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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
FIRST TENNESSEE NATIONAL CORPORATION
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules
14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction
applies: ____________________
(2) Aggregate number of securities to which transaction applies:
___________________
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
(4) Proposed maximum aggregate value of transaction: _____________
(5) Total fee paid: ______________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount previously paid: ______________________________________
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[LOGO](sm)
FIRST TENNESSEE
2000 ANNUAL FINANCIAL DISCLOSURES AND 2001 PROXY STATEMENT
FIRST TENNESSEE NATIONAL CORPORATION
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[Logo]sm First Tennessee
All Things Financial(R)
Working together to create value
and build loyalty,
one opportunity at a time
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[Logo]
March 15, 2001
Dear Shareholders:
You are cordially invited to attend First Tennessee National Corporation's
2001 annual meeting of shareholders. We will hold the meeting on April 17, 2001,
in the Auditorium, First Tennessee Building, 165 Madison Avenue, Memphis,
Tennessee, at 10:00 a.m. We have enclosed the formal notice of the annual
meeting, our 2001 proxy statement, and a form of proxy.
At the meeting, we will ask you to elect four Class II directors and
ratify the appointment of Arthur Andersen LLP as our independent auditors for
2001. The attached proxy statement contains information about these matters.
An appendix to this proxy statement contains detailed financial
information relating to our activities and operating performance during 2000. We
have also enclosed a Summary Annual Report for those of you that did not receive
this document previously.
Last year we began offering our registered shareholders that have access
to the Internet the opportunity to receive proxy statements electronically. If
you have not already done so for this year, we encourage you to elect this
method of receiving the proxy statement next year. Not only will you have access
to the document as soon as it is available, but you will be helping our company
to save expense dollars. If you vote electronically, you will have the
opportunity to give your consent at the conclusion of the voting process.
Your vote is important. You may vote by telephone or over the Internet or
by mail, or if you attend the meeting and want to vote your shares, then prior
to the balloting you should request that your form of proxy be withheld from
voting. We request that you vote by telephone or over the Internet or return
your proxy card in the postage-paid envelope as soon as possible.
Sincerely yours,
/s/ Ralph Horn
- --------------------------------------
Ralph Horn
Chairman of the Board,
President and Chief Executive Officer
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FIRST TENNESSEE NATIONAL CORPORATION
165 Madison Avenue
Memphis, Tennessee 38103
NOTICE OF ANNUAL SHAREHOLDERS' MEETING
April 17, 2001
The annual meeting of shareholders of First Tennessee National Corporation
will be held on April 17, 2001, at 10:00 a.m., CDT, in the Auditorium, First
Tennessee Building, 165 Madison Avenue, Memphis, Tennessee.
The items of business are:
1. Election of four Class II directors to serve until the 2004 annual
meeting of shareholders, or until their successors are duly elected
and qualified.
2. Ratification of appointment of auditors.
These items are described more fully in the following pages, which are
made a part of this notice. The close of business February 23, 2001, is the
record date for the meeting. All shareholders of record at that time are
entitled to vote at the meeting.
Management requests that you vote by telephone or over the Internet
(following the instructions on the enclosed form of proxy) or that you sign and
return the form of proxy promptly, so that if you are unable to attend the
meeting your shares can nevertheless be voted. You may revoke a proxy at any
time before it is exercised at the annual meeting in the manner described on
page 1 of the proxy statement.
/s/ Lenore S. Creson
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Lenore S. Creson
Corporate Secretary
Memphis, Tennessee
March 15, 2001
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IMPORTANT NOTICE
PLEASE (1) VOTE BY TELEPHONE OR (2) VOTE OVER THE INTERNET OR (3) MARK,
DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED FORM OF PROXY IN THE ENCLOSED
ENVELOPE SO THAT YOUR SHARES WILL BE REPRESENTED AT THE MEETING.
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PROXY STATEMENT
FIRST TENNESSEE NATIONAL CORPORATION
TABLE OF CONTENTS
Page
GENERAL MATTERS...................................................................................... 1
STOCK OWNERSHIP INFORMATION AND TABLE................................................................ 2
VOTE ITEM NO. 1 - ELECTION OF DIRECTORS.............................................................. 3
Nominees 3
Continuing Directors 4
The Board of Directors and its Committees 5
Audit Committee Report 6
VOTE ITEM NO. 2 - RATIFICATION OF APPOINTMENT OF AUDITORS............................................ 7
Audit Fees 7
Financial Information Systems Design and Implementation Fees 7
All Other Fees 7
OTHER MATTERS........................................................................................ 7
SHAREHOLDER PROPOSAL DEADLINES....................................................................... 7
EXECUTIVE COMPENSATION............................................................................... 8
Summary Compensation Table 8
Option/SAR Grants in Last Fiscal Year Table 10
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/SAR Values Table 11
Pension Plan Table 12
Employment Contracts and Termination of Employment and
Change-in-Control Arrangements 13
Compensation Committee Interlocks and Insider Participation 14
Certain Relationships and Related Transactions 14
Board Compensation Committee Report on Executive Compensation 14
Total Shareholder Return Performance Graph 19
Compensation of Directors 20
Section 16(a) Beneficial Ownership Reporting Compliance 20
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K........................................................... 21
APPENDIX A - Audit Committee Charter................................................................. A-1
APPENDIX F - Financial Information and Discussion.................................................... F-1
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PROXY STATEMENT
FIRST TENNESSEE NATIONAL CORPORATION
165 Madison Avenue
Memphis, Tennessee 38103
GENERAL MATTERS
The following proxy statement is being mailed to shareholders beginning on
or about March 15, 2001. The Board of Directors is soliciting proxies to be used
at our annual meeting of the shareholders to be held on April 17, 2001, at 10:00
a.m., CDT, in the Auditorium, First Tennessee Building, 165 Madison Avenue,
Memphis, Tennessee, and at any adjournment or adjournments thereof.
The accompanying form of proxy is for use at the meeting if you will be
unable to attend in person. You may revoke your proxy at any time before it is
exercised by writing to the Corporate Secretary, by timely delivering a properly
executed, later-dated proxy (including a telephone or Internet vote) or by
voting by ballot at the meeting. All shares represented by valid proxies
received pursuant to this solicitation, and not revoked before they are
exercised, will be voted in the manner specified therein. If no specification is
made, the proxies will be voted IN FAVOR OF items 1 and 2 below:
1. Election of four Class II directors to serve until the 2004 annual
meeting of shareholders or until their successors are duly elected
and qualified.
2. Ratification of appointment of auditors.
We will bear the entire cost of soliciting the proxies. In following up
the original solicitation of the proxies by mail, we may request brokers and
others to send proxies and proxy material to the beneficial owners of the shares
and may reimburse them for their expenses in so doing. If necessary, we may also
use several of our regular employees to solicit proxies from the shareholders,
either personally or by telephone or by special letter, for which they will
receive no compensation in addition to their normal compensation.
Our common stock is the only class of voting securities. There were
128,190,138 shares of common stock outstanding and entitled to vote as of
February 23, 2001, the record date for the annual shareholders' meeting. Each
share is entitled to one vote. A quorum of the shares must be represented at the
meeting to take action on any matter at the meeting. A majority of the votes
entitled to be cast constitutes a quorum for purposes of the annual meeting. A
plurality of the votes cast is required to elect the nominees as directors. A
majority of the votes cast is required to ratify the appointment of auditors.
Both "abstentions" and broker "non-votes" will be considered present for quorum
purposes, but will not otherwise have any effect on any of the vote items.
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STOCK OWNERSHIP INFORMATION AND TABLE
We know of no person who owned beneficially, as that term is defined by
Rule 13d-3 of the Securities Exchange Act of 1934, more than five percent (5%)
of our common stock on December 31, 2000.
The following table sets forth certain information as of December 31,
2000, concerning beneficial ownership of our common stock by each director and
nominee, each executive officer named in the Summary Compensation Table, and
directors and executive officers as a group:
Name of Shares Beneficially Stock Units in Total and Percent
Beneficial Owner Owned (1) Deferral Accounts (2) of Class (3)
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Robert C. Blattberg 62,480 (4) -- 62,480
Carlos H. Cantu 37,864 (4) -- 37,864
George E. Cates 53,464 (4) -- 53,464
J. Kenneth Glass 485,496 (5) 69,577 555,073
James A. Haslam, III 47,398 (5) -- 47,398
Ralph Horn 1,334,333 (4) 117,497 1,451,830 (1.1%)
John C. Kelley, Jr. 413,894 (5) 77,501 491,395
R. Brad Martin 68,313 (4) -- 68,313
John P. O'Connor, Jr. 354,396 (5) 31,659 386,055
Joseph Orgill, III 269,806 (4) -- 269,806
Vicki R. Palmer 61,295 (4) -- 61,295
Michael D. Rose 80,021 (4) -- 80,021
William B. Sansom 82,882 (4) -- 82,882
Elbert L. Thomas, Jr. 340,318 (5) 29,886 370,204
Directors and Executive 4,284,284 (5) 373,706 4,657,990 (3.5%)
Officers as a Group (18
persons)
- -------------------------------------------------------------------------------------------------------------------------
(1) The respective directors and officers have sole voting and investment
powers with respect to all of such shares except as specified in note (4)
and note (5). Amounts in the second column do not include stock units in
the third column.
(2) Our stock option program permits participants to defer receipt of shares
upon the exercise of options and our restricted stock incentive plan
permits participants to defer receipt of shares prior to the lapsing of
restrictions imposed on restricted stock awards. Amounts in the third
column reflect the number of shares deferred that a participant has the
right to receive on a future date. These shares are not currently issued
and are not considered to be beneficially owned for purposes of Rule
13d-3, but are reflected in a deferral account on our books as phantom
stock units or restricted stock units.
(3) No individual director or executive officer, except for Mr. Horn,
beneficially owns more than one (1%) percent of our common stock that is
outstanding. Mr. Horn beneficially owns 1.1% including stock units (or
1.0% excluding stock units). The percentage of common stock outstanding
owned by the director and executive officer group (3.5%) includes stock
units. The percentage would be 3.3% with stock units excluded.
(4) Includes the following shares of restricted stock with respect to which
the nonemployee director possesses sole voting power, but no investment
power: Dr. Blattberg - 1,200; Mr. Cantu - 3,600; Mr. Cates - 3,600; Mr.
Haslam - 3,600; Mr. Martin - 2,400; Mr. Orgill - 1,200; Mrs. Palmer -
1,800; Mr. Rose - 1,200; and Mr. Sansom - 1,200. Includes the following
shares as to which the named nonemployee directors have the right to
acquire beneficial ownership through the exercise of stock options granted
under our director plans, all of which are 100% vested: Dr. Blattberg -
56,120; Mr. Cantu - 31,802; Mr. Cates - 39,402; Mr. Haslam -
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31,336; Mr. Martin -27,314; Mr. Orgill - 59,876; Mrs. Palmer - 55,187; Mr.
Rose - 50,861; and Mr. Sansom - 69,142.
(5) Includes the following shares of restricted stock with respect to which
the named person or group has sole voting power but no investment power:
Mr. Glass - 19,290; Mr. Horn - 29,901; Mr. Kelley - 29,479; Mr. Thomas -
10,611; Mr. O'Connor - 15,004; and the director and executive officer
group - 155,733. Includes the following shares as to which the named
person or group has the right to acquire beneficial ownership within 60
days through the exercise of stock options granted under our stock option
plans: Mr. Glass - 276,612; Mr. Horn - 807,161; Mr. Kelley - 229,467; Mr.
Thomas - 285,882; Mr. O'Connor - 155,998; and the director and executive
officer group - 2,394,603. Also includes shares held at December 31, 2000
for 401(k) Savings Plan accounts.
VOTE ITEM NO. 1 - ELECTION OF DIRECTORS
The Board of Directors is divided into three Classes. The term of office
of each Class expires in successive years. The term of Class II directors
expires at this annual meeting. The terms of Class III and Class I directors
expire at the 2002 and 2003 annual meetings, respectively. The Board of
Directors proposes the election of four Class II directors. Each director
elected at the meeting will hold office until the specified annual meeting of
shareholders and until his or her successor is elected and qualified.
If any nominee proposed by the Board of Directors is unable to accept
election, which the Board of Directors has no reason to anticipate, the persons
named in the enclosed form of proxy will vote for the election of such other
persons as management may recommend, unless the Board decides to reduce the
number of directors pursuant to the Bylaws.
We have provided below certain information about the nominees and
directors (including age, current principal occupation which has continued for
at least five years unless otherwise indicated, name and principal business of
the organization in which his or her occupation is carried on, directorships in
other reporting companies, and year first elected to our Board). All of our
directors are also directors of First Tennessee Bank National Association (the
"Bank" or "FTB"). The Bank is our principal operating subsidiary.
NOMINEES FOR DIRECTOR
Class II
For a Three-Year Term Expiring at 2004 Annual Meeting
ROBERT C. BLATTBERG (58) is the Polk Brothers Distinguished Professor of
Retailing, J. L. Kellogg Graduate School of Management, Northwestern University,
Evanston, Illinois. Dr. Blattberg has been a director since 1984 and is a
Chairman of the Audit Committee.
J. KENNETH GLASS (54) is President-Retail Financial Services of First Tennessee
and the Bank. Mr. Glass has been President-Retail Financial Services of the Bank
since April 1999 and of First Tennessee since April 2000. Prior to April 1999,
he was President-Tennessee Banking Group of the Bank and prior to April 2000, he
was Executive Vice President of First Tennessee. Mr. Glass has been a director
since 1996.
JOHN C. KELLEY, JR. (57) is President-Business Financial Services/Memphis
Financial Services of First Tennessee and the Bank. Mr. Kelley has been
President-Business Financial Services/Memphis Financial Services of the Bank
since April 1999 and of First Tennessee since April 2000. Prior to April 1999,
he was President-Memphis Banking Group of the Bank and prior to April 2000, he
was Executive Vice President of First Tennessee. Mr. Kelley has been a director
since 1996.
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MICHAEL D. ROSE (59) is a private investor. Prior to December 19, 1997, he was
Chairman of the Board of Promus Hotel Corporation, Memphis, Tennessee, a
franchiser and operator of hotel brands. Prior to January 1997, Mr. Rose was
also Chairman of the Board of Harrah's Entertainment, Inc. Mr. Rose is a
director of five other public companies, Darden Restaurants, Inc., FelCor
Lodging Trust, Inc., Nextera Enterprises, Inc., ResortQuest International, Inc.,
and Stein Mart, Inc. Mr. Rose has been a director since 1984 and is a member of
the Human Resources Committee.
CONTINUING DIRECTORS
Class III
Term Expiring at 2002 Annual Meeting
CARLOS H. CANTU (67) is Senior Chairman of The ServiceMaster Company, Downers
Grove, Illinois, a company that provides consumer services and supportive
management services. Prior to December 1999, he was President and Chief
Executive Officer of The Service Master Company. Mr. Cantu is a director of two
other public companies, The ServiceMaster Company and Exelon Corporation. Mr.
Cantu has been a director since 1996 and is a member of the Human Resources
Committee.
GEORGE E. CATES (63) is Chairman of the Board and Chief Executive Officer of
Mid-America Apartment Communities, Inc., ("Mid-America") Memphis, Tennessee, a
real estate investment trust. Mr. Cates is a director of two other public
companies, Mid-America Apartment Communities, Inc. and SCB Computer Technology,
Inc. Mr. Cates has been a director of the Corporation since 1996.
JAMES A. HASLAM, III (46) is Chief Executive Officer of Pilot Corporation,
Knoxville, Tennessee, a national retail operator of convenience stores and
travel centers. Mr. Haslam is a director of one other public company, Ruby
Tuesday, Inc. Mr. Haslam has been a director since 1996 and is a member of the
Audit Committee.
RALPH HORN (59) is Chairman of the Board, President, and Chief Executive Officer
of First Tennessee and the Bank. Mr. Horn has served as President of First
Tennessee since 1991, Chief Executive Officer since 1994, and Chairman of the
Board since 1996. Mr. Horn is a director of two other public companies, Harrah's
Entertainment, Inc. and Mid-America Apartment Communities, Inc. Mr. Horn has
been a director since 1991.
Class I
Term Expiring at 2003 Annual Meeting
R. BRAD MARTIN (49) is Chairman of the Board and Chief Executive Officer of Saks
Incorporated, Birmingham, Alabama, a retail merchandising company. Mr. Martin is
a director of two other public companies, Saks Incorporated and Harrah's
Entertainment, Inc. He has been a director since 1994 and is a member of the
Human Resources Committee.
JOSEPH ORGILL, III (63) is Chairman of the Board of Orgill, Inc., Memphis,
Tennessee, wholesale hardware distributors. Prior to January 1996, Orgill, Inc.,
was a subsidiary of Rock Island Corporation, Memphis, Tennessee, of which Mr.
Orgill remains Chairman of the Board. Mr. Orgill has been a director since 1969
and is a member of the Audit Committee.
VICKI R. PALMER (47) is Corporate Senior Vice President, Treasurer, and Special
Assistant to the CEO of Coca-Cola Enterprises Inc., Atlanta, Georgia, a bottler
of soft drink products. Prior to December 1999, Mrs. Palmer was Corporate Vice
President and Treasurer of Coca-Cola Enterprises, Inc. Mrs. Palmer has been a
director since 1993 and is Chairperson of the Human Resources Committee.
WILLIAM B. SANSOM (59) is Chairman of the Board and Chief Executive Officer of
The H. T. Hackney Co., Knoxville, Tennessee, a diversified wholesale
distribution firm serving the food, gas, oil and industrial markets in the
Southeast. He is a director of two other public companies, Martin Marietta
Materials, Inc. and Astec Industries, Inc. Mr. Sansom has been a director since
1984.
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The Board of Directors and its Committees
During 2000, the Board of Directors held four meetings. The average
attendance at Board and committee meetings exceeded 93 percent. No director
attended fewer than 75 percent of the meetings of the Board and the committees
of the Board on which he or she served.
The Board has several standing committees, including the Audit Committee
and the Human Resources Committee. The Human Resources Committee serves as both
a nominating committee and a compensation committee. The Audit Committee and the
Human Resources Committee are each composed of directors who are not First
Tennessee employees. Currently, Messrs. Blattberg, Haslam and Orgill serve on
the Audit Committee and Messrs. Cantu, Martin and Rose and Mrs. Palmer serve on
the Human Resources Committee.
The Audit Committee was established by our Board of Directors and operates
pursuant to a written charter that was last amended and restated on April 18,
2000. A copy of the Committee charter is attached to this proxy statement as
Appendix A. Subject to the limitations and provisions of its charter, the
Committee assists our Board in its oversight of our accounting and financial
reporting principles and policies, internal audit controls and procedures, and
financial statements and the independent audit of the financial statements. The
Committee recommends to the Board the nomination of the independent auditor for
shareholder approval and evaluates the independent auditor and its independence.
The members of the Committee are themselves "independent," as that term is
defined in the listing standards of the New York Stock Exchange, on which our
common stock is listed. During 2000 the Audit Committee held five meetings. The
Audit Committee's Report, a new SEC requirement, is included below.
As a nominating committee, the Human Resources Committee primarily
considers recommendations for nominees to the Board of Directors, reviews the
performance of incumbent directors and senior officers in determining whether to
recommend them to the Board of Directors for reappointment, reviews succession
plans, and between annual meetings has authority to appoint persons to offices
except the offices of Chairman, CEO, President, Auditor and any office in which
the incumbent has been designated by the Board as an Executive Officer. As a
compensation committee, the Human Resources Committee's primary functions
include recommending to the Board major policies concerning compensation,
periodically reviewing corporate compensation and management of human resources,
fixing the compensation of executive officers, reviewing remuneration structures
for non-executive officers, and making recommendations to the Board concerning
compensation arrangements for directors and adoption or amendment of employee
benefit and management compensation plans. During 2000 the Human Resources
Committee held four meetings.
It is our practice to encourage communication between management and
shareholders. Management in turn communicates appropriate information to the
Board. The Human Resources Committee, as a committee of the Board, follows this
procedure in considering nominations for directorships and does not receive
nominations directly from shareholders.
Notwithstanding anything to the contrary set forth in any of our previous
filings under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, that might incorporate future filings by reference,
including this proxy statement, in whole or in part, the following Audit
Committee Report, the Audit Committee Charter attached as Appendix A and the
statements regarding the independence of the members of the Committee shall not
be incorporated by reference into any such filings.
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Audit Committee Report
The role of the Audit Committee (Committee) is to assist our Board of
Directors in its oversight of our financial reporting process. As set forth in
the Committee's charter, management of First Tennessee is responsible for the
preparation, presentation and integrity of our financial statements, and
maintaining appropriate accounting and financial reporting principles and
policies and internal controls and procedures designed to assure compliance with
accounting standards and applicable laws and regulations. The independent
auditors are responsible for auditing our financial statements and expressing an
opinion as to their conformity with generally accepted accounting principles.
In the performance of its oversight function, the Committee has considered
and discussed the audited financial statements with management and the
independent auditors. The Committee has also discussed with the independent
auditors the matters required to be discussed by Statement on Auditing Standards
No. 61, Communication with Audit Committees, as currently in effect. Finally,
the Committee has received the written disclosures and the letter from the
independent auditors required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees, as currently in effect, has
considered whether the provision of non-audit services by the independent
auditors to First Tennessee is compatible with maintaining the auditor's
independence and has discussed with the auditors the auditors' independence.
The members of the Committee are not professionally engaged in the practice of
auditing or accounting and are not experts in the fields of accounting or
auditing, including in respect of auditor independence. Members of the Committee
rely without independent verification on the information provided to them and on
the representations made by management and the independent auditors.
Accordingly, the Committee's oversight does not provide an independent basis to
determine that management has maintained appropriate accounting and financial
reporting principles or appropriate internal controls and procedures designed to
assure compliance with the accounting standards and applicable laws and
regulations. Furthermore, the Committee's considerations and discussions
referred to above do not assure that the audit of our financial statements has
been carried out in accordance with generally accepted auditing standards, that
the financial statements are presented in accordance with generally accepted
accounting principles or that our auditors are in fact "independent."
Based upon the reports and discussions described in this report, and
subject to the limitations on the role and responsibilities of the Committee
referred to above and in the Committee's charter, the Committee recommended to
the Board of Directors that the audited financial statements be included in our
Annual Report on Form 10-K for the year ended December 31, 2000, to be filed
with the Securities and Exchange Commission.
Submitted by the Audit Committee of our Board of Directors.
Audit Committee
Robert C. Blattberg, Chairman
James A. Haslam, III
Joseph Orgill, III
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VOTE ITEM NO. 2 - RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has appointed, based on the recommendation of the
Audit Committee and subject to ratification by the shareholders at the annual
meeting, the firm of Arthur Andersen LLP, independent accountants, to be our
auditors for the year 2001. Fees billed by Arthur Andersen LLP for the year 2000
are described below. The Audit Committee of our Board of Directors has
considered whether the provision of services other than professional services
rendered for the audit of our financial statements and the quarterly review of
the financial statements included in our Form 10-Q's is compatible with
maintaining Arthur Andersen LLP's independence. Representatives of Arthur
Andersen LLP are expected to be present at the annual meeting of shareholders
with the opportunity to make a statement and to respond to appropriate
questions.
Audit Fees
The aggregate fees billed to us by Arthur Andersen LLP for professional
services rendered for the audit of our financial statements for the year 2000
and for the reviews of the financial statements in our Form 10-Q's for the year
2000 were $894,000
Financial Information Systems Design and
Implementation Fees
No fees were billed to us by Arthur Andersen LLP for professional services
for the year 2000 for designing or implementing hardware or software systems
that aggregate service data underlying our financial statements or generate
information that is significant to our financial statements taken as a whole.
All Other Fees
The aggregate fees billed to us by Arthur Andersen LLP for services
rendered for the year 2000 and not included in the fees disclosed in either of
the two preceding subsections were $249,000.
OTHER MATTERS
The Board of Directors, at the time of the preparation and printing of
this proxy statement, knew of no other business to be brought before the meeting
other than the matters described in this proxy statement. If any other business
properly comes before the meeting, the persons named in the enclosed proxy will
have discretionary authority to vote all proxies in accordance with their best
judgment.
SHAREHOLDER PROPOSAL DEADLINES
If you intend to present a shareholder proposal at the 2002 annual
meeting, it must be received by the Corporate Secretary, First Tennessee
National Corporation, P. O. Box 84, Memphis, Tennessee, 38101, not later than
November 15, 2001, for inclusion in the proxy statement and form of proxy
relating to that meeting.
In addition, Sections 2.8 and 3.6 of our Bylaws provide that a shareholder
who wishes to nominate a person for election to the Board or submit a proposal
at a shareholder meeting must comply with certain procedures whether or not the
matter is included in our proxy statement. These procedures require written
notification to us, generally not less than 90 nor more than 120 days prior to
the date of the shareholder meeting. If, however, we give fewer than 100 days'
notice or public disclosure of the shareholder meeting date to shareholders,
then we must receive the shareholder notification not later than 10 days after
the earlier of the date notice of the shareholder meeting was mailed or publicly
disclosed. The shareholder must disclose certain information about the nominee
or item proposed, the shareholder and any other shareholders known to support
the nominee or proposal. Section 2.4 of our Bylaws provides that the date and
time of the annual meeting will be the third Tuesday in April (or, if that day
is a legal holiday, on the next succeeding business day that is not a legal
holiday) at 10:00 a.m. Memphis time or such other date and/or such other time as
our Board may fix by resolution. The meeting date for 2002, determined according
to the Bylaws, is April 16, 2002. Thus, shareholder proposals submitted outside
the
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process that permits them to be included in our proxy statement must be
submitted to the Corporate Secretary between December 17, 2001 and January 16,
2002, or the proposals will be considered untimely. Untimely proposals may be
excluded by the Chairman or our proxies may exercise their discretion and vote
on these matters in a manner they determine to be appropriate.
EXECUTIVE COMPENSATION
The Summary Compensation Table provides information for the last three
years about the Chief Executive Officer ("CEO") and our other four most highly
compensated executive officers at year end 2000. All of the named officers are
officers of both First Tennessee and the Bank. The amounts include all
compensation earned during each year, including amounts deferred, by the named
officers for all services rendered in all capacities to us and our subsidiaries.
Information is provided for each entire year in which an individual served
during any portion of the year as an executive officer. Additional information
is provided in tabular form below about option grants and exercises in 2000,
year-end option values, and pension benefits, along with a report of the Board's
Human Resources Committee on executive compensation and certain other
information concerning compensation of executive officers and directors.
Summary Compensation Table
- -------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
----------------------------------------- -------------------------------------------------
Awards (3) Payouts
----------------------- ----------------------
(a) (b) (c) (d) (e) (f) (g) (h) (I)
Securities
Name Other Restricted Underlying
And Annual Stock Options/ LTIP All Other
Principal Salary Bonus Compensation Award(s) SARs Payouts Compensation
Position Year ($) ($) ($) (7) ($) (1) (#) (2) $ ($) (9)
- -------------------------------------------------------------------------------------------------------------------------
Ralph Horn 2000 $814,346 $ -- $11,544 $ -- 205,547 $ -- $355,997
Chairman, President 1999 771,154 467,461 (5) 11,544 1,162,551 137,331 (5) -- 347,211
& CEO 1998 683,654 412,741 (5) 10,806 -- 65,536 (5) -- 149,231
J. Kenneth Glass 2000 475,385 (4) -- 7,068 -- 110,921 (4) -- 183,282
President-Retail 1999 455,212 (4) 232,947 (4) 7,068 749,995 74,471 (4) -- 184,392
Financial Services 1998 357,634 (4) 232,580 6,720 -- 21,911 (4) -- 106,042
John C. Kelley, Jr. 2000 472,846 -- 7,068 -- 89,512 -- 209,065
President-Business 1999 446,923 234,351 7,068 674,996 44,841 -- 204,435
Financial Services/ 1998 381,923 226,862 6,720 - 16,169 -- 129,012
Memphis Financial
Services
Elbert L. Thomas, Jr. 2000 288,962 -- -- -- 19,086 -- 27,620
Exec. Vice Pres. & 1999 206,787 (6) -- (6) -- 412,556 114,839 (6) -- 27,620
CFO 1998 146,983 (6) -- (6) -- -- 41,206 (6) -- 18,064
John P. O'Connor, Jr. 2000 236,423 106,390 (8) -- -- 18,830 -- 30,345
Exec. Vice Pres. & 1999 222,172 -- (8) -- 337,556 62,251 (8) -- 30,720
Chief Credit Officer 1998 204,291 -- (8) -- -- 21,074 (8) -- 22,391
- -------------------------------------------------------------------------------------------------------------------------
8
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(1) Restricted stock awards are valued on the basis of the fair market value
of a share of stock on the date of the award: $38.88 (2-23-99), adjusted
for stock splits. On 12-31-00, the named officers held the following
shares of restricted stock (including RSU's described in the following
sentence) with market values as indicated: Mr. Horn - 59,901 shares
($1,718,560); Mr. Glass - 31,408 shares ($901,096); Mr. Kelley - 29,479
shares ($845,753); Mr. Thomas - 17,836 shares ($511,715); and Mr. O'Connor
- 15,004 shares ($430,465). The number of shares disclosed in the
preceding sentence includes restricted stock units ("RSU's"), described in
note (2) to the Stock Ownership Table, with respect to which restrictions
had not lapsed at 12-31-00, as follows: Mr. Horn - 30,000 RSU's; Mr. Glass
- 12,118 RSU's; Mr. Kelley - 0 RSU's; Mr. Thomas - 7,225 RSU's; and Mr.
O'Connor - 0 RSU's. Dividends are paid on restricted stock (and dividend
equivalents are paid on RSU's) at the same rate as all other shares of our
common stock. Dividend equivalents on RSU's accrue interest at a 10-year
Treasury rate and are settled only in cash.
(2) All amounts represent shares subject to option. No stock appreciation
rights (SAR's) were awarded.
(3) All share amounts and share values have been revised to reflect the
two-for-one stock split, distributed 2-20-98.
(4) In 1999, 1998 and 1997 Mr. Glass elected to receive a deferred
compensation stock option in lieu of $50,000, $40,000, and $30,000 of his
salary earned for the following year. The amounts in column (c) do not
include the amounts, in lieu of which options for 4,441 shares, 7,022
shares, 5,140 shares, 3,172 shares, 2,758 shares and 2,984 shares
(included in the amounts in column (g)) were granted on 1-02-01, 7-03-00,
1-3-00, 7-1-99, 1-4-99 and 7-1-98, respectively. In 1998 Mr. Glass elected
to receive a deferred compensation stock option in lieu of $50,000 of his
annual bonus for the following year. The amount in column (d) does not
include this amount, in lieu of which an option for 18,519 shares
(included in the amount in column (g)) was granted on 3-1-00.
(5) In 1998 and 1997 Mr. Horn elected to receive a deferred compensation stock
option in lieu of $100,000 of his annual bonus for the following year. The
amount in column (d) for 1999 and 1998 does not include this amount, in
lieu of which options for 37,037 shares and 17,153 shares (included in the
amounts in column (g)) were granted on 3-1-00 and 2-23-99, respectively.
(6) In 1998 and 1997 Mr. Thomas elected to receive a deferred compensation
stock option in lieu of $60,000 and $80,000 of his salary earned for the
following year. The amounts in column (c) do not include, these amounts in
lieu of which options for 7,711 shares, 4,758 shares, 7,355 shares, and
7,958 shares (included in the amounts in column (g)) were granted on
1-3-00, 7-1-99, 1-4-99, and 7-1-98, respectively. In 1998 and 1997 Mr.
Thomas elected to receive a deferred compensation stock option in lieu of
his annual bonus for the following year. The amount in column (d) for 1999
does not include a bonus of $248,645 and for 1998 does not include a bonus
of $113,492, in lieu of which options for 92,091 shares and 19,467 shares
(included in the amounts in column (g)) were granted on 3-1-00 and
2-23-99, respectively.
(7) The amounts in column (e) for all years represent automobile allowance tax
gross-up payments.
(8) Mr. O'Connor's annual bonus is based entirely on his individual personal
plan and not on corporate performance. In 1998 and 1997 Mr. O'Connor
elected to receive a deferred compensation stock option in lieu of his
annual bonus for the following year. The amount in column (d) for 1999
does not include a bonus of $149,155 and for 1998 does not include a bonus
of $89,633, in lieu of which options for 55,243 shares and 15,374 shares
(included in the amounts in column (g)) were granted on 3-1-00 and
2-23-99, respectively.
(9) Elements of "All Other Compensation" for 2000 consist of the following:
Mr. Horn Mr. Glass Mr. Kelley Mr. Thomas Mr. O'Connor
- -------------------------------------------------------------------------------------------------------------------------
Above Mkt Rate: $ 92,727 $ 77,112 $ 91,295 $ -- $ --
SurBen/SERP: 236,800 85,200 96,800 16,800 19,800
Flex $: 5,720 5,720 5,720 5,720 5,720
401(k) Match: 5,100 5,100 5,100 5,100 4,825
Auto Allowance: 15,650 10,150 10,150 -- --
- -------------------------------------------------------------------------------------------------------------------------
Total $355,997 $183,282 $209,065 $27,620 $30,345
=========================================================================================================================
9
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"Above Mkt Rate" represents above-market interest accrued on deferred
compensation.
"Sur Ben/SERP" represents insurance premiums with respect to our
supplemental life insurance and excess pension plans. Under our
Survivor Benefits Plan a benefit of 2 1/2 times final annual base
salary is paid upon the participant's death prior to retirement (or 2
times final salary upon death after retirement).
"Flex $" represents First Tennessee's contribution to the Flexible
Benefits Plan, based on salary, service and corporate performance.
"401(k) Match" represents First Tennessee's 50% matching contribution
to the 401(k) Savings Plan, which is based on the amount contributed
by the participant to the FTNC stock fund, up to 6% of compensation.
The following table provides information about stock options granted
during 2000 to the officers named in the Summary Compensation Table. No stock
appreciation rights (SAR's) were granted during 2000.
Option/SAR Grants in Last Fiscal Year Table
- -------------------------------------------------------------------------------------------------------------------------
Individual Grants
- ----------------------------------------------
(b) Number (c)% of Total (h) Alternatives to
of Securities Options/SARs (f) and (g):
Underlying Granted to (d) Exercise or (e) Grant Date Value.
Options/SAR's Employees in Base Price Expiration Grant Date Present
(a) Name Granted (#)(1) Fiscal Year ($ per share)(1) Date Value ($) (4)
- -------------------------------------------------------------------------------------------------------------------------
Mr. Horn 37,037 (2) .50% $15.27 3/1/20 $141,163
229,287 3.12 17.97 3/1/10 837,242
Mr. Glass 5,140 (2) .07 23.72 1/3/20 45,391
18,519 (2) .25 15.27 3/1/20 70,583
110,945 1.51 17.97 3/1/10 405,116
7,022 (3) .10 14.22 7/3/20 33,141
Mr. Kelley 99,800 1.36 17.97 3/1/10 364,420
Mr. Thomas 7,711 (2) .10 23.72 1/3/20 68,096
92,091 (2) 1.25 15.27 3/1/20 350,995
19,086 .26 17.97 3/1/10 69,693
Mr. O'Connor 55,243 (2) .75 15.27 3/1/20 210,553
13,013 .18 17.97 3/1/10 47,517
- -------------------------------------------------------------------------------------------------------------------------
(1) All options except those marked with footnote (2) or (3) were granted
3-1-00 and vest 50% after four years from the date of grant and 100% after
five years, with accelerated vesting if certain performance criteria (our
stock price equals or exceeds $24.58 on 3-1-03 or on 5 consecutive days
before 3-2-03) are met. The criteria were met and these options vested
December 7, 2000. No SAR's were granted. The exercise price per share
equals the fair market value of one share of our common stock on the date
of grant. Under the terms of all options, including those marked with
footnote (2) and (3), participants are permitted to pay the exercise price
of the options with our stock; participants are permitted to defer receipt
of shares upon an exercise and thereby defer gain; options exercised more
than one year prior to the end of their term are eligible for a reload
option grant when the exercise price is paid with our stock, with the
reload option grant for the number of shares surrendered and having an
exercise price equal to fair market value at the time of the first
exercise and a term equal to the remainder of the first option's term; the
option plan provides for tax withholding rights upon approval of the plan
committee; and upon a Change in Control (as defined in the subsection
entitled
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Employment Contracts and Termination of Employment and Change-in-Control
Arrangements"), all options vest.
(2) Options indicated by footnote (2) that were granted during 2000 were
granted in lieu of compensation earned during 1999. Mr. Glass and Mr.
Thomas were granted options for 5,140 shares and 7,711 shares on 1-3-00 in
lieu of salary of $15,000 and $30,000, respectively. Messrs Horn, Glass,
Thomas and O'Connor were granted options for 37,037 shares, 18,519 shares,
92,091 shares and 55,243 shares, respectively on 3-1-00 in lieu of 1999
bonus of $100,000, $50,000, $248,645 and $149,155, respectively. The
exercise price per share equals 85% of the fair market value ("FMV") of
one share of Corporation common stock on the grant date. The options vest
100% at the time of grant. No SAR's were granted. FMV on grant dates were
$27.91 and $17.97 on 1-3-00 and 3-1-00.
(3) Options indicated by footnote (3) were granted in lieu of compensation
earned during 2000 and contain the same terms as described generally in
footnote (2), except that the exercise price per share equals 80% of FMV
on the grant date, and the option vests six months after the grant date.
Mr. Glass's option was granted on 7-3-00 in lieu of $25,000 of his 2000
salary. FMV on the grant date was $17.78.
(4) A variation of the Black-Scholes option pricing model has been used. The
following assumptions were made for purposes of calculating the Grant Date
Value of the options granted 1-3-00, 3-1-00, 3-1-00 (options in lieu of
compensation), and 7-3-00, respectively: an exercise price of $23.72,
$17.97, $15.27, and $14.22; an option term of 20 years, 10 years, 20
years, and 20 years; an interest rate of 6.66%, 6.26%, 6.26%, and 6.05%;
volatility of 32.62%, 36.31%, 36.31%, and 39.57%; a dividend yield of
3.15%, 4.90%, 4.90%, and 4.95%; a reduction of 0%, 24.18%, 0%, and 2.00%
to reflect the probability of forfeiture due to termination prior to
vesting; and reduction of 8.61%, 6.14%, 3.72%, and 2.82% to reflect the
probability of a shortened option term due to termination prior to the
option expiration date. The actual value, if any, realized by a
participant upon the exercise of an option may differ and will depend on
the future market value of our common stock.
The following table provides information about stock options and SAR's
held at December 31, 2000, and exercises during 2000 by the officers named in
the Summary Compensation Table. The values in column (e) reflect the spread
between the market value at December 29, 2000, of the shares underlying the
option and the exercise price of the option.
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/SAR Values Table
- -------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at In-the-Money Options/SARs
Fiscal Year-End (1) at Fiscal Year-End (1)
---------------------------- ------------------------------
Shares
Acquired Value
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
(#) ($) (#) (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------------------
Mr. Horn 17,172 (2) $243,392 807,161 87,007 $11,143,752 --
Mr. Glass 20,772 322,330 269,590 41,880 2,706,397 $101,608
Mr. Kelley 20,772 298,313 229,467 32,989 2,532,005 --
Mr. Thomas 10,632 (2) 150,363 285,882 16,705 2,779,145 --
Mr. O'Connor 14,176 317,880 155,998 12,708 1,716,219 --
- -------------------------------------------------------------------------------------------------------------------------
11
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(1) No SAR's are attached to any of the options in the table. Option values
are based on $28.69 per share, the average of the high and low sales price
on 12-29-00.
(2) Exercises identified with footnote (2) include the following shares whose
receipt was deferred by the officer to a date subsequent to the exercise
date: Mr. Horn - 13,268 shares, Mr. Thomas - 8,210 shares. The value
realized is the difference between the fair market value of the shares on
the exercise date and the exercise price of the option. The actual value
ultimately realized will depend on the future market value of the shares
at the termination of the deferral period.
The following table provides information about estimated combined benefits
under both our Pension Plan and our Pension Restoration Plan.
Pension Plan Table
=========================================================================================================================
Covered
Compensation Years of Service*
- -------------------------------------------------------------------------------------------------------------------------
15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs. 40 Yrs.
- -------------------------------------------------------------------------------------------------------------------------
$100,000 $ 44,244 $ 53,008 $ 61,769 $ 65,590 $ 69,416 $ 73,243
150,000 59,046 72,746 86,441 92,727 99,020 105,314
200,000 73,848 92,484 111,114 119,864 128,624 137,385
250,000 88,650 112,222 135,786 147,001 158,228 169,456
300,000 103,452 131,960 160,459 174,138 187,832 201,527
350,000 118,254 151,698 185,131 201,275 217,436 233,598
400,000 133,056 171,436 209,804 228,412 247,040 265,669
450,000 147,858 191,174 234,476 255,549 276,644 297,740
500,000 162,660 210,912 259,149 282,686 306,248 329,811
550,000 177,462 230,650 283,821 309,823 335,852 361,882
600,000 192,264 250,388 308,494 336,960 365,456 393,953
650,000 207,066 270,126 333,166 364,097 395,060 426,024
700,000 221,868 289,864 357,839 391,234 424,664 458,095
750,000 236,670 309,602 382,511 418,371 454,268 490,166
800,000 251,472 329,340 407,184 445,508 483,872 522,237
=========================================================================================================================
*Benefit shown is subject to limitations fixed by the Secretary of the
Treasury pursuant to Section 415 of the Internal Revenue Code of 1986, as
amended. The limitation is $135,000 for 2000 or 100% of the employee's
average income in his three highest paid years, whichever is less.
However, a benefit as high as $136,425 could be accrued prior to 1983 and
such higher benefit may be paid to the employee who attained that level
prior to 1983.
Our Pension Plan is integrated with social security under an "offset"
formula, applicable to all participants. Retirement benefits are based upon a
participant's average base salary for the highest 60 consecutive months of the
last 120 months of service ("Covered Compensation"), service, and social
security benefits. Benefits are normally payable in monthly installments after
age 65. The normal form of benefit payment for a married participant is a
qualified joint and survivor annuity with the surviving spouse receiving for
life 50 percent of the monthly amount the participant received. The normal form
of benefit payment for an unmarried participant is an annuity payable for life
and 10 years certain. For purposes of the plan, "compensation" is defined as the
total cash remuneration reportable on the employee's IRS form W-2, plus pre-tax
contributions under the Savings Plan and employee contributions under the
Flexible Benefits Plan, excluding bonuses, commissions, and incentive and
contingent compensation. Our Pension Restoration Plan is an unfunded plan
covering employees in the highest salary grades, including Messrs. Horn, Glass,
and Kelley, whose benefits under the Pension Plan have been limited under Tax
Code Section 415, as described in the note to the Pension Table, and Tax Code
Section 401(a)(17), which limits compensation to $170,000 for purposes of
certain benefit calculations. "Compensation" is defined in the same manner as it
is for purposes of the Pension Plan. Under the Pension Restoration Plan
participants receive
12
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the difference between the monthly pension payable, if tax code limitations did
not apply, and the actual pension payable. The amounts shown in the table are
annual benefits payable (including any social security payments) in the event of
retirement on December 31, 2000, at age 65 of a participant with a spouse who is
age 65, assuming receipt of a qualified joint and 50% survivor annuity. The
estimated credited years of service and the compensation covered by the plans
for each of the individuals named in the Summary Compensation Table are as
follows: Mr. Horn, 37 ($638,019); Mr. Glass, 27 ($397,038); Mr. Kelley, 31
($390,146); Mr. Thomas, 11 ($182,078); and Mr. O'Connor, 30 ($194,841).
Employment Contracts and Termination of Employment and
Change-in-Control Arrangements
We have contracts with approximately 50 officers, including each of the
named executive officers, which may be terminated upon three years' prior
notice. These contracts provide generally for a payment (which, for the named
executive officers, is equal to three times annual base salary plus annual
target bonus) in the event of a termination of the officer's employment by us
other than "for cause" or by the employee for "good reason" (as such terms are
defined in the contracts) within 36 months after a "Change-in-Control" or the
officer's termination of employment for any reason (other than "cause") during
the 30-day period commencing one year after a Change-in-Control. The contracts
provide generally for an excise tax gross-up with respect to any taxes incurred
under Internal Revenue Code Section 4999 following a Change-in-Control and for 3
years continued welfare benefits. The term "Change-in-Control" is defined to
include:
- a merger or other business combination, unless (i) more than 50
percent of the voting power of the corporation resulting from the
business combination is represented by our voting securities
outstanding immediately prior thereto, (ii) no person or other
entity beneficially owns 20 percent or more of the resulting
corporation, and (iii) at least a majority of the members of the
board of directors of the resulting corporation were our directors
at the time of board approval of the business combination (solely
for purposes of the severance contracts, but not for purposes of
their 30-day termination period, the "50 percent" test in clause (i)
is changed to "60 percent" and the "majority of the board" test in
clause (iii) is changed to "two-thirds of the board"),
- the acquisition by a person or other entity of 20 percent or more of
our outstanding voting stock,
- a change in a majority of the Board of Directors, or
- shareholder approval of a plan of complete liquidation or a sale of
substantially all of our assets.
A Change-in-Control has the following effect on certain benefit plans in
which the named executive officers participate:
- Target annual bonuses are prorated through the date of the
Change-in-Control and paid.
- Restricted stock, restricted stock units, phantom stock units and
unvested stock options vest.
- Under our Pension Restoration Plan, a lump sum payout is made to
participants of the present value, using a discount rate of 4.2
percent, of the participant's scheduled projected benefits, assuming
periodic distributions of the participant's accrued benefit in the
normal form under the plan, actuarially adjusted according to a
formula for the participant's age at the time of the
Change-in-Control.
- Excess funding in the Pension Plan is allocated, according to a
formula, to participants and retirees.
- Deferred compensation under individual deferral agreements which
accrue interest based on the 10-year Treasury rate and certain other
benefits are paid over to previously established rabbi trusts. Funds
in such trusts will remain available for the benefit of our general
creditors prior to distribution.
- Our Survivor Benefits Plan generally cannot be amended to reduce
benefits.
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- Under the Directors and Executives Deferred Compensation Plan, a
lump sum payout is made to participating employees and certain
terminated employees of the present value, using a discount rate of
4.2 percent, of the participant's scheduled projected distributions,
assuming employment through normal retirement date and continued
interest accruals at above-market rates, described in the
"Compensation of Directors" section below.
Compensation Committee Interlocks
and Insider Participation
Messrs. Cantu, Martin and Rose and Mrs. Palmer, all of whom are
non-employee directors, served as members of the Board of Director's Human
Resources Committee ("Committee"), which is our compensation committee, during
all or a portion of 2000. No interlocking relationships existed with respect to
any of the members of the Committee. Mr. Horn, Chairman, President and CEO of
First Tennessee, was, however, during 2000 Chairman of the compensation
committee of Mid-America Apartment Communities, Inc., of which Mr. Cates, a
director of First Tennessee, is Chairman and CEO.
Certain Relationships and Related Transactions
Our banking subsidiaries have had banking transactions in the ordinary
course of business with our executive officers, directors, nominees, and their
associates which are reported in a note to our financial statements, and they
expect to have such transactions in the future. Such transactions, which at
December 31, 2000, amounted to 4.50 percent of our shareholders' equity, have
been on substantially the same terms, including interest rates and collateral on
loans, as those prevailing at the same time for comparable transactions with
others and have not involved more than normal risk of collectibility or
presented other unfavorable features.
Notwithstanding anything to the contrary set forth in any of our previous
filings under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, that might incorporate future filings by reference,
including this proxy statement, in whole or in part, the following Board
Compensation Committee Report on Executive Compensation and the Total
Shareholder Return Performance Graph shall not be incorporated by reference into
any such filings.
Board Compensation Committee Report on Executive Compensation
Our Bylaws require the Board of Directors or a Board committee to
determine the compensation of executive officers. The Board has designated the
Human Resources Committee (Committee) to perform this function. The Committee is
composed entirely of independent, nonemployee directors who have no interlocking
relationships with us. The Committee has set forth below its report on the
compensation policies applicable to executive officers and the bases for the
compensation of the Chief Executive Officer (CEO) during 2000.
Our executive compensation programs are designed to align the interests of
the executive officers with our performance and the interests of our
shareholders. Approximately 70 to 85 percent of the executive officers' annual
compensation potential is at risk based on corporate performance and total
shareholder return (defined below). Compensation programs have been designed to
reward executive officers in both cash and our stock based on performance that
also rewards shareholders. When corporate performance does not meet criteria
established by the Committee, incentive compensation is reduced accordingly. In
addition, the executive
14
21
compensation program has been designed to attract and retain qualified executive
officers. Executive compensation consists generally of the following components:
- base salary
- annual incentive bonus
- long-term incentive awards
- deferral of compensation through stock option grants or at market
interest rates (or for compensation deferred before 1996 at
above-market rates)
- customary employee and other benefits typically offered to similarly
situated executives
Base salary and annual bonus are based on an evaluation of the
individual's position and responsibilities based on independent criteria and
external market data and personal and corporate performance. The Committee does
not assign a specific weight to any of the factors but places greater emphasis
on corporate and personal performance in the overall mix.
Long-term incentive awards consist of restricted stock awards containing
provisions for acceleration of vesting upon achievement of corporate performance
criteria and stock options. It is not our practice to "reprice" stock options or
to price them at less than fair market value on the date of grant. Although
deferred compensation options have an exercise price of 80 percent (85 percent
for options granted for years prior to the year 2000) of fair market value on
the grant date, to receive the option the participant must forego the right to
receive cash compensation. Under our option plans the amount of the foregone
cash compensation plus the option exercise price must equal or exceed 100% of
fair market value. We have offered deferred compensation at above-market rates
and deferrals through the use of stock options with deferrals since 1995 limited
to stock options or a 10-year Treasury rate of interest. Executive officers may
also defer the receipt of shares upon the exercise of stock options and defer
the receipt of restricted stock prior to the lapse of restrictions. Except for
our stock fund within our 401(k) plan, other benefits provided to the executive
officers are not tied to corporate performance.
The Committee reviewed external market data provided by an independent
consulting firm from 14 of the highest-performing companies in the American
Banker Top 50, a peer group of banking organizations against which we measure
our strategic performance. We selected the highest-performing companies based
generally on the following one and five-year return measures: return on assets,
return on equity, earnings per share growth, and total shareholder return.
The purpose of the review was to determine compensation practices of these
companies. The Committee also reviewed available compensation data on the other
banking organizations in the American Banker Top 50. The compensation peer group
used by the independent consulting firm did not include all of the banking
organizations listed in the Total Shareholder Return Performance Graph ("TSR
graph") for the 2000 peer group because compensation data on every organization
included in the TSR graph was not available. The median asset size of the
compensation highest-performing peer group was $43.3 billion. The median asset
size of the American Banker Top 50 was $64.1 billion. In actual practice the
compensation of executive officers approximates the median of the compensation
highest-performing peer group when performance goals are met. We do not,
however, have a specific policy that mandates how our compensation practices
will compare to the peer group.
All compensation paid to executive officers during 2000 is fully
deductible on our corporate federal income tax return. Section 162(m) of the Tax
Code generally disallows a tax deduction to public companies, including us, for
compensation exceeding $1 million paid during the year to the CEO and the four
other highest paid executive officers at year end. Certain performance-based
compensation is not, however, subject to the deduction limit. Under Tax Code
regulations the salary and TARSAP (defined below) portions of compensation do
not meet the performance-based compensation criteria of Section 162(m). The
restricted stock plan permits deferral by participants of the receipt of
restricted stock prior to the lapse of restrictions. Any such deferral does not
represent compensation paid during the year, and thus, is not currently subject
to the Section 162(m) limitation. The Committee's practice is to continue to
consider ways to maximize the deductibility of executive compensation while
retaining the discretion deemed necessary to compensate executive officers in a
manner commensurate with performance and the competitive market of executive
talent.
15
22
(i) The CEO's Compensation
Base Salary: The Committee establishes the CEO's base salary annually
based on corporate performance, achievement of objectives in his individualized
written personal plan, and competitive practices within the industry.
The CEO develops his personal plan and submits it to the Committee for
review and recommendation. The Board of Directors approves the plan, which
generally contains strategic, quality and financial goals. A salary increase of
6 percent for Mr. Horn was approved in February of 2000 based on substantial
achievement of 1999 corporate return on common equity (ROE) objectives, Bank
return on assets (ROA) objectives, earnings per share (EPS) growth objectives,
personal plan objectives, and competitive practices. Although no specific weight
is assigned to these factors, the Committee places greater emphasis on corporate
and personal performance than on competitive practices within the industry. Base
salary is intended to represent approximately 15 percent to 30 percent of the
CEO's total compensation potential.
Annual Bonus: The CEO's annual bonus is based entirely on our corporate
performance against financial objectives established by the Committee at the
beginning of each year. The financial objectives for 2000 were based on ROE and
EPS. The CEO may be awarded an annual bonus of a maximum of 125 percent of his
salary dollars earned during the year. The degree of our success in reaching the
corporate targets determines a payout of zero percent to 100 percent of the
CEO's annual bonus potential. During 2000, our corporate performance resulted in
a payout of no bonus to the CEO for 2000. The annual bonus plan in which
executive officers, including the CEO, participate was amended in October of
1999 to reduce the amount paid in cash by approximately 25 percent for the 1999,
2000 and 2001 plan years and to grant stock options to the executive officers in
an amount that was based on a multiple of the bonus reduction. The Committee
made these changes to further align the interests of the officers with the
interests of our shareholders.
Long-term Awards: The CEO's long-term incentive compensation consists of
restricted stock and stock options.
Our restricted stock program includes performance criteria as a condition
to early vesting of awards to executive officers. The objective of this time
accelerated restricted stock award plan (TARSAP) feature is to associate more
closely the long-term compensation of executive officers with shareholder
interests. Under the TARSAP feature restricted stock is granted with accelerated
vesting if performance criteria established by the Committee are met with
respect to specified performance periods. Performance periods are for three
years and overlap: e.g., 1998-2000, 1999-2001, 2000-2002. Performance criteria
have always been based, for all participants, including the CEO, on total
shareholder return (appreciation in the market value of our stock with dividends
reinvested-TSR) targets established at the beginning of each performance period.
Targets are based on our percentile ranking in a peer group (the "100-bank peer
group") of approximately the 100 largest banking organizations by asset size
traded on U.S. exchanges, including the Nasdaq Stock Market's National Market
System, with the condition that TSR must be a positive number. The 100-bank peer
group is different from the peer group used to compare shareholder returns. The
100-bank peer group was originally selected in 1990, prior to the adoption of
SEC rules requiring disclosure of a shareholder return performance graph,
because the Committee believed that it was an appropriate index with which to
associate more closely long-term compensation of executives with shareholder
interests. The restricted stock program which contains the 100-bank peer group
has produced the desired results, and thus, the Committee has continued to use
it for the restricted stock program. In addition to the TSR targets, the
Committee adopted alternative criteria for the accelerated vesting of TARSAP
awards made in 1996 and future years based upon our percentile ranking within
the 100-bank peer group with respect to operating EPS growth rate (or exceeding
a minimum operating EPS growth rate) and average operating ROE, with the
condition that TSR must be a positive number. In January of 2001, the Committee
did not approve the accelerated vesting of the TARSAP shares for the 1998-2000
performance period because neither the target nor the alternative criteria for
the period were met.
In addition to performance-based restricted stock awards, the Committee
generally awards stock options to executive officers, including the CEO, as a
part of a broad-based stock option program under which awards are made to all of
our employees, both full-time and part-time. The CEO's option award (which is
disclosed in the "Option/SAR Grants in Last Fiscal Year Table") was based on an
estimated value of the option which in combination with the restricted stock
award provides the basis for a competitive long-term incentive package.
16
23
Because the value of the option to the CEO is a function of the price growth of
our stock, the amount realized by the CEO is tied directly to increases in
shareholder value. In addition, the option grant contained a performance-based,
accelerated vesting feature, which is described in part (ii) of this report.
Other Benefits: The CEO's compensation reported in the Summary
Compensation Table also includes accrual of above-market rates of interest on
compensation deferred prior to 1996 and the cost of insurance to fund a
supplemental retirement plan and life insurance benefit, which are not directly
based on corporate performance. Above-market rates are accrued for deferred
compensation of the CEO and other named executive officers to retain key
officers. Generally, the plan under which this benefit is offered requires that
the amount deferred be automatically recalculated at market rates if termination
occurs prior to retirement.
(ii) Other Executive Officer Compensation
Base Salary: The CEO recommends and the Committee approves the base salary
for executive officers other than the CEO. Recommendations are generally based
on corporate performance (as measured by financial, quality and strategic
objectives), individual overall performance during the prior year, and
competitiveness in the market place. Corporate performance objectives for 1999,
which were substantially achieved, were the same for executive officers as the
CEO: corporate ROE and Bank ROA objectives, and EPS growth objectives. It is our
policy to maintain a competitive salary commensurate with the duties and
responsibilities of the executive officers. Salary is intended to represent
approximately 15 percent to 30 percent of an executive officer's potential
annual compensation.
Annual Bonus: Executive officers' annual bonus is based on achievement of
corporate financial objectives and performance against personal objectives for
the year, which are recorded in individualized written personal plans.
Individual objectives must include financial, quality and strategic goals. The
degree of completion of goals determines the award. Financial objectives for
2000 were based on ROE and EPS. Although the CEO has an individualized personal
plan, his annual bonus is based entirely on corporate financial performance, and
the Chief Credit Officer's and Controller's annual bonuses are based solely on
individualized personal plans. The maximum annual bonus of executive officers
other than the CEO is between 45 percent and 100 percent of salary dollars
during the year, based on salary grade. During 2000, our corporate performance
resulted in a payment of no bonus for any executive officer whose bonus was
based on corporate performance.
Long-term Awards: The executive officers named in the Summary Compensation
Table and all but one of the other executive officers participate in the TARSAP
program described above with respect to the CEO. The performance criteria are
identical. The number of shares awarded for a three-year performance period is
generally 50 percent of the participant's salary grade mid-point, based on
market value of the shares at the time of the award. We do not provide a federal
income tax gross-up to executive officers at the vesting of restricted stock.
In addition to performance-based restricted stock awards, the Committee
generally awards stock options annually on our stock to executive officers,
including the CEO, as a part of the option program discussed in part (i) of this
report. The number of shares awarded to executive officers is equal to a
percentage of salary (ranging from 100 percent to 200 percent depending on
salary grade, with 200 percent used for the CEO) divided by the market value (or
for the CEO and the Financial Services Presidents, the Black-Scholes value) of
one share of our stock at the time of grant. Executive officers may also be
awarded shares in addition to those calculated as a percent of salary if in the
opinion of the Committee additional shares are required to ensure a competitive
compensation opportunity. The exercise price is the market value at the time of
grant. Options are awarded based on personal performance and to encourage future
performance as well as for retention purposes (with a ten-year term and vesting
at 50 percent after four years and 100 percent after five years). The March 2000
grant's exercise price is $17.97. This grant contains a provision for
accelerated vesting if the closing market price per share equals at least $24.58
for five consecutive days in the three years following the grant or at the end
of the three year period. This grant vested on December 7, 2000. Options are not
granted based on prior corporate performance; except for the March 2000 grants
made to the CEO and the Financial Services Presidents, which were based in part
on prior corporate performance.
17
24
As described above for executive officers and the CEO, bonus plans for all
employees above a specified salary grade were amended to reduce amounts paid in
cash by approximately 25 percent for plan years 1999, 2000, and 2001, and the
Committee awarded options to the portion of this population who received bonuses
at its February 2001 meeting in an amount based on a multiple of the 2000 bonus
reduction.
Other Benefits: We have adopted certain broad-based employee benefit plans
in which executive officers participate and certain other retirement, life and
health insurance plans and we provide customary personal benefits. Except for
our stock fund within our 401(k) plan, the benefits under these plans are not
tied to corporate performance. The executive officers named in the Summary
Compensation Table participate in the other benefits described above with
respect to the CEO.
Human Resources Committee
Vicki R. Palmer, Chairperson
Carlos H. Cantu
R. Brad Martin
Michael D. Rose
18
25
The following graph compares the yearly percentage change in our
cumulative total shareholder return with returns based on the Standard and
Poor's 500 index and a peer group index, which is described below and in a
footnote to the graph. It should be noted that the "total shareholder return"
reflected in the graph is not comparable to the "total shareholder return"
described in the Compensation Committee Report because the former has a
different measurement period and it has been adjusted and weighted for the
market capitalization of the companies in the peer group, as required by SEC
regulations. Our peer group consists of the American Banker Top 50 banking
organizations (excluding First Tennessee) as measured by market capitalization
as of the end of the most recent fiscal year.
TOTAL SHAREHOLDER RETURN PERFORMANCE GRAPH
[CHART]
- --------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
- --------------------------------------------------------------------------------
First Tennessee $100 $128 $233 $272 $209 $221
S&P 500 100 123 164 211 255 232
2000 Peer Group 100 139 216 236 227 269
The graph assumes $100 is invested on December 31, 1995, and dividends are
reinvested. Returns are market-capitalization weighted.
- --------------------------------------------------------------------------------
The 2000 peer group consists of the following: AmSouth Bancorporation,
Associated Banc Corp, BankWest Corporation, Banknorth Group, Inc., Banc One
Corporation, BankAmerica Corporation, Bank of New York Co., Inc., Branch Banking
and Trust Company, Charter One Financial, Inc., Citigroup Inc., Comerica
Incorporated, Commerce Bancorp, Commerce Bancshares, Inc., Compass Bancshares,
Inc., Cullen/Frost Bankers Inc., Fifth Third Bancorp, First Virginia Banks,
Inc., Firstar Corp, First Union Corporation, First Merit Corp, Fleet Boston
Financial Corp., Hibernia Corporation, Huntington Bancshares Incorporated, J.P.
Morgan Chase & Co., KeyCorp, M & T Bank Corporation, Marshall & Ilsley
Corporation, Mellon Financial Corporation, Mercantile Bankshares Corporation,
National City Corporation, National Commerce Bancorp, North Fork Bancorporation,
Northern Trust Corporation, Old Kent Financial Corporation, PNC Financial
Services, Popular Inc., Regions Financial Corp, SouthTrust Corporation, State
Street Corporation, Summit Bancorp, SunTrust Banks, Inc., Synovus Financial
Corporation, TCF Financial Corp, UnionBanCal Corporation, Union Planters
Corporation, U.S. Bancorp [DE], Wachovia Corporation, Wells Fargo & Company, and
Zions Bancorporation.
19
26
Compensation of Directors
During 2000, each nonemployee director was paid a retainer quarterly at an
annual rate of $22,000 plus a fee of $1,000 for each day of each Board and each
committee meeting attended. The chairpersons of the Audit and Human Resources
Committees were paid quarterly an additional retainer at an annual rate of
$3,000 each. Our practice is to hold Board and committee meetings jointly with
the Bank's Board and committees. All of our directors are also directors of the
Bank. Directors are not separately compensated for Bank Board or committee
meetings except for those infrequent meetings that do not occur jointly.
Directors who are officers are not separately compensated for their services as
directors. Under the terms of our 1992 Restricted Stock Incentive Plan, which
was approved by the shareholders, all nonemployee directors received an
automatic, nondiscretionary award of 6,000 shares (adjusted for stock splits) of
restricted stock on May 1, 1992, and all new nonemployee directors will receive
such award upon election to the Board. Restrictions lapse at the rate of 10
percent annually. Such shares are forfeited if the director terminates for any
reason other than death, disability, retirement, or the acquisition by a person
of 20 percent of the voting power of our stock. Upon termination for any of the
four listed reasons, all shares vest. Directors may elect to defer their
retainers and fees. Under the 2000 Non-Employee Directors' Deferred Compensation
Stock Option Plan, all non-employee directors elected to receive stock options
in lieu of fees through 2004. The exercise price per share is 80 percent (85%
under a prior plan for options granted prior to the year 2000) of fair market
value of one share of our common stock on the date of grant, and the number of
shares subject to option granted equals the amount of fees deferred divided by
20 percent (15 percent under a prior plan with respect to options granted prior
to the year 2000) of the fair market value of one share on the date of grant.
Under the Directors and Executives Deferred Compensation Plan, not offered with
respect to compensation earned since 1995, under which up to six annual
deferrals may be elected, amounts deferred accrue interest at rates ranging from
17-22 percent annually, based on age at the time of deferral, with a reduction
to a guaranteed rate based on 10-year Treasury obligations if a participant
terminates prior to a change-in-control for a reason other than death,
disability or retirement. Interim distributions in an amount between 85 percent
and 100 percent of the amount originally deferred are made in the eighth through
the eleventh years following the year of deferral, with the amount remaining in
a participant's account and accrued interest generally paid monthly over the 15
years following retirement at age 65. Certain restrictions and limitations apply
on payments and distributions. Under other deferral agreements, nonemployee
directors have deferred and may defer amounts which generally accrue interest at
a rate tied to 10-year Treasury obligations.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act") requires our directors and officers to file with the SEC
initial reports of ownership and reports of changes in ownership of our common
stock and to furnish us with copies of all forms filed.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required,
during the past fiscal year all Section 16(a) filing requirements applicable to
our officers and directors were complied with, except for the following. Mr.
Horn and Mr. Thomas each filed one report late covering one transaction
involving an employee stock option exercise, payment of the exercise price with
our stock and deferral of receipt of the shares. Mr. O'Connor filed one report
covering one transaction involving the cash exercise of an employee stock option
late due to a clerical error by First Tennessee. None of these transactions was
subject to short swing profits liability.
20
27
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
A COPY OF OUR ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL
STATEMENTS AND SCHEDULES THERETO, WHICH IS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, IS AVAILABLE FREE OF CHARGE TO EACH SHAREHOLDER OF RECORD
UPON WRITTEN REQUEST TO THE TREASURER, FIRST TENNESSEE NATIONAL CORPORATION,
P. O. BOX 84, MEMPHIS, TENNESSEE, 38101. Each such written request must set
forth a good faith representation that as of the record date specified in the
notice of annual shareholders' meeting the person making the request was a
beneficial owner of a security entitled to vote at the annual meeting of
shareholders.
The exhibits to the Annual Report on Form 10-K will also be supplied upon
written request to the Treasurer and payment to us of the cost of furnishing the
requested exhibit or exhibits. A document containing a list of each exhibit to
Form 10-K, as well as a brief description and the cost of furnishing each such
exhibit, will accompany the Annual Report on Form 10-K.
BY ORDER OF THE
BOARD OF DIRECTORS
/s/ Lenore S. Creson
- --------------------------------------
Corporate Secretary
March 15, 2001
21
28
Appendix A
AUDIT COMMITTEE CHARTER
FIRST TENNESSEE NATIONAL CORPORATION
(AS AMENDED AND RESTATED APRIL 18, 2000)
ESTABLISHMENT AND PURPOSES OF THE COMMITTEE
Acting pursuant to Tennessee Code Annotated Section 48-18-206, Article 11(b)(8)
of the Corporation's restated charter, as amended, and Section 3.5 of the
Corporation's bylaws, as amended, the Board of Directors of First Tennessee
National Corporation hereby creates the Audit Committee (the "Committee") of the
Board of Directors, which shall assist the Board of Directors in (1) its
oversight of the Corporation's accounting and financial reporting principles and
policies and internal audit controls and procedures, (2) its oversight of the
Corporation's financial statements and the independent audit thereof, (3)
recommending to the Board the nomination of the independent auditor to be
proposed for shareholder approval, evaluating the independent auditor and, when
deemed appropriate, recommending the replacement of the independent auditor, and
(4) evaluating the independence of the independent auditor.
The function of the Committee is oversight. Management of the Corporation is
responsible for preparation, presentation and integrity of the Corporation's
financial statements. Management and the internal auditor are responsible for
maintaining appropriate accounting and financial reporting principles and
policies and internal controls and procedures designed to assure compliance with
accounting standards and applicable laws and regulations. The independent
auditor is responsible for planning and carrying out a proper audit and reviews,
including reviews of the Corporation's quarterly financial statements prior to
the filing of each quarterly report on Form 10-Q, and other procedures. It is
recognized that, in fulfilling their responsibilities hereunder, members of the
Committee are not full-time employees of the Corporation and are not, and do not
represent themselves to be, accountants or auditors by profession or experts in
the field of accounting or auditing. As such, it is not the duty or
responsibility of the Committee or its members to conduct "field work" or other
types of auditing or accounting reviews or procedures, and each member of the
Committee shall be entitled to rely on (1) the integrity of those persons and
organizations within and outside the Corporation from which it receives
information and (2) the accuracy of the financial and other information provided
to the Committee by such persons or organizations absent actual knowledge to the
contrary (which shall be promptly reported to the Board).
The independent auditor for the Corporation is ultimately accountable to the
Board of Directors (as assisted by the Committee). The Board, with the
assistance of the Committee, has the ultimate authority and responsibility to
select, evaluate, and when appropriate replace the independent auditor (or to
nominate the independent auditor to be proposed for shareholder approval).
The independent auditor shall submit to the Corporation annually a formal
written statement delineating all relationships between the independent auditor
and the Corporation ("Statement as to Independence"), addressing at least the
matters set forth in Independence Standards Board No. 1.
QUALIFICATIONS OF COMMITTEE MEMBERS
The Committee shall consist of at least three members appointed annually by a
majority of the entire Board on the recommendation of the Human Resources
Committee of the Board of Directors, acting in its capacity as the nominating
committee. Members shall be directors who meet the independence and experience
requirements of the New York Stock Exchange ("NYSE"), as such requirements are
interpreted by the Board of Directors in the exercise of its business judgment.
A-1
29
OPERATION OF THE COMMITTEE
Meeting shall be held at least four times yearly and may be called at any time
by the Committee Chairperson or by any two members of the Committee upon written
or oral notice to a majority of the members of the Committee prior to the
meeting. A quorum shall consist of a majority of the members and the vote of a
majority of the members present at a meeting at which a quorum is present shall
be the act of the Committee. Proceedings of the Committee over the signature of
a member in attendance shall be recorded in a minute book and reflect the names
of those in attendance. The Chairperson of the Committee will present a report
of Committee activities to the full Board of Directors at its next regularly
scheduled meeting. The Secretary of the Board will permanently maintain the
minutes of Committee meetings. Meetings may be held jointly with a similar
committee of First Tennessee Bank National Association ("Bank") if either the
members of the Bank's committee and the members of this Committee are identical
or all of the members of the Bank's committee would meet the independence and
experience requirements of the NYSE, including any exceptions permitted thereby.
The Committee shall have unrestricted access to Corporation personnel and
documents and will be given the resources necessary to discharge its
responsibilities. The Committee shall have the resources and authority to retain
special legal, accounting, auditing or other experts or consultants to advise
the Committee. The Committee may request any officer or employee of the
Corporation or of the Corporation's outside counsel or independent auditor to
attend a meeting of the Committee or to meet with any members of, or consultants
to, the Committee. It will be the responsibility of the Committee to maintain
free and open means of communication between the directors and management of the
Corporation. The Committee shall meet separately at least annually with
management, the internal auditor, and the independent auditor in separate
executive sessions to discuss any matters that the Committee or any of these
persons or firms believes should be discussed privately.
DUTIES OF THE COMMITTEE
The Committee is hereby delegated full authority with respect to the following
matters and such additional matters as may be provided in the bylaws of the
Corporation or as the Board of Directors may from time to time by resolution
adopt by a majority of the entire Board specify:
1. with respect to the independent auditor,
a. provide advice to the Board in selecting, evaluating and
replacing the independent auditor.
b. review the fees charged by the independent auditor for audit
and non-audit services.
c. ensure that the independent auditor prepares and delivers
annually a Statement as to Independence (it being understood
that the independent auditor is responsible for the accuracy
and completeness of this Statement), discuss with the
independent auditor any relationships or services disclosed in
this Statement that may have an impact on the objectivity or
independence of the Corporation's independent auditor and
recommend that the Board take appropriate action in response
to this Statement to satisfy itself of the independent
auditor's independence.
d. instruct the independent auditor that the independent auditor
is ultimately accountable to the Board and the Committee.
2. with respect to the internal auditing department,
a. make recommendations to the Board concerning the appointment
and removal of the Corporation's internal auditor.
b. advise the internal auditor that he or she is expected to
provide the Committee summaries of and, as appropriate,
significant reports to management prepared by the internal
auditing department and management's responses thereto.
A-2
30
3. with respect to financial reporting principles and policies and
internal audit controls and procedures,
a. advise management, the internal auditor and the independent
auditor that each is expected to provide to the Committee a
timely analysis of significant financial reporting issues and
practices.
b. consider any reports or communications (and management's
and/or the internal auditor's responses thereto) submitted to
the Committee by the independent auditor required by or
referred to in SAS 61 (as codified by AU Section 380), as may
be modified or supplemented.
c. meet with management, the internal auditor, and/or the
independent auditor to discuss the scope of the annual audit,
the audited financial statements and the form of opinion
thereon proposed by the independent auditor, any significant
matters arising from any audit or report or communication with
respect to significant reports to management prepared by the
internal auditor or required by or referred to in SAS 61
relating to the Corporation's financial statements, and
significant changes to the Corporation's auditing and
accounting principles, policies, controls, procedures and
practices proposed or contemplated by the independent auditor,
the internal auditor or management, and inquire about
significant risks and exposures if any, and the steps taken to
monitor and minimize such risks.
d. obtain from the independent auditor assurance that the audit
was conducted in a manner consistent with Section 10A of the
Securities Exchange Act of 1934, as amended, which set forth
certain procedures to be followed in any audit of financial
statements required under that act.
e. review the Corporation's compliance policies and any material
reports or inquiries received from regulators or government
agencies and management's responses and, with the
Corporation's General Counsel, pending and threatened claims
that may have a material impact on the financial statements.
4. with respect to reporting and recommendations,
a. prepare any report, including any recommendation of the
Committee, required by the rules of the Securities Exchange
Commission to be included in the Corporation's annual proxy
statement.
b. to review and reassess the adequacy of this Charter at least
annually and recommend any changes to the Board.
A-3
31
FINANCIAL INFORMATION AND DISCUSSION
TABLE OF CONTENTS
Selected Financial and Operating Data F-2
Management's Discussion and Analysis F-3
General Information F-3
Forward Looking Statements F-3
Income Statement Analysis (2000 compared to 1999) F-4
Income Statement Analysis (1999 compared to 1998) F-14
Balance Sheet Review F-15
Risk Management F-21
Quarterly Financial Information F-32
Subsequent Event F-32
Glossary F-34
Consolidated Statements of Condition F-37
Consolidated Statements of Income F-38
Consolidated Statements of Shareholders' Equity F-39
Consolidated Statements of Cash Flows F-40
Notes to Consolidated Financial Statements F-41
Report of Independent Public Accountants F-79
Consolidated Historical Performance Statements of Income F-80
Consolidated Average Balance Sheets and Related Yields and Rates F-81
F-1 First Tennessee National Corporation
32
SELECTED FINANCIAL AND OPERATING DATA
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions except per share data) 2000 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY INCOME STATEMENTS
Interest income $ 1,363.0 $ 1,207.2 $ 1,133.8 $ 941.3 $ 896.5 $ 822.5
Less interest expense 764.7 617.7 593.3 458.2 445.3 431.8
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 598.3 589.5 540.5 483.1 451.2 390.7
Provision for loan losses 67.3 57.9 51.3 51.1 35.7 20.6
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 531.0 531.6 489.2 432.0 415.5 370.1
Noninterest income 1,063.4 1,123.1 985.5 668.1 571.2 492.6
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted gross income after provision 1,594.4 1,654.7 1,474.7 1,100.1 986.7 862.7
Noninterest expense 1,257.4 1,275.3 1,121.8 785.0 704.5 609.7
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 337.0 379.4 352.9 315.1 282.2 253.0
Applicable income taxes 104.4 131.9 126.5 117.6 102.3 88.1
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 232.6 $ 247.5 $ 226.4 $ 197.5 $ 179.9 $ 164.9
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA
Basic earnings per share $ 1.79 $ 1.90 $ 1.77 $ 1.54 $ 1.34 $ 1.21
Diluted earnings per share 1.77 1.85 1.72 1.50 1.32 1.20
Cash dividends declared per share .88 .79 .685 .615 .5475 .485
Year-end book value per share 10.70 9.52 8.50 7.44 7.14 6.50
Closing price of common stock per share:
High 29 1/16 45 3/16 38 1/16 33 3/4 19 5/16 15 7/16
Low 16 1/16 27 9/16 23 13/16 18 3/8 14 7/16 9 13/16
Year-end 28 15/16 28 1/2 38 1/16 33 3/8 18 3/4 15 1/8
Dividends per share/year-end closing price 3.0% 2.8% 1.8% 1.8% 2.9% 3.2%
Dividends per share/earnings per share (payout ratio) 49.7 42.7 39.8 41.0 41.5 40.4
Price/earnings ratio 16.3x 15.4x 22.1x 22.3x 14.2x 12.6x
Market capitalization $ 3,744.7 $ 3,715.1 $ 4,920.8 $ 4,279.0 $ 2,507.2 $ 2,032.1
Average shares outstanding (thousands) 129,865 130,573 128,235 128,365 134,393 136,050
Period-end shares outstanding (thousands) 128,745 129,878 128,974 128,209 133,715 134,356
Volume of shares traded (thousands) 99,469 96,207 107,837 135,205 109,038 131,296
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED AVERAGE BALANCES
Total assets $19,320.8 $18,620.8 $16,720.7 $13,280.6 $12,588.3 $11,359.5
Total loans* 9,932.0 8,818.8 8,242.1 7,945.1 7,472.1 6,887.2
Investment securities 2,862.7 2,702.7 2,425.8 2,139.4 2,203.2 2,161.0
Earning assets 16,095.5 15,583.7 14,320.5 11,512.1 11,062.0 10,094.7
Deposits 12,860.8 12,302.1 10,996.4 9,207.1 8,945.5 8,132.4
Term borrowings 384.3 371.1 252.7 185.5 253.7 208.9
Shareholders' equity 1,276.6 1,186.8 996.0 878.8 897.5 822.8
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED PERIOD-END BALANCES
Total assets $18,555.1 $18,373.4 $18,734.0 $14,387.9 $13,058.9 $12,076.9
Total loans* 10,239.5 9,363.2 8,557.1 8,311.4 7,728.2 7,333.3
Investment securities 2,839.0 3,101.3 2,426.3 2,186.5 2,239.5 2,111.4
Earning assets 15,193.3 14,944.2 15,694.6 12,220.2 11,045.8 10,483.6
Deposits 12,188.7 11,358.7 11,723.0 9,671.8 9,033.1 8,582.2
Term borrowings 409.7 358.7 414.5 168.9 234.6 260.0
Shareholders' equity 1,384.2 1,241.5 1,099.5 954.1 954.5 873.2
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average shareholders' equity 18.22% 20.86% 22.73% 22.47% 20.05% 20.04%
Return on average assets 1.20 1.33 1.35 1.49 1.43 1.45
Net interest margin 3.73 3.80 3.80 4.23 4.13 3.92
Allowance for loan losses to loans* 1.40 1.49 1.59 1.51 1.52 1.54
Net charge-offs to average loans* .62 .59 .46 .54 .41 .30
Average total equity to average assets** 7.16 6.91 6.55 7.36 7.13 7.24
Average shareholders' equity to average assets 6.61 6.37 5.96 6.62 7.13 7.24
Average tangible equity to average tangible assets 5.99 5.70 5.23 5.81 6.20 6.36
Average shareholders' equity to average net loans 13.04 13.68 12.28 11.24 12.20 12.15
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RETURN TO SHAREHOLDERS
Stock appreciation 1.5% (25.1)% 14.0% 78.0% 24.0% 48.5%
Dividend yield 3.1 2.1 2.1 3.3 3.6 4.8
Total return 4.6 (23.0) 16.1 81.3 27.6 53.3
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<FN>
* Net of unearned income.
** Total equity includes shareholders' equity, preferred stock of subsidiary and guaranteed preferred beneficial interests in First
Tennessee's junior subordinated debentures.
See accompanying notes to consolidated financial statements. Common stock data reflects the 1998 and 1996 two-for-one stock splits.
</FN>
First Tennessee National Corporation F-2
33
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
GENERAL INFORMATION
- -------------------
First Tennessee National Corporation (First Tennessee) is headquartered in
Memphis, Tennessee, and is a diversified financial services institution which
provides banking and other financial services to its customers through various
regional and national business lines. The REGIONAL BANKING GROUP includes the
retail/commercial bank, the credit card division, and the trust division. The
NATIONAL LINES OF BUSINESS include First Horizon Home Loan Corporation (also
referred to as First Horizon Home Loans or mortgage banking), First Tennessee
Capital Markets (also referred to as capital markets), and transaction
processing (credit card merchant processing, automated teller machine network,
payment processing operation, and check clearing).
Based on management's best estimates certain revenue and expenses are allocated
and to reflect the inherent risk in each business line equity is assigned to the
various business lines. These allocations are periodically reviewed and may be
revised from time to time to more accurately reflect current business conditions
and risks; the previous history is restated to ensure comparability.
For the purpose of this management discussion and analysis (MD&A), noninterest
income (also called fee income) and total revenue exclude securities gains and
losses. Net interest income has been adjusted to a fully taxable equivalent
(FTE) basis for certain tax-exempt loans and investments included in earning
assets. Earning assets, including loans, have been expressed as averages, net of
unearned income. First Tennessee Bank National Association, the primary bank
subsidiary, is also referred to as FTBNA in this discussion.
The following financial discussion should be read with the accompanying
consolidated financial statements and notes. A glossary is included at the end
of the MD&A to assist with terminology.
FORWARD-LOOKING STATEMENTS
- --------------------------
Management's discussion and analysis may contain forward-looking statements with
respect to First Tennessee's beliefs, plans, goals, expectations, and estimates.
These statements are contained in certain sections such as Noninterest Income,
Net Interest Income, Interest Rate Risk Management, Credit Risk Management/Asset
Quality, and Subsequent Event. Forward-looking statements are statements that
are not based on historical information but rather are related to future
operations, strategies, financial results or other developments. The words
"believe", "expect", "anticipate", "intend", "estimate", "should", "is likely",
"going forward", and other expressions that indicate future events and trends
identify forward-looking statements. Forward-looking statements are necessarily
based upon estimates and assumptions that are inherently subject to significant
business, economic and competitive uncertainties and contingencies many of which
are beyond a company's control, and many of which, with respect to future
business decisions and actions (such as acquisitions and divestitures), are
subject to change (including possibly significant changes). Examples of
uncertainties and contingencies include, among other important factors, general
and local economic and business conditions; expectations of and actual timing
and amount of interest rate movements (which can have a significant impact on a
financial services institution); market and monetary fluctuations; inflation;
competition within and outside the financial services industry; technology; and
new products and services in the industries in which First Tennessee operates.
Other uncertainties and contingencies are those inherent in originating and
servicing loans, including prepayment risks and fluctuating collateral values
and changes in customer financial condition. Additionally, the policies of the
Office of the Comptroller of the Currency (OCC), the Board of Governors of the
Federal Reserve System, the Financial Accounting Standards Board (FASB) and the
Securities and Exchange Commission; unanticipated regulatory and judicial
proceedings; and changes in laws and regulations applicable to First Tennessee
and First Tennessee's success in executing its business plans and strategies and
managing the risks involved in the foregoing, could cause actual results to
differ from those currently anticipated. First Tennessee assumes no obligation
to update any forward-looking statements that are made from time to time.
F-3 First Tennessee National Corporation
34
INCOME STATEMENTS ANALYSIS - 2000 COMPARED TO 1999
- --------------------------------------------------
Earnings in 2000 were $232.6 million, a decline of 6 percent from $247.5 million
earned in 1999. Diluted earnings per common share were $1.77 in 2000, down 4
percent from the $1.85 earned in 1999. Earnings per common share were $1.79 in
2000, down 6 percent from the $1.90 earned in 1999. Return on average assets
(ROA) was 1.20 percent in 2000 compared with 1.33 percent in 1999. Return on
average shareholders' equity (ROE) was 18.2 percent in 2000 compared with 20.9
percent in 1999. These figures reflect a variety of transitional income and
expense items, discussed in greater detail throughout this MD&A, that are not
regarded as part of normal operations.
On December 31, 2000, First Tennessee was ranked among the top 50 bank holding
companies nationally in market capitalization ($3.7 billion) and assets ($18.6
billion). On December 31, 1999, market capitalization was $3.7 billion and total
assets were $18.4 billion.
Total revenue for 2000 decreased 3 percent, or $44.4 million, with net interest
income increasing 2 percent, or $8.8 million, and fee income decreasing 5
percent, or $53.2 million.
NONINTEREST INCOME
Fee income provides the majority of First Tennessee's revenue. During 2000 fee
income decreased 5 percent, to $1,067.6 million from $1,120.8 million, and
contributed 64 percent to total revenue in 2000 compared with 66 percent in
1999. Table 1 provides six years of detailed information concerning First
Tennessee's noninterest income. The following discussion provides additional
information on various line items reported in the table.
TABLE 1 - ANALYSIS OF NONINTEREST INCOME
Compound Annual
Growth Rates (%)
-----------------
(Dollars in thousands) 2000 1999 1998 1997 1996 1995 00/99 00/95
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking $ 388,777 $ 632,771 $ 558,366 $ 330,131 $ 275,406 $ 213,563 38.6 - 12.7 +
Divestitures 157,635 4,246 567 - - - NM N/A
Capital markets 117,870 126,835 147,353 98,310 85,871 82,814 7.1 - 7.3 +
Deposit transactions and
cash management 116,080 106,240 90,444 86,047 78,228 74,124 9.3 + 9.4 +
Trust services and
investment management 65,817 59,807 51,198 40,941 34,704 34,435 10.0 + 13.8 +
Merchant processing 48,232 49,711 37,462 32,111 24,185 19,164 3.0 - 20.3 +
Cardholder fees 29,666 25,579 21,046 19,833 17,155 14,885 16.0 + 14.8 +
Equity securities
gains/(losses) 754 2,313 3,940 (854) (2,495) 3,195 67.4 - 25.1 -
Debt securities
gains/(losses) (4,961) (56) 36 141 (186) (751) NM 45.9 -
All other income and
commissions:
Other service charges 23,199 17,430 14,863 10,474 9,891 7,709 33.1 + 24.7 +
Insurance premiums and
commissions 12,203 10,912 8,725 6,457 5,644 6,606 11.8 + 13.1 +
Check clearing fees 11,129 11,143 9,199 13,043 16,873 17,585 .1 - 8.7 -
Other 97,019 76,173 42,304 31,496 25,873 19,282 27.4 + 38.1 +
- -------------------------------------------------------------------------------------------------------
Total other income 143,550 115,658 75,091 61,470 58,281 51,182 24.1 + 22.9 +
- -------------------------------------------------------------------------------------------------------
Total noninterest income $1,063,420 $1,123,104 $ 985,503 $ 668,130 $ 571,149 $ 492,611 5.3 - 16.6 +
=======================================================================================================
<FN>
Certain previously reported amounts have been reclassified to agree with current presentation.
NM - not meaningful
</FN>
First Tennessee National Corporation F-4
35
MORTGAGE BANKING
First Horizon Home Loans, a subsidiary of FTBNA, originates and services
residential mortgage loans. Following origination, the mortgage loans, primarily
first-lien, are sold to investors in the secondary market while the rights to
service such loans have historically been retained. Going forward, First Horizon
Home Loans intends to increase the volume of flow servicing sales and retain a
smaller amount of the servicing originated. Various hedging strategies are used
to mitigate changes in the market value of the loan during the time period
beginning with a price commitment to the customer and ending when the loan is
delivered to the investor. Closed loans held during this time period are
referred to as the mortgage warehouse. Origination fees and gains or losses from
the sale of loans were recognized in 2000 at the time a mortgage loan was sold
into the secondary market (See also Subsequent Events - Accounting for
Derivative Instruments and Hedging Activities). Secondary marketing activities
include gains or losses from mortgage warehouse hedging activities, product
pricing decisions, and gains or losses from the sale of loans into the secondary
market including the capitalized net present value of the mortgage servicing
rights. Servicing rights permit the collection of fees for gathering and
processing monthly mortgage payments for the owner of the mortgage loans. First
Horizon Home Loans employs hedging strategies intended to maintain the value of
its mortgage servicing rights through changing interest rate environments.
Miscellaneous income includes the net gains or losses related to rebalancing
hedges of mortgage servicing rights, income from the foreclosure repurchase
program and other miscellaneous items.
As shown in Table 2, total mortgage banking fee income decreased 39 percent in
2000. Mortgage banking fee income consists of various revenue streams from the
origination process, servicing, and other activities such as sales of servicing.
Total noninterest revenue in 2000 for the mortgage banking segment was $442.8
million, a decrease of 31 percent from $640.3 million in 1999 (see Note 22 -
Business Segment Information). Noninterest income for the mortgage segment
includes total mortgage banking fee income, the gain on the sale of HomeBanc
(see Gains from divestitures section below), income from insurance activities
and other miscellaneous income items.
TABLE 2 - MORTGAGE BANKING
Compound Annual
Growth Rates (%)
-----------------
(Dollars and volume in millions) 2000 1999 1998 00/99 00/98
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Loan origination fees $ 127.2 $ 172.7 $ 159.7 26.4 - 10.8 -
Secondary marketing activities 115.2 242.7 223.4 52.5 - 28.2 -
- ------------------------------------------------------------------------------------------------------
Mortgage origination function 242.4 415.4 383.1 41.6 - 20.5 -
- ------------------------------------------------------------------------------------------------------
Servicing fees 161.5 167.8 117.9 3.7 - 17.0 +
Sale of mortgage servicing rights 14.8 16.4 (.5) 9.9 - N/A
Miscellaneous (29.9) 33.2 57.9 N/A N/A
- ------------------------------------------------------------------------------------------------------
Total noninterest income $ 388.8 $ 632.8 $ 558.4 38.6 - 16.6 -
======================================================================================================
Refinance originations $ 2,835 $ 7,155 $13,146 60.4 - 53.6 -
New loan originations 11,986 12,708 10,105 5.7 - 8.9 +
- ------------------------------------------------------------------------------------------------------
Mortgage loan originations $14,821 $19,863 $23,251 25.4 - 20.2 -
======================================================================================================
Servicing portfolio $47,394 $44,628 $39,738 6.2 + 9.2 +
- ------------------------------------------------------------------------------------------------------
<FN>
N/A = not applicable
</FN>
Total origination volume, consisting of home purchase-related mortgages and
refinanced mortgages, fell 25 percent to $14.8 billion compared with $19.9
billion in 1999. The decline in volume was due to higher interest rates
throughout most of 2000, pricing competition within the industry, and the
closing of less profitable production offices. Home purchase-related mortgage
originations fell 6 percent to $12.0 billion from $12.7 billion, while refinance
volume declined 60 percent to $2.8 billion from $7.2 billion in 1999. Fees
derived from the mortgage origination process (loan origination fees, profits
from the sale of loans and other secondary marketing activities) decreased 42
percent in 2000, to $242.4 million from $415.4 million. This decline was
primarily due to less production; lower margins related to competitive pricing
pressures and a shift in product mix; and a decrease in the
F-5 First Tennessee National Corporation
36
results of hedging and other loan sale activities compared with 1999. Going
forward, based upon a continuation of the recent trend in declining interest
rates, the origination volume from refinanced mortgages is expected to increase
and the negative impact of competitive pricing pressures and other adverse
market conditions may decrease. Actual results could differ because of several
factors, including those presented in the Forward-Looking Statements section of
the MD&A.
Mortgage servicing fee income decreased 4 percent in 2000, to $161.5 million
from $167.8 million. The lower level of servicing fees was primarily due to the
classification late in 1999 of excess mortgage servicing rights to interest-only
strips held in the investment securities portfolio which resulted in an increase
in interest income on securities for 2000 while reducing servicing fees.
The mortgage-servicing portfolio (which includes servicing for ourselves and
others) grew to $47.4 billion on December 31, 2000, compared with $44.6 billion
on December 31, 1999. The change in the portfolio since year-end 1999 is due to
loans added to the servicing portfolio of $14.2 billion reduced by servicing
released originations of $3.2 billion, servicing released through bulk sales of
$3.1 billion and reductions from payments and payoffs received in the normal
course of business of $5.1 billion. Income from the sale of mortgage servicing
rights decreased 10 percent, to $14.8 million from $16.4 million in 1999. In
2000 there were bulk sales of servicing of approximately $3.2 billion, flow
sales of approximately $1.0 billion and bulk purchases of approximately $.5
billion while in 1999 there were bulk sales of approximately $7.6 billion and
bulk purchases of approximately $1.7 billion. See Note 6 - Capitalized Mortgage
Servicing Rights for information summarizing changes in mortgage servicing
rights. Going forward, the planned increase in flow servicing sales along with
amortization of the existing portfolio will result in a reduction in the size of
the servicing portfolio, decreased servicing fees and increased gains from the
sale of mortgage servicing rights. Actual results could differ because of
several factors, including those presented in the Forward-Looking Statements
section of the MD&A.
Miscellaneous mortgage income had a net loss of $29.9 million for 2000 compared
with a net gain of $33.2 million in 1999. The decrease was primarily due to net
losses of $47.7 million principally related to the repositioning of the mortgage
servicing hedge portfolio in preparation for the adoption of SFAS No. 133 on
January 1, 2001, and to reduce expenses related to amortization of the hedges.
During 1999, $17.9 million of miscellaneous income came from net gains on sales
of certain mortgage servicing hedges. Income from the foreclosure repurchase
program increased 14 percent in 2000 to $17.0 million from $14.8 million in
1999.
DIVESTITURES
Gains from divestitures totaled $157.6 million in 2000, $4.2 million in 1999,
and $.6 million in 1998 (certain incremental operating expenses related to these
divestitures were also incurred in 2000 - see the Noninterest Expense section
for additional information). The gains in 2000 reflect First Tennessee's
divestitures of certain slower growing businesses including a gain of $50.2
million from the sale of certain single relationship credit card accounts; a
gain of $33.4 million from the sale of the corporate and municipal trust
business; a gain of $33.1 million from the sale of the MONEY BELT(R) ATM
Network; and a gain of $40.9 million from the sale of the HomeBanc Mortgage
division. In 1999 and 1998, gains of $4.2 million and $.6 million, respectively,
were realized from sales of bank branches in Mississippi (see Note 2 -
Acquisitions/Divestitures).
CAPITAL MARKETS
First Tennessee Capital Markets generates fee income primarily from the purchase
and sale of securities as both principal and agent. Inventory positions are
limited to the procurement of securities solely for distribution to customers by
the sales staff. Inventory is hedged to protect against movements in interest
rates.
During 2000 capital markets noninterest income decreased 7 percent to $117.9
million from $126.8 million. This decrease primarily resulted from the negative
impact resulting from the expectation of rising interest rates and lack of
liquidity in the financial services industry during the first half of 2000. Due
to a change in the market's expectation of interest rates during the second half
of the year and more stable market conditions, capital markets experienced
increased demand from financial services institutions. Also, during the second
half of 2000, capital markets fee income was positively impacted by new revenue
initiatives. Total securities bought and sold by the capital markets division
were $760.0 billion, an increase of 42 percent from $534.3 billion in 1999.
Going forward,
First Tennessee National Corporation F-6
37
the anticipation of future interest rate declines, a steeper yield curve and
increased liquidity in the market, if they occur, are likely to result in a
continuation of the favorable market conditions experienced at the end of 2000.
In addition, new product initiatives could favorably impact revenues in 2001.
Actual results could differ because of several factors, including those
presented in the Forward-Looking Statements section of the MD&A.
DEPOSIT TRANSACTIONS AND CASH MANAGEMENT
Deposit transactions include services related to retail deposit products (such
as service charges on checking accounts) and cash management products and
services such as electronic transaction processing (automated clearing house and
Electronic Data Interchange), account reconciliation services, cash vault
services, lockbox processing, and information reporting (Prime Connection).
Noninterest income from deposit transactions and cash management increased 9
percent in 2000, to $116.1 million from $106.2 million. Growth in cash
management fees along with higher returned check and debit card charges led the
increase in 2000.
TRUST SERVICES AND INVESTMENT MANAGEMENT
Trust services and investment management fees come from the product lines of
investment management, personal trust, employee benefits, and custodial and
corporate trust services. During 2000 total noninterest income from trust
services and investment management grew 10 percent, to $65.8 million from $59.8
million. This increase was driven by growth in investment management fees earned
by the investment advisory companies, repricing of certain products, and
successful cross-sell efforts, particularly to our targeted market. Assets under
management grew 1 percent to $9.8 billion on December 31, 2000, from $9.6
billion on December 31, 1999. The growth in fee income was as follows: the asset
management business lines grew 14 percent; personal trust was up 7 percent; and
employee benefits increased 6 percent. Fee income in 2000 from corporate trust
reflects activity for only part of the year due to the sale of the corporate and
municipal trust business on October 18, 2000.
MERCHANT PROCESSING
Credit card merchant processing involves converting transactions from plastic
media such as check cards, debit cards, credit cards, purchase cards, and
private label credit cards into cash for merchants that sell goods and services
to consumers and businesses.
Fee income from merchant processing decreased 3 percent in 2000, to $48.2
million following an increase of 33 percent in 1999. Fee income in 1999 reached
$49.7 million, due largely to special assessments received from customers and a
change in the customer mix. This positive trend in customer mix continued in
2000 while special assessments received from customers decreased.
CARDHOLDER
Cardholder fees result from issuing and servicing credit cards, and include the
collection of annual fees and late charges, as well as interchange fees received
for accepting credit card transactions. Cardholder noninterest income increased
16 percent in 2000, to $29.7 million from $25.6 million, principally from higher
interchange collections. First Tennessee sold approximately 50 percent of its
credit card portfolio in the latter part of 2000 (see Note 2 -
Acquisitions/Divestitures).
ALL OTHER NONINTEREST INCOME
All other noninterest income grew 24 percent in 2000, to $143.5 million from
$115.7 million. Factors contributing to the increase in 2000 were other service
charges, revenues generated by remittance processing, and company owned life
insurance. Other service charges are generated from banking services performed,
but are not directly related to deposit transactions. This includes fees for
money orders, travelers' checks, savings bonds, safe deposit box rentals, mutual
fund services, safekeeping, and servicing of assets securitized by First
Tennessee. During 2000, other service charges grew 33 percent, to $23.2 million
from $17.4 million, primarily from growth in servicing securitized assets and a
change in the presentation of fees received on check orders. Revenues generated
by the
F-7 First Tennessee National Corporation
38
remittance processing operation which was acquired in June 1999 from National
Processing Co. (NPC) grew 47 percent, or $7.8 million, during 2000, and income
recognized on company owned life insurance increased 74 percent, or $5.3
million. In 1999, a gain of $6.1 million was realized from stock received as a
result of the demutualization of an insurance company.
SECURITIES GAINS/(LOSSES)
In 2000 there were $4.2 million of net securities losses compared to $2.3
million of net securities gains for 1999. In 2000 First Tennessee recognized
$4.6 million of security losses as a result of the sale of lower-yielding
securities in the investment portfolio. The majority of the security gains in
1999 were from sales of equity investments at First Tennessee's venture capital
subsidiaries.
NET INTEREST INCOME
During 2000 net interest income increased 1 percent, to $600.9 million from
$592.5 million, primarily due to strong loan growth in 2000 and the 1999
reclassification of excess mortgage servicing rights to interest-only strips,
the effect of which was minimized by a tightening in the spread between yields
on earning assets and rates paid on interest-bearing liabilities. The
consolidated net interest spread for 2000 was 3.14 percent compared with 3.28
percent for 1999. Rising interest rates in the first half of 2000 reduced the
impact of the narrowing in net interest spread by increasing the benefit from
interest free funding. The consolidated net interest margin (margin) decreased
to 3.73 percent for 2000 compared with 3.80 percent for 1999 due to growth in
earning assets outpacing core deposit growth which required funding the growth
of the balance sheet with purchased funds at higher interest rates, thereby
reducing the margin. The regional banking group's margin fell in 2000 to 4.84
percent from 4.96 percent in 1999. Going forward, if short-term rates continue
to decline and the result is a steeper yield curve, the regional banking group's
margin is likely to increase. Actual results could differ because of several
factors, including those presented in the Forward - Looking Statements section
of the MD&A.
The margin is affected by the activity levels and related funding for First
Tennessee's national lines of business as these nonbank business lines typically
produce different margins than traditional banking activities. Mortgage banking
can affect the overall margin based on a number of factors, including the size
of the mortgage warehouse, the time it takes to deliver loans into the secondary
market, the amount of custodial balances, and the level of mortgage servicing
rights. Capital markets tends to compress the margin because of its strategy to
reduce market risk by hedging its inventory in the cash markets which
effectively eliminates net interest income on these positions. As a result,
First Tennessee's consolidated margin cannot be readily compared to that of
other bank holding companies. Going forward, the consolidated margin will
continue to be influenced by the activity levels in the nonbanking lines of
business, especially from mortgage banking as the level of origination volume is
strongly tied to refinance activity. Actual results could differ because of
several factors, including those presented in the Forward - Looking Statements
section of the MD&A.
First Tennessee National Corporation F-8
39
Table 3 details the computation of the net interest margin for the regional
banking group and the impact that the other business lines had on the
consolidated margin for the years 1998 through 2000.
TABLE 3 - NET INTEREST MARGIN COMPOSITION
2000 1999 1998
- --------------------------------------------------------------------------------
REGIONAL BANKING GROUP:
Yields on earning assets 8.50% 7.91% 8.20%
Rates paid on interest-bearing liabilities 4.72 3.88 4.36
- --------------------------------------------------------------------------------
Net interest spread 3.78 4.03 3.84
- --------------------------------------------------------------------------------
Effect of interest-free sources .91 .78 .89
Loan fees .15 .14 .14
FRB interest and penalties - .01 -
- --------------------------------------------------------------------------------
Regional Banking Group - net interest margin 4.84% 4.96% 4.87%
- --------------------------------------------------------------------------------
MORTGAGE BANKING (.97) (1.02) (.92)
CAPITAL MARKETS (.17) (.16) (.17)
TRANSACTION PROCESSING .03 .02 .02
- --------------------------------------------------------------------------------
Consolidated net interest margin 3.73% 3.80% 3.80%
================================================================================
Interest rate sensitivity is primarily a function of the repricing structure of
First Tennessee's balance sheet (Statement of Condition). Table 4 shows the
assets and liabilities as of year-end, subject to repricing in specified time
intervals with each maturity interval referring to the earliest repricing
opportunity (i.e., the earlier of scheduled contractual maturity or repricing
date) for each asset and liability category. The resulting gap is one tool,
though not a predominant management tool, used to measure the sensitivity of net
interest income to changes in interest rates. It should be noted that the
required gap analysis does not take into account future management actions that
could be undertaken to alter the simulated results, the effect of interest-free
sources, or a change in the slope of the yield curve. (For additional
information see the Risk Management-Interest Rate Risk Management section.)
In order to reflect more appropriately the repricing structure of First
Tennessee's balance sheet, management has made certain adjustments to the
balances shown in the table from their actual contractual terms. Based on
historical and industry data, an estimate of the expected prepayments on
consumer loans and investment securities is reflected in the balances in Table
4. Changes in the economic and interest rate environments may also affect these
expected prepayments.
Similarly, an adjustment to deposits is made to reflect the behavioral
characteristics of certain core deposits that do not have specified contractual
maturities (i.e., interest checking, savings and money market deposit accounts).
Historically, balances on these deposit accounts have remained relatively stable
despite changes in market interest rates. Management has classified certain of
these accounts as non-interest sensitive based on management's historical
pricing practices and runoff experience. Table 4 does not take into account the
effect of interest-free sources, which can be significant to First Tennessee.
F-9 First Tennessee National Corporation
40
TABLE 4 - RATE SENSITIVITY ANALYSIS ON DECEMBER 31, 2000
Within 3 After 3 Months After 6 Months After 1 Year After
(Dollars in millions) Months Within 6 Months Within 12 Months Within 5 Years 5 Years Total
- -------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS:
Loans $ 5,648 $ 319 $ 526 $2,471 $1,275 $10,239
Investment securities 207 174 283 1,658 517 2,839
Mortgage loans held for sale 1,735 -- -- -- -- 1,735
Federal funds sold and
securities purchased under
agreements to resell 122 -- -- -- -- 122
Other earning assets 258 -- -- -- -- 258
- -------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 7,970 $ 493 $ 809 $4,129 $1,792 $15,193
=========================================================================================================================
EARNING ASSET FUNDING:
Savings $ 8 $ -- $ -- $ 207 $ 98 $ 313
Checking interest 153 -- -- 372 752 1,277
Money market 1,905 -- -- -- 251 2,156
CD's under $100,000
and other time 496 506 613 623 48 2,286
CD's $100,000 and more 2,735 157 256 143 19 3,310
Short-term borrowed funds 3,337 -- 100 -- -- 3,437
Term borrowings -- -- -- 175 235 410
- -------------------------------------------------------------------------------------------------------------------------
Total earning asset funding $ 8,634 $ 663 $ 969 $1,520 $1,403 $13,189
=========================================================================================================================
RATE SENSITIVITY GAP:
Period $ (664) $(170) $ (160) $2,609 $ 389
Cumulative (664) (834) (994) 1,615 2,004
- ---------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY GAP ADJUSTED
FOR INTEREST RATE SWAPS:
Period $ (814) $(170) $ (60) $2.659 $ 389
Cumulative (814) (984) (1,044) 1,615 2,004
- ---------------------------------------------------------------------------------------------------------------
ADJUSTED GAP AS A PERCENTAGE
OF TOTAL EARNING ASSETS:
Period (5.4)% (1.1)% (.4)% 17.5% 2.6%
Cumulative (5.4) (6.5) (6.9) 10.6 13.2
- ---------------------------------------------------------------------------------------------------------------
<FN>
Interest-sensitive categories represent ranges in which assets and liabilities can be repriced, not necessarily their actual
maturities. The 'After 5 Years' column includes assets and liabilities with interest sensitivity of more than five years or
with indefinite repricing schedules. Noninterest earning/bearing balances have been excluded from this analysis.
</FN>
Simulation analysis is the primary tool used by First Tennessee to manage the
exposure of net interest income and margin to volatile interest rates, changing
market spreads, forecasted changes in balance sheet mix, and rate sensitivity.
This type of analysis computes the amount of net interest income at risk from
dynamic changes in the market place and related rate, pricing and balance sheet
movements. The simulation models create various at risk scenarios looking at
increases and/or decreases in interest rates from an instantaneous movement, or
a staggered movement over a certain time period. Management reviews these
different scenarios to determine probable actions. The models are then updated
to incorporate management action. A level of acceptable net interest income at
risk based on a staggered increase or decrease in interest rates of 300 basis
points is a component of internal guidelines. Based on First Tennessee's rate
sensitivity position during 2000, there was no net interest income at risk in
2000 when modeling a 300 basis point staggered decline in rates. Conversely, the
net interest income at risk averaged approximately 1 percent of projected 2000
net interest income when modeling a 300 basis point staggered increase in rates.
Based on the rate sensitivity position at December 31, 2000, net interest income
exposure over the next 12 months to a 300 basis point staggered increase in
interest rates is estimated to be approximately 2 percent of projected 2001 net
interest income. There is projected to be no net interest income
First Tennessee National Corporation F-10
41
exposure to a 300 basis point staggered decline in interest rates. A 300 basis
point gradual increase or decrease in interest rates is a hypothetical rate
scenario. These scenarios are used as one estimate of risk, and do not
necessarily represent management's current view of future interest rates or
market developments and may well vary from actual results for a number of
reasons, including those presented in the Forward-Looking Statements section of
the MD&A.
Table 5 provides rate and volume changes in interest income and interest expense
for earning assets and interest-bearing liabilities for the past three years.
TABLE 5 - ANALYSIS OF CHANGES IN NET INTEREST INCOME
2000 Compared to 1999 1999 Compared to 1998
Increase / (Decrease) Due to* Increase / (Decrease) Due to*
(Fully taxable equivalent) ---------------------------------- ------------------------------
(Dollars in thousands) Rate** Volume** Total Rate** Volume** Total
- -------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME - FTE:
Loans $ 59,770 $ 101,010 $ 160,780 $(24,712) $ 49,746 $ 25,034
Investment securities:
U.S. Treasury and other
U.S. government agencies 5,456 3,863 9,319 (1,909) (5,450) (7,359)
States and municipalities (39) (145) (184) (168) (1,443) (1,611)
Other 2,792 7,791 10,583 1,138 26,708 27,846
- ------------------------------------------- --------- --------
Total investment securities 8,448 11,270 19,718 382 18,494 18,876
- ------------------------------------------- --------- --------
Other earning assets:
Mortgage loans held for sale 25,214 (59,184) (33,970) 3,655 21,975 25,630
Investment in bank time deposits 28 (385) (357) (20) (1,478) (1,498)
Federal funds sold and securities
purchased under agreements to resell 4,275 1,862 6,137 (986) 4,783 3,797
Capital markets securities inventory 4,504 (1,347) 3,157 (1,311) 2,067 756
- ------------------------------------------- --------- --------
Total other earning assets 30,340 (55,373) (25,033) 735 27,950 28,685
- ------------------------------------------- --------- --------
Total earning assets 113,760 41,705 155,465 (25,956) 98,551 72,595
- ----------------------------------------------------------------------------------- --------------------------------
Total interest income - FTE $ 155,465 $ 72,595
- ----------------------------------------------------------------------------------- --------------------------------
INTEREST EXPENSE:
Interest-bearing deposits:
Savings $ (44) $ (195) $ (239) $ (1,388) $ 51 $ (1,337)
Checking interest and money market 11,929 (5,390) 6,539 (13,657) 4,749 (8,908)
Certificates of deposit under $100,000
and other time 9,995 (4,565) 5,430 (10,847) (10,251) (21,098)
Certificates of deposit $100,000 and more 41,924 47,043 88,967 (7,380) 61,821 54,441
- ------------------------------------------- --------- --------
Total interest-bearing deposits 77,701 22,996 100,697 (25,766) 48,864 23,098
- ------------------------------------------- --------- --------
Federal funds purchased and securities
sold under agreements to repurchase 33,025 31,661 64,686 (10,024) (7,858) (17,882)
Commercial paper and other
short-term borrowings 18,051 (35,918) (17,867) (4,625) 18,970 14,345
Term borrowings (1,373) 898 (475) (3,411) 8,266 4,855
- ------------------------------------------- --------- --------
Total interest-bearing liabilities 120,962 26,079 147,041 (41,549) 65,965 24,416
- ----------------------------------------------------------------------------------- --------------------------------
Total interest expense $ 147,041 $ 24,416
- ----------------------------------------------------------------------------------- --------------------------------
Net interest income - FTE $ 8,424 $ 48,179
=========================================================================================================================
<FN>
* The changes in interest due to both rate and volume have been allocated to change due to rate and change due to volume in
proportion to the absolute amounts of the changes in each.
** Variances are computed on a line-by-line basis and are non-additive.
</FN>
F-11 First Tennessee National Corporation
42
PROVISION FOR LOAN LOSSES
The provision for loan losses is the charge to operating earnings that
management determines to be necessary to maintain the allowance for loan losses
at an adequate level reflecting management's estimate of the risk of loss
inherent in the loan portfolio. The provision for loan losses increased 16
percent, to $67.3 million in 2000 compared with $57.9 million in 1999, due to
continued loan growth, a change in the loan mix related to growth in loans with
higher risk/reward profiles and an increase in nonperforming loans. In fourth
quarter 2000 the provision was increased by $8.5 million due to the
nonperforming classification of two large commercial credits totaling
approximately $20 million to Tennessee domiciled middle market companies and was
decreased by $10.7 million due to the credit card divestiture. A more detailed
discussion follows in the Risk Management-Credit Risk Management/Asset Quality
section.
NONINTEREST EXPENSE
Noninterest expense, also called operating expense, decreased 1 percent in 2000,
to $1,257.4 million from $1,275.3 million. Expenses in mortgage banking and
capital markets fluctuate based on the type and level of activity. Excluding
mortgage banking and capital markets, total operating expense increased 11
percent. The growth rate was also affected by various expenses (i.e., occupancy,
severance and other operating expenses) of $6.8 million related to the various
divestitures in 2000 and by expenses related to the operations of NPC acquired
in June of 1999. Table 6 provides detail by category for the past six years with
growth rates. Table 7 gives a breakdown of total expenses by business line for
the prior three years.
TABLE 6 - ANALYSIS OF NONINTEREST EXPENSE
Compound Annual
Growth Rates (%)
----------------
(Dollars in thousands) 2000 1999 1998 1997 1996 1995 00/99 00/95
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation,
incentives and benefits $ 598,017 $ 633,640 $ 563,576 $409,783 $385,380 $340,508 5.6 - 11.9 +
Amortization of mortgage
servicing rights 81,568 103,471 95,507 37,452 26,041 14,980 21.2 - 40.3 +
Occupancy 80,453 73,052 51,421 42,848 39,815 37,867 10.1 + 16.3 +
Operations services 70,875 64,545 58,505 49,879 44,109 38,798 9.8 + 12.8 +
Equipment rentals, depreciation
and maintenance 68,230 57,807 45,771 40,093 34,121 31,845 18.0 + 16.5 +
Communications and courier 47,337 51,937 41,468 34,899 32,981 29,880 8.9 - 9.6 +
Amortization of intangible assets 11,738 10,492 11,114 9,631 9,491 8,100 11.9 + 7.7 +
All other expense:
Amortization of hedge
instruments 38,020 49,414 13,345 4,867 - - 23.1 - N/A
Contract employment 28,868 43,685 35,937 17,420 11,288 5,744 33.9 - 38.1 +
Legal and professional fees 26,794 22,492 24,551 13,999 12,050 13,403 19.1 + 14.9 +
Advertising and public relations 26,693 30,187 25,184 18,722 17,629 12,972 11.6 - 15.5 +
Computer software 19,205 15,410 11,629 6,731 4,076 3,004 24.6 + 44.9 +
Supplies 18,170 22,006 20,195 15,267 14,383 11,866 17.4 - 8.9 +
Foreclosed real estate 16,080 6,585 31,019 10,827 7,533 4,962 144.2 + 26.5 +
Travel and entertainment 13,891 18,698 19,485 13,802 10,394 8,211 25.7 - 11.1 +
Distributions on guaranteed
preferred securities 8,070 8,070 8,070 8,070 - - - N/A
Fed service fees 7,112 6,471 5,307 5,799 7,814 9,489 9.9 + 5.6 -
Deposit insurance premium 2,589 1,790 1,578 1,485 5,129 9,957 44.6 + 23.6 -
Other 93,706 55,500 58,107 43,470 42,252 28,129 68.8 + 27.2 +
- --------------------------------------------------------------------------------------------------------
Total other expense 299,198 280,308 254,407 160,459 132,548 107,737 6.7 + 22.7 +
- -------------------------------------------------------------------------------------------------------
Total noninterest expense $1,257,416 $1,275,252 $1,121,769 $785,044 $704,486 $609,715 1.4 - 15.6 +
=======================================================================================================
<FN>
Certain previously reported amounts have been reclassified to agree with current presentation.
</FN>
First Tennessee National Corporation F-12
43
Employee compensation, incentives, and benefits (personnel expense), the largest
component of noninterest expense, decreased 6 percent in 2000, to $598.0 million
from $633.6 million. Personnel expense includes commissions paid in several
lines of business, such as capital markets and mortgage banking. As the revenue
increases or decreases and/or as the product mix changes in these business
lines, the amount of commissions also changes. In addition, other personnel
expenses in mortgage banking and capital markets fluctuate based on the type and
level of activity. Excluding these two business lines, total personnel expense
increased 8 percent due in part to the impact of NPC and severance costs
associated with the realignment activity implemented in 2000.
TABLE 7 - OPERATING EXPENSE COMPOSITION
(Dollars in millions) 2000 1999 1998
- --------------------------------------------------------------------------------
Regional banking group $ 485.1 $ 447.9 $ 402.9
Mortgage banking 563.4 636.0 536.9
Capital markets 92.5 96.7 111.0
Transaction processing 107.9 86.0 62.3
Corporate 8.5 8.7 8.7
- --------------------------------------------------------------------------------
Total operating expense $1,257.4 $1,275.3 $1,121.8
================================================================================
Mortgage banking expenses decreased 11 percent, to $563.4 million from $636.0
million in 1999. Personnel expense fell 20 percent to $223.3 million for 2000
from $278.5 million in 1999 due to lower commissions as a result of lower
activity levels. Amortization of capitalized mortgage servicing rights declined
21 percent to $81.6 million from $103.5 million primarily due to the 1999
classification of excess mortgage servicing rights to interest-only strips and
slower mortgage prepayment speeds experienced in 2000. Amortization expense from
hedge instruments fell 23 percent, or $11.4 million, from 1999 primarily due to
the sale or de-designation of hedge instruments associated with the mortgage
servicing rights in 2000. Foreclosed property expense for mortgage banking
increased 147 percent or $9.3 million in 2000. Other expense increased $21.2
million in 2000 from the establishment of a valuation reserve for mortgage
servicing rights due primarily to the decrease in mortgage interest rates since
third quarter 2000 and the corresponding increase in projected prepayment
speeds. Also impacting the growth in other expense is $10.0 million from the
write-down of the book value of mortgage servicing rights related to a change in
methodology for recognizing the decrease in value of servicing for delinquent
mortgage loans.
Expenses for the regional banking group increased 8 percent, to $485.1 million
from $447.9 million in 1999. This growth rate was affected by increases in
personnel expense, expenses related to the credit card and corporate trust
sales, and various expenses related to the implementation of initiatives to
enhance efficiency and profitability. Capital markets experienced a 4 percent
decrease in expenses, to $92.5 million from $96.7 million primarily due to lower
commissions and incentives compared to 1999. Transaction processing experienced
growth in operating expense of 25 percent, to $107.9 million from $86.0 million.
This growth was mainly related to the operation of the NPC locations acquired
and expenses related to the sale of MONEY BELT(R).
INCOME TAXES
The effective tax rate for 2000 decreased to 31.0 percent from 34.8 percent in
1999. This variance was primarily the result of a tax benefit related to the
sale of mandatorily redeemable cumulative preferred stock issued by an affiliate
of FTBNA during 2000.
INCOME STATEMENT ANALYSIS - 1999 COMPARED TO 1998
- -------------------------------------------------
Earnings in 1999 were $247.5 million, an increase of 9 percent from $226.4
million earned in 1998. Earnings per share increased 7 percent to $1.90 in 1999
from $1.77 in 1998. Diluted earnings per share increased 8 percent to $1.85 in
1999 from $1.72 in 1998. Return on average shareholders' equity was 20.9 percent
in 1999 compared
F-13 First Tennessee National Corporation
44
with 22.7 percent in 1998. Strong internal equity generation and retention
caused the decline in this ratio. Return on average assets was 1.33 percent in
1999 and 1.35 percent in 1998.
Noninterest income increased 14 percent during 1999, to a record $1,120.8
million from $981.6 million and contributed 66 percent to total revenue. During
1999 mortgage banking fees increased 13 percent, to $632.8 million from $558.4
million. During 1999 originations were $19.9 billion compared with a record
$23.3 billion in 1998. The servicing portfolio was $44.6 billion on December 31,
1999, compared with $39.7 billion on December 31, 1998. See Table 2 for a
breakout of mortgage banking fee income. Capital markets' fee income decreased
14 percent in 1999, to $126.8 million from $147.4 million, while securities
bought and sold increased 25 percent, to $534.3 billion from $427.0 billion. The
decrease in fee income resulted primarily from a change in product mix due to
customers' concerns about interest rates which motivated many customers to
remain liquid during the latter half of 1999 and place their money in cash and
short-term investments. Customers also had higher cash needs related to year-end
1999 (Y2K) and the funding of additional loan growth. During 1999 deposit
transactions and cash management fees increased 17 percent, to $106.2 million
from $90.4 million, due to increased sales volume of various cash management
products and services and growth in customer service charges. Trust services and
investment management fees increased 17 percent, to $59.8 million from $51.2
million. This growth was driven by strong performance by the investment advisory
companies, 12 percent growth in assets under management and successful
cross-sell efforts, particularly to our targeted market. Merchant processing
fees grew 33 percent, to $49.7 million from $37.5 million, due to special
assessments received from customers, pricing changes, expansion and change in
the mix of the customer base to a larger portion of direct customers. Cardholder
fees increased 22 percent, to $25.6 million from $21.0 million, principally from
higher interchange collections due to strong purchasing volume and moderate
growth in the credit card portfolio as well as price increases. All other
noninterest income grew 53 percent in 1999, to $115.7 million from $75.7
million. This growth was positively impacted during 1999 by the revenue of $16.7
million generated from NPC and a gain of $6.1 million on the recognition of
stock received from the demutualization of an insurance company. Excluding these
items, all other income and commissions would have grown 23 percent. Additional
contributing factors to the growth rate were other service charges, insurance
premiums and commissions and check clearing fees.
In 1999 there were $2.3 million of net equity securities gains compared with
$3.9 million of net equity securities gains for 1998. The majority of the net
security gains in both 1999 and 1998 were attributable to First Tennessee's
venture capital subsidiaries.
During 1999 net interest income increased 9 percent, to $592.5 million from
$544.3 million, principally from strong loan growth, improvement in the regional
banking group's net interest margin and increased net interest income from
mortgage banking. The regional banking group's margin improved to 4.96 percent
in 1999 from 4.87 percent in 1998 primarily due to a drop in funding cost. The
consolidated margin remained stable at 3.80 percent in 1999 and 1998. See Table
3 for detailed computation on the net interest margin for the regional banking
group and the impact that the other business lines had on the consolidated
margin.
The provision for loan losses increased 13 percent, to $57.9 million in 1999
compared with $51.3 million in 1998, due to increased inherent losses in the
loan portfolio and a change in the loan mix related to growth in loans with
higher risk/reward profiles.
During 1999 noninterest expense increased 14 percent, to $1,275.3 million from
$1,121.8 million, primarily because of growth in mortgage banking and capital
markets. Table 7 gives a breakdown of total expenses by business line. Mortgage
banking accounted for 65 percent of the overall expense growth in 1999 and was
driven by increased mortgage origination volume and a larger servicing
portfolio. The regional banking group accounted for 29 percent of the overall
expense growth. This growth was affected by investments made to expand consumer
lending, to grow insurance and investment management, and to open new branches
in targeted growth markets. Personnel expense, the largest component of
noninterest expense, increased 12 percent, to $633.6 million in 1999 from $563.6
million in 1998. Lower commissions and workforce reductions at capital markets
and changes in management incentive compensation plans favorably impacted the
growth in personnel expense during 1999. The effect was diminished by increases
in non-origination functions at mortgage banking.
First Tennessee National Corporation F-14
45
BALANCE SHEET REVIEW
- --------------------
On December 31, 2000, First Tennessee reported total assets of $18.6 billion
compared with $18.4 billion at the end of 1999 and $18.7 billion at the end of
1998. Average assets were $19.3 billion in 2000 compared with $18.6 billion in
1999 and $16.7 billion in 1998. The 4 percent increase in average assets during
2000 was primarily due to growth in earning assets, which accounted for 73
percent of the growth. In 1999 the increase in earning assets accounted for 66
percent of the growth in average assets.
EARNING ASSETS
Earning assets primarily consist of loans, investment securities and mortgage
loans held for sale. For 2000, earning assets averaged $16.1 billion compared
with $15.6 billion for 1999 and $14.3 billion for 1998. Average earning assets
were 83 percent of total average assets in 2000, 84 percent in 1999 and 86
percent in 1998.
LOANS
Total loans averaged $9.9 billion and grew 13 percent, or $1,113.2 million,
during 2000 and averaged $8.8 billion and grew 7 percent, or $576.7 million
during 1999. Average loans represented 62 percent of average earning assets in
2000; 57 percent in 1999; and 58 percent in 1998. The increase in this ratio in
2000 was due to the strong loan growth offset in part by a 24 percent decrease
in the mortgage warehouse.
During the last three years certain residential real estate loans and automobile
receivables have been securitized. The majority of the securities resulting from
the residential real estate loan securitizations are owned by subsidiaries of
First Tennessee, including FTBNA. Excluding the impact of these securitizations,
total average loans would have grown 12 percent in 2000 and 10 percent in 1999.
Additional loan information is provided in Table 8 and Note 4 - Loans.
TABLE 8 - AVERAGE LOANS
2000 1999
Percent Growth Percent Growth Percent
(Dollars in millions) 2000 of Total Rate 1999 of Total Rate 1998 of Total
- -------------------------------------------------------------------------------------------------------------------------
Commercial:
Commercial, financial and industrial $3,792.0 38% 6.6% $3,557.9 40% 8.0% $3,295.5 40%
Real estate commercial 878.5 9 21.1 725.4 8 7.0 678.1 8
Real estate construction 400.5 4 30.5 307.0 4 (12.8) 352.0 4
Retail:
Real estate residential 3,227.3 32 26.0 2,560.8 29 7.1 2,391.1 29
Real estate construction 152.7 2 61.9 94.3 1 73.3 54.4 1
Other consumer 926.4 9 (7.4) 1,000.0 11 10.2 907.5 11
Credit card receivables 554.6 6 (3.3) 573.4 7 1.8 563.5 7
- ------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned $9,932.0 100% 12.6% $8,818.8 100% 7.0% $8,242.1 100%
========================================================================================================================
Commercial loans, consisting of commercial, financial and industrial; commercial
real estate; and commercial construction loans, averaged $5.1 billion and grew
10 percent, or $480.7 million during 2000, and averaged $4.6 billion and grew 6
percent, or $264.7 million in 1999. Commercial, financial and industrial loans
continued as the single largest loan category in 2000 and represented 75 percent
of the commercial loan portfolio. In 1999, these loans represented 78 percent of
the commercial loan portfolio. Commercial real estate loans averaged $878.5
million in 2000 with growth of 21 percent, and averaged $725.4 million in 1999
with growth of 7 percent. The growth in 2000 was due to new projects and
existing projects committed in 1999 and fully funded in 2000. Commercial
construction loans grew 30 percent in 2000 while averaging $400.5 million, and
decreased 13 percent while averaging $307.0 million in 1999. The growth in 2000
was primarily attributable to expansion of a program at First Horizon Home Loans
for developers of single family residential properties. Additional commercial
loan information is provided in Table 9.
F-15 First Tennessee National Corporation
46
TABLE 9 - CONTRACTUAL MATURITIES OF COMMERCIAL LOANS AT DECEMBER 31, 2000
After 1 Year
(Dollars in thousands) Within 1 Year Within 5 Years After 5 Years Total
- -------------------------------------------------------------------------------------------------------------------------
Commercial, financial and industrial $ 2,223,082 $ 1,469,009 $ 272,305 $ 3,964,396
Real estate commercial 341,043 515,823 90,037 946,903
Real estate construction 328,229 81,861 5,623 415,713
- -------------------------------------------------------------------------------------------------------------------------
Total commercial loans, net of unearned income $ 2,892,354 $ 2,066,693 $ 367,965 $ 5,327,012
=========================================================================================================================
For maturities over one year:
Interest rates - floating $ 918,664 $ 154,058 $ 1,072,722
Interest rates - fixed 1,148,029 213,907 1,361,936
- -------------------------------------------------------------------------------------------------------------------------
Total $ 2,066,693 $ 367,965 $ 2,434,658
=========================================================================================================================
The retail loan portfolio consists of residential real estate (principally
secured by first and/or second liens on residential property), other consumer
(student, automobile and other consumer installment loans requiring periodic
payments of principal and interest), credit card, and retail construction loans.
In 2000 retail loans averaged $4.9 billion and grew 15 percent, or $632.5
million, and in 1999 averaged $4.2 billion and grew 8 percent, or $312.0
million. Average retail loans would have grown 14 percent in 2000 if loans
securitized during these periods had been included in the growth rate
calculation.
Residential real estate loans led the increase in retail loans and accounted for
66 percent of the retail loan portfolio in 2000 and 61 percent in 1999. The
residential real estate loan portfolio averaged $3.2 billion and grew 26 percent
in 2000 due to continued growth in second mortgages originated by First Horizon
Equity Lending, a division of FTBNA, and averaged $2.6 billion and grew 7
percent in 1999. The retail real estate construction portfolio averaged $152.7
million in 2000 and increased 62 percent due to expansion of a program at First
Horizon Home Loans to provide residential constructions loans to individuals for
whom we have committed a permanent mortgage. In comparison, this portfolio
averaged $94.3 million in 1999 and grew 73 percent. The retail real estate
construction loans are all in First Horizon Home Loans. Other consumer loans
averaged $926.4 million in 2000 with a decrease of 7 percent, and averaged 1.0
billion in 1999 with growth of 10 percent.
Total credit card receivables (Visa, MasterCard and private label accounts)
averaged $554.6 million, a decrease of 3 percent in 2000, while averaging $573.4
million in 1999 with growth of 2 percent from 1998. On December 31, 2000, credit
card receivables had decreased to $319.4 million due to First Tennessee's
decision to focus on core multi-relationship customers and sell almost $300
million of affinity, co-branded, and certain single relationship credit card
receivables, which did not fit this strategic focus (see also Note 2 -
Acquisitions/Divestitures for additional information).
Going forward, First Tennessee expects loan growth to decrease slightly due to
anticipated slower growth in the national and regional economies. As loan growth
continues to outpace deposit growth, First Tennessee will continue to evaluate
alternative sources of funding which may include loan sales, securitizations,
syndications, and debt offerings.
INVESTMENT SECURITIES
The investment portfolio of First Tennessee consists principally of debt
securities used as a source of income, liquidity and collateral for repurchase
agreements or public fund deposits. Additionally, the investment portfolio is
used as a tool to manage risk from movements in interest rates. On December 31,
2000, the investment portfolio totaled $2.8 billion. The investment portfolio is
classified into two categories: securities available for sale (AFS) and
securities held to maturity (HTM). Table 10 shows information pertaining to the
composition, yields and maturities of the investment securities portfolio.
First Tennessee National Corporation F-16
47
TABLE 10 - CONTRACTUAL MATURITIES OF INVESTMENT SECURITIES AT DECEMBER 31, 2000 (AMORTIZED COST)
After 1 Year After 5 Years
Within 1 Year Within 5 Years Within 10 Years After 10 Years
---------------- ----------------- ----------------- ---------------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
- -------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
States and municipalities* $ 2,055 6.75% $ 7,145 7.04% $ 8,543 7.37% $ 4,072 8.15%
Privately issued CMOs -- -- -- -- 314,609 6.86 301,891 7.51
- -------------------------------------------------------------------------------------------------------------------------
Total $ 2,055 6.75% $ 7,145 7.04% $323,152 6.87% $ 305,963 7.52%
=========================================================================================================================
SECURITIES AVAILABLE FOR SALE:
Mortgage-backed securities
and collateralized
mortgage obligations** $ 8,186 6.59% $ 36,270 6.67% $ 26,345 7.38% $1,603,883 6.57%
U.S. Treasury and other U.S.
government agencies 36,007 6.18 74,576 6.62 30,404 7.19 997 6.38
States and municipalities* 4,504 5.54 7,494 5.45 325 5.25 21,500 7.93
Other 2,953 8.29 9,368 8.16 7,895 6.81 306,123 *** 7.72
- -------------------------------------------------------------------------------------------------------------------------
Total $51,650 6.31% $127,708 6.68% $ 64,969 7.21% $1,932,503 6.77%
=========================================================================================================================
<FN>
* Weighted average yields on tax-exempt obligations have been computed by adjusting allowable tax-exempt income to a
fully taxable equivalent basis using a tax rate of 35 percent.
** Includes $1.7 billion of government agency issued mortgage-backed securities and collateralized mortgage obligations
which, when adjusted for early paydowns, have an estimated average life of 3.1 years.
*** Includes $155 million of equity securities with no stated maturity.
</FN>
Average investment securities increased 6 percent, or $160.0 million, in 2000 to
$2.9 billion. During 1999 average investment securities increased 11 percent, or
$276.9 million. In 2000 the growth in investment securities came principally
from the 1999 reclassification of excess mortgage servicing rights to
interest-only strips held in the investment portfolio. The growth in 1999 came
from securitization activity and the retention of a portion of the resulting
securities. Excluding the securitization transactions in 1999, investment
securities would have decreased 1 percent. Investment securities represented 18
percent of earning assets in 2000 and 17 percent of earning assets in 1999 and
1998.
On December 31, 2000, the AFS securities totaled $2.2 billion and had an average
life of 3.4 years. AFS securities consisted primarily of mortgage-backed
securities, collateralized mortgage obligations (CMOs), U.S. Treasuries, U.S.
government agencies, equities, and interest only strips. On December 31, 2000,
these securities had approximately $23.9 million of net unrealized gains that
resulted in an increase in book equity of approximately $14.6 million, net of
$9.3 million of deferred income taxes. On December 31, 1999, the AFS securities
portfolio totaled $2.3 billion and had approximately $35.7 million of net
unrealized losses that resulted in a decrease in book equity of approximately
$21.8 million, net of $13.9 million of deferred income tax benefit. On December
31, 1998, the AFS securities portfolio totaled $1.8 billion and had
approximately $20.9 million of net unrealized gains that resulted in an increase
in book equity of approximately $12.9 million, net of $8.0 million of deferred
income taxes.
On December 31, 2000, the HTM securities totaled $638.3 million and had an
average life of 4.0 years. HTM securities include privately issued CMOs and
municipal securities. The privately issued CMOs represent consumer real estate
loans that have been securitized and retained through the use of a Real Estate
Mortgage Investment Conduit (REMIC). The HTM securities portfolio had a net
unrealized loss on December 31, 2000, of $18.6 million. On December 31, 1999,
the HTM securities totaled $768.9 million and had a net unrealized loss of $34.1
million, and on December 31, 1998, the HTM securities portfolio totaled $609.8
million and had a net unrealized gain of $.6 million.
MORTGAGE LOANS HELD FOR SALE (MORTGAGE WAREHOUSE)
Due to lower origination activity in 2000 the mortgage warehouse represented
only 15 percent of total earning assets, compared with 21 percent of earning
assets in 1999 and 20 percent in 1998. During 2000 the mortgage
F-17 First Tennessee National Corporation
48
warehouse averaged $2.5 billion and decreased 24 percent, or $766.9 million,
from 1999. During 1999 the mortgage warehouse averaged $3.2 billion and
increased 11 percent, or $306.5 million, from 1998. Since the mortgage warehouse
loans are generally held in inventory for a short period of time, there may be
significant differences between average and period-end balances. At year-end
2000, the mortgage warehouse totaled $1.7 billion compared with $2.0 billion and
$4.2 billion at year-end 1999 and 1998, respectively.
DEPOSITS, OTHER SOURCES OF FUNDS AND LIQUIDITY MANAGEMENT
DEPOSITS
During 2000 core deposits decreased 3 percent, or $237.1 million, and averaged
$8.9 billion. This compares to growth of 1 percent, or $134.3 million, and an
average balance of $9.1 billion in 1999. In 1998, these deposits averaged $9.0
billion. The decrease in core deposits during 2000 came primarily from checking
interest and money market accounts and parallels the trend in the industry.
Interest-bearing core deposits decreased 4 percent and averaged $6.0 billion in
2000 compared with an average balance of $6.3 billion for both 1999 and 1998.
Noninterest bearing deposits grew 2 percent, or $43.3 million, during 2000, due
to growth in a cash management investment product, and averaged $2.9 billion. In
1999, noninterest-bearing deposits grew 7 percent, or $174.6 million, primarily
from growth in demand deposits, and averaged $2.8 billion. Noninterest-bearing
deposits averaged $2.7 billion in 1998.
OTHER SOURCES OF FUNDS
Short-term purchased funds averaged $7.9 billion for 2000, up 12 percent, or
$821.4 million, from the previous year. This increase was primarily used to fund
the growth in earning assets. Short-term purchased funds increased 24 percent,
or $1.4 billion in 1999, and averaged $7.1 billion and $5.7 billion during 1999
and 1998, respectively. The growth in 1999 was primarily used to fund a larger
balance sheet principally due to growth in earning assets. Short-term purchased
funds accounted for 46 percent of First Tennessee's funding (core deposits plus
purchased funds and term borrowings) in 2000, 43 percent in 1999, and 38 percent
in 1998. See Note 9 - Short-Term Borrowings for additional information.
Term borrowings include senior and subordinated borrowings and advances with
maturities greater than one year. On average, term borrowings increased 4
percent, or $13.2 million, during 2000 and averaged $384.3 million, compared
with an increase of 47 percent, or $118.4 million, and an average balance of
$371.1 million in 1999. The increase in 1999 was primarily due to a full-year
effect on averages from the $250 million of subordinated debt issued in 1998.
Term borrowings averaged $252.7 million in 1998. Term borrowings on December 31,
2000, were $409.7 million, an increase of 14 percent, or $51.0 million, from
1999 year-end. See Note 10 - Term Borrowings for additional information.
LIQUIDITY MANAGEMENT
The objective of liquidity management is to ensure the continuous availability
of funds to meet the demands of depositors and borrowers. The Asset/Liability
Committee, a committee consisting of senior management that meets regularly, is
responsible for managing these needs by taking into account the marketability of
assets; the sources, stability and availability of funding; and the level of
unfunded commitments. Core deposits are First Tennessee's primary source of
funding and one of the most stable sources of liquidity for a bank. In 2000, the
total loan to core deposit ratio was 112 percent compared with 97 percent and 92
percent in 1999 and 1998, respectively. This ratio increased in 1999 as loan
growth continued to outpace deposit growth. FTBNA has a bank note program
available for additional liquidity, under which the bank may borrow funds from
time to time, at maturities of 30 days to 30 years. On December 31, 2000,
approximately $3.0 billion was available under the bank note program as a
long-term (greater than one year) funding source.
Parent company liquidity is maintained by cash flows stemming from dividends and
interest payments collected from subsidiaries, which represent the primary
source of funds to pay dividends to shareholders and interest to debtholders.
The amount of dividends from bank subsidiaries is subject to certain regulatory
restrictions that are
First Tennessee National Corporation F-18
49
described in Note 18 - Restrictions, Contingencies and Other disclosures. The
parent company statements are presented in Note 26 - Parent Company Financial
Information. The parent company also has the ability to enhance its liquidity
position by raising equity or incurring debt. Under an effective shelf
registration statement on file with the Securities and Exchange Commission
(SEC), First Tennessee, as of December 31, 2000, may offer from time to time at
its discretion, debt securities, and common and preferred stock aggregating up
to $225 million. In addition, First Tennessee also has an effective capital
securities shelf registration statement on file with the SEC under which up to
$200 million of capital securities is available for issuance.
Maintaining adequate credit ratings on debt issues is critical to liquidity
because it affects the ability of First Tennessee to attract funds from various
sources on a cost-competitive basis. The various credit ratings are detailed in
Table 11.
TABLE 11 - CREDIT RATINGS AT DECEMBER 31, 2000
Standard & Poor's Moody's Fitch
- -------------------------------------------------------------------------------------------------------------------------
FIRST TENNESSEE NATIONAL CORPORATION
Overall credit rating A-/Negative A2/Stable A/Stable/F1
Subordinated debt BBB+ A3 A-
Capital securities* BBB a2 A-
- -------------------------------------------------------------------------------------------------------------------------
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
Overall credit rating A/Negative/A-1 A1/Stable A/Stable/F1
Long-term/short-term deposits A/A-1 A1/P-1 A+/F1
Other long-term/short-term funding** A A1/P-1
Subordinated debt A- A2 A-
- -------------------------------------------------------------------------------------------------------------------------
FT REAL ESTATE SECURITIES COMPANY, INC.
Preferred stock BBB+ a1
- -------------------------------------------------------------------------------------------------------------------------
<FN>
* Guaranteed preferred beneficial interests in First Tennessee's subordinated debentures.
** Other funding includes senior bank notes.
A rating is not a recommendation to buy, sell or hold securities.
</FN>
CAPITAL
Total capital (shareholders' equity plus qualifying capital securities and
subsidiary preferred stock) on December 31, 2000, was $1.5 billion, up 14
percent, or $181.1 million, from December 31, 1999. Shareholders' equity
(excluding the qualifying capital securities and subsidiary preferred stock) was
$1.4 billion at year-end 2000, up 11 percent from 1999, which was up 13 percent
from year-end 1998. The increase in total capital in 2000 came from retention of
net income after dividends, issuance and sale of subsidiary preferred stock and
stock option exercises, reduced by shares repurchased. The increase in total
capital in 1999 came from retention of net income after dividends, equity issued
for acquisitions and stock option exercises, reduced by shares repurchased. The
Consolidated Statements of Shareholders' Equity highlights the changes in equity
since December 31, 1997.
Capital adequacy is an important indicator of financial stability and
performance. Management's objectives are to maintain a level of capitalization
that is sufficient to sustain asset growth, take advantage of profitable growth
opportunities and promote depositor and investor confidence. Overall, First
Tennessee's capital position remained strong as shown in Table 12. Unrealized
market valuations had no material effect on the ratios.
F-19 First Tennessee National Corporation
50
TABLE 12 - CAPITAL RATIOS
2000 1999 1998
- --------------------------------------------------------------------------------
Average total capital to average assets* 7.16% 6.91% 6.55%
Average shareholders' equity to average assets 6.61 6.37 5.96
Period-end shareholders' equity to assets 7.46 6.76 5.87
Period-end double leverage 107.2 108.9 112.5
- --------------------------------------------------------------------------------
<FN>
* Total capital includes shareholders' equity, preferred stock of subsidiary
and guaranteed preferred beneficial interests in First Tennessee's junior
subordinated debentures.
</FN>
Banking regulators define minimum capital ratios for bank holding companies and
their subsidiaries. Based on the risk-based capital rules and definitions
prescribed by the banking regulators, should an institution's capital ratios
decline below predetermined levels, it would become subject to a series of
increasingly restrictive regulatory actions. The system categorizes a financial
institution's capital position into one of five categories ranging from
well-capitalized to critically under-capitalized. For an institution to qualify
as well-capitalized, Tier 1 Capital, Total Capital and Leverage capital ratios
must be at least 6 percent, 10 percent and 5 percent, respectively. As of
December 31, 2000, First Tennessee and all of its banking affiliates had
sufficient capital to qualify as well-capitalized institutions as shown in Note
13 - Regulatory Capital.
At the January 1998 meeting of the board of directors, a two-for-one stock split
was approved. The stock split was effective February 20, 1998, and changed the
par value of First Tennessee's common stock from $1.25 to $.625 per share and
the shares of authorized common stock increased from 200 million to 400 million.
All share-related information has been restated in this document to reflect the
stock split.
On December 31, 2000, book value per common share was $10.70 compared with $9.52
for 1999 and $8.50 for 1998. Average shares outstanding for the three-year
period were: 129.9 million in 2000, 130.6 million in 1999 and 128.2 million in
1998. Period-end shares outstanding for this same three year-period were: 128.7
million, 129.9 million and 129.0 million, respectively. The lower number of
shares outstanding in 2000 was due to more shares repurchased than shares issued
for stock option exercises and acquisitions. First Tennessee's shares are traded
on The New York Stock Exchange under the symbol FTN. The sales price ranges, net
income per share and dividends declared by quarter, for each of the last two
years, are presented in Table 20.
On December 31, 2000, the closing sales price of First Tennessee's common stock
was $28.9375 per share. This price was 270 percent of year-end book value per
share, and the annual dividend yield for 2000 was 3.1 percent based on dividends
declared in 2000 and the closing market price of $28.50 on December 31, 1999.
Management has authority to repurchase common stock from time to time for
various benefit programs. During 2000, First Tennessee repurchased 2.5 million
shares while 1.3 million were issued for benefit plans. During 1999, 1.3 million
shares were repurchased while 1.9 million were issued for benefit plans and .3
million were issued for acquisitions. During 1998, 1.9 million shares were
repurchased while 2.1 million were issued for benefit plans and .5 million were
issued for acquisitions. Pursuant to board authority, First Tennessee plans to
continue to purchase shares from time to time for its stock option plans and
will evaluate the level of capital and take action designed to generate or use
capital as appropriate for the interests of the shareholders. Also, in October
2000 First Tennessee announced that the Board of Directors approved the
repurchase of up to 9.5 million shares by June 30, 2002, subject to market
conditions, accumulation of excess equity and prudent capital management. During
2000, no shares were repurchased pursuant to this authority.
RISK MANAGEMENT
- ---------------
INTEREST RATE RISK MANAGEMENT
The primary purpose of managing interest rate risk is to minimize the volatility
to earnings from changes in interest rates and preserve the value of First
Tennessee's capital. The Asset/Liability Committee is responsible for
coordinating the financial management of net interest income, liquidity,
mortgage banking interest rate risk,
First Tennessee National Corporation F-20
51
investment portfolio, off-balance sheet hedging, and other such activities.
Interest rate risk is managed by structuring the balance sheet to attempt to
maximize overall profitability, increase revenue, and achieve the desired level
of net interest income while managing interest sensitivity risk and liquidity.
Derivative financial instruments are used to aid in managing the exposure of the
balance sheet, net interest income, fee income, and expenses to changes in
interest rates. Interest rate sensitivity risk is defined as the risk that
future changes in interest rates will impact income.
First Tennessee's net interest income and its financial condition are affected
by changes in the level of market interest rates as the repricing
characteristics of its loans and other assets do not necessarily match those of
its deposits, other borrowings and capital. For example, some fixed-rate assets
that reprice within one year are funded with floating-rate debt. This position
will benefit net interest income in a declining interest rate environment and
will negatively impact net interest income in a rising interest rate
environment. In the case of floating-rate assets and liabilities, First
Tennessee may also be exposed to basis risk, which results from changing spreads
between loans and deposit rates.
The interest rate sensitivity analysis cannot be used in isolation to determine
the level of interest rate exposure because it does not fully capture the impact
of changes in the balance sheet mix, administered rates (such as the prime
lending rate), embedded options, lagged interest rate changes, and certain other
factors. Accordingly, First Tennessee uses simulation analysis as its primary
tool to manage interest rate risk exposure. This type of analysis computes net
interest income at risk under a variety of market interest rate scenarios to
more dynamically identify interest rate risk exposures. This simulation, which
considers forecasted balance sheet changes, prepayment speeds, deposit mix,
pricing impacts, and other changes in the net interest spread, provides an
estimate of the annual net interest income at risk for given changes in interest
rates. This estimate includes assumptions that are inherently uncertain and, as
a result, the model cannot precisely estimate net interest income or precisely
predict the impact of higher or lower interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude and
frequency of interest rate changes and changes in market conditions, and
management's strategies, among other factors.
Rate shock analysis using multiple interest rate movements up and down is used
by mortgage banking to determine the amount of interest rate risk and market
value exposure of loan commitments in the pipeline and the mortgage warehouse
and of mortgage servicing rights. Various factors are used in this analysis
including the magnitude and direction of interest changes, prepayment speeds,
and other factors that could affect mortgage banking. Derivative financial
instruments are used by mortgage banking for two purposes. Forward contracts and
option contracts are used to protect the value of the pipeline and mortgage
warehouse against rises in interest rates between the time an interest rate is
committed to the customer and the mortgage is sold into the secondary market.
Interest rate contracts are utilized to protect against the prepayment risk of
the mortgage servicing rights that generally accompanies declines in interest
rates. As interest rates fall, the value of the mortgage servicing rights should
decrease and the value of the servicing hedge should increase. Conversely, as
interest rates rise, the value of mortgage servicing rights should increase and
the value of the servicing hedge should decrease. Under SFAS No. 133 hedge
accounting, ineffectiveness in these hedging strategies will be reflected
immediately in income.
Capital markets buys and sells various types of securities for its customers.
When these securities settle on a delayed basis, they are considered forward
contracts. Inventory positions are limited to the procurement of securities
solely for distribution to customers by the sales staff, and ALCO policies and
guidelines have been established to limit the risk in managing this inventory.
The derivative financial instruments listed in Table 13 are shown at both
notional and fair values. Table 13 also details First Tennessee's interest rate
sensitivity profile at December 31, 2000, based on projected cash flows using
contractual maturity for loans and expected repayment dates for securities. Note
24 - Financial Instruments with Off-Balance Sheet Risk should be referred to for
additional information. See Net Interest Income discussion for additional
assumptions and information. The information provided in this section including
the discussion regarding simulation analysis and rate shock analysis is
forward-looking. Actual results could differ because of interest rate movements,
the ability of management to execute its business plans and other factors,
including those presented in the Forward-Looking Statements section of this
MD&A.
F-21 First Tennessee National Corporation
52
TABLE 13 - RISK SENSITIVITY ANALYSIS
CAPITAL MARKETS
Fair
(Dollars in millions) 2001 2002 2003 2004 2005 2006+ Total Value
- -------------------------------------------------------------------------------------------------------------------------
ASSETS:
Capital markets securities inventory:
Floating $ 254 $ -- $ -- $ -- $ -- $ -- $ 254 $ 254
Average interest rate 6.75% -- -- -- -- -- 6.75%
- -------------------------------------------------------------------------------------------------------------------------
INTEREST RATE DERIVATIVES (NOTIONAL VALUE):
Forward contracts:
Commitments to buy $(1,611) -- -- -- -- -- $(1,611) $ (3)
Weighted average settlement price 99.34% -- -- -- -- -- 99.34%
Commitments to sell $ 1,720 -- -- -- -- -- $ 1,720 $ 3
Weighted average settlement price 99.43% -- -- -- -- -- 99.43%
Caps purchased -- $ 165 $ 10 -- -- -- $ 175 *
Weighted average strike price -- 7.00% 7.00% -- -- -- 7.00%
Caps written -- $(165) $ (10) -- -- -- $ (175) *
Weighted average strike price -- 7.00% 7.00% -- -- -- 7.00%
Floors purchased -- $ 95 $ 125 $ 5 $ 20 -- $ 245 $ 3
Weighted average strike price -- 6.15% 7.67% 6.25% 6.25% -- 6.94%
Floors written -- $ (95) $(125) $ (5) $ (20) -- $ (245) $ (3)
Weighted average strike price -- 6.15% 7.67% 6.25% 6.25% -- 6.94%
Option contracts purchased $ 90 -- -- -- -- -- $ 90 $ 1
Weighted average strike price 100.75% -- -- -- -- -- 100.75%
Option contracts written $ (90) -- -- -- -- -- $ (90) $ (1)
Weighted average strike price 100.75% -- -- -- -- -- 100.75%
Swap contracts -- $ 10 $ 5 -- $ 20 $ 50 $ 85 *
Average pay rate (floating) -- 9.50% 6.89% -- 7.97% 7.16% 7.61%
Average receive rate (fixed) -- 9.48% 7.13% -- 8.52% 7.66% 8.05%
Swap contracts -- $ (10) $ (5) -- $ (20) $ (50) $ (85) *
Average pay rate (fixed) -- 9.48% 7.13% -- 8.52% 7.66% 8.05%
Average receive rate (floating) -- 9.50% 6.89% -- 7.97% 7.16% 7.61%
- -------------------------------------------------------------------------------------------------------------------------
<FN>
* Amount is less than $500,000
</FN>
First Tennessee National Corporation F-22
53
TABLE 13 - RISK SENSITIVITY ANALYSIS (CONTINUED)
HELD FOR PURPOSES OTHER THAN TRADING
Fair
(Dollars in millions) 2001 2002 2003 2004 2005 2006+ Total Value
- -------------------------------------------------------------------------------------------------------------------------
ASSETS:
Loans, net of unearned income*:
Floating $4,124 $ 406 $ 191 $ 155 $ 173 $ 180 $5,229 $5,229
Average interest rate 9.65% 9.08% 8.80% 8.66% 8.83% 9.00% 9.49%
Fixed $1,261 $ 694 $ 718 $ 601 $ 416 $ 1,259 $4,949 $5,029
Average interest rate 9.06% 8.88% 8.33% 8.20% 8.73% 8.62% 8.68%
Mortgage loans held for sale - floating $1,735 -- -- -- -- -- $1,735 $1,748
Average interest rate 8.10% -- -- -- -- -- 8.10%
Investment securities - fixed $ 664 $ 507 $ 410 $ 341 $ 400 $ 517 $2,839 $2,820
Average interest rate 6.83% 6.76% 6.80% 6.93% 6.82% 7.70% 6.98%
Liquid assets - floating** $ 126 -- -- -- -- -- $ 126 $ 126
Average interest rate 6.59% -- -- -- -- -- 6.59%
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Interest-bearing deposits:
Floating $2,251 -- -- -- -- $ 251 $2,502 $2,502
Average interest rate 5.44% -- -- -- -- 5.36% 5.43%
Fixed $4,578 $ 595 $ 323 $ 198 $ 229 $ 917 $6,840 $6,872
Average interest rate 6.17% 5.19% 4.15% 2.60% 3.24% 3.22% 5.20%
Short-term borrowings:
Floating $3,418 -- -- -- -- -- $3,418 $3,418
Average interest rate 6.27% -- -- -- -- -- 6.27%
Fixed $ 19 -- -- -- -- -- $ 19 $ 19
Average interest rate 5.64% -- -- -- -- -- 5.64%
Term borrowings - fixed -- -- $ 50 -- $ 125 $ 235 $ 410 $ 403
Average interest rate -- -- 6.92% -- 6.73% 6.12% 6.40%
Guaranteed preferred beneficial interests
in First Tennessee's junior
subordinated debentures - fixed -- -- -- -- -- $ 100 $ 100 $ 88
Average interest rate -- -- -- -- -- 8.07% 8.07%
Preferred stock of subsidiary - fixed -- -- -- -- -- $ 38 $ 38 $ 37
Average interest rate -- -- -- -- -- 9.50% 9.50%
- -------------------------------------------------------------------------------------------------------------------------
<FN>
* Excludes nonaccrual loans.
** Consists of federal funds sold, securities purchased under agreements to resell and investments in time deposits.
</FN>
F-23 First Tennessee National Corporation
54
TABLE 13 - RISK SENSITIVITY ANALYSIS (CONTINUED)
HELD FOR PURPOSES OTHER THAN TRADING (CONTINUED)
(Dollars in millions) 2001 2002 2003 2004 2005 2006+ Total Value
- -------------------------------------------------------------------------------------------------------------------------
DERIVATIVES (NOTIONAL VALUE):
MORTGAGE BANKING**:
Pipeline and warehouse hedging
Forward contracts-
Commitments to sell $1,883 $ -- $ -- $ -- $ -- $ -- $ 1,883 $(12)
Weighted average settlement price 100.22% -- -- -- -- -- 100.22%
Servicing portfolio hedging
Floors purchased -- -- -- -- $ 2,925 -- $ 2,925 $ 73
Weighted average strike price -- -- -- -- 6.30% -- 6.30%
Floors written -- -- -- -- $ (500) -- $ (500) $ (9)
Weighted average strike price -- -- -- -- 6.00% -- 6.00%
Forwards purchased $ 870 -- -- -- -- -- $ 870 $ 8
Weighted average strike price 6.74% -- -- -- -- -- 6.74%
Swaps -- -- -- -- -- $ 750 $ 750 $ 69
Average pay rate (fixed) -- -- -- -- -- 7.25% 7.25%
Average receive rate (floating) -- -- -- -- -- 6.40% 6.40%
Swaps -- -- $ 145 -- -- -- $ 145 $ 15
Average pay rate (floating) -- -- 6.72% -- -- -- 6.72%
Average receive rate (floating) -- -- 4.86% -- -- -- 4.86%
Swaptions purchased $ 225 -- -- -- -- $1,000 $ 1,225 $ 30
Average interest rate 5.91% -- -- -- -- 6.25% 6.19%
Other
Floors purchased $7,025 -- $ 5,350 -- -- -- $12,375 $ 16
Weighted average strike price 4.67% -- 4.48% -- -- -- 4.59%
Floors written $(5,350) $(5,350) $(15)
Weighted average strike price 4.48% 4.48%
INTEREST RATE RISK MANAGEMENT:
Swaps $ 250 -- $ 50 -- -- -- $ 300 *
Average pay rate (floating) 6.67% -- 6.38% -- -- -- 6.62%
Average receive rate (fixed) 6.73% -- 7.15% -- -- -- 6.80%
Swaps $ 200 -- -- -- -- -- $ 200 *
Average pay rate (floating) 6.66% -- -- -- -- -- 6.66%
Average receive rate (floating) 6.86% -- -- -- -- -- 6.86%
Caps:
Purchased -- $ 20 -- -- -- -- $ 20 *
Weighted average strike price -- 8.00% -- -- -- -- 8.00%
Written -- $ (20) -- -- -- -- $ (20) *
Weighted average strike price -- 8.00% -- -- -- -- 8.00%
Equity options purchased -- -- $ 2 -- -- -- $ 2 $ 1
Weighted average strike price -- -- $ 1,117 -- -- -- $ 1,117
OTHER:
Equity collar: $ 2
Call - written $ (4) -- -- -- -- -- $ (4)
Weighted average strike price $ 70 -- -- -- -- -- $ 70
Put - purchased $ 4 -- -- -- -- -- $ 4
Weighted average strike price $ 62 -- -- -- -- -- $ 62
- -------------------------------------------------------------------------------------------------------------------------
<FN>
* Amount is less than $500,000
** Mortgage banking derivatives had a net book value of $172 million on December 31, 2000.
</FN>
CREDIT RISK MANAGEMENT/ASSET QUALITY
First Tennessee manages credit risk and asset quality through diversification in
the loan portfolio and adherence to its credit policy process. First Tennessee's
goal is not to avoid risk but to manage it and include it in the pricing
decision. Management strives to identify loans experiencing difficulty early
enough to correct the deficiencies. In
First Tennessee National Corporation F-24
55
addition, management attempts to recognize problem loans and nonperforming loans
in a timely manner. Both charge-offs and asset writedowns are recorded promptly,
based on management's assessments of current collateral values and the
borrower's ability to repay.
At December 31, 2000, First Tennessee did not have any concentrations of 10
percent or more of total loans in any single industry.
ALLOWANCE FOR LOAN LOSSES AND CHARGE-OFFS
Management's policy is to maintain the allowance for loan losses at a level
sufficient to absorb the estimated losses inherent in the loan portfolio. The
allowance for loan losses is increased by the provision for loan losses and
recoveries and is decreased by charged-off loans and the portion of the
allowance attributable to loans sold. The adequacy of reserves is analyzed
quarterly for the purpose of maintaining coverage of estimated losses inherent
in the loan portfolio. An analytical model is used to test the adequacy of the
reserves, based on historical loss experience, current trends and reasonably
foreseeable events. This methodology determines an estimated loss percentage
(reserve rate), which is applied against the balance of loans in each segment of
the loan portfolio at the evaluation date.
COMMERCIAL AND COMMERCIAL REAL ESTATE LOANS
To assess the quality of individual commercial loans, all commercial loans are
internally assigned a credit rating, ranging from grades A to F (in 2001 grades
will be assigned using 1 to 10). Analyzing the migration of loan grades assists
in the credit risk management of the portfolio. A reserve rate is established
for each loan grade based on a historical three-year moving average of actual
charge-offs. The reserve rate is then adjusted for current trends, both internal
and external, that may affect the asset quality of the loan portfolio. Some of
the factors considered in making these adjustments include: levels of and trends
in delinquencies; classified loans and nonaccrual loans; trends in outstandings
and maturities; effects of changes in lending policies and underwriting
guidelines; introduction of new loan products with different risk
characteristics; experience, ability and depth of lending management and staff;
migration trends of loan grades; and charge-off trends that may skew the
historical three-year moving average. Finally, the reserve rates for each loan
grade are reviewed quarterly to reflect local, regional and national economic
trends; concentrations of cyclical industries; and the economic prospects for
industry concentrations. To supplement management's process in setting these
additional adjustments, an economic model is used that evaluates the correlation
between historical charge-offs and a number of state and national economic
indicators. Also, all classified loans $1 million and greater are evaluated
separately, and a specific reserve is set based on the exposure (the difference
between the outstanding loan amount and the estimated net realizable value of
the collateral) and the probability of loss.
Table 14 shows the reserve rates (percentage of allowance for loan losses to
outstanding balances) by loan category. The reserve rate for all commercial
loans declined to .88 percent in 2000 from .92 percent in 1999 and .96 percent
in 1998. The decline in the reserve rate primarily reflects a reduction in the
C- grade loss factor due to declining charge-off rates from the historical
three-year moving average study. The reserve rate for impaired loans decreased
to 36.59 percent in 2000 from 42.86 percent in 1999 and 50.00 percent in 1998.
This decline reflects the improved collateral position of the impaired loans,
therefore, less reserves are required even though the level of impaired loans
has increased. The charge-off ratio (see Table 17) decreased to .08 percent in
2000 from .17 percent in 1999, which was up from .05 percent in 1998.
TABLE 14 - RESERVE RATES
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Commercial, commercial real estate and commercial construction* .88% .92% .96%
Impaired 36.59 42.86 50.00
Retail (excluding credit card) .85 1.06 1.13
Credit card receivables 5.02 4.12 4.21
- ------------------------------------------------------------------------------------------------------------------------
<FN>
* Excludes impaired loans.
Certain previously reported amounts have been restated to agree with current presentation.
</FN>
F-25 First Tennessee National Corporation
56
RETAIL LOANS
Reserve rates are also established for each segment of the retail loan portfolio
based on historical loss trends and are adjusted to reflect current trends. Some
of the factors for making these adjustments include: changes in underwriting
guidelines or credit scoring models; trends in consumer payment patterns,
delinquencies and personal bankruptcy; staffing levels in the collection area;
changes in the mix of loan products outstanding; experience, ability and depth
of lending management and staff; value of underlying collateral; and charge-off
trends. The reserve rates are also adjusted for changing economic conditions and
the adequacy of the reserves to cover inherent loss.
The reserve rate for retail loans decreased to .85 percent from 1.06 percent in
1999 and 1.13 percent in 1998. The decrease in the retail loan reserve rate for
2000 was impacted by an increase in the reserve rate for installment loans of
the regional banking group to reflect higher charge-off trends; a decrease in
the reserve rate due to lower than expected losses from a business decision to
retain and cure nonperforming loans in mortgage banking rather then sell them in
the market place; and a decrease in the reserve rate due to the acceleration of
charge-offs to comply with the new Federal Financial Institutions Examination
Council (FFIEC) regulations. The residential real estate charge-off ratio
increased to .51 percent in 2000 from .36 percent in 1999 and the other consumer
charge-off ratio increased to 1.83 percent in 2000 from 1.37 percent in 1999.
The reserve rate for the credit card portfolio increased in 2000 to 5.02 percent
due to rising delinquency rates and charge-off trends after decreasing slightly
in 1999 to 4.12 percent from 4.21 percent in 1998. In 2001 the remaining credit
card portfolio contains accounts which historically have shown lower amounts of
delinquencies and charge-offs, thereby requiring less reserves. The credit card
receivables net charge-off ratio increased 61 basis points to 4.25 percent in
2000 from 3.64 percent in 1999 which was down from 3.92 percent in 1998.
TOTAL LOANS
The total allowance for loan losses increased 3 percent, or $4.1 million, from
year-end 1999, at which time it had increased 3 percent, or $3.6 million, since
year-end 1998. Period-end loans grew 9 percent in both 2000 and 1999. The ratio
of allowance for loan losses to loans, net of unearned income, declined to 1.40
percent on December 31, 2000, from 1.49 percent on December 31, 1999. Excluding
the FFIEC adjustment and the sale of credit cards the ratio for 2000 would have
been 1.55 percent. The ratio of allowance for loan losses to loans was 1.59
percent at December 31, 1998.
Table 15 gives a breakdown of the allowance allocation by major loan types and
commercial loan grades at December 31, 2000, compared with the same period in
1999. This table also shows the amount of the general reserve. A general reserve
is maintained on the commercial loan portfolio based on management's judgment
regarding the risk of error in grading the loans and in the specific allowances
for individual loans or pools of loans. The general reserve has well defined
criteria that must be met before any of this reserve is used. Table 16
summarizes by category, loans charged off and recoveries of loans previously
charged off. This table also shows the additions to the reserve (provision),
which have been charged against operating earnings.
Net charge-offs increased to $61.1 million for the year ended December 31, 2000.
Net charge-offs were $51.7 million for 1999 and $37.8 million for 1998. The
increase in the level of net charge-offs was due to higher retail loan net
charge-offs, which included those products with higher risk/return profiles
while the level of commercial loan net charge-offs decreased. Total commercial
and commercial real estate related loan net charge-offs decreased to $4.1
million in 2000 from $7.9 million in 1999. Residential real estate loan net
charge-offs increased to $16.5 million in 2000 from $9.2 million in 1999. Other
consumer loan net charge-offs increased to $16.9 million in 2000 from $13.7 in
1999. Credit card receivables net charge-offs increased to $23.6 million for
2000 from $20.8 million for 1999. The level of credit card net charge-offs
should decrease in 2001 due to the sale of some credit card loans. The ratio of
net charge-offs to average loans increased to .62 percent for 2000 from .59
percent for 1999 and .46 percent for 1998. The increase in the net charge-off
ratio in 2000 was primarily due to the implementation of the FFIEC regulations.
The impact of implementing the new regulations resulted in additional net
charge-offs of $4.4 million in 2000 and increased the net charge-off ratio by
.05 percentage point. Overall, the commercial net charge-off ratio declined in
2000, while the retail net charge-off ratio increased.
First Tennessee National Corporation F-26
57
Within the course of normal mortgage banking activities, a small percentage of
nonperforming assets is created when FHA/VA borrowers are delinquent in their
monthly payments prior to the completion of the insuring process. Additionally,
loans that have been sold may be required to be repurchased if they are found
not to meet an investor's origination criteria. From this pool, there were net
charge-offs of $5.1 million in 2000, an increase from $2.1 million in 1999 and
$3.4 million in 1998. These net charge-offs had the effect of adding .06
percentage point to the total net charge-off ratio in 2000. The primary reason
for the increase in these charge-offs was the implementation of the new FFIEC
regulations.
Going forward, asset quality ratios will be affected by loan sales, other
balance sheet strategies and shifts in loan mix to and from products with higher
risk/return profiles. Asset quality indicators are likely to deteriorate
somewhat from the favorable levels achieved in recent periods as the growth in
the economy begins to slow, however, including the effects of the credit card
sale, net charge-offs as a percent of average loans should remain stable. Actual
results could differ because of several factors, including those presented in
the Forward-Looking Statements section of this MD&A discussion.
F-27 First Tennessee National Corporation
58
TABLE 15 - LOANS AND FORECLOSED REAL ESTATE AT DECEMBER 31
2000 1999
-------------------------------------------------------------- -----------------------
Construction Allowance Allowance
and Commercial for Loan for Loan
(Dollars in millions) Commercial Development Real Estate TOTAL Loss Total Loss
- -------------------------------------------------------------------------------------------------------------------------
Internal grades*:
A $ 226 $ -- $ -- $ 226 $ -- $ 236 $ --
B 553 2 75 630 1 754 1
C 2,318 377 678 3,373 20 3,027 19
C- 651 33 164 848 9 616 9
D 111 2 11 124 7 77 4
E 37 -- 10 47 5 41 5
F 33 -- 5 38 5 33 6
- -------------------------------------------------------------------------------------------------------------------------
3,929 414 943 5,286 47 4,784 44
Impaired loans:
Contractually past due 13 2 4 19 4 3 2
Contractually current 22 -- -- 22 11 4 1
- -------------------------------------------------------------------------------------------------------------------------
Total commercial and
commercial real estate loans $ 3,964 $ 416 $ 947 $ 5,327 $ 62 $ 4,791 $ 47
- -------------------------------------------------------------------------------------------------------------------------
Retail:
Real estate residential 3,573 23 2,814 24
Real estate construction 180 2 133 1
Consumer 840 14 1,018 17
Credit card receivables 319 16 607 25
- -------------------------------------------------------------------------------------------------------------------------
Total retail loans 4,912 55 4,572 67
- -------------------------------------------------------------------------------------------------------------------------
Unfunded commitments -- 3 -- 4
General reserve -- 24 -- 22
- -------------------------------------------------------------------------------------------------------------------------
Total loans $10,239 $ 144 $ 9,363 $ 140
=========================================================================================================================
Foreclosed real estate:
Foreclosed property $ 3 $ -- $ 1 $ 4 $ 6
Foreclosed property -
mortgage banking 12 12
- -------------------------------------------------------------------------------------------------------------------------
Total foreclosed real estate $ 16 $ 18
=========================================================================================================================
<FN>
Loans are expressed net of unearned income. All amounts in the Allowance for Loan Loss columns have been rounded to the nearest
million dollars. Grade A loans have reserve amounts of less than $500,000. Certain previously reported amounts have been restated
to agree with current presentation.
* Based on internal loan classifications. Definitions of each credit grade are provided below:
GRADE A: Established, stable companies with excellent earnings, liquidity, and capital. Possess many of the same
characteristics as Standard & Poor's (S&P) AA rated companies.
GRADE B: Established, stable companies with good earnings, liquidity, and capital. Possess many of the same characteristics as
S&P A rated companies.
GRADE C: Established, stable companies with satisfactory earnings, liquidity, and capital and with consistent, positive trends
relative to industry norms.
GRADE C-: Established, stable companies with either inconsistent and/or marginal earnings, or liquidity, or capital. Overall
acceptable credits with minor weaknesses which warrant additional servicing.
GRADE D: Financial condition adversely affected by temporary lack of earnings or liquidity or changes in the operating
environment. An action plan is required to rehabilitate the credit or have it refinanced elsewhere.
GRADE E: Significant developing weaknesses or adverse trends in earnings, liquidity, capital, or operating environment. No
discernible market for refinancing is available.
GRADE F: Significantly higher than normal probability that: (1) legal action or liquidation of collateral is required;
(2) there will be a loss; or (3) both will occur. This grade and impaired loans are believed to be substantially
equivalent to the regulators' classifications of substandard or doubtful.
IMPAIRED: A loan for which it is probable that all amounts due, according to the contractual terms of the loan agreement, will
not be collected.
</FN>
First Tennessee National Corporation F-28
59
TABLE 16 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) 2000 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES:
Beginning balance $ 139,603 $ 136,013 $ 125,859 $ 117,748 $ 112,567 $ 109,859
Provision for loan losses** 67,353 57,923 51,351 51,115 35,677 20,592
Allowance from acquisitions -- -- 140 -- -- 2,632
Securitizations/divestiture (2,173) (2,683) (3,575) -- -- --
Charge-offs:
Commercial:
Commercial, financial
and industrial 6,583 9,714 5,379 6,238 3,299 5,019
Real estate commercial 857 510 -- 150 47 544
Real estate construction 47 -- 442 136 10 44
Retail:
Real estate residential* 17,348 9,742 8,725 6,541 2,774 1,359
Real estate construction -- -- -- 109 -- --
Consumer 20,868 17,392 9,734 13,681 13,288 11,391
Credit card receivables 25,485 22,867 24,242 27,420 22,964 16,874
- ------------------------------------------------------------------------------------------------------------------------
Total charge-offs 71,188 60,225 48,522 54,275 42,382 35,231
- ------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial:
Commercial, financial
and industrial 2,903 2,082 2,751 1,717 3,251 6,236
Real estate commercial 480 228 641 2,623 461 492
Real estate construction -- 8 148 171 171 59
Retail:
Real estate residential 857 510 788 654 847 1,061
Consumer 3,937 3,725 4,253 4,417 5,044 4,845
Credit card receivables 1,924 2,022 2,179 1,689 2,112 2,022
- ------------------------------------------------------------------------------------------------------------------------
Total recoveries 10,101 8,575 10,760 11,271 11,886 14,715
- ------------------------------------------------------------------------------------------------------------------------
Net charge-offs 61,087 51,650 37,762 43,004 30,496 20,516
- ------------------------------------------------------------------------------------------------------------------------
Ending balance $ 143,696 $ 139,603 $ 136,013 $ 125,859 $ 117,748 $ 112,567
========================================================================================================================
LOANS, OUTSTANDING AT
DECEMBER 31*** $ 10,239,450 $ 9,363,158 $ 8,557,064 $8,311,350 $7,728,203 $7,333,283
- ------------------------------------------------------------------------------------------------------------------------
Average loans, outstanding
during the year*** $ 9,931,955 $ 8,818,766 $ 8,242,135 $7,945,143 $7,472,095 $6,887,218
- ------------------------------------------------------------------------------------------------------------------------
RATIOS***:
Allowance to loans 1.40% 1.49% 1.59% 1.51% 1.52% 1.54%
Net charge-offs to
average loans .62 .59 .46 .54 .41 .30
Net charge-offs to allowance 42.5 37.0 27.8 34.2 25.9 18.2
- ------------------------------------------------------------------------------------------------------------------------
<FN>
* Real estate residential charge-offs include $5.1 million, $2.1 million, $3.4 million and $3.2 million of
charge-offs for 2000, 1999, 1998 and 1997, respectively, related to loans classified as nonperforming from the
warehouse and the repurchase of loans originated and previously sold by First Horizon Home Loans.
** Provision was reduced by $10.7 million in 2000 related to credit card loans sold.
*** Net of unearned income.
</FN>
F-29 First Tennessee National Corporation
60
TABLE 17 - NET CHARGE-OFF RATIOS
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
BREAKDOWN BY LOAN CATEGORY:
Commercial .08% .17% .05%
Real estate residential .51 .36 .33
Other consumer 1.83 1.37 .60
Credit card receivables 4.25 3.64 3.92
Total net charge-offs .62 .59 .46
- ------------------------------------------------------------------------------------------------------------------------
<FN>
Loans are averages expressed net of unearned income.
</FN>
NONPERFORMING ASSETS
Nonperforming loans consist of impaired, other nonaccrual and restructured
loans. These, along with foreclosed real estate and other assets, represent
nonperforming assets. Impaired loans are those loans for which it is probable
that all amounts due, according to the contractual terms of the loan agreement,
will not be collected and for which recognition of interest income has been
discontinued. Other nonaccrual loans are residential loans on which recognition
of interest income has been discontinued. Restructured loans generally take the
form of an extension of the original repayment period and/or a reduction or
deferral of interest or principal because of deterioration in the financial
position of the borrower.
Nonperforming assets increased 65 percent, or $30.6 million, in 2000 with an
increase of 111 percent, or $32.2 million in nonperforming loans. Nonperforming
loans in the regional banking group increased $33.9 million in 2000 while there
was a decrease of $1.7 million in the mortgage banking group. In the fourth
quarter of 2000, two large Tennessee domiciled middle market companies with
total balances of approximately $20 million were placed on nonaccrual. On
December 31, 2000, foreclosed properties amounted to $16.3 million, a decrease
of 9 percent due to less foreclosed real estate in the regional banking group.
Information regarding nonperforming assets and loans is presented in Table 19.
As shown in the table, the ratio of nonperforming assets to total loans was .76
percent on December 31, 2000. In the regional banking group, the ratio of
nonperforming assets to total loans was .48 percent. Table 18 gives additional
information related to changes in nonperforming assets for 1998 through 2000.
TABLE 18 - CHANGES IN NONPERFORMING ASSETS
(Dollars in millions) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Beginning balance $ 47.1 $ 44.2 $ 50.9
Additional nonperforming assets 115.0 88.1 124.5
Payments (73.3) (74.1) (123.0)
Charge-offs (11.1) (11.1) (8.2)
- -------------------------------------------------------------------------------------------------------------------------
Ending balance $ 77.7 $ 47.1 $ 44.2
=========================================================================================================================
First Tennessee National Corporation F-30
61
TABLE 19 - NONPERFORMING ASSETS AT DECEMBER 31
(Dollars in thousands) 2000 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
AMOUNTS:
Impaired loans* $ 41,207 $ 7,514 $ 12,111 $ 8,712 $ 10,322 $ 11,865
Other nonaccrual loans 20,095 21,604 15,696 29,703 8,604 7,175
- -------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 61,302 29,118 27,807 38,415 18,926 19,040
Foreclosed real estate 16,290 17,870 16,242 12,202 7,823 11,794
Other assets 97 91 199 235 196 1,022
- -------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 77,689 $ 47,079 $ 44,248 $ 50,852 $ 26,945 $ 31,856
=========================================================================================================================
Non-government guaranteed
past due loans** $ 26,011 $ 19,178 $ 21,745 $ 21,015 $ 20,011 $ 19,796
Government guaranteed past due loans** 16,281 10,671 9,858 11,059 10,736 10,820
- -------------------------------------------------------------------------------------------------------------------------
RATIOS***:
Nonperforming loans to total loans .60% .31% .32% .46% .24% .26%
Nonperforming assets to total loans plus
foreclosed real estate and other assets .76 .50 .52 .61 .35 .43
Nonperforming assets and
non-government guaranteed past due
loans to total loans plus foreclosed
real estate and other assets 1.01 .71 .77 .86 .61 .70
- -------------------------------------------------------------------------------------------------------------------------
<FN>
* For the years 1997, 1996 and 1995 impaired loans included $196,000, $279,000 and $303,000 of restructured loans,
respectively.
** Loans that are 90 days or more past due as to principal and/or interest and not yet impaired or on nonaccrual status.
*** Total loans are net of unearned income.
Certain previously reported amounts have been adjusted to agree with current presentation.
</FN>
PAST DUE LOANS AND POTENTIAL PROBLEM ASSETS
Past due loans are loans contractually past due 90 days or more as to interest
or principal payments, but which have not yet been put on nonaccrual status. The
ratio of past due loans was .41 percent at year-end 2000, up from .32 percent at
December 31, 1999. This increase is related to a $4.6 million government
guaranteed commercial loan which increased the ratio of past due loans by .04
percentage point. The remaining increase is related to the growth in the higher
risk segments of the consumer loan portfolio. Additional historical past due
loan information can be found in Table 19. Loans 30 to 89 days past due, which
are not included in past due loans or potential problem assets, increased to
$105.7 million or 1.03 percent of total loans on December 31, 2000, from $88.4
million or .94 percent of total loans on December 31, 1999.
Potential problem assets, which are not included in nonperforming assets,
increased to $107.6 million or 1.05 percent of total loans on December 31, 2000,
from $75.0 million or .80 percent of total loans on December 31, 1999. Potential
problem assets represent those assets where information about possible credit
problems of borrowers has caused management to have serious doubts about the
borrower's ability to comply with present repayment terms. This definition is
believed to be substantially consistent with the standards established by the
Office of the Comptroller of the Currency for loans classified substandard.
F-31 First Tennessee National Corporation
62
QUARTERLY FINANCIAL INFORMATION
- -------------------------------
TABLE 20 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION
2000 1999
-------------------------------------------- ------------------------------------------
(Dollars in millions except FOURTH THIRD SECOND FIRST Fourth Third Second First
per share data) QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
SUMMARY INCOME INFORMATION:
Interest income $ 347.0 $ 352.6 $ 344.1 $ 319.3 $ 310.6 $ 303.2 $ 293.2 $ 300.2
Interest expense 196.2 202.5 192.2 173.8 162.9 155.9 146.8 152.1
Provision for loan losses 18.2 16.5 17.1 15.5 14.0 14.1 15.0 14.8
Noninterest income before
securities transactions 334.6 261.5 250.7 220.8 255.5 284.4 294.3 286.6
Securities gains/(losses) (5.6) (.3) .1 1.6 .5 1.9 (.1) --
Noninterest expense 352.6 310.2 301.7 292.9 293.4 314.4 330.7 336.8
Net income 71.7 66.0 55.4 39.5 64.1 69.4 61.0 53.0
- ---------------------------------------------------------------------------- -------------------------------------------
BASIC EARNINGS PER SHARE $ .56 $ .51 $ .42 $ .30 $ .49 $ .53 $ .47 $ .41
DILUTED EARNINGS PER SHARE .55 .50 .42 .30 .48 .52 .45 .40
- ---------------------------------------------------------------------------- -------------------------------------------
COMMON STOCK INFORMATION:
Closing price per share:
High $29 1/16 $22 3/16 $22 3/16 $27 9/16 $36 1/16 $39 15/16 $45 3/16 $41 1/8
Low 19 5/16 17 13/16 16 37/64 16 1/16 27 9/16 28 1/8 37 35 1/8
Period-end 28 15/16 20 3/8 16 37/64 20 5/16 28 1/2 28 1/8 38 5/16 36 5/8
Dividends declared per share .22 .22 .22 .22 .22 .19 .19 .19
- -------------------------------------------------------------------------------------------------------------------------
SUBSEQUENT EVENT
- ----------------
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain instruments embedded in other
contracts) be recorded on the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
instrument's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows the instrument's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting.
Upon adoption of SFAS No. 133, all freestanding derivative instruments are
remeasured at fair value with differences between the previous book value and
fair value reported as a one-time accounting adjustment. Likewise, offsetting
gains and losses on hedged assets, liabilities and firm commitments are
recognized as adjustments of their respective book values at the adoption date
as part of this accounting adjustment. Except to the extent that they relate to
hedges of the variable cash flow exposure of forecasted transactions, the net
accounting adjustment (net of hedge difference and hedged item difference) is
reported in net income in the period of adoption. The remainder of the
accounting adjustment, which relates to hedges of the variable cash flow
exposure of forecasted transactions, is reported as a cumulative effect
adjustment of comprehensive income in the period of adoption.
SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133," and SFAS No. 138, "Accounting for Certain Derivative Instrument and
Certain Hedging Activities - an Amendment of FASB Statement No. 133," is
effective for fiscal years beginning after June 15, 2000. First Tennessee
adopted SFAS No. 133 on January 1, 2001. Note 24 -
First Tennessee National Corporation F-32
63
Financial Instruments with Off-Balance Sheet Risk provides the book values and
fair values of freestanding derivative instruments that are required to be
recognized on First Tennessee's balance sheet as assets or liabilities at fair
value. The impact of adopting SFAS No. 133 on January 1, 2001, resulted in a net
transition adjustment of $6 million in after-tax loss. Subsequent to adoption,
SFAS No. 133 could increase the future volatility of mortgage banking earnings
and other comprehensive income.
Certain provisions of SFAS No. 133 continue to undergo significant discussion
and debate by the FASB and its Derivatives Implementation Group (DIG). One such
potential issue involves the determination of the components of value of
mortgage banking interest rate lock commitments, which have tentatively been
determined to be a derivative instrument by FASB. If First Tennessee's
interpretation of the value is ultimately determined to be in conflict with that
of the FASB or DIG, the adjustment to the net transition impact at January 1,
2001, would be an additional after-tax loss of up to $2 million. Subsequent to
adoption, under First Tennessee's interpretation of the components of value of
an interest rate lock commitment a substantial portion of the gain or loss from
the sale of the related mortgage loan will be recognized at the time the
commitment is made and at the time the loan is closed. Under existing rules all
of the gain or loss is recognized at the time the loan is sold into the
secondary market.
F-33 First Tennessee National Corporation
64
GLOSSARY
ALLOWANCE FOR LOAN LOSSES - Valuation reserve representing the amount considered
by management to be adequate to cover estimated losses inherent in the loan
portfolio.
BASIS POINT - The equivalent of one-hundredth of one percent (0.01). One hundred
basis points equals one percent. This unit is generally used to measure
movements in interest yields and rates.
BASIS RISK - Refers to changes in the relationship between various interest rate
segments (e.g. the difference between the Prime and the Fed Funds Rates).
BOOK VALUE PER COMMON SHARE - A ratio determined by dividing shareholders'
equity at the end of a period by the number of common shares outstanding at the
end of that period.
BULK SALES - Refers to sales of mortgage servicing rights that are transacted
separately from the sale of the related loans.
CHARGE-OFFS - The amount charged against the allowance for loan losses to reduce
specific loans to their collectible amount.
CLASSIFIED LOAN - A loan that has caused management to have serious doubts about
the borrower's ability to comply with present repayment terms. Included in this
category are grade F performing and nonperforming loans. In compliance with the
standards established by the Office of the Comptroller of the Currency (OCC)
these loans are classified as substandard, doubtful, and loss depending on the
severity of the loan's deterioration.
COMMERCIAL PAPER - A short-term unsecured debt obligation of the parent company
with maturities typically of 30 days to 270 days.
COMMERCIAL AND STANDBY LETTERS OF CREDIT - Commercial letters of credit are
issued or confirmed by an entity to ensure the payment of its customers'
payables and receivables. Standby letters of credit are issued by an entity to
ensure its customers' performance in dealing with others.
COMMITMENT TO EXTEND CREDIT - Agreements to make or acquire a loan or lease as
long as agreed-upon terms (e.g., expiration date, covenants, or notice) are met.
Generally these commitments have fixed expiration dates or other termination
clauses and may require payment of a fee.
CORE DEPOSITS - Core deposits consist of all interest-bearing and
noninterest-bearing deposits, except certificates of deposit over $100,000. They
include checking interest deposits, money market deposit accounts, time and
other savings, plus demand deposits.
DERIVATIVE FINANCIAL INSTRUMENT - Forwards, swaps, option contracts, or other
financial instruments with similar characteristics, such as interest rate caps
or floors, or fixed-rate loan commitments.
DILUTED EARNINGS PER COMMON SHARE - Net income, divided by average shares
outstanding plus the number of shares that would be outstanding if all dilutive
common shares had been issued. Dilutive common shares, for example, would
represent outstanding options where the average stock price exceeds the price at
which the option was granted.
DOUBLE LEVERAGE RATIO - A ratio that measures the degree to which parent company
debt supports investments in subsidiaries. It is calculated by dividing the
parent company's investment in subsidiaries by total consolidated equity.
EARNING ASSETS - Assets that generate interest or dividend income or
yield-related fee income, such as loans and investment securities.
EARNINGS PER COMMON SHARE - Net income, divided by the average number of common
shares outstanding in the period. (See also diluted earnings per share)
First Tennessee National Corporation F-34
65
FEDERAL FUNDS SOLD/PURCHASED - Excess balances of depository institutions which
are loaned to each other, generally on an overnight basis.
FLOW SALES - Refers to sales of loans where the servicing right is released at
the time the related loan is sold.
FULLY TAXABLE EQUIVALENT INCOME (FTE) - Income which has been adjusted by
increasing tax-exempt income to a level that would yield the same after-tax
income had that income been subject to taxation.
HEDGE - An instrument used to reduce risk by entering into a transaction which
offsets existing or anticipated exposures to changes in interest rates.
INTEREST FREE SOURCES - Noninterest bearing liabilities (such as demand
deposits, other liabilities, and shareholders' equity) net of nonearning assets
(such as cash, fixed assets, and other assets).
INTEREST RATE CAPS AND FLOORS - Contracts with notional principal amounts that
require the seller, in exchange for a fee, to make payments to the purchaser if
a specified market interest rate exceeds a fixed upper "capped" level or falls
below a fixed lower "floor" level on specified future dates.
INTEREST RATE FORWARD CONTRACTS - Contracts representing commitments either to
purchase or sell at a specified future date a specified security or financial
instrument at a specified price, and may be settled in cash or through delivery.
These obligations are generally short term in nature.
INTEREST RATE OPTIONS - A contract that grants the holder (purchaser), for a
fee, the right to either purchase or sell a financial instrument at a specified
price within a specified period of time or on a specified date from the writer
(seller) of the option.
INTEREST RATE SENSITIVITY - The relationship of changes in interest income and
interest expense to fluctuations in interest rates over a defined period of
time.
INTEREST RATE SWAP - An agreement in which two entities agree to exchange, at
specified intervals, interest payment streams calculated on an agreed upon
notional principal amount with at least one stream based on a floating rate
index.
INTEREST SENSITIVITY GAP - The difference between interest-rate sensitive assets
and interest-rate sensitive liabilities over a designated time period. A net
asset exists when interest-rate sensitive assets exceed interest-rate sensitive
liabilities. A net liability position exists when liabilities exceed assets.
LEVERAGE RATIO - Tier 1 capital divided by quarterly average assets excluding
any adjustments for available for sale securities unrealized gains/(losses),
goodwill, and certain other intangible assets.
LIQUIDITY - The ability of a corporation to generate adequate funds to meet its
cash flow requirements. It is measured by the ability to quickly convert assets
into cash with minimal exposure to interest rate risk, by the size and stability
of the core deposit base, and by additional borrowing capacity within the money
markets.
MARKET CAPITALIZATION - Market value of a firm computed by multiplying the
number of shares outstanding by the current stock price.
MORTGAGE PIPELINE - Interest rate commitments made to customers on mortgage
loans that have not yet been closed and funded.
MORTGAGE WAREHOUSE - A mortgage loan that has been closed and funded and is
awaiting sale and delivery into the secondary market.
MORTGAGE SERVICING RIGHTS - The right to service mortgage loans, generally owned
by someone else, for a fee. Loan servicing includes collecting payments;
remitting funds to investors, insurance companies, and taxing authorities;
collecting delinquent payments; and foreclosing on properties when necessary.
F-35 First Tennessee National Corporation
66
NET INTEREST INCOME (NII) - Interest income less interest expense.
NET INTEREST MARGIN - A measurement of how effectively the bank utilizes its
earning assets in relationship to the interest cost of funding them. It is
computed by dividing fully taxable-equivalent net interest income by average
earning assets.
NET INTEREST SPREAD - The difference between the average yield earned on earning
assets on a fully taxable equivalent basis and the average rate paid for
interest-bearing liabilities.
NONACCRUAL LOANS - Loans on which interest accruals have been discontinued due
to the borrower's financial difficulties. Interest income on these loans is
reported on a cash basis as it is collected after recovery of principal.
NONPERFORMING ASSETS - Interest earning assets on which interest income is not
being accrued, restructured loans on which interest rates or terms of repayment
have been materially revised, real estate properties acquired through
foreclosure, and repossessed assets.
NOTIONAL PRINCIPAL AMOUNT - An amount on which payments for interest rate swaps
and interest rate options, caps and floors are based. The "notional amount" is
not paid or received.
PROVISION FOR LOAN LOSSES - The periodic charge to earnings for potential losses
in the loan portfolio.
PURCHASED FUNDS - The combination of certificates of deposit greater than
$100,000, federal funds purchased, securities sold under agreement to
repurchase, bank notes, commercial paper, and other short-term borrowings.
RECOVERIES - The amount added to the allowance for loan losses when funds are
received on a loan which was previously charged off.
REPURCHASE AGREEMENT - A method of short-term financing where one party agrees
to buy back, at a future date (generally overnight) and an agreed-upon price, a
security it sells to another party.
RESTRUCTURED LOANS - Loans where the institution, for economic or legal reasons
related to the debtor's financial difficulties, grants a concession to the
debtor that it would not otherwise consider.
RETURN ON AVERAGE ASSETS (ROA) - A measure of profitability that indicates how
effectively an institution utilized its assets. It is calculated by dividing
annualized net income by total average assets.
RETURN ON AVERAGE EQUITY (ROE) - A measure of profitability that indicates what
an institution earned on its shareholders' investment. ROE is calculated by
dividing net income by total average shareholders' equity.
REVENUE - The sum of net interest income and noninterest income. For some
comparisons, securities gains/losses are excluded.
RISK-ADJUSTED ASSETS - A regulatory risk-based calculation that takes into
account the broad differences in risks among a banking organization's assets and
off-balance sheet instruments.
SECURITIZED ASSETS OR SECURITIZATION - The process by which financial assets are
packaged, underwritten and sold as securities.
TIER 1 CAPITAL RATIO - Ratio consisting of shareholders' equity before any
adjustments for available for sale securities unrealized gains/(losses), reduced
by goodwill, certain other intangible assets and the disallowable portion of
mortgage servicing rights divided by risk-adjusted assets.
TOTAL CAPITAL RATIO - Tier 1 capital plus the allowable portion of the allowance
for loan losses and qualifying subordinated debt divided by risk-adjusted
assets.
First Tennessee National Corporation F-36
67
CONSOLIDATED STATEMENTS OF CONDITION
December 31
-----------------------------
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks (Note 18) $ 838,148 $ 956,077
Federal funds sold and securities purchased under agreements to resell 122,251 279,537
- ------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 960,399 1,235,614
- ------------------------------------------------------------------------------------------------------------------------
Investment in bank time deposits 3,629 3,263
Capital markets securities inventory 253,796 147,041
Mortgage loans held for sale 1,735,070 2,049,945
Securities available for sale (Note 3) 2,200,741 2,332,356
Securities held to maturity (fair value of $619,728 at December 31, 2000,
and $734,853 at December 31, 1999) (Note 3) 638,315 768,936
Loans, net of unearned income (Note 4) 10,239,450 9,363,158
Less: Allowance for loan losses 143,696 139,603
- ------------------------------------------------------------------------------------------------------------------------
Total net loans 10,095,754 9,223,555
- ------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net (Note 5) 286,107 305,519
Real estate acquired by foreclosure 16,290 17,870
Mortgage servicing rights, net (Note 6) 743,714 826,210
Intangible assets, net (Note 7) 121,624 133,568
Capital markets receivables and other assets 1,499,647 1,329,513
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $18,555,086 $18,373,390
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing (Note 8) $ 9,341,603 $ 8,560,462
Noninterest-bearing 2,847,088 2,798,239
- ------------------------------------------------------------------------------------------------------------------------
Total deposits 12,188,691 11,358,701
- ------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase (Note 9) 2,981,026 2,856,282
Commercial paper and other short-term borrowings (Note 9) 456,535 1,550,229
Capital markets payables and other liabilities 996,574 908,048
Term borrowings (Note 10) 409,676 358,663
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 17,032,502 17,031,923
- ------------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in First Tennessee's
junior subordinated debentures (Note 11) 100,000 100,000
Preferred stock of subsidiary (Note 12) 38,428 --
- ------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock - no par value (5,000,000 shares authorized, but unissued) -- --
Common stock - $.625 par value (shares authorized - 400,000,000; shares
issued - 128,744,573 at December 31, 2000 and 129,878,459 at December 31, 1999) 80,465 81,174
Capital surplus 115,775 130,636
Undivided profits 1,172,548 1,053,722
Accumulated other comprehensive income (Note 15) 14,598 (21,752)
Deferred compensation on restricted stock incentive plans (4,183) (5,674)
Deferred compensation obligation 4,953 3,361
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,384,156 1,241,467
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $18,555,086 $18,373,390
========================================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
F-37 First Tennessee National Corporation
68
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
---------------------------------------------------
(Dollars in thousands except per share data) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 912,372 $ 751,555 $ 725,907
Interest on investment securities:
Taxable 196,864 175,933 155,956
Tax-exempt 1,946 2,661 3,658
Interest on mortgage loans held for sale 197,314 231,284 205,654
Interest on capital markets securities inventory 34,410 31,371 30,541
Interest on other earning assets 20,140 14,360 12,061
- -------------------------------------------------------------------------------------------------------------------------
Total interest income 1,363,046 1,207,164 1,133,777
- -------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Savings 5,537 5,776 7,113
Checking interest and money market 110,802 104,263 113,171
Certificates of deposit under $100,000 and other time 129,211 123,781 144,879
Certificates of deposit $100,000 and more 254,880 165,913 111,472
Interest on short-term borrowings 239,947 193,128 196,665
Interest on term borrowings 24,318 24,793 19,938
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense 764,695 617,654 593,238
- -------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 598,351 589,510 540,539
Provision for loan losses 67,353 57,923 51,351
- -------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 530,998 531,587 489,188
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 388,777 632,771 558,366
Divestitures 157,635 4,246 567
Capital markets 117,870 126,835 147,353
Deposit transactions and cash management 116,080 106,240 90,444
Trust services and investment management 65,817 59,807 51,198
Merchant processing 48,232 49,711 37,462
Cardholder fees 29,666 25,579 21,046
Equity securities gains, net 754 2,313 3,940
Debt securities gains/(losses), net (4,961) (56) 36
All other income and commissions (Note 14) 143,550 115,658 75,091
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,063,420 1,123,104 985,503
- -------------------------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 1,594,418 1,654,691 1,474,691
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives and benefits 598,017 633,640 563,576
Amortization of mortgage servicing rights 81,568 103,471 95,507
Occupancy 80,453 73,052 51,421
Operations services 70,875 64,545 58,505
Equipment rentals, depreciation and maintenance 68,230 57,807 45,771
Communications and courier 47,337 51,937 41,468
Amortization of intangible assets 11,738 10,492 11,114
All other expense (Note 14) 299,198 280,308 254,407
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 1,257,416 1,275,252 1,121,769
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 337,002 379,439 352,922
Applicable income taxes (Note 16) 104,421 131,906 126,542
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 232,581 $ 247,533 $ 226,380
=========================================================================================================================
EARNINGS PER COMMON SHARE (Note 17) $ 1.79 $ 1.90 $ 1.77
- -------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE (Note 17) $ 1.77 $ 1.85 $ 1.72
- -------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 129,865,065 130,572,763 128,235,006
- -------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
First Tennessee National Corporation F-38
69
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Deferred Deferred
Other Compen- Compen-
Common Common Capital Undivided Comprehensive sation sation
(Amounts in thousands) Shares Total Stock Surplus Profits Income Asset Liability
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 128,209 $ 954,096 $ 80,131 $ 49,536 $ 811,396 $ 15,333 $ (2,300) $ --
Net income -- 226,380 -- -- 226,380 -- -- --
Other comprehensive income:
Unrealized market adjustments,
net of tax and reclassification
adjustment -- (2,461) -- -- -- (2,461) -- --
---------------------------------------------------------------------------------------------
Comprehensive income -- 223,919 -- -- 226,380 (2,461) -- --
---------------------------------------------------------------------------------------------
Cash dividends declared -- (87,768) -- -- (87,768) -- -- --
Common stock issued:
Acquisitions:
McGuire Mortgage Company 351 8,951 219 8,732 -- -- -- --
Keystone Mortgage, Inc. 190 5,164 119 5,045 -- -- -- --
For exercise of stock options 2,087 26,546 1,305 23,734 -- -- -- 1,507
Tax benefit from non-qualified
stock options -- 17,135 -- 17,135 -- -- -- --
Common stock repurchased (1,867) (61,836) (1,167) (19,638) (41,031) -- -- --
Amortization on restricted
stock incentive plans -- 1,212 -- -- -- -- 1,212 --
Other 4 12,115 2 12,234 -- -- (121) --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 128,974 1,099,534 80,609 96,778 908,977 12,872 (1,209) 1,507
Net income -- 247,533 -- -- 247,533 -- -- --
Other comprehensive income:
Unrealized market adjustments,
net of tax and reclassification
adjustment -- (34,624) -- -- -- (34,624) -- --
---------------------------------------------------------------------------------------------
Comprehensive income -- 212,909 -- -- 247,533 (34,624) -- --
---------------------------------------------------------------------------------------------
Cash dividends declared -- (102,788) -- -- (102,788) -- -- --
Common stock issued:
Acquisitions:
Cambridge Mortgage Company 22 704 14 690 -- -- -- --
Elliot Ames, Inc. 242 6,800 151 6,649 -- -- -- --
For exercise of stock options 1,904 32,306 1,190 30,942 -- -- -- 174
Tax benefit from non-qualified
stock options -- 11,616 -- 11,616 -- -- -- --
Common stock repurchased (1,286) (41,213) (804) (40,409) -- -- -- --
Amortization on restricted
stock incentive plans -- 2,149 -- -- -- -- 2,149 --
Other 22 19,450 14 24,370 -- -- (6,614) 1,680
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 129,878 1,241,467 81,174 130,636 1,053,722 (21,752) (5,674) 3,361
Net income -- 232,581 -- -- 232,581 -- -- --
Other comprehensive income:
Unrealized market adjustments,
net of tax and reclassification
adjustment -- 36,350 -- -- -- 36,350 -- --
---------------------------------------------------------------------------------------------
Comprehensive income -- 268,931 -- -- 232,581 36,350 -- --
---------------------------------------------------------------------------------------------
Cash dividends declared -- (113,755) -- -- (113,755) -- -- --
Common stock issued
for exercise of stock options 1,309 17,310 818 15,557 -- -- -- 935
Common stock repurchased (2,461) (48,476) (1,539) (46,937) -- -- -- --
Amortization on restricted
stock incentive plans -- 2,019 -- -- -- -- 2,019 --
Other 19 16,660 12 16,519 -- -- (528) 657
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 128,745 $ 1,384,156 $ 80,465 $ 115,775 $ 1,172,548 $ 14,598 $ (4,183) $ 4,953
==================================================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
F-39 First Tennessee National Corporation
70
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
------------------------------------------
(Dollars in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
OPERATING Net income $ 232,581 $ 247,533 $ 226,380
ACTIVITIES Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Provision for loan losses 67,353 57,923 51,351
Provision for deferred income tax 40,082 81,633 83,454
Depreciation and amortization of premises and equipment 58,854 53,719 40,431
Amortization of mortgage servicing rights 81,568 103,471 95,507
Amortization of intangible assets 11,738 10,492 11,114
Net other amortization and accretion 39,370 51,524 15,283
Market value adjustment on foreclosed property 9,911 5,633 16,820
Loss/(gain) on sale of securitized auto loans 1,315 - (643)
Gain on early retirement of debt - (1,420) -
Gain on equity interest from demutualization - (6,143) -
Equity securities gains (754) (2,313) (3,940)
Debt securities losses/(gains) 4,961 56 (36)
Net losses/(gains) on disposals of fixed assets 5,367 (1,405) (703)
Gains on divestitures (157,635) (4,246) (567)
Net (increase)/decrease in:
Capital markets securities inventory (106,755) 220,779 (105,064)
Mortgage loans held for sale 410,999 1,858,685 (2,968,356)
Capital markets receivables (28,428) 149,690 (143,893)
Interest receivable (9,994) 1,859 (25,013)
Other assets (189,472) (639,096) (722,144)
Net increase/(decrease) in:
Capital markets payables 37,920 (127,795) 112,110
Interest payable (7,194) (2,356) (8,919)
Other liabilities (13,692) (60,693) 181,366
- -------------------------------------------------------------------------------------------------------------------------
Total adjustments 255,514 1,749,997 (3,371,842)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided/(used) by operating activities 488,095 1,997,530 (3,145,462)
- -------------------------------------------------------------------------------------------------------------------------
INVESTING Held to maturity securities:
ACTIVITIES Maturities 131,720 216,146 160,471
Purchases (500) - -
Available for sale securities:
Sales 887,188 71,053 53,643
Maturities 515,589 683,613 944,145
Purchases (1,241,976) (880,343) (675,358)
Premises and equipment:
Sales 1,549 11,927 2,733
Purchases (44,883) (106,420) (80,414)
Net increase in loans (1,407,939) (1,270,333) (1,102,674)
Proceeds from auto loan securitizations 184,379 - 72,756
Net (increase)/decrease in investment in bank time deposits (366) (2,052) 1,076
Proceeds from divestitures, net of cash and cash equivalents 455,832 (4,778) (7,654)
Acquisitions, net of cash and cash equivalents acquired - (6,973) (9,243)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (519,407) (1,288,160) (640,519)
- -------------------------------------------------------------------------------------------------------------------------
FINANCING Common stock:
ACTIVITIES Exercise of stock options 16,639 34,457 24,943
Cash dividends paid (113,958) (98,704) (84,521)
Repurchase of shares (48,542) (41,262) (61,854)
Term borrowings:
Issuance 101,200 52,421 247,613
Payments (50,392) (107,200) (2,301)
Net increase/(decrease) in:
Deposits 820,100 (316,797) 2,063,738
Short-term borrowings (968,950) 67,209 1,532,862
- -------------------------------------------------------------------------------------------------------------------------
Net cash (used)/provided by financing activities (243,903) (409,876) 3,720,480
- -------------------------------------------------------------------------------------------------------------------------
Net (decrease)/increase in cash and cash equivalents (275,215) 299,494 (65,501)
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 1,235,614 936,120 1,001,621
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 960,399 $ 1,235,614 $ 936,120
=========================================================================================================================
Total interest paid $ 771,189 $ 619,740 $ 601,749
Total income taxes paid 96,693 48,802 28,348
- -------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
First Tennessee National Corporation F-40
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING. The consolidated financial statements of First Tennessee
National Corporation (First Tennessee), including its subsidiaries, are prepared
in conformity with generally accepted accounting principles and follow general
practices within the industries in which it operates. This preparation requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. These estimates and assumptions
are based on information available as of the date of the financial statements
and could differ from actual results.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION. The consolidated
financial statements include the accounts of First Tennessee and its
majority-owned subsidiaries. Affiliates that are not majority owned are
accounted for by the equity method. All significant intercompany transactions
and balances have been eliminated. For purposes of comparability, certain prior
period amounts have been reclassified to conform with current year presentation.
None of these reclassifications had any effect on net income or earnings per
share for any of the periods presented.
Business combinations accounted for as purchases are included in the financial
statements from the respective dates of acquisition.
STATEMENTS OF CASH FLOWS. For purposes of these statements, cash and due from
banks, federal funds sold, and securities purchased under agreements to resell
are considered cash and cash equivalents. Federal funds are usually sold for
one-day periods, and securities purchased under agreements to resell are
short-term, highly liquid investments.
The following significant non-cash stock transactions reflect the two-for-one
stock split that First Tennessee effected February 20, 1998. In 1998, First
Tennessee acquired Keystone Mortgage, Inc. and McGuire Mortgage Company for
approximately 187,000 shares and 341,000 shares of First Tennessee stock,
respectively. In 1999, approximately 22,000 shares were issued related to the
acquisition of Cambridge Mortgage Company and approximately 242,000 shares were
issued related to the acquisition of Elliot Ames, Inc.
CAPITAL MARKETS SECURITIES INVENTORY. Inventories purchased in connection with
underwriting or dealer activities are carried at market value. Gains and losses,
both realized and unrealized, on these inventories are reflected in noninterest
income as capital markets income.
INVESTMENT SECURITIES. Securities that First Tennessee has the ability and
positive intent to hold to maturity are classified as securities held to
maturity and are carried at amortized cost. Securities that may be sold prior to
maturity for asset/liability management purposes and equity securities are
classified as securities available for sale and are carried at fair value. The
unrealized gains and losses on securities available for sale are excluded from
earnings and are reported, net of tax, as a component of other comprehensive
income within shareholders' equity.
The amortized cost of all securities is adjusted for amortization of premium and
accretion of discount to maturity, or earlier call date if appropriate, using
the level yield method. Such amortization and accretion is included in interest
income from securities. Realized gains and losses and declines in value judged
to be other than temporary are determined by the specific identification method
and reported in noninterest income.
SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS. First Tennessee Capital Markets enters into short-term
purchases of securities under agreements to resell as a means of converting
proceeds from securities sold short into interest earning assets. Securities
delivered under these transactions are delivered to either the dealer custody
account at the Federal Reserve Bank or to the applicable counterparty.
Securities sold under agreements to repurchase (securities sold) are offered to
cash management customers as an automated, collateralized investment account.
Securities sold are also used by the regional banking group to obtain favorable
borrowing rates on its purchased funds. Under these transactions, securities are
delivered to the counterparty's custody account. In the normal course of
business, First Tennessee does not use this as a primary funding source.
MORTGAGE BANKING. First Tennessee's mortgage lenders originate first-lien
mortgage loans primarily for the purpose of selling them in the secondary
market. Mortgage loans held for sale (warehouse) are recorded at the lower of
aggregate cost or market value. Also included in the lower of cost or market
analysis are the estimated costs and market values of the mortgage loan
commitments. Gains and losses realized from the sale of these assets and
adjustments to market value are included in noninterest income. In certain
cases, mortgage banking continues to service securitized mortgage loans and has
also retained interest-only strips. The retained interests are initially valued
by allocating the total cost basis of the securitized assets between the assets
sold and the retained interests based on their relative fair values at the time
of securitization. The interest-only strips are financial assets that represent
rights to receive earnings from serviced assets that exceed contractually
specified servicing fees and are recognized on the balance sheet in securities
available for sale. The fair value of the interest-only strips is
F-41 First Tennessee National Corporation
72
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
determined using market prices from closely comparable assets such as mortgage
servicing rights that are tested against prices determined using a valuation
model that calculates the present value of estimated future cash flows.
First Horizon Home Loan Corporation, an indirect wholly owned subsidiary of
First Tennessee, has also completed proprietary securitizations of loans from
the warehouse with jumbo fixed rate loans through its subsidiary First Horizon
Asset Securities, Inc. The resulting securities are sold as senior and
subordinate bonds, while servicing rights and a principal cashflow tranche
(principal-only strip) are retained. Gain or loss on sale of the securities is
recognized in noninterest income. The retained interests are initially valued by
allocating the total cost basis of the securitized assets between the assets
sold and the retained interests based on their relative fair values at the time
of securitization. The principal-only strips are recognized on the balance sheet
in securities available for sale. The fair value of the principal-only strips is
determined using key market indicators to establish a benchmark that is adjusted
to reflect the difference between readily marketable securities and privately
issued securities.
Servicing rights related to the mortgages sold have historically been mostly
retained. Currently, only limited amounts of mortgage servicing rights (MSRs)
are being retained as mortgage banking intends to curtail growth in the
servicing portfolio. First Tennessee uses a cash flow valuation model to
determine the fair value of the servicing rights created. These valuations are
tested for reasonableness against prices obtained from flow and bulk sales of
servicing and are validated through an independent market valuation. Model
assumptions are periodically reviewed and may be revised from time to time to
more accurately reflect current assumptions such as prepayment speeds.
For purposes of impairment evaluation and measurement, the MSRs are stratified
based on the predominant risk characteristics of the underlying loans. For First
Tennessee, these strata include adjustable rate conventional and government;
fixed rate conventional and government by interest rate band. The MSRs are
amortized as noninterest expense over the period of and in proportion to the
estimated net servicing revenues. A quarterly value impairment analysis is
performed using a discounted cash flow methodology that is disaggregated by
predominant risk characteristics. Impairment, if any, is recognized through a
valuation allowance for individual strata. See further detail about mortgage
banking policies in the derivative financial instruments disclosure below. See
also the Accounting changes section of this footnote for disclosures related to
the impact of Statement of Financial Accounting Standards (SFAS) 133,
"Accounting for Derivative Instruments and Hedging Activities."
LOANS. Loans are stated at principal amounts outstanding, net of unearned
income. Interest on loans is recognized at the applicable interest rate on the
principal amount outstanding. Impaired loans are generally carried on a
nonaccrual status. Loans are ordinarily placed on nonaccrual status when, in
management's opinion, the collection of principal or interest is unlikely, or
when the collection of principal or interest is 90 days or more past due. Retail
real estate loans and other retail loans are not placed on nonaccrual status,
but are charged off when past due 180 days and 120 days, respectively. However,
if the debtor has filed for bankruptcy, the loans are charged off within 60 days
of notification or at 120 days past due for close ended loans and 180 days for
open ended loans (i.e. credit card), whichever is shorter.
Accrued but uncollected interest is reversed and charged against interest income
when the loan is placed on nonaccrual status. On retail loans, accrued but
uncollected interest is reversed when the loan is charged off. 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. Interest payments received on nonaccrual and impaired loans are
normally applied to principal. Once all principal has been received, additional
interest payments are recognized on a cash basis as interest income.
When First Tennessee sells loans in securitizations of automobile loans, it
retains interest-only strips and servicing rights, both of which are retained
interests in the securitized receivables. Gain or loss on sale of the loans are
recognized in noninterest income based on the carrying amount of the financial
assets involved in the transfer, allocated between the assets sold and the
retained interests based on their relative fair value at the date of transfer.
Subsequent to the sale, the servicing rights are recognized on the balance sheet
in "Intangible assets."
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is maintained at a
level that management determines is adequate to absorb estimated losses inherent
in the loan portfolio. Management's evaluation process used to determine the
adequacy of the allowance combines three factors: historical loss experience
derived from analytical models, current trends and reasonably foreseeable
events. The actual amounts realized could differ in the near term from the
amounts assumed in arriving at the allowance for possible loan losses reported
in the financial statements.
All losses of principal are charged to the account when the loss actually occurs
or when a determination is made that a loss is probable. Additions are made to
the allowance through periodic provisions charged to current operations and
recovery of principal on loans previously charged off.
First Tennessee National Corporation F-42
73
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT. Premises and equipment are carried at cost less
accumulated depreciation and amortization and include additions that materially
extend the useful lives of existing premises and equipment. All other
maintenance and repair expenditures are expensed as incurred. Gains and losses
on dispositions are reflected in noninterest income and expense.
Depreciation and amortization are computed principally on the straight-line
method over the estimated useful lives of the assets and are expensed to
noninterest expense. Leasehold improvements are amortized over the lesser of the
lease periods or the estimated useful lives using the straight-line method.
REAL ESTATE ACQUIRED BY FORECLOSURE. Real estate acquired by foreclosure
consists of properties that have been acquired in satisfaction of debt. These
properties are carried at the lower of the outstanding loan amount or the
estimated fair market value minus the estimated cost to sell the real estate.
Losses arising at foreclosure are charged to the allowance for loan losses.
Required developmental costs associated with foreclosed property under
construction are capitalized and included in determining the estimated net
realizable value of the property which is reviewed periodically, and any
write-downs are charged against current earnings as market adjustments.
INTANGIBLE ASSETS. Intangible assets consist of "Other intangibles" and
"Goodwill." The "Other intangibles" represents identified intangible assets,
including premium on purchased deposits, which are amortized over their
estimated useful lives, except for those assets related to deposit bases that
are primarily amortized over 10 years. "Goodwill" represents the excess of cost
over net assets of acquired subsidiaries less identifiable intangible assets and
is amortized to noninterest expense using the straight-line method over periods
ranging from 15 to 40 years. Management evaluates whether events or
circumstances have occurred that indicate the remaining useful life or carrying
value of intangibles should be revised.
DERIVATIVE FINANCIAL INSTRUMENTS. First Tennessee utilizes derivative financial
instruments in order to manage exposure to fluctuations in interest rates and to
meet the financial needs of customers. For interest rate risk management
purposes, First Tennessee primarily utilizes interest rate swaps. Mortgage
banking operations mainly use mandatory forward delivery commitments and
purchased and written options to hedge against risks associated with the
warehouse, the pipeline, or the servicing portfolio. Capital markets uses
various derivatives, including interest rate swaps, futures, forward and option
contracts and securities underwriting commitments in order to meet the needs of
its customers with forwards being the most commonly used instrument.
To qualify as a hedge used to manage interest rate risk, the following criteria
must be met: (1) the asset or liability to be hedged exposes First Tennessee to
interest rate risk; (2) the instrument alters or reduces sensitivity to interest
rate changes; and (3) the instrument is designated and effective as a hedge.
For interest rate contracts used to hedge interest rate risk, income and expense
are deferred and amortized over the lives of the hedged assets or liabilities.
The amortization of this income and expense is an adjustment to interest income
or expense of the hedged item. Fees are deferred and amortized over the lives of
the contracts. Any related assets or liabilities are recorded on the balance
sheet in other assets or other liabilities.
For those derivatives used to manage interest rate risk that are terminated
prior to maturity, realized gains and losses are deferred and amortized
straight-line over the remaining original life of the agreement as an adjustment
to the hedged asset or liability. If the underlying hedged asset or liability is
sold or prepaid, the related portion of any unrecognized gain or loss on the
derivative is recognized in current earnings as part of the gain or loss on the
sale or prepayment.
Forward and option contracts are used by mortgage banking operations to hedge
against interest rate risk in the warehouse and the pipeline and are reviewed
periodically for correlation with expected changes in value. Option contracts
used to hedge against interest rate risk in the servicing portfolio are
designated to specific risk tranches of servicing.
Forward and option contracts used to hedge the pipeline and the warehouse are
considered in the lower of cost or market valuation of the pipeline and the
warehouse with any related gains or losses being recognized in mortgage banking
noninterest income. Premiums paid for purchased options are deferred and
reported in other assets and are amortized over the lives of the contracts to
mortgage banking noninterest income.
Options used to hedge the servicing portfolio are adjusted for changes in
intrinsic value with gains and losses recognized as a basis adjustment of the
related mortgage servicing rights risk tranche. Premiums are deferred and
amortized on a straight-line basis over the contract life to other noninterest
expense. Any unamortized premiums related to the options are reported in other
assets.
For derivatives hedging the warehouse and pipeline that are terminated prior to
maturity, gains and losses are recognized in current earnings as mortgage
banking noninterest income unless such gains and losses are related to future
loan deliveries, in which case they are deferred and recognized at the time the
related loans are sold. For derivatives hedging the servicing
F-43 First Tennessee National Corporation
74
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
portfolio that are terminated prior to maturity, gains and losses are split
between the return of time value premium and the intrinsic value. Gains or
losses from the change in the intrinsic value are deferred as a basis adjustment
to the related mortgage servicing rights risk tranche, and the gains or losses
resulting from the return of time value premium are recognized in current
earnings in mortgage banking noninterest income.
Any contracts that fail to qualify for hedge accounting are measured at fair
value with any gains or losses included in current earnings in noninterest
income.
Derivative contracts utilized in trading activities by capital markets are
measured at fair value, and gains or losses are recognized in capital markets
noninterest income as they occur. Related assets are recorded on the balance
sheet as capital markets securities inventory or receivables and any liabilities
are recognized as capital markets payables.
Cash flows from derivative contracts are reported as operating activities on the
Consolidated Statements of Cash Flows.
INCOME TAXES. The provision for income taxes is based on income reported for
consolidated financial statement purposes and includes deferred taxes resulting
from the recognition of certain revenues and expenses in different periods for
tax reporting purposes. First Tennessee files a consolidated federal income tax
return except for a credit life insurance company and a real estate investment
trust which both file separate returns.
EARNINGS PER SHARE. Earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for each period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding adjusted to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares resulting from options granted under First Tennessee's stock option plans
had been issued. First Tennessee utilizes the treasury stock method in this
calculation. Per share amounts reflect the February 20, 1998, two-for-one stock
split.
ACCOUNTING CHANGES. On January 1, 1999, First Tennessee adopted SFAS No. 134,
"Accounting for Mortgage-Backed Securities Retained after Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This Statement
amends SFAS No. 65, which required that retained securities be classified as
trading securities. SFAS No. 134 allows these securities to be classified as
trading, held to maturity or available for sale based on the intent and ability
of the enterprise.
On January 1, 1999, First Tennessee adopted Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities." This Statement requires that
the costs of start-up activities, including organization costs, be expensed as
incurred.
On January 1, 1998, First Tennessee adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting comprehensive
income and its components in the financial statements. Comprehensive income is
the total of net income and all other nonowner changes in equity. The only
component of other comprehensive income for First Tennessee is unrealized
holding gains/(losses) on available for sale securities.
On January 1, 1998, First Tennessee adopted SOP 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," which allows for
the capitalization of internal and external personnel costs for the development
or modification of qualified internal use software.
For the year ending December 31, 1998, First Tennessee adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
standard requires a business to report financial and descriptive information
about its reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance.
For the year ending December 31, 1998, First Tennessee adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." The
standard revised the required disclosures for employee benefit plans but did not
change the measurement or recognition of such plans.
In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This Statement replaces SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires substantial disclosures, but carries over most of SFAS No. 125's
provisions without reconsideration. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
First Tennessee National Corporation F-44
75
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The disclosure provisions of the
statement are effective immediately and have been adopted by First Tennessee.
Other provisions become effective for transactions occurring after March 31,
2001. The adoption of the continuing provisions of SFAS No. 125 will not have a
material impact on First Tennessee's consolidated financial position or results
of operations. Adoption of the new provisions of SFAS No. 140 are also not
expected to be material to First Tennessee's consolidated financial position or
results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative instrument's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative instrument's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company formally document, designate, and assess
the effectiveness of transactions that receive hedge accounting.
Upon adoption of SFAS No. 133, all freestanding derivative instruments are
remeasured at fair value with differences between the previous book value and
fair value reported as a one-time accounting adjustment. Likewise, offsetting
gains and losses on hedged assets, liabilities and firm commitments are
recognized as adjustments of their respective book values at the adoption date
as part of this accounting adjustment. Except to the extent that they relate to
hedges of the variable cash flow exposure of forecasted transactions, the net
accounting adjustment (net of hedge difference and hedged item difference) is
reported in net income in the period of adoption. The remainder of the
accounting adjustment, which relates to hedges of the variable cash flow
exposure of forecasted transactions, is reported as a cumulative effect
adjustment of comprehensive income in the period of adoption.
SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133," and SFAS No. 138, "Accounting for Certain Derivative Instrument and
Certain Hedging Activities - an Amendment of FASB Statement No. 133," is
effective for fiscal years beginning after June 15, 2000. First Tennessee
adopted SFAS No. 133 on January 1, 2001. Note 24 - Financial Instruments with
Off-Balance Sheet Risk provides the book values and fair values of freestanding
derivative instruments that are required to be recognized on First Tennessee's
balance sheet as assets or liabilities at fair value. The impact of adopting
SFAS No. 133 on January 1, 2001, resulted in a net transition adjustment of $6
million in after-tax loss. Subsequent to adoption, SFAS No. 133 could increase
the future volatility of mortgage banking earnings and other comprehensive
income.
Certain provisions of SFAS No. 133 continue to undergo significant discussion
and debate by the FASB and its Derivatives Implementation Group (DIG). One such
potential issue involves the determination of the components of value of
mortgage banking interest rate lock commitments, which have tentatively been
determined to be a derivative instrument by FASB. If First Tennessee's
interpretation of the value is ultimately determined to be in conflict with that
of the FASB or DIG, the adjustment to the net transition impact at January 1,
2001, would be an additional after-tax loss of up to $2 million. Subsequent to
adoption, under First Tennessee's interpretation of the components of value of
an interest rate lock commitment a substantial portion of the gain or loss from
the sale of the related mortgage loan will be recognized at the time the
commitment is made and at the time the loan is closed. Under existing rules all
of the gain or loss is recognized at the time the loan is sold into the
secondary market.
NOTE 2 - ACQUISITIONS/DIVESTITURES
On December 27, 2000, First Tennessee Bank National Association (FTBNA), the
primary banking subsidiary of First Tennessee, sold $265.8 million of its
affinity, co-branded, and certain single relationship credit card accounts and
assets, to MBNA Corporation for $322.1 million. This initial phase of the
transaction resulted in a pre-tax gain of $50.2 million in the fourth quarter of
2000. On January 17, 2001, the transaction was completed with the sale of an
additional $31.3 million of credit card accounts for $37.8 million resulting in
a pre-tax gain of $6.0 million.
On December 18, 2000, FTBNA sold its MONEY BELT(R) ATM Network to Genpass Inc.
This transaction was completed for $34.6 million and resulted in a pre-tax gain
of $33.1 million.
On December 14, 2000, First Tennessee entered into a definitive agreement to
sell its wholly owned subsidiary, Peoples and Union Bank, of Lewisburg,
Tennessee to First Farmers & Merchants National Bank, of Columbia, Tennessee.
First Tennessee expects to recognize a pre-tax gain (net of expenses) of
approximately $12 million in first half of 2001 when it is anticipated that the
merger will be completed upon receipt of regulatory approvals.
F-45 First Tennessee National Corporation
76
NOTE 2 - ACQUISITIONS/DIVESTITURES (CONTINUED)
On November 15, 2000, First Tennessee Securities Corporation (FTSC), a wholly
owned subsidiary of FTBNA, signed a definitive purchase agreement to acquire
certain assets of Midwest Research-Maxus Group Limited, a Cleveland-based
institutional equity research firm. This transaction was completed for
approximately $13.7 million on January 2, 2001.
On October 18, 2000, FTBNA sold its corporate and municipal trust business to
The Chase Manhattan Bank. This transaction was completed for $35.1 million and
resulted in a pre-tax gain of $33.4 million.
On April 28, 2000, First Horizon Home Loan Corporation, a wholly owned
subsidiary of FTBNA, sold its HomeBanc Mortgage division. The sales price for
the division was $57.6 million and resulted in a pre-tax gain of $40.9 million.
On October 1, 1999, First Tennessee acquired Elliot Ames, Inc. of Los Altos,
California, for approximately 292,000 shares of its common stock. Elliot Ames
was merged into First Horizon Home Loan Corporation. This acquisition was
accounted for as a purchase and was immaterial to First Tennessee.
On July 20, 1999, First Tennessee completed the sale of substantially all of the
assets and liabilities of Planters Bank of Tunica, Mississippi, a wholly owned
subsidiary, to First Security Bank of Batesville, Mississippi. This transaction
was completed for $10.5 million and was immaterial to First Tennessee.
On June 1, 1999, FTBNA acquired from National Processing Co. their remittance
processing business locations in Atlanta, Dallas, Louisville and Phoenix for
approximately $6.0 million. The acquisition of these units was accounted for as
a purchase and was immaterial to First Tennessee.
On March 31, 1999, First Tennessee acquired Cambridge Mortgage Company of
Seattle, Washington, for approximately 22,000 shares of its common stock.
Cambridge was merged into First Horizon Home Loan Corporation. This acquisition
was accounted for as a purchase and was immaterial to First Tennessee.
The following table provides information concerning acquisitions completed
during the three years ended December 31, 2000. Acquisitions accounted for as
purchases are included in the financial statements from the date of the
acquisition. All share information reflects the 1998 two-for-one stock split.
Common Shares
Date of Issued Method of
Acquisition Location Acquisition (thousands) Accounting
- -------------------------------------------------------------------------------------------------------------------------
Elliot Ames, Inc. Los Altos, California 10/1/99 292 Purchase
Cambridge Mortgage Co. Seattle, Washington 3/31/99 22 Purchase
McGuire Mortgage Company Prairie Village, Kansas 12/31/98 341 Purchase
Keystone Mortgage, Inc. Kirkland, Washington 7/1/98 187 Purchase
Martin & Company, LLP Knoxville, Tennessee 1/2/98 $19.5 million cash Purchase
- -------------------------------------------------------------------------------------------------------------------------
First Tennessee National Corporation F-46
77
NOTE 3 - INVESTMENT SECURITIES
The following tables summarize First Tennessee's securities held to maturity and
available for sale at December 31, 2000 and 1999:
AT DECEMBER 31, 2000*
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
States and municipalities $ 21,815 $ 348 $ (109) $ 22,054
Private issue CMOs** 616,500 1,074 (19,900) 597,674
- -------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 638,315 $ 1,422 $(20,009) $ 619,728
=========================================================================================================================
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury and other U.S. government agencies $ 141,984 $ 1,658 $ (490) $ 143,152
Government agency issued MBSs 149,350 480 (973) 148,857
Government agency issued CMOs 1,521,288 13,511 (1,813) 1,532,986
States and municipalities 33,823 338 -- 34,161
Private issue CMOs 4,046 699 (9) 4,736
Other 170,862 -- (4,533) 166,329
Equity*** 155,477 16,939 (1,896) 170,520
- -------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $2,176,830 $ 33,625 $ (9,714) $2,200,741
=========================================================================================================================
<FN>
* Includes $1.8 billion of securities pledged to secure public deposits, securities sold under agreements to
repurchase and for other purposes.
** Represents First Tennessee's Real Estate Mortgage Investment Conduit.
*** Equity securities include venture capital investment securities.
</FN>
AT DECEMBER 31, 1999*
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
States and municipalities $ 25,892 $ 163 $ (171) $ 25,884
Private issue CMOs** 743,044 -- (34,075) 708,969
- -------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 768,936 $ 163 $(34,246) $ 734,853
=========================================================================================================================
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury and other U.S. government agencies $ 168,011 $ 139 $ (2,673) $ 165,477
Government agency issued MBSs 297,161 888 (4,495) 293,554
Government agency issued CMOs 1,397,718 335 (41,388) 1,356,665
States and municipalities 15,446 275 (10) 15,711
Private issue CMOs 186,010 -- (14) 185,996
Other 145,597 3,386 (2,525) 146,458
Equity*** 158,109 10,935 (549) 168,495
- -------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $2,368,052 $ 15,958 $(51,654) $2,332,356
=========================================================================================================================
<FN>
* Includes $1.7 billion of securities pledged to secure public deposits, securities sold under agreements to
repurchase and for other purposes.
** Represents First Tennessee's Real Estate Mortgage Investment Conduit.
*** Equity securities include venture capital investment securities.
</FN>
F-47 First Tennessee National Corporation
78
NOTE 3 - INVESTMENT SECURITIES (CONTINUED)
Provided below are the amortized cost and estimated fair value by contractual
maturity for the securities portfolios at December 31, 2000:
Held to Maturity Available for Sale
----------------------- -----------------------
Estimated Estimated
By Contractual Maturity Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------
Within 1 year $ 2,055 $ 2,057 $ 43,464 $ 43,206
After 1 year; within 5 years 7,145 7,186 91,438 92,109
After 5 years; within 10 years 8,543 8,681 38,624 39,650
After 10 years 4,072 4,130 173,143 168,677
- ------------------------------------------------------------------------------------------------------------------------
Subtotal 21,815 22,054 346,669 343,642
- ------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities and CMOs 616,500 597,674 1,674,684 1,686,579
Equity securities -- -- 155,477 170,520
- ------------------------------------------------------------------------------------------------------------------------
Total $638,315 $619,728 $2,176,830 $2,200,741
========================================================================================================================
<FN>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
</FN>
The table below provides information on realized gross gains and realized gross
losses on sales from the available for sale portfolio for the years ended
December 31:
(Dollars in thousands) AFS Debt* AFS Equity* Total
- ------------------------------------------------------------------------------------------------------------------------
2000
Gross gains on sales $ 1,518 $ 1,586 $ 3,104
Gross losses on sales (4,926) (269) (5,195)
- ------------------------------------------------------------------------------------------------------------------------
1999
Gross gains on sales $ 10 $ 3,122 $ 3,132
Gross losses on sales (84) (24) (108)
- ------------------------------------------------------------------------------------------------------------------------
1998
Gross gains on sales $ 323 $ 6,804 $ 7,127
Gross losses on sales (292) -- (292)
- ------------------------------------------------------------------------------------------------------------------------
<FN>
* AFS - Available for sale
</FN>
Losses totaling $2.2 million, $.8 million and $2.9 million for the years 2000,
1999 and 1998, respectively, were recognized for securities that, in the opinion
of management, have been permanently impaired.
NOTE 4 - LOANS
A summary of the major categories of loans outstanding on December 31 is shown
below:
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Commercial:
Commercial, financial and industrial $ 3,964,396 $3,660,642
Real estate commercial 946,903 776,553
Real estate construction 415,713 353,659
Retail:
Real estate residential 3,573,260 2,814,249
Real estate construction 179,515 132,740
Consumer 840,228 1,018,110
Credit card receivables 319,435 607,205
- ------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income* $10,239,450 $9,363,158
Allowance for loan losses 143,696 139,603
- ------------------------------------------------------------------------------------------------------------------------
Total net loans $10,095,754 $9,223,555
========================================================================================================================
<FN>
* Loans are presented net of $1.1 million and $.2 million of unearned income on December 31, 2000 and 1999, respectively.
</FN>
First Tennessee National Corporation F-48
79
NOTE 4 - LOANS (CONTINUED)
Nonperforming loans consist of loans which management has identified as
impaired, other nonaccrual loans and loans which have been restructured. On
December 31, 2000 and 1999, there were no outstanding commitments to advance
additional funds to customers whose loans had been restructured. The following
table presents nonperforming loans on December 31:
(Dollars in thousands) 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
Impaired loans $ 41,207 $ 7,514
Other nonaccrual loans 20,095 21,604
- -------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 61,302 $ 29,118
=========================================================================================================================
Interest income received during 2000 for impaired loans was $2.8 million and for
other nonaccrual loans was $1.3 million. Under their original terms, interest
income would have been approximately $4.0 million for the impaired loans and
$1.7 million for the other nonaccrual loans outstanding on December 31, 2000.
The average balance of impaired loans was approximately $14.7 million for 2000
and $12.5 million for 1999.
Activity in the allowance for loan losses related to non-impaired and impaired
loans for years ended December 31 is summarized as follows:
(Dollars in thousands) Non-impaired Impaired Total
- -------------------------------------------------------------------------------------------------------------------------
Balance on December 31, 1997 $ 122,107 $ 3,752 $ 125,859
Transfer of allowance due to securitizations (3,575) -- (3,575)
Allowance from acquisitions 140 -- 140
Provision for loan losses 48,474 2,877 51,351
Charge-offs (43,384) (5,138) (48,522)
Loan recoveries 9,810 950 10,760
- -------------------------------------------------------------------------------------------------------------------------
Net charge-offs (33,574) (4,188) (37,762)
- -------------------------------------------------------------------------------------------------------------------------
Balance on December 31, 1998 133,572 2,441 136,013
Transfer of allowance due to securitizations (1,790) -- (1,790)
Adjustment due to divestiture (893) -- (893)
Provision for loan losses 49,962 7,961 57,923
Charge-offs (50,156) (10,069) (60,225)
Loan recoveries 6,283 2,292 8,575
- -------------------------------------------------------------------------------------------------------------------------
Net charge-offs (43,873) (7,777) (51,650)
- -------------------------------------------------------------------------------------------------------------------------
Balance on December 31, 1999 136,978 2,625 139,603
- -------------------------------------------------------------------------------------------------------------------------
Transfer of allowance due to securitizations (2,173) -- (2,173)
Provision for loan losses* 51,456 15,897 67,353
Charge-offs (64,662) (6,526) (71,188)
Loan recoveries 6,740 3,361 10,101
- -------------------------------------------------------------------------------------------------------------------------
Net charge-offs (57,922) (3,165) (61,087)
- -------------------------------------------------------------------------------------------------------------------------
BALANCE ON DECEMBER 31, 2000 $ 128,339 $ 15,357 $ 143,696
=========================================================================================================================
<FN>
* Provision for loan losses was reduced by $10.7 million in 2000 related to credit card loans sold.
</FN>
Certain executive officers and directors (and their associates) of First
Tennessee were loan customers during 2000 and 1999. Such loans are at normal
credit terms, including interest rates and collateral, and do not represent more
than a normal risk of collection. The following is a summary of related party
loans outstanding and the activity for the years ended December 31:
F-49 First Tennessee National Corporation
80
NOTE 4 - LOANS (CONTINUED)
(Dollars in thousands) 2000 1999
- -------------------------------------------------------------------------------
Balance at beginning of year $ 68,198 $ 70,731
Additions 345,151 279,183
Deletions:
Repayments (348,724) (274,936)
No longer related (2,385) (6,780)
- -------------------------------------------------------------------------------
Total deletions (351,109) (281,716)
- -------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 62,240 $ 68,198
===============================================================================
Included in other assets and in other liabilities on the Consolidated Statements
of Condition are amounts due from customers on acceptances and bank acceptances
outstanding of $7.0 million and $7.4 million on December 31, 2000 and 1999,
respectively.
NOTE 5 - PREMISES, EQUIPMENT AND LEASES
Premises and equipment on December 31 are summarized below:
(Dollars in thousands) 2000 1999
- -------------------------------------------------------------------------------
Land $ 35,987 $ 34,404
Buildings 173,690 171,876
Leasehold improvements 57,150 56,033
Furniture, fixtures and equipment 272,199 278,949
- -------------------------------------------------------------------------------
Premises and equipment, at cost 539,026 541,262
Less accumulated depreciation and amortization 252,919 235,743
- -------------------------------------------------------------------------------
Premises and equipment, net $ 286,107 $ 305,519
===============================================================================
First Tennessee is obligated under a number of noncancelable operating leases
for premises and equipment with terms up to 19 years, which may include the
payment of taxes, insurance and maintenance costs.
Minimum future lease payments for noncancelable operating leases on premises and
equipment on December 31, 2000, are shown below:
(Dollars in thousands)
- -------------------------------------------------------------------------------
2001 $ 57,832
2002 50,563
2003 37,911
2004 26,832
2005 18,333
2006 and after 69,166
- -------------------------------------------------------------------------------
Total minimum lease payments $260,637
===============================================================================
<FN>
Payments required under capital leases are not material.
</FN>
Aggregate minimum income under sublease agreements for these periods is $19.0
million.
Rent expense incurred under all operating lease obligations was as follows for
the years ended December 31:
(Dollars in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------
Rent expense, gross $ 61,835 $ 56,656 $ 35,857
Rent income (4,158) (2,810) (1,901)
- -------------------------------------------------------------------------------
Rent expense, net $ 57,677 $ 53,846 $ 33,956
===============================================================================
First Tennessee National Corporation F-50
81
NOTE 6 - MORTGAGE SERVICING RIGHTS
Following is a summary of changes in capitalized mortgage servicing rights, net
of accumulated amortization, included in the Consolidated Statements of
Condition:
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1997 $ 408,921
Addition of mortgage servicing rights 435,893
Amortization (95,507)
Net hedge gains applied (84,557)
Sales of mortgage servicing rights (312)
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1998 664,438
Addition of mortgage servicing rights 420,046
Amortization (103,471)
Net hedge losses applied 70,529
Sales of mortgage servicing rights (133,066)
Purchase of mortgage servicing rights 28,388
Conversion to interest only strip* (120,654)
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1999 826,210
Addition of mortgage servicing rights 230,168
Amortization (81,568)
Net hedge gains applied (125,058)
Sales of mortgage servicing rights (60,307)
Impairment (31,158)
Conversion to interest only strip* (14,573)
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000 $ 743,714
=========================================================================================================================
<FN>
* Excess of servicing fair value over the contractually specified servicing.
</FN>
The mortgage servicing rights on December 31, 2000 and 1999, had estimated
market values of approximately $765.1 million and $876.3 million, respectively.
These balances represent the rights to service approximately $43.9 billion and
$41.5 billion of mortgage loans on December 31, 2000 and 1999. In addition,
First Tennessee had approximately $1.8 billion and $1.3 billion in unpaid
principal balance of mortgage loans for which the servicing rights were not
capitalized on December 31, 2000 and 1999. These mortgage servicing rights had
estimated market values of $9.3 million and $5.2 million, respectively. On
December 31, 2000, a valuation allowance due to impairment of $21.2 million was
required. On December 31, 1999 no valuation allowance was required.
NOTE 7 - INTANGIBLE ASSETS
Following is a summary of intangible assets, net of accumulated amortization,
included in the Consolidated Statements of Condition:
Other
(Dollars in thousands) Goodwill Intangibles*
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1997 $ 83,677 $ 28,734
Amortization expense (5,463) (5,651)
Acquisitions 29,256 2,292
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1998 107,470 25,375
Amortization expense (5,665) (4,827)
Acquisitions 10,491 724
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1999 112,296 21,272
Amortization expense (5,802) (5,125)
Impairment (811) --
Divestitures (3,297) --
Acquisitions 1,379 1,712
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000 $ 103,765 $ 17,859
=========================================================================================================================
<FN>
* Represents premium on purchased deposits, covenants not to compete and non-mortgage servicing rights.
</FN>
F-51 First Tennessee National Corporation
82
NOTE 8 - TIME DEPOSIT MATURITIES
Following is a table of maturities for time deposits outstanding on December 31,
2000, which include "Certificates of deposit under $100,000 and other time" and
"Certificates of deposit $100,000 and more". "Certificates of deposit $100,000
and more" totaled $3.3 billion on December 31, 2000. Time deposits are included
in "Interest-bearing" deposits on the Consolidated Statements of Condition.
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------
2001 $4,716,895
2002 507,791
2003 160,902
2004 57,301
2005 and after 153,124
- -------------------------------------------------------------------------------------------------------------------------
Total $5,596,013
=========================================================================================================================
NOTE 9 - SHORT-TERM BORROWINGS
Short-term borrowings include federal funds purchased and securities sold under
agreements to repurchase, commercial paper, and other borrowed funds which
include term federal funds purchased, short-term bank notes, and advances from
the Federal Home Loan Bank.
Federal funds purchased and securities sold under agreements to repurchase and
commercial paper generally have maturities of less than 90 days. Other
short-term borrowings have original maturities of one year or less.
The detail of these borrowings for the years 2000, 1999 and 1998 is presented in
the following table:
Federal Funds
Purchased and
Securities Sold Other
Under Agreements Commercial Short-term
(Dollars in thousands) to Repurchase Paper Borrowings
- -------------------------------------------------------------------------------------------------------------------------
2000
Average balance $2,899,428 $17,050 $1,033,406
Year-end balance 2,981,026 19,169 437,366
Maximum month-end outstanding 3,844,312 19,169 1,684,125
Average rate for the year 5.84% 5.31% 6.74%
Average rate at year-end 5.92 5.64 6.62
- -------------------------------------------------------------------------------------------------------------------------
1999
Average balance $2,292,857 $18,268 $1,613,124
Year-end balance 2,856,282 16,272 1,533,957
Maximum month-end outstanding 2,856,282 21,221 1,801,230
Average rate for the year 4.57% 4.18% 5.44%
Average rate at year-end 4.61 4.63 6.00
- -------------------------------------------------------------------------------------------------------------------------
1998
Average balance $2,456,449 $22,337 $1,263,121
Year-end balance 2,912,018 23,203 1,404,071
Maximum month-end outstanding 3,733,294 26,958 1,511,624
Average rate for the year 4.99% 4.59% 5.79%
Average rate at year-end 4.79 4.12 5.19
- -------------------------------------------------------------------------------------------------------------------------
On December 31, 2000, $50 million of borrowings under unsecured lines of credit
from non-affiliated banks were available to the parent company to provide for
general liquidity needs at an annual facility fee of .10 percent.
First Tennessee National Corporation F-52
83
NOTE 10 - TERM BORROWINGS
The following table presents information pertaining to term borrowings (debt
with original maturities greater than one year) for First Tennessee and its
subsidiaries on December 31:
(Dollars in thousands) 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
FIRST TENNESSEE NATIONAL CORPORATION:
Subordinated capital notes:
Matures on November 15, 2005 -- 6 3/4% $ 74,601 $ 74,520
FIRST TENNESSEE BANK NATIONAL ASSOCIATION:
Notes payable to Federal Home Loan Bank*:
Matures on January 12, 2005 -- 6.125% 50,000 --
Matures on September 05, 2003 -- 6.67% 50,000 --
Matures through November 1, 2009 -- 8.10% 1,783 1,983
Matures through January 1, 2028 -- 4.00% 40 41
Matures through May 1, 2028 -- 4.00% 38 39
Matures through June 1, 2029 -- 4.00% 43 43
Maturity September 16, 2002 -- 5.42% -- 50,000
Subordinated bank notes:
Matures on April 1, 2008 -- 6.40% 89,490 89,420
Matures on December 1, 2008 -- 5.75% 140,426 140,274
FT REAL ESTATE SECURITIES COMPANY, INC.:
Preferred stock minority interest -- 99
FIRST NATIONAL BANK OF SPRINGDALE:
Notes payable to Federal Home Loan Bank*:
Matures through April 1, 2009 -- 5.885% 929 1,000
Matures through June 2, 2009 -- 5.885% 570 600
Matures through May 1, 2009 -- 5.698% 590 644
Matures through April 1, 2005 -- 7.345% 1,166 --
- -------------------------------------------------------------------------------------------------------------------------
Total $409,676 $358,663
=========================================================================================================================
<FN>
* These Federal Home Loan Bank borrowings are collateralized with $974.0 million first-lien permanent mortgage loans.
</FN>
Annual principal repayment requirements as of December 31, 2000, are as follows:
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------
2001 $ 420
2002 426
2003 50,435
2004 442
2005 126,336
2006 and after 233,725
- -------------------------------------------------------------------------------------------------------------------------
F-53 First Tennessee National Corporation
84
NOTE 11 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN FIRST TENNESSEE'S
JUNIOR SUBORDINATED DEBENTURES
On December 30, 1996, First Tennessee, through its underwriters, sold to
institutional investors $100 million of capital securities. First Tennessee
Capital I (Capital I), a Delaware business trust wholly owned by First
Tennessee, issued $100 million of Capital Securities, Series A at 8.07%. The
proceeds were upstreamed to First Tennessee as junior subordinated debt under
the same terms and conditions. First Tennessee has, through various contractual
arrangements, fully and unconditionally guaranteed all of Capital I's
obligations with respect to the capital securities. These capital securities
qualify as Tier I capital and are presented in the Consolidated Statements of
Condition as "Guaranteed Preferred Beneficial Interests in First Tennessee's
Junior Subordinated Debentures." The sole asset of Capital I is $103 million of
junior subordinated debentures issued by First Tennessee. These junior
subordinated debentures also carry an interest rate of 8.07 percent. Both the
capital securities of Capital I and the junior subordinated debentures of First
Tennessee will mature on January 6, 2027; however, under certain circumstances,
the maturity of both may be shortened to a date not earlier than January 6,
2017.
NOTE 12 - PREFERRED STOCK OF SUBSIDIARY
On September 14, 2000, FT Real Estate Securities Company, Inc. (FTRESC), an
indirect wholly owned subsidiary of First Tennessee, issued 50 shares of 9.50%
Cumulative Preferred Stock, Series B (Series B Preferred Shares), with a
liquidation preference of $1.0 million per share to other wholly owned
subsidiaries of First Tennessee. FTRESC is a real estate investment trust (REIT)
established for the purpose of acquiring, holding and managing real estate
mortgage assets. During 2000, an aggregate total of 41 of the Series B Preferred
Shares were sold privately to nonaffiliates. Dividends on the Series B Preferred
Shares are cumulative and are payable semi-annually. The dividends are recorded
in noninterest expense.
The Series B Preferred Shares are mandatorily redeemable on March 31, 2031, and
redeemable at the discretion of FTRESC in the event that the Series B Preferred
Shares cannot be accounted for as Tier 2 regulatory capital or there is more
than an insubstantial risk that dividends paid with respect to the Series B
Preferred Shares will not be fully deductible. They are not subject to any
sinking fund and are not convertible into any other securities of FTRESC, First
Tennessee or any of its subsidiaries. The shares are, however, automatically
exchanged at the direction of the Office of the Comptroller of the Currency for
preferred stock of FTBNA, having substantially the same terms as the Series B
Preferred Shares in the event FTBNA becomes undercapitalized, insolvent or in
danger of becoming undercapitalized. The total amount of "Preferred stock of
subsidiary" publicly issued and outstanding on December 31, 2000, as reported on
the Consolidated Statements of Condition, was $38.4 million.
First Tennessee National Corporation F-54
85
NOTE 13 - REGULATORY CAPITAL
First Tennessee is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on First Tennessee's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
specific capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices must be met. Capital amounts and classification are also
subject to qualitative judgment by the regulators about components, risk
weightings and other factors. Quantitative measures established by regulation to
ensure capital adequacy require First Tennessee to maintain minimum amounts and
ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1
capital to average assets (leverage). Management believes, as of December 31,
2000, that First Tennessee met all capital adequacy requirements to which it was
subject.
The actual capital amounts and ratios of First Tennessee and FTBNA (the primary
banking subsidiary of First Tennessee) are presented in the table below:
First Tennessee National First Tennessee Bank
Corporation National Association
----------------------------------- --------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
ON DECEMBER 31, 2000:
Actual:
Total Capital $1,805,986 12.11% $1,634,920 11.48%
Tier 1 Capital 1,327,496 8.90 1,223,667 8.59
Leverage 1,327,496 6.98 1,223,667 6.76
For Capital Adequacy Purposes:
Total Capital 1,192,764 => 8.00 1,139,406 => 8.00
Tier 1 Capital 596,382 => 4.00 569,703 => 4.00
Leverage 761,136 => 4.00 724,532 => 4.00
To Be Well Capitalized Under Prompt
Corrective Action Provisions:
Total Capital 1,490,955 => 10.00 1,424,258 => 10.00
Tier 1 Capital 894,573 => 6.00 854,555 => 6.00
Leverage 951,420 => 5.00 905,665 => 5.00
- ---------------------------------------------------------------------------------------------------------------------
On December 31, 1999:
Actual:
Total Capital $1,666,565 12.00% $1,494,824 11.18%
Tier 1 Capital 1,218,075 8.77 1,128,553 8.44
Leverage 1,218,075 6.53 1,128,553 6.35
For Capital Adequacy Purposes:
Total Capital 1,111,462 => 8.00 1,069,575 => 8.00
Tier 1 Capital 555,731 => 4.00 534,788 => 4.00
Leverage 746,400 => 4.00 711,379 => 4.00
To Be Well Capitalized Under Prompt
Corrective Action Provisions:
Total Capital 1,389,327 => 10.00 1,336,969 => 10.00
Tier 1 Capital 833,596 => 6.00 802,181 => 6.00
Leverage 933,000 => 5.00 889,224 => 5.00
- ---------------------------------------------------------------------------------------------------------------------
The following table details the actual regulatory capital ratios for other bank
subsidiaries on December 31, 2000:
FNB Peoples and
CBT(1) Springdale(2) Peoples(3) Union(4)
- -----------------------------------------------------------------------------------------------------------------------
ON DECEMBER 31, 2000:
Total Capital 12.58% 13.41% 16.03% 11.58%
Tier 1 Capital 11.33 12.51 14.78 10.49
Leverage 7.71 10.11 10.25 6.87
- -----------------------------------------------------------------------------------------------------------------------
<FN>
(1) Cleveland Bank and Trust Company (2) First National Bank of Springdale (3) Peoples Bank of Senatobia
(4) Peoples and Union Bank
</FN>
F-55 First Tennessee National Corporation
86
NOTE 14 - OTHER INCOME AND OTHER EXPENSE
Following is detail concerning "All other income and commissions" and "All other
expense" as presented in the Consolidated Statements of Income:
(Dollars in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
ALL OTHER INCOME AND COMMISSIONS:
Other service charges $ 23,199 $ 17,430 $ 14,863
Insurance premiums and commissions 12,203 10,912 8,725
Check clearing fees 11,129 11,143 9,199
Other 97,019 76,173 42,304
- -------------------------------------------------------------------------------------------------------------------------
Total $143,550 $115,658 $ 75,091
=========================================================================================================================
ALL OTHER EXPENSE:
Amortization of hedge instruments $ 38,020 $ 49,414 $ 13,345
Contract employment 28,868 43,685 35,937
Legal and professional fees 26,794 22,492 24,551
Advertising and public relations 26,693 30,187 25,184
Computer software 19,205 15,410 11,629
Supplies 18,170 22,006 20,195
Foreclosed real estate 16,080 6,585 31,019
Travel and entertainment 13,891 18,698 19,485
Distributions on guaranteed preferred securities 8,070 8,070 8,070
Fed service fees 7,112 6,471 5,307
Deposit insurance premium 2,589 1,790 1,578
Other 93,706 55,500 58,107
- -------------------------------------------------------------------------------------------------------------------------
Total $299,198 $280,308 $254,407
=========================================================================================================================
NOTE 15 - COMPONENTS OF OTHER COMPREHENSIVE INCOME
Following is detail of "Accumulated other comprehensive income" as presented in
the Consolidated Statements of Condition:
Accumulated
Gain/(Loss) Tax Other
Before-Tax (Expense)/ Comprehensive
(Dollars in thousands) Amount Benefit Income
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1997 $ 15,333
Other comprehensive income:
Unrealized market adjustments for the period $ (51) $ 19 (32)
Less: adjustment for net gains included in net income 3,976 (1,547) 2,429
- --------------------------------------------------------------------------------------------------- -----------
December 31, 1998 $ (4,027) $ 1,566 12,872
===================================================================================================
Other comprehensive income:
Unrealized market adjustments for the period $(54,472) $ 21,227 (33,245)
Less: adjustment for net gains included in net income 2,257 (878) 1,379
- --------------------------------------------------------------------------------------------------- -----------
December 31, 1999 $(56,729) $ 22,105 (21,752)
===================================================================================================
Other comprehensive income:
Unrealized market adjustments for the period $ 55,400 $(21,621) 33,779
Less: adjustment for net losses included in net income (4,207) 1,636 (2,571)
- --------------------------------------------------------------------------------------------------- -----------
DECEMBER 31, 2000 $ 59,607 $(23,257) $ 14,598
=================================================================================================== ===========
First Tennessee National Corporation F-56
87
NOTE 16 - INCOME TAXES
The components of income tax expense/(benefit) are as follows:
(Dollars in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 38,781 $ 64,615 $ 45,374
State 25,558 (14,342) (2,286)
Deferred:
Federal 59,155 60,276 68,528
State (19,073) 21,357 14,926
- -------------------------------------------------------------------------------------------------------------------------
Total $ 104,421 $ 131,906 $ 126,542
=========================================================================================================================
The effective tax rates for 2000, 1999 and 1998 were 30.99 percent, 34.76
percent and 35.86 percent, respectively. Income tax expense was different than
the amounts computed by applying the statutory federal income tax rate to income
before income taxes because of the following:
(Dollars in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Federal income tax rate 35% 35% 35%
- ------------------------------------------------------------------------------------------------------------------------
Tax computed at statutory rate $ 117,951 $ 132,803 $ 123,523
Increase/(decrease) resulting from:
Tax-exempt interest (1,219) (1,454) (2,145)
State income taxes 4,223 4,760 8,222
Sale of preferred stock by subsidiary (10,739) -- --
Other (5,795) (4,203) (3,058)
- ------------------------------------------------------------------------------------------------------------------------
Total $ 104,421 $ 131,906 $ 126,542
========================================================================================================================
A deferred tax asset or liability is recognized for the tax consequences of
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. The tax consequence is calculated
by applying enacted statutory tax rates, applicable to future years, to these
temporary differences. Temporary differences which gave rise to deferred tax
(assets)/liabilities on December 31, 2000 and 1999, were as follows:
(Dollars in thousands) 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Loss reserves $ (63,741) $ (67,278)
Net operating loss carryforwards (13,143) (4,700)
Investments in securities -- (13,757)
Employee benefits (7,915) (5,361)
Other (11,349) (9,004)
- -------------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets (96,148) (100,100)
- -------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Capitalized mortgage servicing rights 329,806 283,272
Depreciation and amortization 17,508 10,945
Investments in securities 14,931 10,423
Deferred loan fees 4,304 7,988
Federal Home Loan Bank stock 9,483 7,783
Capitalized computer software 8,218 6,689
Other 23,114 21,424
- -------------------------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities 407,364 348,524
- -------------------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities $ 311,216 $ 248,424
=========================================================================================================================
F-57 First Tennessee National Corporation
88
NOTE 17 - EARNINGS PER SHARE
The following table shows a reconciliation of earnings per common share to
diluted earnings per common share. All share and per share data reflect the 1998
two-for-one stock split.
(Dollars in thousands, except per share data) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE COMPUTATION:
Net income $ 232,581 $ 247,533 $ 226,380
Weighted average common shares outstanding 129,296,245 130,161,432 128,056,450
Shares attributable to deferred compensation 568,820 411,331 178,556
- --------------------------------------------------------------------------------------------------------------------
Total weighted average common shares outstanding 129,865,065 130,572,763 128,235,006
Earnings per common share $ 1.79 $ 1.90 $ 1.77
====================================================================================================================
DILUTED EARNINGS PER COMMON SHARE COMPUTATION:
Net income $ 232,581 $ 247,533 $ 226,380
Weighted average common shares outstanding 129,865,065 130,572,763 128,235,006
Dilutive effect due to stock options 1,798,166 3,406,177 3,627,484
- --------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, as adjusted 131,663,231 133,978,940 131,862,490
Diluted earnings per common share $ 1.77 $ 1.85 $ 1.72
====================================================================================================================
NOTE 18 - RESTRICTIONS, CONTINGENCIES AND OTHER DISCLOSURES
RESTRICTIONS ON CASH AND DUE FROM BANKS. The commercial banking subsidiaries of
First Tennessee are required to maintain average reserve and clearing balances
with the Federal Reserve Bank under the Federal Reserve Act and Regulation D.
The balances required on December 31, 2000 and 1999, were $162.2 million and
$203.2 million, respectively. These reserves are included in "Cash and due from
banks" on the Consolidated Statements of Condition.
RESTRICTIONS ON DIVIDENDS. Dividends are paid by First Tennessee from its
assets, which are mainly provided by dividends from its subsidiaries. Certain
regulatory restrictions exist regarding the ability of the banking subsidiaries
to transfer funds to First Tennessee in the form of cash, dividends, loans or
advances. As of December 31, 2000, the banking subsidiaries had undivided
profits of $1,082.2 million of which $334.5 million was available for
distribution to First Tennessee as dividends without prior regulatory approval.
RESTRICTIONS ON INTERCOMPANY TRANSACTIONS. Under Federal banking law, banking
subsidiaries may not extend credit to the parent company in excess of 10 percent
of the banks' capital stock and surplus, as defined, or $171.8 million on
December 31, 2000. The parent company had borrowings of $53.2 million from FTBNA
on December 31, 2000. Certain loan agreements also define other restricted
transactions related to additional borrowings.
CONTINGENCIES. In June 1998, a judgment entered in the circuit court of Houston
County, Alabama became final, approving a settlement of a class action filed
against FTBNA on behalf of persons in Alabama who had financed with FTBNA their
purchases of satellite dish television systems (satellite systems). All
individual lawsuits previously filed in state court in Alabama relating to the
financing of satellite systems by FTBNA were finally settled in 1997.
In May 1996, FTBNA was named as a defendant in a purported nationwide class
action lawsuit filed in federal court in Alabama in which plaintiffs assert that
FTBNA and another defendant engaged in unfair and deceptive practices in
connection with the financing of satellite systems. The complaint alleges
violations of the Truth in Lending Act (TILA) and the federal RICO statute, and
fraud by suppression with respect to Alabama residents. In addition to these
theories, plaintiffs proceed against FTBNA on an agency theory. The complaint
seeks unquantified compensatory, triple, and punitive damages. FTBNA has filed a
motion requesting the dismissal of plaintiffs' RICO and fraudulent suppression
claims, but the court has not ruled on the motion. The plaintiffs filed motions
seeking certification of a nationwide class on the TILA and RICO claims and a
statewide subclass on the fraud claims. In February 2000, the Magistrate Judge
filed a recommendation granting in part and denying in part plaintiffs' motion,
concluding that the case should be certified as a nationwide class action on the
TILA statutory damages claim which has a cap of $500,000 plus attorney fees. The
Magistrate Judge also stated that it was his recommendation that no other
classes be certified. FTBNA filed objections to the Magistrate Judge's
recommendation. In March 2000, the district court adopted the recommendation of
the Magistrate Judge that the class be certified as to the TILA statutory
damages claim, but
First Tennessee National Corporation F-58
89
NOTE 18 - RESTRICTIONS, CONTINGENCIES AND OTHER DISCLOSURES (CONTINUED)
modified the class definition to exclude persons who were included in the
Houston County, Alabama class action settlement. Plaintiffs have filed a motion
for reconsideration of the ruling on their class certification motion. FTBNA has
filed an Opposition to Plaintiffs' Motion to Reconsider. In addition to the
Alabama lawsuits, in September 1997, a nationwide class action was filed in
state court in Tennessee relating to the same satellite systems financing
program. The complaint asserts that material facts were withheld from the
purchasers in connection with the financing, that FTBNA and First Tennessee were
unjustly enriched from the sale of such systems, and that FTBNA and First
Tennessee violated the Tennessee Consumer Protection Act. The trial court
entered an order of conditional class certification and FTBNA and First
Tennessee requested a review of that certification order for the purpose of
having the conditional order set aside. A decision was rendered by the trial
court in January 2001 denying that motion. The case is presently certified as a
class action and FTBNA and First Tennessee have filed a request for an
interlocutory appeal on this issue. FTBNA and First Tennessee also filed a
motion to hold this case in abeyance pending the resolution of the federal court
case in Alabama in which many of the same issues are being addressed. That
motion has been argued, although the court has not made a determination at this
time. In 1999, three additional cases relating to the financing of satellite
systems by FTBNA were filed. One case, originally filed in the Circuit Court of
Humphreys County, Mississippi, was removed to the United States District Court
for the Northern District of Mississippi where it is now pending. Plaintiffs
allege violations of a Mississippi statute, Mississippi common law, and seek
rescission and cancellation of the contracts. The complaint seeks $45 million in
actual damages and $900 million in punitive damages. The other two cases, filed
in state court in Arkansas and alleging similar causes of action under the laws
of the state of Arkansas, were settled in January 2001 for an immaterial amount.
In 2000, four additional satellite dish cases were filed in Mississippi. In two
of these cases, filed in the Choctaw Tribal Court, plaintiffs allege false and
negligent misrepresentations, fraudulent disclosure, fraud, negligent and wanton
hiring, training, and supervision, and mental and emotional distress. Each
complaint seeks rescission of the contract, the return of all monies paid,
unquantified actual and punitive damages, attorneys' fees and injunctive relief.
The remaining two cases, originally filed in state court in Mississippi and
alleging similar causes of action, have been removed to federal court.
Plaintiffs have filed a motion to remand in these two cases. The motions have
presently not been argued. FTBNA and First Tennessee deny liability, deny that
any co-defendant is their agent, and intend to defend these actions vigorously.
In January 2000, the Tennessee Court of Appeals reversed an award of $9 million
in punitive damages which had previously been rendered against FTBNA and
affirmed an award of $209,156 in compensatory damages against FTBNA as well as a
$60,000 award in favor of First Tennessee against the plaintiff. The plaintiff
appealed that decision to the Tennessee Supreme Court, which heard arguments in
November 2000. No decision has been rendered. In July 1998, a judgment had been
rendered in the Chancery Court of Shelby County, Tennessee against FTBNA as the
successor by merger to Community Bank of Germantown for $9 million in punitive
damages. The court had previously entered a judgment against FTBNA in the amount
of $209,156 compensatory damages in August 1997, and a judgment in favor of
FTBNA against the plaintiff in the amount of $60,000. The plaintiff had claimed
that Community Bank of Germantown had obtained additional collateral on a loan
by promising to make a new loan to the plaintiff, which was never made. The
litigation was pending at the time of First Tennessee's acquisition of Community
Bank of Germantown in February 1995. FTBNA had appealed the decision of the
Chancery Court.
In addition to these cases, various other claims and lawsuits are pending
against First Tennessee and its subsidiaries. Although First Tennessee cannot
predict the outcome of the foregoing actions, after consulting with counsel, it
is management's opinion that when resolved, the amount, if any, will not have a
material adverse effect on the consolidated financial statements of First
Tennessee and its subsidiaries.
OTHER DISCLOSURES - COMPANY OWNED LIFE INSURANCE. First Tennessee has purchased
life insurance on certain of its employees and is the beneficiary on these
policies. On December 31, 2000, the cash surrender value of these policies,
which is included in "Capital markets receivables and other assets" on the
Consolidated Statements of Condition, was $192.5 million. There are no
restrictions on the proceeds from these benefits, and First Tennessee has not
borrowed against the cash surrender value of these policies.
F-59 First Tennessee National Corporation
90
NOTE 19 - SHAREHOLDER PROTECTION RIGHTS AGREEMENT
On October 20, 1998, First Tennessee adopted a Shareholder Protection Rights
Agreement (the "Agreement") and declared a dividend of one right on each
outstanding share of common stock held on November 2, 1998, or issued thereafter
and prior to the time the rights separate and thereafter pursuant to options and
convertible securities outstanding at the time the rights separate.
The Agreement provides that until the earlier of the tenth business day (subject
to certain adjustments by the board of directors) after a person or group
commences a tender or exchange offer that will, subject to certain exceptions,
result in such person or group owning 10 percent or more of First Tennessee's
common stock, or the tenth business day (subject to certain adjustments by the
board) after the public announcement by First Tennessee that a person or group
owns 10 percent or more of First Tennessee's common stock, the rights will be
evidenced by the common stock certificates, will automatically trade with the
common stock, and will not be exercisable. Thereafter, separate rights
certificates will be distributed, and each right will entitle its holder to
purchase one one-hundredth of a share of participating preferred stock having
economic and voting terms similar to those of one share of common stock for an
exercise price of $150.
If any person or group acquires 10 percent or more of First Tennessee's common
stock, then each right (other than rights beneficially owned by holders of 10
percent or more of the common stock or affiliates, associates or transferees
thereof, which rights become void) will entitle its holder to purchase, for the
exercise price, a number of shares of First Tennessee common stock or
participating preferred stock having a market value of twice the exercise price.
Also, if there is a 10 percent shareholder and First Tennessee is involved in
certain significant transactions, each right will entitle its holder to
purchase, for the exercise price, a number of shares of common stock of the
other party having a market value of twice the exercise price. If any person or
group acquires 10 percent or more (but not more than 50 percent) of First
Tennessee's common stock, First Tennessee's board of directors may, at its
option, exchange one share of First Tennessee common stock or one one-hundredth
of a share of participating preferred stock for each right (other than rights
which have become void). The board of directors may amend the Agreement in any
respect prior to the tenth business day after announcement by First Tennessee
that a person or group has acquired 10 percent or more of First Tennessee's
common stock. The rights will expire on the earliest of the following times: the
time of the exchange described in the second preceding sentence; December 31,
2009; or the date the rights are redeemed as described in the following
sentence. The rights may be redeemed by the board of directors for $0.001 per
right until 10 business days after First Tennessee announces that any person or
group owns 10 percent or more of First Tennessee's common stock.
NOTE 20 - SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS
SAVINGS PLAN. Substantially all employees of First Tennessee are covered by a
contributory savings plan in conjunction with a flexible benefits plan. During
the year, First Tennessee makes contributions to each employee's flexible
benefits plan account. These contributions are based on length of service and a
percentage of the employee's salary. The employees have the option to direct a
portion or all of the contribution into their savings plan accounts. Employees
may also make pre-tax and after-tax personal contributions to the savings plan.
First Tennessee matches the majority of employee pre-tax contributions invested
in First Tennessee's common stock at a rate of $.50 for each $1.00 invested up
to 6 percent of the employee's qualifying salary. Contributions made by First
Tennessee to the flexible benefits plan were $19.5 million for 2000, $18.8
million for 1999 and $15.7 million for 1998.
PENSION PLAN. Substantially all employees of First Tennessee are covered by a
noncontributory, defined benefit pension plan. Pension benefits are based on
years of service, average compensation near retirement and estimated social
security benefits at age 65. The annual funding is based on an actuarially
determined amount using the entry age cost method.
OTHER EMPLOYEE BENEFITS. First Tennessee provides postretirement medical
insurance to full-time employees retiring under the provisions of the First
Tennessee Pension Plan. The postretirement medical plan is contributory with
retiree contributions adjusted annually. The plan is based on criteria that are
a combination of the employee's age and years of service and utilizes a two-step
approach. For any employee retiring on or after January 1, 1995, First Tennessee
will contribute a fixed amount based on years of service and age at time of
retirement.
First Tennessee National Corporation F-60
91
NOTE 20 - SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
ACTUARIAL ASSUMPTIONS. The actuarial assumptions used in the defined benefit
pension plan and the other employee benefit plans were as follows:
Pension Benefits Postretirement Benefits
----------------------------------- ------------------------------
2000 1999 1998 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
SEPTEMBER 30 MEASUREMENT DATE
Discount rate 7.75% 7.50% 6.75% 7.75% 7.50% 6.75%
Expected return on plan assets 10.00 10.00 10.00 10.00 10.00 10.00
Expected return on plan assets dedicated to
employees who retired prior to January 1, 1993 N/A N/A N/A 6.50 6.50 6.50
Rate of compensation increase 4.00 4.00 4.00 N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
The components of net periodic benefit cost for the plan years 2000, 1999 and
1998 were as follows:
Pension Benefits Postretirement Benefits
------------------------------------ --------------------------------
(Dollars in thousands) 2000 1999 1998 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 9,024 $ 8,341 $ 7,258 $ 900 $ 832 $ 712
Interest cost 12,868 11,468 9,971 1,824 1,711 1,637
Expected return on plan assets (23,853) (20,950) (18,773) (1,696) (1,480) (1,374)
Amortization of prior service cost 338 322 322 6 3 3
Recognized gains & losses -- 311 -- (154) -- (107)
Amortization of transition obligation or asset (460) (460) (460) 989 989 989
- -------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost/(benefit) $ (2,083) $ (968) $ (1,682) $ 1,869 $ 2,055 $ 1,860
=========================================================================================================================
F-61 First Tennessee National Corporation
92
NOTE 20 - SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
The following table sets forth the plans' funded status reconciled to the
amounts shown in the Consolidated Statements of Condition:
Pension Benefits Postretirement Benefits
---------------------------- ---------------------------
(Dollars in thousands) 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of plan year $ 174,039 $ 172,065 $ 25,059 $ 26,064
Service cost 9,024 8,341 900 832
Interest cost 12,868 11,468 1,824 1,711
Amendments -- 228 (2,369) 43
Actuarial gain (7,572) (13,131) (65) (1,837)
Benefits paid (6,061) (4,932) (1,617) (1,754)
- -----------------------------------------------------------------------------------------------------------------
Benefit obligation at end of plan year $ 182,298 $ 174,039 $ 23,732 $ 25,059
=================================================================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of plan year $ 258,552 $ 228,601 $ 19,129 $ 16,860
Actual return on plan assets 41,747 32,029 3,222 2,986
Employer contribution -- 2,854 972 1,037
Benefits paid (6,061) (4,932) (1,617) (1,754)
- -----------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of plan year $ 294,238 $ 258,552 $ 21,706 $ 19,129
=================================================================================================================
NET FUNDED STATUS AT SEPTEMBER 30 $ 111,940 $ 84,513 $ (2,026) $ (5,930)
Unrecognized net actuarial loss (41,392) (15,926) (6,860) (5,423)
Unrecognized net transitional (asset)/obligation (940) (1,400) 11,862 12,851
Unrecognized prior service cost 2,250 2,588 (2,300) 75
- -----------------------------------------------------------------------------------------------------------------
Prepaid benefit cost at September 30 71,858 69,775 676 1,573
Contributions paid from October 1 to December 31 -- -- 1,040 972
- -----------------------------------------------------------------------------------------------------------------
Prepaid benefit cost at December 31 $ 71,858 $ 69,775 $ 1,716 $ 2,545
=================================================================================================================
The following table sets forth the amounts and types of mutual funds managed by
FTBNA that are included in plan assets.
Pension Benefits Postretirement Benefits
-------------------------- ----------------------------
(Dollars in thousands) 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------
First Funds Capital Appreciation Portfolio Class I $ 43,970 $ 28,717 $2,461 $1,528
First Funds Growth & Income Portfolio Class I 138,749 121,391 7,693 6,164
First Funds Bond Portfolio Class I 96,611 93,231 4,876 4,275
- -----------------------------------------------------------------------------------------------------------------
The cost of health care benefits was projected to increase at an annual per
capita rate of 5.75 percent in 2000 and remain at an even level thereafter. In
1999, the annual rate of increase was assumed to be 6.75 percent decreasing
evenly to a rate of 5.75 percent by the year 2000 and remaining at an even level
thereafter. In 1998, the annual rate of increase was assumed to be 7.75 percent
decreasing evenly to a rate of 5.75 percent by the year 2000 and remaining at
that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
(Dollars in thousands) 1% Increase 1% Decrease
- -----------------------------------------------------------------------------------------------------------------
Adjusted total service and interest cost components $ 2,809 $ 2,656
Adjusted postretirement benefit obligation at end of plan year 24,615 22,951
- -----------------------------------------------------------------------------------------------------------------
First Tennessee provides benefits to former and inactive employees after
employment but before retirement. The obligation/(benefit) recognized in
accordance with accounting standards was $4.8 million in 2000, $.2 million in
1999 and $(.2) million in 1998.
First Tennessee National Corporation F-62
93
NOTE 20 - SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
Medical and group life insurance expenses incurred for active employees are
shown in the following table:
(Dollars in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Medical plan expense based on claims incurred $17,679 $14,558 $12,322
Participants 6,522 7,567 6,689
- ------------------------------------------------------------------------------------------------------------------
Group life insurance expense based on benefits incurred $ 1,271 $ 1,392 $ 1,120
Participants 9,811 10,860 10,097
- ------------------------------------------------------------------------------------------------------------------
NOTE 21 - STOCK OPTION, RESTRICTED STOCK INCENTIVE, AND DIVIDEND REINVESTMENT
PLANS
At its January 1998 meeting, the board of directors authorized a two-for-one
split of First Tennessee's common stock. The shares were distributed February
20, 1998, to shareholders of record on February 6, 1998. Share and per share
amounts in the accompanying text and tables have been adjusted for this stock
split.
STOCK OPTION PLANS. First Tennessee issues non-qualified stock options under
various plans to employees, non-employee directors, and bank advisory board
members. The plans provide for the issuance of First Tennessee common stock at a
price equal to its fair market value at the date of grant; however, the exercise
price may be less than the fair market value if the grantee has agreed to
receive the options in lieu of compensation. The foregone compensation plus the
exercise price must equal the fair market value of the stock on the date of
grant. All options expire 10 years from the date of grant, except for those
options that were part of compensation deferral, which expire 20 years from the
date of grant. There were 7,996,708 shares available for option plan grants on
December 31, 2000.
As a result of plan amendments adopted by the board of directors during 1997,
employees may defer the receipt of shares upon the exercise of stock options.
The summary of stock option activity is shown below:
Weighted
Options Average
Outstanding Exercise Price
- ------------------------------------------------------------------------------------------------------------------
January 1, 1998 12,153,230 $ 13.85
Options granted 4,069,623 30.16
Options exercised (2,468,821) 11.73
Options canceled (499,430) 21.20
------------
December 31, 1998 13,254,602 18.96
============
Options exercisable 10,185,877 16.97
- ------------------------------------------------------------------------------------------------------------------
January 1, 1999 13,254,602 $ 18.96
Options granted 6,151,908 34.28
Options exercised* (1,982,652) 17.10
Options canceled (524,348) 32.27
------------
December 31, 1999 16,899,510 24.33
============
Options exercisable 12,316,124 21.06
- ------------------------------------------------------------------------------------------------------------------
January 1, 2000 16,899,510 $ 24.33
Options granted 7,423,312 17.56
Options exercised* (1,491,040) 12.32
Options canceled (1,575,966) 27.39
------------
December 31, 2000 21,255,816 22.58
============
Options exercisable 17,246,539 21.18
- ------------------------------------------------------------------------------------------------------------------
<FN>
* Stock options exercised for 2000 and 1999, respectively, included 112,306 and 106,392 options converted to stock
equivalents as part of the deferred compensation program.
</FN>
F-63 First Tennessee National Corporation
94
NOTE 21 - STOCK OPTION, RESTRICTED STOCK INCENTIVE, AND DIVIDEND REINVESTMENT
PLANS (CONTINUED)
The following table summarizes information about stock options outstanding on
December 31, 2000:
Weighted Weighted
Weighted Average Average
Average Exercise Exercise
Remaining Price - Price -
Options Contractual Options Options Options
Exercise Price Range Outstanding Life Outstanding Exercisable Exercisable
- ------------------------------------------------------------------------------------------------------------------
$ 4.00 - $14.00 2,865,492 6.81 years $ 10.05 2,865,492 $ 10.05
$14.01 - $24.00 10,162,967 13.03 years 18.13 8,555,908 18.72
$24.01 - $34.00 5,807,629 16.55 years 30.22 5,794,002 30.21
$34.01 - $44.00 2,419,728 7.92 years 37.77 31,137 39.11
- ------------------------------------------------------------------------------------------------------------------
First Tennessee accounts for these plans under APB Opinion No. 25 pursuant to
which recognized compensation costs are negligible. Had compensation cost for
these plans been determined consistent with SFAS No. 123, First Tennessee's net
income and earnings per share would have been reduced to the following pro forma
amounts:
December 31
-----------------------------------------
(Dollars in thousands except per share data) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 232,581 $ 247,533 $ 226,380
Pro forma net income 216,444 237,948 221,252
Earnings per share, as reported 1.79 1.90 1.77
Pro forma earnings per share 1.67 1.82 1.73
- ------------------------------------------------------------------------------------------------------------------
Total compensation costs that would have been recognized in income under SFAS
No. 123 for all stock-based compensation awards was $26.4 million for 2000,
$15.7 million for 1999 and $8.4 million for 1998.
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. First Tennessee
used the Black-Scholes Option Pricing Model to estimate the fair value of stock
options granted in 2000, 1999 and 1998, with the following assumptions:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Expected dividend yield 2.84% 3.03% 3.06%
Expected option lives of options issued at market 6.56 years 4.83 years 6.21 years
Expected option lives of options issued below market 2.08 years 2.15 years 2.20 years
Expected volatility 24.25% 20.04% 18.94%
Risk-free interest rates 6.50% 5.30% 5.54%
- ------------------------------------------------------------------------------------------------------------------
Weighted
Average Fair
Number Value per Option
Issued at Grant Date
- ------------------------------------------------------------------------------------------------------------------
2000:
Options issued at market on the date of grant 3,142,929 $5.34
Options issued below market on the date of grant 4,280,383 5.20
- ------------------------------------------------------------------------------------------------------------------
1999:
Options issued at market on the date of grant 2,720,585 $7.71
Options issued below market on the date of grant 3,431,323 8.01
- ------------------------------------------------------------------------------------------------------------------
1998:
Options issued at market on the date of grant 1,584,613 $8.35
Options issued below market on the date of grant 2,485,010 6.69
- ------------------------------------------------------------------------------------------------------------------
First Tennessee National Corporation F-64
95
NOTE 21 - STOCK OPTION, RESTRICTED STOCK INCENTIVE, AND DIVIDEND REINVESTMENT
PLANS (CONTINUED)
RESTRICTED STOCK INCENTIVE PLANS. First Tennessee has authorized the issuance of
its common stock for awards to executive employees who have a significant impact
on the profitability of First Tennessee under restricted stock incentive plans.
Additionally, one of the plans provides for 6,000 shares of restricted stock to
be granted to each new non-employee director upon election to the board of
directors with restrictions lapsing as defined in the plans. In 2000 First
Tennessee granted 10,000 restricted shares under the plans. In 1999, 170,112
restricted shares were granted and 3,849 shares were granted in 1998.
Compensation expense related to these plans was $2.0 million, $2.1 million and
$1.2 million for the years 2000, 1999 and 1998, respectively. There were 679,441
shares available for restricted stock incentive grants on December 31, 2000.
The board of directors approved amendments to the restricted stock plan during
1998 permitting deferral by participants of the receipt of restricted stock
prior to the lapse of restrictions.
DIVIDEND REINVESTMENT PLAN. The Dividend Reinvestment and Stock Purchase Plan,
as amended in 1995, authorizes the sale of First Tennessee's common stock from
authorized, but unissued common stock or from shares acquired on the open market
to shareholders who choose to invest all or a portion of their cash dividends
and make optional cash payments of $25 to $10,000 per quarter without paying
commissions. Since 1988, shares for this plan have been purchased on the open
market. The price of the shares purchased directly from First Tennessee is the
mean between the high and low sales price on the investment date. The price of
shares purchased on the open market is the average price paid.
NOTE 22 - BUSINESS SEGMENT INFORMATION
First Tennessee provides traditional retail/commercial banking and other
financial services to its customers. These products and services are categorized
into two broad groups: a regional banking group and national lines of business.
The regional banking group provides a comprehensive package of financial
services including traditional banking, trust services, investments, asset
management, insurance and credit card services to its customers. Banking
subsidiaries offer general banking products through financial centers in 23
Tennessee counties, in northern Mississippi and in northwest Arkansas as well as
through consumer finance offices in 10 states nationwide. The national lines of
business include mortgage banking, capital markets and transaction processing.
Mortgage banking offers first and second mortgages through origination offices
in 31 states and also services a multi-billion dollar portfolio. Capital markets
offers investment securities and advisory services such as portfolio analysis,
tax planning and loan securitization to institutional clients nationwide through
offices in Chicago, Dallas, Kansas City, Memphis, Mobile, Nashville and New
York. Transaction processing includes credit card merchant processing,
nationwide check clearing and remittance processing. The Other segment is used
to isolate corporate items such as expense related to guaranteed preferred
beneficial interests in First Tennessee's junior subordinated debentures and
securities gains or losses which include any venture capital gains or losses and
related incentive costs.
First Tennessee's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. The
measurements used in reporting these segments are the same as those reviewed
monthly by the chief operating decision-maker.
Total revenue, expense and asset levels reflect those which are specifically
identifiable or which are allocated based on an internal allocation method. Net
interest income is allocated to the segments using a combination of matched
funding and multiple pool transfer pricing methods. In addition to expenses paid
directly by the segments, allocated expenses may be charged to the lines of
business based on the utilization of resources. Equity is allocated to the
segments through risk analysis that incorporates the appropriate level of
credit, operating, market and franchise risk factors. Because the allocations
are based on internally developed assignments and allocations, they are to an
extent subjective. This assignment and allocation has been consistently applied
for all periods presented. The following table reflects the approximate amounts
of consolidated revenue, expense, tax, and assets for the three years ended
December 31, for each segment:
F-65 First Tennessee National Corporation
96
NOTE 22 - BUSINESS SEGMENT INFORMATION (CONTINUED)
Regional
Banking Mortgage Capital Transaction
(Dollars in thousands) Group Banking Markets Processing Other CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------
2000
Interest income $ 1,020,350 $ 281,698 $ 44,029 $ 16,969 $ -- $ 1,363,046
Interest expense 482,052 239,251 40,990 2,402 -- 764,695
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 538,298 42,447 3,039 14,567 -- 598,351
Other revenues 361,665 442,768 118,709 144,485 (4,207) 1,063,420
Depreciation and
amortization 55,406 127,833 1,248 7,043 -- 191,530
Other expenses* 497,084 435,527 91,248 100,888 8,492 1,133,239
- -------------------------------------------------------------------------------------------------------------------------
Pre-tax income/(loss) 347,473 (78,145) 29,252 51,121 (12,699) 337,002
Income taxes 119,710 (40,808) 10,920 19,425 (4,826) 104,421
- -------------------------------------------------------------------------------------------------------------------------
Net income/(loss) $ 227,763 $ (37,337) $ 18,332 $ 31,696 $ (7,873) $ 232,581
=========================================================================================================================
Average assets $12,962,487 $ 5,042,760 $761,919 $553,660 $ -- $19,320,826
- -------------------------------------------------------------------------------------------------------------------------
Expenditures for
long-lived assets $ 27,255 $ 7,235 $ 991 $ 9,402 $ -- $ 44,883
- -------------------------------------------------------------------------------------------------------------------------
1999
Interest income $ 877,572 $ 273,149 $ 38,659 $ 17,784 $ -- $ 1,207,164
Interest expense 367,533 214,254 33,760 2,107 -- 617,654
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 510,039 58,895 4,899 15,677 -- 589,510
Other revenues 254,898 640,323 126,905 98,721 2,257 1,123,104
Depreciation and
amortization 41,249 172,673 1,363 3,921 -- 219,206
Other expenses* 456,486 471,354 95,386 82,118 8,625 1,113,969
- -------------------------------------------------------------------------------------------------------------------------
Pre-tax income 267,202 55,191 35,055 28,359 (6,368) 379,439
Income taxes 89,205 21,145 13,199 10,776 (2,419) 131,906
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 177,997 $ 34,046 $ 21,856 $ 17,583 $ (3,949) $ 247,533
=========================================================================================================================
Average assets $12,039,221 $ 5,300,788 $779,893 $500,853 $ -- $18,620,755
- -------------------------------------------------------------------------------------------------------------------------
Expenditures for
long-lived assets $ 61,037 $ 35,625 $ 1,259 $ 8,499 $ -- $ 106,420
- -------------------------------------------------------------------------------------------------------------------------
1998
Interest income $ 850,002 $ 228,113 $ 37,555 $ 18,107 $ -- $ 1,133,777
Interest expense 382,003 175,363 33,101 2,771 -- 593,238
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 467,999 52,750 4,454 15,336 -- 540,539
Other revenues 207,186 562,601 147,360 64,380 3,976 985,503
Depreciation and
amortization 30,647 127,062 1,748 2,878 -- 162,335
Other expenses* 419,272 414,120 109,283 59,372 8,738 1,010,785
- -------------------------------------------------------------------------------------------------------------------------
Pre-tax income 225,266 74,169 40,783 17,466 (4,762) 352,922
Income taxes 79,435 26,951 15,329 6,637 (1,810) 126,542
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 145,831 $ 47,218 $ 25,454 $ 10,829 $ (2,952) $ 226,380
=========================================================================================================================
Average assets $11,200,707 $ 4,304,449 $729,081 $486,494 $ -- $16,720,731
- -------------------------------------------------------------------------------------------------------------------------
Expenditures for
long-lived assets $ 56,988 $ 33,861 $ 1,782 $ 5,633 $ -- $ 98,264
- -------------------------------------------------------------------------------------------------------------------------
<FN>
* Includes loan loss provision.
</FN>
First Tennessee National Corporation F-66
97
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting standards require the disclosure of estimated fair values of all
asset, liability and off-balance sheet financial instruments. The following fair
value estimates are determined as of a specific point in time utilizing various
assumptions and estimates. The use of assumptions and various valuation
techniques, as well as the absence of secondary markets for certain financial
instruments, will likely reduce the comparability of fair value disclosures
between financial institutions. In some cases, book value is a reasonable
estimate of fair value due to the relatively short period of time between
origination of the instrument and its expected realization. The following table
summarizes the book value and estimated fair value of financial instruments
recorded in the Consolidated Statements of Condition as of December 31, 2000 and
1999:
ON DECEMBER 31, 2000 On December 31, 1999
----------------------------- -----------------------------
Book Fair Book Fair
(Dollars in thousands) Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------------
ASSETS:
Loans, net of unearned income:
Floating $ 5,228,815 $ 5,228,890 $ 4,550,445 $ 4,550,465
Fixed 4,949,333 5,028,614 4,783,595 4,706,826
Nonaccrual 61,302 61,302 29,118 29,118
Allowance for loan losses (143,696) (143,696) (139,603) (139,603)
- ------------------------------------------------------------------------------------------------------------------------
Total net loans 10,095,754 10,175,110 9,223,555 9,146,806
Liquid assets 379,676 379,676 429,841 429,841
Mortgage loans held for sale* 1,735,070 1,747,832 2,049,945 2,027,052
Securities available for sale 2,200,741 2,200,741 2,332,356 2,332,356
Securities held to maturity 638,315 619,728 768,936 734,853
Nonearning assets 1,081,800 1,081,800 1,162,332 1,162,332
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Defined maturity $ 5,596,013 $ 5,627,825 $ 4,719,036 $ 4,721,510
Undefined maturity 6,592,678 6,592,678 6,639,665 6,639,665
- ------------------------------------------------------------------------------------------------------------------------
Total deposits 12,188,691 12,220,503 11,358,701 11,361,175
Short-term borrowings 3,437,561 3,437,454 4,406,511 4,404,640
Term borrowings 409,676 402,941 358,663 326,708
Other noninterest-bearing liabilities 216,172 216,172 185,399 184,255
Guaranteed preferred beneficial interests in First
Tennessee's junior subordinated debentures 100,000 87,578 100,000 91,559
Preferred stock of subsidiary 38,428 36,603 -- --
- ------------------------------------------------------------------------------------------------------------------------
<FN>
* Mortgage loans held for sale had an additional fair value related to mortgage servicing rights of approximately $20.6
million and $16.6 million on December 31, 2000 and 1999, respectively.
Information on the fair value of off-balance sheet financial instruments can be found in Note 24 - Financial Instruments with
Off-Balance Sheet Risk.
</FN>
The following describes the assumptions and methodologies used to estimate the
fair value for financial instruments:
FLOATING RATE LOANS. With the exception of floating rate 1-4 family residential
mortgage loans, the fair value is approximated by the book value. Floating rate
1-4 family residential mortgage loans reprice annually and will lag movements in
market rates; whereas, commercial and consumer loans typically reprice monthly.
The fair value for floating rate 1-4 family mortgage loans is calculated by
discounting future cash flows to their present value. Future cash flows are
discounted to their present value by using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
time period. Prepayment assumptions based on historical prepayment speeds have
been applied to the floating rate 1-4 family residential mortgage portfolio.
FIXED RATE LOANS. The fair value is estimated by discounting future cash flows
to their present value. Future cash flows are discounted to their present value
by using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same time period. Prepayment assumptions
based on historical prepayment speeds have been applied to the fixed rate
mortgage and installment loan portfolios.
F-67 First Tennessee National Corporation
98
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
NONACCRUAL LOANS. The fair value is approximated by the book value.
ALLOWANCE FOR LOAN LOSSES. The fair value is approximated by the book value.
Additionally, the credit exposure known to exist in the loan portfolio is
embodied in the allowance for loan losses.
LIQUID ASSETS. The fair value is approximated by the book value. For the purpose
of this disclosure, liquid assets consist of federal funds sold, securities
purchased under agreements to resell, capital markets securities inventory and
investment in bank time deposits.
MORTGAGE LOANS HELD FOR SALE. Fair values are based primarily on quoted market
prices.
SECURITIES AVAILABLE FOR SALE. Fair values are based primarily on quoted market
prices.
SECURITIES HELD TO MATURITY. Fair values for marketable securities are based
primarily on quoted market prices. Fair values for securitized loans are based
upon cash flows discounted at a market yield. Market yields are computed by
adding Treasury yields at year-end plus an appropriate spread estimated by
observing quotes on similarly structured marketable securities and changes in
swap spreads.
NONEARNING ASSETS. The fair value is approximated by the book value. For the
purpose of this disclosure, nonearning assets include cash and due from banks,
accrued interest receivable and capital markets receivables.
DEFINED MATURITY DEPOSITS. The fair value is estimated by discounting future
cash flows to their present value. Future cash flows are discounted by using the
current market rates of similar instruments applicable to the remaining
maturity. For the purpose of this disclosure, defined maturity deposits include
all certificates of deposit and other time deposits.
UNDEFINED MATURITY DEPOSITS. The fair value is approximated by the book value.
For the purpose of this disclosure, undefined maturity deposits include demand
deposits, checking interest accounts, savings accounts, and money market
accounts.
SHORT-TERM BORROWINGS. The fair value of federal funds purchased, securities
sold under agreements to repurchase, commercial paper, bank notes and other
short-term borrowings is approximated by the book value. The fair value for
Federal Home Loan Bank borrowings is determined using discounted future cash
flows.
TERM BORROWINGS. The fair value is approximated by the present value of the
contractual cash flows discounted by the investor's yield which considers First
Tennessee's and FTBNA's debt ratings.
OTHER NONINTEREST-BEARING LIABILITIES. For the purpose of this disclosure, other
noninterest-bearing liabilities include accrued interest payable and capital
markets payables. The fair value is approximated by the book value.
GUARANTEED PREFERRED BENEFICIAL INTERESTS. The fair value is approximated by the
present value of the contractual cash flows discounted by the investor's yield
which considers First Tennessee's debt rating.
PREFERRED STOCK OF SUBSIDIARY. The fair value is approximated by the current
trade amount of similar instruments.
NOTE 24 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
First Tennessee utilizes various financial instruments as part of its risk
management strategy and as a means to meet customers' needs. These instruments
are subject to credit and market risks that are not reflected on the balance
sheet. The activities that currently employ financial instruments with
off-balance sheet risk are mortgage banking, interest rate risk management and
capital markets operations. First Tennessee also enters into commitments for
lending related purposes to meet customers' financial needs. Controls and
monitoring procedures for these instruments have been established and are
routinely revised. The Asset/Liability Committee (ALCO) monitors the usage and
effectiveness of financial instruments. ALCO, in conjunction with senior credit
officers, also periodically reviews and revises counterparty credit limits.
Credit Risk represents the maximum potential loss due to possible
non-performance by obligors and counterparties under the terms of contracts.
First Tennessee manages credit risk by entering into financial instrument
transactions through national exchanges, primary dealers or approved
counterparties, and using mutual margining agreements whenever possible to limit
potential exposure. With exchange-traded contracts, the credit risk is limited
to the clearinghouse used. For non-exchange traded instruments, credit risk may
occur when there is a gain in the fair value of the financial instrument and the
counterparty fails to perform according to the terms of the contract and/or when
the collateral proves to be of insufficient value.
First Tennessee National Corporation F-68
99
NOTE 24 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
Market Risk represents the potential loss due to the decrease in the value of a
financial instrument caused primarily by changes in interest rates, prepayment
speeds or the prices of debt instruments. The measurement of market risk
associated with financial instruments is meaningful only when all related and
offsetting on- and off-balance sheet hedges are aggregated, and the resulting
net positions are identified.
LENDING RELATED
First Tennessee enters into fixed and variable loan commitments with customers.
When these commitments have contract rate adjustments that lag changes in market
rates, the financial instruments have characteristics similar to option
contracts. First Tennessee follows the same credit policies and underwriting
practices in making commitments as it does for on-balance sheet instruments.
Each counterparty's creditworthiness is evaluated on a case-by-case basis. The
amount of collateral obtained, if any, is based on management's credit
evaluation of the counterparty.
Commitments to Extend Credit are contractual obligations to lend to a customer
as long as all established contractual conditions are met. These commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The majority of First Tennessee's loan commitments has
maturities less than one year and reflects the prevailing market rates at the
time of the commitment. Since commitments may expire without being fully drawn
upon, the total contract amount does not necessarily represent future cash
requirements.
Other Commitments include standby and commercial letters of credit and loan
purchase agreements. Standby and commercial letters of credit are conditional
commitments issued by First Tennessee to guarantee the performance and/or
payment of a customer to a third party in connection with specified
transactions. Loan purchase agreements are used as credit enhancement to third
party special purpose entities (SPEs) that originate or purchase qualifying
loans that are funded with commercial paper. The credit risk involved in issuing
commercial and standby letters of credit is essentially the same as that
involved in extending loan facilities to customers.
The following is a summary of the maximum credit exposure of each class of
lending related off-balance sheet financial instruments outstanding on December
31:
(Dollars in millions) 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Commitments to extend credit:
Consumer credit card lines $1,532.7 $2,065.7
Consumer home equity 733.0 595.6
Commercial real estate and construction and land development 1,003.4 743.0
Mortgage banking 716.3 771.6
Commercial and other 1,515.1 1,478.8
- ------------------------------------------------------------------------------------------------------------------
Total loan commitments 5,500.5 5,654.7
Other commitments:
Standby letters of credit 323.7 266.9
Other 235.3 85.0
- ------------------------------------------------------------------------------------------------------------------
Total loan and other commitments $6,059.5 $6,006.6
==================================================================================================================
F-69 First Tennessee National Corporation
100
NOTE 24 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
The following table shows the notional or contractual amounts and related fair
values for the off-balance sheet financial instruments on December 31:
2000 1999
-------------------------- ----------------------------
Notional Fair Notional Fair
(Dollars in millions) Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------
Loan commitments $ 5,500.5 $4.5 $ 5,654.7 $ .1
Other commitments 559.0 5.7 351.9 4.7
- ------------------------------------------------------------------------------------------------------------------
Foreign exchange contracts:
Contracts to buy $ (1.5) $ .1 $ (.5) *
Contracts to sell 1.5 (.1) .5 *
- ------------------------------------------------------------------------------------------------------------------
Net position $ -- $ -- $ --
==================================================================================================================
<FN>
* Amount is less than $100,000.
Mortgage banking loan commitments had an additional fair value related to mortgage servicing rights of
approximately $3.5 million on December 31, 2000, and $8.0 million on December 31, 1999.
</FN>
In addition to these financial instruments, First Tennessee entered into an
equity collar in 2000 to protect the value of stock that is to be received from
an equity investment. The collar consists of the combination of a written call
option and a purchased put option, both of which mature on March 21, 2001. On
December 31, 2000, the fair value of this collar was $2.3 million.
MORTGAGE BANKING
First Tennessee uses both forward sales commitments and option contracts to
protect the market value of mortgage loan commitments in the pipeline and the
mortgage warehouse loans awaiting sale in the secondary market. Adverse market
interest rate changes, between the time a customer receives a rate-lock
commitment and the time the loan is sold to an investor, can erode the value of
that mortgage. Therefore, First Tennessee enters into forward sales commitments
and option contracts to mitigate the interest rate risk associated with the
origination and sale of mortgage loans.
First Tennessee enters into interest rate contracts to mitigate the loss in
value of its mortgage servicing rights from the effects of increased prepayment
activity that generally result from declining interest rates. With respect to
the purchased interest rate contracts, First Tennessee is not exposed to loss
beyond the initial amount used to purchase the hedge instruments. These
financial instruments are included in this discussion to more completely
disclose the servicing hedging position. The credit risk inherent in these
transactions relates to the possibility of counterparties not performing
according to the terms of the contract. This credit risk is controlled through
credit approvals, risk control limits and on-going monitoring procedures through
ALCO. The credit risk is represented by the aggregate fair value of only those
interest rate contracts that currently have a positive fair value.
Interest Rate Forward Contracts are over-the-counter contracts where two parties
agree to purchase and sell a specific quantity of a financial instrument at a
specified price, with delivery or settlement at a specified date. Interest Rate
Option Contracts give the purchaser the right, but not the obligation, to buy or
sell a specified quantity of a financial instrument, at a specified price,
during a specified period of time. Caps and Floors are options that are linked
to a notional principal amount and an underlying indexed interest rate. Exposure
to loss on all interest rate contracts will increase or decrease as interest
rates fluctuate. The following disclosures of the fair value of interest rate
contracts are made using available market information and appropriate valuation
methodologies. Fair value is defined as the amount First Tennessee would receive
or pay in the market to replace the contracts as of the valuation date.
First Tennessee National Corporation F-70
101
NOTE 24 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
2000 1999
------------------------------------ -----------------------------------
Notional Book Fair Notional Book Fair
(Dollars in millions) Value Value Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------------
Interest rate contracts:
Mortgage pipeline and warehouse hedging:
Forward contracts - commitments to sell $ 1,883.1 $ -- $ (12.2) $ 2,137.0 $ -- $ 19.6
Option contracts - caps purchased -- -- -- 1,900.0 17.5 16.2
Servicing portfolio hedging:
Floors
Purchased 2,925.0 63.9 73.1 20,275.0 133.1 26.8
Written (500.0) (6.2) (9.2) -- -- --
Caps:
Purchased -- -- -- 500.0 7.3 9.8
Written -- -- -- (500.0) (11.5) (17.1)
Forwards purchased 870.0 8.3 8.3 -- -- --
Swaptions purchased 1,225.0 21.7 29.9 1,000.0 17.1 13.7
Swaps - receive floating/pay fixed 750.0 69.0 69.0 625.0 (12.7) (12.7)
Swaps - receive floating/pay floating 144.9 15.1 15.1 -- -- --
Other:
Floors
Purchased 12,375.0 15.5 15.5 -- -- --
Written (5,350.0) (15.0) (15.0) -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Residential first-lien mortgage loans are originated by First Tennessee to be
sold in the secondary market. Some of these loans are sold with provisions of
recourse. As of December 31, 2000 and 1999, the outstanding principal amount of
these loans and the amount of credit risk was $169.2 million and $213.2 million,
respectively. A reserve has been established to cover any inherent losses. These
loans are reviewed on a regular basis to ensure that reserves are adequate to
provide for foreclosure losses. In addition, First Tennessee originates, sells
and services loans guaranteed by the Veterans Administration (VA). A VA guaranty
typically covers only the lesser of $46,000 or 25 percent to 50 percent of the
unpaid loan balance. In the event of foreclosure, First Tennessee, as a servicer
of VA loans, has credit risk to the extent that the outstanding loan balance
exceeds the VA guarantee and the value of the underlying real estate. As of
December 31, 2000 and 1999, the outstanding principal balance of VA loans
serviced was $5.3 billion and $5.1 billion, respectively. These loans are
reviewed on a regular basis, and a reserve has been established to cover any
inherent losses.
F-71 First Tennessee National Corporation
102
NOTE 24 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
INTEREST RATE RISK MANAGEMENT
First Tennessee's ALCO focuses on managing market risk by controlling and
limiting earnings volatility attributable to changes in interest rates. Interest
rate risk exists to the extent that interest-earning assets and liabilities have
different maturity or repricing characteristics. First Tennessee uses
off-balance sheet financial instruments that are designed to moderate the impact
on earnings as interest rates change.
Interest Rate Swaps involve the exchange of interest payments at specified
intervals between two parties without the exchange of any underlying principal.
Notional amounts are used in such contracts to calculate interest payments due
to counterparties and do not represent credit exposure. The primary risks
associated with swaps are the exposure to movements in interest rates and the
ability of counterparties to meet the terms of the contracts.
Weighted
Notional Fair Average Final
(Dollars in millions) Value Value Receive Rate Maturity In
- -------------------------------------------------------------------------------------------------------------------------
2000
Interest rate contracts:
Swaps - receive fixed/pay floating** $ 300.0 $ .4 6.803% 2003
Swaps - receive floating/pay floating** 200.0 * 6.862% 2001
Caps:
Purchased 20.0 * Strike 8% 2002
Written (20.0) * Strike 8% 2002
Equity contracts:
Purchased options 1.9 .7 2003
- -------------------------------------------------------------------------------------------------------------------------
1999
Interest rate contracts:
Swaps - receive fixed/pay floating** $ 415.0 $ (.7) 5.245% 2000
Swaps - receive floating/pay floating** 741.7 (.3) 5.870% 2000
Caps:
Purchased 20.0 .1 Strike 8% 2002
Written (20.0) (.1) Strike 8% 2002
Equity contracts:
Purchased options 1.9 .7 2003
- -------------------------------------------------------------------------------------------------------------------------
<FN>
* Amount is less than $100,000.
** The weighted average rate paid on interest rate swaps on December 31, 2000,
was 6.639 percent and 6.062 percent on December 31, 1999.
</FN>
First Tennessee National Corporation F-72
103
NOTE 24 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
CAPITAL MARKETS
Capital markets buys and sells mortgage securities, municipal bonds and other
securities for trading purposes. When these securities settle on a delayed
basis, they are considered forward contracts. These transactions are measured at
fair value, and gains or losses are recognized in earnings as they occur.
Capital markets utilize futures contracts, from time to time, to manage exposure
arising from the inventory position. Credit risk related to these transactions
is controlled through credit approvals, risk control limits and on-going
monitoring procedures through ALCO.
ON FOR THE YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2000
------------------------- -------------------
Net Average
Notional Fair Gain/ Fair
(Dollars in millions) Value Value (Loss) Value
- ------------------------------------------------------------------------------------------------------------------------
Forward contracts:
Commitments to buy:
Gain position $ (483.6) $ .8
Loss position (1,127.6) (4.1)
Commitments to sell:
Gain position 1,339.9 4.5
Loss position 379.6 (1.2)
- ------------------------------------------------------------------------------------------------------------------------
Net position $ 108.3 $ -- $91.2 $(.6)
========================================================================================================================
Option contracts*:
Purchased $ 510.0 $ 3.5 $(1.7) $ .6
Written (510.0) (3.5) 2.1 (.6)
- ------------------------------------------------------------------------------------------------------------------------
Net position $ -- $ -- $ .4 $ --
========================================================================================================================
Swaps:
Receive fixed/pay floating $ 84.5 $ (.7) $ (.6) $(.4)
Receive floating/pay fixed (84.5) .7 .9 .4
- ------------------------------------------------------------------------------------------------------------------------
Net position $ -- $ -- $ .3 $ --
========================================================================================================================
<FN>
*Option contracts include interest rate options, caps and floors.
</FN>
On For the Year Ended
December 31, 1999 December 31, 1999
------------------------ -----------------------
Net Average
Notional Fair Gain/ Fair
(Dollars in millions) Value Value (Loss) Value
- -------------------------------------------------------------------------------------------------------------------------
Forward contracts:
Commitments to buy:
Gain position $ (1,026.3) $ 13.5
Loss position (215.0) (1.6)
Commitments to sell:
Gain position 258.6 2.7
Loss position 1,081.2 (15.0)
- -------------------------------------------------------------------------------------------------------------------------
Net position $ 98.5 $ (.4) $ 114.1 $ (1.1)
=========================================================================================================================
F-73 First Tennessee National Corporation
104
NOTE 25 - SECURITIZATIONS
During 2000, First Tennessee securitized and sold $190 million of indirect
automobile loan receivables and recognized a pre-tax loss of $1.3 million, which
was recorded in other noninterest expense. In the securitization, First
Tennessee retained an interest only strip and servicing rights, both of which
are retained interests in the securitized receivables. First Tennessee receives
servicing fees on the outstanding balance of securitized receivables and retains
the rights to future cash flows arising after the investors in the
securitization trust have received the return for which they contracted. The
investors and the securitization trust have no recourse to First Tennessee's
assets for failure of debtors to pay when due except to the extent of First
Tennessee's rights to future cash flows and any subordinated interests retained.
First Tennessee's retained interests are subordinate to investor's interests and
are subject to credit, prepayment, and interest rate risks on the transferred
financial assets.
First Tennessee uses assumptions and estimates in determining the fair value
allocated to the retained interest at the time of initial sale. These
assumptions and estimates include projections concerning the annual percentage
rates charged to customers, charge-off experience, loan repayment rates, the
cost of funds, and discount rates commensurate with the risks involved. For the
automobile loan securitization completed during 2000, the fair value assigned to
the retained interest at the date of securitization was $8.6 million. Key
economic assumptions used in measuring the retained interests at the time of the
securitization were as follows: an annual prepayment rate of 13 percent, a
weighted average life of 41 months, expected annual credit losses of .97
percent, a discount rate of 9 percent on the servicing asset and 11.5 percent on
the interest-only strip, and a yield of 10.07 percent. On December 31, 2000, the
sensitivity of the current fair value of the retained interests to 10 percent
and 20 percent adverse changes in assumptions was not material.
During 2000, First Horizon Home Loan Corporation (FHHLC) securitized $11.6
billion of single-family residential mortgage loans in primarily proprietary and
agency securitization transactions, and the resulting securities were sold as
senior and subordinate certificates. FHHLC recognized pre-tax gains of $138.2
million on these sales, which were recorded in mortgage banking noninterest
income and securities gains. In certain cases, FHHLC continues to service and
receive servicing fees related to the securitized mortgage loans, and has also
retained interest only strips or senior certificates structured as principal
only strips. FHHLC receives annual servicing fees approximating .35 percent of
the outstanding balance of the underlying loans. In 2000, FHHLC recognized
approximately $230.2 million in mortgage servicing rights through these
securitizations. These mortgage servicing rights, as well as other mortgage
servicing rights held by FHHLC, are discussed further in Note 6 - Mortgage
Servicing Rights. The investors and the securitization trusts have no recourse
to assets of FHHLC or First Tennessee for failure of debtors to pay when due.
FHHLC uses assumptions and estimates in determining the fair value allocated to
retained interests at the time of initial securitization. The key economic
assumptions used in 2000 to measure the fair value of retained interests at the
date of securitization were as follows:
MSR's IO's PO's
- ----------------------------------------------------------------------------------
Weighted average life (in years) 6.0 - 8.7 6.0 - 8.7 8.9 - 9.7
Annual prepayment rate 8.1% - 13.0% 8.1% - 13.0% 7.5% - 9.0%
Annual discount rate 10.3% - 10.5% 10.3% - 10.5% 5.0% - 6.2%
Annual cost to service $43 per loan N/A N/A
Annual earnings on escrow 5.5% - 6.9% N/A N/A
- ----------------------------------------------------------------------------------
The expected static pool credit losses as of December 31, 2000, are
approximately .08 percent of the original principal balance of loans securitized
during 2000. Static pool losses are calculated by summing the actual and
projected future credit losses and dividing them by the original balance of the
securitized loans. The percent above represents weighted average credit losses
for all securitizations during the year.
First Tennessee National Corporation F-74
105
NOTE 25 - SECURITIZATIONS (CONTINUED)
On December 31, 2000, the sensitivity of the current fair value of the mortgage
servicing rights (MSR's), interest only strips (IO's), and principal only strips
(PO's) to immediate 10 percent and 20 percent adverse changes in assumptions are
as follows:
ON DECEMBER 31, 2000
-----------------------------------------------
(Dollars in thousands, except for annual cost to service) MSR's IO's PO's
- ------------------------------------------------------------------------------------------------------------------------
Fair value of retained interests $ 765,128 $ 146,909 $ 4,176
Weighted average life (in years) 6.8 6.7 8.0
Annual prepayment rate 13.0% 13.0% 9.7%
Impact on fair value of 10% adverse change $ (32,310) $ (6,587) $ (114)
Impact on fair value of 20% adverse change (62,009) (12,651) (234)
Annual discount rate on residual cash flows 10.5% 10.5% 7.2%
Impact on fair value of 10% adverse change $ (30,787) $ (5,391) $ (139)
Impact on fair value of 20% adverse change (59,228) (10,397) (260)
Annual cost to service $43 per loan N/A N/A
Impact on fair value of 10% adverse change $ (7,565) N/A N/A
Impact on fair value of 20% adverse change (15,130) N/A N/A
Annual earnings on escrow 5.5% N/A N/A
Impact on fair value of 10% adverse change $ (18,139) N/A N/A
Impact on fair value of 20% adverse change (36,062) N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
These sensitivities are hypothetical and should not be considered to be
predictive of future performance. As the figures indicate, changes in fair value
based on a 10 percent variation in assumptions generally cannot necessarily be
extrapolated because the relationship of the change in assumption to the change
in fair value may not be linear. Also, in this table, the effect of a variation
in a particular assumption on the fair value of the retained interest is
calculated independently from any change in another assumption. In reality,
changes in one factor may result in changes in another, which might magnify or
counteract the sensitivities. Furthermore, the estimated fair values as
disclosed should not be considered indicative of future earnings on these
assets.
First Tennessee Capital Assets Corporation (FTCAC), an indirect wholly-owned
subsidiary of First Tennessee, enters into transactions where mortgage loans are
purchased, pooled, securitized and sold. During 2000, $1.0 billion of mortgage
loans were sold for a pre-tax gain of $7.1 million that was recognized in
capital markets noninterest income. FTCAC does not retain servicing rights or
any other form of residual on these securitizations.
For the year ended December 31, 2000, cash flows received and paid related to
the automobile and real estate loan securitizations were as follows:
(Dollars in thousands) 2000
- -------------------------------------------------------------------------------------------------------------------------
Proceeds from initial securitizations $12,932,272
Servicing fees received 161,514
Purchases of delinquent or foreclosed assets 24,246
Other cash flows received on retained interests* 159,365
- -------------------------------------------------------------------------------------------------------------------------
<FN>
* Other cash flows include all cash flows from interest-only strips, principal-only strips and REMIC securities.
</FN>
In addition to the previously mentioned securitizations, First Tennessee has
securitized certain real estate loans through a real estate mortgage investment
conduit (REMIC) in prior years and retained all of the interests in the
securitized assets. Fair value for these securities are based upon cash flows
discounted at a market yield. Market yields are computed by adding Treasury
yields at year-end plus an appropriate spread estimated by observing quotes on
similarly structured marketable securities and changes in swap spreads. The
retained interest is classified on the balance sheet as "Securities held to
maturity".
F-75 First Tennessee National Corporation
106
NOTE 25 - SECURITIZATIONS (CONTINUED)
On December 31, 2000, the sensitivity of the current fair value of the REMIC
securities to immediate 10 percent and 20 percent adverse changes in assumptions
are as follows:
REMIC
(Dollars in thousands) Securities
- -------------------------------------------------------------------------------------------------------------------------
Fair value of retained interests $ 597,674
Weighted average life (in years) 4.4 - 5.2
Annual prepayment rate 16.5% - 22.0%
Impact on fair value of 10% adverse change $(11,080)
Impact on fair value of 20% adverse change (11,767)
Annual discount rate on residual cash flows 7.7% - 7.9%
Impact on fair value of 10% adverse change $(26,795)
Impact on fair value of 20% adverse change (42,335)
- -------------------------------------------------------------------------------------------------------------------------
As of December 31, 2000, the principal amount of loans securitized and other
loans managed with them, and the principal amount of delinquent loans, in
addition to net credit losses during 2000 are as follows:
Total Principal Principal Amount Net Credit
(Dollars in thousands) Amount of Loans of Delinquent Loans* Losses
- -------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED
ON DECEMBER 31, 2000 DECEMBER 31, 2000
--------------------------------------- ------------------
Type of loan:
Automobile loans $ 363,168 $ 1,600 $ 6,362
Commercial, financial and industrial 3,999,210 40,994 3,680
Real estate residential 31,735,710 190,411 17,016
- ------------------------------------------------------------------------- --------- --------
Total loans managed or securitized** 36,098,088 $ 233,005 $ 27,058
========= ========
Loans securitized and sold (25,963,465)
Loans held for sale or securitization (1,735,070)
Loans securitized and transferred to
investment securities (638,494)
- -------------------------------------------------------------------------
Loans held in portfolio $ 7,761,059
=========================================================================
<FN>
* Includes nonaccrual loans and loans 90 days or more past due.
** Securitized loans are automobile and real estate residential loans in which First Tennessee has a retained interest
other than servicing rights.
</FN>
First Tennessee National Corporation F-76
107
NOTE 26 - PARENT COMPANY FINANCIAL INFORMATION
Following are condensed statements of the parent company:
STATEMENTS OF CONDITION December 31
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash $ 14 $ 2
Securities purchased from subsidiary bank under agreements to resell 70,484 34,726
- -------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 70,498 34,728
Investment in bank time deposits 44,325 76,325
Securities available for sale 59,651 54,708
Investments in subsidiaries at equity:
Bank 1,448,359 1,318,122
Non-bank 35,091 34,333
Other assets 48,105 46,003
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,706,029 $ 1,564,219
=========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Commercial paper and other short-term borrowings $ 19,169 $ 16,272
Accrued employee benefits and other liabilities 71,810 75,667
Term borrowings 230,894 230,813
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 321,873 322,752
Shareholders' equity 1,384,156 1,241,467
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,706,029 $ 1,564,219
=========================================================================================================================
STATEMENTS OF INCOME Year Ended December 31
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Dividend income:
Bank $ 152,994 $ 116,070 $ 122,484
Non-bank 9,021 7,957 6,059
- -------------------------------------------------------------------------------------------------------------------------
Total dividend income 162,015 124,027 128,543
Interest income 6,517 10,147 12,117
Other income 292 250 432
- -------------------------------------------------------------------------------------------------------------------------
Total income 168,824 134,424 141,092
- -------------------------------------------------------------------------------------------------------------------------
Interest expense:
Short-term debt 989 840 1,112
Term borrowings 17,110 20,355 23,594
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense 18,099 21,195 24,706
Compensation, employee benefits and other expense 16,209 14,672 12,085
- -------------------------------------------------------------------------------------------------------------------------
Total expense 34,308 35,867 36,791
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed net income
of subsidiaries 134,516 98,557 104,301
Applicable income taxes (11,176) (12,061) (10,522)
- -------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net income of subsidiaries 145,692 110,618 114,823
Equity in undistributed net income of subsidiaries:
Bank 86,236 136,012 110,566
Non-bank 653 903 991
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 232,581 $ 247,533 $ 226,380
=========================================================================================================================
F-77 First Tennessee National Corporation
108
NOTE 26 - PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 232,581 $ 247,533 $ 226,380
Less undistributed net income of subsidiaries 86,889 136,915 111,557
- ------------------------------------------------------------------------------------------------------------------------
Income before undistributed net income of subsidiaries 145,692 110,618 114,823
Adjustments to reconcile income to net cash provided by operating activities:
Provision/(benefit) for deferred income taxes 1,914 (807) (1,207)
Depreciation and amortization 3,414 3,048 2,101
Gain on sale of securities (40) -- --
Net change in interest receivable and other assets (4,289) (2,112) (5,145)
Net change in interest payable and other liabilities 13,275 17,192 19,415
- ------------------------------------------------------------------------------------------------------------------------
Total adjustments 14,274 17,321 15,164
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 159,966 127,939 129,987
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Securities:
Sales and prepayments 97 9,452 --
Purchases (5,000) (5,000) (35,400)
Decrease/(increase) in investment in bank time deposits 32,000 (23,154) (48,077)
Principal collected on advances to subsidiaries -- 75,500 --
Proceeds from sale of a subsidiary -- 6,652 --
Cash investments in subsidiaries (8,329) (1,758) (9,719)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided/(used) by investing activities 18,768 61,692 (93,196)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Common stock:
Exercise of stock options 16,639 34,457 24,943
Cash dividends (113,958) (98,696) (84,521)
Repurchase of shares (48,542) (41,262) (61,854)
Term borrowings:
Issuance -- 5,000 35,000
Payment -- (83,750) --
Increase/(decrease) in short-term borrowings 2,897 (6,932) 28
- ------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (142,964) (191,183) (86,404)
- ------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 35,770 (1,552) (49,613)
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 34,728 36,280 85,893
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 70,498 $ 34,728 $ 36,280
========================================================================================================================
Total interest paid $ 17,353 $ 22,225 $ 24,035
Total income taxes paid 93,325 46,750 25,631
- ------------------------------------------------------------------------------------------------------------------------
First Tennessee National Corporation F-78
109
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of First Tennessee National
Corporation:
We have audited the accompanying consolidated statements of condition
of First Tennessee National Corporation (a Tennessee corporation) and
subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of First Tennessee
National Corporation and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Memphis, Tennessee
January 16, 2001
F-79 First Tennessee National Corporation
110
CONSOLIDATED HISTORICAL STATEMENTS OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
Growth Rates (%)
------------------
(Dollars in millions except per share data) 2000 1999 1998 1997 1996 1995 00/99 00/95*
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 912.4 $ 751.5 $ 725.9 $ 699.6 $ 653.5 $ 611.0 21.4 + 8.4 +
Investment securities:
Taxable 196.9 175.9 155.9 135.3 136.0 130.9 11.9 + 8.5 +
Tax-exempt 1.9 2.7 3.7 4.5 5.1 4.6 29.6 - 16.2 -
Other earning assets:
Mortgage loans held for sale 197.3 231.3 205.7 76.9 82.1 54.7 14.7 - 29.2 +
Investments in bank time deposits .1 .5 2.0 .5 .7 .2 80.0 - 12.9 -
Federal funds sold and securities
purchased under agreements to resell 20.0 13.9 10.1 11.1 5.0 8.5 43.9 + 18.7 +
Capital markets securities inventory 34.4 31.4 30.5 13.4 14.1 12.6 9.6 + 22.2 +
- ---------------------------------------------------------------------------------------------------------------
Total interest income 1,363.0 1,207.2 1,133.8 941.3 896.5 822.5 12.9 + 10.6 +
- ---------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
Savings 5.5 5.8 7.1 8.2 9.4 10.8 5.2 - 12.6 -
Checking interest and money market 110.8 104.3 113.2 95.1 92.7 95.8 6.2 + 3.0 +
Certificates of deposit under $100,000 and
other time 129.2 123.8 144.9 160.5 166.5 167.8 4.4 + 5.1 -
Certificates of deposit $100,000 and more 254.9 165.9 111.5 47.7 46.3 30.6 53.6 + 52.8 +
Federal funds purchased and securities
sold under agreements to repurchase 169.4 104.7 122.6 89.8 78.0 80.9 61.8 + 15.9 +
Commercial paper and other short-term borrowings 68.9 87.1 72.6 39.2 29.3 25.7 20.9 - 21.8 +
Federal Reserve Bank penalties 1.7 1.3 1.5 1.8 2.3 2.2 30.8 + 5.0 -
Term borrowings 24.3 24.8 19.9 15.9 20.8 18.0 2.0 - 6.2 +
- ---------------------------------------------------------------------------------------------------------------
Total interest expense 764.7 617.7 593.3 458.2 445.3 431.8 23.8 + 12.1 +
- ---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 598.3 589.5 540.5 483.1 451.2 390.7 1.5 + 8.9 +
Provision for loan losses 67.3 57.9 51.3 51.1 35.7 20.6 16.3 + 26.7 +
- ---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION 531.0 531.6 489.2 432.0 415.5 370.1 .1 - 7.5 +
- ---------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 388.8 632.8 558.4 330.1 275.4 213.6 38.6 - 12.7 +
Divestitures 157.6 4.2 .6 - - - NM N/A
Capital markets 117.9 126.8 147.4 98.3 85.9 82.8 7.1 - 7.3 +
Deposit transactions and cash management 116.1 106.2 90.4 86.1 78.2 74.1 9.3 + 9.4 +
Trust services and investment management 65.8 59.8 51.2 40.9 34.7 34.4 10.0 + 13.8 +
Merchant processing 48.2 49.7 37.5 32.1 24.2 19.2 3.0 - 20.3 +
Cardholder fees 29.7 25.6 21.0 19.8 17.2 14.9 16.0 + 14.8 +
Equity securities gains/(losses) .8 2.3 3.9 (.8) (2.5) 3.2 67.4 - 25.1 -
Debt securities gains/(losses) (5.0) - - .1 (.2) (.8) N/A 45.9 -
All other income and commissions 143.5 115.7 75.1 61.5 58.3 51.2 24.1 + 22.9 +
- ---------------------------------------------------------------------------------------------------------------
Total noninterest income 1,063.4 1,123.1 985.5 668.1 571.2 492.6 5.3 - 16.6 +
- ---------------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION 1,594.4 1,654.7 1,474.7 1,100.1 986.7 862.7 3.6 - 13.1 +
- ---------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives and benefits 598.0 633.6 563.6 409.8 385.4 340.5 5.6 - 11.9 +
Amortization of mortgage servicing rights 81.6 103.5 95.5 37.4 26.0 15.0 21.2 - 40.3 +
Occupancy 80.5 73.1 51.4 42.8 39.8 37.9 10.1 + 16.3 +
Operations services 70.9 64.6 58.5 49.9 44.1 38.8 9.8 + 12.8 +
Equipment rentals, depreciation and maintenance 68.2 57.8 45.8 40.1 34.1 31.8 18.0 + 16.5 +
Communications and courier 47.3 51.9 41.5 34.9 33.0 29.9 8.9 - 9.6 +
Amortization of intangible assets 11.7 10.5 11.1 9.6 9.5 8.1 11.9 + 7.7 +
All other expense 299.2 280.3 254.4 160.5 132.6 107.7 6.7 + 22.7 +
- ---------------------------------------------------------------------------------------------------------------
Total noninterest expense 1,257.4 1,275.3 1,121.8 785.0 704.5 609.7 1.4 - 15.6 +
- ---------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 337.0 379.4 352.9 315.1 282.2 253.0 11.2 - 5.9 +
Applicable income taxes 104.4 131.9 126.5 117.6 102.3 88.1 20.8 - 3.5 +
- ---------------------------------------------------------------------------------------------------------------
NET INCOME $ 232.6 $ 247.5 $ 226.4 $ 197.5 $ 179.9 $ 164.9 6.0 - 7.1 +
===============================================================================================================
FULLY TAXABLE EQUIVALENT ADJUSTMENT $ 2.6 $ 3.0 $ 3.8 $ 4.3 $ 5.4 $ 5.0 13.3 - 12.3 -
- ---------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE $ 1.79 $ 1.90 $ 1.77 $ 1.54 $ 1.34 $ 1.21 5.8 - 8.1 +
- ---------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ 1.77 $ 1.85 $ 1.72 $ 1.50 $ 1.32 $ 1.20 4.3 - 8.1 +
- ---------------------------------------------------------------------------------------------------------------
<FN>
* Compound annual growth rate.
Certain previously reported amounts have been reclassified to agree with current presentation. Per share data reflect
the 1998 and 1996 two-for-one stock splits.
</FN>
First Tennessee National Corporation F-80
111
CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
2000 1999 Average
----------------------------- ---------------------------- Balance
Interest Average Interest Average Growth(%)
(Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/ --------
(Dollars in millions) Balance Expense Rates Balance Expense Rates 00/99
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Earning assets:
Loans, net of unearned income $ 9,932.0 $ 913.3 9.20% $ 8,818.8 $ 752.4 8.53% 12.6 +
Investment securities:
U.S. Treasury and other U.S. government agencies 1,767.7 119.8 6.78 1,711.1 110.5 6.46 3.3 +
States and municipalities 48.7 3.6 7.49 50.7 3.8 7.56 3.9 -
Other 1,046.3 76.8 7.34 940.9 66.2 7.04 11.2 +
- ------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,862.7 200.2 6.99 2,702.7 180.5 6.68 5.9 +
- ------------------------------------------------------------------------------------------------------------------------
Other earning assets:
Mortgage loans held for sale 2,450.8 197.3 8.05 3,217.7 231.3 7.19 23.8 -
Investment in bank time deposits 2.1 .1 5.07 9.8 .5 4.76 78.6 -
Federal funds sold and securities purchased
under agreements to resell 328.4 20.0 6.10 292.6 13.9 4.75 12.2 +
Capital markets securities inventory 519.5 34.7 6.68 542.1 31.6 5.82 4.2 -
- ------------------------------------------------------------------------------------------------------------------------
Total other earning assets 3,300.8 252.1 7.64 4,062.2 277.3 6.82 18.7 -
- ------------------------------------------------------------------------------------------------------------------------
Total earning assets 16,095.5 1,365.6 8.48 15,583.7 1,210.2 7.77 3.3 +
Allowance for loan losses (144.5) (141.2) 2.3 +
Cash and due from banks 815.8 779.3 4.7 +
Premises and equipment, net 294.6 288.5 2.1 +
Capital markets receivables and other assets 2,259.4 2,110.5 7.1 +
- ------------------------------------------------------------------------------------------------------------------------
Total assets/Interest income $19,320.8 $1,365.6 $18,620.8 $1,210.2 3.8 +
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing deposits:
Savings $ 337.4 $ 5.5 1.64% $ 350.0 $ 5.8 1.65% 3.6 -
Checking interest and money market 3,371.5 110.8 3.29 3,551.2 104.3 2.94 5.1 -
Certificates of deposit under $100,000 and other time 2,310.3 129.2 5.59 2,398.4 123.8 5.16 3.7 -
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing core deposits 6,019.2 245.5 4.08 6,299.6 233.9 3.71 4.5 -
Certificates of deposit $100,000 and more 3,959.7 254.9 6.44 3,163.9 165.9 5.24 25.2 +
Federal funds purchased and securities sold
under agreements to repurchase 2,899.4 169.4 5.84 2,292.9 104.7 4.57 26.5 +
Commercial paper and other short-term borrowings 1,050.4 70.6 6.72 1,631.4 88.4 5.42 35.6 -
Term borrowings 384.3 24.3 6.34 371.1 24.8 6.69 3.5 +
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 14,313.0 764.7 5.34 13,758.9 617.7 4.49 4.0 +
Demand deposits 1,688.0 1,866.6 9.6 -
Other noninterest-bearing deposits 1,193.9 972.0 22.8 +
Capital markets payables and other liabilities 741.8 736.5 .7 +
Guaranteed preferred beneficial interests in
First Tennessee's junior subordinated debentures 100.0 100.0 --
Preferred stock of subsidiary 7.5 -- N/A
Shareholders' equity 1,276.6 1,186.8 7.6 +
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity/
Interest expense $19,320.8 $ 764.7 $18,620.8 $ 617.7 3.8 +
========================================================================================================================
Net interest income-tax equivalent basis/Yield $ 600.9 3.73% $ 592.5 3.80%
Fully taxable equivalent adjustment (2.6) (3.0)
- ------------------------------------------------------------------------------------------------------------------------
Net interest income $ 598.3 $ 589.5
========================================================================================================================
Net interest spread 3.14% 3.28%
Effect of interest-free sources used to fund earning assets .59 .52
- ------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.73% 3.80%
========================================================================================================================
<FN>
Certain previously reported amounts have been reclassified to agree with current
presentation. Yields and corresponding income amounts are adjusted to a fully
taxable equivalent. Earning assets yields are expressed net of unearned income.
Rates are expressed net of unamortized debenture cost for long-term debt. Net
interest margin is computed using total net interest income.
</FN>
F-81 First Tennessee National Corporation
112
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 Average
- ------------------------------ ---------------------------- ---------------------------- --------------------------- Balance
Interest Average Interest Average Interest Average Interest Average Growth(%)
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/ ----------
Balance Expense Rates Balance Expense Rates Balance Expense Rates Balance Expense Rates 00/95*
- -----------------------------------------------------------------------------------------------------------------------------------
$ 8,242.1 $ 727.4 8.83% $ 7,945.1 $701.3 8.83% $ 7,472.1 $655.9 8.78% $ 6,887.2 $ 613.3 8.90% 7.6 +
1,795.2 117.8 6.56 1,963.3 129.3 6.59 2,031.2 131.0 6.45 2,004.3 125.9 6.28 2.5 -
69.8 5.4 7.80 83.7 6.8 8.06 98.1 7.9 8.02 81.4 7.0 8.63 9.8 -
560.8 38.4 6.84 92.4 6.1 6.65 73.9 4.8 6.51 75.3 4.9 6.53 69.3 +
- -----------------------------------------------------------------------------------------------------------------------
2,425.8 161.6 6.66 2,139.4 142.2 6.65 2,203.2 143.7 6.52 2,161.0 137.8 6.38 5.8 +
- -----------------------------------------------------------------------------------------------------------------------
2,911.2 205.7 7.06 1,005.9 76.9 7.64 1,059.4 82.1 7.74 706.1 54.7 7.75 28.3 +
40.8 2.0 4.81 9.8 .5 5.05 14.6 .7 5.05 3.1 .2 5.79 7.5 -
193.4 10.1 5.22 207.1 11.1 5.37 94.2 5.0 5.30 157.5 8.5 5.42 15.8 +
507.2 30.8 6.07 204.8 13.6 6.65 218.5 14.5 6.66 179.8 13.0 7.22 23.6 +
- -----------------------------------------------------------------------------------------------------------------------
3,652.6 248.6 6.80 1,427.6 102.1 7.15 1,386.7 102.3 7.38 1,046.5 76.4 7.30 25.8 +
- -----------------------------------------------------------------------------------------------------------------------
14,320.5 1,137.6 7.94 11,512.1 945.6 8.21 11,062.0 901.9 8.15 10,094.7 827.5 8.20 9.8 +
(133.1) (123.6) (117.1) (113.0) 5.0 +
697.6 658.6 662.8 659.0 4.4 +
222.4 195.1 181.4 166.0 12.2 +
1,613.3 1,038.4 799.2 552.8 32.5 +
- -----------------------------------------------------------------------------------------------------------------------
$16,720.7 $1,137.6 $13,280.6 $945.6 $12,588.3 $901.9 $11,359.5 $ 827.5 11.2 +
=======================================================================================================================
$ 347.5 $ 7.1 2.05% $ 376.5 $ 8.2 2.17% $ 424.3 $ 9.4 2.23% $ 459.5 $ 10.8 2.35% 6.0 -
3,403.7 113.2 3.32 2,963.7 95.1 3.21 2,715.9 92.7 3.41 2,378.9 95.8 4.03 7.2 +
2,588.7 144.9 5.60 2,798.0 160.5 5.74 2,885.2 166.5 5.77 2,872.6 167.8 5.84 4.3 -
- -----------------------------------------------------------------------------------------------------------------------
6,339.9 265.2 4.18 6,138.2 263.8 4.30 6,025.4 268.6 4.46 5,711.0 274.4 4.81 1.1 +
1,992.5 111.5 5.59 843.0 47.7 5.66 835.8 46.3 5.54 531.9 30.6 5.75 49.4 +
2,456.4 122.6 4.99 1,790.1 89.8 5.01 1,588.1 78.0 4.91 1,491.1 80.9 5.43 14.2 +
1,285.5 74.1 5.76 663.0 41.0 6.18 520.1 31.6 6.07 404.2 27.9 6.90 21.0 +
252.7 19.9 7.91 185.5 15.9 8.60 253.7 20.8 8.24 208.9 18.0 8.63 13.0 +
- -----------------------------------------------------------------------------------------------------------------------
12,327.0 593.3 4.81 9,619.8 458.2 4.76 9,223.1 445.3 4.83 8,347.1 431.8 5.17 11.4 +
1,749.0 1,695.8 1,816.1 1,746.8 .7 -
915.0 530.1 268.2 142.7 52.9 +
633.7 457.5 383.4 300.1 19.8 +
100.0 98.6 -- -- N/A
-- -- -- -- N/A
996.0 878.8 897.5 822.8 9.2 +
- -----------------------------------------------------------------------------------------------------------------------
$16,720.7 $ 593.3 $13,280.6 $458.2 $12,588.3 $445.3 $11,359.5 $ 431.8 11.2 +
=======================================================================================================================
$ 544.3 3.80% $487.4 4.23% $456.6 4.13% $ 395.7 3.92%
(3.8) (4.3) (5.4) (5.0)
- -----------------------------------------------------------------------------------------------------------------------
$ 540.5 $483.1 $451.2 $ 390.7
=======================================================================================================================
3.13% 3.45% 3.32% 3.03%
.67 .78 .81 .89
- -----------------------------------------------------------------------------------------------------------------------
3.80% 4.23% 4.13% 3.92%
=======================================================================================================================
<FN>
* Compound annual growth rate
</FN>
F-82 First Tennessee National Corporation
113
CORPORATE OFFICERS
Ralph Horn
Chairman of the Board, President
and Chief Executive Officer
J. Kenneth Glass
President
Retail Financial Services
John C. Kelley, Jr.
President
Business Financial Services
Memphis Financial Services
Susan Schmidt Bies
Executive Vice President
Risk Management
Harry A. Johnson, III
Executive Vice President
General Counsel
Sarah L. Meyerrose
Executive Vice President
Employee Services
John P. O'Connor, Jr.
Executive Vice President
Chief Credit Officer
Elbert L. Thomas, Jr.
Executive Vice President
Chief Financial Officer
James F. Keen
Senior Vice President
Corporate Controller
Milton A. Gutelius, Jr.
Senior Vice President
Treasurer
114
Lenore S. Creson
Corporate Secretary
CORPORATE AND
FIRST TENNESSEE BANK
NATIONAL ASSOCIATION
BOARDS OF DIRECTORS
Robert C. Blattberg
Polk Brothers Distinguished
Professor of Retailing
J. L. Kellogg Graduate School of Management
Northwestern University
Carlos H. Cantu
Senior Chairman
The ServiceMaster Company
George E. Cates
Chairman of the Board
and Chief Executive Officer
Mid-America Apartment Communities, Inc.
J. Kenneth Glass
President,
Retail Financial Services
First Tennessee National Corporation
First Tennessee Bank National Association
James A. Haslam, III
Chief Executive Officer
Pilot Corporation
Ralph Horn
Chairman of the Board, President
and Chief Executive Officer
First Tennessee National Corporation
First Tennessee Bank National Association
John C. Kelley, Jr.
President,
Business Financial Services
President, Memphis Financial Services
First Tennessee National Corporation
First Tennessee Bank National Association
115
R. Brad Martin
Chairman of the Board
and Chief Executive Officer
Saks, Incorporated
Joseph Orgill, III
Chairman of the Board
Orgill, Inc.
Vicki R. Palmer
Senior Vice President, Treasurer
And Special Assistant to CEO
Coca-Cola Enterprises Inc.
Michael D. Rose
Private Investor
William B. Sansom
Chairman of the Board
and Chief Executive Officer
The H.T. Hackney Co.
All Things Financial
116
SHAREHOLDER INFORMATION
STOCK LISTING
First Tennessee's common stock is traded on the New York Stock Exchange under
the symbol FTN.
SHAREHOLDER ASSISTANCE
If you need help, call us at 1-888-598-4933:
- - For answers to questions about stock transfers, changes of address,
dividend payments or lost certificates
- - To receive information or an enrollment card for direct deposit of
dividend checks
- - To eliminate duplicate mailings of financial information
- - To receive a prospectus and enrollment card for our dividend
reinvestment and stock purchase plan
If you would rather contact our transfer agent directly, call Wells Fargo
Shareholder Services at 1-800-468-9716:
INTERNET
Visit www.firsttennessee.com or www.firsthorizononline.com to find out about our
products and services as well as the latest investor relations information
including stock quotes, news releases and other financial data.
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 10:00 a.m. Tuesday, April 17,
2001, at the First Tennessee Building, 165 Madison Avenue, M-Level Auditorium,
Memphis, Tennessee.
GENERAL INFORMATION
First Tennessee Corporate Headquarters
165 Madison Ave.
Memphis, TN 38103
(901) 523-4444
Information in this report may contain forward-looking statements that are
provided to assist in the understanding of anticipated future performance.
However, a number of important factors could cause actual results to differ
materially from those expressed in the forward-looking statements. Please refer
to the "Forward-Looking Statements" section in the Third Quarter 2000 Form 10-Q
for additional forward-looking information.
FIRST TENNESSEE AFFILIATES
Check Consultants, Inc.
Cleveland Bank & Trust Company
Federal Flood Certification Corp.
First Express Remittance Processing, Inc.
First Horizon Asset Securities, Inc.
First Horizon Home Loan Corporation
First Horizon Insurance Services, Inc.
First Horizon Merchant Services, Inc.
First Horizon Strategic Alliances, Inc.
First National Bank of Springdale
117
First Tennessee Bank National Association
First Tennessee Brokerage, Inc.
First Tennessee Capital Assets Corporation
First Tennessee Commercial Loan Management, Inc.
First Tennessee Housing Corporation
First Tennessee Securities Corporation
FT Insurance Corporation
FT Real Estate Securities Company, Inc.
FT Real Estate Securities Holding Company, Inc.
FT Reinsurance Company
Hickory Capital Corporation
Hickory Venture Capital Corporation
Highland Capital Management Corp.
Martin & Company, Inc.
Norlen Life Insurance Company
Peoples and Union Bank
Peoples Bank (of Senatobia)
118
[Logo]sm First Tennessee
All Things Financial(R)
119
[LOGO] FIRST TENNESSEE
First Tennessee National Corporation
Annual Meeting
April 17, 2001
10:00 a.m. Central Daylight Time
First Tennessee Building
M-Level Auditorium
165 Madison Avenue
Memphis, Tennessee 38103
If you consented to access your proxy information electronically, you
may view it by going to the following website on the internet:
http://www.firsttennessee.com
If you would like to access the proxy material electronically next
year, you may do so by giving your consent at the following website:
http://www.econsent.com/ftn/
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints James L. Boren, Jr. and George P. Lewis, or
any one or more of them with full power of substitution, as Proxy or Proxies, to
represent and vote all shares of stock standing in my name on the books of the
Corporation at the close of business on February 23, 2001, which I would be
entitled to vote if personally present at the Annual Meeting of Shareholders of
First Tennessee National Corporation to be held in the Auditorium, First
Tennessee Building, 165 Madison Avenue, Memphis, Tennessee, April 17, 2001, at
10 a.m. CDT or any adjournments thereof, upon the matters set forth in the
notice of said meeting as stated on the reverse side. The Proxies are further
authorized to vote in their discretion as to any other matters which may come
before the meeting. The Board of Directors, at the time of preparation of the
Proxy Statement, knows of no business to come before the meeting other than that
referred to in the Proxy Statement.
THE SHARES COVERED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS GIVEN ON THE REVERSE SIDE AND WHEN NO INSTRUCTIONS ARE GIVEN WILL
BE VOTED FOR PROPOSALS 1 AND 2, WHICH ARE DESCRIBED IN THE ACCOMPANYING NOTICE
OF ANNUAL MEETING AND PROXY STATEMENT AND ON THE REVERSE SIDE OF THIS PROXY.
(continued on reverse side)
YOU CAN VOTE YOUR PROXY BY TELEPHONE, OVER THE INTERNET, OR BY SIGNING AND
RETURNING THIS CARD ON THE REVERSE SIDE.
(See voting instructions on reverse.)
120
COMPANY #
-------------
CONTROL #
-------------
THERE ARE THREE WAYS TO VOTE YOUR PROXY.
YOUR TELEPHONE OR INTERNET VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES
IN THE SAME MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD.
VOTE BY PHONE -- TOLL FREE -- 1-800-240-6326 -- QUICK *** EASY *** IMMEDIATE
- - Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days
a week until 12:00 p.m. (noon) on April 16, 2001.
- - You will be prompted to enter your 3-digit Company Number and your
7-digit Control Number which are located above.
- - Follow the simple voice mail instructions.
VOTE BY INTERNET -- http://www.eproxy.com/ftn/ -- QUICK *** EASY *** IMMEDIATE
- - Use the Internet to vote your proxy 24 hours a day, 7 days a week until
12:00 p.m. (noon) on April 16, 2001.
- - You will be prompted to enter your 3-digit Company number and your
7-digit Control Number which is located above to obtain your records
and create an electronic ballot.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to First Tennessee National Corporation,
c/o Shareowner Services SM, P. O. Box 64873, St. Paul, MN 55164-0873.
IF YOU VOTE BY PHONE OR INTERNET, PLEASE DO NOT MAIL YOUR PROXY CARD.
[ ] Please detach here [ ]
[X] Please mark votes as in this example.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ITEMS 1
AND 2.
1. Election of four Class II directors to serve until the 2004
Annual Meeting of Shareholders. Nominees: (01) Robert C.
Blattberg (02) J. Kenneth Glass (03) John C. Kelley, Jr. and
(04) Michael D. Rose
[ ] VOTE FOR [ ] VOTE WITHHELD
all nominees from all nominees
Instructions: To withhold authority to vote -------------------------------
for any nominee(s), write the number(s) of
the nominee(s) in the box to the right. -------------------------------
FOR AGAINST ABSTAIN
2. Ratification of appointment of [ ] [ ] [ ]
Arthur Andersen LLP as auditors.
Address change? Mark Box. ------------------------------
Indicate changes below:
------------------------------
121
The undersigned hereby acknowledges receipt of notice of said meeting
and the related proxy statement.
Date , 2001
--------------------------
------------------------------
------------------------------
Signatures in Box
Shareholders sign here exactly as shown on the imprint on this card. When
signing as Attorney, Executor, Administrator, Trustee or Guardian, please give
full name. If more than one Trustee, all should sign. All Joint Owners should
sign.