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 June 30, 1996 ------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission file number 0-4491 ------ FIRST TENNESSEE NATIONAL CORPORATION ------------------------------------ (Exact name of registrant as specified in its charter) Tennessee 62-0803242 - -------------------------------- ----------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 165 Madison Avenue, Memphis, Tennessee 38103 - -------------------------------------- -------- (Address of principal executive offices) (Zip Code) (901) 523-4027 ------------------------------------------------ (Registrant's telephone number, including area code) None -------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $1.25 par value 67,155,030 - ----------------------------- ---------------------------- Class Outstanding at July 31, 1996
2 FIRST TENNESSEE NATIONAL CORPORATION INDEX Part I. Financial Information Part II. Other Information Signatures Exhibit Index Exhibit 3(ii) Exhibit 11 Exhibit 27
3 PART I. ------- FINANCIAL INFORMATION Item 1. Financial Statements. - ------------------------------ The Consolidated Statements of Condition The Consolidated Statements of Income The Statements of Cash Flows The Notes to Consolidated Financial Statements This financial information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods presented.
4 <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CONDITION First Tennessee National Corporation - ------------------------------------------------------------------------------------------------------------------------------- June 30 December 31 ---------------------------------- ------------ (Dollars in thousands)(Unaudited) 1996 1995 1995 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> ASSETS: Cash and due from banks $ 674,458 $ 657,666 $ 710,870 Federal funds sold and securities purchased under agreements to resell 104,257 182,778 64,978 - ------------------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 778,715 840,444 775,848 - ------------------------------------------------------------------------------------------------------------------------------- Investment in bank time deposits 1,642 1,744 2,119 Broker/dealer securities inventory 196,821 227,458 182,655 Mortgage loans held for sale 1,103,237 735,268 789,183 Securities available for sale 2,176,485 1,195,327 2,036,668 Securities held to maturity (market value of $71,870 at June 30, 1996; $977,857 at June 30, 1995; and $75,750 at December 31, 1995) 71,599 985,010 74,731 Loans, net of unearned income 7,487,691 6,882,044 7,333,283 Less: Allowance for loan losses 116,478 110,747 112,567 - ------------------------------------------------------------------------------------------------------------------------------- Total net loans 7,371,213 6,771,297 7,220,716 - ------------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 181,591 165,621 177,400 Real estate acquired by foreclosure 8,714 13,732 11,794 Mortgage servicing rights 216,082 94,437 149,220 Intangible assets 124,110 101,131 128,985 Bond division receivables and other assets 724,748 482,541 527,563 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $12,954,957 $11,614,010 $12,076,882 =============================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Demand $ 1,859,864 $ 1,775,417 $ 1,983,994 Checking/Interest 172,356 485,986 103,860 Savings 744,624 603,518 592,320 Money market account 2,546,617 1,867,453 2,499,817 Certificates of deposit under $100,000 and other time 2,900,771 2,866,162 2,882,094 Certificates of deposit $100,000 and more 748,146 514,797 520,112 - ------------------------------------------------------------------------------------------------------------------------------- Total deposits 8,972,378 8,113,333 8,582,197 - ------------------------------------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 1,525,945 1,558,908 1,674,225 Commercial paper and other short-term borrowings 591,944 377,137 86,520 Bond division payables and other liabilities 715,029 535,562 600,699 Term borrowings 257,327 202,320 260,017 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities 12,062,623 10,787,260 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 - 67,122,092 at June 30, 1996; 67,800,580 at June 30, 1995; and 67,178,236 at December 31, 1995) 83,903 84,751 83,973 Capital surplus 58,780 82,467 63,610 Undivided profits 761,000 660,738 716,861 Unrealized market adjustment on available for sale securities (7,051) 1,140 10,582 Deferred compensation on restricted stock incentive plan (4,298) (2,346) (1,802) - ------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 892,334 826,750 873,224 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,954,957 $11,614,010 $12,076,882 =============================================================================================================================== </TABLE>
5 <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF INCOME First Tennessee National Corporation - ---------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 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 $161,636 $151,393 $321,803 $293,065 Interest on investment securities: Taxable 34,227 33,166 66,323 66,837 Tax-exempt 1,326 1,152 2,669 2,240 Interest on mortgage loans held for sale 22,603 10,792 41,484 18,775 Interest on broker/dealer securities inventory 4,527 3,477 8,785 6,974 Interest on other earning assets 1,655 2,772 2,562 6,245 - ---------------------------------------------------------------------------------------------------------------------- Total interest income 225,974 202,752 443,626 394,136 - ---------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on deposits: Checking/Interest 670 2,063 1,319 4,209 Savings 2,411 2,739 4,914 5,667 Money market account 22,970 21,823 47,557 43,147 Certificates of deposit under $100,000 and other time 41,311 42,747 82,742 81,254 Certificates of deposit $100,000 and more 12,651 7,701 22,617 14,478 Interest on short-term borrowings 27,793 25,942 55,624 49,163 Interest on term borrowings 5,214 4,384 10,521 8,547 - ---------------------------------------------------------------------------------------------------------------------- Total interest expense 113,020 107,399 225,294 206,465 - ---------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 112,954 95,353 218,332 187,671 Provision for loan losses 7,559 3,216 15,592 7,364 - ---------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 105,395 92,137 202,740 180,307 - ---------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Mortgage banking 60,902 42,896 119,021 89,665 Bond division 17,145 22,602 45,266 41,021 Deposit transactions and cash management 19,860 18,286 37,295 36,881 Cardholder and merchant processing 9,478 8,589 19,238 16,206 Trust services 9,078 8,212 17,692 18,535 Equity securities gains/(losses) 15 (106) 490 92 Debt securities gains/(losses) 37 131 (180) 395 All other 13,205 13,176 27,475 24,405 - ---------------------------------------------------------------------------------------------------------------------- Total noninterest income 129,720 113,786 266,297 227,200 - ---------------------------------------------------------------------------------------------------------------------- ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 235,115 205,923 469,037 407,507 - ---------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Employee compensation, incentives, and benefits 93,062 81,637 192,004 160,961 Operations services 10,421 9,097 21,077 18,108 Occupancy 9,823 8,679 19,148 17,789 Communications and courier 8,545 7,156 16,786 14,490 Equipment rentals, depreciation, and maintenance 8,588 7,425 16,769 15,613 Amortization of mortgage servicing rights 4,816 2,951 13,899 5,769 Advertising and public relations 4,519 2,990 9,458 6,890 Legal and professional fees 3,362 2,394 5,862 7,590 Amortization of intangible assets 2,362 1,940 4,716 3,737 Deposit insurance premium 464 4,393 883 8,751 All other 22,035 15,843 42,981 31,970 - ---------------------------------------------------------------------------------------------------------------------- Total noninterest expense 167,997 144,505 343,583 291,668 - ---------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 67,118 61,418 125,454 115,839 Applicable income taxes 24,771 20,665 45,666 40,479 - ---------------------------------------------------------------------------------------------------------------------- NET INCOME $ 42,347 $ 40,753 $ 79,788 $ 75,360 ====================================================================================================================== NET INCOME PER COMMON SHARE $ .63 $ .59 $ 1.19 $ 1.10 - ---------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING 67,224,935 68,482,624 67,263,195 68,350,692 - ---------------------------------------------------------------------------------------------------------------------- </TABLE>
6 <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS First Tennessee National Corporation - --------------------------------------------------------------------------------------------------------------- Six Months Ended June 30 -------------------------- (Dollars in thousands)(Unaudited) 1996 1995 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 79,788 $ 75,360 Adjustments to reconcile net income to net cash provided/(used) by operating activities: Provision for loan losses 15,592 7,364 Provision for deferred income tax 27,324 14,708 Depreciation and amortization of premises and equipment 13,912 11,877 Amortization of mortgage servicing rights 13,899 5,769 Amortization of intangibles 4,716 3,737 Net amortization of premiums and accretion of discounts 15,790 8,787 Market value adjustment on foreclosed property 1,394 1,409 Equity securities (gains)/losses (490) (92) Debt securities (gains)/losses 180 (395) Net (gain)/loss on disposal of fixed assets (8) 1,294 Net increase in: Broker/dealer securities inventory (14,166) (57,427) Mortgage loans held for sale (314,054) (219,861) Bond division receivables (123,154) (53,716) Interest receivable (4,112) - Other assets (161,486) (134,582) Net increase/(decrease)in: Bond division payables 60,608 87,588 Interest payable (208) 6,015 Other liabilities 38,260 84,579 - --------------------------------------------------------------------------------------------------------------- Total adjustments (426,003) (232,946) - --------------------------------------------------------------------------------------------------------------- Net cash used by operating activities (346,215) (157,586) - --------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITES: Proceeds from maturities of: Held to maturity securities 4,554 38,300 Available for sale securities 218,299 62,897 Proceeds from sale of: Available for sale securities 360,773 65,787 Premises and equipment 834 1,449 Payments for purchase of: Held to maturity securities (1,463) (5,064) Available for sale securities (746,117) (87,513) Premises and equipment (18,345) (19,405) Net increase in loans (162,868) (343,571) Decrease in investment in bank time deposits 477 790 Acquisitions, net of cash and cash equivalents acquired 400 12,691 - --------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (343,456) (273,639) - --------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from: Exercise of stock options 2,712 2,282 Issuance of term borrowings - 90,000 Payments for: Capital lease obligations (117) (73) Term borrowings (2,776) (1,499) Stock repurchase (12,093) (30,573) Cash dividends (35,727) (31,102) Equity distributions related to acquisitions - (20) Net increase in: Deposits 383,395 138,696 Short-term borrowings 357,144 126,006 - --------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 692,538 293,717 - --------------------------------------------------------------------------------------------------------------- Net increase/(decrease) in cash and cash equivalents 2,867 (137,508) - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 775,848 977,952 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 778,715 $ 840,444 =============================================================================================================== Total interest paid $ 218,537 $ 199,839 Total income taxes paid 18,341 22,666 </TABLE>
7 NOTE 1 -- FINANCIAL INFORMATION The unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles. In the opinion of management, all necessary adjustments have been made for a fair presentation of financial position and results of operations for the periods presented. The operating results for the six month period ended June 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.
8 NOTE 2 -- LOANS The composition of the loan portfolio at June 30 is detailed below: <TABLE> <CAPTION> (Dollars in thousands) 1996 1995 - --------------------------------------------------------------------------------------- <S> <C> <C> Commercial $3,394,050 $3,147,611 Consumer 2,603,152 2,343,929 Permanent mortgage 658,219 663,355 Credit card receivables 534,784 479,494 Real estate construction 283,150 231,936 Nonaccrual 14,336 15,719 - --------------------------------------------------------------------------------------- Loans, net of unearned income 7,487,691 6,882,044 Allowance for loan losses 116,478 110,747 - --------------------------------------------------------------------------------------- Total net loans $7,371,213 $6,771,297 ======================================================================================= The following table presents information concerning nonperforming loans at June 30: (Dollars in thousands) 1996 1995 - --------------------------------------------------------------------------------------- <S> <C> <C> Impaired loans $ 8,949 $ 9,556 Other nonaccrual loans 5,387 6,163 Restructured loans - 72 - --------------------------------------------------------------------------------------- Total nonperforming loans $14,336 $15,791 ======================================================================================= </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 June 30, 1996 and 1995, were $279,000 and $365,000, respectively. The following table presents information concerning impaired loans: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30 June 30 ------------------- -------------------- (Dollars in thousands) 1996 1995 1996 1995 - --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Total interest on impaired loans $ 243 $ 587 $ 384 $ 930 Average balance on impaired loans 8,479 11,804 8,564 10,798 - --------------------------------------------------------------------------------------- </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 six months ended June 30, 1995 and 1996, 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 881 - 881 Provision for loan losses 4,242 3,122 7,364 Charge-offs 13,788 2,239 16,027 Less loan recoveries 8,658 12 8,670 - --------------------------------------------------------------------------------------- Net charge-offs/(recoveries) 5,130 2,227 7,357 - --------------------------------------------------------------------------------------- Balance at June 30, 1995 $107,310 $3,437 $110,747 ======================================================================================= Balance at January 1, 1996 $109,051 $3,516 $112,567 Provision for loan losses 16,065 (473) 15,592 Charge-offs 17,710 299 18,009 Less loan recoveries 6,009 319 6,328 - --------------------------------------------------------------------------------------- Net charge-offs/(recoveries) 11,701 (20) 11,688 - --------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1996 $113,415 $3,063 $116,478 ======================================================================================= </TABLE>
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 six month periods ended June 30, 1996, compared to the three month and six month periods ended June 30, 1995. To assist the reader in obtaining a better understanding of First Tennessee and its performance, this discussion should be read in conjunction with First Tennessee's unaudited consolidated financial statements and accompanying notes appearing in this report. Additional information including the 1995 financial statements, notes and management's discussion is provided in the 1995 annual report. OVERVIEW QUARTERLY COMPARISON: Earnings per share for the second quarter of 1996 was $.63, up 7 percent from last year's second quarter earnings per share of $.59. Net income for the second quarter of 1996 was $42.3 million, an increase of 4 percent over the $40.8 million earned in the second quarter of 1995. Return on average assets was 1.34 percent and return on average equity was 19.48 percent for the second quarter of 1996 compared with 1.48 percent and 20.05 percent, respectively, for the same period in 1995. YEAR-TO-DATE COMPARISON: For the first six months, net income in 1996 totaled $79.8 million, or $1.19 per share, compared with $75.4 million, or $1.10 per share, for the same period in 1995. Return on average assets for the first half of 1996 was 1.28 percent and return on average equity was 18.37 percent, compared with 1.39 percent and 19.07 percent, respectively, for the same period in 1995. Total assets were $13.0 billion and shareholders' equity was $892.3 million at June 30, 1996. INCOME STATEMENT/BALANCE SHEET DISCUSSION NONINTEREST INCOME QUARTERLY COMPARISON: Noninterest income, also called fee income, grew 14 percent, or $15.9 million, from the second quarter of 1995, excluding securities gains. Noninterest income accounted for 53 percent of total revenue in the second quarter of 1996. The rise in fee income resulted primarily from increases in mortgage banking which grew 42 percent, or $18.0 million, as origination volume increased $1.2 billion to $2.8 billion for the quarter and the servicing portfolio grew $6.6 billion to $20.5 billion at June 30, 1996. As a result of higher interest rates, the growth in fee income was lessened by higher secondary marketing losses and price concessions, as well as less gains on sales of servicing than what was experienced in 1995. Refinance activity decreased from 47 percent of total originations in the first quarter of 1996 to 26 percent in the second quarter of 1996. Refinance activity was 13 percent in the second quarter of 1995. Revenues in the bond division were 24 percent, or $5.5 million, lower in the second quarter of 1996 compared with the same period in 1995. As a result of a rising interest rate environment and stronger economic activity, bank customers experienced increased loan volume thus reducing their investment requirements and changing their long term investment preferences. This led to a change in customer's transaction mix towards shorter-term investments which historically have had lower spreads, thus resulting in lower revenues despite the increase in securities bought and sold ($48.8 billion in second quarter 1995 compared with $55.1 billion). In credit card and merchant processing, higher transaction volume from existing customers and an expanded customer base achieved through targeted marketing efforts led to a 10 percent, or $.9 million, increase in fees compared with the second quarter of 1995. As a result of increases in volume, fee income from deposit transactions and cash management increased 9 percent, or $1.6 million, for the same period. Trust services grew 11 percent, or $.9 million, as managed trust assets grew 13 percent from the second quarter of 1995. YEAR-TO-DATE COMPARISON: For the first six months of 1996, noninterest income increased $39.3 million, or 17 percent, over the same period last year excluding
10 securities gains. Fee income represented 55 percent of total revenues during the first six months of both 1995 and 1996. Mortgage banking fee income grew 33 percent, bond division fee income grew 10 percent, and cardholder and merchant processing grew 19 percent from the prior year. Trust services declined 5 percent; however, this decline includes the impact of an accounting change that was made in the first quarter of 1995 from cash basis to accrual basis. As a result of the decrease in FDIC premiums, fee income from deposit transactions and cash management was relatively flat from the prior year. NET INTEREST INCOME QUARTERLY COMPARISON: For the second quarter of 1996, net interest income, on a taxable-equivalent basis, increased 18 percent, or $17.8 million, over the second quarter of 1995. This increase was due to a larger balance sheet with increased levels of average earnings assets (13 percent) and an 18 basis point increase in the net interest margin. YEAR-TO-DATE COMPARISON: For the first six months of 1996, net interest income, on a taxable-equivalent basis, increased 16 percent, or $31.1 million, over the same period in 1995. Net interest income is the amount of income generated by earning assets reduced by the interest cost of funding those assets. Net interest margin is computed by dividing net interest income (on a taxable-equivalent basis) by average earning assets. The discussion that follows details changes in these two components of net interest income. BALANCE SHEET GROWTH QUARTERLY COMPARISON: Total assets at June 30, 1996, were 12 percent, or $1.3 billion, higher than total assets at June 30, 1995. Period-end net loans increased 9 percent, or $605.6 million from June 30, 1995 to June 30, 1996; the mortgage warehouse increased 50 percent, or $368.0 million; and investment securities increased 3 percent, or $67.7 million. The growth in the period-end balance sheet was partially funded by a 9 percent, or $541.2 million, increase in interest-bearing core deposits. The balance sheet growth is attributable primarily 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, net loans grew 7 percent and interest-bearing core deposits grew 6 percent from June 30, 1995. Comparing average balances from second quarter 1995, total assets grew 15 percent, or $1.6 billion; net loans grew 9 percent, or $604.3 million, and interest-bearing core deposits grew 8 percent, or $485.3 million. Net commercial loans grew 7 percent, or $212.0 million, and net consumer loans grew 12 percent, or $271.1 million. Commercial loans represented 45 percent and consumer loans represented 35 percent of total loans. Credit card receivables grew 13 percent, or $60.9 million, as a result of targeted marketing campaigns. The permanent mortgage portfolio was relatively flat from the previous year, and real estate construction grew 24 percent, or $51.8 million. Excluding the purchase acquisition of Financial Investment Corporation, average net loans grew 7 percent and average interest-bearing core deposits grew 5 percent from the second quarter of 1995. With the increase in mortgage originations, average mortgage warehouse loans held for sale increased 125 percent, or $672.5 million, from the second quarter of 1995. This growth was funded by an increase of 34 percent, or $845.2 million, in purchased funds from the second quarter of 1995. YEAR-TO-DATE COMPARISON: Year-to-date average assets increased 15 percent between 1995 and 1996. In comparing the 1995 and 1996 six month periods, net loans grew 10 percent. Commercial loans grew 9 percent and consumer loans grew 12 percent over the same six month period. This growth was primarily funded with interest-bearing core deposits, which grew 8 percent. Credit card receivables grew 13 percent and mortgage warehouse loans grew 146 percent. The growth in the mortgage warehouse was primarily funded by an increase in purchased funds of 33 percent from the previous year. Excluding the purchase acquisition of Financial Investment Corporation, net loans grew 8 percent and interest-bearing core deposits grew 4 percent for the six month period.
11 NET INTEREST MARGIN QUARTERLY COMPARISON: The net interest margin (margin) percentage improved from 3.91 for the second quarter of 1995 to 4.09 for the second 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 34 basis points while the effect of net free funds decreased 16 basis points. The improvement in the net interest spread reflects the expiration of the amortization of a basis swap in May 1996, which improved margin 10 basis points. NET INTEREST MARGIN COMPUTATION TABLE <TABLE> <CAPTION> Second Quarter -------------- 1996 1995 - --------------------------------------------------------------------------- <S> <C> <C> Yield on earning assets 8.04% 8.17% Rate paid on interest-bearing liabilities 4.69 5.16 - --------------------------------------------------------------------------- Net interest spread 3.35 3.01 Effect of interest-free sources .66 .82 Loan fees .10 .10 FRB interest and penalties (.02) (.02) - --------------------------------------------------------------------------- Net interest margin 4.09% 3.91% =========================================================================== </TABLE> The net interest margin is affected by the activity levels of and related funding for First Tennessee's specialty lines of business, as these nonbank business lines generally produce lower margins than traditional retail/commercial banking activities. Consequently, First Tennessee's consolidated margin cannot readily be compared to that of other bank holding companies. The mortgage warehouse balance grew almost 125 percent between the second quarters of 1995 and 1996, adding $9.1 million to net interest income in 1996 compared to $4.9 million in the second quarter of 1995. Because the spread between the yields on mortgage loans temporarily in the warehouse and the related short-term funding rates is significantly less than the comparable spread earned in the retail/commercial bank, the consolidated margin was negatively impacted 15 basis points in the second quarter of 1996 compared with 3 basis points in the second quarter of 1995. The bond division contributed $.7 million more to net interest income in the second quarter of 1996 than in the same period in 1995. With its strategy to hedge inventory in the cash markets, the bond division also tends to negatively impact the consolidated net interest margin, since net interest income is effectively eliminated on these positions. This negative impact was 10 basis points in the second quarter of 1996, an improvement from the negative 15 basis points impact in the second quarter of 1995. The decline in the net interest margin in the other specialty lines of business, as shown in the Net Interest Margin Composition Table, came from the decreasing value of customer demand deposits that earn credit to pay for First Express services and from competitive pricing pressures experienced in credit card. The retail/commercial bank margin improved from 4.04 percent in the second quarter of 1995 to 4.29 percent in the second quarter of 1996. With First Tennessee's existing balance sheet mix and the current interest rate environment, the retail/commercial bank's margin is expected to remain stable throughout the balance of 1996, and going forward, the consolidated margin will improve with the expiration of the basis swap and will continue to be influenced by the activity levels of the specialty lines of business. NET INTEREST MARGIN COMPOSITION TABLE <TABLE> <CAPTION> Second Quarter --------------- 1996 1995 - --------------------------------------------------------------------------- <S> <C> <C> Retail/commercial bank 4.29% 4.04% Basis swap (.09) (.19) Bond division (.10) (.15) Mortgage banking (.15) (.03) Other specialty lines of business .14 .24 - --------------------------------------------------------------------------- Total net interest margin 4.09% 3.91% =========================================================================== </TABLE>
12 YEAR-TO-DATE COMPARISON: Year-to-date net interest margin improved from 3.92 percent to 4.01 percent. This improvement came from the reasons noted above in the quarterly comparison discussion. PROVISION FOR LOAN LOSSES/ASSET QUALITY The provision for loan losses increased from $3.2 million for the second quarter of 1995 to $7.6 million for the second quarter of 1996. The higher provision reflects a higher level of allowance for loan losses commensurate with loan growth. In addition, the level of provision was increased due to inherent losses reflecting economic trends. The increase in net charge-offs was primarily related to consumer and credit card lending as the ratio of net charge-offs to total loans increased to .31 percent for the second quarter of 1996 compared with .19 percent from the same period in 1995. Although increased from the prior year's low level, credit card net charge-offs remain favorable to industry averages. The increase in 90 day past due loans reflects the overall trends in both permanent mortgage and the consumer loan delinquencies which are in line with current market trends. The allowance for loan losses to loans has remained stable over the past few quarters and was 1.56 percent at June 30, 1996, and 1.61 percent at June 30, 1995. At June 30, 1996, First Tennessee had no concentration of 10 percent or more of total loans in any single industry. <TABLE> <CAPTION> ASSET QUALITY INFORMATION June 30 (Dollars in thousands) ----------------------- 1996 1995 - ----------------------------------------------------------------------- <S> <C> <C> Nonaccrual loans $ 14,336 $ 15,719 Restructured loans - 72 - ----------------------------------------------------------------------- Total nonperforming loans 14,336 15,791 - ----------------------------------------------------------------------- Foreclosed real estate 8,714 13,732 Other assets 925 1,785 - ----------------------------------------------------------------------- Total nonperforming assets $ 23,975 $ 31,308 ======================================================================= Loans 90 days past due $ 32,157 $ 23,078 Potential problem assets 79,063 72,742 Allowance for credit losses: Beginning balance $114,631 $109,862 Acquisitions - 881 Provision for loan losses 7,559 3,216 Charge-offs (9,159) (8,736) Loan recoveries 3,447 5,524 - ----------------------------------------------------------------------- Ending balance $116,478 $110,747 ======================================================================= Allowance as a percentage of loans 1.56% 1.61% Nonperforming loans to total loans .19 .23 Nonperforming assets to total loans, foreclosed real estate and other assets .32 .45 Allowance to nonperforming assets 485.8 353.7 </TABLE> <TABLE> <CAPTION> NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS June 30 ---------------------- 1996 1995 - ------------------------------------------------------------------------ <S> <C> <C> Commercial and commercial real estate (.13)% (.18)% Consumer .27 .15 Credit card receivables 3.98 3.29 Permanent mortgage (.04) .03 Total .31 .19 - ------------------------------------------------------------------------ </TABLE>
13 NONINTEREST EXPENSE QUARTERLY COMPARISON: Total noninterest expense (operating expense) for the second quarter of 1996 increased 16 percent, or $23.5 million, over the same period in 1995. Employee compensation, incentives, and benefits (staff expense), the largest category, increased 14 percent, or $11.4 million. Staff expense includes commissions paid in several lines of business, such as the bond division, mortgage banking, and the venture capital companies. As the revenues increase or decrease in these business lines, the commissions change accordingly. Commissions and incentives in mortgage banking increased 52 percent and decreased 21 percent in the bond division from the second quarter of 1995. With higher origination volume and a larger servicing portfolio, amortization and hedging of mortgage servicing rights increased $1.9 million. The increase in advertising and public relations primarily resulted from targeted marketing expansion in the credit card business line in response to an increasingly competitive environment. The decrease in the deposit insurance premium reflects the cutback in the FDIC premium rate to zero at the beginning of 1996. The remaining expense in this category is the Savings Association Insurance Fund (SAIF) assessment on deposits that First Tennessee acquired in 1992 and a small FDIC administrative fee. Excluding purchase acquisitions since the second quarter of 1995, operating expense grew 1 percent in the retail/commercial bank and 26 percent in the specialty lines of business. YEAR-TO-DATE COMPARISON: For the first six months of 1996, noninterest expense increased 18 percent over the same period last year with the purchase acquisitions and one-time acquisition costs not materially impacting this increase. Excluding purchase acquisitions and one-time acquisition costs, operating expenses grew 1 percent in the retail/commercial bank and 35 percent in the specialty lines of business for the same reasons noted above. In addition, during the first quarter of 1996, mortgage banking recognized approximately $2 million related to back office consolidation. CAPITAL Shareholders' equity at June 30, 1996, was $892.3 million, an increase of $65.6 million, or 8 percent, from June 30, 1995. As a result of stock repurchased in the latter part of 1995, the period-end equity to assets ratio declined from 7.12 percent to 6.89 percent (June 1995 to June 1996). From time to time, First Tennessee will evaluate the level of capital and take action designed to generate or use the capital (i.e., acquisitions, stock buybacks, etc.) to maximize the benefit to shareholders. At June 30, 1996, the corporation's Tier 1 capital ratio was 8.78 percent, the Total capital ratio was 11.66 percent and the Leverage ratio was 6.37 percent. On June 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 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.
14 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AT JUNE 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 $1,606.5 Consumer home equity 282.7 Commercial real estate and construction and land development 353.7 Mortgage banking 826.6 Other 1,456.6 Commercial and standby letters of credit 238.4 Foreign exchange contracts, net position .4 Interest rate risk management activities: Interest rate swap receive fixed/ pay floating - amortizing 290.8 Mortgage banking Commitments to sell loans, net position 1,423.7 Put options purchased 924.5 HELD OR ISSUED FOR BROKER/DEALER OPERATIONS Forward contracts: Commitments to buy $1,010.2 Commitments to sell 1,028.0 Futures contracts: Commitments to buy 54.5 Options contracts: Written option contracts 2.0 Purchased option contracts 2.0 When-issued securities: Commitments to buy .2 Commitments to sell .2 Securities underwriting commitments 1.8 - --------------------------------------------------------------------- </TABLE>
15 Part II. -------- OTHER INFORMATION Items 1,2, 3, and 5. - -------------------- As of the end of the second quarter, 1996, the answers to Items 1,2, 3, and 5 were either inapplicable or negative, and therefore, these items are omitted. Item 4. Submission of Matters to a Vote of Security Holders. - ------------------------------------------------------------- (a) The Company's Annual Meeting of Shareholders was held April 16, 1996. (b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934. There were no solicitations in opposition to management's nominees for election to Class III (Messrs. Cantu, Cates, Haslam and Horn). The nominees were elected for a three-year term, or until their respective successors are duly elected and qualified. Directors continuing in office are Ms. Roman and Messrs. Blattberg, Martin, Orgill, Rose, Sansom, and Street. (c) At the Annual Meeting, the shareholders also ratified the appointment of Arthur Andersen LLP as independent auditors for the year 1996. The shareholders vote was as follows: <TABLE> <CAPTION> 1. Nominees For Witheld -------- --- ------- <S> <C> <C> Carlos H. Cantu 53,265,316 302,571 George E. Cates 53,280,273 287,614 James A. Haslam, III 53,278,934 288,954 Ralph Horn 53,319,802 248,086 </TABLE> <TABLE> <CAPTION> For Witheld Abstain --- ------- ------- <S> <C> <C> <C> <C> 2. Ratification of Auditors 53,250,121 218,894 98,647 </TABLE> There were no "broker non-votes" with respect to any of the nominees or the ratification of the auditors and no abstentions with respect to any of the nominees. 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 second quarter of 1996.
16 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: 8/13/96 By: Elbert L. Thomas Jr. ---------------- -------------------------------- Elbert L. Thomas Jr. Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer
17 EXHIBIT INDEX <TABLE> <CAPTION> Exhibit No. Exhibit Description Page No. - ----------- ------------------- -------- <S> <C> <C> 3(ii) Bylaws of the Corporation, as amended Filed Herewith 11 Statement re Computation of Per Share Earnings. Filed Herewith 27 Financial Data Schedule (for SEC use only) Filed Herewith </TABLE>