated for impairment based on the excess of the carrying amount of the
mortgage servicing rights over their fair value. In measuring impairment, the
carrying amount must be stratified based on one or more predominant risk
characteristics of the underlying loans. Impairment is recognized through a
valuation allowance for each individual stratum. Under SFAS No. 65, the
impairment evaluation could be made using either discounted or undiscounted
cash flows with no required level of disaggregation specified. Any impairment
was recorded directly against the asset.
Following is a summary of capitalized mortgage servicing rights, net of
accumulated amortization, included in the Consolidated Statements of Condition:
Capitalized
Mortgage
Servicing
(Dollars in thousands) Rights
---------------------------------------------------------------
December 31, 1993 $ 85,983
Amortization expense (5,302)
Acquisitions/divestitures (495)
---------------------------------------------------------------
March 31, 1994 $ 80,186
Amortization expense (3,658)
Acquisitions/divestitures (126)
---------------------------------------------------------------
June 30, 1994 $ 76,402
===============================================================
December 31, 1994 $ 72,722
Amortization expense (2,818)
Acquisitions/divestitures 7,638
---------------------------------------------------------------
March 31, 1995 $ 77,542
Amortization expense (2,951)
Acquisitions/divestitures 19,846
---------------------------------------------------------------
June 30, 1995 $ 94,437
===============================================================
Fair value at June 30, 1995 $142,922
---------------------------------------------------------------
The value of pre-SFAS No.122 purchased mortgage servicing rights is established
using the lesser of: a discounted cashflow analysis; current market value; or
the unamortized cost basis. These purchased mortgage servicing rights are
being amortized using an accelerated method over the estimated life of the
servicing income. A quarterly value impairment analysis is performed using a
discounted methodology that is disaggregated by purchase transaction. No
reserve was required as of March 31 or June 30, 1995.
13
The value of post-SFAS No. 122 purchased mortgage servicing rights and
originated mortgage servicing rights is established by allocating the total
costs incurred between the loan and the servicing rights based on their
relative fair values. To determine the fair value of the servicing rights
created, First Tennessee uses the market prices under current sales contracts
which are tested against prices obtained from flow and bulk purchasers of
servicing and prices determined using a valuation model that calculates the
present value of future cash flows. Post-SFAS No. 122 implementation purchased
and originated mortgage servicing rights are being amortized using an
accelerated method over the estimated life of the servicing income. A
quarterly value impairment analysis is performed using a discounted methodology
that is disaggregated by predominant risk characteristics. First Tennessee has
determined those risk characteristics to include: multi-family, residential
fixed rate, and residential adjustable rate loans. No reserve was required as
of March 31 or June 30, 1995.
14
NOTE 6 - LOANS
The composition of the loan portfolio at June 30 is summarized below:
(Dollars in thousands) 1995 1994
------------------------------------------------------------------
Commercial $3,147,611 $2,749,666
Consumer 2,343,929 2,104,118
Permanent mortgage 663,355 562,533
Credit card receivables 479,494 434,113
Real estate construction 231,936 129,716
Nonaccrual 15,719 18,626
------------------------------------------------------------------
Loans, net of unearned income 6,882,044 5,998,772
Allowance for loan losses 110,747 110,342
------------------------------------------------------------------
Total net loans $6,771,297 $5,888,430
==================================================================
On January 1, 1995, First Tennessee adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." On that date,
impaired loans totaling $9,742,000 were identified. All impaired loans had a
related allowance that totaled $2,542,000.
The following table presents information concerning nonperforming loans at
June 30:
(Dollars in thousands) 1995
--------------------------------------------
Impaired loans $ 9,556
Other nonaccrual loans 6,163
Restructured loans 72
--------------------------------------------
Total $15,791
============================================
Impaired loans are generally carried on a nonaccrual status. 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 interest
payments are recognized as interest income on a cash basis. Total interest
income recognized on impaired loans was $587,000 for the three months ended
June 30, 1995, and $930,000 for the six months ended June 30, 1995. The
average balance of impaired loans for the three months ended June 30, 1995, was
approximately $11,804,000 and was approximately $10,798,000 for the six months
ended June 30, 1995. Total restructured impaired loans at June 30, 1995, were
$365,000.
An allowance for loan losses is maintained for all impaired loans.
Activity in the allowance for loan losses related to non-impaired loans,
impaired loans, and for the total allowance for the six months ended June 30,
1995, is summarized as follows:
(Dollars in thousands) Non-impaired Impaired Total
-----------------------------------------------------------------------
Balance at 1/1/95 $109,859 $ -- $109,859
Transfer of allowance (2,542) 2,542 --
Allowance from acquisitions 881 -- 881
Provision for loan losses 4,242 3,122 7,364
Charge-offs 13,788 2,239 16,027
Less loan recoveries 8,658 12 8,670
-----------------------------------------------------------------------
Net charge-offs 5,130 2,227 7,357
-----------------------------------------------------------------------
Balance at 6/30/95 $107,310 $3,437 $110,747
=======================================================================
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED FINANCIAL REVIEW
The following discussion provides management's analysis of the consolidated
financial condition and results of operations of First Tennessee National
Corporation (First Tennessee). It is intended that this discussion be read in
conjunction with the accompanying consolidated financial statements and the
notes, as well as the 1994 financial statements, the notes thereto, and the
accompanying management's discussion and analysis contained in the 1994 annual
report.
OVERVIEW OF OPERATIONS
Record net income of $40.8 million was achieved for the second quarter
of 1995, an 11 percent increase from the $36.8 million for the second quarter
of 1994. Earnings per share for the second quarter of 1995 increased to $1.20
from $1.07 for the second quarter of 1994. Double-digit growth in commercial
and consumer loans, as well as growth in fee income, led to this increase. For
the six months ended June 30, 1995, net income was $75.4 million or $2.21 per
share compared with $76.6 million or $2.23 per share for the first six months
of 1994. Noninterest income accounted for approximately 55 percent of total
revenues during the second quarter as well as the first six months of 1995.
Total assets were $11.6 billion at June 30, 1995. Additional performance
measurements are shown in the table below.
EARNINGS PERFORMANCE
------------------------------------------------------------
For the Second Quarter Ended
------------------------------------------------------------
1995 1994
------------------------------------------------------------
Net income (millions) $ 40.8 $ 36.8
Net income per share 1.20 1.07
Return on equity 20.05% 19.61%
Return on assets 1.48 1.41
------------------------------------------------------------
For the Six Months Ended
------------------------------------------------------------
1995 1994
------------------------------------------------------------
Net income (millions) $ 75.4 $ 76.6
Net income per share 2.21 2.23
Return on equity 19.07% 20.63%
Return on assets 1.39 1.46
------------------------------------------------------------
During the first half of 1994 and the first quarter of 1995, a number
of one-time items were recognized. In the first quarter of 1995, First
Tennessee acquired Carl I. Brown and Company, headquartered in Kansas City, and
Community Bancshares Inc., of Germantown, Tennessee. During the first quarter
of 1994, First Tennessee acquired SNMC Management Corporation, parent of
Sunbelt National Mortgage Corporation, Cleveland Bank & Trust Company, and
Highland Capital Management Corp. All acquisitions closed during the first
quarters of both 1995 and 1994 were accounted for as poolings of interests.
Therefore the financial position and results of operations of all companies are
reflected on a combined basis from the earliest period presented. On April 1,
1995, First Tennessee acquired Peoples Commercial Services Corporation of
Senatobia, Mississippi. This acquisition was accounted for as a purchase and
therefore the consolidated statements do not reflect the results of their
operations prior to that date. One-time expenses were recognized in several of
these acquisitions. In addition, during the second quarter of 1994, First
Tennessee utilized equity securities gains to establish a charitable foundation
that resulted in additional one-time income and expense. A discussion of First
Tennessee's performance is provided below.
16
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME AND EARNING ASSETS
For purposes of this discussion, net interest income has been adjusted
to a fully taxable equivalent 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.
NET INTEREST INCOME AND EARNING ASSETS
------------------------------------------------------------
For the Second Quarter Ended
------------------------------------------------------------
(Dollars in millions) 1995 1994 Change
------------------------------------------------------------
Investment securities $2,178.4 $2,200.1 (1)%
Loans 7,320.0 6,702.2 9
Other earning assets 383.0 380.6 1
------------------------------------------------------------
Total earning assets $9,881.4 $9,282.9 6
------------------------------------------------------------
Net interest income $ 96.5 $ 100.7 (4)%
Net interest spread 3.09% 3.70%
Net interest margin 3.91 4.34
------------------------------------------------------------
For the Six Months Ended
------------------------------------------------------------
1995 1994 Change
------------------------------------------------------------
Investment securities $2,189.9 $2,246.5 (3)%
Loans 7,121.3 6,704.0 6
Other earning assets 419.9 405.9 3
------------------------------------------------------------
Total earning assets $9,731.1 $9,356.4 4
------------------------------------------------------------
Net interest income $ 190.1 $ 201.9 (6)%
Net interest spread 3.10% 3.71%
Net interest margin 3.92 4.33
------------------------------------------------------------
Earning assets increased 6 percent as total loans grew 9 percent and
investment securities declined 1 percent from the second quarter of 1994.
Commercial loans grew 16 percent, consumer loans rose 13 percent, and the
permanent mortgage portfolio increased 19 percent. This growth was coupled
with a 36 percent reduction in mortgage warehouse loans. For the six months
ending June 30, 1995, earning assets increased 4 percent with total loan growth
of 6 percent and a decline in the investment portfolio of approximately 3
percent. From the first six-month period of 1994 to 1995, commercial loans
grew 13 percent, consumer loans increased 16 percent, the permanent mortgage
portfolio rose 18 percent and the mortgage warehouse loans decreased 52
percent.
Commercial loans represented 43 percent and consumer loans and credit
card receivables were 38 percent of total loans for the second quarter of 1995.
The increase in loans was partially funded by a 7 percent growth in interest-
bearing deposits, largely certificates of deposit less than $100,000.
Although earning assets increased 6 percent, net interest income
decreased 4 percent as the net interest margin (margin) compressed 43 basis
points from the level for the second quarter of 1994. This decrease was a
result of the extreme interest rate movements since June 30, 1994, and their
impact on First Tennessee's balance sheet and off-balance sheet positions.
Since the beginning of 1995, the margin has remained relatively flat as a
result of several strategies, including the termination of a basis swap, that
were implemented to realign the balance sheet. These strategies have helped
neutralize the balance sheet as shown in the Rate Sensitivity Analysis table.
At June 30, 1995, the balance sheet was rate sensitive $31 million more
liabilities than assets scheduled to reprice within one year, which is .3
percent of earning assets and within guideline limits. The costs associated
with the basis swap negatively impacted the margin approximately 20 basis
points in the second quarter of 1995. The net interest margin for the second
quarter of 1995 was 3.91 percent compared to 3.92 percent for the first quarter
of 1995. For the six-month period, net interest income decreased 6 percent,
and the margin was 3.92 percent. Based on current interest rates, the net
interest margin should begin to improve over the next year as the amortization
period for the basis swap ends and as assets mature and reprice.
17
NONINTEREST INCOME
--------------------------------------------------------------
For the Second Quarter Ended
--------------------------------------------------------------
(Dollars in millions) 1995 1994 Change
--------------------------------------------------------------
Mortgage banking $ 42.9 $ 47.8 (10)%
Bond division 22.6 20.0 13
Deposit transactions and
cash management 17.6 16.2 8
Bank card 9.3 7.5 25
Trust services 8.2 7.9 3
Other 14.2 11.0 28
--------------------------------------------------------------
Total fee revenue $114.8 $110.4 4%
--------------------------------------------------------------
Gains on securities -- 7.7
--------------------------------------------------------------
Total noninterest income $114.8 $118.1 (3)%
--------------------------------------------------------------
For the Six Months Ended
--------------------------------------------------------------
1995 1994 Change
--------------------------------------------------------------
Mortgage banking $ 89.7 $104.0 (14)%
Bond division 41.0 46.2 (11)
Deposit transactions and
cash management 35.4 31.1 14
Bank card 17.4 14.1 23
Trust services 18.6 13.9 34
Other 26.4 22.1 19
--------------------------------------------------------------
Total fee revenue $228.5 $231.4 (1)%
--------------------------------------------------------------
Gains on securities .5 22.3
--------------------------------------------------------------
Total noninterest income $229.0 $253.7 (10)%
--------------------------------------------------------------
Noninterest income, excluding securities transactions in both periods,
grew 4 percent compared with the second quarter of 1994. The mortgage banking
entities originated $1.6 billion of mortgage loans during the second quarter of
1995 compared to $1.9 billion during the second quarter of 1994 and $.9 billion
during the first quarter of 1995. The decline in origination volume from the
previous year reflects the high level of refinance activity which continued
through the second quarter of 1994. The mortgage servicing portfolio, which
includes servicing for ourselves and others, totaled $13.9 billion at June 30,
1995, compared to $15.0 billion at June 30, 1994. During the quarter, First
Tennessee adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights an
amendment of FASB Statement No. 65," which changed the method of accounting for
mortgage servicing rights. This adoption, effective from the beginning of the
year, resulted in an increase of approximately $3.0 million in first quarter
net income. Going forward, First Tennessee should continue to benefit from
this accounting change through the opportunity to retain additional servicing.
For the first six months of 1995, mortgage banking noninterest income declined
14 percent from the first six months of 1994, reflecting the impact of lower
origination volume.
The 13 percent quarter-over-quarter increase in noninterest income at
the bond division demonstrates the results of increased penetration among
nonbanking customers. For the first six months of 1995, the bond division's
noninterest income declined 11 percent. However, the bond division attained
record revenue the first quarter of 1994 as a result of a very active bond
market. The bond division acts primarily as a broker for its customers and does
not speculate in fixed-income securities for its own account. The inventory is
highly liquid, turning over two to three times a day, and overnight positions
are hedged against movements in interest rates.
Quarter-over-quarter growth in deposit transactions and cash
management noninterest income was driven by sales to new customers and
increases in existing customer transactions. For the first six months of 1995,
deposit transactions and cash management noninterest income grew 14 percent,
with much of the growth resulting from an accounting methodology change from
cash basis to accrual basis in the first quarter of 1995. Bank card
noninterest income includes both cardholder and merchant processing fees. The
increase of 25 percent between the second quarter of 1995 and the second
quarter of 1994 was primarily due to an overall increase in the number of
merchant transactions processed. For the first six months of 1995, bank card
noninterest income grew 23 percent. Trust services noninterest income grew 3
percent from additional penetration into the affluent market segment as well as
growth in managed assets. Managed assets at June 30, 1995, were $4.6 billion
compared to $4.1 billion at June 30, 1994. For the first six months of 1995,
trust services noninterest income increased 34 percent primarily due to an
accounting methodology change from cash basis to accrual basis in the first
quarter of 1995. Gains on securities during the second quarter of 1994 included
equity gains related to the establishment of the charitable foundation.
18
NONINTEREST EXPENSE
----------------------------------------------------------------
For the Second Quarter Ended
----------------------------------------------------------------
(Dollars in millions) 1995 1994 Change
----------------------------------------------------------------
Staff expense $ 81.6 $ 91.6 (11)%
Occupancy 8.7 8.4 3
Amortization of
intangibles and mortgage
servicing rights 4.9 5.2 (7)
Equipment expense 7.4 7.2 3
Other 42.9 53.0 (19)
----------------------------------------------------------------
Total operating expense $145.5 $165.4 (12)%
----------------------------------------------------------------
For the Six Months Ended
----------------------------------------------------------------
1995 1994 Change
----------------------------------------------------------------
Staff expense $161.0 $189.1 (15)%
Occupancy 17.8 16.3 9
Amortization of
intangibles and mortgage
servicing rights 9.5 12.1 (22)
Equipment expense 15.6 14.0 12
Other 89.5 103.4 (13)
----------------------------------------------------------------
Total operating expense $293.4 $334.9 (12)%
----------------------------------------------------------------
Noninterest expense (also called operating expense) decreased 12
percent, and excluding the one-time items discussed below, decreased 7 percent
between the second quarter of 1995 and the second quarter of 1994. For the
first six months of 1995 compared to the first six months of 1994, noninterest
expense decreased 12 percent, and excluding the one-time items discussed below
decreased 10 percent. The primary reasons for the decrease were fewer one-time
expenses and the reduction in commissions paid as a result of lower
commission-based revenue. First Tennessee recognized one-time acquisition
expenses of $5.8 million and $4.1 million in the first quarters of 1995 and
1994, respectively. There were no one-time acquisition expenses in the second
quarter of either year. During the first quarter of 1994, First Tennessee
adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits"
with the recognition of $2.3 million of postemployment benefits related to
prior service rendered and rights vested. Additionally, during the second
quarter of 1994, First Tennessee established a charitable foundation that
increased other expenses $8.5 million for the quarter. The largest dollar
decrease for the quarter and year-to-date periods was in employee compensation,
incentives, and benefits expense (staff expense), which decreased 11 percent
and 15 percent, respectively. Most of this decrease reflected the variable
expenses of the bond division and mortgage banking which experienced lower
revenues on a combined basis during these same periods.
INCOME TAXES
-----------------------------------------
Effective tax rates 1995 1994
-----------------------------------------
For the quarter ended 33.6% 25.4%
For the six months ended 34.9 30.2
-----------------------------------------
The tax rate increase was primarily due to a $1.9 million tax
reduction in each quarter of 1994 for the elimination of a portion of a
deferred tax valuation allowance related to the acquisition of SNMC Management
Corporation. In addition, the lower tax rate in 1994 resulted from a reduction
in taxes in the amount of $2.7 million related to the establishment of the
charitable foundation.
CAPITAL
------------------------------------------------------
For the Second Quarter Ended
------------------------------------------------------
1995 1994
------------------------------------------------------
Equity/assets ratio 7.36% 7.19%
Equity/loans 11.14 11.22
Tangible equity/tangible
assets* 6.51 6.39
Book value per share $24.39 $22.16
------------------------------------------------------
* Mortgage servicing rights are included as tangible assets.
Average shareholders' equity, through the retention of net income,
increased 9 percent from the second quarter of 1994. First Tennessee
establishes capital guidelines based on industry standards, regulatory
requirements, perceived risks of the various businesses, and future growth
opportunities. For an institution to qualify as well-capitalized as set forth
in the banking regulations, Tier 1 capital, Total capital, and leverage capital
ratios must be at least 6 percent, 10 percent, and 5 percent, respectively. On
June 30, 1995, First Tennessee's bank subsidiaries had sufficient capital to
qualify as well-capitalized institutions under the regulatory capital standards
as shown in the Regulatory Capital table.
LIQUIDITY
During the second quarter of 1995, average core deposits, the most
stable source of liquidity, funded 68 percent of total average assets while
funding from short-term purchased funds was 21 percent. Average
19
interest-bearing core deposits grew 6 percent from the second quarter of 1994.
Short-term purchased funds include: certificates of deposit greater than
$100,000, federal funds purchased, securities sold under agreements to
repurchase, commercial paper, and other borrowed funds. Short-term purchased
funds increased to $2.5 billion at June 30, 1995, from $2.1 billion at June 30,
1994.
ASSET QUALITY AND CREDIT RISK MANAGEMENT
First Tennessee manages asset quality and credit risk by maintaining
diversification in its loan portfolio and through adherence to its credit
policy. First Tennessee's goal is not to avoid risk, but to manage it.
Barring any major changes in the economy, asset quality is expected to remain
relatively stable in 1995 based on the current mix in the commercial and
consumer loan portfolios. At June 30, 1995, First Tennessee had no
concentrations of 10 percent or more of total loans in any single industry.
Commercial loans are internally assigned a credit rating, ranging from
A to F. Loans graded C and above were 96 percent of total graded loans at June
30, 1995, compared with 94 percent at June 30, 1994. Commercial real estate
loans were $566 million at June 30, 1995, compared with $502 million at June
30, 1994, as originally reported. Construction and development loans were
$208 million at the end of the second quarter of 1995, an increase of $95
million from the amounts originally reported for the second quarter of 1994.
The Loans Secured by Real Estate table reflects the diversity in real estate
loans by project type.
The Net Loans and Foreclosed Real Estate table provides a breakdown of
the commercial loan portfolio of FTBNA by grades and major loan types as of
June 30, 1995 and 1994, and year-end 1994. This table also presents
information on consumer loans, credit card receivables, mortgages and other
First Tennessee bank subsidiaries.
The allowance for loan losses reflects management's judgment of the
risks inherent in the loan portfolio. The allowance for loan losses is
increased by the provision for loan losses and recoveries and is decreased by
charged-off loans. The evaluation process to determine potential losses
includes consideration of the industry, specific conditions of the individual
borrower, and the general economic environment. As these factors change, the
loan loss provision changes.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
---------------------------------------------------------------
For the Second Quarter Ended
---------------------------------------------------------------
(Dollars in millions) 1995 1994
---------------------------------------------------------------
Beginning balance $109.8 $112.2
Provision for loan losses 3.2 2.9
Allowance of acquired bank .9 -
Net charge-offs (3.2) (4.8)
-------------------------------------------------------------
Ending balance $110.7 $110.3
-------------------------------------------------------------
RATIOS:
Allowance to loans* 1.45% 1.66%
Net charge-offs to average
loans* .18 .28
Net charge-offs to allowance 11.6 17.2
-------------------------------------------------------------
For the Six Months Ended
-------------------------------------------------------------
1995 1994
-------------------------------------------------------------
Beginning balance $109.9 $110.7
Provision for loan losses 7.3 8.7
Allowance of acquired bank .9 -
Net charge-offs (7.4) (9.1)
-------------------------------------------------------------
Ending balance $110.7 $110.3
-------------------------------------------------------------
RATIOS:
Allowance to loans* 1.45% 1.66%
Net charge-offs to average
loans* .21 .27
Net charge-offs to allowance 13.3 16.4
-------------------------------------------------------------
*net of unearned income; includes mortgage warehouse loans held for sale
reported on the Consolidated Statements of Condition
Excluding mortgage warehouse loans, the ratio of allowance for loan
losses to loans would have been 1.61 percent at June 30, 1995, and 1.84 percent
at June 30, 1994. Net charge-offs decreased to $3.2 million or .18 percent of
average loans for the quarter ended June 30, 1995. For the six-month
period, net charge-offs decreased to $7.4 million or .21 percent of average
loans. Commercial and real estate loan recoveries exceeded charge-offs by $1.5
million for the second quarter of 1995. For the six-month period, commercial
20
and real estate loan net recoveries were $2.2 million compared to $1.7 million
net charge-offs for the same period in 1994. Consumer loan net charge-offs as
a percent of average consumer loans, net of unearned income, were .19 percent
while credit card receivable net charge-offs as a percentage of credit card
receivables were 3.15 percent. Consumer loan net charge-offs were $2.2 million
for both periods while credit card charge-offs increased to $7.2 million from
$5.1 million year-to-date last year.
As shown in the Nonperforming Assets table, nonperforming assets
decreased 42 percent from June 30, 1994. Nonperforming loans decreased 20
percent and foreclosed real estate decreased 57 percent for the same time
period. The Changes in Nonperforming Assets table provides additional detail
regarding nonperforming assets since June 30, 1994.
NONPERFORMING ASSETS
------------------------------------------------------------------------------
June 30 December 31
------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994 1994
------------------------------------------------------------------------------
AMOUNTS:
Impaired loans* $ 9,556
Other nonaccrual loans 6,163
------------------------------------------------------------------------------
Total nonaccrual loans 15,719 $18,626 $16,853
Restructured loans 72 1,018 158
------------------------------------------------------------------------------
Total nonperforming loans 15,791 19,644 17,011
Foreclosed real estate 13,732 31,931 19,215
Other assets 1,785 2,504 2,055
------------------------------------------------------------------------------
Total nonperforming assets $31,308 $54,079 $38,281
==============================================================================
Past due loans:**
Non-government guaranteed $14,873 $12,444 $13,297
Government guaranteed 10,482 10,879 10,030
------------------------------------------------------------------------------
RATIOS:
Nonperforming loans to total .21% .30% .24%
loans***
Nonperforming assets to total
loans, plus foreclosed real
estate and other assets*** .41 .81 .54
Nonperforming assets and non-
government guaranteed past
due loans to total loans, plus
foreclosed real estate and
other assets*** .61 1.00 .73
------------------------------------------------------------------------------
All loans shown net of unearned income.
* Includes $365,000 of restructured loans.
** Loans that are 90 days or more past due as to principal and/or interest and
not yet impaired or on nonaccrual status.
***Total loans includes mortgage warehouse loans held for sale reported on the
Consolidated Statements of Condition.
CHANGES IN NONPERFORMING ASSETS
-----------------------------------------------------------------------------------
For the Quarters Ended
-----------------------------------------------------------------------------------
1995 1994
------------------------------------------------- -----------------------------
(Dollars in millions) 6/30 3/31 12/31 9/30 6/30
------------------------------------------------- -----------------------------
Beginning balance $ 36.0 $38.3 $ 43.5 $ 54.1 $59.5
New nonperformers 9.8 2.3 6.5 3.0 1.5
Return to accrual - (.2) - - -
Payments (12.8) (4.0) (10.3) (12.6) (6.4)
Charge-offs (1.7) (.4) (1.4) (1.0) (.5)
------------------------------------------------- -----------------------------
Ending balance $ 31.3 $36.0 $ 38.3 $ 43.5 $54.1
------------------------------------------------- -----------------------------
Past due loans were $25.4 million at June 30, 1995, a $2.1 million
increase from the $23.3 million reported at June 30, 1994. Potential problem
assets, which are not included in nonperforming assets, were $72.7 million at
June 30, 1995, which was approximately 1 percent of total loans.
21
OFF-BALANCE SHEET ACTIVITY
In the normal course of business, First Tennessee is a party to
off-balance sheet financial instruments that are not required to be reflected
in a balance sheet. First Tennessee enters into transactions involving these
instruments in order to meet the financial needs of its customers and manage
its own exposure to fluctuations in interest rates. These instruments are
categorized into: those Held or Issued for Purposes other than bond division,
and those Held or Issued for bond division as noted in the Off-Balance Sheet
Financial Instruments table.
The Held or Issued for Purposes other than bond division category
includes such instruments as loan commitments and customer requests, as well as
tools used for interest rate risk management. Commitments to extend credit are
agreements to lend to a customer at a future date. Since many of the
commitments are expected to expire without being drawn upon fully, the total
commitment amounts do not necessarily represent future cash requirements.
Interest rate risk management instruments may include interest rate swaps, caps,
floors, and forward contracts. During the first quarter of 1995, First
Tennessee terminated $500 million of a $1 billion basis swap. This swap was
executed as a tool to manage interest rate risk. The remaining $500 million of
the basis swap was terminated during the second quarter of 1995. As of June 30,
1995, deferred losses from terminated swap transactions were $15.8 million and
will be amortized through May 1996. The mortgage banking entities use forwards
to hedge interest rates between the time a mortgage loan is committed to the
customer and the time it is funded and securitized.
In the normal course of business, the bond division buys and sells
mortgage securities, municipal bonds, and other securities that settle on a
delayed basis. Under generally accepted accounting principles, these
instruments are considered forward contracts as shown in the table.
22
RATE SENSITIVITY ANALYSIS AT JUNE 30, 1995
Interest Sensitivity Period
-----------------------------------------------------------------------------
Within 3 After 3 months After 6 months
(Dollars in millions) Months Within 6 months Within 12 months Other Total
--------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS:
Loans $4,116 $ 346 $ 624 $2,531 $ 7,617
Investment securities 140 96 214 1,731 2,181
Other earning assets 412 -- -- -- 412
--------------------------------------------------------------------------------------------------------------------------
Total earning assets $4,668 $ 442 $ 838 $4,262 $ 10,210
--------------------------------------------------------------------------------------------------------------------------
EARNING ASSET FUNDING:
Interest-bearing deposits $2,234 $ 601 $ 653 $2,850 $ 6,338
Short-term purchased funds 1,936 -- -- -- 1,936
Term borrowings 21 2 3 176 202
Noninterest-bearing funds 132 (4) (7) 1,613 1,734
--------------------------------------------------------------------------------------------------------------------------
Earning asset funding $4,323 $ 599 $ 649 $4,639 $ 10,210
==========================================================================================================================
RATE SENSITIVITY GAP:
Period $ 345 $(157) $ 189 $ (377)
Cumulative 345 188 377 --
--------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY GAP ADJUSTED FOR INTEREST
RATE FUTURES AND INTEREST RATE SWAPS:
Period $ (54) $(239) $ 262 $ 31
Cumulative (54) (293) (31) --
--------------------------------------------------------------------------------------------------------------------------
ADJUSTED GAP AS A PERCENT OF EARNING ASSETS:
Period (0.5)% (2.4)% 2.6 % 0.3 %
Cumulative (0.5) (2.9) (0.3) --
--------------------------------------------------------------------------------------------------------------------------
Interest-sensitive categories represent ranges in which assets and liabilities
can be repriced, not necessarily their actual maturities. Other amounts include
assets and liabilities with interest sensitivity of more than 12 months or with
indefinite repricing schedules.
23
REGULATORY CAPITAL AT JUNE 30, 1995
Peoples
(Dollars in thousands) First Tennessee (1) FTBNA (2) CBT (3) and Union (4)
------------------------------------------------------------------------------------------------------------------
CAPITAL:
Tier 1 capital:
Shareholders' common equity $ 826,750 $ 740,458 $ 24,136 $15,042
Disallowed intangibles (72,371) (67,895) 0 0
Adjust for unrealized holding (gains)/losses on
available for sale securities (1,140) (155) (186) (16)
------------------------------------------------------------------------------------------------------------------
Total Tier 1 capital 753,239 672,408 23,950 15,026
------------------------------------------------------------------------------------------------------------------
Tier 2 capital:
Qualifying debt 79,813 75,000 0 0
Qualifying allowance for loan losses 102,544 97,867 1,822 818
------------------------------------------------------------------------------------------------------------------
Total Tier 2 capital 182,357 172,867 1,822 818
------------------------------------------------------------------------------------------------------------------
Total capital $ 935,596 $ 845,275 $ 25,772 $ 15,844
==================================================================================================================
Risk-adjusted assets $ 8,195,295 $ 7,822,711 $144,628 $ 65,378
Quarterly average assets* 11,086,366 10,510,212 238,353 118,564
------------------------------------------------------------------------------------------------------------------
RATIOS:
Tier 1 capital to risk-adjusted assets 9.19% 8.60% 16.56% 22.98%
Tier 2 capital to risk-adjusted assets 2.23 2.21 1.26 1.25
------------------------------------------------------------------------------------------------------------------
Total capital to risk-adjusted assets 11.42% 10.81% 17.82% 24.23%
==================================================================================================================
Leverage - Tier 1 capital to
adjusted quarterly average assets 6.84% 6.44% 10.05% 12.67%
less disallowed intangibles
------------------------------------------------------------------------------------------------------------------
Peoples
(Dollars in thousands) Planters (5) FTBNA-MS (6) Bank (7)
----------------------------------------------------------------------------------------------------
CAPITAL:
Tier 1 capital:
Shareholders' common equity $ 6,117 $ 6,562 $ 17,227
Disallowed intangibles 0 (728) (10,038)
Adjust for unrealized holding (gains)/losses on
available for sale securities 112 0 (298)
----------------------------------------------------------------------------------------------------
Total Tier 1 capital 6,229 5,834 6,891
----------------------------------------------------------------------------------------------------
Tier 2 capital:
Qualifying debt 0 0 0
Qualifying allowance for loan losses 420 468 593
----------------------------------------------------------------------------------------------------
Total Tier 2 capital 420 468 593
----------------------------------------------------------------------------------------------------
Total capital $ 6,649 $ 6,302 $ 7,484
====================================================================================================
Risk-adjusted assets $33,136 $37,298 $ 47,146
Quarterly average assets* 59,620 61,388 102,052
----------------------------------------------------------------------------------------------------
RATIOS:
Tier 1 capital to risk-adjusted assets 18.80% 15.64% 14.62%
Tier 2 capital to risk-adjusted assets 1.27 1.26 1.25
----------------------------------------------------------------------------------------------------
Total capital to risk-adjusted assets 20.07% 16.90% 15.87%
====================================================================================================
Leverage - Tier 1 capital to
adjusted quarterly average assets 10.45% 9.62% 7.49%
less disallowed intangibles
----------------------------------------------------------------------------------------------------
* Adjusted for unrealized holding (gains)/losses on available for sale
securities.
(1) First Tennessee National Corporation (2) First Tennessee Bank National
Association
(3) Cleveland Bank and Trust Company (4) Peoples and Union Bank (5) Planters
Bank
(6) First Tennessee Bank National Association Mississippi (7) Peoples Bank of
Senatobia
Based on regulatory guidelines.
24
LOANS AND FORECLOSED REAL ESTATE, PERIOD-END AMOUNTS
June 30, 1995
----------------------------------------------------------------------
Construction Allowance
and Commercial For Loan
(Dollars in millions) Commercial Development Real Estate Total Losses
---------------------------------------------------------------------------------------------------------------------
Internal grades:
A $ 202 $ 0 $ 3 $ 205 $ -
B 388 13 54 455 1
C 1,789 189 473 2,451 23
D 45 2 17 64 5
E 14 2 9 25 3
F 22 2 8 32 8
---------------------------------------------------------------------------------------------------------------------
2,460 208 564 3,232 40
Impaired loans:
Contractually past due 6 - 1 7 3
Contractually current 1 - 1 2 1
Nonaccrual loans:
Contractually past due 1 - - 1 -
Contractually current - - - - -
---------------------------------------------------------------------------------------------------------------------
Total commercial &
commercial real estate loans $2,468 $208 $566 $3,242 $ 44
---------------------------------------------------------------------------------------------------------------------
Retail:
Consumer 2,263 20
Credit card 479 19
Permanent mortgages 647 4
Mortgage warehouse loans held for sale 735 -
Mortgage banking nonaccrual loans 6 1
---------------------------------------------------------------------------------------------------------------------
Total retail loans 4,130 44
---------------------------------------------------------------------------------------------------------------------
Cleveland Bank & Trust Company 145 3
Planters Bank 26 1
Peoples Bank 45 1
Other/Unfunded commitments 29 3
General reserve - 15
---------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income $7,617 $111
=====================================================================================================================
Foreclosed real estate:
Foreclosed property $ 1 $ 8 $ 2 $ 11
Foreclosed property - mortgage banking 3
Insubstance foreclosure -
---------------------------------------------------------------------------------------------------------------------
Total foreclosed real estate $ 14
=====================================================================================================================
June 30, 1994 December 31, 1994
------------------------ -------------------------
Allowance Allowance
For Loan For Loan
(Dollars in millions) Total Losses Total Losses
----------------------------------------------------------------------------------------------------------
Internal grades:
A $ 146 $ - $ 207 $ -
B 339 1 399 1
C 2,112 23 2,284 23
D 88 6 74 7
E 38 4 26 4
F 31 10 39 9
-------------------------------------------------------------------------------------------------------
2,754 44 3,029 44
Impaired loans:
Contractually past due - - - -
Contractually current - - - -
Nonaccrual loans:
Contractually past due 7 4 6 2
Contractually current 5 3 4 2
-------------------------------------------------------------------------------------------------------
Total commercial &
commercial real estate loans $2,766 $ 51 $3,039 $ 48
-------------------------------------------------------------------------------------------------------
Retail:
Consumer 2,038 19 2,191 20
Credit card 434 18 475 19
Permanent mortgages 560 2 586 2
Mortgage warehouse loans held for sale 632 - 515 -
Mortgage banking nonaccrual loans 5 1 6 1
-------------------------------------------------------------------------------------------------------
Total retail loans 3,669 40 3,773 42
-------------------------------------------------------------------------------------------------------
Cleveland Bank & Trust Company 138 3 139 3
Planters Bank 28 1 25 1
Peoples Bank - - - -
Other/Unfunded commitments 29 3 37 3
General reserve - 12 - 13
-------------------------------------------------------------------------------------------------------
Total loans, net of unearned income $6,630 $110 $7,013 $110
=======================================================================================================
Foreclosed real estate:
Foreclosed property $ 19 $ 14
Foreclosed property - mortgage banking 13 5
Insubstance foreclosure 0 0
-------------------------------------------------------------------------------------------------------
Total foreclosed real estate $32 $19
-------------------------------------------------------------------------------------------------------
All amounts in the Allowance for Loan Losses columns have been rounded to the
nearest million dollars. Grade A loans have reserve amounts of less than
$500,000.
Definitions of each credit grade are provided below:
*GRADE A -- Established, stable companies with excellent earnings, liquidity,
and capital. Possess many of the same characteristics as Standard & Poor's
(S&P) AA rated companies.
*GRADE B -- Established, stable companies with good earnings, liquidity, and
capital. Possess many of the same characteristics as S&P A rated companies.
*GRADE C -- Established, stable companies with satisfactory earnings,
liquidity, and capital and with consistent, positive trends relative to
industry norms.
*GRADE D -- Financial condition adversely affected by temporary lack of
earnings or liquidity or changes in the operating environment. An action
plan is required to rehabilitate the credit or have it refinanced elsewhere.
*GRADE E -- Significant developing weaknesses or adverse trends in earnings,
liquidity, capital, or operating environment. No discernable market for
refinancing is available.
*GRADE F -- Significantly higher than normal probability that: (1) legal
action or liquidation of collateral is required; (2) there will be a loss; or
(3) both will occur. This grade is believed to be substantially equivalent
to the regulators' classifications of substandard and doubtful.
*NONACCRUAL -- A loan that is placed on nonaccrual status is not included in
any of these six grades, but is placed in a separate nonaccrual category.
Commercial and real estate loans are placed on nonaccrual status
automatically once they become 90 days or more past due.
Based on internal loan classifications.
25
LOANS SECURED BY REAL ESTATE, PERIOD-END AMOUNTS
June 30, 1995
-----------------------------------
Construction Commercial
(Dollars in millions) & Development Real Estate Total
------------------------------------------------------------------------------------------------------
RISK CATEGORIES:
Real estate collateral serves as only source of repayment $124 $175 $299
Real estate collateral is primary source of
repayment with a substantial secondary source 84 391 475
------------------------------------------------------------------------------------------------------
Total $208 $566 $774
======================================================================================================
PROJECT TYPE:
Apartments $ 11 $ 98 $109
Hotels/Motels 5 57 62
Office buildings - multi-tenant -- 51 51
Single family builder 83 5 88
Shopping centers 57 112 169
Commercial/Special purpose units 7 82 89
All other 45 161 206
------------------------------------------------------------------------------------------------------
Total $208 $566 $774
======================================================================================================
December 31, 1994*
-------------------------------------
Construction Commercial
(Dollars in millions) & Development Real Estate Total
------------------------------------------------------------------------------------------------------
RISK CATEGORIES:
Real estate collateral serves as only source of repayment $ 79 $170 $249
Real estate collateral is primary source of
repayment with a substantial secondary source 60 366 426
------------------------------------------------------------------------------------------------------
Total $139 $536 $675
======================================================================================================
PROJECT TYPE:
Apartments $ 6 $ 74 $ 80
Hotels/Motels 8 48 56
Office buildings - multi-tenant 2 56 58
Single family builder 53 4 57
Shopping centers 23 136 159
Commercial/Special purpose units 8 75 83
All other 39 143 182
------------------------------------------------------------------------------------------------------
Total $139 $536 $675
======================================================================================================
Based on internal loan classifications for graded loans.
Excludes Cleveland Bank & Trust, Planters Bank, and Peoples Bank.
* As originally reported.
26
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AT JUNE 30, 1995
Notional Notional
(Dollars in millions) Value Value
----------------------------------------------------------------------------------------------------------------------------------
HELD OR ISSUED FOR PURPOSES OTHER THAN BOND DIVISION HELD OR ISSUED FOR BOND DIVISION
Commitments to extend credit: Forward contracts:
Consumer credit card lines $1,589.9 Commitments to purchase $1,616.6
Consumer home equity 222.5 Commitments to sell 1,750.1
Commercial real estate and
construction and land development 261.7 Futures contracts:
Mortgage banking 596.1 Commitment to purchase 82.0
Other 1,292.8
Interest rate swap receive fixed/ pay floating 75.0
Commercial and Standby letters of credit 219.0
Securities underwriting commitments 2.1
Foreign exchange contracts, net position 2.1
Interest rate risk management activities:
Interest rate swap receive fixed/
pay floating - amortizing 552.8
Mortgage banking
Commitments to sell loans, net position 990.3
Put options purchased 44.5
Eurodollar placement futures 150.0
27
Part II.
OTHER INFORMATION
Items 1, 2, 3, and 5.
As of the end of the second quarter, 1995, the answers to Items 1, 2, 3, and 5
were either inapplicable or negative, and therefore, these items are omitted.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company's Annual Meeting of Shareholders was held on April 18, 1995.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934. There were no solicitations in
opposition to management's nominees for election to Class II (Dr. Blattberg,
Mr. Hyde, Mr. Rose, and Mr. Street) or Class I (Mr. Martin). The nominees for
Class II were elected for a three-year term, and the nominee for Class I was
elected for a two-year term, or, in each case, until their respective
successors are duly elected and qualified. Directors continuing in office are
Ms. Roman and Messrs. Belz, Horn, Orgill, Ray, Sansom, and Terry.
(c) At the Annual Meeting, the shareholders approved the Non-Employee
Directors' Deferred Compensation Stock Option Plan and the 1995 Employee Stock
Option Plan and ratified the appointment of Arthur Andersen LLP as
independent auditors for the year 1995.
1. Nominees For Withheld
--- --------
Robert C. Blattberg 28,669,439 307,928
J. R. Hyde, III 28,867,582 109,784
R. Brad Martin 28,875,596 101,771
Michael D. Rose 28,888,719 88,647
Gordon P. Street, Jr. 28,882,670 94,697
For Against Abstain
--- ------- -------
2. Approval of Director Plan 24,334,461 2,203,859 394,722
3. Approval of Employee Plan 24,059,658 2,780,867 296,290
4. Ratification of auditors 28,732,210 121,197 123,958
There were no "broker non-votes" with respect to any of the nominees or the
ratification of auditors and no abstentions with respect to any of the
nominees. The "broker non-vote" was 2,044,324 shares with respect to the
Directors' Option Plan and 1,840,550 shares with respect to the Employee Option
Plan.
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 second quarter of 1995.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST TENNESSEE NATIONAL CORPORATION
------------------------------------
(Registrant)
DATE: 8/14/95 By: Elbert L. Thomas Jr.
--------------------- --------------------------
Elbert L. Thomas Jr.
Senior Vice President and Chief
Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
29
EXHIBIT INDEX
Exhibit No. Exhibit Description Page No.
----------- ------------------- --------
* 10(l) Non-Employee Directors' Deferred Compensation Stock
Option Plan, attached as Exhibit A to the Corporation's
Proxy Statement dated March 15, 1995, mailed to share-
holders in connection with the Corporation's April 18, 1995,
Annual Meeting of Shareholders and incorporated herein
by reference.
* 10(m) 1995 Employee Stock Option Plan, attached as Exhibit B to
the Corporation's Proxy Statement dated March 15, 1995,
mailed to shareholders in connection with the Corporation's
April 18, 1995, Annual Meeting of Shareholders and
incorporated herein by reference.
11 Statement re Computation of Per Share Earnings Filed Herewith
27 Financial Data Schedule (for SEC use only) Filed Herewith
* Exhibits marked with an "*" represent management
contract or compensatory plan or arrangement
required to be filed as an exhibit.
EX-11
2
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
1
EXHIBIT 11
FIRST TENNESSEE NATIONAL CORPORATION
PRIMARY EARNINGS PER SHARE
AND FULLY DILUTED EARNINGS PER SHARE
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ ------------------------------
Computation for Statements of Income: 1995 1994 1995 1994
------------------------------------ ----------- ----------- ----------- -----------
Per statements of income (Thousands):
Net income $ 40,753 $ 36,751 $ 75,360 $ 76,555
=========== =========== =========== ===========
Per statements of income:
Weighted average shares outstanding 34,241,312 34,330,157 34,175,346 34,309,837
=========== =========== =========== ===========
Primary earnings per share (a):
Net income $ 1.20 $ 1.07 $ 2.21 $ 2.23
=========== =========== =========== ===========
Additional Primary computation
------------------------------
Adjustment to weighted average shares
outstanding:
Weighted average shares outstanding
per primary computation above 34,241,312 34,330,157 34,175,346 34,309,837
Add dilutive effect of outstanding
options (as determined by the
application of the treasury stock
method) 501,997 541,214 480,662 520,795
----------- ----------- ----------- -----------
Weighted average shares outstanding,
as adjusted 34,743,309 34,871,371 34,656,008 34,830,632
=========== =========== =========== ===========
Primary earnings per share, as adjusted (b):
Net income $ 1.17 $ 1.05 $ 2.17 $ $2.20
=========== =========== =========== ===========
Additional Fully Diluted Computation
------------------------------------
Adjustment to weighted average share
outstanding:
Weighted average shares outstanding
per primary computation above 34,743,309 34,871,371 34,656,008 34,830,632
Additional dilutive effect of outstanding
options (as determined by the application
of the treasury stock method) 91,420 51,409 56,108 25,913
----------- ----------- ----------- -----------
Weighted average shares outstanding,
as adjusted 34,834,729 34,922,780 34,712,116 34,856,545
=========== =========== =========== ===========
Fully diluted earnings per share, as adjusted (b):
Net income $ 1.17 $ 1.05 $ 2.17 $ 2.20
=========== =========== =========== ===========
(a) These figures agree with the related amounts in the statements of income.
(b) This calculation is submitted in accordance with Securities Exchange Act
of 1934 Release No. 9083 although not required by footnote 2 paragraph
14 of APB Opinion No. 15 because it results in dilution of less than
3%.
EX-27
3
FINANCIAL DATA SCHEDULE
9
1,000
6-MOS
DEC-31-1995
JAN-01-1995
JUN-30-1995
657,666
1,744
182,778
227,458
1,195,327
985,010
977,857
7,617,312
110,747
11,614,010
8,113,333
1,936,045
535,562
202,320
84,751
0
0
741,999
11,614,010
311,840
69,077
13,219
394,136
148,755
206,465
187,671
7,364
487
293,418
115,839
75,360
0
0
75,360
2.21
2.17
3.92
15,719
25,355
72
72,742
109,859
16,027
8,670
110,747
110,747
0
0