1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark one) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 34,574,938 - ----------------------------- ------------------------------- Class Outstanding at October 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 <TABLE> <CAPTION> CONSOLIDATED First Tennessee STATEMENTS OF National CONDITION Corporation - ---------------------------------------------------------------------------------------------------------------------- September 30 December 31 ---------------------------- ----------------- (Dollars in thousands)(Unaudited) 1995 1994 1994 - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> ASSETS: Cash and due from banks $ 709,133 $ 713,525 $ 724,828 Federal funds sold and securities purchased under agreements to resell 102,219 185,515 253,124 - ---------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 811,352 899,040 977,952 - ---------------------------------------------------------------------------------------------------------------------- Investment in bank time deposits 1,033 2,745 2,534 Trading securities inventory 224,917 223,227 170,031 Mortgage warehouse loans held for sale 714,856 559,308 515,407 Securities available for sale 1,012,534 1,242,901 1,166,738 Securities held to maturity (market value of $969,651 at September 30, 1995; $969,546 at September 30, 1994; and $951,444 at December 31, 1994) 976,923 1,004,164 1,004,177 Loans, net of unearned income 7,022,704 6,262,818 6,498,042 Less: Allowance for loan losses 110,882 110,178 109,859 - ---------------------------------------------------------------------------------------------------------------------- Total net loans 6,911,822 6,152,640 6,388,183 - ---------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 168,094 154,968 159,036 Real estate acquired by foreclosure 13,714 23,085 19,215 Intangible assets 103,389 88,012 91,725 Mortgage servicing rights 121,873 73,125 72,722 Bond division receivables and other assets 520,561 408,268 365,229 - ---------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 11,581,068 $ 10,831,483 $ 10,932,949 ====================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Demand $ 1,809,031 $ 1,723,653 $ 1,733,336 Checking/Interest 482,891 510,448 508,741 Savings 578,496 676,413 605,388 Money market account 1,906,330 1,732,449 1,819,825 Certificates of deposit under $100,000 and other time 2,853,894 2,652,243 2,771,012 Certificates of deposit $100,000 and more 443,641 498,758 442,004 - ---------------------------------------------------------------------------------------------------------------------- Total deposits 8,074,283 7,793,964 7,880,306 Federal funds purchased and securities sold under agreements to repurchase 1,403,090 1,158,835 1,457,517 Commercial paper and other short-term borrowings 477,802 607,693 352,522 Bond division payables and other liabilities 600,156 376,386 353,928 Term borrowings 201,057 111,701 113,771 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities 10,756,388 10,048,579 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 - 33,282,284 at September 30, 1995; 34,400,749 at September 30, 1994; and 34,073,958 at December 31, 1994) 83,206 86,002 85,185 Capital surplus 53,009 106,907 91,558 Undivided profits 688,742 607,294 625,231 Unrealized market adjustment on available for sale securities 1,797 (14,241) (24,273) Deferred compensation on restricted stock incentive plan (2,074) (3,058) (2,796) - ---------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 824,680 782,904 774,905 - ---------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,581,068 $ 10,831,483 $ 10,932,949 ====================================================================================================================== </TABLE>
5 <TABLE> <CAPTION> CONSOLIDATED First Tennessee STATEMENTS OF National INCOME Corporation - ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended Nine Months Ended September 30 September 30 ---------------------------------- -------------------------- (Dollars in thousands except per share data)(Unaudited) 1995 1994 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> INTEREST INCOME: Interest and fees on loans $ 174,154 $ 139,503 $ 485,994 $ 402,239 Interest on investment securities: Taxable 32,318 32,122 99,155 94,297 Tax-exempt 1,024 1,203 3,264 3,949 Interest on trading securities inventory 2,627 3,803 9,601 9,449 Interest on other earning assets 1,408 2,344 7,653 5,475 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 211,531 178,975 605,667 515,409 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE: Interest on deposits: Checking/Interest 1,759 2,278 5,968 6,971 Savings 2,482 3,434 8,149 10,173 Money market account 21,654 14,990 64,801 38,205 Certificates of deposit under $100,000 and other time 43,481 32,196 124,735 86,524 Certificates of deposit $100,000 and more 7,128 4,650 21,606 13,115 Interest on short-term borrowings 32,054 19,651 81,217 54,585 Interest on term borrowings 4,366 2,498 12,913 7,021 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 112,924 79,697 319,389 216,594 - ------------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME 98,607 99,278 286,278 298,815 Provision for loan losses 5,921 4,231 13,285 12,918 - ------------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 92,686 95,047 272,993 285,897 - ------------------------------------------------------------------------------------------------------------------------------------ NONINTEREST INCOME: Mortgage banking 55,276 42,767 144,941 146,719 Bond division 20,341 17,562 61,362 63,759 Deposit transactions and cash management 17,888 16,530 53,300 47,600 Trust services 8,562 6,877 27,097 20,738 Bank card 9,978 8,505 27,385 22,619 Equity securities gains/(losses) 1,441 34 1,533 23,217 Debt securities gains/(losses) (1,416) 204 (1,021) (637) All other 14,327 13,207 40,750 35,323 - ------------------------------------------------------------------------------------------------------------------------------------ Total noninterest income 126,397 105,686 355,347 359,338 - ------------------------------------------------------------------------------------------------------------------------------------ ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 219,083 200,733 628,340 645,235 - ------------------------------------------------------------------------------------------------------------------------------------ NONINTEREST EXPENSE: Employee compensation, incentives, and benefits 86,889 79,652 247,850 268,748 Operations services 9,479 8,523 27,587 25,086 Occupancy 9,264 8,993 27,053 25,253 Equipment rentals, depreciation, and maintenance 7,613 7,205 23,226 21,170 Communications and courier 7,694 7,394 22,184 23,320 Advertising and public relations 3,255 2,247 10,145 8,642 Amortization of mortgage servicing rights 3,888 3,104 9,657 12,064 Legal and professional fees 1,904 3,194 9,494 11,411 Deposit insurance premium 43 4,309 8,794 12,627 Amortization of intangible assets 1,980 1,578 5,717 4,774 All other 19,043 19,266 52,763 67,242 - ------------------------------------------------------------------------------------------------------------------------------------ Total noninterest expense 151,052 145,465 444,470 480,337 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 68,031 55,268 183,870 164,898 Applicable income taxes 24,201 17,669 64,680 50,744 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 43,830 $ 37,599 $ 119,190 $ 114,154 ==================================================================================================================================== NET INCOME PER COMMON SHARE $ 1.30 $ 1.11 $ 3.51 $ 3.34 - ------------------------------------------------------------------------------------------------------------------------------------ WEIGHTED AVERAGE SHARES OUTSTANDING 33,465,059 34,002,397 33,935,982 34,206,231 - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE>
6 <TABLE> <CAPTION> CONSOLIDATED First Tennessee STATEMENTS National OF CASH FLOWS Corporation - ------------------------------------------------------------------------------------------------------------------------------------ Nine Months Ended September 30 ----------------------------------- (Dollars in thousands)(Unaudited) 1995 1994 - --------------------------------- ----------------------------------- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 119,190 $ 114,154 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 13,285 12,918 Depreciation and amortization of premises and equipment 18,085 15,349 Amortization of intangibles 5,717 4,774 Amortization of mortgage servicing rights 9,657 12,064 Net amortization of premiums and accretion of discounts 14,736 11,143 Market value adjustment on foreclosed property 2,700 974 Securities contributed to charitable trust - 8,338 Equity securities gains (1,533) (23,217) Debt securities losses 1,021 637 Net loss on disposal of fixed assets 1,132 195 Deferred income tax provision 22,809 3,326 Net (increase) decrease in: Trading securities inventory (54,886) (44,564) Mortgage warehouse loans held for sale (199,449) 703,910 Bond division receivables (60,502) (11,900) Interest receivable (3,414) (2,475) Other assets (193,215) (22,017) Net increase (decrease) in: Bond division payables 84,872 (20,843) Interest payable 16,553 7,349 Other liabilities 124,782 (54,569) - ------------------------------------------------------------------------------------------------------------------------------------ Total adjustments (197,650) 601,392 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash (used) provided by operating activities (78,460) 715,546 - ------------------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Proceeds from maturities of: Held to maturity securities 71,001 332,793 Available for sale securities 124,016 242,918 Proceeds from sale of: Available for sale securities 226,897 317,540 Premises and equipment 2,563 931 Payments for purchase of: Held to maturity securities (29,587) (446,224) Available for sale securities (124,842) (308,874) Premises and equipment (28,185) (30,641) Net increase in loans (490,611) (703,920) Decrease in investment in bank time deposits 1,501 4,892 Acquisitions, net of cash and cash equivalents acquired 12,691 - - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (234,556) (590,585) - ------------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Proceeds from exercise of stock options 3,682 2,232 Proceeds from the issuance of term borrowings 90,000 14,000 Payments for: Capital lease obligations (110) (110) Term borrowings (2,781) (439) Cash dividends (47,048) (40,314) Equity distributions related to acquisitions (20) (600) Stock repurchase (63,296) (1,300) Net increase (decrease) in: Deposits 95,136 191,246 Short-term borrowings 70,853 (185,269) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities 146,416 (20,554) - ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (166,600) 104,407 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 977,952 794,633 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 811,352 $ 899,040 ==================================================================================================================================== Total interest paid $ 302,132 $ 209,248 Total income taxes paid 33,474 54,071 </TABLE>
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 amend- ment 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 third quarter of 1994 and were accounted for as poolings of interests; therefore, the financial statements for all periods presented reflect the combined companies. 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 third quarter of 1994 and for the nine months ended September 30, 1994: <TABLE> <CAPTION> Three Months Nine Months (Dollars in thousands, Ended Ended except per share data) Sept. 30, 1994 Sept. 30, 1994 - --------------------------------------------------------------------------------------------- <S> <C> <C> TOTAL REVENUE:* First Tennessee, as originally reported $186,360 $587,693 Carl I. Brown 15,106 60,822 CBI 3,526 9,704 Eliminations (28) (66) - --------------------------------------------------------------------------------------------- First Tennessee $204,964 $658,153 ============================================================================================= NET INCOME: First Tennessee, as originally reported $36,758 $109,248 Carl I. Brown (67) 2,687 CBI 908 2,219 - --------------------------------------------------------------------------------------------- First Tennessee $37,599 $114,154 ============================================================================================= NET INCOME PER SHARE: First Tennessee, as originally reported $1.14 $3.40 Carl I. Brown (.39) 15.55 CBI .28 .69 First Tennessee 1.11 3.34 - --------------------------------------------------------------------------------------------- </TABLE> * Total revenue is net interest income and noninterest income. The following acquisitions occurred during 1995 and were accounted for as purchases; therefore, the financial statements are reflected on a combined basis from the date of acquisition. 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. On October 1, 1995, First Tennessee acquired for approximately 1,283,000 shares of its common stock all of the outstanding shares of Financial Investment Corp. (FIC), parent company of First National Bank of Springdale (FNB), headquartered in Springdale, Arkansas. As approved by the First Tennessee Board of Directors, the shares issued in this transaction were repurchased in the open market. FNB became a wholly owned subsidiary of First Tennessee. The following presents, on a proforma basis, certain financial data pertaining to the Peoples and FIC transactions as if they 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 <TABLE> <CAPTION> Nine Months (Dollars in thousands, Ended except per share data) September 30, 1995 - ---------------------------------------------------------------------------------------------------------- <S> <C> TOTAL REVENUE:* First Tennessee, as originally reported $ 641,625 Peoples 1,232 FIC 10,312 Purchase accounting adjustments (1,674) - ---------------------------------------------------------------------------------------------------------- First Tennessee proforma $ 651,495 ========================================================================================================== NET INCOME: First Tennessee, as originally reported $ 119,190 Peoples 430 FIC 2,158 Purchase accounting adjustments (1,896) - ---------------------------------------------------------------------------------------------------------- First Tennessee proforma $ 119,882 ========================================================================================================== NET INCOME PER SHARE: First Tennessee, as originally reported $ 3.51 Peoples 3.23 FIC 1.21 First Tennessee proforma 3.39 - ---------------------------------------------------------------------------------------------------------- * Total revenue is net interest income and noninterest income. </TABLE>
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: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 ----------------------- ----------------------- (Dollars in thousands) 1995 1994 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> ALL OTHER INCOME: Check clearing fees $ 4,766 $ 3,951 $ 13,161 $ 11,846 Other service charges 1,893 1,832 5,757 5,783 Other 7,668 7,424 21,832 17,694 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 14,327 $ 13,207 $ 40,750 $ 35,323 ==================================================================================================================================== ALL OTHER EXPENSE: Supplies $ 2,770 $ 2,618 $ 8,359 $ 8,743 Contribution to charitable foundation - - - 8,338 Fed service fees 2,259 2,244 7,094 6,304 Travel and entertainment 1,891 2,299 5,657 7,487 Foreclosed real estate 1,474 1,105 3,255 2,395 Other 10,649 11,000 28,398 33,975 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 19,043 $ 19,266 $ 52,763 $ 67,242 ==================================================================================================================================== </TABLE>
11 NOTE 4 - INTANGIBLE ASSETS Following is a summary of intangible assets, net of accumulated amortization, included in the Consolidated Statements of Condition: <TABLE> <CAPTION> Premium on Purchased Deposits (Dollars in thousands) Goodwill and Assets - --------------------------------------------------------- <S> <C> <C> December 31, 1993 $ 62,565 $ 28,972 Amortization expense (2,252) (2,522) Acquisitions/Divestitures 1,249 - - -------------------------------------------------------- September 30, 1994 $ 61,562 $ 26,450 ======================================================== December 31, 1994 $ 66,086 $ 25,639 Amortization expense (2,589) (3,128) Acquisitions/Divestitures 11,352 6,029 - -------------------------------------------------------- September 30, 1995 $ 74,849 $ 28,540 ======================================================== </TABLE>
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, second, and third 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: <TABLE> <CAPTION> Capitalized Mortgage Servicing (Dollars in thousands) Rights - --------------------------------------------------------------- <S> <C> 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 Amortization expense (3,104) Acquisitions/Divestitures (173) - --------------------------------------------------------------- September 30, 1994 $ 73,125 =============================================================== 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 Amortization expense (3,888) Acquisition/Divestitures 31,324 - --------------------------------------------------------------- September 30, 1995 $ 121,873 =============================================================== Fair value at September 30, 1995 $ 165,085 - --------------------------------------------------------------- </TABLE> The value of pre-SFAS No.122 PMSRs is established using the lesser of: a discounted cashflow analysis; current market value; or the unamortized cost basis. These PMSRs 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 any quarter end in 1995. The value of post-SFAS No. 122 PMSRs and OMSRs 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 PMSRs and OMSRs 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 any quarter end in 1995.
13 NOTE 6 -- LOANS The composition of the loan portfolio at September 30 is summarized below: <TABLE> <CAPTION> (Dollars in thousands) 1995 1994 - --------------------------------------------------------------------------------------------------- <S> <C> <C> Commercial $3,167,155 $2,882,671 Consumer 2,434,438 2,193,887 Permanent mortgage 678,789 573,466 Credit card receivables 497,794 448,248 Real estate construction 227,889 146,669 Nonaccrual 16,639 17,877 - --------------------------------------------------------------------------------------------------- Loans, net of unearned income 7,022,704 6,262,818 Allowance for loan losses 110,882 110,178 - --------------------------------------------------------------------------------------------------- Total net loans $6,911,822 $6,152,640 =================================================================================================== </TABLE> 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 September 30: <TABLE> <CAPTION> (Dollars in thousands) 1995 - ------------------------------------------------------------- <S> <C> Impaired loans $ 9,167 Other nonaccrual loans 7,472 - ------------------------------------------------------------- Total $16,639 ============================================================= </TABLE> 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 $373,000 for the three months ended September 30, 1995 and $1,303,000 for the nine months ended September 30, 1995. The average balance of impaired loans for the three months ended September 30, 1995 was approximately $8,777,000 and was approximately $10,117,000 for the nine months ended September 30, 1995. Total restructured impaired loans at September 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 nine months ended September 30, 1995, is summarized as follows: <TABLE> <CAPTION> (Dollars in thousands) Non-impaired Impaired Total - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Balance at January 1, 1995 $ 109,859 $ -- $109,859 Transfer of allowance (2,542) 2,542 -- Allowance from acquisitions 1,028 -- 1,028 Provision for loan losses 9,294 3,991 13,285 Charge-offs 21,572 3,126 24,698 Less loan recoveries 11,339 69 11,408 - ------------------------------------------------------------------------------------------------------------------ Net charge-offs 10,233 3,057 13,290 - ------------------------------------------------------------------------------------------------------------------ Balance at September 30, 1995 $ 107,406 $ 3,476 $110,882 ================================================================================================================== </TABLE>
14 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 $43.8 million was achieved for the third quarter of 1995, a 17 percent increase from the $37.6 million for the third quarter of 1994. Earnings per share for the third quarter of 1995 increased to $1.30 from $1.11 for the third quarter of 1994. Double-digit growth in all loans, improving performance in the bond division and mortgage banking, as well as the reduction in Federal Deposit Insurance Corporation (FDIC) premiums and the FDIC refund were drivers of this increase in net income. For the first nine months of 1995, net income was $119.2 million or $3.51 per share compared with $114.2 million or $3.34 per share for the same period in 1994. Noninterest income accounted for approximately 56 percent of total revenues during the third quarter and 55 percent of total revenues for the first nine months of 1995. Total assets were $11.6 billion at September 30, 1995. Additional performance measurements are shown in the table below. EARNINGS PERFORMANCE <TABLE> <CAPTION> - ------------------------------------------------------------ For the Third Quarter Ended --------------------------- 1995 1994 - ------------------------------------------------------------ <S> <C> <C> Net income (millions) $ 43.8 $ 37.6 Net income per share 1.30 1.11 Return on equity 21.32% 19.41% Return on assets 1.50 1.42 - ------------------------------------------------------------ </TABLE> <TABLE> <CAPTION> For the Nine Months Ended ------------------------- 1995 1994 - ------------------------------------------------------------ <S> <C> <C> Net income (millions) $119.2 $114.2 Net income per share 3.51 3.34 Return on equity 19.84% 20.21% Return on assets 1.43 1.45 - ------------------------------------------------------------ </TABLE> During the first nine months 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 nine months of 1994, First Tennessee acquired SNMC Management Corporation, parent of Sunbelt National Mortgage Corporation, Cleveland Bank and Trust Company, Highland Capital Management Corp., and Planters Bank. All acquisitions closed during the first quarter of 1995 and the first nine months of 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; therefore, the consolidated statements do not reflect the results of its 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. 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.
15 NET INTEREST INCOME AND EARNING ASSETS <TABLE> <CAPTION> - ------------------------------------------------------------------------ For the Third Quarter Ended --------------------------- (Dollars in millions) 1995 1994 Change - ------------------------------------------------------------------------ <S> <C> <C> <C> Investment securities $ 2,144.2 $2,197.6 (2)% Loans 7,945.4 6,712.7 18 Other earning assets 264.9 437.0 (39) - ------------------------------------------------------------------------ Total earning assets $10,354.5 $9,347.3 11% - ------------------------------------------------------------------------ Net interest income $ 99.8 $ 100.6 (1)% Net interest spread 3.04% 3.62% Net interest margin 3.85 4.29 - ------------------------------------------------------------------------ </TABLE> <TABLE> <CAPTION> For the Nine Months Ended ------------------------- 1995 1994 Change - ------------------------------------------------------------------------ <S> <C> <C> <C> Investment securities $2,174.5 $2,230.1 (2)% Loans 7,399.0 6,707.0 10 Other earning assets 367.7 416.3 (12) - ------------------------------------------------------------------------ Total earning assets $9,941.2 $9,353.4 6% - ------------------------------------------------------------------------ Net interest income $ 289.8 $ 302.5 (4)% Net interest spread 3.09% 3.67% Net interest margin 3.89 4.32 - ------------------------------------------------------------------------ </TABLE> Earning assets increased 11 percent as total loans grew 18 percent and investment securities declined 2 percent from the third quarter of 1994. Commercial loans grew 14 percent and consumer loans rose 11 percent. The mortgage warehouse grew $363 million, or 59 percent, over the previous year and the permanent mortgage portfolio increased 18 percent. For the nine months ending September 30, 1995, earning assets increased 6 percent with total loan growth of 10 percent and a decline in the investment portfolio of approximately 2 percent from the same period in 1994. For this same nine-month comparison, commercial loans grew 13 percent, consumer loans increased 14 percent and the permanent mortgage portfolio rose 18 percent. The 24 percent year-to-date decrease in mortgage warehouse loans reflected lower origination volumes in the beginning of 1995, compared to the same nine-month period in 1994, when stronger refinancing activity occurred. For the third quarter of 1995, commercial loans represented 40 percent, and consumer loans and credit card receivables were 36 percent, with mortgage loans (the permanent portfolio and warehouse) accounting for 21 percent of total loans. The increase in loans was partially funded by a 29 percent increase in purchased funds and 4 percent growth in interest-bearing core deposits, including money market accounts and certificates of deposit less than $100,000. Net interest income was relatively flat from the previous year with a 44 basis point compression in the net interest margin (margin). This decrease in margin reflected the extreme interest rate movements during the past year and its impact on First Tennessee's balance sheet and off-balance sheet positions. Several strategies have been implemented throughout 1995 to realign and neutralize the balance sheet. As shown in the Rate Sensitivity Analysis Table, at September 30, 1995, the balance sheet was rate sensitive $205 million more assets than liabilities scheduled to reprice within one year, which is 2.0 percent of earning assets and within First Tennessee guideline limits. The margin has remained relatively stable in 1995 with first quarter margin of 3.92 percent, second quarter margin of 3.91 percent, and third quarter margin of 3.85 percent. Fluctuations in activity levels in First Tennessee's specialty lines of business directly impact the margin as these nonbank business lines typically produce different margins than traditional banking activities. Because of First Tennessee's unique business mix, a comparison of First Tennessee's consolidated margin to that of other bank holding companies is less relevant. The 6 basis point decline between the second and third quarter's margins reflect the impact of the $444 million increase in the mortgage warehouse from the second quarter to the third quarter of 1995, as mortgage banking negatively impacted the margin 12 basis points. However, improvement in the traditional retail/commercial bank partially mitigated this compression. The margin continued to be negatively impacted approximately 19 basis points in the third quarter from costs associated with terminating the basis swap earlier in the year. This negative impact will continue through May 1996 when the amortization period for the swap ends.
16 For the nine-month period, net interest income decreased 4 percent, and the margin was 3.89 percent. Going forward, the traditional retail/commercial bank's margin should continue to improve based on current interest rates and First Tennessee's existing balance sheet mix. However, the consolidated margin will be influenced by the activity levels in the specialty lines of business, especially from the bond division and mortgage banking. NONINTEREST INCOME <TABLE> <CAPTION> - ------------------------------------------------------------ For the Third Quarter Ended --------------------------- (Dollars in millions) 1995 1994 Change - ------------------------------------------------------------ <S> <C> <C> <C> Mortgage banking $ 55.3 $ 42.8 29% Bond division 20.3 17.6 16 Deposit transactions and cash management 17.9 16.5 8 Bank card 10.0 8.5 17 Trust services 8.6 6.9 25 Other 14.3 13.2 8 - ------------------------------------------------------------ Total fee revenue $126.4 $105.5 20% Gains on securities - .2 (89) - ------------------------------------------------------------ Total noninterest income $126.4 $105.7 20% - ------------------------------------------------------------ </TABLE> <TABLE> <CAPTION> For the Nine Months Ended ------------------------- 1995 1994 Change - ------------------------------------------------------------ <S> <C> <C> <C> Mortgage banking $144.9 $146.7 (1)% Bond division 61.4 63.8 (4) Deposit transactions and cash management 53.3 47.6 12 Bank card 27.4 22.6 21 Trust services 27.1 20.7 31 Other 40.8 35.3 15 - ------------------------------------------------------------ Total fee revenue $354.9 $336.7 5% Gains on securities .5 22.6 (98) - ------------------------------------------------------------ Total noninterest income $355.4 $359.3 (1)% - ------------------------------------------------------------ </TABLE> Noninterest income (fee income), excluding securities transactions in both periods, grew 20 percent compared with the third quarter of 1994. Fee income in the mortgage banking entities grew 29 percent compared with the third quarter of 1994, as a result of increased originations and the benefit of a new accounting rule (SFAS No. 122, "Accounting for Mortgage Servicing Rights an amendment of FASB Statement No. 65"(SFAS No. 122)) related to originated servicing rights. The mortgage banking entities originated $2.5 billion of mortgage loans during the third quarter of 1995 compared with $1.4 billion during the third quarter of 1994. Year-to-date mortgage loan originations in 1995 were $5.0 billion compared with $5.8 billion in 1994. The decline in origination volume from the previous year reflected the high level of refinancing activity during the first quarter of 1994. The mortgage servicing portfolio, which includes servicing for ourselves and others, totaled $15.4 billion at September 30, 1995, compared with $14.5 billion at September 30, 1994. For the first nine months of 1995, mortgage banking noninterest income was relatively flat compared to the same period in 1994. The bond division experienced 16 percent growth in fee income during the third quarter of 1995 compared with the same period in 1994. This growth demonstrates the results of increased penetration among nonbanking customers. The bond division acts primarily as a broker for its customers and does not speculate. The inventory is highly liquid, turning over several times a day, and overnight positions are hedged against movements in interest rates. For the first nine months of 1995, the bond division's noninterest income declined 4 percent. However, this comparison includes record revenue during the first quarter of 1994 as a result of a very active bond market. Quarter-over-quarter growth in deposit transactions and cash management noninterest income was primarily driven by an increase in existing customer transactions, and was partially offset by less fees collected due to the reduction in the FDIC premium. For the first nine months of 1995, deposit transactions and cash management noninterest income grew 12 percent, with a portion of the growth resulting from an accounting methodology change from
17 cash basis to accrual basis in the first quarter of 1995. Bank card noninterest income includes both cardholder and merchant processing fees. The $1.5 million increase between the third quarter of 1995 and third quarter of 1994 was primarily due to an increase in merchant processing as the customer base expanded. For the first nine months of 1995, bank card noninterest income grew 21 percent. Trust services noninterest income grew 25 percent from the third quarter of 1994 to the third quarter of 1995 due to the growth in managed assets and the benefit of an accounting change earlier in 1995. Managed assets at September 30, 1995, for First Tennessee Bank National Association (FTBNA) were $4.9 billion compared with $4.4 billion at September 30, 1994. This increase was a result of both growth in the number of new accounts and increases in the market value of existing portfolios. For the first nine months of 1995, trust services noninterest income increased 31 percent for the same reasons previously noted. There were no material gains or losses on securities during the third quarter of either 1995 or 1994. During the first nine months of 1994, the securities gains were the result of transactions in the venture capital subsidiary and gains realized on equity securities utilized in the establishment of the charitable foundation. NONINTEREST EXPENSE <TABLE> <CAPTION> - -------------------------------------------------------------------------- For the Third Quarter Ended --------------------------- (Dollars in millions) 1995 1994 Change - -------------------------------------------------------------------------- <S> <C> <C> <C> Staff expense $ 86.9 $ 79.7 9% Occupancy 9.3 9.0 3 Amortization of intangibles and mortgage servicing rights 5.9 4.7 25 Equipment expense 7.6 7.2 6 Other 41.4 44.9 (8) - -------------------------------------------------------------------------- Total operating expense $151.1 $145.5 4% - -------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> For the Nine Months Ended ------------------------- 1995 1994 Change - -------------------------------------------------------------------------- <S> <C> <C> <C> Staff expense $247.8 $268.7 (8)% Occupancy 27.1 25.3 7 Amortization of intangibles and mortgage servicing rights 15.4 16.8 (9) Equipment expense 23.2 21.2 10 Other 131.0 148.3 (12) - -------------------------------------------------------------------------- Total operating expense $444.5 $480.3 (7)% - -------------------------------------------------------------------------- </TABLE> Total noninterest expense (also called operating expense) increased 4 percent from the third quarter of 1994. Staff expense, the largest component of operating expense, increased 9 percent over the third quarter of 1994, resulting from the additional commissions paid due to increased commission-based revenue. Amortization expense increased 25 percent in the third quarter, primarily related to the new accounting rules for originated servicing rights (SFAS No. 122). The effect of the lower FDIC premiums and the refund from the FDIC reduced deposit insurance expense $4.3 million in the third quarter of 1995 from the third quarter of 1994, which is included in the "Other" expense category in the table above. For the first nine months of 1995 compared with the first nine months of 1994, noninterest expense declined 7 percent. First Tennessee recognized one-time acquisition expenses of $5.8 million and $4.2 million in the first nine months of 1995 and 1994, respectively. 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 operating expenses $8.5 million for the quarter. Excluding all of these one-time expenses, noninterest expense for the nine-month period, declined 6 percent. The largest dollar decrease for the nine-month year-to-date periods was in staff expense, which decreased 8 percent. This decrease reflected the reduction in variable expenses paid on commission-based revenue.
18 <TABLE> <CAPTION> INCOME TAXES - ------------------------------------------------------------- Effective tax rates 1995 1994 - ------------------------------------------------------------- <S> <C> <C> For the quarter ended 35.6% 32.0% For the nine months ended 35.2 30.8 - ------------------------------------------------------------- </TABLE> The effective 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 <TABLE> <CAPTION> - ------------------------------------------------------------------------ For the Third Quarter Ended --------------------------- 1995 1994 - ------------------------------------------------------------------------ <S> <C> <C> Equity/assets ratio 7.02% 7.32% Equity/loans 10.26 11.45 Tangible equity/tangible assets* 6.18 6.54 Book value per share $24.78 $22.76 - ------------------------------------------------------------------------ </TABLE> * Mortgage servicing rights are included as tangible assets. Average shareholders' equity, through the retention of net income, increased 6 percent from the third quarter of 1994. 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 September 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. During the second quarter of 1995, First Tennessee repurchased $30.6 million of its stock, and in the third quarter of 1995, repurchased $32.7 million of its stock in anticipation of acquiring Financial Investment Corp. (FIC), a bank holding company in Springdale, Arkansas. This acquisition was completed after quarter-end (see Subsequent Events), and $70 million of First Tennessee stock was issued to FIC shareholders at the close. Liquidity During the third quarter of 1995, average core deposits, the most stable source of liquidity, funded 65 percent of total average assets while funding from short-term purchased funds was 23 percent. Average interest-bearing core deposits grew 4 percent from the third 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 remained flat at $2.3 billion for September 30, 1995 and 1994, while term borrowings increased $89.4 million for the same period as loan growth, especially in the mortgage warehouse, outpaced deposit growth. 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 the fourth quarter based on the current mix in the commercial and consumer loan portfolios. At September 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 September 30, 1995, compared with 94 percent at September 30, 1994. Commercial real estate loans were $566.1 million at September 30, 1995, compared with $529.4 million at September 30, 1994, as originally reported. Construction and development loans were $197.2 million at the end of the third quarter of 1995, an increase of $73.0 million from the amounts originally reported for the third quarter of 1994, due to a favorable real estate market which has grown consistently since the first 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 September 30, 1995 and 1994, and year-end 1994. This table also presents
19 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 <TABLE> <CAPTION> - ------------------------------------------------------------------------ For the Third Quarter Ended --------------------------- (Dollars in millions) 1995 1994 - ------------------------------------------------------------------------ <S> <C> <C> Beginning balance $110.7 $110.4 Provision for loan losses 5.9 4.2 Allowance of acquired bank .2 - Net charge-offs (5.9) (4.4) - ------------------------------------------------------------------------ Ending balance $110.9 $110.2 - ------------------------------------------------------------------------ Ratios: Allowance to loans* 1.43% 1.62% Net charge-offs to average loans* .30 .26 Net charge-offs to allowance 21.4 16.0 - ------------------------------------------------------------------------ </TABLE> <TABLE> <CAPTION> For the Nine Months Ended ------------------------- 1995 1994 - ------------------------------------------------------------------------ <S> <C> <C> Beginning balance $109.9 $110.7 Provision for loan losses 13.3 12.9 Allowance of acquired bank 1.0 - Net charge-offs (13.3) (13.4) - ------------------------------------------------------------------------ Ending balance $110.9 $110.2 - ------------------------------------------------------------------------ Ratios: Allowance to loans* 1.43% 1.62% Net charge-offs to average loans* .24 .27 Net charge-offs to allowance 16.0 16.3 - ------------------------------------------------------------------------ </TABLE> * 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 1.58 percent at September 30, 1995, and 1.76 percent at September 30, 1994. Net charge-offs increased to $5.9 million or .30 percent of average loans for the quarter ended September 30, 1995. For the nine-month period, net charge-offs were relatively flat at $13.3 million or .24 percent of average loans. Commercial and real estate loan net charge-offs were $.4 million for the third quarter of 1995 or .05 percent of average commercial and real estate loans compared with $.5 million or .07 percent for the same period in 1994. For the nine-month period, commercial and real estate loan net recoveries were $1.7 million, compared with $2.1 million net charge-offs for the same period in 1994. Consumer loan net charge-offs were $4.0 million for the nine months of 1995 compared with $3.5 million for the nine months of 1994. In both periods this represented .23 percent of average consumer loans net of unearned income. Credit card receivable net charge-offs were $10.8 million for the nine months of 1995 or 3.07 percent of credit card receivables compared with $7.8 million or 2.44 percent for the same period in 1994. As shown in the Nonperforming Assets table, nonperforming assets decreased 28 percent from September 30, 1994. Nonperforming loans decreased 9 percent and foreclosed real estate decreased 41 percent for the same time period. The Changes in Nonperforming Assets table provides additional detail regarding nonperforming assets since September 30, 1994.
20 NONPERFORMING ASSETS <TABLE> <CAPTION> - ------------------------------------------------------------------------ September 30 December 31 ------------ ----------- (Dollars in thousands) 1995 1994 1994 - ------------------------------------------------------------------------ <S> <C> <C> <C> Amounts: Impaired loans* $ 9,167 Other nonaccrual loans 7,472 - ------------------------------------------------------------------------ Total nonaccrual loans 16,639 $17,877 $16,853 Restructured loans - 459 158 - ------------------------------------------------------------------------ Total nonperforming loans 16,639 18,336 17,011 Foreclosed real estate 13,714 23,085 19,215 Other assets 1,094 2,087 2,055 - ------------------------------------------------------------------------ Total nonperforming assets $31,447 $43,508 $38,281 ======================================================================== Past due loans:** Non-government guaranteed $16,542 $12,589 $13,297 Government guaranteed 9,984 10,827 10,030 - ------------------------------------------------------------------------ Ratios: Nonperforming loans to total loans*** .22% .27% .24% Nonperforming assets to total loans, plus foreclosed real estate and other assets*** .41 .64 .54 Nonperforming assets and non- government guaranteed past due loans to total loans, plus foreclosed real estate and other assets*** .62 .82 .73 - ------------------------------------------------------------------------ </TABLE> All loans shown net of unearned income. * Includes $365,000 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 <TABLE> <CAPTION> - --------------------------------------------------------------------------------- For the Quarters Ended ------------------------------------------- 1995 1994 - --------------------------------------------------------------------------------- (Dollars in millions) 9/30 6/30 3/31 12/31 9/30 - --------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Beginning balance $31.3 $36.0 $38.3 $43.5 $54.1 New nonperformers 4.3 9.8 2.3 6.5 3.0 Return to accrual - - (.2) - - Payments (3.3) (12.8) (4.0) (10.3) (12.6) Charge-offs (.9) (1.7) (.4) (1.4) (1.0) - ---------------------------------------------------------------------------------- Ending balance $31.4 $31.3 $36.0 $38.3 $43.5 - ---------------------------------------------------------------------------------- </TABLE> Past due loans were $26.5 million at September 30, 1995, a $3.1 million increase from the $23.4 million reported at September 30, 1994. Potential problem assets, which are not included in nonperforming assets, were $68.4 million at September 30, 1995, which remained approximately 1 percent of total loans. OFF-BALANCE SHEET ACTIVITY In the normal course of business, First Tennessee is a party to financial instruments that are not required to be reflected on a balance sheet. First Tennessee enters into transactions involving these instruments 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 September 30, 1995, deferred losses from terminated swap transactions were
21 $11.3 million and will be amortized through May 1996. The mortgage banking entities use forward sales and options to hedge interest rates between the time a mortgage note rate is locked to the customer and the time the loan 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. SUBSEQUENT EVENTS Acquisitions On October 1, 1995, First Tennessee acquired Financial Investment Corporation (FIC), parent company of the First National Bank of Springdale in Springdale, Arkansas. First National Bank, which became a subsidiary of First Tennessee, had $349.3 million in total assets, $291.7 million in total deposits, and $48.0 million in shareholders' equity at September 30, 1995. The purchase price was $70 million and FIC's shareholders exchanged each share of FIC stock for .7181 shares of First Tennessee's stock. This acquisition was accounted for as a purchase. FDIC Premiums The FDIC increased deposit insurance to $.23 per $100 of deposits in 1991. When this increase occurred, First Tennessee assessed only a portion of this cost to its customers. In August of 1995, the FDIC voted to lower FDIC premiums paid by well-capitalized banks to $.04 per $100 of deposits. First Tennessee will benefit approximately $3.3 million per quarter from this reduction in premiums. Fees received from customers, that have partially offset the overall cost of the deposit insurance premium, will no longer be assessed; thus reducing revenues approximately $1.2 million per quarter going forward. Proposed Banking Changes Congress is currently discussing various proposals to fully capitalize the Savings Association Insurance Fund (SAIF). A one-time assessment could potentially be charged to all institutions that have SAIF-insured deposits. The timing of the assessment could be as early as the fourth quarter of 1995. In management's opinion, the maximum pre-tax cost to First Tennessee is estimated to be approximately $6.5 million. A decrease in this assessment is being considered for Oakar banks. Oakar banks are banks that bought thrift deposits insured by SAIF, such as First Tennessee through the acquisition of Home Financial Corporation in 1992.
22 RATE SENSITIVITY ANALYSIS AT SEPTEMBER 30, 1995 <TABLE> <CAPTION> Interest Sensitivity Period --------------------------------------------------------------------- Within 3 After 3 months After 6 months (Dollars in millions) Months Within 6 months Within 12 months Other Total - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> EARNING ASSETS: Loans $ 3,849 $ 409 $ 867 $ 2,613 $ 7,738 Investment securities 140 96 231 1,522 1,989 Other earning assets 328 -- -- -- 328 - ------------------------------------------------------------------------------------------------------------------------------- Total earning assets $ 4,317 $ 505 $ 1,098 $ 4,135 $ 10,055 =============================================================================================================================== EARNING ASSET FUNDING: Interest-bearing deposits $ 2,277 $ 501 $ 642 $ 2,845 $ 6,265 Short-term purchased funds 1,881 -- -- -- 1,881 Term borrowings 22 1 3 175 201 Noninterest-bearing funds 152 (6) (72) 1,634 1,708 - ------------------------------------------------------------------------------------------------------------------------------ Total earning asset funding $ 4,332 $ 496 $ 573 $ 4,654 $ 10,055 =============================================================================================================================== RATE SENSITIVITY GAP: Period $ (15) $ 9 $ 525 $ (519) Cumulative (15) (6) 519 -- - ------------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVITY GAP ADJUSTED FOR INTEREST RATE FUTURES AND INTEREST RATE SWAPS: Period $ (428) $ 30 $ 603 $ (205) Cumulative (428) (398) 205 -- - ------------------------------------------------------------------------------------------------------------------------------- ADJUSTED GAP AS A PERCENT OF EARNING ASSETS: Period (4.3)% .3 % 6.0 % (2.0)% Cumulative (4.3) (4.0) 2.0 -- - ------------------------------------------------------------------------------------------------------------------------------- </TABLE> 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 SEPTEMBER 30, 1995 <TABLE> <CAPTION> Peoples (Dollars in thousands) First Tennessee (1) FTBNA (2) CBT (3) and Union (4) - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> CAPITAL: Tier 1 capital: Shareholders' common equity $ 824,680 $ 762,068 $ 24,579 $ 15,102 Disallowed intangibles (75,386) (70,060) -- -- Adjust for unrealized holding (gains)/losses on available for sale securities (1,797) (462) (449) (21) - ----------------------------------------------------------------------------------------------------------------------- Total Tier 1 capital 747,497 691,546 24,130 15,081 - ----------------------------------------------------------------------------------------------------------------------- Tier 2 capital: Qualifying debt 79,829 75,000 -- -- Qualifying allowance for loan losses 106,427 101,391 1,870 827 - ----------------------------------------------------------------------------------------------------------------------- Total Tier 2 capital 186,256 176,391 1,870 827 - ----------------------------------------------------------------------------------------------------------------------- Total capital $ 933,753 $ 867,937 $ 26,000 $ 15,908 ======================================================================================================================= Risk-adjusted assets $ 8,514,179 $ 8,108,097 $ 148,426 $ 66,072 Quarterly average assets 11,616,075 11,036,987 238,786 117,746 - ----------------------------------------------------------------------------------------------------------------------- RATIOS: Tier 1 capital to risk-adjusted assets 8.78 % 8.53 % 16.26 % 22.83 % Tier 2 capital to risk-adjusted assets 2.19 2.17 1.26 1.25 - ----------------------------------------------------------------------------------------------------------------------- Total capital to risk-adjusted assets 10.97 % 10.70 % 17.52 % 24.08 % ======================================================================================================================= Leverage - Tier 1 capital to adjusted quarterly average assets 6.48 % 6.31 % 10.11 % 12.81 % less disallowed intangibles </TABLE> <TABLE> <CAPTION> Peoples (Dollars in thousands) Planters (5) FTBNA-MS (6) Bank (7) - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> CAPITAL: Tier 1 capital: Shareholders' common equity $ 6,389 $ 6,802 $ 17,700 Disallowed intangibles (697) (9,065) Adjust for unrealized holding (gains)/losses on available for sale securities 79 -- (312) - --------------------------------------------------------------------------------------------------------- Total Tier 1 capital 6,468 6,105 8,323 - --------------------------------------------------------------------------------------------------------- Tier 2 capital: Qualifying debt -- -- -- Qualifying allowance for loan losses 416 500 583 - --------------------------------------------------------------------------------------------------------- Total Tier 2 capital 416 500 583 - --------------------------------------------------------------------------------------------------------- Total capital $ 6,884 $ 6,605 $ 8,906 ========================================================================================================= Risk-adjusted assets $ 32,757 $ 39,881 $ 46,319 Quarterly average assets 59,671 61,988 103,365 - --------------------------------------------------------------------------------------------------------- RATIOS: Tier 1 capital to risk-adjusted assets 19.75 % 15.31 % 17.97 % Tier 2 capital to risk-adjusted assets 1.27 1.25 1.26 - --------------------------------------------------------------------------------------------------------- Total capital to risk-adjusted assets 21.02 % 16.56 % 19.23 % ========================================================================================================= Leverage - Tier 1 capital to adjusted quarterly average assets 10.84 % 9.96 % 8.83 % less disallowed intangibles </TABLE> (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 <TABLE> <CAPTION> September 30, 1995 -------------------------------------------------------------------------- Construction Allowance and Commercial For Loan (Dollars in millions) Commercial Development Real Estate Total Losses - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Internal grades: A $ 180 $ - $ 3 $ 183 $ - B 407 15 56 478 1 C 1,799 176 478 2,453 23 D 55 3 11 69 5 E 24 1 9 34 3 F 19 1 8 28 7 - ----------------------------------------------------------------------------------------------------------------------------- 2,484 196 565 3,245 39 Impaired loans: Contractually past due 6 1 1 8 4 Contractually current 1 - - 1 - Nonaccrual loans: Contractually past due 1 - - 1 - Contractually current - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Total commercial & commercial real estate loans $2,492 $197 $566 $3,255 $ 43 - ----------------------------------------------------------------------------------------------------------------------------- Retail: Consumer 2,355 20 Credit card 498 19 Permanent mortgages 664 4 Mortgage warehouse loans held for sale 715 - Mortgage banking nonaccrual loans 7 1 - ----------------------------------------------------------------------------------------------------------------------------- Total retail loans 4,239 44 - ----------------------------------------------------------------------------------------------------------------------------- Cleveland Bank & Trust Company 148 3 Planters Bank 27 1 Peoples Bank 45 1 Other/Unfunded commitments 24 3 General reserve - 16 - ----------------------------------------------------------------------------------------------------------------------------- Total loans, net of unearned income $7,738 $111 ============================================================================================================================= Foreclosed real estate: Foreclosed property $ 1 $ 8 $ 2 $ 11 Foreclosed property - mortgage banking 3 - ----------------------------------------------------------------------------------------------------------------------------- Total foreclosed real estate $ 14 ============================================================================================================================= <CAPTION> September 30, 1994 December 31, 1994 ----------------------------- -------------------------- Allowance Allowance For Loan For Loan (Dollars in millions) Total Losses Total Losses - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Internal grades: A $ 172 $ - $ 207 $ - B 403 1 399 1 C 2,179 23 2,284 23 D 83 6 74 7 E 47 4 26 4 F 27 9 39 9 - --------------------------------------------------------------------------------------------------------------------------- 2,911 43 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 $2,923 $ 50 $3,039 $ 48 - --------------------------------------------------------------------------------------------------------------------------- Retail: Consumer 2,126 20 2,191 20 Credit card 448 18 475 19 Permanent mortgages 570 2 586 2 Mortgage warehouse loans held for sale 559 - 515 0 Mortgage banking nonaccrual loans 4 1 6 1 - --------------------------------------------------------------------------------------------------------------------------- Total retail loans 3,707 41 3,773 42 - --------------------------------------------------------------------------------------------------------------------------- Cleveland Bank & Trust Company 138 3 139 3 Planters Bank 28 1 25 1 Peoples Bank - - - - Other/Unfunded commitments 26 2 37 3 General reserve - 13 - 13 - --------------------------------------------------------------------------------------------------------------------------- Total loans, net of unearned income $6,822 $110 $7,013 $110 =========================================================================================================================== Foreclosed real estate: Foreclosed property $ 10 $ 14 Foreclosed property - mortgage banking 13 5 - --------------------------------------------------------------------------------------------------------------------------- Total foreclosed real estate $ 23 $ 19 =========================================================================================================================== </TABLE> 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 <TABLE> <CAPTION> September 30, 1995 ------------------------------------------------ Construction Commercial (Dollars in millions) & Development Real Estate Total - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> RISK CATEGORIES: Real estate collateral serves as only source of repayment $ 120 $ 168 $ 288 Real estate collateral is primary source of repayment with a substantial secondary source 77 398 475 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 197 $ 566 $ 763 ==================================================================================================================================== PROJECT TYPE: Apartments $ 15 $ 100 $ 115 Hotels/Motels 6 64 70 Office buildings - multi-tenant 1 49 50 Single family builder 83 5 88 Shopping centers 40 106 146 Commercial/Special purpose units 11 83 94 All other 41 159 200 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 197 $ 566 $ 763 ==================================================================================================================================== </TABLE> <TABLE> <CAPTION> December 31, 1994 ------------------------------------------------------------- Construction Commercial (Dollars in millions) & Development Real Estate Total - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> 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 ==================================================================================================================================== </TABLE> Based on internal loan classifications for graded loans. Excludes Cleveland Bank & Trust, Planters Bank, and Peoples Bank.
26 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AT SEPTEMBER 30, 1995 <TABLE> <CAPTION> Notional Notional (Dollars in millions) Value Value - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> 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 $1,593.4 Commitments to purchase $1,030.3 Consumer home equity 239.1 Commitments to sell 1,142.7 Commercial real estate and construction and land development 293.2 Futures contracts: Mortgage banking 568.9 Commitment to purchase 10.0 Other 1,303.1 Interest rate swap receive fixed/ pay floating 75.0 Commercial and standby letters of credit 243.2 Securities underwriting commitments .3 Foreign exchange contracts, net position .6 Interest rate risk management activities: Interest rate swap receive fixed/ pay floating - amortizing 552.8 Mortgage banking Commitments to sell loans, net position 893.9 Put options purchased 40.5 Eurodollar placement futures - </TABLE>
27 Part II. -------- OTHER INFORMATION Items 1, 2, 3, 4 and 5. - ----------------------- As of the end of the third quarter, 1995, the answers to Items 1, 2, 3, 4 and 5 were either inapplicable or negative, and therefore, these items are omitted. Item 6. Exhibits and Reports on Form 8-K. - ------------------------------------------ (a) Exhibits furnished in accordance with the provisions of the Exhibit Table of Item 601 of Regulation S-K are included as described in the Exhibit Index which is a part of this report. Exhibits not listed in the Exhibit Index are omitted because they are inapplicable. (b) No reports on Form 8-K were filed during the third 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: 11/13/95 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 <TABLE> <CAPTION> Exhibit No. Exhibit Description Page No. - ----------- ------------------- -------- <S> <C> <C> 4 The Corporation and certain of its consolidated subsidiaries have outstanding certain long-term debt. See Note 12 in the Corporation's 1994 Annual Report to Shareholders. In addition, the Corporation entered into a Credit Agreement dated as of July 25, 1995 with Bank of America National Trust and Savings Association, as agent, and other financial institutions. None of such debt exceeds 10% of the total assets of the Corporation and its consolidated subsidiaries. Thus, copies of constituent instruments defining the rights of the holders of such debt are not required to be included as exhibits. The Corporation agrees to furnish copies of such instruments to the Securities and Exchange Commission upon request. 11 Statement re Computation of Per Share Earnings Filed Herewith 27 Financial Data Schedule (for SEC use only) Filed Herewith </TABLE>