<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 September 30, 1996
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period fr om to
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Commission file number 0-4491
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FIRST TENNESSEE NATIONAL CORPORATION
----------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-0803242
- ---------------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
165 Madison Avenue, Memphis, Tennessee 38103
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(901) 523-4027
----------------------------------------------
(Registrant's telephone number, including area code)
None
---------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
----- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $1.25 par value 67,165,630
- ----------------------------- ----------------------------
Class Outstanding at October 31, 1996
<PAGE> 2
FIRST TENNESSEE NATIONAL CORPORATION
INDEX
Part I. Financial Information
Part II. Other Information
Signatures
Exhibit Index
Exhibit 11
Exhibit 27
<PAGE> 3
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
The Consolidated Statements of Condition
The Consolidated Statements of Income
The Statements of Cash Flows
The Notes to Consolidated Financial Statements
This financial information reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position and results of operations for the interim periods presented.
<PAGE> 4
CONSOLIDATED STATEMENTS OF CONDITION First Tennessee National Corporation
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30 December 31
----------------------- ---------------
(Dollars in thousands)(Unaudited) 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 778,719 $ 709,133 $ 710,870
Federal funds sold and securities purchased
under agreements to resell 168,253 102,219 64,978
- ---------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 946,972 811,352 775,848
- ---------------------------------------------------------------------------------------------------------
Investment in bank time deposits 936 1,033 2,119
Broker/dealer securities inventory 179,169 224,917 182,655
Mortgage loans held for sale 737,037 714,856 789,183
Securities available for sale 2,154,602 1,012,534 2,036,668
Securities held to maturity (market value of $68,736
at September 30, 1996; $969,651 at September 30, 1995;
and $75,750 at December 31, 1995) 68,357 976,923 74,731
Loans, net of unearned income 7,630,034 7,022,704 7,333,283
Less: Allowance for loan losses 117,717 110,882 112,567
- ---------------------------------------------------------------------------------------------------------
Total net loans 7,512,317 6,911,822 7,220,716
- ---------------------------------------------------------------------------------------------------------
Premises and equipment, net 184,903 168,094 177,400
Real estate acquired by foreclosure 7,059 13,714 11,794
Mortgage servicing rights 251,156 121,873 149,220
Intangible assets 121,928 103,389 128,985
Bond division receivables and other assets 636,909 520,561 527,563
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 12,801,345 $11,581,068 $12,076,882
=========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 1,893,163 $ 1,809,031 $ 1,983,994
Checking/Interest 140,086 482,891 103,860
Savings 675,264 578,496 592,320
Money market account 2,596,715 1,906,330 2,499,817
Certificates of deposit under $100,000 and other time 2,904,217 2,853,894 2,882,094
Certificates of deposit $100,000 and more 862,643 443,641 520,112
- ---------------------------------------------------------------------------------------------------------
Total deposits 9,072,088 8,074,283 8,582,197
- ---------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under
agreements to repurchase 1,589,888 1,403,090 1,674,225
Commercial paper and other short-term borrowings 322,297 477,802 86,520
Bond division payables and other liabilities 636,038 600,156 600,699
Term borrowings 255,998 201,057 260,017
- ---------------------------------------------------------------------------------------------------------
Total liabilities 11,876,309 10,756,388 11,203,658
- ---------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock - no par value (5,000,000 shares authorized,
but unissued) - - -
Common stock - $1.25 par value (shares authorized -200,000,000;
shares issued - 67,143,632 at September 30, 1996; 66,564,568
at September 30, 1995; and 67,178,236 at December 31, 1995) 83,929 83,206 83,973
Capital surplus 60,802 53,009 63,610
Undivided profits 790,005 688,742 716,861
Unrealized market adjustment on available for sale securities (5,764) 1,797 10,582
Deferred compensation on restricted stock incentive plan (3,936) (2,074) (1,802)
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity 925,036 824,680 873,224
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,801,345 $11,581,068 $12,076,882
=========================================================================================================
</TABLE>
<PAGE> 5
CONSOLIDATED STATEMENTS OF INCOME First Tennessee National Corporation
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- -----------------------
(Dollars in thousands except per share data)(Unaudited) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 164,075 $ 156,049 $485,878 $ 449,114
Interest on investment securities:
Taxable 34,176 32,318 100,499 99,155
Tax-exempt 1,241 1,024 3,910 3,264
Interest on mortgage loans held for sale 22,034 18,105 63,518 36,880
Interest on broker/dealer securities inventory 2,483 2,627 11,268 9,601
Interest on other earning assets 1,768 1,408 4,330 7,653
- -------------------------------------------------------------------------------------------------------------------
Total interest income 225,777 211,531 669,403 605,667
- -------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Checking/Interest 609 1,759 1,928 5,968
Savings 2,336 2,482 7,250 8,149
Money market account 20,964 21,654 68,521 64,801
Certificates of deposit under $100,000 and other time 41,888 43,481 124,630 124,735
Certificates of deposit $100,000 and more 12,042 7,128 34,659 21,606
Interest on short-term borrowings 27,617 32,054 83,241 81,217
Interest on term borrowings 5,272 4,366 15,793 12,913
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 110,728 112,924 336,022 319,389
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 115,049 98,607 333,381 286,278
Provision for loan losses 8,853 5,921 24,445 13,285
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 106,196 92,686 308,936 272,993
- -------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 71,495 55,276 190,516 144,941
Bond division 16,951 20,341 62,217 61,362
Deposit transactions and cash management 20,141 18,644 57,436 55,525
Cardholder and merchant processing 10,860 9,345 30,098 25,551
Trust services 9,462 8,562 27,154 27,097
Equity securities gains/(losses) 49 1,441 539 1,533
Debt securities gains/(losses) (5) (1,416) (185) (1,021)
All other 13,466 13,154 40,941 37,559
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income 142,419 125,347 408,716 352,547
- -------------------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 248,615 218,033 717,652 625,540
- -------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives, and benefits 94,005 86,889 286,009 247,850
Operations services 11,706 9,479 32,783 27,587
Occupancy 10,129 9,264 29,286 27,053
Communications and courier 8,097 7,694 24,883 22,184
Equipment rentals, depreciation, and maintenance 8,488 7,613 25,126 23,226
Amortization of mortgage servicing rights 7,307 3,888 21,206 9,657
Advertising and public relations 3,469 3,255 12,927 10,145
Legal and professional fees 2,924 1,904 8,786 9,494
Amortization of intangible assets 2,412 1,980 7,128 5,717
Deposit insurance premium 4,259 43 5,142 8,794
All other 22,116 17,993 65,219 49,963
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense 174,912 150,002 518,495 441,670
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 73,703 68,031 199,157 183,870
Applicable income taxes 26,906 24,201 72,572 64,680
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 46,797 $ 43,830 $ 126,585 $ 119,190
===================================================================================================================
NET INCOME PER COMMON SHARE $ .69 $ .66 $ 1.88 $ 1.76
- -------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 67,144,391 66,930,118 67,223,305 67,871,964
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS First Tennessee National Corporation
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30
-------------------------------
(Dollars in thousands)(Unaudited) 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 126,585 $ 119,190
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Provision for loan losses 24,445 13,285
Provision for deferred income tax 39,465 22,809
Depreciation and amortization of premises and equipment 21,381 18,085
Amortization of mortgage servicing rights 21,206 9,657
Amortization of intangibles 7,128 5,717
Net amortization and accretion (3,834) 14,736
Market value adjustment on foreclosed property 3,029 2,700
Equity securities gains (539) (1,533)
Debt securities losses 185 1,021
Net (gain)/loss on disposal of fixed assets (43) 1,132
Net increase in:
Broker/dealer securities inventory 3,486 (54,886)
Mortgage loans held for sale 52,146 (199,449)
Bond division receivables (66,367) (60,502)
Interest receivable (5,586) (3,414)
Other assets (152,393) (193,215)
Net increase/(decrease) in:
Bond division payables 58,802 84,872
Interest payable 2,196 16,553
Other liabilities (51,685) 124,782
- -----------------------------------------------------------------------------------------------
Total adjustments (46,978) (197,650)
- -----------------------------------------------------------------------------------------------
Net cash provided/(used) by operating activities 79,607 (78,460)
- -----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of:
Held to maturity securities 7,766 71,001
Available for sale securities 316,193 124,016
Proceeds from sale of:
Available for sale securities 381,195 226,897
Premises and equipment 941 2,563
Payments for purchase of:
Held to maturity securities (1,463) (29,587)
Available for sale securities (840,550) (124,842)
Premises and equipment (28,705) (28,185)
Net increase in loans (312,043) (490,611)
Decrease in investment in bank time deposits 1,183 1,501
Acquisitions, net of cash and cash equivalents acquired 400 12,691
- -----------------------------------------------------------------------------------------------
Net cash used by investing activities (475,083) (234,556)
- -----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from:
Exercise of stock options 3,948 3,682
Issuance of term borrowings - 90,000
Payments for:
Capital lease obligations (176) (110)
Term borrowings (4,149) (2,781)
Stock repurchase (14,093) (63,296)
Cash dividends (53,517) (47,048)
Equity distributions related to acquisitions - (20)
Net increase in:
Deposits 483,147 95,136
Short-term borrowings 151,440 70,853
- -----------------------------------------------------------------------------------------------
Net cash provided by financing activities 566,600 146,416
- -----------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 171,124 (166,600)
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 775,848 977,952
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 946,972 $ 811,352
===============================================================================================
Total interest paid $ 326,812 $ 302,132
Total income taxes paid 33,107 33,474
</TABLE>
<PAGE> 7
NOTE 1 - FINANCIAL INFORMATION
The unaudited interim consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. In the opinion of
management, all necessary adjustments have been made for a fair presentation of
financial position and results of operations for the periods presented. The
operating results for the three month and nine month periods ended September 30,
1996, are not necessarily indicative of the results that may be expected going
forward. For further information, refer to the audited consolidated financial
statements and footnotes included in the 1995 Annual Report to shareholders.
<PAGE> 8
NOTE 2 -- LOANS
The composition of the loan portfolio at September 30 is detailed below:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $3,465,575 $3,167,155
Consumer 2,657,539 2,434,438
Permanent mortgage 653,205 678,789
Credit card receivables 537,034 497,794
Real estate construction 298,074 227,889
Nonaccrual 18,607 16,639
- ------------------------------------------------------------------------------------------
Loans, net of unearned income 7,630,034 7,022,704
Allowance for loan losses 117,717 110,882
- ------------------------------------------------------------------------------------------
Total net loans $7,512,317 $6,911,822
==========================================================================================
</TABLE>
The following table presents information concerning nonperforming loans
at September 30:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans $11,777 $ 9,167
Other nonaccrual loans 6,830 7,472
- ------------------------------------------------------------------------------------------
Total nonperforming loans $18,607 $16,639
==========================================================================================
</TABLE>
Nonperforming loans consist of impaired loans, other nonaccrual loans, and
certain restructured loans. An impaired loan is a loan that management
believes the contractual amount due probably will not be collected. Impaired
loans are generally carried on a nonaccrual status. Nonaccrual loans are loans
on which interest accruals have been discontinued due to the borrower's
financial difficulties. Management may elect to continue the accrual of
interest when the estimated net realizable value of collateral is sufficient to
recover the principal balance and accrued interest.
Generally, interest payments received on impaired loans are applied to
principal. Once all principal has been received, additional payments are
recognized as interest income on a cash basis. Total restructured impaired
loans at September 30, 1996 and 1995, were $279,000 and $365,000, respectively.
The following table presents information concerning impaired loans:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- -----------------------
(Dollars in thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest on impaired loans $ 91 $ 373 $ 475 $ 1,303
Average balance on impaired loans 10,723 8,777 9,289 10,117
- ------------------------------------------------------------------------------------------
</TABLE>
An allowance for loan losses is maintained for all impaired loans.
Activity in the allowance for loan losses related to non-impaired loans,
impaired loans, and for the total allowance for the nine months ended
September 30, 1996 and 1995, is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Non-impaired Impaired Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1995 $109,859 $ - $109,859
Transfer of allowance (2,542) 2,542 -
Allowance from acquisitions 1,028 - 1,028
Provision for loan losses 9,294 3,991 13,285
Charge-offs 21,572 3,126 24,698
Less loan recoveries 11,339 69 11,408
- ------------------------------------------------------------------------------------------
Net charge-offs/(recoveries) 10,233 3,057 13,290
- ------------------------------------------------------------------------------------------
Balance at September 30, 1995 $107,406 $3,476 $110,882
==========================================================================================
Balance at January 1, 1996 $109,051 $3,516 $112,567
Provision for loan losses 24,111 334 24,445
Charge-offs 27,935 816 28,751
Less loan recoveries 9,099 357 9,456
- ------------------------------------------------------------------------------------------
Net charge-offs/(recoveries) 18,836 459 19,295
- ------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996 $114,326 $3,391 $117,717
==========================================================================================
</TABLE>
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CONSOLIDATED FINANCIAL REVIEW
The following is a discussion and analysis of the financial condition
and results of operations of First Tennessee National Corporation (First
Tennessee) for the three month and nine month periods ended September 30, 1996,
compared to the three month and nine month periods ended September 30, 1995.
First Tennessee is made up of the retail/commercial bank and six specialty
lines of business: mortgage banking, the bond division, credit card, trust
services, First Express (nationwide check clearing) and transaction processing.
To assist the reader in obtaining a better understanding of First Tennessee and
its performance, this discussion should be read in conjunction with First
Tennessee's unaudited consolidated financial statements and accompanying notes
appearing in this report. Additional information including the 1995 financial
statements, notes and management's discussion is provided in the 1995 annual
report.
THIRD QUARTER OVERVIEW
First Tennessee reported record earnings of $.69 per share, up 5
percent over last year's third quarter earnings per share, and net income of
$46.8 million, an increase of 7 percent from the previous year.
On September 30, 1996, Federal legislation was enacted which required
all banks to help bail out the Savings & Loan industry. This action included
the assessment of a one-time fee to banks that own previously acquired thrift
deposits of $.526 per $100 of thrift deposits they held at March 31, 1995. The
pre-tax cost to First Tennessee of the one-time Savings Association Insurance
Fund (SAIF) assessment was $3.8 million in the third quarter of 1996.
Excluding the SAIF assessment, First Tennessee would have reported
earnings per share of $.73, up 11 percent from $.66 in 1995, and net income of
$49.1 million, up 12 percent from the previous year.
INCOME AND PROFITABILITY RATIOS FOR THE THIRD QUARTER TABLE
<TABLE>
<CAPTION>
1996
-----------------------------
One-time SAIF Assessment:
-----------------------------
Included Excluded 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (millions) $46.8 $49.1 $43.8
Earnings per share $ .69 $ .73 $ .66
Return on average assets 1.47% 1.55% 1.50%
Return on average equity 20.71% 21.75% 21.32%
- ---------------------------------------------------------------------------------
</TABLE>
At September 30, 1996, total assets were $12.8 billion and
shareholders' equity was $925.0 million.
INCOME STATEMENT/BALANCE SHEET DISCUSSION
NONINTEREST INCOME
Noninterest income, also called fee income, grew 14 percent, or $17.1
million, from the third quarter of 1995. Noninterest income contributed 55
percent to total revenue during the third quarter of 1996. The growth in fee
income came largely from mortgage banking.
Mortgage banking fee income increased 29 percent, or $16.2 million,
from the year-ago quarter. This growth was primarily from increased servicing
fees and income from mortgage loans sold into the secondary market. Mortgage
servicing income increased $6.3 million from the third quarter of 1995 as the
servicing portfolio grew $6.3 billion - from $15.4 billion at September 30,
1995, to $21.7 billion at September 30, 1996. Origination volume was
essentially flat for the third quarters of 1995 and 1996 with approximately
$2.4 billion of mortgage loans being originated in each quarter. Refinance
activity accounted for approximately 19 percent of total originations in the
third quarter of 1996 compared with 23 percent for the third quarter of 1995.
Approximately $350 million more loans were sold in the third quarter of 1996
compared with the same period in 1995. This larger volume of loans sold into
the secondary market was the major reason for the $5.3 million increase from
gains on the sale of loans.
Bond division fee income decreased 17 percent, or $3.4 million, from
the previous year's quarter. Community banks, the bond division's primary
customer base, experienced an increase in loan volume thus reducing their
investment security demands. Additionally, expectations of future interest
rate increases caused many of these customers to delay purchasing decisions
and invest in shorter maturity securities.
<PAGE> 10
Total securities bought and sold by the bond division was relatively flat for
the third quarters of 1995 and 1996 at approximately $43.6 billion each
quarter.
The credit card operations of cardholder and merchant processing
increased 16 percent, or $1.5 million, resulting from increased volume and the
expansion of new customer bases and relationships. Higher transaction volume
led to the 8 percent, or $1.5 million, increase in deposit transactions and
cash management. Trust services noninterest income increased 11 percent, or
$.9 million, from the previous year's quarter.
NET INTEREST INCOME
For the third quarter of 1996, net interest income, on a fully taxable
equivalent basis, increased 17 percent, or $16.5 million, from the year-ago
quarter. This increase was due to a larger balance sheet with growth in earning
assets of 7 percent and a 33 basis point improvement in the net interest
margin.
BALANCE SHEET GROWTH
Total assets grew 11 percent, or $1.2 billion, from September 30, 1995,
to September 30, 1996. Earning assets, including loans, have been expressed
net of unearned income. Period-end loans, increased 9 percent, or $607.3
million, from September 30, 1995, to September 30, 1996; mortgage loans held
for sale (mortgage warehouse) increased 3 percent, or $22.2 million; and
investment securities increased 12 percent, or $233.5 million. The growth in
the period-end balance sheet was partially funded by a 9 percent, or $494.7
million, increase in interest-bearing core deposits. The balance sheet growth
is attributable to internal growth and the purchase acquisition of Financial
Investment Corporation (parent company of First National Bank of Springdale in
Springdale, Arkansas, acquired on October 1, 1995, with assets of $349 million
at acquisition). Excluding this acquisition, loans grew 7 percent,
investment securities grew 4 percent and interest-bearing core deposits grew 5
percent from September 30, 1995.
Comparing average balances from third quarter 1995, total assets grew
9 percent, or $1.0 billion; loans grew 8 percent, or $556.0 million;
investment securities grew 3 percent, or $55.0 million; and interest-bearing
core deposits increased 9 percent, or $535.8 million. Commercial loans
increased 7 percent, or $219.4 million. Commercial loans represented 45
percent and consumer loans represented 35 percent of total loans.
Consumer loans grew 10 percent, or $247.4 million. Through the efforts of
targeted marketing campaigns, credit card receivables grew 10 percent, or $47.9
million. The permanent mortgage portfolio decreased 3 percent, or $18.0
million, as new loans were securitized and sold and older loans paid down.
Real estate construction loans grew 26 percent, or $59.7 million. This
increase was primarily due to single family related construction projects.
Excluding the purchase acquisition of Financial Investment Corporation, average
loans and average interest-bearing core deposits each grew 6 percent from
the third quarter of 1995.
The average mortgage warehouse increased 11 percent, or $105.8
million, from the third quarter of 1995. This growth was funded by an increase
of 12 percent, or $340.3 million, in purchased funds, which closely match the
mortgage warehouse average life, from the third quarter of 1995.
NET INTEREST MARGIN
The net interest margin (margin) percentage improved from 3.85 for the
third quarter of 1995 to 4.18 for the third quarter of 1996. As shown in the
Net Interest Margin Computation Table, the net interest spread (the difference
between the yield on earning assets and the rates paid on interest-bearing
liabilities) increased 53 basis points while the effect of net free funds
decreased 20 basis points. Approximately half of the year-over-year improvement
in the net interest margin came from the expiration in May 1996 of amortization
expense related to a basis swap.
NET INTEREST MARGIN COMPUTATION TABLE
<TABLE>
<CAPTION>
Third Quarter
-------------
1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Yield on earning assets 8.06% 8.08%
Rate paid on interest-bearing liabilities 4.57 5.12
- -----------------------------------------------------------------------------
Net interest spread 3.49 2.96
Effect of interest-free sources .61 .81
Loan fees .09 .09
FRB* interest and penalties (.01) (.01)
- -----------------------------------------------------------------------------
Net interest margin 4.18% 3.85%
=============================================================================
</TABLE>
*Federal Reserve Bank
<PAGE> 11
The net interest margin is affected by the activity levels and related
funding for First Tennessee's specialty lines of business, as these nonbank
business lines typically produce different margins than traditional
retail/commercial banking activities. Consequently, First Tennessee's
consolidated margin cannot be readily compared to that of other bank holding
companies.
Benefiting from strong loan growth and restructuring in the investment
portfolio, the retail/commercial bank margin improved from 4.06 percent in the
third quarter of 1995 to 4.26 percent for the third quarter of 1996.
The negative impact on the net interest margin from mortgage banking
occurs because the spread between the rates on mortgage loans temporarily in
the warehouse and the related short-term funding rates are significantly less
than the comparable spread earned in the retail/commercial bank. The bond
division also negatively impacts the net interest margin because of its
strategy to hedge inventory in the cash markets which effectively eliminates
net interest income on these positions, but reduces the risk of large market
losses due to interest rate moves.
NET INTEREST MARGIN COMPOSITION TABLE
<TABLE>
<CAPTION>
Third Quarter
------------------
1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Retail/commercial bank 4.26% 4.06%
Basis swap impact - (.17)
Bond division (.10) (.10)
Mortgage banking (.11) (.15)
Other lines of business .13 .21
- --------------------------------------------------------------
Total net interest margin 4.18% 3.85%
==============================================================
</TABLE>
PROVISION FOR LOAN LOSSES/ASSET QUALITY
The reserve for loan losses to loans remained relatively stable at
1.54 percent on September 30, 1996, and 1.58 percent on September 30, 1995.
However, the provision for loan losses increased $2.9 million to $8.9 million
at September 30, 1996. The increase in provision reflects a higher amount of
allowance for loan losses commensurate with loan growth. In addition, given
economic trends, the level of provision was increased due to inherent losses
primarily in the consumer loan and credit card portfolios. Net charge-offs to
average loans for the third quarter were .41 percent in 1996 compared with
.34 percent in 1995. The increase in net charge-offs was primarily related to
consumer and credit card lending, as the commercial and commercial real estate
net charge-offs resulted in net recoveries. Despite the increase in credit
card net charge-offs from the previous year, asset quality of both credit cards
and consumer loans remained favorable to industry averages in the third quarter
of 1996. The increase in 90 day past due loans reflects the overall trends in
consumer loan delinquencies which are consistent with current market trends in
the industry. At September 30, 1996, First Tennessee had no concentration of
10 percent or more of total loans in any single industry.
ASSET QUALITY INFORMATION TABLE
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30
-----------------------
1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming loans $ 18,607 $ 16,639
Foreclosed real estate 7,059 13,714
Other assets 203 1,094
- ---------------------------------------------------------------------------------
Total nonperforming assets $ 25,869 $ 31,447
=================================================================================
Loans 90 days past due $ 32,424 $ 25,439
Potential problem assets 77,984 68,279
(Includes loans 90 days past due)
Allowance for credit losses:
Balance at June 30 $ 116,478 $ 110,747
Acquisitions -- 147
Provision for loan losses 8,853 5,921
Charge-offs (10,742) (8,671)
Loan recoveries 3,128 2,738
- ---------------------------------------------------------------------------------
Balance at September 30 $ 117,717 $ 110,882
=================================================================================
Allowance as a % of loans 1.54% 1.58%
Nonperforming loans to total loans .24 .24
Nonperforming assets to total loans,
foreclosed real estate and other assets .34 .45
Allowance to nonperforming assets 455.1 352.6
- ---------------------------------------------------------------------------------
</TABLE>
<PAGE> 12
NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS TABLE
<TABLE>
<CAPTION>
For the quarter ended
September 30
------------------
1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Commercial and commercial real estate (.02)% .04%
Consumer .39 .33
Credit card receivables 3.94 2.92
Permanent mortgage (.02) .03
Total .41 .34
- ------------------------------------------------------------------------
</TABLE>
NONINTEREST EXPENSE
Total noninterest expense (operating expense) for the third quarter of
1996 increased $24.9 million, or 17 percent, over the same period in 1995.
Excluding the one-time SAIF assessment, total operating expense increased $21.1
million, or 14 percent. Approximately half of the growth in operating expenses
is related to the mortgage banking division due to its larger servicing
portfolio, production costs, and costs associated with entering new production
channels. Excluding mortgage banking and the SAIF assessment, overall
operating expense increased 10 percent from the third quarter of 1995.
Employee compensation, incentives, and benefits (staff expense), the
largest category, increased 8 percent, or $7.1 million. Staff expense includes
commissions paid in several lines of business such as the bond division and
mortgage banking. As the revenues increase or decrease in these business
lines, the commissions change accordingly. Salaries and commissions increased
11 percent in mortgage banking and decreased 14 percent in the bond division
from the third quarter of 1995.
Amortization and hedging of mortgage servicing rights increased $3.4
million as a result of a larger servicing portfolio. The $4.2 million increase
in the deposit insurance premium from the previous year includes the $3.8
million one-time SAIF assessment fee.
Excluding the purchase acquisition of Financial Investment
Corporation and the SAIF assessment, operating expense in the retail/commercial
bank increased 9 percent and in the specialty lines of business increased 15
percent from the third quarter of 1995.
CAPITAL
Shareholders' equity at September 30, 1996, was $925.0 million, an
increase of 12 percent, or $100.4 million, from $824.7 million at September 30,
1995. The period-end equity to assets ratio improved from 7.11 percent at
September 30, 1995, to 7.27 percent at September 30, 1996. The average equity
to average assets ratio improved from 7.02 percent in the third quarter of 1995
to 7.18 percent for the same period in 1996. (Note: these equity ratios do not
include the effects of the mark to market valuation of the investment portfolio
(FASB 115)).
At September 30, 1996, the corporation's Tier 1 capital ratio was 9.14
percent, the Total capital ratio was 12.02 percent and the Leverage ratio was
6.67 percent. On September 30, 1996, First Tennessee's bank subsidiaries had
sufficient capital to qualify as well-capitalized institutions under the
regulatory capital standards.
OFF-BALANCE SHEET ACTIVITY
In the normal course of business, First Tennessee is a party to
financial instruments that are not required to be reflected on a balance sheet.
First Tennessee enters into transactions involving these instruments to meet
the financial needs of its customers and manage its
<PAGE> 13
own exposure to fluctuations in interest rates. These instruments are
categorized into those "Held or issued for purposes other than broker/dealer
operations" and those "Held or issued for broker/dealer operations" as noted in
the Off-Balance Sheet Financial Instruments Table.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AT SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Notional
(Dollars in millions) Value
- -----------------------------------------------------------------------------
<S> <C>
HELD OR ISSUED FOR PURPOSES OTHER THAN BROKER/DEALER OPERATIONS
Commitments to extend credit:
Consumer credit card lines $1,589.7
Consumer home equity 307.4
Commercial real estate and
construction and land development 317.1
Mortgage banking 754.6
Other 1,566.7
Commercial and standby letters of credit 246.2
Foreign exchange contracts, net position .1
Interest rate risk management activities:
Interest rate swap receive fixed/
pay floating - amortizing 287.7
Mortgage banking
Commitments to sell loans, net position 952.9
Put options purchased 1,068.0
Call options written 40.0
HELD OR ISSUED FOR BROKER/DEALER OPERATIONS
Forward contracts:
Commitments to buy $ 531.2
Commitments to sell 505.9
Futures contracts:
Commitments to buy -
Options contracts:
Written option contracts -
Purchased option contracts -
When-issued securities:
Commitments to buy -
Commitments to sell -
Securities underwriting commitments .2
- -----------------------------------------------------------------------------
</TABLE>
NINE MONTHS EARNINGS HIGHLIGHTS
Net income totaled $126.6 million for the nine months ended September
30, 1996, an increase of 6 percent from $119.2 million for the same period last
year, and earnings per share increased 7 percent from $1.76 in 1995 to $1.88 in
1996.
Noninterest income increased 16 percent to $408.7 million from $352.5
million in the same period in 1995. Noninterest income comprised 55 percent of
total revenue. Mortgage banking fee income grew $45.6 million, or 31 percent,
from increased origination volume and a larger servicing portfolio. The bond
division's fee income was relatively flat from the previous year with 1 percent
growth. Cardholder and merchant processing increased $4.5 million, or 18
percent from the previous year. Growth rates were negatively impacted as a
result of the 1995 accounting changes from cash basis to accrual basis, such
that deposit transactions and cash management grew $1.9 million, or 3 percent,
and trust service fee income was flat for the nine month comparable periods.
Net interest income stated on a fully taxable-equivalent basis totaled
$337.5 million, up 16 percent, or $47.7 million, from the same period in 1995.
Year-to-date net interest margin improved from 3.89 percent in 1995 to 4.07
percent in 1996. The provision for loan losses increased to $24.4 million from
$13.3 million in the previous year.
Noninterest expenses totaled $518.5 million, up 17 percent from $441.7
million in 1995. The increase in noninterest expenses related primarily to
mortgage banking. Excluding mortgage banking operations, noninterest expenses
increased 8 percent from the prior year. Staff expense, the largest category,
increased $38.2 million, or 15 percent. Salaries and commissions in mortgage
banking increased 30 percent and in the bond division increased 6 percent from
the nine month period in 1995. As a result of higher origination volume and a
larger servicing portfolio, amortization and hedging of mortgage servicing
rights increased $11.5 million. The $3.7 million decrease in the deposit
insurance premium includes the benefit of the reduction in the FDIC premium to
zero at the beginning of 1996 partially offset by the $3.8 million one-time
SAIF assessment.
Excluding the impact of acquisition related transactions and the
one-time SAIF assessment, operating expenses grew 3 percent in the
retail/commercial bank and 27 percent in the specialty lines of business.
BALANCE SHEET
Total assets averaged $12.5 billion for the first nine months, up 13
percent from last year's average of $11.1 billion. Loans averaged $7.4
billion for the first nine months, an increase of 10 percent from last year.
Interest-bearing core deposits averaged $6.3 billion for the first nine months,
an increase of 8 percent from $5.8 billion in 1995. Excluding the purchase
acquisition of Financial Investment Corporation, average loans grew 7
percent and average interest-bearing core deposits grew 5 percent.
SUBSEQUENT EVENTS
The thrift fund rescue and regulatory relief package was signed into
law on September 30, 1996. In addition to the one-time special assessment to
recapitalize SAIF, the new law will require banks as well as the thrifts to pay
the interest due on Financing Corp. (FICO) bonds. These FICO bonds were used
to bail out the thrift industry during the 1980s. All banks will be assessed
to pay the interest due on FICO bonds starting on January 1, 1997. Management
expects that the cost to First Tennessee will be immaterial.
<PAGE> 14
Part II.
OTHER INFORMATION
Items 1, 2, 3, 4 and 5.
As of the end of the third quarter, 1996, the answers to Items 1, 2, 3, 4 and 5
were either inapplicable or negative, and therefore, these items are omitted.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits furnished in accordance with the provisions of the Exhibit
Table of Item 601 of Regulation S-K are included as described in the
Exhibit Index which is a part of this report. Exhibits not listed in the
Exhibit Index are omitted because they are inapplicable.
(b) No reports on Form 8-K were filed during the third quarter of
1996.
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST TENNESSEE NATIONAL CORPORATION
------------------------------------
(Registrant)
DATE: 11/13/96 By: /s/ Elbert L. Thomas, Jr.
--------------------- ----------------------------
Elbert L. Thomas Jr.
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
<PAGE> 16
EXHIBIT INDEX
Exhibit No. Exhibit Description Page No.
11 Statement re Computation of Per Share Earnings. Filed Herewith
27 Financial Data Schedule (for SEC use only) 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 Nine Months Ended
September 30 September 30
------------------------------- -------------------------------
Computation for Statements of Income: 1996 1995 1996 1995
- ------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Per statements of income (Thousands):
Net income $ 46,797 $ 43,830 $ 126,585 $ 119,190
============= ============= ============= =============
Per statements of income:
Weighted average shares outstanding 67,144,391 66,930,118 67,223,305 67,871,964
============= ============= ============= =============
Primary earnings per share (a):
Net income $ .69 $ .66 $ 1.88 $ 1.76
============= ============= ============= =============
Additional Primary computation
- ------------------------------------
Adjustment to weighted average shares
outstanding:
Weighted average shares outstanding
per primary computation above 67,144,391 66,930,118 67,223,305 67,871,964
Add dilutive effect of outstanding
options (as determined by the
application of the treasury stock
method) 1,598,213 1,375,756 1,584,150 1,102,068
Weighted average shares outstanding, ------------- ------------- ------------- -------------
as adjusted 68,742,604 68,305,874 68,807,455 68,974,032
============= ============= ============= =============
Primary earnings per share, as adjusted (b):
Net income $ .68 $ .64 $ 1.84 $ 1.73
============= ============= ============= =============
Additional Fully Diluted Computation
- ------------------------------------
Adjustment to weighted average share
outstanding:
Weighted average shares outstanding
per primary computation above 68,742,604 68,305,874 68,807,455 68,974,032
Additional dilutive effect of outstanding
options (as determined by the application
of the treasury stock method) 96,538 192,470 71,676 139,804
Weighted average shares outstanding, ------------- ------------- ------------- -------------
as adjusted 68,839,142 68,498,344 68,879,131 69,113,836
============= ============= ============= =============
Fully diluted earnings per share, as adjusted (b):
Net income $ .68 $ .63 $ 1.84 $ 1.72
============= ============= ============= =============
</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%.
Per share data reflects the 1996 two-for-one stock split.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST
TENNESSEE NATIONAL CORPORATION'S SEPTEMBER 30, 1996, FINANCIAL STATEMENTS FILED
IN ITS FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCES TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 778,719
<INT-BEARING-DEPOSITS> 936
<FED-FUNDS-SOLD> 168,253
<TRADING-ASSETS> 179,169
<INVESTMENTS-HELD-FOR-SALE> 2,154,602
<INVESTMENTS-CARRYING> 68,357
<INVESTMENTS-MARKET> 68,736
<LOANS> 7,630,034
<ALLOWANCE> 117,717
<TOTAL-ASSETS> 12,801,345
<DEPOSITS> 9,072,088
<SHORT-TERM> 1,912,185
<LIABILITIES-OTHER> 636,038
<LONG-TERM> 255,998
0
0
<COMMON> 83,929
<OTHER-SE> 841,107
<TOTAL-LIABILITIES-AND-EQUITY> 12,801,345
<INTEREST-LOAN> 549,396
<INTEREST-INVEST> 104,409
<INTEREST-OTHER> 15,598
<INTEREST-TOTAL> 669,403
<INTEREST-DEPOSIT> 236,988
<INTEREST-EXPENSE> 336,022
<INTEREST-INCOME-NET> 333,381
<LOAN-LOSSES> 24,445
<SECURITIES-GAINS> 354
<EXPENSE-OTHER> 518,495
<INCOME-PRETAX> 199,157
<INCOME-PRE-EXTRAORDINARY> 126,585
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126,585
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.84
<YIELD-ACTUAL> 4.07
<LOANS-NON> 18,607
<LOANS-PAST> 32,424
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 77,984
<ALLOWANCE-OPEN> 112,567
<CHARGE-OFFS> 28,751
<RECOVERIES> 9,456
<ALLOWANCE-CLOSE> 117,717
<ALLOWANCE-DOMESTIC> 117,717
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
