<PAGE> 1
FORM 10-Q/A
Amendment No. 1
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
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
This amendment to Items 1 and 2 of Part I is the result of the
change in the method used to reflect the acquisitions that have
occurred this year and are accounted for as poolings of interest.
Previously, the acquisitions were recorded by restatement of beginning
retained earnings without restating the prior-period income
statements. The amendment reflects the financial position and results
of operations of all companies on a combined basis from the earliest
period presented. Items 1 and 2 of Part I are hereby restated, as
amended, in their entirety as follows:
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 to fair representation of the results
of the periods covered.
<PAGE> 3
CONSOLIDATED STATEMENTS OF CONDITION First Tennessee
National
Corporation
<TABLE>
<CAPTION>
March 31 December 31
------------------------ -------------
(Dollars in thousands)(Unaudited) 1994 1993 1993
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 601,905 $ 423,748 $ 618,214
Federal funds sold and securities purchased under agreements to resell 324,169 153,201 137,663
- - ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 926,074 576,949 755,877
- - ----------------------------------------------------------------------------------------------------------------------
Investment in bank time deposits 4,552 2,435 7,637
Trading securities inventory 526,018 251,140 178,663
Mortgage warehouse loans held for sale 733,045 221,225 1,099,686
Securities held for sale -- 94,338 53,035
Securities available for sale 1,365,478 -- --
Investment securities:
Mortgage-backed securities and collateralized
mortgage obligations -- 2,431,458 1,637,531
U.S. Treasury and other U.S. government agencies -- 410,277 377,491
States and municipalities -- 108,290 83,351
Other -- 129,136 87,674
- - ----------------------------------------------------------------------------------------------------------------------
Total investment securities (market value of $3,150,794
at March 31, 1993, and $2,228,565 at December 31, 1993) -- 3,079,161 2,186,047
- - ----------------------------------------------------------------------------------------------------------------------
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 2,166,042 2,520,955
Tax-exempt 74,905 91,957 78,271
- - ----------------------------------------------------------------------------------------------------------------------
Total commercial loans 2,578,347 2,257,999 2,599,226
Consumer 1,968,867 1,369,590 1,799,455
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 25,738
- - ----------------------------------------------------------------------------------------------------------------------
Total gross loans 5,597,709 4,677,417 5,424,192
Less: Unearned income 11,140 17,963 12,082
Allowance for loan losses 107,877 101,848 106,764
- - ----------------------------------------------------------------------------------------------------------------------
Total net loans 5,478,692 4,557,606 5,305,346
- - ----------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 135,992 114,561 134,792
Real estate acquired by foreclosure 31,577 22,567 31,650
Customers' acceptances 3,725 4,212 4,871
Intangible assets 167,403 115,852 174,095
Bond division receivables and other assets 616,464 457,225 369,320
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 10,654,824 $9,497,271 $10,301,019
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 1,758,560 $1,491,754 $ 1,914,132
Checking/Interest 537,663 517,374 542,462
Savings 709,582 542,494 534,211
Money market account 1,717,825 1,603,916 1,682,996
Certificates of deposit under $100,000 and other time 2,296,962 2,431,995 2,270,728
Certificates of deposits $100,000 and more 487,986 433,636 402,528
- - ----------------------------------------------------------------------------------------------------------------------
Total deposits 7,508,578 7,021,169 7,347,057
Federal funds purchased and securities sold under
agreements to repurchase 1,047,118 858,612 1,010,473
Commercial paper and other short-term borrowings 428,996 349,901 746,561
Acceptances outstanding 3,725 4,212 4,871
Bond division payables and other liabilities 859,002 527,441 412,105
Long-term debt 91,829 93,083 92,043
- - ----------------------------------------------------------------------------------------------------------------------
Total liabilities 9,939,248 8,854,418 9,613,110
- - ----------------------------------------------------------------------------------------------------------------------
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; 31,641,356
at March 31, 1993; and 31,745,521 at December 31, 1993) 79,567 79,103 79,364
Capital surplus 87,781 86,078 85,413
Undivided profits 548,222 481,112 525,507
Unrealized market adjustment on available for sale securities 3,811 -- --
Deferred compensation on restricted stock incentive plan (3,805) (3,440) (2,375)
- - ----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 715,576 642,853 687,909
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' $ 10,654,824 $9,497,271 $10,301,019
======================================================================================================================
</TABLE>
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME First Tennessee
National
Corporation
<TABLE>
<CAPTION>
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 $ 99,524
Interest on investment securities:
Taxable 29,362 46,823
Tax-exempt 1,224 1,833
Interest on trading securities inventory 2,626 2,213
Interest on other earning assets 1,642 1,057
- - ---------------------------------------------------------------------------------
Total interest income 156,794 151,450
- - ---------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Checking/Interest 2,233 2,534
Savings 3,173 3,802
Money market account 10,061 10,675
Certificates of deposit under $100,000
and other time 25,382 30,576
Certificates of deposit $100,000 and more 3,998 3,881
Interest on short-term borrowings 13,958 10,012
Interest on long-term debt 2,259 2,476
- - ---------------------------------------------------------------------------------
Total interest expense 61,064 63,956
- - ---------------------------------------------------------------------------------
NET INTEREST INCOME: 95,730 87,494
Provision for loan losses 5,671 9,247
- - ---------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 90,059 78,247
- - ---------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 33,714 13,524
Bond division 26,231 23,585
Service charges on deposit accounts 14,501 13,294
Bank card 6,644 6,377
Trust service 5,898 5,514
Equity securities gains 14,989 594
Investment securities gains (losses) (321) 364
Other 11,128 10,629
- - ---------------------------------------------------------------------------------
Total noninterest income 112,784 73,881
- - ---------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 202,843 152,128
- - ---------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives, and benefits 82,961 57,326
Operations services 8,057 6,885
Occupancy 6,897 5,646
Amortization of intangible assets 6,719 5,566
Communications and courier 6,575 4,626
Equipment rentals, depreciation, and maintenance 5,500 4,385
Deposit insurance premium 4,002 4,194
Other 26,764 18,299
- - ---------------------------------------------------------------------------------
Total noninterest expense 147,475 106,927
- - ---------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 55,368 45,201
Applicable income taxes 18,738 15,469
- - ---------------------------------------------------------------------------------
NET INCOME $ 36,630 $ 29,732
=================================================================================
NET INCOME PER COMMON SHARE $ 1.15 $ 0.94
- - ---------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 31,792,655 31,612,020
- - ---------------------------------------------------------------------------------
TAX EQUIVALENT ADJUSTMENT TO TOTAL INTEREST INCOME $ 1,152 $ 1,917
- - ---------------------------------------------------------------------------------
</TABLE>
<PAGE> 5
CONSOLIDATED First Tennessee
STATEMENTS National
OF CASH FLOWS Corporation
<TABLE>
<CAPTION>
Three Months Ended
March 31
(Dollars in thousands)(Unaudited) 1994 1993
- - --------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 36,630 $ 29,732
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 5,671 9,247
Depreciation and amortization of premises and equipment 4,576 3,833
Amortization of intangibles 6,719 5,566
Net amortization of premiums and accretion of discounts 4,020 6,206
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 (46)
Net gain on disposal of fixed assets (93) (1)
Net gain on disposal of branch -- (672)
Deferred income tax provision (benefit) 1,786 (1,893)
Net (increase) decrease in:
Trading securities inventory (347,355) (62,533)
Mortgage warehouse loans held for sale 366,641 (11,922)
Bond division receivables (221,784) (176,867)
Interest receivable (2,472) (2,848)
Other assets (28,822) (42,380)
Net increase (decrease) in:
Bond division payables 438,846 174,371
Interest payable 3,567 1,221
Other liabilities (42,369) 25,683
- - --------------------------------------------------------------------------------
Total adjustments 174,677 (73,904)
- - --------------------------------------------------------------------------------
Net cash provided by operating activities 211,307 (44,172)
- - --------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of:
Investment securities -- 313,757
Held to maturity securities 259,765 --
Available for sale securities 61,864 --
Proceeds from sale of:
Debt securities -- 20,739
Equity securities -- 2,271
Available for sale securities 164,065 --
Premises and equipment 349 1
Payments for purchase of:
Debt securities -- (387,621)
Equity securites -- (1,488)
Held to maturity securities (105,068) --
Available for sale securities (119,640) --
Premises and equipment (6,714) (4,464)
Net increase in loans (178,883) (8,770)
Decrease (increase) in investment in bank time deposits 3,085 (253)
Branch sale, including cash and cash equivalents sold -- (18,339)
- - --------------------------------------------------------------------------------
Net cash used by investing activities 78,823 (84,167)
- - --------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 467 677
Payments for:
Capital lease obligations (37) (37)
Long-term debt (237) (36,236)
Cash dividends (127) (8,769)
Equity distributions related to acquisitions (600) --
Stock repurchase -- (20)
Net increase (decrease) in:
Deposits 161,521 (72,909)
Short-term borrowings (280,920) 21,130
- - --------------------------------------------------------------------------------
Net cash used by financing activities (119,933) (96,164)
- - --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents 170,197 (224,503)
- - --------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 755,877 801,452
- - --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 926,074 $ 576,949
================================================================================
Total interest paid $ 54,352 $ 63,279
Total income taxes paid 8,305 1,867
</TABLE>
<PAGE> 6
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> 7
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. (HCMC) 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 Capital 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
equity capital of approximately $23.7 million.
The consolidated financial statements of First Tennessee give effect
to these mergers which have been accounted for as poolings of interests.
Accordingly, the accounts of the acquired companies have been combined with
those of First Tennessee for all periods presented to reflect the results of
these companies on a combined basis for all periods presented, except for
dividends. Certain reclassifications of the historical results of these
companies have been made to conform to the current presentation.
The following presents on a combined basis certain financial data
pertaining to the acquisitions completed in the first quarter of 1994:
<TABLE>
<CAPTION>
(Dollars in thousands, First
except per share data) Tennessee SNMC HCMC CBT Combined
- - ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS
ENDED MARCH 31, 1993
Total revenue* $ 146,636 $ 10,770 $ 946 $ 3,023 $ 161,375
Net income 30,242 (1,386) 69 807 29,732
Net income per share:
Primary 1.07 (15.40) 691.32 8.07 0.94
Fully diluted 1.05 (15.40) 691.32 8.07 0.92
- - ----------------------------------------------------------------------------------
*Total revenue is net interest income and noninterest income
</TABLE>
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> 8
NOTE 3 -- OTHER INCOME AND OTHER EXPENSE
Following is detail concerning "Other income" and "Other expense" as presented
in the Consolidated Statements of Income:
Three Months Ended
March 31
------------------
(Dollars in thousands) 1994 1993
- - ---------------------------------------------------------------
OTHER INCOME:
Check clearing fees $ 3,966 $ 3,503
Other service charges 2,089 2,364
All other 5,073 4,762
- - ---------------------------------------------------------------
Total $11,128 $10,629
===============================================================
OTHER EXPENSE:
Legal and professional fees $ 4,718 $ 2,185
Advertising and public relations 3,083 1,894
Supplies 2,426 1,752
Fed service fees 1,997 1,877
Travel and entertainment 1,741 1,372
Foreclosed real estate 694 550
All other 12,105 8,669
- - ---------------------------------------------------------------
Total $26,764 $18,299
===============================================================
<PAGE> 9
NOTE 4 -- INTANGIBLE ASSETS
Following is a summary of intangible assets (net of accumulated amortization)
included in the Consolidated Statements of Condition:
March 31 December 31
------------------ -----------
(Dollars in thousands) 1994 1993 1993
- - -------------------------------------------------------------------------
Purchased mortgage servicing rights $ 77,326 $ 62,736 $ 82,625
Goodwill 61,992 22,099 62,565
Premium on purchased deposits and assets 28,085 31,017 28,905
- - -------------------------------------------------------------------------
Total intangible assets $167,403 $115,852 $174,095
=========================================================================
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> 10
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> 11
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> 12
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
This amendment to Items 1 and 2 of Part I is the result of the change
in the method used to reflect the acquisitions that have occurred this year and
are accounted for as poolings of interest. Previously, the acquisitions were
recorded by restatement of beginning retained earnings without restating the
prior-period income statements. The amendment reflects the financial position
and results of operations of all companies on a combined basis from the
earliest period presented. Items 1 and 2 of Part I are hereby restated, as
amended, in their entirety as follows:
CONSOLIDATED FINANCIAL REVIEW
On January 4, 1994, SNMC Management Corporation (SNMC) was acquired.
Sunbelt National Mortgage Corporation (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 $227.1 million in assets,
$200.3 million in deposits, and $23.7 million in equity capital at March 31,
1994.
These acquisitions were accounted for as poolings-of-interest.
Accordingly, all financial data for the current and prior periods have been
included to reflect the financial position and the results of operations of all
companies on a combined basis from the earliest period presented. Maryland
National Mortgage Corporation (Maryland) was acquired on October 1, 1993, and
was accounted for as a purchase. Therefore, results of Maryland operations
prior to October 1, 1993, are not reflected in the consolidated statements.
Net income for the first quarter of 1994 was $1.15 per share, an
increase of 22 percent from the $.94 per share for the first quarter of 1993.
Net income for the first quarter of 1994 totaled $36.6 million compared to
$29.7 million for the same period last year, an increase of 23 percent. The
improvement in earnings was primarily attributable to the strong growth of
noninterest income from the mortgage banking expansion and a record quarter of
bond division income.
Return on equity (ROE) was 20.88 percent for the quarter ended March
31, 1994, compared to 19.07 percent 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 1.33 percent 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.
EARNINGS ANALYSIS
NET INTEREST INCOME
Net interest income (NII) provided 46 percent of net revenues for
First Tennessee in the first quarter. NII 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, and earning assets, including loans,
have been expressed as averages, net of unearned income. 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
$89.4 million for the same period last year, an increase of 8 percent. This
increase can be attributed to an increase in earning assets as well as a change
in the mix of earning assets.
Earning assets increased 9 percent for the quarter compared to the
same period last year. Total loans grew 31 percent during this same time
period. Loans, the largest component of earning assets, represented 71 percent
of earning assets for the first quarter of 1994, up significantly from 59
percent for the comparable period last year.
Commercial loans, the single largest loan category, comprised 29
percent of earning assets for the quarter ended March 31, 1994. The balance
of $2.6 billion represented a 16 percent increase from the same period in 1993,
and was primarily due to
<PAGE> 13
the strong economic recovery realized over the past year. Consumer loans
increased 39 percent from first quarter 1993 due to market growth through Gulf
Pacific Mortgage, a division of FTBNA; enhanced promotional campaigns to
attract refinancing activity of consumer real estate; and expanded
cross-selling of loan products to current deposit customers.
Mortgage loans, which includes 1-4 family residential mortgage loans
originated by First Tennessee, increased from $774 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 Maryland, which were not
included in previous year s numbers, and from the volume of refinancings
in the first quarter of 1994.
As a result of strong loan growth and the acquisitions of the mortgage
companies, total investment securities dropped 28 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 37 percent for the same period last year.
A 6 percent increase in average core deposits supported much of the
growth in earning assets. 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 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 39 percent decrease from the $9.2
million 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 46 percent for the first quarter of 1993. Excluding securities
transactions in both periods, noninterest income grew 35 percent relative to
the same period last year. Mortgage banking noninterest income grew 149
percent 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 in the mortgage banking operations. 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 9 percent from $13.3 million in first quarter
1993 to $14.5 million in first quarter 1994. Trust income increased 7 percent
for the same time period from $5.5 million to $5.9 million, reflecting overall
business growth. If securities transactions and Maryland noninterest income,
which is not included in the prior year results, are excluded, noninterest
income grew 17 percent, and mortgage banking noninterest income increased 58
percent when comparing first quarter 1994 to first quarter 1993.
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
portfolio incurred in the normal course of business. The remainder reflected
the gain associated with the Hickory Venture Capital transaction.
NONINTEREST EXPENSE
Noninterest operating expense was $147.5 million compared with $106.9
million in the first quarter of 1993. Excluding expenses related to Maryland,
onetime 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 12 percent in first quarter 1994 compared
with first quarter 1993.
An increase of 45 percent in employee compensation, incentives, and
benefits, the single largest category of noninterest expenses, was the major
contributor to expense growth. Approximately 38 percent of the increase was
attributable to Maryland, and approximately 3 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 9 percent to personnel expense growth. Excluding
incentives related to the Hickory Venture Capital transaction, incremental
expenses associated with Maryland, and the impact of SFAS No. 112, employee
compensation, incentives, and benefits expense rose 19 percent in the first
quarter of 1994 compared to the first quarter of
<PAGE> 14
1993. The increase is primarily the result of a higher number of employees,
regular salary increases, and higher commissions and incentives expense in
mortgage banking. Other noninterest expense increased 46 percent from first
quarter 1993. Legal and professional fees primarily related to recent
acquisitions led the increase, rising 116 percent. Advertising and public
relations increased 63 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
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 decrease
from the 34.2 percent 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, reflecting tax operating losses realized during 1992 and 1993.
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 executive-level management committee, meets regularly to
review both the interest rate sensitivity and liquidity positions 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 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. 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 forwards totaled $1.1 billion at March 31, 1994. The
purpose of mortgage banking forwards is to hedge the interest rate risk from
the time the mortgage loan is committed until it is funded and securitized.
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 potential 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
<PAGE> 15
core deposits and other interest-bearing funds; accessibility to 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 $1.6 billion at March 31, 1993 to $2.1 billion
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 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 and a minimum ratio
of average equity to average net loans equal to or above 10.50 percent. Both
of these goals are currently being met. Average equity to average assets was
7.07 percent in first quarter of 1994, compared to 7.00 percent in the first
quarter of 1993. During the first quarter of 1994, average equity to average
net loans was 11.47 percent compared to 13.35 percent for the same period last
year.
The Federal Reserve, the Office of the Comptroller of the Currency,
and the Federal Deposit Insurance Corporation (FDIC) 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.
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 shareholders' equity (excluding SFAS No. 115 adjustment)
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 well-capitalized standard is
another capital goal included in First Tennesse's capital policy.
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. As acquisitions are completed,
we transition them into this centralized credit process as soon as practical.
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.
<PAGE> 16
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.
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 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 $527.1 million at December 31, 1993. Construction and development
loans increased to $93.1 million at the end of the first quarter of 1994 from
$78.8 million at December 31, 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.
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.
<PAGE> 17
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 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.
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.
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 $101.8
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 2.09
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 30 percent to $4.6 million at March 31,
1994, from $6.5 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 .54 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.
NONPERFORMING ASSETS
Nonperforming assets, consisting of nonaccrual and restructured loans,
foreclosed real estate and other assets, increased 7 percent to $55.1 million
at March 31, 1994. This compares to $51.3 million reported at March 31, 1993.
Excluding Maryland, nonperforming assets would have been $33.9 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 49 percent if
Maryland 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 .56 percent for the same period in 1993. Excluding Maryland, this ratio
would have been .22 percent. There is $31.6 million of foreclosed real estate
included in nonperforming assets as of March 31, 1994. Excluding Maryland,
foreclosed real estate would have been $16.8 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> 18
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, compared to the $22.8 million 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 36 percent to $66.2 million
compared to $103.7 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.
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
unrealized holding gains of approximately $3.8 million net of $2.4 million of
deferred income taxes.
<PAGE> 19
REGULATORY CAPITAL
<TABLE>
<CAPTION>
First Tennessee* FTBNA**
--------------- -------- Well-
March 31 March 31 Capitalized
--------------- -------- Regulatory
(Dollars in thousands) 1994 1994 Minimums
- - -------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAPITAL:
Tier 1 capital:
Shareholders' common equity $ 715,576 $ 634,969
Less disallowed intangibles 62,963 66,128
Less unrealized holding gains on
available for sale securities 3,811 2,297
- - -------------------------------------------------------------------------------------
Total Tier 1 capital 648,802 566,544
- - -------------------------------------------------------------------------------------
Tier 2 capital:
Qualifying debt 82,521 75,000
Qualifying allowance for loan losses 87,698 84,539
- - -------------------------------------------------------------------------------------
Total Tier 2 capital 170,219 159,539
- - -------------------------------------------------------------------------------------
Total capital $ 819,021 $ 726,083
=====================================================================================
Risk-adjusted assets $ 6,995,639 $6,744,048
Quarterly average assets 10,066,588 9,664,049
- - -------------------------------------------------------------------------------------
RATIOS:
Tier 1 capital to risk-adjusted assets 9.27 % 8.40 % 6.00 %
Tier 2 capital to risk-adjusted assets 2.44 2.37 --
- - -------------------------------------------------------------------------------------
Total capital to risk-adjusted assets 11.71 % 10.77 % 10.00 %
=====================================================================================
Leverage - Tier 1 capital to quarterly
average assets less disallowed
intangibles 6.49 % 5.90 % 5.00 %
- - -------------------------------------------------------------------------------------
* First Tennessee National Corporation **First Tennessee Bank National Association
Based on regulatory guidelines
</TABLE>
<PAGE> 20
LOANS AND FORECLOSED REAL ESTATE, PERIOD-END AMOUNTS
<TABLE>
<CAPTION>
March 31, 1994
-----------------------------------------------------------------
Construction Allowance
and Commercial For Loan
(Dollars in millions) Commercial Development Real Estate Total Losses
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Internal grades:
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 loans, net of unearned income $ 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
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Internal grades:
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 221 - 1,100 -
Mortgage banking nonaccrual loans - - 9 1
- - ----------------------------------------------------------------------------------------------
Total retail loans 2,484 36 3,765 37
- - ----------------------------------------------------------------------------------------------
Cleveland Bank & Trust Company 137 3 144 3
Other/unfunded commitments 14 3 31 3
General reserve - 10 - 12
- - ----------------------------------------------------------------------------------------------
Total loans, net of unearned income $4,881 $ 102 $ 6,512 $ 107
==============================================================================================
Foreclosed real estate:
Foreclosed property $ 18 $ 18
Foreclosed property - mortgage - 14
Insubstance foreclosure 4 -
- - ----------------------------------------------------------------------------------------------
Total foreclosed real estate $ 22 $ 32
==============================================================================================
</TABLE>
<PAGE> 21
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> 22
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Year-to-Date (3/31)
(Dollars in thousands) 1994 1993
- - -----------------------------------------------------------
Allowance for loan losses:
Beginning balance $ 106,764 $ 99,077
Provision for loan losses 5,671 9,247
Net charge-offs (4,558) (6,476)
- - -----------------------------------------------------------
Ending balance $ 107,877 $ 101,848
===========================================================
RATIOS:
Allowance to loans (net of
unearned income)* 1.71 % 2.09 %
Net charge-offs to average loans
(net of unearned income)* 0.29 0.54
Net charge-offs to allowance 16.9 25.4
- - -----------------------------------------------------------
*Includes loans held for sale reported in "Mortgage warehouse
loans held for sale" on the Consolidated Statements of
Condition
<PAGE> 23
NONPERFORMING ASSETS ACTIVITY
<TABLE>
<CAPTION>
Quarters Ended
(Dollars in millions) 3/31/94 12/31/93 9/30/93 6/30/93 3/31/93
- - ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 59.3 $ 41.5 $ 47.2 $ 51.3 $ 54.7
New nonperformers 7.0 4.6 2.1 11.4 5.9
Acquisitions -- 22.8 -- -- --
Return to accrual (2.0) -- -- (3.4) --
Payments (6.8) (4.0) (7.2) (7.8) (6.5)
Charge-offs (2.4) (5.6) (.6) (4.2) (2.8)
Market writedowns -- -- -- (.1) --
- - ---------------------------------------------------------------------------------
Ending balance $ 55.1 $ 59.3 $ 41.5 $ 47.2 $ 51.3
=================================================================================
</TABLE>
<PAGE> 24
NONPERFORMING ASSETS
March 31 December 31
-------------------- -----------
(Dollars in thousands) 1994 1993 1993
- - -------------------------------------------------------------------------------
AMOUNTS:
Nonaccrual loans $ 20,001 $ 26,409 $ 25,738
Restructured loans 395 1,040 579
- - -------------------------------------------------------------------------------
Total nonperforming loans 20,396 27,449 26,317
Foreclosed real estate 31,577 22,567 31,650
Other assets 3,091 1,285 1,285
- - -------------------------------------------------------------------------------
Total nonperforming assets $ 55,064 $ 51,301 $ 59,252
===============================================================================
Past due loans:*
Non-government guaranteed $ 12,033 $ 13,221 $ 12,817
Government guaranteed 10,696 9,574 11,560
- - -------------------------------------------------------------------------------
RATIOS:
Nonperforming loans to total loans
(net of unearned income)** .32% .56% .40%
Nonperforming assets to total loans
(net of unearned income) plus foreclosed
real estate and other assets** .87 1.05 .91
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 1.32 1.10
- - -------------------------------------------------------------------------------
* 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> 25
<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> 26
<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> 27
GRAPH TITLE: Cumulative Changes in Nonaccrual Loans and
Other Real Estate Since Year-End 1988
(Quarterly)
NARRATIVE DESCRIPTION: This is a line graph with the x-axis
representing quarterly periods from 1988 to
second quarter1994 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 Nonaccrual
(Millions of Charge-Offs Loans and
$) and OREO
Adjustments
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
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. The data is as originally
reported and includes acquisitions from the
date of the acquisition.
REFERENCE: Credit Risk Management and Asset Quality
Sections
<PAGE> 28
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
second 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
(Millions of Charge-Offs Classified
$) and Assets
Adjustments
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
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. The data is as originally
reported and includes acquisitions from the
date of the acquisition.
REFERENCE: Credit Risk Management and Asset Quality
Sections
<PAGE> 29
Part II.
OTHER INFORMATION
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> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to its quarterly report on Form 10-Q
for the quarter ended March 31, 1994, to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST TENNESSEE NATIONAL CORPORATION
(Registrant)
DATE: 8/19/94 By: James F. Keen
----------- ----------------------------------
James F. Keen
Senior Vice President and Controller
(Duly Authorized Officer and
Chief Financial Officer)
<PAGE> 31
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 $ 29,732
=============================
Per statements of income:
Weighted average shares outstanding 31,792,655 31,612,020
=============================
Primary earnings per share (a):
Net income $ 1.15 $ .94
=============================
Additional Primary computation
- - ----------------------------------------------
Adjustment to weighted average shares
outstanding:
Weighted average shares outstanding
per primary computation above 31,792,655 31,612,020
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 32,151,223
=============================
Primary earnings per share, as adjusted (b):
Net income $ 1.14 $ .92
=============================
Additional Fully Diluted Computation
- - ----------------------------------------------
Adjustment to weighted average share
outstanding:
Weighted average shares outstanding
per primary computation above 32,243,085 32,151,223
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 32,190,123
=============================
Fully diluted earnings per share, as adjusted (b):
Net income $ 1.14 $ .92
=============================
</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%.
