1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark one) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 -------------- 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, $1.25 par value 67,182,416 - ----------------------------- ---------------------------- Class Outstanding at April 30, 1996
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> CONSOLIDATED First Tennessee STATEMENTS OF National CONDITION Corporation - ------------------------------------------------------------------------------------------------ <CAPTION> March 31 December 31 -------- ----------- (Dollars in thousands)(Unaudited) 1996 1995 1995 - ------------------------------------------------------------------------------------------------ <S> <C> <C> <C> ASSETS: Cash and due from banks $ 658,101 $ 562,465 $ 710,870 Federal funds sold and securities purchased under agreements to resell 52,063 260,800 64,978 - ------------------------------------------------------------------------------------------------- Total cash and cash equivalents 710,164 823,265 775,848 - ------------------------------------------------------------------------------------------------- Investment in bank time deposits 1,628 3,673 2,119 Broker/dealer securities inventory 358,212 166,373 182,655 Mortgage warehouse loans held for sale 1,138,871 412,661 789,183 Securities available for sale 2,163,053 1,167,269 2,036,668 Securities held to maturity (market value of $73,688 at March 31, 1996; $961,960 at March 31, 1995; and $75,750 at December 31, 1995) 72,296 988,386 74,731 Loans, net of unearned income 7,325,244 6,638,666 7,333,283 Less: Allowance for loan losses 114,631 109,862 112,567 - ------------------------------------------------------------------------------------------------- Total net loans 7,210,613 6,528,804 7,220,716 - ------------------------------------------------------------------------------------------------- Premises and equipment, net 178,970 159,458 177,400 Real estate acquired by foreclosure 13,215 18,455 11,794 Intangible assets 126,355 93,624 128,985 Mortgage servicing rights 184,054 77,542 149,220 Bond division receivables and other assets 661,001 476,741 527,563 - ------------------------------------------------------------------------------------------------- TOTAL ASSETS $12,818,432 $10,916,251 $12,076,882 ================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Demand $ 1,824,027 $ 1,664,689 $ 1,983,994 Checking/Interest 158,344 495,494 103,860 Savings 673,140 593,972 592,320 Money market account 2,535,464 1,804,214 2,499,817 Certificates of deposit under $100,000 and other time 2,843,388 2,877,951 2,882,094 Certificates of deposit $100,000 and more 718,224 498,336 520,112 - ------------------------------------------------------------------------------------------------- Total deposits 8,752,587 7,934,656 8,582,197 - ------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 1,552,661 1,353,036 1,674,225 Commercial paper and other short-term borrowings 567,106 162,298 86,520 Bond division payables and other liabilities 804,464 459,548 600,699 Term borrowings 258,633 203,553 260,017 - ------------------------------------------------------------------------------------------------- Total liabilities 11,935,451 10,113,091 11,203,658 - ------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY: Preferred stock - no par value (5,000,000 shares authorized, but unissued) - - - Common stock - $1.25 par value (shares authorized - 200,000,000; shares issued - 67,394,920 at March 31, 1996; 68,304,134 at March 31, 1995; and 67,178,236 at December 31, 1995) 84,244 85,380 83,973 Capital surplus 67,573 93,382 63,610 Undivided profits 736,443 636,062 716,861 Unrealized market adjustment on available for sale securities (916) (9,038) 10,582 Deferred compensation on restricted stock incentive plan (4,363) (2,626) (1,802) - ------------------------------------------------------------------------------------------------- Total shareholders' equity 882,981 803,160 873,224 - ------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,818,432 $10,916,251 $12,076,882 ================================================================================================= </TABLE>
5 <TABLE> <CAPTION> CONSOLIDATED First Tennessee STATEMENTS OF National INCOME Corporation - ---------------------------------------------------------------------------------------- Three Months Ended March 31 ---------------------------- (Dollars in thousands except per share data)(Unaudited) 1996 1995 - ---------------------------------------------------------------------------------------- <S> <C> <C> INTEREST INCOME: Interest and fees on loans $160,167 $141,672 Interest on investment securities: Taxable 32,096 33,671 Tax-exempt 1,343 1,088 Interest on mortgage warehouse loans held for sale 18,881 7,983 Interest on broker/dealer securities inventory 4,258 3,497 Interest on other earning assets 907 3,473 - ---------------------------------------------------------------------------------------- Total interest income 217,652 191,384 - ---------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on deposits: Checking/Interest 649 2,146 Savings 2,503 2,928 Money market account 24,587 21,324 Certificates of deposit under $100,000 and other time 41,431 38,507 Certificates of deposit $100,000 and more 9,966 6,777 Interest on short-term borrowings 27,831 23,221 Interest on term borrowings 5,307 4,163 - ---------------------------------------------------------------------------------------- Total interest expense 112,274 99,066 - ---------------------------------------------------------------------------------------- NET INTEREST INCOME 105,378 92,318 Provision for loan losses 8,033 4,148 - ---------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 97,345 88,170 - ---------------------------------------------------------------------------------------- NONINTEREST INCOME: Mortgage banking 58,119 46,769 Bond division 28,121 18,419 Deposit transactions and cash management 17,319 18,555 Cardholder and merchant processing 9,876 7,657 Trust services 8,614 10,323 Equity securities gains 475 198 Debt securities gains/(losses) (217) 264 All other 14,270 11,229 - ---------------------------------------------------------------------------------------- Total noninterest income 136,577 113,414 - ---------------------------------------------------------------------------------------- ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 233,922 201,584 - ---------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Employee compensation, incentives, and benefits 98,942 79,324 Operations services 10,656 9,011 Occupancy 9,325 9,110 Amortization of mortgage servicing rights 9,083 2,818 Communications and courier 8,241 7,334 Equipment rentals, depreciation, and maintenance 8,181 8,188 Advertising and public relations 4,939 3,900 Legal and professional fees 2,500 5,196 Amortization of intangible assets 2,354 1,797 Deposit insurance premium 419 4,358 All other 20,946 16,127 - ---------------------------------------------------------------------------------------- Total noninterest expense 175,586 147,163 - ---------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 58,336 54,421 Applicable income taxes 20,895 19,814 - ---------------------------------------------------------------------------------------- NET INCOME $ 37,441 $ 34,607 ======================================================================================== NET INCOME PER COMMON SHARE $ .56 $ .51 - ---------------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING 67,301,454 68,217,294 - ---------------------------------------------------------------------------------------- </TABLE>
6 <TABLE> CONSOLIDATED First Tennessee STATEMENTS National OF CASH FLOWS Corporation - ------------------------------------------------------------------------------------------ <CAPTION> Three Months Ended March 31 --------------------------- (Dollars in thousands)(Unaudited) 1996 1995 - ------------------------------------------------------------------------------------------ <S> <C> <C> OPERATING ACTIVITIES: Net income $ 37,441 $ 34,607 Adjustments to reconcile net income to net cash provided/(used) by operating activities: Provision for loan losses 8,033 4,148 Provision for deferred income tax 20,895 11,964 Depreciation and amortization of premises and equipment 6,916 5,840 Amortization of mortgage servicing rights 9,083 2,818 Amortization of intangibles 2,354 1,797 Net amortization of premiums and accretion of discounts 5,317 4,056 Market value adjustment on foreclosed property 1,137 651 Equity securities gains (475) (198) Debt securities (gains)/losses 217 (264) Net loss on disposal of fixed assets 49 1,621 Net (increase)/decrease in: Broker/dealer securities inventory (175,557) 3,658 Mortgage warehouse loans held for sale (349,688) 102,746 Bond division receivables (129,686) (127,738) Interest receivable 1,809 1,621 Other assets (72,160) (27,455) Net increase/(decrease) in: Bond division payables 121,458 97,086 Interest payable 6,977 6,795 Other liabilities 82,738 (160) - ------------------------------------------------------------------------------------------- Total adjustments (460,583) 88,986 - ------------------------------------------------------------------------------------------- Net cash (used)/provided by operating activities (423,142) 123,593 - ------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Proceeds from maturities of: Held to maturity securities 2,427 17,494 Available for sale securities 98,774 27,571 Proceeds from sale of: Available for sale securities 79,285 62,889 Premises and equipment 30 29 Payments for purchase of: Held to maturity securities - (1,343) Available for sale securities (322,280) (65,217) Premises and equipment (8,160) (7,306) Net (increase)/decrease in loans 259 (144,198) Decrease/(increase) in investment in bank time deposits 491 (1,139) - ------------------------------------------------------------------------------------------- Net cash used by investing activities (149,174) (111,220) - ------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from: Exercise of stock options 1,502 1,221 Issuance of term borrowings - 90,000 Payments for: Capital lease obligations (59) (37) Term borrowings (1,427) (236) Stock repurchase (505) - Cash dividends (17,869) (15,054) Equity distributions related to acquisitions - (14) Net increase/(decrease) in: Deposits 165,968 51,765 Short-term borrowings 359,022 (294,705) - ------------------------------------------------------------------------------------------- Net cash provided/(used) by financing activities 506,632 (167,060) - ------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (65,684) (154,687) - ------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 775,848 977,952 - ------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $710,164 $823,265 =========================================================================================== Total interest paid $100,785 $ 89,591 Total income taxes paid 462 2,906 </TABLE>
7 NOTE 1 - FINANCIAL INFORMATION The unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles. In the opinion of management, all necessary adjustments have been made for a fair presentation of financial position and results of operations for the periods presented. The operating results for the three month period ended March 31, 1996, are not necessarily indicative of the results that may be expected going forward. For further information, refer to the audited consolidated financial statements and footnotes included in the 1995 Annual Report to shareholders.
8 NOTE 2 -- LOANS The composition of the loan portfolio at March 31 is detailed below: <TABLE> <CAPTION> (Dollars in thousands) 1996 1995 - ------------------------------------------------------------------ <S> <C> <C> Commercial $3,316,086 $3,055,676 Consumer 2,563,818 2,283,324 Permanent mortgage 673,104 641,687 Credit card receivables 514,277 448,004 Real estate construction 244,975 194,438 Nonaccrual 12,984 15,537 - ------------------------------------------------------------------ Loans, net of unearned income 7,325,244 6,638,666 Allowance for loan losses 114,631 109,862 - ------------------------------------------------------------------ Total net loans $7,210,613 $6,528,804 ================================================================== </TABLE> The following table presents information concerning nonperforming loans at March 31: <TABLE> <CAPTION> (Dollars in thousands) 1996 1995 - ------------------------------------------------------------------- <S> <C> <C> Impaired loans $ 7,377 $ 9,820 Other nonaccrual loans 5,607 5,717 Other restructured loans - 102 - ------------------------------------------------------------------ Total nonperforming loans $12,984 $15,639 ================================================================== </TABLE> Nonperforming loans consist of impaired loans, other nonaccrual loans, and certain restructured loans. An impaired loan is a loan that management believes the contractual amount due probably will not be collected. Impaired loans are generally carried on a nonaccrual status. Nonaccrual loans are loans on which interest accruals have been discontinued due to the borrower's financial difficulties. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to recover principal balance and accrued interest. Generally, interest payments received on impaired loans are applied to principal. Once all principal has been received, additional payments are recognized as interest income on a cash basis. Total interest income recognized on impaired loans was $141,000 for the three months ended March 31, 1996. The average balance of impaired loans for the same period was approximately $8,649,000. Total restructured impaired loans at March 31, 1996, were $279,000. 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 three months ended March 31, 1996, is summarized as follows: <TABLE> <CAPTION> (Dollars in thousands) Non-impaired Impaired Total - ------------------------------------------------------------------ <S> <C> <C> <C> Balance at January 1, 1996 $109,051 $ 3,516 $112,567 Provision for loan losses 9,304 (1,271) 8,033 Charge-offs 8,719 131 8,850 Less loan recoveries 2,694 187 2,881 - ------------------------------------------------------------------ Net charge-offs 6,025 (56) 5,969 - ------------------------------------------------------------------ BALANCE AT MARCH 31, 1996 $112,330 $ 2,301 $114,631 ================================================================== </TABLE>
9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is a discussion and analysis of the financial condition and results of operations of First Tennessee National Corporation (First Tennessee) for the three month period ended March 31, 1996, compared to the three month period ended March 31, 1995. To assist the reader in obtaining a better understanding of First Tennessee and its performance, this discussion should be read in conjunction with First Tennessee's unaudited consolidated financial statements and accompanying notes appearing in this report. Additional information including the 1995 financial statements, notes and management's discussion is provided in the 1995 Annual Report. OVERVIEW Net income for the first quarter of 1996 was $37.4 million, an increase of 8 percent over the $34.6 million earned in the first quarter of 1995. For the first quarters, earnings per share increased 10 percent to $.56 in 1996 from $.51 per share in 1995. Return on average assets was 1.22 percent and return on average equity was 17.27 percent for the first quarter of 1996 compared with 1.31 percent and 18.04 percent, respectively, for the same period in 1995. During the first quarter of 1996, the company's board of directors approved a two-for-one stock split. For each share held, each shareholder of record as of February 2, 1996, received one additional share of stock on February 16, 1996. As a result of the stock split, the outstanding shares doubled to 67.2 million. All share information has been adjusted for this split. INCOME STATEMENT/BALANCE SHEET DISCUSSION A. Noninterest Income Noninterest income, also called fee income, grew 21 percent or $23.4 million from the first quarter of 1995. The rise in fee income resulted largely from increases experienced in two specialty lines of business - the bond division and mortgage banking. The bond division achieved record fee income of $28.1 million during the quarter, an increase of $9.7 million, or 53 percent, over the same period in 1995. This increase resulted from non-bank customer base expansion; and a resurgence in bank customer demand for securities resulting from lower loan demand and the ability to restructure their portfolios due to an accounting change which occurred in the fourth quarter of 1995. Mortgage banking noninterest income increased $11.4 million, or 24 percent, principally from an increase of 206 percent in origination volume, and growth in the servicing portfolio of 42 percent. Refinance activity increased from 10 percent of total originations in the first quarter of 1995 to 47 percent in the first quarter of 1996. The growth in fee income was lower due to secondary marketing losses from the rise in interest rates experienced in the first quarter of 1996 and a gain of $12 million from bulk sales of servicing during the first quarter of 1995. Fee income in cardholder and merchant processing increased $2.2 million, or 29 percent, from the expansion of new customer bases and relationships. As a result of the decrease in FDIC premiums, fee income from deposit transactions and cash management was negatively impacted since this fee was no longer collected from corporate and cash management customers. Trust services also showed a decline in fee income from 1995 to 1996. However, an accounting change made in the first quarter of 1995 from cash basis to accrual basis distorts this growth rate. For comparative purposes, using cash basis accounting, the year over year fee income growth would have been 17 percent. B. Net Interest Income For the first quarter of 1996, net interest income, on a taxable-equivalent basis, increased $13.3 million, or 14 percent, over the first quarter of 1995. This increase was due to a larger balance sheet with increased levels of earnings assets (13 percent) and a relatively flat net interest margin. B.1. Balance Sheet Growth Total assets increased $1.9 billion, or 17 percent, compared to March 31, 1995. Period end net loans increased $687 million, or 10 percent; the mortgage warehouse increased $726 million, or 176 percent; and investment securities
10 increased $80 million, or 4 percent. The growth in the period end balance sheet was partially funded by a $439 million, or 8 percent increase, in interest-bearing core deposits. The balance sheet growth is attributable to internal growth and the acquisitions of Peoples Commercial Services Corporation (parent company of Peoples Bank in Senatobia, Mississippi acquired on April 1, 1995, with assets of $98 million at acquisition) and Financial Investment Corporation (parent company of First National Bank of Springdale, in Springdale, Arkansas acquired on October 1, 1995, with assets of $349 million at acquisition). Excluding these two acquisitions, net loans grew 7 percent and interest-bearing core deposits grew 3 percent. In comparing average balances, from first quarter 1995, total assets grew $1.6 billion, or 15 percent; net loans grew $791 million, or 12 percent, and interest-bearing core deposits grew $406 million, or 7 percent. Net commercial loans grew $326 million, or 11 percent, and net consumer loans grew $277 million, or 12 percent. This loan growth is reflective of strong economic growth, with the state of Tennessee experiencing real gross state product of 4 percent during the past year. Commercial loans represented 45 percent and consumer loans represented 35 percent of total loans. Credit card receivables grew $58 million, or 13 percent, as a result of targeted marketing campaigns. The permanent mortgage portfolio increased $69 million or 11 percent, and real estate construction grew $62 million, or 33 percent. With the increase in mortgage originations, average mortgage warehouse loans held for sale increased $680 million, or 177 percent, from the first quarter of 1995. This growth was funded by an increase of $752 million, or 33 percent, in purchased funds from the first quarter of 1995. B.2. Net interest margin The net interest margin is affected by the activity levels and related funding for First Tennessee's specialty lines of business (mortgage banking, bond division, credit card, trust services, First Express - check clearing operation and transaction processing), as these nonbank business lines typically produce different margins from traditional retail/commercial banking activities. Consequently, First Tennessee's consolidated margin cannot be readily compared to that of other bank holding companies. The mortgage warehouse balance almost tripled between the first quarters of 1995 and 1996, adding $6.1 million to net interest income in 1996 compared with $3.6 million in the first quarter of 1995. Because the spread between the yields on mortgage loans temporarily in the warehouse and the related short-term funding rates is significantly less than the comparable spread earned in the retail/commercial bank, the consolidated margin was negatively impacted 20 basis points in the first quarter of 1996 compared with 2 basis points in the first quarter of 1995. The bond division contributed $.8 million more to net interest income in 1996 than in 1995. Because of its strategy to hedge inventory in the cash markets, the bond division also tends to negatively impact the consolidated net interest margin, since the net interest income is effectively eliminated on these positions. This negative impact was 11 basis points in the first quarter of 1996, an improvement from the negative 16 basis point impact in the first quarter of 1995. The decline in the net interest margin in the other specialty lines of business, as shown in the table below (Net Interest Margin Composition), came from pricing pressures experienced in credit card, and the decreasing value of demand deposits at First Express as a result of lower long term interest rates. The retail/commercial bank margin improved from 4.01 percent in the first quarter of 1995 to 4.22 percent in the first quarter of 1996. In May of 1996, the amortization of a $1 billion basis swap, executed in May of 1993 and terminated at the beginning of 1995, will end. With First Tennessee's existing balance sheet mix, the current interest rate environment, and the costs associated with the basis swap ending in May, the retail/commercial bank's margin is expected to continue to improve throughout 1996. Going forward, the consolidated margin will continue to be influenced by the activity levels in the specialty lines of business.
11 <TABLE> <CAPTION> NET INTEREST MARGIN COMPOSITION First Quarter 1996 1995 ----- ---- <S> <C> <C> Retail/commercial bank 4.22% 4.01% Basis swap (.16) (.20) Bond division (.11) (.16) Mortgage banking (.20) (.02) Other specialty lines of business .19 .29 ---- ---- Total net interest margin 3.94% 3.92% ==== ==== </TABLE> C. Provision for Loan Losses/Asset quality The provision for loan losses increased $3.9 million to $8.0 million at March 31, 1996. The higher provision results from a return to a more normalized asset quality position, and an increase in the level of allowance for loan losses commensurate with current loan growth. The allowance for loan losses to loans was 1.56 percent at March 31, 1996, and 1.65 percent at March 31, 1995. The increase in past due loans reflects the overall trends in both permanent mortgage and the consumer loan delinquencies, the change in the loan mix, and a return to more normalized past due levels. At March 31, 1996, First Tennessee had no concentration of 10 percent or more of total loans in any single industry. <TABLE> <CAPTION> March 31, ---------------------- ASSET QUALITY INFORMATION 1996 1995 (Dollars in thousands) -------- -------- <S> <C> <C> Nonaccrual loans $ 12,705 $ 15,537 Restructured loans 279 102 -------- -------- Total nonperforming loans 12,984 15,639 Foreclosed real estate 13,215 18,455 Other assets 966 1,922 -------- -------- Total nonperforming assets $ 27,165 $ 36,016 ======== ======== Loans 90 days past due $ 33,593 $ 24,480 Potential problem assets $ 69,498 $ 67,189 Allowance for credit losses: Beginning balance $112,567 $109,859 Provision for loan losses 8,033 4,148 Charge-offs (8,850) (7,291) Loan recoveries 2,881 3,146 -------- -------- Ending balance $114,631 $109,862 ======== ======== Allowance as a % of loans 1.56% 1.65% Nonperforming loans to total loans .18% .24% Nonperforming assets to total loans, foreclosed real estate and other assets .37% .54% Allowance to nonperforming assets 422.0% 305.0% </TABLE> <TABLE> <CAPTION> March 31, ---------------------- NET CHARGE-OFFS AS A PERCENT OF AVERAGE LOANS 1996 1995 -------- -------- <S> <C> <C> Commercial and commercial real estate (.08)% (.09)% Consumer .37% .22% Credit card receivables 3.32% 3.01% Permanent mortgage .05% .05% Total .33% .26% </TABLE> D. Noninterest Expense Total noninterest expense for the first quarter of 1996 increased $28.4 million, or 19 percent over the same period in 1995. Employee compensation, incentives, and benefits (staff expense) represented the majority of this increase with growth of $19.6 million or 25 percent. The increase in staff expense came primarily from the volume-based businesses where commissions and incentives increased 118 percent from the previous year.
12 With higher origination volume and a larger servicing portfolio, expenses related to amortization and hedging of mortgage servicing rights increased $6.3 million. The increase in advertising and public relations primarily resulted from selective marketing expansion in the credit card business line in response to an increasingly competitive environment. The decrease in the deposit insurance premium reflects the decrease in the FDIC premium rate to zero at the beginning of 1996. The remaining expense in this category is the Savings Association Insurance Fund (SAIF) assessment on deposits that First Tennessee acquired in 1992 and a small FDIC administrative fee. Congress is discussing various proposals to recapitalize SAIF in which a one-time assessment could potentially be charged to all institutions with SAIF-insured deposits. During the quarter, approximately $2 million related to the back office consolidation within mortgage banking was recognized. To make year over year expense growth more comparable, if the FDIC premium, the one-time acquisition costs in the first quarter of 1995, and the acquisitions closed after first quarter 1995 are excluded, and all expenses related to mortgage banking and the bond division are excluded, expenses grew 7 percent between first quarter 1995 and 1996. E. Capital Shareholders' equity at March 31, 1996, was $883.0 million, an increase of $79.8 million, or 10 percent, from March 31, 1995. As a result of stock repurchased in the latter part of 1995, period end equity to assets declined from 7.36 percent to 6.89 percent (March 1995 to March 1996). From time to time, the company will evaluate the level of capital and take action designed to generate or use the capital (i.e., acquisitions, stock buybacks, etc.) to maximize the benefit to shareholders. At March 31, 1996, the Corporation's Tier 1 capital ratio was 8.68 percent, the Total capital ratio was 11.57 percent and the Leverage ratio was 6.45 percent. On March 31, 1996, First Tennessee's bank subsidiaries had sufficient capital to qualify as well-capitalized institutions under the regulatory capital standards. 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 broker/dealer operations" and those "Held or issued for broker/dealer operations" as noted in the Off-Balance Sheet Financial Instruments table.
13 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AT MARCH 31, 1996 <TABLE> <CAPTION> Notional (Dollars in millions) Value - --------------------------------------------------------------------- <S> <C> HELD OR ISSUED FOR PURPOSES OTHER THAN BROKER/DEALER OPERATIONS Commitments to extend credit: Consumer credit card lines $1,659.7 Consumer home equity 271.4 Commercial real estate and construction and land development 337.0 Mortgage banking 971.7 Other 1,458.7 Commercial and standby letters of credit 236.2 Foreign exchange contracts, net position .1 Interest rate risk management activities: Interest rate swap receive fixed/ pay floating - amortizing 344.5 Mortgage banking Commitments to sell loans, net position 1,606.7 Put options purchased 602.5 HELD OR ISSUED FOR BROKER/DEALER OPERATIONS Forward contracts: Commitments to buy 1,811.7 Commitments to sell 1,943.5 Futures contracts: Commitments to buy 85.3 When-issued securities: Commitments to buy .2 Commitments to sell .2 Securities underwriting commitments .3 </TABLE>
14 Part II. -------- OTHER INFORMATION Items 1, 3, 4 and 5. - -------------------- As of the end of the first quarter, 1996, the answers to Items 1, 3, 4 and 5 were either inapplicable or negative, and therefore, these items are omitted. Item 2. Changes in Securities. - ------------------------------- The Restated Charter, as amended, of the Corporation has been amended, effective February 16, 1996, to change each of the 100 million authorized shares of common stock, with a par value of $2.50, into two shares of common stock (for an aggregate of 200 million shares of common stock), with a par value of $1.25, to reflect the 2-for-1 stock split declared by the Corporation's Board of Directors on January 16, 1996, which was payable February 16, 1996, to shareholders of record February 2, 1996. The stock split doubled the Corporation's shares of common stock outstanding and the shares of common stock authorized but unissued without changing the Corporation's stated capital. Item 6. Exhibits and Reports on Form 8-K. - ------------------------------------------ (a) Exhibits furnished in accordance with the provisions of the Exhibit Table of Item 601 of Regulation S-K are included as described in the Exhibit Index which is a part of this report. Exhibits not listed in the Exhibit Index are omitted because they are inapplicable. (b) No reports on Form 8-K were filed during the first quarter of 1996.
15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST TENNESSEE NATIONAL CORPORATION ------------------------------------ (Registrant) DATE: 5/15/96 By: /s/ Elbert L. Thomas Jr. --------------------- -------------------------- Elbert L. Thomas Jr. Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)
16 EXHIBIT INDEX Exhibit No. Exhibit Description Page No. - ----------- ------------------- -------- 3(i) Restated Charter of the Corporation, as amended, attached as exhibit 3(i) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, 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