<PAGE> 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, 1994
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 31,839,899
- - ----------------------------- -----------------------------
Class Outstanding at April 30, 1994
<PAGE> 2
FIRST TENNESSEE NATIONAL CORPORATION
INDEX
Page No.
--------
Part I. Financial Information 2
Part II. Other Information
Signatures
Exhibit Index
Exhibit 11
-1-
<PAGE> 3
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
The Consolidated Statements of Condition are presented on page 3.
The Consolidated Statements of Income are presented on page 4.
The Statements of Cash Flows are presented on page 5.
The Notes to Consolidated Financial Statements are presented on pages 6
through 11.
The financial information included on pages 3 through 11 reflects all
adjustments which are, in the opinion of management, necessary to fair
representation of the results of the periods covered.
-2-
<PAGE> 4
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION First Tennessee
National
Corporation
March 31
------------------------ December 31
(Dollars in thousands)(Unaudited) 1994 1993 1993
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 601,905 $ 410,494 $ 602,416
Federal funds sold and securities purchased under
agreements to resell 324,169 148,501 137,663
------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 926,074 558,995 740,079
------------------------------------------------------------------------------------------------------------------------------
Investment in bank time deposits 4,552 2,112 7,537
Trading securities inventory 526,018 251,140 178,663
Mortgage warehouse loans held for sale 733,045 78,073 719,500
Securities held for sale -- 94,338 53,035
Securities available for sale 1,365,478 -- --
Investment securities:
Mortgage-backed securities and collateralized
mortgage obligations -- 2,427,943 1,634,873
U.S. Treasury and other U.S. government agencies -- 369,733 338,447
States and municipalities -- 84,592 56,430
Other -- 128,245 86,951
------------------------------------------------------------------------------------------------------------------------------
Total investment securities (market value of $3,078,934
at March 31, 1993, and $2,156,243 at December 31, 1993) -- 3,010,513 2,116,701
------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
Mortgage-backed securities and collateralized
mortgage obligations 572,444 -- --
U.S. Treasury and other U.S. government agencies 11,569 -- --
States and municipalities 62,018 -- --
Other 19,773 -- --
------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity (market value of
$652,970 at March 31, 1994) 665,804 -- --
- - -------------------------------------------------------------------------------------------------------------------------------
Loans:
Commercial:
Taxable 2,503,442 2,089,749 2,441,217
Tax-exempt 74,905 91,471 77,763
- - -------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 2,578,347 2,181,220 2,518,980
Consumer 1,968,867 1,308,304 1,735,579
Real estate mortgage 512,943 569,462 495,855
Credit card receivables 412,326 388,656 428,074
Real estate construction 105,225 65,301 75,844
Nonaccrual 20,001 26,409 24,805
- - -------------------------------------------------------------------------------------------------------------------------------
Total gross loans 5,597,709 4,539,352 5,279,137
Less: Unearned income 11,140 16,900 11,069
Allowance for loan losses 107,877 99,179 103,734
- - -------------------------------------------------------------------------------------------------------------------------------
Total net loans 5,478,692 4,423,273 5,164,334
- - -------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 135,992 107,182 125,729
Real estate acquired by foreclosure 31,577 22,032 31,609
Customers' acceptances 3,725 4,212 4,871
Intangible assets 167,403 57,695 131,230
Bond division receivables and other assets 616,464 432,254 335,560
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,654,824 $ 9,041,819 $ 9,608,848
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 1,758,560 $ 1,470,714 $ 1,888,333
Checking/Interest 537,663 490,223 520,005
Savings 709,582 517,838 494,969
Money market account 1,717,825 1,575,688 1,656,211
Certificates of deposit under $100,000 and other time 2,296,962 2,354,393 2,206,232
Certificates of deposits $100,000 and more 487,986 412,672 381,001
- - -------------------------------------------------------------------------------------------------------------------------------
Total deposits 7,508,578 6,821,528 7,146,751
Federal funds purchased and securities sold under
agreements to repurchase 1,047,118 858,612 1,009,473
Commercial paper and other short-term borrowings 428,996 159,287 320,575
Acceptances outstanding 3,725 4,212 4,871
Bond division payables and other liabilities 859,002 488,808 358,231
Long-term debt 91,829 90,743 89,962
- - -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 9,939,248 8,423,190 8,929,863
- - -------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock - no par value (5,000,000 shares authorized, but unissued) -- -- --
Common stock - $2.50 par value (shares authorized - 50,000,000;
shares issued - 31,826,717 at March 31, 1994; 28,221,400
at March 31, 1993; and 28,325,565 at December 31, 1993) 79,567 70,554 70,814
Capital surplus 87,781 87,099 86,429
Undivided profits 548,222 464,416 524,117
Unrealized market adjustment on available for sale securities 3,811 -- --
Less deferred compensation on restricted stock incentive plan 3,805 3,440 2,375
- - -------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 715,576 618,629 678,985
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,654,824 $ 9,041,819 $ 9,608,848
===============================================================================================================================
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME First Tennessee
National
Corporation
Three Months Ended
March 31
----------------------------------
(Dollars in thousands except per share data)(Unaudited) 1994 1993
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 121,940 $ 94,587
Interest on investment securities:
Taxable 29,362 46,032
Tax-exempt 1,224 1,493
Interest on trading securities inventory 2,626 2,213
Interest on other earning assets 1,642 1,011
--------------------------------------------------------------------------------------------------------------
Total interest income 156,794 145,336
--------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Checking/Interest 2,233 2,416
Savings 3,173 3,628
Money market account 10,061 10,489
Certificates of deposit under $100,000
and other time 25,382 29,763
Certificates of deposit $100,000 and more 3,998 3,681
Interest on short-term borrowings 13,958 7,865
Interest on long-term debt 2,259 2,453
--------------------------------------------------------------------------------------------------------------
Total interest expense 61,064 60,295
--------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME: 95,730 85,041
Provision for loan losses 5,671 9,022
--------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 90,059 76,019
--------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 33,714 2,865
Bond division 26,231 23,585
Service charges on deposit accounts 14,501 13,049
Bank card 6,644 6,377
Trust service 5,898 4,465
Equity securities gains 14,989 594
Investment securities gains (losses) (321) 337
Other 11,128 10,323
--------------------------------------------------------------------------------------------------------------
Total noninterest income 112,784 61,595
--------------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 202,843 137,614
--------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives, and benefits 82,961 50,118
Operations services 8,057 6,469
Occupancy 6,897 5,055
Amortization of intangible assets 6,719 2,343
Communications and courier 6,575 4,202
Equipment rentals, depreciation, and maintenance 5,500 3,961
Deposit insurance premium 4,002 4,085
Other 26,764 16,011
--------------------------------------------------------------------------------------------------------------
Total noninterest expense 147,475 92,244
--------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 55,368 45,370
Applicable income taxes 18,738 15,128
--------------------------------------------------------------------------------------------------------------
NET INCOME $ 36,630 $ 30,242
==============================================================================================================
NET INCOME PER COMMON SHARE $ 1.15 $ 1.07
--------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 31,792,655 28,192,064
--------------------------------------------------------------------------------------------------------------
TAX EQUIVALENT ADJUSTMENT TO TOTAL INTEREST INCOME $ 1,152 $ 1,722
--------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
CONSOLIDATED First Tennessee
STATEMENTS National
OF CASH FLOWS Corporation
Three Months Ended
March 31
------------------------
(Dollars in thousands)(Unaudited) 1994 1993
-------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 36,630 $ 30,242
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 5,671 9,022
Depreciation and amortization of premises and equipment 4,576 3,652
Amortization of intangibles 6,719 2,343
Net amortization of premiums and accretion of discounts 4,020 5,910
Market value adjustment on foreclosed property 414 39
Market value adjustment on securities held for sale -- (314)
Equity securities gains (14,989) (594)
Debt securities losses (gains) 321 (19)
Net gain on disposal of fixed assets (93) (1)
Net gain on disposal of branch -- (672)
Deferred income tax provision (benefit) 1,786 (1,847)
Net (increase) decrease in:
Trading securities inventory (347,355) (62,533)
Mortgage warehouse loans held for sale 365,549 9,517
Bond division receivables (221,784) (176,867)
Interest receivable (2,472) (2,668)
Other assets (30,716) (36,551)
Net increase (decrease) in:
Bond division payables 438,846 174,371
Interest payable 3,567 1,252
Other liabilities (41,781) 11,838
-------------------------------------------------------------------------------------------
Total adjustments 172,279 (64,122)
-------------------------------------------------------------------------------------------
Net cash provided by operating activities 208,909 (33,880)
-------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of:
Investment securities -- 309,863
Held to maturity securities 259,815 --
Available for sale securities 61,964 --
Proceeds from sale of:
Debt securities -- 19,677
Equity securities -- 2,271
Available for sale securities 164,065 --
Premises and equipment 968 1
Payments for purchase of:
Debt securities -- (378,330)
Equity securites -- (1,488)
Held to maturity securities (105,068) --
Available for sale securities (119,640) --
Premises and equipment (6,483) (3,931)
Net increase in loans (177,825) (7,158)
Decrease (increase) in investment in bank time deposits 3,032 (50)
Net cash and cash equivalents from acquisition 15,748 --
Branch sale, including cash and cash equivalents sold -- (18,339)
-------------------------------------------------------------------------------------------
Net cash used by investing activities 96,576 (77,484)
-------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 467 677
Payments for:
Capital lease obligations (37) (37)
Long-term debt (237) (36,150)
Cash dividends (127) (8,619)
Stock repurchase -- (20)
Net increase (decrease) in:
Deposits 161,363 (73,933)
Short-term borrowings (280,919) 7,616
-------------------------------------------------------------------------------------------
Net cash used by financing activities (119,490) (110,466)
-------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents 185,995 (221,830)
-------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 740,079 780,825
-------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 926,074 $ 558,995
===========================================================================================
Total interest paid $ 54,352 $ 58,934
Total income taxes paid 8,305 1,234
</TABLE>
<PAGE> 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 1993 Annual Report to shareholders.
<PAGE> 8
NOTE 2 -- BUSINESS COMBINATIONS
On January 4, 1994, First Tennessee completed the acquisition of SNMC
Management Corporation (SNMC). SNMC, the parent of Sunbelt National Mortgage
Corporation headquartered in Dallas, Texas, became a wholly owned subsidiary of
First Tennessee Bank National Association, the principal subsidiary of First
Tennessee. At March 31, 1994, SNMC had total assets of approximately $418.6
million.
On March 1, 1994, Highland Capital Management Corp. merged with First
Tennessee Investment Management, Inc., a wholly owned subsidiary of First
Tennessee. The combined organization became a wholly owned subsidiary of First
Tennessee with the name Highland Captial Management Corp. and manages $2.6
billion in assets.
On March 16, 1994, First Tennessee completed the acquisition of
Cleveland Bank and Trust Company (CBT). CBT became a wholly owned subsidiary
of First Tennessee. At March 31, 1994, CBT had total assets of approximately
$227.1 million; total deposits of approximately $200.3 million; and total
capital of approximately $23.7 million.
These acquisitions were accounted for as poolings of interests; however
due to immateriality only beginning shareholders' equity was restated without
restating statements of income or condition for prior periods.
On March 29, 1994, First Tennessee and Planters Bank of Tunica,
Mississippi (Planters), announced the execution of a definitive agreement
pursuant to which a wholly owned subsidiary of First Tennessee would be merged
with and into Planters for approximately $14 million in First Tennessee common
stock. The acquisition price is based on First Tennessee's common stock per
share price being within a range of $34 per share and $42 per share, inclusive.
Based on the purchase price and the range of the per share price, First
Tennessee will issue between 334,286 and 412,941 shares of its common stock.
At December 31, 1993, Planters had approximately $66 million in assets and $6
million in capital. The acquisition will be accounted for as a pooling of
interests and is subject to regulatory and Planters shareholder approvals. The
transaction is expected to close in the third quarter of 1994.
<PAGE> 9
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
March 31
-------------------
(Dollars in thousands) 1994 1993
----------------------------------------------------------------
<S> <C> <C>
OTHER INCOME:
Check clearing fees $ 3,966 $ 3,503
Other service charges 2,089 2,364
All other 5,073 4,456
----------------------------------------------------------------
Total $ 11,128 $ 10,323
================================================================
OTHER EXPENSE:
Legal and professional fees $ 4,718 $ 2,015
Advertising and public relations 3,083 1,857
Supplies 2,426 1,421
Fed service fees 1,997 1,877
Travel and entertainment 1,741 1,217
Foreclosed real estate 694 504
All other 12,105 7,120
----------------------------------------------------------------
Total $ 26,764 $ 16,011
================================================================
</TABLE>
<PAGE> 10
NOTE 4 -- INTANGIBLE ASSETS
Following is a summary of intangible assets (net of accumulated amortization)
included in the Consolidated Statements of Condition:
<TABLE>
<CAPTION>
March 31 December 31
----------------------- -----------
(Dollars in thousands) 1994 1993 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchased mortgage servicing rights $ 77,326 $ 6,229 $ 41,182
Goodwill 61,992 20,449 61,143
Premium on purchased deposits and assets 28,085 31,017 28,905
-------------------------------------------------------------------------------
Total intangible assets $ 167,403 $ 57,695 $ 131,230
===============================================================================
</TABLE>
The acquisition of SNMC in the first quarter of 1994 resulted in an
increase of approximately $39.0 million of purchased mortgage servicing
rights. During 1993, goodwill and purchased mortgage servicing rights
increased approximately $42.0 million and $31.9 million, respectively,
due to the acquisition of Maryland National Mortgage Corporation.
<PAGE> 11
NOTE 5 -- HELD TO MATURITY AND AVAILABLE FOR SALE SECURITIES
Proceeds from the sales of investments in securities available for sale were
$145,764,000 during the first quarter. Gross losses of $502,000 were realized
on the 1994 sales. Gains and losses from sales are computed on the specific
identification method and are included in noninterest income.
Separate reconciliations of the amortized cost to the estimated market
values of investments in securities at March 31, 1994, are provided below:
HELD TO MATURITY SECURITIES
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in thousands) Cost Gains Losses Value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AT MARCH 31, 1994:
U.S. Treasury and other
U.S. government agencies $ 11,569 $ 97 $ (40) $ 11,626
Government agency
issued MBS 153,387 -- (4,818) 148,569
Government agency
issued CMOs 419,057 66 (9,903) 409,220
States and municipalities 62,018 1,915 (398) 63,535
Private issued CMOs -- -- -- --
Private issued asset-backed 19,773 247 -- 20,020
---------------------------------------------------------------------------------------
Total $ 665,804 $ 2,325 $(15,159) $ 652,970
=======================================================================================
AVAILABLE FOR SALE SECURITIES
---------------------------------------------------------------------------------------
U.S. Treasury and other
U.S. government agencies $ 335,586 $ 805 $ (4,036) $ 332,355
Government agency
issued MBS 222,753 9,104 (1,325) 230,532
Government agency
issued CMOs 720,668 1,213 (8,624) 713,257
States and municipalities 14,555 1,854 -- 16,409
Private issued CMOs 1,015 9 -- 1,024
Private issued asset-backed 12,663 75 (4) 12,734
Other 10,799 94 (318) 10,575
Equity 41,220 8,651 (1,279) 48,592
---------------------------------------------------------------------------------------
Total $1,359,259 $21,805 $(15,586) $1,365,478
=======================================================================================
</TABLE>
The amortized cost and estimated market value of securities at March 31,
1994 by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
HELD TO MATURITY Estimated
Amortized Market
(Dollars in thousands) Cost Value
------------------------------------------------------------------------------------------
<S> <C> <C>
At March 31, 1994:
Within 1 year $ 30,961 $ 31,458
After 1 year; within 5 years 42,874 44,310
After 5 years; within 10 years 6,964 7,090
After 10 years 12,561 12,323
------------------------------------------------------------------------------------------
Subtotal 93,360 95,181
------------------------------------------------------------------------------------------
Mortgage-backed securities and CMOs 572,444 557,789
------------------------------------------------------------------------------------------
Total $ 665,804 $ 652,970
==========================================================================================
AVAILABLE FOR SALE
------------------------------------------------------------------------------------------
Within 1 year $ 41,927 $ 43,487
After 1 year; within 5 years 310,110 306,575
After 5 years; within 10 years 20,110 20,530
After 10 years 1,456 1,481
------------------------------------------------------------------------------------------
Subtotal 373,603 372,073
------------------------------------------------------------------------------------------
Mortgage-backed securities and CMOs 944,436 944,813
Equity securities 41,220 48,592
------------------------------------------------------------------------------------------
Total $1,359,259 $1,365,478
==========================================================================================
</TABLE>
<PAGE> 12
NOTE 6 -- POSTEMPLOYMENT BENEFITS
In November 1992, FASB issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." It requires the recognition of the obligation
for benefits to former and inactive employees after employment but
before retirement. Those benefits include, but are not limited to, salary
continuation, supplemental unemployment benefits, severance benefits,
disability-related benefits, workers' compensation, job training and
counseling, and continuation of benefits such as health care and life
insurance coverage. On January 1, 1994, First Tennessee adopted SFAS No.
112 with the recognition of $2.3 million of postemployment benefits related
to prior service rendered and rights vested.
<PAGE> 13
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
CONSOLIDATED FINANCIAL REVIEW
On January 4, 1994, SNMC Management Corporation (SNMC) was acquired.
Sunbelt National Mortgage Company (Sunbelt), a subsidiary of SNMC, has a
network of 44 offices in 14 states, with most of the originations occurring in
the Southwest, Florida, and North Carolina. During 1993, Sunbelt originated
$3.3 billion in mortgage loans and at year-end serviced $6.1 billion in
mortgage loans.
On March 1, 1994, Highland Capital Management Corp. (HCMC) merged with
First Tennessee Investment Management, Inc. (FTIM), a wholly owned
subsidiary of First Tennessee National Corporation (First Tennessee). The
combined organization, with the name Highland Capital Management Corp.,
manages $2.6 billion in fixed income and equity securities.
On March 16, 1994, First Tennessee acquired Cleveland Bank and Trust
Company (CBT) of Cleveland, Tennessee. CBT had $227 million in assets,
$200 million in deposits, and $23.7 million in equity capital at March 31,
1994.
These acquisitions were accounted for as poolings-of-interest.
However, the acquisitions were recorded by restatement of beginning
shareholders' equity without restating statements of income or condition for
the years prior to 1994 (since prior years' impact of the acquisitions was not
material.)
Net income for the first quarter of 1994 was $1.15 per share, an
increase of 7.5 percent from the $1.07 per share reported for the first quarter
of 1993. Net income for the first quarter of 1994 totaled $36.6 million
compared to $30.2 million for the same period last year, an increase of 21.1
percent. The improvement in earnings was primarily attributable to the strong
growth of noninterest income with a record quarter of bond division income.
This was also
<PAGE> 14
the first quarter of results reflecting the recent mortgage
acquisitions of Sunbelt and Maryland National Mortgage Corporation (Maryland).
Return on equity (ROE) was 20.88 percent for the quarter ended March
31, 1994, compared to 20.18 percent reported for the same period last year.
The 20.88 percent ROE reflects the adoption of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," on January 1, 1994.
Excluding the SFAS No. 115 impact would have resulted in a ROE of 21.29 percent
for the first quarter of 1994. Return on average assets (ROA) increased to
1.48 percent for the quarter ended March 31, 1994, from the 1.43 percent
reported for the first quarter of 1993.
The first quarter earnings were impacted by a number of one-time items
during the first quarter. These items included $3.8 million after-tax
acquisition costs for Sunbelt and CBT and $1.4 million after-tax postemployment
benefit expenses related to adoption of SFAS No. 112, "Employers' Accounting
for Postemployment Benefits." These additional costs reduced earnings per share
16 cents. In addition, Hickory Venture Capital Corporation, a subsidiary of
First Tennessee Bank National Association (FTBNA), recognized an after-tax
gain, net of incentives, of $7.7 million on the sale of an investment which
increased earnings 24 cents per share. After adjusting for these impacts, ROE
would have been 19.46 percent and ROA would have been 1.38 percent.
The following analysis discusses First Tennessee's financial condition
and results of operations for the first quarter of 1994 compared to the same
period in 1993. All accompanying financial statements, tables, and notes to
the statements should be read in conjunction with the narrative and be
considered an integral part of the analysis.
<PAGE> 15
EARNINGS ANALYSIS
NET INTEREST INCOME
Net interest income (NII) is the principal source of earnings for First
Tennessee. It is the difference between interest and fees earned on earning
assets and the interest expense incurred on interest-bearing liabilities. For
purposes of this discussion, NII has been adjusted to a fully taxable
equivalent basis for certain tax-exempt loans and investments included in
earning assets. Changes in the mix and volume of earning assets and
interest-bearing liabilities, their related yields, and overall interest rates
have a major impact on earnings.
NII rose to $96.9 million for the quarter ended March 31, 1994, from
$86.8 million reported for the same period last year, an increase of 12
percent. This increase can be attributed to an increase in earning assets as
well as a change in the mix of earning assets.
Average earning assets, net of unearned income, increased 14 percent
for the quarter compared to the same period last year. Total average loans
grew 38 percent during this same time period. Excluding acquisitions closed in
the past 12 months, total average loan growth would have been 20 percent.
Average loans, the largest component of average earning assets, net of unearned
income, represented 71 percent of average earning assets for the first quarter
of 1994, up significantly from 58 percent reported for the comparable period
last year.
Average commercial loans, net of unearned income, the single largest
loan category, comprised 29 percent of average earning assets for the quarter
ended March 31, 1994. The average balance of $2.6 billion represented a 20
percent increase from the same period in 1993, due to the addition of
loans from acquired companies as well as Tennessee's recent
<PAGE> 16
economic growth. Average consumer loans increased 46 percent from
first quarter 1993 due to additional market penetration through Gulf Pacific
Mortgage, a division of FTBNA; aggressive promotional campaigns to attract
refinancing activity of consumer real estate; and increased focus on
cross-selling loan products to current deposit customers.
Average mortgage loans, net of unearned income, which includes 1-4
family residential mortgage loans originated by First Tennessee, increased from
$641.1 million in the first quarter of 1993 to $1.3 billion in the first
quarter of 1994. This substantial increase was due to mortgage loans
originated by Sunbelt and Maryland which were not included in previous year's
numbers.
As a result of strong loan growth and the acquisitions of the mortgage
companies, total investment securities dropped 26 percent to an average of $2.2
billion for first quarter 1994, significantly changing the earning asset mix.
Investment securities represented 24 percent of average earning assets for
first quarter 1994 compared to 38 percent for the same period last year.
A 9 percent increase in average core deposits supported much of the
growth in earning assets. Excluding the effect of acquisitions closed in the
past 12 months, core deposit growth would have been 2 percent. Average core
deposits continued to be First Tennessee's largest source of funding, providing
77 percent of the required earning asset funding.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the periodic charge to earnings for
potential losses in the loan portfolio. Management's policy is to maintain the
allowance for loan losses at a level sufficient to absorb all estimated losses
inherent in the loan portfolio. The allowance is increased by the provision
and decreased by loan
<PAGE> 17
charge-offs, net of recoveries. 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 level of loan loss provision changes. Reflecting continued
improvement in asset quality, the loan loss provision for the first quarter of
1994, totaled $5.7 million, a 37 percent decrease from the $9.0 million
reported for the same period in 1993.
NONINTEREST INCOME
Noninterest income is a significant source of First Tennessee's
revenue, representing 54 percent of net revenues for the first quarter of 1994,
compared with 42 percent for the first quarter of 1993. Excluding securities
transactions in both periods, noninterest income grew 62 percent relative to
the same period last year. Mortgage banking noninterest income grew from $2.9
million to $33.7 million from first quarter 1993 to first quarter 1994. This
increase was primarily related to increased income from mortgage servicing fees
and expanded loan origination volume related to the Maryland and Sunbelt
acquisitions. The bond division set record noninterest income of $26.2 million
for the quarter ended March 31, 1994, up 11 percent from the same period the
prior year. This increase is a result of enlarging the customer base through
increased customer diversification efforts and new office expansion. Income
from service charges on deposit accounts increased 11 percent from $13.0
million in first quarter 1993 to $14.5 million in first quarter 1994. Trust
income increased 32 percent for the same time period from $4.5 million to $5.9
million, primarily due to the Highland Capital Management Corp. acquisition.
Net securities gains amounted to $14.7 million in first quarter 1994.
This amount included $300,000 of securities losses from the available for sale
<PAGE> 18
portfolio incurred in the normal course of business. The remainder reflected
the gain associated with the Hickory Venture Capital transaction. Excluding
income in those companies acquired since first quarter 1993 and securities
transactions, the noninterest income would have risen 9 percent in the first
quarter of 1994 compared with the first quarter of 1993.
NONINTEREST EXPENSE
Noninterest operating expense was $147.5 million compared with $92.2
million in the first quarter of 1993. Excluding expenses in the acquired
companies, acquisition expenses, expenses related to the adoption of SFAS No.
112, and incentive expenses related to the Hickory Venture Capital gain,
noninterest operating expense would have risen 9 percent in first quarter 1994
compared with first quarter 1993.
An increase of 66 percent in employee compensation, incentives, and
benefits, the single largest category of noninterest expenses, was the major
contributor to expense growth. Approximately 67 percent of the increase was
attributable to acquisitions that have closed since the end of first quarter
1993, and approximately 2 percent of the increase in personnel expenses was
due to increases in commissions and incentives expense from bond division
activities. In addition, SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" was adopted January 1, 1994, and contributed $2.3
million, or 3 percent of personnel expenses. Excluding bond division
commissions and incentives, incentives related to the Hickory Venture Capital
transaction, incremental expenses associated with the acquired companies, and
the impact of SFAS No. 112, employee compensation, incentives, and benefits
expense rose 10 percent in the first quarter of 1994 compared to the first
quarter of 1993.
<PAGE> 19
Other noninterest expense increased 67 percent from first quarter 1993.
Professional fees primarily related to recent acquisitions led the increase,
rising 230 percent. Advertising and public relations increased 66 percent and
can be attributed to the product campaigns conducted during the period. The
remainder of the increase in other noninterest expense was spread among several
expense categories including legal fees, supplies, travel and entertainment,
and other insurance and taxes.
INCOME TAXES
The effective tax rate, or taxes as a percentage of pre-tax income, for
the three months ended March 31, 1994, was 33.8 percent, a slight increase over
the 33.3 percent reported for the same period last year. The tax rates reflect
a statutory federal rate of 34 percent for the first quarter of 1993 instead of
the current 35 percent which went into effect during the third quarter of 1993.
The effective tax rate for the first quarter of 1994 was lowered as a result of
eliminating $1.9 million of Sunbelt's $7.7 million deferred tax asset valuation
allowance. This deferred tax asset was established during 1992 and 1993 as a
result of financial and tax operating losses realized in those years.
ASSET/LIABILITY MANAGEMENT
Two factors affecting efficient asset/liability management are interest
rate risks and liquidity needs. The primary objective of interest rate
sensitivity management is to maintain net interest income growth while reducing
exposure to the risks inherent in interest rate movements. Liquidity is
provided by a well-structured balance sheet. Management's Asset/Liability
Committee (ALCO), an
<PAGE> 20
executive-level management committee, meets regularly to review both
the interest rate sensitivity position and liquidity of First Tennessee.
INTEREST RATE RISKS
First Tennessee's ALCO subjects earnings projections to a variety of
interest rate scenarios as well as pricing, maturity, growth, and mix
strategies to make informed decisions to increase income and limit interest
rate risk.
First Tennessee's goal is to stabilize the net interest margin by
limiting the size of the rate sensitivity position. One ALCO guideline is to
maintain an interest sensitivity gap position between the volume of assets and
the volume of liabilities repricing within one year below 5 percent of earning
assets. At March 31, 1994, the balance sheet was rate sensitive by $94 million
more assets than liabilities scheduled to reprice within one year. At one
percent of earning assets, this position was within guideline limits and
represented a relatively neutral position.
In addition, ALCO monitors the impact of changes in the level of
interest rates, the steepness of the yield curve, and market spreads on NII.
Results from recent NII simulations estimated that NII was relatively unchanged
given a 200 basis point parallel shift in the level of interest rates. In
addition, management periodically analyzes the effect on NII of severe stress
test scenarios in which the current steepness of the yield curve is reduced
significantly and loan and deposit spreads narrow sharply.
Off-balance sheet transactions such as interest rate swaps, forwards,
and options are used to manage rate sensitivity and to increase flexibility and
profitability in an increasingly competitive environment. These transactions
are
<PAGE> 21
only used to hedge potential fluctuations in income or market values and
are not used to generate speculative earnings. Total forward and futures
contracts at March 31, 1994, amounted to $3.8 billion compared to $1.9 billion
at March 31, 1993. Of the $3.8 billion, $2.7 billion were forward contracts
completed by the bond division. Forward contracts at the bond division
represent pending customer transactions that are non-regular way settlements,
and these forward contracts normally settle within 30 days. Mortgage banking
hedges mortgage commitments that management expects to fund and securitize.
These mortgage banking forwards totaled $1.1 billion at March 31, 1994. The
notional value of interest rate swaps at March 31, 1994, was $1.5 billion
compared to $47.0 million at March 31, 1993. The volume of this type of
off-balance sheet instruments increased as First Tennessee recognized several
opportunities to hedge potential NII risks. This included a $1 billion prime
rate versus fed funds rate swap that was added during 1993 in order to minimize
the impact from the eventual narrowing in the spread between base rate loans
and short-term market rates. The notional amount of this swap, which matures
in 1996, approximated one-half of First Tennessee's loans indexed to this rate.
Additionally, $250 million of interest rate floors and caps were acquired and
issued and $450 million in index amortizing fixed vs. floating rate swaps were
purchased since March 1, 1993, as part of First Tennessee's on-going interest
rate sensitivity management.
LIQUIDITY
First Tennessee's goal is to maintain adequate liquidity to meet
potential funding needs of loan and deposit customers. This is achieved by
maintaining a stable base of core deposits and other interest-bearing funds;
accessibility to
<PAGE> 22
local, regional, and national funding sources; readily marketable
assets; and diversity in customers, products, and market areas. The ability to
maintain liquidity also is enhanced by adequate earnings power and adequate
capital. ALCO establishes guidelines to monitor the current liquidity position
and ensure adequate funding capacity.
Long-term liquidity needs are provided by a large core deposit base and
a strong capital position. Average core deposits, the most stable source of
liquidity, funded 69 percent of total average assets in the first quarter of
1994, while short-term purchased funds funded 21 percent. 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, including term federal funds purchased. Short-term
purchased funds increased from $158.1 million at March 31, 1993, to $627.8
million at March 31, 1994. This increase was due to loan growth outpacing
deposit growth. First Tennessee's commercial paper is rated TBW-1 by Thomson
BankWatch, its highest rating category for short-term debt.
CAPITAL ADEQUACY
Capital adequacy refers to the level of capital required to sustain
asset growth over time and to absorb losses. Management's objective is to
maintain a level of capitalization that is sufficient to take advantage of
profitable growth opportunities while meeting regulatory requirements. This is
achieved by improving profitability through effectively allocating resources to
more profitable businesses, improving asset quality, strengthening service
quality, and streamlining costs. The primary measures used by management to
monitor the results of these efforts are the ratios of average equity to
average assets,
<PAGE> 23
average tangible equity to average tangible assets, and average equity
to net loans. For each of these ratios, a long-term goal is established. At
least once a year the goals are re-evaluated to ensure that they continue to
meet management's objectives and reflect changes in market conditions and the
regulatory environment.
Management's long-term goal is to maintain an average equity to average
assets ratio between 6.75 percent and 7.50 percent. Average equity to average
assets was 7.1 percent in first quarter of 1994, unchanged from the first
quarter of 1993.
Management's other long-term capital goals are to maintain a minimum
ratio of average equity to average net loans equal to or above 10.50 percent
and an average tangible equity to average tangible assets ratio equal to or
above 5.00 percent. Both of these goals are currently being met. During the
first quarter of 1994, average equity to average net loans was 11.5 percent
compared to 13.6 percent for the same period last year. Average tangible
equity to average tangible assets was 5.5 percent compared with 6.4 percent for
the first quarter of 1994 and 1993, respectively.
In addition to managing these three ratios, First Tennessee ensures
that it satisfies all external capital requirements. The Federal Reserve Board
and the Office of the Comptroller of the Currency have several capital
guidelines governing the activities of bank holding companies and national
banks. These guidelines require the maintenance of an amount of capital based
on risk-adjusted assets so that categories of assets with potentially higher
credit risk will have more capital backing than assets with lower risk. In
addition, banks and bank holding companies are required to maintain capital to
support, on a risk-adjusted basis, certain off-balance sheet activities such
as loan commitments.
<PAGE> 24
The capital guidelines classify capital into two tiers referred to as
Tier 1 and Tier 2. Total capital consists of Tier 1 capital which for First
Tennessee is common stock less goodwill and certain other intangible assets,
and Tier 2 capital which for First Tennessee is qualifying subordinated debt
and a limited amount of loan loss reserves. In determining risk-based capital
requirements, assets are assigned risk-weights of 0 percent to 100 percent,
depending on the regulatory assigned levels of risk associated with such
assets. Off-balance sheet items are considered in the calculation of
risk-adjusted assets through conversion factors established by the regulators.
Furthermore, regulators monitor a leverage ratio which compares Tier 1 capital
to total average assets less goodwill and certain other intangible assets. The
risk-based regulatory capital ratios are shown for First Tennessee and FTBNA in
the accompanying table.
The FDIC also monitors risk-based capital guidelines and requires
weaker banks to pay higher premium rates while allowing healthy,
well-capitalized banks to pay less. Assessments for banks range from 23 cents
for well-capitalized institutions to 31 cents for the weakest undercapitalized
institutions. On March 31, 1994, First Tennessee and its bank subsidiaries
qualified as well-capitalized institutions.
The overall decrease in the capital ratios reflects management's
planned use of capital to fund the acquisitions closed over the past 12 months
and to support balance sheet growth. The ratios should improve as retained
earnings continue to grow.
<PAGE> 25
CREDIT RISK MANAGEMENT AND ASSET QUALITY
First Tennessee manages risk in the loan portfolio through its credit
policy, diversity in the mix of loans in the portfolio, intensive analysis of
credit requests, a continuous process of monitoring existing loans, and the
credit judgment of experienced credit officers. Management believes the
objective of a sound credit policy is to extend quality loans to customers
while managing risk affecting shareholders and depositors. First Tennessee's
goal is not to avoid risk, but rather to manage it.
COMMERCIAL LENDING
The average commercial loan portfolio represented 41 percent of average
total loans, net of unearned income at March 31, 1994. To assess the quality
of individual commercial loans, all commercial loans are internally assigned a
credit rating, ranging from A to F, to assist in the credit risk management of
these loans. The credit rating assigned to a particular loan is based on the
financial condition of the borrower and collateral on the loan. Grades are
assigned at the inception of the loan, reviewed regularly and revised as
needed. The majority of commercial loans at First Tennessee are graded C at
inception. This reflects a commercial customer base of smaller businesses,
defined as companies with annual sales of $50 million or less. Due to
increased business activity and generally improving economic conditions
throughout 1993 and the first quarter of 1994, loans graded C and above,
expressed as a percentage of total graded loans, improved to 94 percent at
March 31, 1994, from 90 percent at March 31, 1993.
<PAGE> 26
COMMERCIAL REAL ESTATE
First Tennessee has two principal types of commercial real estate
lending. The first category, construction and development lending, involves
the extension of credit to build or otherwise develop real estate properties
which are later sold, operated for income-producing purposes, or occupied by
the owner for other business reasons. The real property and improvements serve
as collateral for the loan. The second category consists of commercial real
estate loans and loans to businesses secured by real estate collateral.
Commercial real estate loans generally have intermediate or long-term
maturities with payment schedules designed to amortize the loans over their
terms. Business loans in this category are made to finance real estate used in
business operations or for general business purposes. Construction and
development loans are moved to the commercial real estate loan category when
the construction is completed.
As a part of the commercial loan portfolio all commercial real estate
loans are assigned a risk grade. In addition to the grading process, one of
the tools management employs in monitoring the risk of loss in commercial real
estate lending activities is to assign all commercial real estate loans to
either of two risk categories. The higher risk loan category contains loans
where the primary source of repayment comes from either the sale of the real
estate property or the cash flow from the project, and a substantial secondary
source of repayment is not available. Consequently, the risk potential for
loss on these loans is subject to the fluctuations in the market value of the
real estate collateral. For this reason, more stringent underwriting
standards, including equity requirements and loan to value ratios, debt service
coverage ratios, capitalization rates, discount rates and hold periods, are
applied to these loans. The other risk category contains loans which have a
substantial secondary source in addition to having real estate as the primary
source of repayment. These loans are
<PAGE> 27
generally considered to have less risk of loss due to the additional source of
repayment.
Commercial real estate loans at March 31, 1994, were $497.0 million
compared to $437.0 million at March 31, 1993. Construction and development
loans increased to $105.2 million at the end of the first quarter of 1994 from
$65.3 million at the end of the first quarter of 1993, as additional funding
for construction projects increased.
To monitor the risk of loss on commercial real estate loans, an annual
review of collateral values is required on all loans where real estate is the
sole or primary repayment source. An independent appraisal review department
reviews the appraisal assumptions to ensure they reflect current economic
conditions. Also, loan review personnel in their regularly scheduled
examinations verify that First Tennessee's appraisal policy and procedures are
being followed.
Maintaining a diverse commercial real estate portfolio by project type
is another important way commercial real estate lending risk is managed. The
Loans Secured by Real Estate table reflects the diversity in real estate by
project type.
CONSUMER LENDING
First Tennessee manages credit risk in consumer loans through
standardized products, uniform underwriting guidelines, and centralized process
controls. Credit underwriting guidelines are established for loan maturities,
collateral, and credit qualifications including credit scores, bankruptcy
scores, and debt to income levels.
<PAGE> 28
These underwriting guidelines are developed and monitored centrally to
ensure consistent application across First Tennessee. The application and
approval processes are controlled through an enhanced computer system. The
borrower's application is programmatically compared to the credit underwriting
guidelines. The system informs the lender if the loan does or does not meet
the credit standard established for that type of loan. For loans that meet the
credit standards the system automatically produces the loan documents and
records the loan. Loans which do not meet the standards are rejected and moved
to a higher level of lending authority which has the ability to make
exceptions. Exceptions are monitored by the senior management of consumer
lending. The application and the data used in making the loan decision is
stored in an electronic format for further analysis.
Collections and loan operations are two important centralized process
controls for risk in the consumer portfolio. Collections is centralized to
capitalize on the collection specialization and economies of scale as well as
consistent application of collection procedures. The collection process is
automated to ensure timely collection of accounts and consistent management of
risk associated with delinquent accounts. Loan operations is centralized and
provides a final independent document review and notifies the loan officer of
any document exception.
COUNTERPARTY CREDIT RISK MANAGEMENT
Counterparty credit risk includes First Tennessee's exposure to other
financial institutions. These risks arise from the extension of direct credit
or from agreements that require some exchange of future payments or securities.
As a financial intermediary, First Tennessee continuously has exposure to these
types
<PAGE> 29
of transactions. In order to limit its concentration to any individual
financial institution, ALCO, in conjunction with the chief credit officer and
senior credit officers, employs a corporate-wide process to monitor, manage,
and limit the risk to financial counterparties. Also, formal policies have
been approved by the board of directors which quantify potential exposure and
create corporate-wide risk limits based on the creditworthiness of financial
institution counterparties.
Recently regulatory agencies have initiated several new proposals to
address this issue. Being one of the first banks of its size to analyze and
create controls for this type of risk, First Tennessee is continuing its
overall effort to manage risk proactively, including credit assessment of the
credit risk of swap counterparties.
ALLOWANCE FOR LOAN LOSSES AND NET CHARGE-OFFS
Management's policy is to maintain the allowance for loan losses at a
level sufficient to absorb all estimated losses inherent in the loan portfolio.
The allowance amount consists of two principal components: amounts specifically
provided for loans reviewed on an individual or pool basis and a general
portion designed to supplement the specific allocations. The Net Loans and
Foreclosed Real Estate table shows the allowance account allocations by
internal grades for the commercial loan portfolio and by loan type for those
loans not graded. The data is presented for periods ended March 31, 1994 and
1993. For each of the period-ends presented, the general portion of the
allowance account is between $10 million and $12 million. At the same time,
the specific allocations have changed among the loan types or grades in each
period, reflecting the changing circumstances of individual credits or groups
of loans.
<PAGE> 30
The allowance for loan losses is increased by the provision for loan
losses and decreased by charged-off loans, net of recoveries. On March 31,
1994, the total allowance for loan losses was $107.9 million compared to $99.2
million for the same period last year. The allowance for loan losses to loans,
net of unearned income, was 1.71 percent at March 31, 1994, compared to 2.16
percent at March 31, 1993. Excluding the mortgage warehouse loans, these
ratios would have been 1.93 percent and 2.19 percent at March 31, 1994 and
1993, respectively.
Net charge-offs decreased 31 percent to $4.6 million at March 31, 1994,
from $6.6 million at March 31, 1993. Net charge-offs to average loans, net of
unearned income, improved to .29 percent for first quarter 1994 compared to .58
percent for first quarter 1993.
Commercial and real estate loan net charge-offs as a percentage of
average commercial loans, net of unearned income, were .20 percent for the
first quarter of 1994. Consumer loan net charge-offs as a percent of average
consumer loans, net of unearned income, were .16 percent while credit card
receivables net charge-offs as a percentage of credit card receivables were
2.32 percent.
In management's opinion, the amount of total net charge-offs for 1994
are expected to remain at or slightly below the level of net charge-offs
incurred in 1993, but at a slightly higher level than experienced in the first
quarter of 1994.
<PAGE> 31
NONPERFORMING ASSETS
Nonperforming assets, consisting of nonaccrual and restructured loans,
foreclosed real estate and other assets, increased 9 percent to $55.1 million
at March 31, 1994. This compares to $50.6 million reported at March 31, 1993.
Excluding recent acquisitions, nonperforming assets would have been $31.8
million. Nonperforming loans are those loans where, in the opinion of
management, the full collection of principal or interest is unlikely.
Nonperforming loans decreased 26 percent to $20.4 million at March 31, 1994,
from the $27.4 million reported at March 31, 1993. This decrease would have
been 53 percent if recent acquisitions had not been included. The ratio of
nonperforming loans to total loans decreased to .32 percent at the end of the
first quarter of 1994 compared to .60 percent for the same period in 1993.
Excluding recent acquisitions, this ratio would have been .24 percent. There
is $31.6 million of foreclosed real estate included in nonperforming assets as
of March 31, 1994. Excluding recent acquisitions, foreclosed real estate would
have been $16.6 million, and this amount has been written down to 52 percent of
the original loan values, net of payments. The Nonperforming Assets table
details the activity in nonperforming assets between March 31, 1994, and March
31, 1993.
In management's opinion, the level of nonperforming assets in 1994
should remain relatively unchanged, provided the economy continues to grow.
<PAGE> 32
PAST DUE LOANS
Past due loans are loans that are 90 days or more past due as to
principal or interest but have not been placed on nonaccrual status. First
Tennessee continues accruing interest on these loans if they are currently in
the process of collection and are well-secured. Past due loans amounted to
$22.7 million at March 31, 1994, a $0.8 million increase from the $21.9 million
reported at March 31, 1993.
Potential problem assets are not included in nonperforming assets, and
represent those assets where information about possible credit problems of
borrowers has caused management to have serious doubts about the borrower's
ability to comply with present repayment terms. This definition is believed to
be substantially consistent with the standards established by the Office of the
Comptroller of the Currency for assets classified substandard and doubtful. At
March 31, 1994, potential problem assets declined 32 percent to $66.2 million
compared to $97.6 million at March 31, 1993.
LOAN CONCENTRATIONS
Loan industry concentrations are a measure of the diversification of
the commercial loan portfolio. Diversification is an important means of
reducing the investment risks associated with fluctuations in economic
conditions. At March 31, 1994, First Tennessee had no concentrations of 10
percent or more of total loans in any single industry.
<PAGE> 33
ACCOUNTING AND REGULATORY MATTERS
SFAS NO. 112 - "EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS"
In November 1992, FASB issued SFAS No. 112. It requires the
recognition of the obligation for benefits to former and inactive employees
after employment but before retirement. Those benefits include, but are not
limited to, salary continuation, supplemental unemployment benefits, severance
benefits, disability-related benefits, workers' compensation, job training and
counseling, and continuation of benefits such as health care and life insurance
coverage. SFAS No. 112 is effective for fiscal years beginning after December
15, 1993, with early adoption permitted. On January 1, 1994, First Tennessee
adopted SFAS No. 112 with the recognition of $2.3 million of pre-tax
postemployment benefits related to prior service rendered and rights vested.
SFAS NO. 115 - "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES"
In May 1993, FASB issued SFAS No. 115. This statement requires that
investment securities be classified as either held to maturity securities,
which are reported at amortized cost; trading securities, which are reported at
fair value, with unrealized gains and losses included in earnings; and
available for sale securities, which are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity. SFAS No. 115 is effective for fiscal years
beginning after December 15, 1993.
On January 1, 1994, First Tennessee adopted SFAS No. 115 with the
recognition of approximately $1.4 billion of securities being classified as
available for sale. At March 31, 1994, these securities had approximately $6.2
million of aggregate holding gains that resulted in an increase in equity for
<PAGE> 34
unrealized holding gains of approximately $3.8 million net of $2.4 million of
deferred income taxes.
<PAGE> 35
<TABLE>
<CAPTION>
NET LOANS AND FORECLOSED REAL ESTATE, PERIOD-END AMOUNTS
March 31, 1994
-------------------------------------------------------------
Construction Allowance
and Commercial For Loan
(Dollars in millions) Commercial Development Real Estate Total Losses
--------------------------------------------------------------------------------------------------------------
Internal grades:
<S> <C> <C> <C> <C> <C>
A $ 142 $ - $ 4 $ 146 $ -
B 309 - 8 317 1
C 1,442 93 428 1,963 22
D 47 - 20 67 6
E 27 - 21 48 5
F 23 - 11 34 11
--------------------------------------------------------------------------------------------------------------
1,990 93 492 2,575 45
Nonaccrual loans:
Contractually past due with:
Substantial performance - - - - -
Limited performance 4 - 1 5 3
No performance 1 - - 1 1
Contractually current 3 - 4 7 4
--------------------------------------------------------------------------------------------------------------
Total commercial and commercial
real estate loans $ 1,998 $93 $497 $ 2,588 $ 53
Retail:
Consumer 1,906 15
Credit card 412 17
Permanent mortgages 512 4
Mortgage warehouse loans held for sale 733 -
Mortgage banking nonaccrual loans 6 1
--------------------------------------------------------------------------------------------------------------
Total retail loans 3,569 37
Cleveland Bank & Trust Company 142 3
Other/Unfunded commitments 21 3
General reserve - 12
--------------------------------------------------------------------------------------------------------------
Total net loans $ 6,320 $108
==============================================================================================================
Foreclosed real estate:
Foreclosed property $ 2 $12 $ 3 $ 17
Foreclosed property - mortgage - - - 15
Insubstance foreclosure - - - -
--------------------------------------------------------------------------------------------------------------
Total foreclosed real estate $ 32
==============================================================================================================
<CAPTION>
March 31, 1993 December 31, 1993
------------------- ------------------
Allowance Allowance
For Loan For Loan
(Dollars in millions) Total Losses Total Losses
----------------------------------------------------------------------------------------------------------
Internal grades:
<S> <C> <C> <C> <C>
A $ 80 $ - $ 111 $ -
B 306 1 370 1
C 1,638 20 1,916 23
D 73 2 65 5
E 59 3 58 5
F 64 15 36 11
----------------------------------------------------------------------------------------------------------
2,220 41 2,556 45
Nonaccrual loans:
Contractually past due with:
Substantial performance - - - -
Limited performance 5 2 7 4
No performance 12 4 2 1
Contractually current 9 3 7 2
----------------------------------------------------------------------------------------------------------
Total commercial and commercial
real estate loans $ 2,246 $ 50 $ 2,572 $ 52
Retail:
Consumer 1,306 13 1,733 15
Credit card 389 18 428 17
Permanent mortgages 568 5 495 4
Mortgage warehouse loans held for sale 78 - 720 -
Mortgage nonaccrual - - 9 1
----------------------------------------------------------------------------------------------------------
Total retail loans 2,341 36 3,385 37
Cleveland Bank & Trust Company - - - -
Other/Unfunded commitments 14 3 31 3
General reserve - 10 - 12
----------------------------------------------------------------------------------------------------------
Total net loans $ 4,601 $ 99 $ 5,988 $ 104
==========================================================================================================
Foreclosed real estate:
Foreclosed property $ 18 $ 18
Foreclosed property - mortgage - 14
Insubstance foreclosure 4 -
----------------------------------------------------------------------------------------------------------
Total foreclosed real estate $ 22 $ 32
==========================================================================================================
</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. For internal
management purposes, nonaccrual loans are divided into four sub-categories:
(1) contractually current, or payments are less than 90 days past due;
(2) contractually past due 90 days or more with substantial performance
(more than 85 percent of contractual payments being received);
(3) contractually past due with limited performance (between 1 percent
and 85 percent of contractual payments being received); and
(4) contractually past due with no performance.
Based on internal loan classifications
<PAGE> 36
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Year-to-Date
----------------------------
(Dollars in thousands) 1994 1993
---------------------------------------------------------------
Allowance for loan losses:
Beginning balance $ 103,734 $ 96,795
Provision for loan losses 5,671 9,022
Allowance from acquistions 3,030 --
Net charge-offs (4,558) (6,638)
---------------------------------------------------------------
Ending balance $ 107,877 $ 99,179
===============================================================
RATIOS:
Allowance to loans (net of
unearned income)* 1.71 % 2.16 %
Net charge-offs to average loans
(net of unearned income)* 0.29 0.58
Net charge-offs to allowance 16.9 26.8
---------------------------------------------------------------
*Includes loans held for sale reported in "Mortgage warehouse
loans held for sale" on the Consolidated Statements of
Condition
<PAGE> 37
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
March 31 December 31
--------------------- ---------------
(Dollars in thousands) 1994 1993 1993
----------------------------------------------------------------------------------
<S> <C> <C> <C>
AMOUNTS:
Nonaccrual loans $ 20,001 $ 26,409 $ 24,805
Restructured loans 395 1,040 579
----------------------------------------------------------------------------------
Total nonperforming loans 20,396 27,449 25,384
Foreclosed real estate 31,577 22,032 31,609
Other assets 3,091 1,120 1,120
----------------------------------------------------------------------------------
Total nonperforming assets $ 55,064 $ 50,601 $ 58,113
==================================================================================
Past due loans:*
Non-government guaranteed $ 12,033 $ 12,542 $ 12,215
Government guaranteed 10,696 9,383 11,024
----------------------------------------------------------------------------------
RATIOS:
Nonperforming loans to total loans
(net of unearned income)** .32 % .60 % .42 %
Nonperforming assets to total loans
(net of unearned income) plus foreclosed
real estate and other assets** .87 1.09 .97
Nonperforming assets and non-government
guaranteed past due loans to total loans
(net of unearned income) plus foreclosed
real estate and other assets** 1.06 1.37 1.35
----------------------------------------------------------------------------------
</TABLE>
*Loans that are 90 days or more past due as to principal and/or interest and
not yet on nonaccrual status.
**Total loans includes loans held for sale reported in "Mortgage warehouse
loans held for sale" on the Consolidated Statements of Condition.
<PAGE> 38
<TABLE>
<CAPTION>
RATE SENSITIVITY ANALYSIS AT MARCH 31, 1994
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 $ 3,220 $ 464 $ 484 $ 2,152 $ 6,320
Investment securities 166 159 293 1,413 2,031
Other earning assets 855 -- -- -- 855
-------------------------------------------------------------------------------------------------------------
Total earning assets $ 4,241 $ 623 $ 777 $ 3,565 $ 9,206
----------------------------------------------------------------------------------------------------=========
EARNING ASSET FUNDING:
Interest-bearing deposits $ 2,243 $ 523 $ 410 $ 2,574 $ 5,750
Short-term purchased funds 1,476 -- -- -- 1,476
Long-term debt -- 1 1 90 92
Noninterest-bearing funds 442 -- -- 1,446 1,888
-------------------------------------------------------------------------------------------------------------
Earning asset funding $ 4,161 $ 524 $ 411 $ 4,110 $ 9,206
----------------------------------------------------------------------------------------------------=========
RATE SENSITIVITY GAP:
Period $ 80 $ 99 $ 366 $ (545)
Cumulative 80 179 545 --
----------------------------------------------------------------------------------------------------
RATE SENSITIVITY GAP ADJUSTED FOR INTEREST
RATE FUTURES AND INTEREST RATE SWAPS:
Period $ (359) $ 97 $ 356 $ (94)
Cumulative (359) (262) 94 --
----------------------------------------------------------------------------------------------------
ADJUSTED GAP AS A PERCENT OF EARNING ASSETS:
Period (3.9)% 1.1 % 3.8 % (1.0)%
Cumulative (3.9) (2.8) 1.0 --
----------------------------------------------------------------------------------------------------
</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.
<PAGE> 39
<TABLE>
<CAPTION>
FTBNA LOANS SECURED BY REAL ESTATE, PERIOD-END AMOUNTS
March 31, 1994 December 31, 1993
----------------------------------- ------------------------------------
Construction Commercial Construction Commercial
(Dollars in millions) & Development Real Estate Total & Development Real Estate Total
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RISK CATEGORIES:
Real estate collateral serves as
only source of repayment $ 62 $ 171 $ 233 $ 55 $ 171 $ 226
Real estate collateral is primary
source of repayment with a
substantial secondary source 31 326 357 24 356 380
- - -------------------------------------------------------------------------------------------------------------------------
Total $ 93 $ 497 $ 590 $ 79 $ 527 $ 606
=========================================================================================================================
PROJECT TYPE:
Apartments $ 1 $ 60 $ 61 $ 1 $ 77 $ 78
Hotels/Motels 1 57 58 - 62 62
Office buildings - multi-tenant 3 59 62 3 58 61
Single family builder 49 2 51 46 2 48
Shopping centers 12 106 118 7 99 106
Commercial/Special purpose units 3 67 70 2 73 75
All Other 24 146 170 20 156 176
- - -------------------------------------------------------------------------------------------------------------------------
Total $ 93 $ 497 $ 590 $ 79 $ 527 $ 606
=========================================================================================================================
</TABLE>
Based on internal loan classifications. Certain previously reported amounts
have been reclassified to agree with current presentation.
<PAGE> 40
NONPERFORMING ASSETS ACTIVITY
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------------------------------------------------
(Dollars in millions) March 31, 1993 June 30, 1993 September 30, 1993 December 31, 1993 March 31, 1994
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance $54.7 $50.6 $46.9 $41.1 $58.1
New nonperformers 5.2 11.4 2.1 3.7 7.0
Acquisitions 0.0 0.0 0.0 22.8 1.0
Return to accrual 0.0 (3.4) 0.0 0.0 (2.0)
Payments (6.5) (7.4) (7.3) (3.9) (6.6)
Charge-offs (2.8) (4.2) (0.6) (5.6) (2.4)
Market writedowns 0.0 (0.1) 0.0 0.0 0.0
- - ------------------------------------------------------------------------------------------------------------------------------
Ending balance $50.6 $46.9 $41.1 $58.1 $55.1
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 41
<TABLE>
<CAPTION>
REGULATORY CAPITAL
FTNC*
-------------------------------------
March 31 December 31
------------------ -----------
(Dollars in thousands) 1994 1993 1993
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAPITAL:
Tier 1 capital:
Shareholders' common equity $ 715,576 $ 618,629 $ 678,985
Less disallowed intangibles 62,963 21,111 62,152
Less unrealized holding gains on
available for sale securities 3,811 -- --
- - -------------------------------------------------------------------------------------------------
Total Tier 1 capital 648,802 597,518 616,833
- - -------------------------------------------------------------------------------------------------
Tier 2 capital:
Qualifying debt 82,521 85,413 82,505
Qualifying allowance for loan losses 87,698 71,290 80,569
- - -------------------------------------------------------------------------------------------------
Total Tier 2 capital 170,219 156,703 163,074
- - -------------------------------------------------------------------------------------------------
Total capital $ 819,021 $ 754,221 $ 779,907
=================================================================================================
Risk-adjusted assets $ 6,995,639 $ 5,675,345 $ 6,422,329
Quarterly average assets 10,066,588 8,598,890 9,478,513
- - -------------------------------------------------------------------------------------------------
RATIOS:
Tier 1 capital to risk-adjusted assets 9.27% 10.53% 9.60%
Tier 2 capital to risk-adjusted assets 2.44 2.76 2.54
- - -------------------------------------------------------------------------------------------------
Total capital to risk-adjusted assets 11.71% 13.29% 12.14%
=================================================================================================
Leverage - Tier 1 capital to quarterly
average assets less disallowed
intangibles 6.49% 6.97% 6.55%
- - -------------------------------------------------------------------------------------------------
<CAPTION>
FTNBA**
---------------------------------------- Well-
March 31 March 31, December 31, Capitalized
----------- --------- ------------ Regulatory
(Dollars in thousands 1994 1993 1993 Minimums
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CAPITAL:
Tier 1 capital:
Shareholders' common equity $ 634,969 $ 571,620 $ 627,371
Less disallowed intangibles 66,128 34,553 66,413
Less unrealized holding gains on
available for sale securities 2,297 -- --
- - -------------------------------------------------------------------------------------------------------------
Total Tier 1 capital 566,544 537,067 560,958
- - -------------------------------------------------------------------------------------------------------------
Tier 2 capital:
Qualifying debt 75,000 75,000 75,000
Qualifying allowance for loan losses 84,539 69,929 79,332
- - -------------------------------------------------------------------------------------------------------------
Total Tier 2 capital 159,539 144,929 154,332
- - -------------------------------------------------------------------------------------------------------------
Total capital $ 726,083 $ 681,996 $ 715,290
=============================================================================================================
Risk-adjusted assets $ 6,744,048 $5,565,784 $ 6,323,351
Quarterly average assets 9,664,049 8,503,210 9,338,303
- - -------------------------------------------------------------------------------------------------------------
RATIOS:
Tier 1 capital to risk-adjusted assets 8.40% 9.65% 8.87% 6.00%
Tier 2 capital to risk-adjusted assets 2.37 2.60 2.44 --
- - -------------------------------------------------------------------------------------------------------------
Total capital to risk-adjusted assets 10.77% 12.25% 11.31% 10.00%
=============================================================================================================
Leverage - Tier 1 capital to quarterly
average assets less disallowed
intangibles 5.90% 6.34% 6.05% 5.00%
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
* First Tennessee National Corporation **First Tennessee Bank National
Association Based on regulatory guidelines
<PAGE> 42
FIRST QUARTER REPORT GRAPHS
GRAPH TITLE: Cumulative Changes in Nonaccrual Loans and
Other Real Esate Since Year-end 1988 (Quarterly)
NARRATIVE DESCRIPTION: This is a line graph with the x-axis representing
quarterly periods from 1988 to first quarter 1994,
and the y-axis ranges from $0 to $210 million.
There are two lines: nonaccrual loans and OREO net
of charge-offs and adjustments and nonaccrual loans
and OREO. The nonaccrual loans and OREO net of
charge-offs and adjustments line begins at $0
at December 31, 1988, generally increases until it
reaches $59 million in the first quarter of 1991,
then decreases steadily to $(6) million in the
third quarter of 1993, and then rises to $11
million in the fourth quarter of 1993, and decreases
again to $8 million at March 31, 1994. The
nonaccrual loans and OREO line begins at $0 at
December 31, 1988, generally increases until it
reaches $144 million in the fourth quarter of 1991,
then decreases steadily to $127 million in the
third quarter of 1993, and then rises to $148
million in the first quarter of 1994. The area
between the two lines is shaded and represents the
impact to nonaccrual loans and OREO from net
charge-offs and adjustments.
DATA POINTS:
Nonaccrual Loans
and OREO
Net of Charge-
Offs and
Adjustments Nonaccrual Loans
(Millions of $) and OREO
12/31/88 0 0
1Q89 13 15
2Q89 45 49
3Q89 35 57
12/31/89 27 63
1Q90 37 77
2Q90 35 82
3Q90 35 91
12/31/90 56 123
1Q91 59 134
2Q91 50 137
3Q91 43 142
12/31/91 35 144
1Q92 32 144
2Q92 24 142
3Q92 20 142
12/31/92 7 134
1Q93 3 133
2Q93 0 133
3Q93 -6 127
12/31/93 11 149
1Q94 8 148
<PAGE> 43
FIRST QUARTER REPORT GRAPHS
NOTE: These graphs are used by management to monitor
classified assets and nonperforming assets
trends. They compare the level of classified assets
and nonperforming assets before and after
charge-offs and market adjustment.
REFERENCE: Allowance for Loan Losses and net Charge-Offs and
Nonperforming Assets Sections.
<PAGE> 44
FIRST QUARTER REPORT GRAPHS
GRAPH TITLE: Cumulative Changes in Classified Assets
Since Year-End 1988 (Quarterly)
NARRATIVE DESCRIPTION: This is a line graph with the x-axis representing
quarterly periods from 1988 to first quarter 1994,
and the y-axis ranges from $0 to $210
million. There are two lines: classified assets
net of charge-offs and adjustments and classified
assets. The classified assets net of charge-offs
and adjustments line begins at $0 at December 31,
1988, generally increases until it reaches $99
million in the third quarter of 1991, then
decreases steadily to $(6) million in the first
quarter of 1994. The classified assets
line begins at $0 at December 31, 1988,
generally increases until it reaches $202 million
in the third quarter of 1991, then decreases
steadily to $128 million in the third quarter of
1993, and then rises to $136 million in the
first quarter of 1994. The area between the two
lines is shaded and represents the impact to
nonaccrual loans and OREO from net charge-offs
and adjustments.
DATA POINTS:
Classified Assets
Net of Charge-
Offs and
Adjustments
(Millions of $) Classified Assets
12/31/88 0 0
1Q89 17 19
2Q89 59 67
3Q89 46 68
12/31/89 30 68
1Q90 74 115
2Q90 83 131
3Q90 83 141
12/31/90 80 154
1Q91 95 173
2Q91 95 186
3Q91 99 202
12/31/91 78 190
1Q92 73 189
2Q92 59 179
3Q92 51 175
12/31/92 24 151
1Q93 17 147
2Q93 -4 130
3Q93 -6 128
12/31/93 -5 134
1Q94 -6 136
<PAGE> 45
FIRST QUARTER REPORT GRAPHS
NOTE: These graphs are used by management to monitor
classified assets and nonperforming assets
trends. They compare the level of classified
assets and nonperforming assets before and after
charge-offs and market adjustments
REFERENCE: Allowance for Loan Losses and Net Charge-Offs and
Nonperforming Assets Sections
<PAGE> 46
Part II.
OTHER INFORMATION
Items 1 through 5.
As of the end of the first quarter, 1994, the answers to Items 1 through 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 first quarter of 1994.
<PAGE> 47
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: 5/16/94 By: Susan Schmidt Bies
----------------------------------
Susan Schmidt Bies
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer and
Chief Financial Officer)
<PAGE> 48
EXHIBIT INDEX
Exhibit No. Exhibit Description Page No.
- - ----------- ------------------- --------
11 Statement re Computation of Per Share Earnings Filed Herewith
<PAGE> 1
EXHIBIT 11
FIRST TENNESSEE NATIONAL CORPORATION
PRIMARY EARNINGS PER SHARE
AND FULLY DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------------------
Computation for Statements of Income: 1994 1993
------------------------------------
<S> <C> <C>
Per statements of income (Thousands):
Net income $ 36,630 $ 30,242
====================================
Per statements of income:
Weighted average shares outstanding 31,792,655 28,192,064
====================================
Primary earnings per share (a):
Net income $ 1.15 $ 1.07
====================================
Additional Primary computation
Adjustment to weighted average shares
outstanding:
Weighted average shares outstanding
per primary computation above 31,792,655 28,192,064
Add dilutive effect of outstanding
options (as determined by the
application of the treasury stock
method) 450,430 539,203
Weighted average shares outstanding, ------------------------------------
as adjusted 32,243,085 28,731,267
====================================
Primary earnings per share, as adjusted (b):
Net income $ 1.14 $ 1.05
====================================
Additional Fully Diluted Computation
Adjustment to weighted average share
outstanding:
Weighted average shares outstanding
per primary computation above 32,243,085 28,731,267
Additional dilutive effect of outstanding
options (as determined by the application
of the treasury stock method) 125 38,900
Weighted average shares outstanding, ------------------------------------
as adjusted 32,243,210 28,770,167
====================================
Fully diluted earnings per share, as adjusted (b):
Net income $ 1.14 $ 1.05
====================================
</TABLE>
(a) These figures agree with the related amounts in the statements of income.
(b) This calculation is submitted in accordance with Securities Exchange Act
of 1934 Release No. 9083 although not required by footnote 2 paragraph
14 of APB Opinion No. 15 because it results in dilution of less than
3%.
