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 ===============================================================================================================
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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 -------------------------------------------------------------------------------------------------------------
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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 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST TENNESSEE NATIONAL CORPORATION'S JUNE 30, 1995, FINANCIAL STATEMENTS FILED IN ITS 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 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