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EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
This financial review should be read with the consolidated financial statements
and accompanying notes presented on pages 28 through 48 and other information
presented on pages 6 through 10. A glossary is included on pages 26 through 27
to assist with terminology.
OVERVIEW OF OPERATIONS
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EARNINGS PERFORMANCE
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1994 1993 1992
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Net income (millions) $146.3 $106.1 $ 90.4
Net income per share $ 4.56 $ 3.31 $ 2.99
Return on average equity 20.04% 16.07% 14.98%
Return on average assets 1.45% 1.11% 1.05%
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Earnings for 1994 reflect the fourth consecutive year of record earnings.
Factors contributing to the 1994 earnings increase and performance improvement
include a lower loan loss provision due to improved credit quality,
double-digit commercial and consumer loan growth, and an expansion in fee-based
businesses. The positive impact during 1994 was somewhat reduced by increased
noninterest expenses related to this expansion.
Net income in years prior to 1994 has been impacted by the effect of
acquisitions accounted for as poolings of interests. These acquisitions in 1994
included: SNMC Management Corporation (SNMC), parent company of Sunbelt
National Mortgage Corporation (Sunbelt Mortgage); Highland Capital Management
Corp.; Cleveland Bank and Trust Company; and Planters Bank. Maryland National
Mortgage Corporation, renamed MNC Mortgage Corporation (MNC Mortgage) in 1994,
was acquired on October 1, 1993, and was accounted for as a purchase.
Therefore, the consolidated statements do not reflect the results of MNC
Mortgage's operations prior to October 1, 1993. For additional information
related to acquisitions see Note 2 - Business Combinations. The graphs on this
page show the originally reported information (i.e., the performance ratios as
originally presented in that year's annual report) compared to the same
information as restated to reflect poolings of interests. The difference in
earnings per share for 1993 between the reported $4.26 and the restated $3.31
was 95 cents. Of this amount, 80 cents was primarily due to Sunbelt's 1993
business plan of retaining servicing to increase future fee income rather than
selling servicing to cover origination expenses and the shares issued as part
of the transaction. The remaining 15 cents difference is attributable to the
banks and investment advisor acquired in 1994.
For the remainder of this document, the financial position and results of
operations of all companies are reflected on a combined basis for transactions
accounted for as poolings of interests from the earliest period presented.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income provided approximately 50 percent of revenue in 1994.
Changes in the mix and volume of earning assets and interest-bearing
liabilities, their related yields and interest rates, have a major impact on
earnings. For purposes of this discussion, net interest income has been
adjusted to a fully taxable equivalent 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.
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NET INTEREST INCOME AND EARNING ASSETS
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(Dollars in millions) 1994 1993 1992
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Investment securities $2,153.9 $2,921.9 $2,716.2
Loans 6,431.0 5,360.9 4,689.2
Other earning assets 411.1 325.6 419.6
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Total earning assets $8,996.0 $8,608.4 $7,825.0
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Net interest income $ 385.4 $ 369.7 $ 343.0
Net interest spread 3.62% 3.68% 3.65%
Net interest margin 4.28% 4.29% 4.38%
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Earning assets increased 5 percent in 1994, reflecting the improved
commercial and consumer loan demand and the acquisition of MNC Mortgage, which
were partially funded by a decrease in the investment securities portfolio.
Loans in 1994 were 71 percent of earning assets compared to 62 percent and 60
percent in 1993 and 1992, respectively. The growth in earning assets in 1994
was primarily supported by a 6 percent increase in average interest-bearing
core deposits. Interest-bearing core deposits continued to be First Tennessee's
largest source of funding, providing 60 percent of the required earning asset
funding.
Net interest income increased 4 percent during 1994 compared to 8 percent
in 1993. Growth in both years was primarily due to a higher volume of average
earning assets. Net interest margin was 4.28 percent for 1994 which was flat
compared with 1993 despite the impact of a 250 basis point increase in interest
rates in the national market. The net interest margin for 1993 was 4.29
percent, 9 basis points less than 1992. Conversely, in 1994, the net interest
spread declined to 3.62 percent from 3.68 percent in 1993, as interest-bearing
liabilities repriced faster than interest-bearing assets. Rising interest rates
reduced the impact of the narrowing in the net interest spread by increasing
the benefit from interest free funding. Based on First Tennessee's economic
assumptions of further interest rate increases in the first half of 1995,
coupled with ongoing competitive pressures and loan and deposit growth, spreads
may not mirror the levels seen in 1994. Management expects that these factors
will contribute to a decline in the net interest margin. Once interest rates
stabilize, the net interest margin should begin to improve. Additional
discussion can be found in the Interest Rate Risk section.
PROVISION FOR LOAN LOSSES
The provision for loan losses reflects management's judgment of the risk
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. The evaluation process to determine potential losses includes
consideration of the industry, specific conditions of the individual borrower,
and the general economic environment. As these factors change, the level of
loan loss provision changes.
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PROVISION FOR LOAN LOSSES
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(Dollars in millions) 1994 1993 1992
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Provision for loan losses $ 16.7 $ 35.7 $44.2
Net charge-offs 17.5 28.8 36.9
Allowance for loan losses 107.0 107.7 99.8
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The provision for 1994, the lowest level since 1990, reflects the significant
improvement in asset quality. Additional discussion of asset quality can be
found under Asset Quality and Credit Risk Management.
NONINTEREST INCOME
Noninterest income, also called fee income, is a significant source of
First Tennessee's revenue, contributing approximately 50 percent in 1994. Total
noninterest income increased 16 percent in 1994 compared to a 42 percent
increase in 1993.
NONINTEREST INCOME
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(Dollars in millions) 1994 1993 1992
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Mortgage banking $118.4 $ 85.7 $ 16.3
Bond division 77.5 91.5 80.3
Deposit transactions and
cash management 63.2 57.4 52.9
Bank card 31.4 28.5 26.6
Trust services 28.9 26.5 23.8
All other 49.1 44.4 37.7
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Total fee income 368.5 334.0 237.6
Gains/(losses)on securities 20.6 .8 (1.6)
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Total noninterest income $389.1 $334.8 $236.0
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Mortgage banking - Mortgage banking noninterest income consists of loan
origination fees, servicing fee income, net gains from the sale of
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mortgage loans, and gains from the sale of mortgage servicing rights. As
interest rates increased during the year, refinancing activity declined
resulting in increased pricing competition for originations. The decline in
refinancing activity due to the interest rate environment also lengthened the
expected life of the servicing portfolio resulting in an increase in the market
value of servicing assets. During 1994, mortgage originations totaled $4.3
billion as compared to $4.8 billion during 1993. The mortgage servicing
portfolio, which includes servicing for ourselves and others, totaled $11.7
billion at year-end 1994 as compared to $13.1 billion at year-end 1993. The
change in the portfolio was created primarily from additions due to
originations of $4.3 billion, flow and bulk sales of servicing of $4.2 billion,
principal reductions including prepayments of $1.9 billion, and acquired
servicing of $.4 billion. Although the servicing portfolio declined in total
principal serviced, the estimated market value of the portfolio increased
approximately 7 percent in value. Gains recognized from the sale of servicing
during 1994 totaled $54.2 million as compared to $13.6 million during 1993.
Bond division - Bond division revenues decreased 15 percent in 1994,
following a 14 percent increase in 1993 and a 17 percent increase in 1992. The
decrease in 1994 primarily resulted from a change in customer investment
activities because of changing market conditions, volatile and rising interest
rates, and strong loan growth in community banks, one of the principal customer
segments of the bond division. The increase in 1993 was a result of increased
market penetration, additional products, and the diversification of the
customer base. Bond division revenues are obtained primarily from the 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.
Going forward, the bond division's revenues should begin to rise once interest
rates stabilize and banks begin to experience slower loan growth.
Deposit transactions and cash management - The 10 percent growth in 1994 and
the 8 percent growth in 1993 reflect increased sales of cash management
services, the introduction of new retail deposit products, and increased sales
of existing products.
Bank card - Bank card income includes both cardholder and merchant
processing fees. An increased sales force helped improve the overall volume of
merchant card transactions processed as well as the expansion of merchant
services in restaurant and hotel chains.
Trust services - The 9 percent increase in trust services income was a
result of fee growth in the managed segment of the business, including Personal
Trust, Employee Benefit Trust, and Investment Management accounts. Total trust
assets including custodial accounts were approximately $12.6 billion at the end
of 1994 compared to $13.7 billion for the previous year. The decrease in asset
values was due to the departure of a few institutional custody accounts and
maturing bond issues in the corporate trust area.
Net securities gains/losses - Net securities gains during 1994 included $7.5
million of equity securities gains related to the formation of the charitable
foundation; $4.4 million of losses resulting from securities being sold in the
normal course of business; an $.8 million recovery from investments previously
written down; and $16.7 million recognized as venture capital gains. The
venture capital subsidiaries realized $.5 million in losses in 1993 and no gain
or loss in 1992. Securities gains in 1993 included a $.3 million recovery, and
securities losses in 1992 included a markdown of $1.4 million on the investment
securities classified as securities held for sale.
Excluding venture capital gains and other securities transactions,
noninterest income grew 10 percent during 1994 and 41 percent during 1993. The
majority of the growth in 1993 was due to acquired mortgage companies.
NONINTEREST EXPENSE
Noninterest expense, also called operating expense, increased 11 percent
during 1994 and 30 percent during 1993. During 1994, a number of nonrecurring
expenses were recognized, which included adoption of SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," on January 1, 1994. Adoption of this
standard increased benefits expense $2.3 million related to prior services
rendered and rights vested. In addition, a charitable foundation was
established which increased contribution expenses $9.4 million. Finally,
acquisitions completed in 1994 resulted in a number of one-time costs which
totaled $4.8 million. Excluding the one-time items discussed above and
incentive expenses related to the venture capital gains, noninterest operating
expense increased 7 percent during 1994. The increase in 1993 includes the
impact of the MNC Mortgage and the New South Bancorp acquisitions in the
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fourth quarter of 1993. These acquisitions added $20.4 million to 1993
expenses.
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NONINTEREST OPERATING EXPENSE
(Dollars in millions) 1994 1993 1992
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Staff expense $294.9 $265.8 $198.9
Operations services 33.2 28.5 24.2
Occupancy 30.0 24.9 23.0
Communications 26.0 21.5 17.0
Equipment 24.6 20.3 17.0
Amortization of intangibles 20.7 30.8 13.7
Deposit insurance premium 16.4 16.0 15.7
Legal and professional fees 12.7 10.9 11.2
All other 87.2 73.2 59.1
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Total operating expense $545.7 $491.9 $379.8
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The acquisition of mortgage companies contributed 39 percent in 1994 and
82 percent in 1993 of the growth in operating expenses. Specifically, mortgage
company acquisitions contributed approximately 68 percent of the 11 percent
increase in employee compensation, incentives, and benefits (staff expense) in
1994, and approximately 70 percent of the 34 percent increase in 1993. Staff
expense comprised 54 percent of the increase in noninterest expense in 1994 and
approximately 60 percent of the increase in 1993. However, excluding the
mortgage acquisitions, staff expense grew 4 percent in 1994.
Impact of Mortgage Companies on Noninterest Income and Noninterest Expense -
The acquisition of the mortgage companies had a significant impact on the
comparability of noninterest income and noninterest expenses for the periods
presented. MNC Mortgage, as a purchase acquisition, is only included in the
statements of operations for the fourth quarter of 1993 and forward. SNMC, as a
pooling of interests acquisition, is reflected in all periods presented.
However, SNMC began operations in November 1992; therefore, only the results of
two months of operations are included in that year. The following table is
presented to illustrate the impact of these acquisitions on various noninterest
income and noninterest expense line items from year to year. These numbers are
not adjusted for the one-time items discussed earlier.
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IMPACT OF MORTGAGE ACQUISITIONS
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% Growth including % Growth excluding
mortgage acquisitions mortgage acquisitions*
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1994 1993 1994 1993
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Noninterest Income:
Mortgage banking 38% 426% 51% 8%
All other 11 18 10 15
Total noninterest income 16 42 10 13
Noninterest Expense:
Staff expense 11% 34% 4% 10%
Operations services 17 18 17 11
Occupancy 21 8 5 2
Communications 21 27 11 9
Equipment 21 19 13 6
Amortization of
intangibles (33) 125 (33) (37)
All other 19 20 23 (2)
Total noninterest
expense 11 30 8 5
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*excludes MNC Mortgage and SNMC
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As shown in the table, in 1994 total noninterest income grew 16 percent
with the mortgage acquisitions and 10 percent without the mortgage
acquisitions, while total noninterest expense grew 11 percent with mortgage
acquisitions and 8 percent without mortgage acquisitions.
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INCOME TAXES
INCOME TAXES
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1994 1993 1992
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Effective tax rates 29.4% 37.8% 38.3%
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The lower tax rate in 1994 resulted from the elimination of $7.7 million of
deferred tax valuation allowance related to Sunbelt Mortgage and $2.9 million
related to the establishment of a charitable foundation. Without these items
the effective tax rate for 1994 would have been 34.4 percent. For further
information see Note 17 - Income Taxes.
BALANCE SHEET REVIEW
At December 31, 1994, First Tennessee reported $10.5 billion in total
assets compared to $10.4 billion and $9.4 billion at the end of 1993 and 1992,
respectively. Average assets were $10.1 billion in 1994 compared to $9.6
billion in 1993 and $8.6 billion in 1992.
EARNING ASSETS
In banking the primary types of earning assets are securities and loans.
The earnings from these assets are subject to risks including liquidity,
interest rate, and credit risks. The management of these risks will be
discussed further in the Asset/Liability Risk Management and Asset Quality and
Credit Risk Management sections.
Investment Securities - On January 1, 1994, First Tennessee adopted SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS
No. 115 requires entities to classify debt and equity securities as either held
to maturity, available for sale, or trading securities. Held to maturity
securities are to be recorded at amortized cost, whereas available for sale
securities are to be carried at market value. Upon adoption, First Tennessee
classified approximately $1.4 billion of securities as available for sale,
resulting in an increase in shareholders' equity of $14.4 million, net of $9.2
million of deferred income taxes.
At December 31, 1994, there were $1.2 billion of securities classified as
available for sale with an average life of 2.5 years. These securities had
approximately $39.4 million of aggregate holding losses that resulted in a
decrease in equity of approximately $24.1 million, net of $15.3 million of
deferred income taxes. These securities consisted primarily of treasuries;
agency collateralized mortgage obligations (CMOs), mortgage-backed securities,
and notes; and equities. Management closely monitors forecasted cash flows on
its portfolio of mortgage-backed derivative securities, principally Planned
Amortization Class CMOs. These cash flows are relatively predictable and
satisfy First Tennessee's need for liquidity resulting from changing economic
conditions or increases in customer demand for loans.
Securities classified as held to maturity are purchased with the intent to
hold until maturity. At December 31, 1994, there were $.9 billion of securities
classified as held to maturity with an average life of 3.2 years. These
securities consisted primarily of agency CMOs, agency mortgage-backed
securities, municipal bonds, and treasuries. The held to maturity securities
net unrealized loss at December 31, 1994, was $50.0 million.
Corporate guidelines call for all securities purchased for the investment
portfolio to be rated investment grade by Moody's or Standard & Poor's.
Securities backed by the U.S. government and its agencies, both on a direct and
indirect basis, represented approximately 95 percent of the investment
portfolio at December 31, 1994. All CMOs and other asset-backed securities are
AAA rated. For further information see Note 5 - Investment Securities.
Loans - Loans grew 20 percent during 1994 and 14 percent during 1993. For
purposes of this discussion, loans have been expressed as averages, net of
unearned income. Growth has occurred in all of the loan categories for the last
two years except for permanent mortgages in 1993, as shown in the Loans table
below. Additional loan information is provided in Note 6 - Loans.
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LOANS
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(Dollars in millions) 1994 1993 1992
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Commercial $2,684.0 $2,358.0 $2,256.9
Consumer 2,055.9 1,505.5 1,212.3
Credit card receivables 432.7 396.5 388.1
Real estate construction 117.3 82.0 58.9
Permanent mortgage 539.3 511.5 627.7
Mortgage warehouse 583.3 480.0 106.7
Nonaccrual 18.5 27.4 38.6
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Total $6,431.0 $5,360.9 $4,689.2
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Commercial loans, the single largest loan category, increased 14 percent
and represented 42 percent of total loans in 1994. This compares to a 4 percent
increase and 44 percent of total loans in 1993. The increase in commercial
loans reflects increased, targeted marketing efforts and economic growth
experienced in Tennessee.
The consumer loan portfolio consists of real estate, automobile, student,
and other consumer installment loans that require periodic payments of
principal and interest. The consumer loan portfolio increased 37 percent and
represented 32 percent of loans in 1994, compared to a 24 percent increase and
28 percent of loans in 1993. The significant increase during 1994 was
consistent with management's goal of increasing the consumer loan portfolio as
a percentage of total loans. Real estate loans, principally secured by first
and second liens on residential property, contributed significantly to the
increase in the consumer loan portfolio in 1994.
Credit card balances grew 9 percent in 1994 compared to 2 percent in 1993.
The improvement in 1994 was a result of increased consumer confidence and
selective promotional campaigns.
The real estate construction loan portfolio increased 43 percent in 1994
and 39 percent in 1993, reflecting growth in the economy and an increase in the
development of new and existing properties. However, these loans only comprised
approximately 2 percent of total loans for both periods.
The permanent mortgage loan portfolio increased 5 percent in 1994
reflecting higher originations and management's decision to retain a larger
portion of mortgages. This compares to a 19 percent decrease in 1993. The
decline in 1993 was related to a high number of mortgages prepaying as interest
rates declined.
Mortgage warehouse loans, which are loans awaiting securitization,
increased 22 percent in 1994 due to the purchase acquisition of MNC Mortgage;
this portfolio more than quadrupled between 1993 and 1992 as a result of the
mortgage expansion strategy.
DEPOSITS
DEPOSITS
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(Dollars in millions) 1994 1993 1992
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Interest-bearing core
deposits $5,362.8 $5,077.3 $5,072.6
Demand deposits 1,713.0 1,508.7 1,297.5
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Total core deposits $7,075.8 $6,586.0 $6,370.1
CDs $100,000+ 437.3 398.2 452.7
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Total deposits $7,513.1 $6,984.2 $6,822.8
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Total core deposits include demand deposits, checking interest, regular
savings, money market accounts, and certificates of deposit less than $100,000
(CDs). First Tennessee is the leading banking organization in Tennessee in
total deposits and is the first in market share in total deposits in three of
the five major metropolitan statistical areas across the state.
Interest-bearing core deposits grew 6 percent in 1994, following minimal
growth in 1993. The growth in 1994 reflected the benefit of new products,
promotional campaigns, mortgage banking related activity, and higher interest
rates attracting customers to these investment vehicles. Conversely, the small
growth in 1993 was a result of low interest rates during this period
influencing customers to look elsewhere for higher yielding investment
alternatives.
Noninterest-bearing demand deposits are comprised of individual and
business accounts including correspondent banks and other check clearing
customers. Demand deposits represented approximately 23 percent of
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total deposits in 1994 and 22 percent in 1993. The $204 million increase in the
level of demand deposits in 1994 reflected an increase of larger balances in
many existing commercial accounts which were required to offset the impact of
lower earnings credit rates, and accounts related to the mortgage company
acquisitions.
Certificates of deposit of more than $100,000 increased 10 percent during
1994 compared to a 12 percent decrease in 1993, reflecting customer investment
choices as interest rates decreased in 1993 and rose in 1994.
CAPITAL
CAPITAL
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Internal
(Dollars in millions) 1994 1993 1992 Policy
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Shareholders' equity $730.3 $660.3 $603.5
Equity/assets ratio 7.21% 6.88% 7.02% 6.75-7.5%
Equity/net loans 11.55 12.57 13.15 10.5% min
Tangible equity/
tangible assets 5.68 5.62 6.23 5.0% min
Book value per share $23.51 $21.65 $19.72
Closing stock price 40.75 38.50 36.75
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Average shareholders' equity increased 11 percent in 1994 and 9 percent in
1993. The primary source of growth in shareholders' equity during 1994 was the
retention of net income. The Consolidated Statements of Shareholders' Equity
highlight the detailed changes in equity during 1994.
Capital adequacy refers to the level of capital required to sustain asset
growth over time and to absorb losses. Management's objectives are to maintain
a level of capitalization that is sufficient to take advantage of profitable
growth opportunities and to promote depositor and investor confidence. The
capital levels are a result of First Tennessee's capital policy which
establishes guidelines based on industry standards, regulatory requirements,
perceived risk of the various businesses, and future growth opportunities.
Periodically, the policy is re-evaluated and presented to the board of
directors to ensure it continues to support corporate objectives, the
regulatory environment, and changes in market conditions.
Federal regulators have adopted a capital-based supervisory system for all
insured financial institutions. Should a financial 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 undercapitalized. 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. On
December 31, 1994, all of First Tennessee's bank subsidiaries had sufficient
capital to qualify as well-capitalized institutions.
ASSET/LIABILITY RISK MANAGEMENT
INTEREST RATE RISK
Managing interest rate risk is fundamental to banking. Banking institutions
manage the inherently different maturity and repricing characteristics of the
lending and deposit-taking lines of business to achieve a desired interest rate
sensitivity position and to limit their exposure to interest rate risk. First
Tennessee manages its balance sheet to achieve maximum shareholder value within
the constraints of its interest rate risk discipline, the maintenance of high
credit quality, and sound leverage and liquidity positions. Management's
Asset/Liability Committee (ALCO), an executive-level management committee,
meets regularly to review both the interest rate sensitivity and liquidity
positions of First Tennessee. The primary objective of interest rate
sensitivity management is to maintain net interest income growth while reducing
exposure to the risks inherent in interest rate movements.
Measurement of Interest Rate Sensitivity Risk - One measure of interest rate
risk is the gap report, which details the repricing differences for assets and
liabilities for given periods. At December 31, 1994, the balance sheet was
modestly rate sensitive by $125.0 million more liabilities than assets
repricing within one year. At 1.4 percent of earnings assets, this position was
within management guideline limits which are 5 percent of earning assets. A
liability sensitive gap indicates that over the course of a year an upward
movement in rates will negatively impact net interest margin since liabilities
will reprice faster than assets. The gap report has some
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limitations, including the fact that it is a static (i.e., point-in-time)
measurement; it does not capture basis risk; and it does not capture risk that
varies non-proportionally with rate movements.
Because of the limitations of gap reports, First Tennessee uses a
simulation model as its primary method of measuring interest rate risk. The
simulation model, because of its dynamic nature, forecasts the effects of
future balance sheet trends, changing slopes of the yield curve, different
patterns of rate movements, and changing relationships between rates. The
results of the simulation analysis are used by management to evaluate possible
corrective actions to reduce any negative impact to net interest margin.
The traditional investment portfolio and off-balance sheet instruments are
used interchangeably to alter the rate sensitive position of a banking
institution. This is accomplished by holding fixed-rate debt instruments in the
securities portfolio and/or by holding off-balance sheet derivative
instruments. During the fourth quarter of 1993 and beginning of 1994, First
Tennessee lengthened the maturity of prime rate loans and thus restructured the
asset sensitive position created from the mortgage company acquisitions by
executing index amortizing swaps. With these swaps, First Tennessee receives a
fixed interest rate and pays a floating rate applied to an amortizing notional
principal amount. The notional total of the index amortizing swaps held by
First Tennessee is $550 million. Approximately 54 percent of these have a final
maturity in the fourth quarter of 1996 and the remainder have a final maturity
in 1997 with the opportunity for $100 million of these to be called in 1995. As
of December 31, 1994, these swaps had a depreciated market value of $33.3
million.
At December 31, 1994, First Tennessee also had a $1 billion swap (basis
swap) on which the fed funds rate, limited to an increase of 25 basis points
each quarter (the cap), is received, and on which the prime rate less a fixed
spread is paid. This swap was executed in May of 1993 and matures in May 1996,
and was intended to alter the relationship between the rate on money market
accounts and the national prime rate in expectation of a narrowing between
prime and short-term market rates. Since the spread between the prime rate and
fed funds rate has not narrowed as expected, and since the increase in the
funds received has been limited by the cap, this swap had a depreciated market
value of $35.3 million at December 31, 1994. Subsequent to year end, half of
this swap was terminated in order to restructure the rate sensitivity position
and limit a portion of the loss going forward in a rising rate scenario. See
Subsequent Events section for additional information.
Although these off-balance sheet instruments currently have negative market
values, the offsetting balance sheet position (cash positions) matched against
these swaps have positive value and positive impact on net interest income. The
value of checking and savings accounts increased in 1994 as market rates
increased. In addition, the historically wide spread between prime rate loans
and money market rates has also continued, generating additional interest
income and reducing the unfavorable impact of the basis swap. Together, these
cash positions partially mitigate the negative off-balance sheet impact. Faster
economic growth has stimulated additional loan volume further reducing the
unfavorable impact of higher interest rates on these instruments. Going
forward, the market value of the swaps, will fluctuate depending on the
remaining maturity of the swap and the market's expectations regarding the
future movements in interest rates.
The mortgage banking companies use forwards and options to hedge interest
rates between the time the mortgage loan is committed to the customer and the
time it is funded and securitized. For additional information, see Note 1 -
Summary of Significant Accounting Policy and Note 20 - Off-Balance Sheet
Financial Instruments.
LIQUIDITY MANAGEMENT
Liquidity management involves planning to meet anticipated funding needs
at a reasonable cost, as well as contingency plans to meet unanticipated
funding needs or a loss of funding sources. Liquidity management is governed by
policies formulated and monitored by ALCO, which take into account the
marketability of assets, the sources and stability of funding, and the level of
unfunded commitments.
Long-term liquidity needs are provided by a large core deposit base, which
is the most stable source of liquidity a bank can have due to the long-term
relationship with depositors and the deposit insurance provided by the FDIC. In
1994, 70 percent of total assets were funded by core deposits while 20 percent
were funded with short-term purchased funds, compared to 69 percent and 21
percent, respectively, in 1993.
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
payments to bondholders. The amount of dividends from bank
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subsidiaries is subject to certain regulatory restrictions as detailed in Note
15 - Restriction on Dividends and Intercompany Transactions. At December 31,
1994, $242.2 million in dividends could have been paid to the parent by its
subsidiary banks without regulatory approval. The parent company statements are
presented in Note 22 - Condensed 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, First Tennessee,
as of December 31, 1994, may offer from time to time, at its discretion, debt
securities and common and preferred stock up to $300 million.
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
below.
CREDIT RATINGS AT 31, 1994
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Standard Thomson
Moody's & Poor's Bankwatch Fitch
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First Tennessee:
Overall credit rating B
Senior sinking fund debentures A
Subordinated capital notes Baa1 BBB+
Commercial paper TBW-1
FTBNA:
Short-term/Long-term deposits P-1/A1 A-1/A TBW-1
Counterparty credit rating A1 A
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COUNTERPARTY CREDIT RISK MANAGEMENT
Counterparty credit risk management includes First Tennessee's exposure to
other financial institutions. These risks arise from the extension of direct
credit or from agreements that potentially require some exchange of cash or
securities in the future. As a financial intermediary, First Tennessee
continuously has exposure to these types of transactions. In order to limit its
concentration to any individual financial institution, First Tennessee's ALCO,
in conjunction with the chief credit officer and senior credit officers, has a
corporate-wide process to monitor, manage, and limit the risk to financial
counterparties established pursuant to an ALCO policy which has been approved
by the board of directors.
As of December 31, 1994, all limits established for counterparties,
including off-balance sheet transactions, were within policy.
ASSET QUALITY AND CREDIT RISK MANAGEMENT
First Tennessee manages asset quality and credit risk by maintaining
diversification in its loan portfolio and through adherence to its credit
policy. First Tennessee strives to identify loans experiencing difficulty early
enough to correct the problems, to recognize nonperforming loans in a timely
manner, to record charge-offs promptly based on realistic assessments of
current collateral values and the borrower's ability to repay, and to maintain
adequate reserves to cover inherent losses in the loan portfolio. First
Tennessee's goal is not to avoid risk, but to manage it. Barring any major
changes in the economy, asset quality is expected to remain stable in 1995
based on the current mix in the commercial and consumer loan portfolio. As this
mix changes, asset quality performance ratios will change.
CREDIT POLICY
Management believes the objective of a sound credit policy is to extend
quality loans to customers while controlling risk affecting shareholders and
depositors. The executive committee of the board of directors approves all
credit policies, reviews underwriting guidelines, and maintains a review
process to monitor asset quality and compliance.
COMMERCIAL LENDING
First Tennessee manages credit risk in the commercial loan portfolio
through the approval process, by monitoring the quality of loans after they
have been made, and through management of concentrations in the portfolio. The
objective of First Tennessee's credit process is to make approval of
straighforward credits relatively simple, but to increase the degree of
involvement by experienced and independent credit officers as the credit risk
becomes more complex.
To assess the quality of individual commercial loans, lenders assign an
internal credit rating, ranging from A to F, to assist in the credit risk
management of these loans. The credit rating is based on the lender's
assessment of the financial condition of the borrower and
10
collateral on the loan, and is monitored and revised by the lender to
accurately reflect the quality of the loan. The majority of commercial loan
customers at First Tennessee are small businesses and middle market companies,
and are graded C at inception. A commercial loan review staff, independent of
the lending functions, is engaged in the continuous process of examining the
loan portfolio to ensure that the loans are properly graded. The loan review
staff also reviews collateral values and compliance with bank policy and
underwriting guidelines. Due to increased business activity and generally
improving economic conditions throughout 1994, loans graded C and above,
expressed as a percentage of total graded loans, improved to 95 percent at
December 31, 1994. The Loans and Foreclosed Real Estate table gives a breakdown
of the commercial loan portfolio by grades and major loan types at December 31,
1994, compared to the same period in 1993.
First Tennessee maintains an internal list of loans known as the Watch
List. The Watch List includes performing loans and lending commitments that
have been identified by management as requiring a closer level of monitoring
and active management, but that have not yet been classified as potential
problem loans. The Watch List slightly improved to approximately $105 million
at December 31, 1994.
Industry concentrations are a measure of the diversification of the
commercial loan portfolio. Diversification is an important means of reducing
the investment risk associated with fluctuations in economic conditions. At
December 31, 1994, First Tennessee had no concentrations of 10 percent or more
of total loans in any single industry.
COMMERCIAL REAL ESTATE AND CONSTRUCTION AND DEVELOPMENT
Construction and development lending involves the extension of credit to
build or otherwise develop real estate properties which are later sold,
operated for income-producing purposes, or occupied by the owner for other
business reasons. Construction and development loans are moved to the
commercial real estate loan category when the construction is completed.
All commercial real estate loans, including construction and development,
are assigned a risk grade and are assigned to one of two risk of loss
categories. The higher risk of loss category contains loans where the primary
source of repayment comes from either the sale of the real estate property or
cash flow from the project, and a substantial secondary source of repayment is
not available. Consequently, the risk potential for loss on these loans is
subject to the fluctuations in the market value of the real estate collateral.
For this reason, more stringent underwriting standards, including equity
requirements and loan to value ratios, debt service coverage ratios,
capitalization rates, discount rates, and hold periods are applied to these
loans. The other risk of loss category contains loans which have a substantial
secondary source in addition to having real estate as the primary source of
repayment. These loans are generally considered to have less risk of loss due
to the additional source of repayment.
Commercial real estate loans at December 31, 1994 and 1993,were $536.2
million and $527.1 million, respectively. Construction and development loans
increased to $138.7 million at the end of 1994 from $78.8 million at December
31, 1993, as additional funding for new and existing construction projects
increased.
Maintaining a diverse commercial real estate portfolio by project type is
another important way commercial real estate lending risk is managed. The FTBNA
Loans Secured by Real Estate table reflects the diversity in real estate by
project type.
CONSUMER LENDING
First Tennessee manages credit risk in consumer loans through standardized
products and uniform underwriting guidelines. Underwriting guidelines are
developed and monitored centrally for loan maturities, collateral, and credit
qualifications including credit scores, bankruptcy scores, and debt to income
levels.
The application and approval processes are managed through an enhanced
computer system which informs the lender if the loan does or does not meet the
credit standard established for that type of loan. Loans which do not meet the
standards are denied and/or moved to a higher level of lending authority. This
level has the ability to make exceptions, which are monitored by management. A
consumer loan review staff, independent of the lending function, reviews the
loan decisions for compliance with bank policy and underwriting guidelines.
Collections and loan operations provide controls to minimize risk in the
consumer portfolio. Collections is primarily centralized to capitalize on the
collection specialization and economies of scale as well as consistent
application of collection procedures. The collection process is automated to
ensure timely collection of accounts and consistent management of risk
associated with delinquent accounts. Loan
11
operations is primarily centralized, provides an independent document review,
and notifies the loan officer of any document exception.
ALLOWANCE FOR LOAN LOSSES AND NET CHARGE-OFFS
Management's policy is to maintain the allowance for loan losses at a level
sufficient to absorb all estimated losses inherent in the loan portfolio. The
allowance amount consists of two principal components: amounts specifically
provided for loans reviewed on an individual or pool basis and a general
portion designed to supplement the specific allocations. The Loans and
Foreclosed Real Estate table shows the allowance allocations by internal grades
for the commercial loan portfolio and by loan type for those loans not graded
for periods ended December 31, 1994 and 1993.
The total allowance for loan losses for 1994 was relatively flat from the
1993 level. The ratio of allowance for loan losses to loans, net of unearned
income, declined in 1994 compared with 1993. Excluding mortgage warehouse
loans, this ratio would have been 1.69 percent and 1.98 percent in 1994 and
1993, respectively.
NET CHARGE-OFFS AS A PERCENT OF AVERAGE LOANS
--------------------------------------------------------------------------------
NET OF UNEARNED INCOME 1994 1993
--------------------------------------------------------------------------------
Commercial and commercial real estate .05% .49%
Consumer .22 .35
Credit card receivables 2.49 2.80
Permanent mortgage .11 .06
--------------------------------------------------------------------------------
Net charge-offs decreased 39 percent in 1994 and 22 percent in 1993. Net
charge-offs to average loans, net of unearned income, improved in 1994 due to
the continued improvement in asset quality. See Analysis of Allowance for Loan
Losses table for additional information.
Each lending product category in the loan portfolio has, as a normal course
of business, an expected level of net charge-offs based on the profit margin of
that product. In management's opinion, net charge-offs in 1995 will be higher
than 1994, but there will be no significant deterioration in the expected level
of net charge-offs as a percentage of the total loans in each lending product
category, provided the economy continues to grow. As the product mix changes,
the absolute level of net charge-offs and the percent to total loans may
fluctuate.
NONPERFORMING ASSETS
Nonperforming assets, consisting of nonaccrual and restructured loans,
foreclosed real estate and other assets, decreased 38 percent during 1994, and
increased 7 percent during 1993 due to $22.8 million of nonperforming assets
added from MNC Mortgage. The improvement in nonperforming assets during the
last three years was due to significantly reduced levels of new nonperformers
as a result of an improving economic environment and management's efforts to
identify deteriorating assets early enough in the cycle to ensure prompt action
toward resolution.
Nonperforming loans are those loans where, in the opinion of management,
the full collection of principal or interest is unlikely. Nonperforming loans
decreased 37 percent during 1994 and 12 percent during 1993.
Foreclosed properties are obtained when First Tennessee actually forecloses
on real property or when a title is obtained to the collateral supporting
certain loans in full or partial satisfaction of a debt. At December 31, 1994,
foreclosed properties amounted to $18.0 million, a decrease of 43 percent from
the $31.7 million of foreclosed properties reported in 1993.
When the supporting collateral of a loan is placed in the foreclosed real
estate category, it is transferred at the lower of either the recorded
investment in the loan or the estimated net realizable value based upon recent
appraisals. The difference between the book value of the loan and the estimated
net realizable value of the collateral is charged against the allowance for
loan losses. The amount of foreclosed commercial real estate at December 31,
1994, valued at 50 percent of original loan amounts, is not expected to decline
significantly during 1995. See Changes in Nonperforming Assets table below.
In management's opinion, nonperforming assets as a percent of total loans
is expected to remain flat or increase slightly in 1995, provided the economy
continues to grow. Similar to the level of net charge-offs experienced over a
period of time, there is a core amount of nonperforming assets which are
related to normal lending activities. Changes in the level of total loans, the
mix of the loan portfolio, and
12
economic conditions will primarily determine the future levels of nonperforming
assets.
CHANGES IN NONPERFORMING ASSETS
--------------------------------------------------------------------------------
(Dollars in millions) 1994 1993 1992
--------------------------------------------------------------------------------
Beginning balance $59.5 $55.8 $84.0
New nonperformers 18.0 22.4 32.3
Acquisitions ---- 24.2 ----
Return to accrual (2.0) (3.4) (.5)
Payments (33.5) (26.2) (39.9)
Charge-offs (5.3) (13.2) (17.8)
Market writedowns ---- (.1) (2.3)
--------------------------------------------------------------------------------
Ending balance $36.7 $59.5 $55.8
--------------------------------------------------------------------------------
PAST DUE LOANS AND POTENTIAL PROBLEM ASSETS
Past due loans are loans that are 90 days or more past due as to principal
or interest but have not been placed on nonaccrual status. First Tennessee
continues accruing interest on these loans if they are currently in the process
of collection and are well-secured. Past due loans were $22.3 million at
December 31, 1994, a $2.1 million decrease from the $24.4 million at year-end
1993.
Potential problem assets, which are not included in nonperforming assets,
increased to $76.3 million at December 31, 1994, from the prior year's level
and remained at approximately 1 percent of total loans. 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 assets classified substandard and doubtful.
SUBSEQUENT EVENTS
Significant First Quarter Events
Subsequent to December 31, 1994, First Tennessee terminated $500 million of
the basis swap discussed in the Interest Rate Risk section. The termination
reflects a decision to modify balance sheet management strategies, as a result
of a change in First Tennessee's overall interest rate risk tolerance. The
termination cost of the swap was $16.5 million, and was deferred and will be
amortized over the remaining 16 months of the swap.
Deposit Insurance Premium Proposal
On January 31, the Federal Deposit Insurance Corporation proposed an 83
percent reduction in the deposit premium rates banks pay. They also announced
plans to widen the range of premiums which is now 23 cents to 31 cents per $100
of deposits to between 4 cents and 31 cents. The comment period on this
proposal will end April 17. A decrease in premiums would be beneficial to First
Tennessee and its deposit customers.
Originated Mortgage Servicing Rights Proposal
The Financial Accounting Standards Board (FASB) has proposed a change to
Rule 65 (SFAS 65) to make originated and purchased mortgage servicing rights
equal in the eyes of the accounting profession. Previously, if a company bought
servicing rights, the rights appeared on the books as an asset. But if the
rights were acquired in making a loan, they did not appear on the books. Based
on the last proposal, it is the opinion of management that this change will
have a positive impact on First Tennessee's mortgage banking operations.
SFAS No. 114 - "Accounting by Creditors for Impairment of a Loan"
In May 1993, the FASB issued SFAS No. 114. It requires that impaired loans
that are within the scope of this statement be measured based on the present
value of expected future cash flows, discounted at the loan's effective
interest rate; at the loan's observable market price; or the fair value of the
collateral, if the loan is collateral dependent. SFAS No. 114 is effective for
fiscal years beginning after December 15, 1994, with earlier adoption
permitted. First Tennessee adopted SFAS No. 114 on January 1, 1995, with no
material impact.
13
ANALYSIS OF CHANGES IN NET INTEREST INCOME
1994 Compared to 1993 1993 Compared to 1992
Increase (Decrease) Due to* Increase (Decrease) Due to*
(Fully taxable equivalent) ------------------------------------- -------------------------------------
(Dollars in thousands) Rate** Volume** Total Rate** Volume** Total
---------------------------------------------------------------------------------------------------------------------------------
Interest income - FTE:
Loans:
Commercial $ 6,728 $ 24,584 $ 31,312 $(11,131) $ 7,470 $ (3,661)
Consumer (6,285) 44,201 37,916 (11,448) 25,079 13,631
Mortgage warehouse loans held for sale 457 7,472 7,929 (1,762) 26,886 25,124
Permanent mortgage (4,274) 2,322 (1,952) (2,874) (10,298) (13,172)
Credit card receivables 736 4,719 5,455 (3,192) 1,097 (2,095)
Real estate construction 697 3,379 4,076 (819) 2,119 1,300
Nonaccrual 353 (581) (228) 729 (456) 273
--------------------------------------------- -------- --------
Total loans (2,367) 86,875 84,508 (34,304) 55,704 21,400
--------------------------------------------- -------- --------
Investment securities:
U.S. Treasury and other U.S.
government agencies (1,077) (36,048) (37,125) (22,063) 28,471 6,408
States and municipalities (571) (2,526) (3,097) (274) (1,785) (2,059)
Other (1,814) (7,861) (9,675) (2,337) (15,570) (17,907)
--------------------------------------------- -------- --------
Total investment securities (3,366) (46,531) (49,897) (27,298) 13,740 (13,558)
--------------------------------------------- -------- --------
Other earning assets:
Investment in bank time deposits 1 43 44 (659) (1,630) (2,289)
Federal funds sold and securities
purchased under agreements to resell 2,342 1,837 4,179 (791) (2,198) (2,989)
Trading securities inventory 1,836 1,596 3,432 (2,316) 1,339 (977)
--------------------------------------------- -------- --------
Total other earning assets 3,658 3,997 7,655 (2,139) (4,116) (6,255)
--------------------------------------------- -------- --------
Total earning assets 13,434 28,832 42,266 (57,435) 59,022 1,587
---------------------------------------------------------------------------------------------------------------------------------
Total Interest income $ 42,266 $ 1,587
---------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing deposits:
Checking/Interest $ (978) $ (455) $ (1,433) $ (3,236) $ 1,275 $ (1,961)
Savings (4,746) 2,752 (1,994) (3,660) 1,327 (2,333)
Money market account 10,109 2,748 12,857 (11,289) 2,575 (8,714)
Certificates of deposit under $100,000
and other time (713) 4,426 3,713 (19,739) (9,439) (29,178)
Certificates of deposit $100,000 and more 1,901 1,574 3,475 (1,682) (2,201) (3,883)
--------------------------------------------- -------- --------
Total interest-bearing deposits 4,735 11,883 16,618 (43,869) (2,200) (46,069)
Federal funds purchased and securities
sold under agreements to repurchase 10,757 584 11,341 (3,066) 9,666 6,600
Commercial paper and othershort-term
borrowings 2,243 (3,384) (1,141) (3,272) 19,151 15,879
Long-term debt 317 (565) (248) 1,444 (2,998) (1,554)
--------------------------------------------- -------- --------
Total interest-bearing liabilities 16,580 9,990 26,570 (52,023) 26,879 (25,144)
---------------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 26,570 $(25,144)
---------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 15,696 $ 26,731
---------------------------------------------------------------------------------------------------------------------------------
* 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.
14
ANALYSIS OF NONINTEREST INCOME AND NONINTEREST EXPENSE
Growth rates (%)
----------------
(Dollars in thousands) 1994 1993 1992 1991 1990 1989 94/93 94/89
------------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Mortgage banking $118,442 $ 85,640 $ 16,290 $ 8,246 $ 7,725 $ 6,059 38.3 + 81.2 +
Bond division 77,478 91,525 80,275 68,628 41,704 31,769 15.3 - 19.5 +
Deposit transactions and cash
management 63,198 57,420 52,946 45,253 39,254 36,586 10.1 + 11.6 +
Bank card 31,401 28,467 26,556 25,834 22,299 20,496 10.3 + 8.9 +
Trust services 28,933 26,532 23,819 20,996 17,994 16,587 9.0 + 11.8 +
Equity securities gains/(losses) 24,251 (479) 342 (713) (1,039) 2,326 5,162.8 + 59.8 +
Investment securities gains/(losses) (3,610) 1,284 (1,918) (757) (940) (191) 381.2 - 80.0 -
All other:
Check clearing fees 16,125 14,569 12,956 8,879 8,610 9,251 10.7 + 11.8 +
Other service charges 7,221 9,296 6,942 5,539 4,936 5,331 22.3 - 6.3 +
Other 25,731 20,553 17,834 13,092 18,481 18,004 25.2 + 7.4 +
--------------------------------------------------------------------------------------------------------------
Total other income 49,077 44,418 37,732 27,510 32,027 32,586 10.5 + 8.5 +
--------------------------------------------------------------------------------------------------------------
Total noninterest income $389,170 $334,807 $236,042 $194,997 $159,024 $146,218 16.2 + 21.6 +
--------------------------------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation, incentives, and
benefits $294,884 $265,851 $198,907 $168,251 $144,339 $143,949 10.9 + 15.4 +
Operations services 33,201 28,482 24,181 21,809 18,437 3,822 16.6 + 54.1 +
Occupancy 30,000 24,863 23,047 20,413 18,579 18,365 20.7 + 10.3 +
Communications and courier 25,999 21,544 17,000 15,894 13,847 15,144 20.7 + 11.4 +
Equipment rentals, depreciation, and
maintenance 24,600 20,264 17,015 13,606 12,516 22,477 21.4 + 1.8 +
Amortization of intangible assets 20,680 30,811 13,666 8,911 7,932 7,027 32.9 - 24.1 +
Deposit insurance premium 16,419 16,014 15,678 12,846 7,133 5,064 2.5 + 26.5 +
All other:
Legal and professional fees 12,665 10,883 11,228 7,944 6,159 6,414 16.4 + 14.6 +
Supplies 9,763 8,969 5,992 5,382 5,379 6,490 8.9 + 8.5 +
Advertising and public relations 9,635 7,335 5,852 4,693 4,258 5,170 31.4 + 13.3 +
Fed service fees 8,544 7,778 7,228 5,311 4,960 5,178 9.8 + 10.5 +
Contribution to charitable foundation 9,379 -- -- -- -- -- N/A N/A
Travel and entertainment 8,112 7,255 5,301 4,615 4,685 4,798 11.8 + 11.1 +
Market adjustments to foreclosed real
estate 3,032 378 3,180 6,846 1,846 1,816 702.1 + 10.8 +
Other 38,791 41,471 31,530 29,498 26,197 25,865 6.5 - 8.4 +
--------------------------------------------------------------------------------------------------------------
Total other expense 99,921 84,069 70,311 64,289 53,484 55,731 18.9 + 12.4 +
--------------------------------------------------------------------------------------------------------------
Total noninterest expense $545,704 $491,898 $379,805 $326,019 $276,267 $271,579 10.9 + 15.0 +
--------------------------------------------------------------------------------------------------------------
Certain previously reported amounts have been reclassified to agree with
current presentation.
15
MATURITIES OF INVESTMENT SECURITIES HELD TO MATURITY AT DECEMBER 31, 1994
(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
------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities and collateralized
mortgage obligations* $ 464 5.38% $17,784 6.03% $166,468 6.01% $654,236 5.95%
U.S. Treasury and other U.S. government agencies 17,533 5.35 21,208 5.79 4,974 5.40 1,021 7.15
States and municipalities** 16,402 10.28 20,265 9.41 8,040 8.67 13,991 9.51
------------------------------------------------------------------------------------------------------------------------------------
Total $34,399 7.70% $59,257 7.10% $179,482 6.12% $669,248 6.02%
------------------------------------------------------------------------------------------------------------------------------------
* Includes $837.3 million of government agency issued mortgage-backed
securities and collateralized mortgage obligations which, when adjusted
for early paydowns, have an estimated average life of 3.14 years.
** 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.
MATURITIES OF INVESTMENT SECURITIES AVAILABLE FOR SALE AT DECEMBER 31, 1994
(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
------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities and collateralized
mortgage obligations* $ 1,971 6.52% $ 70,843 6.21% $217,246 6.01% $503,958 6.67%
U.S. Treasury and other U.S. government agencies 15,296 5.94 300,293 5.64 8,369 6.89 1,535 5.11
States and municipalities** 1,566 12.91 5,035 9.11 6,469 9.55 1,710 8.27
Other 3,416 6.35 4,815 5.74 61 11.31 48,096 *** 5.22
------------------------------------------------------------------------------------------------------------------------------------
Total $22,249 6.54% $380,986 5.79% $232,145 6.14% $555,299 6.54%
------------------------------------------------------------------------------------------------------------------------------------
* Includes $793.6 million of government agency issued mortgage-backed
securities and collateralized mortgage obligations which, when adjusted
for early paydowns, have an estimated average life of 2.6 years.
** 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.
*** Represents equity securities with no stated maturity.
16
MATURITIES OF LOANS AT DECEMBER 31, 1994
After 1 Year
(Dollars in thousands) Within 1 Year Within 5 Years After 5 Years Total
----------------------------------------------------------------------------------------------------
Commercial $1,638,408 $1,049,898 $ 200,365 $2,888,671
Consumer 68,983 1,092,515 1,075,233 2,236,731
Credit card receivables 475,471 -- -- 475,471
Real estate construction 101,791 48,982 9,595 160,368
Permanent mortgage 51,183 59,708 458,838 569,729
Nonaccrual 6,143 4,339 6,057 16,539
----------------------------------------------------------------------------------------------------
Total loans, net of unearned income $2,341,979 $2,255,442 $1,750,088 $6,347,509
----------------------------------------------------------------------------------------------------
For maturities over one year:
Interest rates - floating $ 699,935 $ 425,054 $1,124,989
Interest rates - fixed 1,555,507 1,325,034 2,880,541
----------------------------------------------------------------------------------------------------
Total $2,255,442 $1,750,088 $4,005,530
----------------------------------------------------------------------------------------------------
17
REGULATORY CAPITAL AT DECEMBER 31, 1994
(Dollars in thousands) First Tennessee (1) FTBNA (2) CBT (3) Peoples (4) Planters (5) FTBNA-MS (6)
------------------------------------------------------------------------------------------------------------------------------
Capital:
Tier 1 capital:
Shareholders' common equity $ 748,771 $ 672,783 $ 23,514 $ 14,479 $ 5,220 $ 6,242
Less disallowed intangibles 66,941 68,185 -- -- -- 792
Add unrealized holding losses on
available for sale securities 24,116 23,256 233 479 654 --
------------------------------------------------------------------------------------------------------------------------------
Total Tier 1 capital 705,946 627,854 23,747 14,958 5,874 5,450
------------------------------------------------------------------------------------------------------------------------------
Tier 2 capital:
Qualifying debt 79,780 75,000 -- -- -- --
Qualifying allowance for loan losses 91,429 87,676 1,790 801 417 446
------------------------------------------------------------------------------------------------------------------------------
Total Tier 2 capital 171,209 162,676 1,790 801 417 446
------------------------------------------------------------------------------------------------------------------------------
Total capital $ 877,155 $ 790,530 $ 25,537 $ 15,759 $ 6,291 $ 5,896
------------------------------------------------------------------------------------------------------------------------------
Risk-adjusted assets $ 7,298,776 $ 6,999,746 $142,127 $ 63,999 $32,819 $35,543
Quarterly average assets 10,315,059 9,894,347 233,943 118,769 60,003 58,433
------------------------------------------------------------------------------------------------------------------------------
Ratios:
Tier 1 capital to risk-adjusted assets 9.67% 8.97% 16.71% 23.37% 17.90% 15.33%
Tier 2 capital to risk-adjusted assets 2.35 2.32 1.26 1.25 1.27 1.26
------------------------------------------------------------------------------------------------------------------------------
Total capital to risk-adjusted assets 12.02% 11.29% 17.97% 24.62% 19.17% 16.59%
------------------------------------------------------------------------------------------------------------------------------
Leverage - Tier 1 capital to
adjusted quarterly average assets 6.87% 6.37% 10.14% 12.54% 9.68% 9.46%
------------------------------------------------------------------------------------------------------------------------------
(1) First Tennessee National Corporation (2) First Tennessee Bank National
Association (3) Cleveland Bank and Trust Company
(4) Peoples and Union Bank (5) Planters Bank (6) First Tennessee Bank
National Association Mississippi
Based on regulatory guidelines
18
RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1994
Interest Sensitivity Period
Within 3 After 3 Months After 6 Months
(Dollars in millions) Months Within 6 Month Within 12 Months Other Total
-------------------------------------------------------------------------------------------------------------------
Earning assets:
Loans $3,217 $ 334 $ 732 $2,434 $6,717
Investment securities 95 113 163 1,723 2,094
Other earning assets 440 -- -- -- 440
-------------------------------------------------------------------------------------------------------------------
Total earning assets $3,752 $ 447 $ 895 $4,157 $9,251
-------------------------------------------------------------------------------------------------------------------
Earning asset funding:
Interest-bearing deposits $1,834 $ 556 $ 600 $2,997 $5,987
Short-term purchased funds 1,654 -- -- -- 1,654
Long-term debt -- 1 1 92 94
Noninterest-bearing funds 104 (4) (7) 1,423 1,516
-------------------------------------------------------------------------------------------------------------------
Earning asset funding $3,592 $ 553 $ 594 $4,512 $9,251
-------------------------------------------------------------------------------------------------------------------
Rate sensitivity gap:
Period $ 160 $(106) $ 301 $ (355)
Cumulative 160 54 355 --
----------------------------------------------------------------------------------------------------------
Rate sensitivity gap adjusted for interest
rate futures and interest rate swaps:
Period $ (390) $(106) $ 371 $ 125
Cumulative (390) (496) (125) --
----------------------------------------------------------------------------------------------------------
Adjusted gap as a percent of earning assets:
Period (4.2)% (1.2)% 4.0% 1.4%
Cumulative (4.2) (5.4) (1.4) --
----------------------------------------------------------------------------------------------------------
Interest-sensitive categories represent ranges in which assets and liabilities
can be repriced, not necessarily their actual maturities. Other amounts
include assets and liabilities with interest sensitivity of more than 12 months
or with indefinite repricing schedules.
19
LOANS AND FORECLOSED REAL ESTATE AT DECEMBER 31
1994 1993
------------------------------------------------------------- -----------------
Construction Allowance Allowance
and Commercial for Loan for Loan
(Dollars in millions) Commercial Development Real Estate Total Losses Total Losses
--------------------------------------------------------------------------------------------------------------------------
Internal grades:
A $ 204 $ -- $ 3 $ 207 $ -- $ 111 $ --
B 368 4 27 399 1 370 1
C 1,587 133 461 2,181 22 1,916 23
D 50 1 23 74 7 65 5
E 17 -- 9 26 4 58 5
F 29 1 9 39 8 36 11
--------------------------------------------------------------------------------------------------------------------------
2,255 139 532 2,926 42 2,556 45
Nonaccrual loans:
Contractually past due 5 -- 1 6 2 9 5
Contractually current 1 -- 3 4 2 7 2
--------------------------------------------------------------------------------------------------------------------------
Total commercial &
commercial real estate loans $2,261 $139 $536 $2,936 $ 46 $2,572 $ 52
--------------------------------------------------------------------------------------------------------------------------
Retail:
Consumer 2,164 19 1,733 15
Credit card 475 19 428 17
Permanent mortgages 565 2 495 4
Mortgage warehouse loans held for sale 370 -- 1,100 --
Mortgage banking nonaccrual loans 6 1 9 1
--------------------------------------------------------------------------------------------------------------------------
Total retail loans 3,580 41 3,765 37
--------------------------------------------------------------------------------------------------------------------------
Cleveland Bank & Trust Company 139 3 144 3
Planters Bank 25 1 25 1
Other/Unfunded commitments 37 3 31 3
General reserve -- 13 -- 12
--------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income $6,717 $107 $6,537 $108
--------------------------------------------------------------------------------------------------------------------------
Foreclosed real estate:
Foreclosed property $ 2 $ 9 $ 2 $ 13 $ 18
Foreclosed property - mortgage banking -- -- -- 5 14
--------------------------------------------------------------------------------------------------------------------------
Total foreclosed real estate $ 18 $ 32
--------------------------------------------------------------------------------------------------------------------------
All amounts in the Allowance for Loan Losses columns have been rounded to the
nearest million dollars. Grade A loans have reserve amounts of less than
$500,000.
Definitions of each credit grade are provided below:
*GRADE A -- Established, stable companies with excellent earnings, liquidity,
and capital. Possess many of the same characteristics as Standard & Poor's
(S&P) AA rated companies.
*GRADE B -- Established, stable companies with good earnings, liquidity, and
capital. Possess many of the same characteristics as S&P A rated companies.
*GRADE C -- Established, stable companies with satisfactory earnings,
liquidity, and capital and with consistent, positive trends relative to
industry norms.
*GRADE D -- Financial condition adversely affected by temporary lack of
earnings or liquidity or changes in the operating environment. An action
plan is required to rehabilitate the credit or have it refinanced elsewhere.
*GRADE E -- Significant developing weaknesses or adverse trends in earnings,
liquidity, capital, or operating environment. No 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 is believed to be substantially equivalent
to the regulators' classifications of substandard and doubtful.
*NONACCRUAL -- A loan that is placed on nonaccrual status is not included in
any of these six grades, but is placed in a separate nonaccrual category.
Commercial and real estate loans are placed on nonaccrual status
automatically once they become 90 days or more past due.
Based on internal loan classifications.
20
FTBNA LOANS SECURED BY REAL ESTATE AT DECEMBER 31
1994 1993
-------------------------------- ----------------------------------
Construction Commercial Construction Commercial
(Dollars in millions) & Development Real Estate Total & Development Real Estate Total
----------------------------------------------------------------------------------------------------------------------------------
Risk categories:
Real estate collateral serves as only source of repayment $ 79 $170 $249 $ 55 $171 $226
Real estate collateral is primary source of
repayment with a substantial secondary source 60 366 426 24 356 380
----------------------------------------------------------------------------------------------------------------------------------
Total $139 $536 $675 $ 79 $527 $606
----------------------------------------------------------------------------------------------------------------------------------
Project type:
Apartments $ 6 $ 74 $ 80 $ 1 $ 77 $ 78
Hotels/Motels 8 48 56 -- 62 62
Office buildings - multi-tenant 2 56 58 3 58 61
Single family builder 53 4 57 46 2 48
Shopping centers 23 136 159 7 99 106
Commercial/Special purpose units 8 75 83 2 73 75
All other 39 143 182 20 156 176
----------------------------------------------------------------------------------------------------------------------------------
Total $139 $536 $675 $ 79 $527 $606
----------------------------------------------------------------------------------------------------------------------------------
Based on internal loan classifications. Certain previously reported amounts
have been reclassified to agree with current presentation.
21
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) 1994 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Beginning balance $ 107,723 $ 99,827 $ 92,464 $ 88,576 $ 67,469 $ 53,347
Provision for loan losses 16,733 35,697 44,242 55,393 64,821 64,536
Allowance from acquisitions -- 971 -- 9,327 -- --
Charge-offs:
Commercial 5,672 15,869 18,094 31,059 24,408 34,235
Consumer 8,902 8,704 10,242 14,375 12,733 12,644
Credit card receivables 12,674 13,357 17,013 16,913 11,510 8,773
Real estate construction -- 2,320 173 6,888 6,214 2,410
Permanent mortgage 712 687 1,650 930 1,020 223
-----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 27,960 40,937 47,172 70,165 55,885 58,285
-----------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 3,765 5,916 5,278 5,086 8,207 5,029
Consumer 4,364 3,445 2,713 2,773 2,519 1,813
Credit card receivables 1,890 2,262 1,985 1,278 1,141 934
Real estate construction 373 159 215 150 286 79
Permanent mortgage 101 383 102 46 18 16
-----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 10,493 12,165 10,293 9,333 12,171 7,871
-----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 17,467 28,772 36,879 60,832 43,714 50,414
-----------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 106,989 $ 107,723 $ 99,827 $ 92,464 $ 88,576 $ 67,469
-----------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income
outstanding at December 31* $ 6,717,378 $ 6,536,658 $ 4,890,358 $ 4,689,325 $ 4,481,467 $ 4,299,636
-----------------------------------------------------------------------------------------------------------------------------------
Average loans, net of unearned income
outstanding during the year* $ 6,430,956 $ 5,360,869 $ 4,689,248 $ 4,477,786 $ 4,330,697 $ 4,265,829
-----------------------------------------------------------------------------------------------------------------------------------
Ratios:
Allowance to loans, net of unearned income 1.59 % 1.65 % 2.04 % 1.97 % 1.98 % 1.57 %
Net charge-offs to average loans,
net of unearned income* 0.27 0.54 0.79 1.36 1.01 1.18
Net charge-offs to allowance 16.3 26.7 36.9 65.8 49.4 74.7
-----------------------------------------------------------------------------------------------------------------------------------
*Includes mortgage warehouse loans held for sale reported on the Consolidated Statements of Condition.
22
NONPERFORMING ASSETS AT DECEMBER 31
(Dollars in thousands) 1994 1993 1992
---------------------------------------------------------------------------------------------
Amounts:
Nonaccrual loans $16,539 $ 25,966 $28,773
Restructured loans 158 579 1,288
---------------------------------------------------------------------------------------------
Total nonperforming loans 16,697 26,545 30,061
Foreclosed real estate 17,989 31,658 24,491
Other assets 2,055 1,292 1,292
---------------------------------------------------------------------------------------------
Total nonperforming assets $36,741 $ 59,495 $55,844
---------------------------------------------------------------------------------------------
Non-government guaranteed past due loans*** $12,287 $ 12,873 $14,301
Government guaranteed past due loans*** 10,030 11,560 8,906
Past due loans*
---------------------------------------------------------------------------------------------
Ratios:
Nonperforming loans to total loans, net of unearned income** .25% .41% .61%
Nonperforming assets to total loans, net of unearned income,
plus foreclosed real estate and other assets** .55 .91 1.14
Nonperforming assets and past due loans to total loans,
net of unearned income, plus foreclosed real estate and
other assets** .88 1.28 1.61
---------------------------------------------------------------------------------------------
(Dollars in thousands) 1991 1990 1989
----------------------------------------------------------------------------------------------
Amounts:
Nonaccrual loans $43,521 $ 69,685 $48,513
Restructured loans 2,346 965 47
----------------------------------------------------------------------------------------------
Total nonperforming loans 45,867 70,650 48,560
Foreclosed real estate 37,406 32,075 25,808
Other assets 723 109 394
----------------------------------------------------------------------------------------------
Total nonperforming assets $83,996 $102,834 $74,762
----------------------------------------------------------------------------------------------
Non-government guaranteed past due loans***
Government guaranteed past due loans***
Past due loans* $21,947 $ 17,274 $13,178
----------------------------------------------------------------------------------------------
Ratios:
Nonperforming loans to total loans, net of unearned income** .98% 1.58% 1.13%
Nonperforming assets to total loans, net of unearned income,
plus foreclosed real estate and other assets** 1.78 2.28 1.73
Nonperforming assets and past due loans to total loans,
net of unearned income, plus foreclosed real estate and
other assets** 2.24 2.66 2.03
----------------------------------------------------------------------------------------------
*Past due loans that are 90 days or more past due as to principal and/or
interest and not yet on nonaccrual status.
**Total laoans includes mortgage warehouse loans held for sale reported on the
Consolidated Statements of Condition.
***Not available for years prior to 1992.
23
GRAPH TITLE: RETURN ON AVERAGE ASSETS
NARRATIVE DESCRIPTION: This is a bar graph with the x-axis
representing annual periods from
1989 to 1994 and the y-axis ranging
from 0.00 percent to 1.50 percent.
There are two sets of bars: return
on average assets as originally
reported, and return on average
assets as restated to include
acquisitions. The originally
reported bars begin in 1989 at .5
percent and steadily increase to
1.5 percent in 1994. The restated
bars begin in 1989 at .6 percent and
gradually increase to 1.1 percent in
1993.
DATA POINTS:
Return on Average Return on Average
Assets as Assets as Restated
Originally to Include
Year Reported Acquisitions
1989 .5 .6
1990 .7 .8
1991 .9 1.0
1992 1.1 1.1
1993 1.4 1.1
1994 1.5
NOTE: The information in this graph for
periods prior to 1994 is presented
as originally reported and restated
to give effect for the poolings of
interest transactions with SNMC
Management Corporation, Highland
Capital Management Corp., Cleveland
Bank and Trust Company, and Planters
Bank which occurred in 1994, with New
South Bancorp which occurred in 1993,
and with Home Federal Corporation
which occurred in 1992.
REFERENCE: Overview of Operations Section
GRAPH TITLE: RETURN ON AVERAGE EQUITY
NARRATIVE DESCRIPTION: This is a bar graph with the x-axis
representing annual periods from
1989 to 1994 and the y-axis ranging
from 0.00 percent to 25.00 percent.
There are two sets of bars: return
on average equity as originally
reported, and return on average
equity restated to include
acquisitions. The originally
reported bars begin in 1989 at 7.7
percent and increase to 20.0 percent
in 1994. The restated bars begin in
1989 at 8.1 percent and increase to
16.1 percent in 1993.
DATA POINT:
Return on Average Return on Average
Equity as Equity as Restated
Originally to Include
Year Reported Acquisitions
1989 7.7 8.1
1990 12.3 11.6
1991 15.3 13.8
1992 15.4 15.0
1993 19.0 16.1
1994 20.0
NOTE: The information in this graph for
periods prior to 1994 is presented
as originally reported and restated
to give effect for the poolings of
interest transactions with SNMC
Management Corporation, Highland
Capital Management Corp., Cleveland
Bank and Trust Company, and Planters
Bank which occurred in 1994, with New
South Bancorp which occurred in 1993,
and with Home Federal
24
Corporation which occurred in 1992.
REFERENCE: Overview of Operations Section
GRAPH TITLE: EARNINGS PER SHARE
NARRATIVE DESCRIPTION: This is a bar graph with the x-axis
representing annual periods from
1989 to 1994 and the y-axis ranging
from $0.00 to $5.00. There are two
sets of bars: earnings per share as
originally reported, and earnings
per share as restated to include
acquisitions. The earnings per
shares as originally reported bars
begin in 1989 at $1.21 and steadily
increase to $4.56 in 1994. The
earnings per share as restated bars
begin in 1989 at $1.32 and increase
to $3.31 in 1993.
Data Points:
Earnings Per Share Earnings Per Share
as Originally as Restated to
Year Reported Include Acquisitions
1989 $1.21 $1.32
1990 2.01 1.96
1991 2.69 2.51
1992 3.19 2.99
1993 4.26 3.31
1994 4.56
NOTE: The information in this graph for
periods prior to 1994 is presented
as originally reported and restated
to give effect for the poolings of
interest transactions with SNMC
Management Corporation, Highland
Capital Management Corp., Cleveland
Bank and Trust Company, and Planters
Bank which occurred in 1994, with New
South Bancorp which occurred in 1993,
and with Home Federal Corporation
which occurred in 1992. Earnings per
share has been adjusted to reflect
the three-for-two stock dividend in
1992.
REFERENCE: Overview of Operations
GRAPH TITLE: NET INTEREST INCOME AND MARGIN TREND
ANALYSIS
NARRATIVE DESCRIPTION: This is a combination line and bar
graph with the x-axis representing
annual periods from 1989 to 1994 and
the left y-axis ranges from $0 to
$400 million and the right y-axis
ranges from 2.50 percent to 5.00
percent. The bars represent the
fully taxable equivalent of net
interest income in dollars and the
two lines represent the net
interest spread percent and net
interest margin percent. The bars
begin in 1989 at $260.3 million and
steadily increase to $385.4 million
in 1994. The net interest spread
line begins in 1989 at 2.92 percent,
gradually increases to 3.68 percent
in 1993 and decreases slightly to
3.62 percent in 1994. The net
interest margin line begins in 1989
at 4.11 percent, generally increases
to 4.38 percent in 1992 and
gradually decreases to 4.28 percent
in 1994.
25
DATA POINTS: (Millions of Dollars)
Net Net Net
Interest Interest Interest
Year Income Spread Margin
1989 $260.3 2.92 4.11
1990 276.6 2.99 4.09
1991 299.2 3.20 4.15
1992 343.0 3.65 4.38
1993 369.7 3.68 4.29
1994 385.4 3.62 4.28
REFERENCE: Provision for Loan Losses Section
GRAPH TITLE: EARNING ASSET MIX AS A PERCENT OF
AVERAGE ASSETS
NARRATIVE DESCRIPTION: This is a stacked bar graph with the
x-axis representing annual periods
from 1989 to 1994 and the y-axis
ranging from 0 percent to 100.0
percent. The total of the stacked
bars, which represents the percent
of average assets, begins at 89.2
percent in 1989, increases to 91.2
percent in 1991, then gradually
falls to 88.8 percent in 1994. The
stacked bar is comprised of four
different shaded areas: commercial
loans, retail loans, investment
securities, and other earning
assets. The area highlighting the
percentage of commercial loans, to
earning assets, began at 34.4
percent in 1989 gradually declined
to 25.7 percent in 1993 before
rising to 27.8 percent in 1994. The
area highlighting the percentage of
retail loans to earning assets began
at 25.8 percent in 1989, gradually
increased to 35.7 percent in 1994.
The area highlighting the percentage
of investment securities to earning
assets began at 19.9 percent in
1989, gradually increased to 31.6
percent in 1992, then fell to 21.3
percent in 1994. The top area of
the stacked bar represented the
percentage of other earning assets
to total assets and began at 9.1
percent in 1989, increased to 10.9
in 1990, decreased to 10.3 percent
in 1991, fell to a low of 3.4
percent in 1993 before increasing to
4.0 percent in 1994.
DATA POINTS:
Percent
Other of
Commercial Retail Investment Earning Average
Year Loans Loans Securities Assets Assets
1989 34.4 25.8 19.9 9.1 89.2
1990 32.0 26.3 21.7 10.9 90.9
1991 29.9 26.8 24.2 10.3 91.2
1992 27.4 27.2 31.6 4.9 91.1
1993 25.7 30.2 30.5 3.4 89.8
1994 27.8 35.7 21.3 4.0 88.8
Note: Retail loans includes consumer,
credit card, and residential
mortgages.
REFERENCE: Earning Assets Section
GRAPH TITLE: NET CHARGE-OFFS
NARRATIVE DESCRIPTION: This is a bar graph with the x-axis
representing annual periods from
1989 to 1994 and the y-axis ranging
from $0 to $80 million. The bars
begin in 1989 at 50.4 million,
decrease to 43.7 million in 1990,
increase to 60.8 million in 1991,
before falling steadily to a low of
17.5 million in 1994.
26
DATA POINTS: (Dollars in Millions)
Year Net Charge-Offs
1989 50.4
1990 43.7
1991 60.8
1992 36.9
1993 28.8
1994 17.5
REFERENCE: Allowance for Loan Losses and Net
Charge-Offs Section
GRAPH TITLE: NONPERFORMING ASSETS TO TOTAL LOANS
(SEE NOTE)
NARRATIVE DESCRIPTION: This is a bar graph with the x-axis
representing annual periods from
1989 to 1994 and the y-axis ranging
from 0 percent to 2.50 percent. The
bars begin in 1989 at 1.73 percent,
increase to 2.28 percent in 1990,
then decrease steadily to .55
percent in 1994.
DATA POINTS:
Nonperforming
Assets to Total
Year Loans
1989 1.73
1990 2.28
1991 1.78
1992 1.14
1993 .91
1994 .55
NOTE: Net of unearned income plus
foreclosed real estate and other
assets.
REFERENCE: Nonperforming Assets Section
GRAPH TITLE: NONPERFORMIMG LOANS
NARRATIVE DESCRIPTION: This is a bar graph with the x-axis
representing annual periods from
1989 to 1994 and the y-axis ranging
from $0 to $80 million. The bars
begin in 1989 at $48.6 million,
increase to $70.7 million in 1990,
fall to $45.9 million in 1991, then
gradually decrease to $16.7 million
in 1994.
DATA POINTS:
Nonperforming
Year Loans
1989 48.6
1990 70.7
1991 45.9
1992 30.1
1993 26.5
1994 16.7
REFERENCE: Nonperforming Assets Section
GRAPH TITLE: CUMULATIVE CHANGES IN CLASSIFIED
ASSETS SINCE YEAR-END 1988
(QUARTERLY)
NARRATIVE DESCRIPTION: This is a line graph with the x-axis
representing quarterly periods from
fourth quarter 1988 to fourth
quarter 1994, and the y-axis ranges
from $(30) to $210 million. There
are two lines: classified assets net
of charge-offs and adjustments, and
classified assets. The classified
assets net of charge-offs and
27
adjustments line begins December
31,1988 at $0, generally increases
until it reaches $99 million in the
third quarter of 1991, decreases
steadily to $(30) million in the
third quarter of 1994, and increases
to $(15) million in the fourth
quarter of 1994. The classified
assets line begins December 31, 1988
at $0, generally increases until it
reaches $202 million in the third
quarter of 1991, decreases steadily
to $128 million in the third quarter
of 1993, rises to $136 million in
the first quarter of 1994, decreases
to $113 million in the third quarter
of 1994 and increases to $129
million in the fourth quarter of
1994. The area between the two
lines is shaded and represents
charge-offs and adjustments to
foreclosed real estate.
DATA POINTS: (Millions of Dollars)
Classified
Assets
Net of
Charge-Offs
Quarter and Classified
& Year Adjustments Assets
12/31/88 $ 0 $ 0
1Q89 17 19
2Q89 59 67
3Q89 46 68
12/31/89 30 68
1Q90 74 115
2Q90 83 131
3Q90 83 141
12/31/90 .80 154
1Q91 95 173
2Q91 95 186
3Q91 99 202
12/31/91 78 190
1Q92 73 189
2Q92 59 179
3Q92 51 175
12/31/92 24 151
1Q93 17 147
2Q93 -4 130
3Q93 -6 128
12/31/93 -5 134
1Q94 -6 136
2Q94 -14 128
3Q94 -30 113
4Q94 -15 129
REFERENCE: Nonperforming Assets Section
GRAPH TITLE: CUMULATIVE CHANGES IN NONACCRUAL
LOANS AND OTHER REAL ESTATE SINCE
YEAR-END 1988 (Quarterly)
(QUARTERLY)
NARRATIVE DESCRIPTION: This is a line graph with the x-axis
representing quarterly periods from
fourth quarter 1988 to fourth
quarter 1994 and the y-axis ranges
from $(30) million to $210 million.
There are two lines: nonaccrual
loans and OREO net of charge-offs
and adjustments, and nonaccrual
loans and OREO. The nonaccrual
loans and OREO net of charge-offs
and adjustments line begins December
31, 1988 at $0, generally increases
until it reaches $59 million in the
first quarter of 1991, decreases
steadily to $(6) million in the
third quarter of 1993, rises to $11
million in the fourth quarter of
1993, and decreases again to $(11)
million at December 31, 1994. The
nonaccrual loans and OREO line
begins December 31, 1988 at $0,
generally increases until it reaches
$144 million in the fourth quarter
of 1991, decreases steadily to $127
million in the third
28
quarter of 1993, rises to $149
million in the fourth quarter of
1993, at which point it begins to
decrease again to $131 million by
the fourth quarter of 1994. The
area between the two lines is
shaded and represents charge-offs and
adjustments to foreclosed real
estate.
DATA POINTS: (Millions of Dollars)
Nonaccrual
Loans and
OREO
Net of
Charge-Offs Nonaccrual
Quarter & and Loans and
Year Adjustments OREO
12/31/88 $ 0 $ 0
1Q89 13 15
2Q89 45 49
3Q89 35 57
12/31/89 27 63
1Q90 37 77
2Q90 35 82
3Q90 35 91
12/31/90 56 123
1Q91 59 134
2Q91 .50 137
3Q91 43 142
12/31/91 35 144
1Q92 32 144
2Q92 24 142
3Q92 20 142
12/31/92 7 134
1Q93 3 133
2Q93 0 133
3Q93 -6 127
12/31/93 11 149
1Q94 8 148
2Q94 3 143
3Q94 -6 135
4Q94 -11 131
REFERENCE: Nonperforming Assets Section
29
GLOSSARY
ALLOWANCE FOR LOAN LOSSES - This reserve represents the amount considered by
management to be adequate to cover estimated losses inherent to the loan
portfolio. A valuation reserve for possible loan losses.
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 interest rates
(e.g., the difference between the Prime and the Fed Funds Rate).
BOOK VALUE PER SHARE - The value of a share of common stock determined by
dividing shareholders' equity at the end of a period by the number of common
shares outstanding at the end of the same period.
CHARGE-OFFS - The amount charged against the allowance for loan losses to
reduce a specific loan to its collectible amount.
CLASSIFIED ASSET - A bank asset 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,
foreclosed property, repossessed assets, and other assets. In compliance with
the standards established by the Office of the Comptroller of the Currency
(OCC) these assets are classified as substandard, doubtful, and loss depending
on the severity of the asset's deterioration.
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.
COMMITMENTS TO EXTEND CREDIT - Agreements to make or acquire a loan or lease as
long as agreed-upon terms (e.g., expiry, 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 certificates, time and
other savings, plus demand deposits.
EARNING ASSETS - Assets that generate interest and dividend income and
yield-related fee income, such as loans and investments.
EARNINGS PER SHARE - Net income, divided by the average number of common shares
outstanding in the period.
FEDERAL FUNDS SOLD/PURCHASED - Excess balances of depository institutions which
are loaned to each other, generally on an overnight basis.
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 change in market rates.
INTEREST RATE FORWARD AND FUTURES 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 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 OPTION - 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 time period.
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 at a designated time period.
A net asset position is the amount by which interest-rate
30
sensitive assets exceed interest-rate sensitive liabilities. An excess of
liabilities would represent a net liability position.
LEVERAGE RATIO - Tier 1 capital divided by quarterly average assets without
the adjustment for securities holding gains or losses less 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.
MORTGAGE LOANS SOLD WITH RECOURSE - Mortgages sold with an agreement to
repurchase any loans upon default.
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.
Purchased mortgage servicing rights (PMSRs) are intangibles created when
mortgage servicing rights are acquired from another party.
NET FREE FUNDING - Noninterest-bearing liabilities (such as demand deposits,
other liabilities, and shareholders' equity) net of nonearning assets (such as
cash, fixed assets, and other assets). It represents the portion of earning
assets being funded by noninterest-bearing funds and is a low-cost source of
funds.
NET INTEREST INCOME (NII) - The amount of income generated by earning assets
reduced by the interest expense of funding those assets.
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 FTE net interest income by average
interest earning assets.
NET INTEREST SPREAD - The difference between the average yield earned on
earning assets on a FTE 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 the cash basis as it is collected after recovery of principal.
NONPERFORMING ASSETS - Loans 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,
repossessed assets, and other assets.
NOTIONAL PRINCIPAL AMOUNT - An amount on which interest rate swaps and interest
rate options, caps and floors payments are based. The "notional amount" is not
paid or received.
OPTIONS - Contracts which allow the holder of the option to purchase or sell a
financial instrument at a specified price and within a specified period of time
from or to the "seller" or "writer" of the option.
PROVISION FOR LOAN LOSSES - The provision for loan losses is the periodic
charge to earnings for potential losses in the loan portfolio. The evaluation
process to determine potential losses includes consideration of the industry,
specific conditions of individual borrowers, and the general economic
environment.
RECOVERIES - The amount added to the allowance for loan losses when funds are
received on a loan which was previously charged off.
RESTRUCTURED LOANS - A loan is considered restructured when an 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 utilizes 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 annualized net income by total average shareholders' equity.
RETURN ON REVENUE (ROR) - The fully taxable equivalent pre-tax profit before
loan loss provision divided by the fully taxable equivalent net interest
income plus noninterest income.
RISK-ADJUSTED ASSETS - A regulatory risk-based capital measure for assessing
capital adequacy that takes into account the broad differences
31
in risks among a banking organization's assets and off-balance sheet
instruments.
RISK-BASED CAPITAL RATIOS - Regulatory ratios of capital to assets, including
assets not reflected on the balance sheet, which have been adjusted to reflect
the risk profile of such assets. Tier 1 capital consists of shareholders'
equity before any adjustment for securities holding gains (losses) reduced by
goodwill and certain other intangible assets, while total capital is Tier 1
capital plus the allowable portion of the allowance for loan losses and
qualifying subordinated debt.
SECURITIES AVAILABLE FOR SALE - Investment securities that will be held for
indefinite periods of time and which may be sold as part of the bank's
asset/liability strategy. These securities are recorded at their current
market value rather than at their historical amortized cost.
SECURITIES HELD TO MATURITY - Investment securities that the bank has the
ability and the intent to hold to maturity. These securities are recorded at
their original cost, adjusted for amortization of premium or discount
accretion.
SECURITIES IN TRADING INVENTORY - Investment securities that are bought and
held principally for the purpose of selling them in the near term (thus held
for only a short period of time).
TOTAL REVENUES - The sum of net interest income and noninterest income.
WATCH LIST LOANS - Identified loans graded D and E requiring a closer level of
monitoring due to some of the following circumstances: impact of negative
economic conditions; changes in company ownership; underwriting exceptions; and
reduction in the value of collateral.
32
CONSOLIDATED STATEMENTS OF CONDITION First Tennessee National Corporation
-------------------------------------------------------------------------------------------------------------------------
December 31
-------------------------
(Dollars in thousands) 1994 1993
-------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 691,093 $ 623,084
Federal funds sold and securities purchased under agreements to resell 267,845 137,663
-------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 958,938 760,747
-------------------------------------------------------------------------------------------------------------------------
Investment in bank time deposits 2,534 7,637
Trading securities inventory 170,031 178,663
Mortgage warehouse loans held for sale 369,869 1,099,686
Securities available for sale 1,151,277 --
Securities held for sale -- 53,035
Securities held to maturity (market value of $892,420 at December 31, 1994) 942,386 --
Investment securities (market value of $2,263,256 at December 31, 1993) -- 2,220,087
Loans, net of unearned income 6,347,509 5,436,972
Less: Allowance for loan losses 106,989 107,723
-------------------------------------------------------------------------------------------------------------------------
Total net loans 6,240,520 5,329,249
-------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 152,962 136,230
Real estate acquired by foreclosure 17,989 31,658
Intangible assets 162,163 174,095
Bond division receivables and other assets 353,742 375,610
-------------------------------------------------------------------------------------------------------------------------
Total assets $10,522,411 $10,366,697
-------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity:
Deposits:
Demand $ 1,701,857 $ 1,925,298
Checking/Interest 486,150 548,224
Savings 583,755 537,252
Money market account 1,779,541 1,697,270
Certificates of deposit under $100,000 and other time 2,708,155 2,280,644
Certificates of deposit $100,000 and more 428,964 413,893
-------------------------------------------------------------------------------------------------------------------------
Total deposits 7,688,422 7,402,581
Federal funds purchased and securities sold under
agreements to repurchase 1,453,802 1,014,644
Commercial paper and other short-term borrowings 199,962 746,561
Bond division payables and other liabilities 337,683 417,284
Long-term debt 93,771 92,043
-------------------------------------------------------------------------------------------------------------------------
Total liabilities 9,773,640 9,673,113
-------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock - no par value (5,000,000 shares
authorized, but unissued) -- --
Common stock - $2.50 par value (shares authorized - 100,000,000;
shares issued - 31,853,323 at December 31, 1994, and
32,031,683 at December 31, 1993) 79,633 80,079
Capital surplus 79,860 90,198
Undivided profits 616,190 525,682
Unrealized market adjustment on available for sale securities (24,116) --
Deferred compensation on restricted stock incentive plan (2,796) (2,375)
-------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 748,771 693,584
-------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $10,522,411 $10,366,697
-------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
33
CONSOLIDATED First Tennessee
STATEMENTS OF National
INCOME Corporation
Year Ended December 31
----------------------------------------
(Dollars in thousands except per share data) 1994 1993 1992
-----------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 519,943 $ 435,039 $ 412,122
Interest on investment securities:
Taxable 122,778 169,585 181,148
Tax-exempt 5,030 7,179 8,610
Interest on trading securities inventory 12,810 9,304 10,285
Interest on other earning assets 8,098 3,875 9,146
-----------------------------------------------------------------------------------------------------
Total interest income 668,659 624,982 621,311
-----------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits:
Checking/Interest 8,819 10,252 12,213
Savings 12,712 14,706 17,039
Money market account 55,291 42,434 51,148
Certificates of deposit under $100,000 and other time 118,233 114,520 143,698
Certificates of deposit $100,000 and more 18,666 15,191 19,074
Interest on short-term borrowings 65,306 55,106 32,627
Interest on long-term debt 9,067 9,315 10,869
-----------------------------------------------------------------------------------------------------
Total interest expense 288,094 261,524 286,668
-----------------------------------------------------------------------------------------------------
Net interest income 380,565 363,458 334,643
Provision for loan losses 16,733 35,697 44,242
-----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 363,832 327,761 290,401
-----------------------------------------------------------------------------------------------------
Noninterest income:
Mortgage banking 118,442 85,640 16,290
Bond division 77,478 91,525 80,275
Deposit transactions and cash management 63,198 57,420 52,946
Bank card 31,401 28,467 26,556
Trust services 28,933 26,532 23,819
Equity securities gains/(losses) 24,251 (479) 342
Debt securities gains/(losses) (3,610) 1,284 (1,918)
All other 49,077 44,418 37,732
-----------------------------------------------------------------------------------------------------
Total noninterest income 389,170 334,807 236,042
-----------------------------------------------------------------------------------------------------
Adjusted gross income after provision for loan losses 753,002 662,568 526,443
-----------------------------------------------------------------------------------------------------
Noninterest expense:
Employee compensation, incentives, and benefits 294,884 265,851 198,907
Operations services 33,201 28,482 24,181
Occupancy 30,000 24,863 23,047
Communications and courier 25,999 21,544 17,000
Equipment rentals, depreciation, and maintenance 24,600 20,264 17,015
Amortization of intangible assets 20,680 30,811 13,666
Deposit insurance premium 16,419 16,014 15,678
All other 99,921 84,069 70,311
-----------------------------------------------------------------------------------------------------
Total noninterest expense 545,704 491,898 379,805
-----------------------------------------------------------------------------------------------------
Income before income taxes 207,298 170,670 146,638
Applicable income taxes 60,949 64,588 56,217
-----------------------------------------------------------------------------------------------------
Net income $ 146,349 $ 106,082 $ 90,421
-----------------------------------------------------------------------------------------------------
Net income per common share $ 4.56 $ 3.31 $ 2.99
-----------------------------------------------------------------------------------------------------
Weighted average shares outstanding 32,114,076 32,031,123 30,219,758
-----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
34
CONSOLIDATED First Tennessee
STATEMENTS OF National
SHAREHOLDERS' EQUITY Corporation
------------------------------------------------------------------------------------------------------------------------------------
Common Common Capital Undivided
(Dollars in thousands) Shares Total Stock Surplus Profits
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1991, as originally reported 19,855,013 $538,462 $49,637 $ 99,403 $391,608
Adjustments for poolings of interests 1,955,289 24,160 4,888 1,862 17,410
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1991, restated 21,810,302 562,622 54,525 101,265 409,018
Net income -- 90,421 -- -- 90,421
Cash dividends declared -- (37,490) -- -- (37,490)
Common stock issued:
SNMC Management Corp. acquisition 1,750,829 5,428 4,377 1,051 --
Three-for-two stock split 7,960,571 (27) 19,902 (19,929) --
For exercise of stock options 329,436 5,386 824 4,562 --
Under employee benefit plans 1,086 50 3 47 --
Restricted: incentive to non-employee directors 10,000 -- 25 490 --
Common stock repurchased (33,500) (1,138) (84) (1,054) --
Amortization of deferred compensation
on restricted stock incentive plan -- 1,265 -- -- --
Other -- 1,122 -- 1,090 32
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 31,828,724 627,639 79,572 87,522 461,981
Adjustments for pooling of interests 148,895 2,605 372 772 1,461
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992, restated 31,977,619 630,244 79,944 88,294 463,442
Net income -- 106,082 -- -- 106,082
Cash dividends declared -- (43,582) -- -- (43,582)
Common stock issued:
For exercise of stock options 113,473 2,061 283 1,778 --
Restricted: employee benefit plan 59,641 -- 149 2,132 --
incentive to non-employee directors 1,500 -- 4 51 --
Common stock repurchased (120,550) (4,797) (301) (4,496) --
Amortization of deferred compensation
on restricted stock incentive plan -- 1,397 -- -- --
Other -- 2,179 -- 2,439 (260)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993, restated 32,031,683 693,584 80,079 90,198 525,682
Net income -- 146,349 -- -- 146,349
Cash dividends declared -- (55,871) -- -- (55,871)
Common stock issued:
Emerald Mortgage Company acquisition 151,926 7,105 380 6,725 --
For exercise of stock options 138,515 2,488 346 2,142 --
Restricted: employee benefit plan 45,000 -- 113 1,603 --
incentive to non-employee directors 1,650 -- 4 75 --
Common stock repurchased (515,000) (24,211) (1,288) (22,923) --
Change in unrealized market adjustment on available
for sale securities -- (24,116) -- -- --
Amortization of deferred compensation
on restricted stock incentive plan -- 1,374 -- -- --
Other (451) 2,069 (1) 2,040 30
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 31,853,323 $748,771 $79,633 $ 79,860 $616,190
------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Unrealized Deferred
Market Compen-
(Dollars in thousands) Adjustment sation
--------------------------------------------------------------------------------------------
Balance, December 31, 1991, as originally reported $ -- (2,186)
Adjustments for poolings of interests -- --
--------------------------------------------------------------------------------------------
Balance, December 31, 1991, restated
Net income -- (2,186)
Cash dividends declared -- --
Common stock issued:
SNMC Management Corp. acquisition -- --
Three-for-two stock split -- --
For exercise of stock options -- --
Under employee benefit plans -- --
Restricted: incentive to non-employee directors -- (515)
Common stock repurchased -- --
Amortization of deferred compensation
on restricted stock incentive plan -- 1,265
Other -- --
--------------------------------------------------------------------------------------------
Balance, December 31, 1992 (1,436)
Adjustments for pooling of interests -- --
--------------------------------------------------------------------------------------------
Balance, December 31, 1992, restated (1,436)
Net income -- --
Cash dividends declared -- --
Common stock issued:
For exercise of stock options -- --
Restricted: employee benefit plan -- (2,281)
incentive to non-employee directors -- (55)
Common stock repurchased -- --
Amortization of deferred compensation
on restricted stock incentive plan -- 1,397
Other -- --
--------------------------------------------------------------------------------------------
Balance, December 31, 1993, restated $ -- (2,375)
Net income -- --
Cash dividends declared -- --
Common stock issued:
Emerald Mortgage Company acquisition -- --
For exercise of stock options -- --
Restricted: employee benefit plan -- (1,716)
incentive to non-employee directors -- (79)
Common stock repurchased -- --
Change in unrealized market adjustment on available
for sale securities (24,116) --
Amortization of deferred compensation
on restricted stock incentive plan -- 1,374
Other -- --
--------------------------------------------------------------------------------------------
Balance, December 31, 1994 $(24,116) (2,796)
--------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
35
CONSOLIDATED
STATEMENTS First Tennessee
OF CASH FLOWS National Corporation
----------------------------------------------------------------------------------------------------------
Year Ended December 31
------------------------------------------
(Dollars in thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 146,349 $ 106,082 $ 90,421
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Provision for loan losses 16,733 35,697 44,242
Provision for deferred income tax (2,540) (1,873) 4,178
Depreciation and amortization of premises and equipment 20,121 16,445 13,831
Amortization of intangibles 20,680 30,811 13,666
Net amortization of premiums and accretion of discounts 12,882 25,278 14,692
Market value adjustment on foreclosed property 1,601 378 3,180
Market value adjustment on securities held for sale -- (248) 1,416
Securities contributed to charitable trust 9,379 -- --
Equity securities (gains)/losses (24,251) 479 (342)
Debt securities (gains)/losses 3,610 (1,036) 502
Net gain on disposal of branch -- (672) --
Net (gain)/loss on disposal of fixed assets 108 (873) 1,600
Net (increase)/decrease in:
Trading securities inventory 8,632 9,944 (89,013)
Mortgage warehouse loans held for sale 730,008 (432,558) (115,999)
Bond division receivables 39,667 (30,178) 96,116
Interest receivable (6,355) 9,436 18,087
Other assets (9,394) (86,421) (2,105)
Net increase/(decrease) in:
Bond division payables (50,511) 30,760 (150,989)
Interest payable 14,691 336 (5,368)
Other liabilities (61,813) 43,249 11,276
----------------------------------------------------------------------------------------------------------
Total adjustments 723,248 (351,046) (141,030)
----------------------------------------------------------------------------------------------------------
Net cash provided/(used) by operating activities 869,597 (244,964) (50,609)
----------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from maturities of:
Investment securities -- 1,597,633 875,243
Held to maturity securities 336,305 -- --
Available for sale securities 294,928 -- --
Proceeds from sale of:
Debt securities -- 478,176 220,990
Equity securities -- 6,248 46,318
Available for sale securities 410,040 -- --
Premises and equipment 1,204 856 377
Payments for purchase of:
Debt securities -- (1,271,926) (1,800,956)
Equity securities -- (15,807) (6,808)
Held to maturity securities (478,327) -- --
Available for sale securities (404,540) -- --
Premises and equipment (38,451) (33,397) (18,071)
Net (increase)/decrease in loans (914,676) (738,668) (112,076)
Decrease/(increase) in investment in bank time deposits 5,103 (2,484) 239,478
Branch sale, including cash and cash equivalents sold -- (18,339) --
Acquisitions, net of cash and cash equivalents acquired 130 (102,577) --
----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (788,284) (100,285) (555,505)
----------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from:
Exercise of stock options 2,457 2,020 5,272
Issuance of equity instruments -- -- 5,428
Issuance of long-term debt 2,984 -- --
Payments for:
Capital lease obligations (146) (146) (146)
Long-term debt (1,346) (37,345) (1,392)
Stock repurchase (24,211) (4,797) (1,138)
Cash dividends (41,022) (51,970) (29,347)
Cash-in-lieu of fractional shares (47) -- --
Net increase/(decrease) in:
Deposits 285,841 229,659 155,124
Short-term borrowings (107,632) 160,651 438,417
----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 116,878 298,072 572,218
----------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 198,191 (47,177) (33,896)
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 760,747 807,924 841,820
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 958,938 $ 760,747 $ 807,924
----------------------------------------------------------------------------------------------------------
Total interest paid $ 273,046 $ 259,592 $ 291,850
Total income taxes paid 68,257 70,588 57,536
----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
36
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Tennessee National Corporation
(First Tennessee) and its subsidiaries conform to generally accepted accounting
principles and, as to its banking subsidiaries, with general practice within
the banking industry. The following is a summary of the most significant of
these policies.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of First Tennessee and its banking and non-banking subsidiaries more
than 50 percent owned. Subsidiaries not more than 50 percent owned are
recorded using the equity method. Whereas banking is the most significant
aspect of First Tennessee's business, non-banking subsidiaries engage in
business activities which complement banking, such as credit life and accident
insurance, discount brokerage, and financial investment and trust advisory
services. All significant intercompany accounts and transactions have been
eliminated.
BASIS OF PRESENTATION. Prior period financial statements are restated to
include the accounts of companies that are acquired and accounted for as
poolings of interests, with the exception of New South Bancorp (NSB) which was
recorded by restatement of beginning shareholders' equity without restating
statements of income or condition for the years prior to 1993 based on
materiality. Business combinations accounted for as purchases are included in
the consolidated financial statements from the respective dates of acquisition.
The consolidated financial statements for prior periods also reflect certain
reclassifications to conform to current presentation. None of these
reclassifications had any effect on net income or earnings per share.
STATEMENTS OF CASH FLOWS. Cash and cash equivalents as presented in the
statements include cash and due from banks, federal funds sold, and securities
purchased under agreements to resell. Generally, federal funds are sold for
one-day periods and securities purchased under agreements to resell are
short-term, highly liquid investments. In 1994, First Tennessee issued
approximately 3,858,000 shares of its common stock related to the acquisitions
of SNMC Management Corporation (SNMC), Highland Capital Management Corp.
(HCMC), Cleveland Bank and Trust Company (CBT), Planters Bank (Planters), and
Emerald Mortgage Company (Emerald) (Note 2). In 1993, approximately 149,000
shares of First Tennessee common stock were issued in exchange for all of the
common stock of NSB (Note 2). In 1992, First Tennessee issued approximately
4,177,000 shares of its common stock in exchange for all of the common stock of
Home Financial Corporation (HFC) of Johnson City, Tennessee (Note 2).
TRADING SECURITIES INVENTORY. Trading securities inventory includes securities
purchased in connection with underwriting or dealer activities and is carried
at market value. Realized and unrealized gains and losses on trading
securities are reflected in noninterest income as bond division income.
SECURITIES HELD TO MATURITY. Securities which First Tennessee has the ability
and positive intent to hold to maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts, which are recognized as
adjustments to interest income. Realized gains and losses and unrealized
permanent impairments in value are reported in noninterest income.
SECURITIES AVAILABLE FOR SALE. Securities available for sale include both debt
and equity securities and are reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity. Gains and losses from sales are computed by the specific
identification method and are reported in noninterest income.
MORTGAGE WAREHOUSE LOANS HELD FOR SALE. Mortgage loans that are originated and
held for sale to investors are classified as held for sale. These assets are
recorded at the lower of cost or market value as determined using aggregated
methodology. Gains and losses realized from the sale of these assets and
adjustments to market value are included in noninterest income.
LOANS. Loans are stated at principal amounts outstanding net of unearned
income. Interest on certain consumer installment loans is recognized by the
sum-of-the-months-digits method which does not differ materially from the
effective interest method. Interest on other loans is recognized at the
applicable interest rate on the principal amount outstanding. Included in
nonperforming loans are nonaccrual loans and loans which have been restructured
in accordance with criteria in SFAS No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructuring."
Loans generally are placed on nonaccrual status when the collection of
principal or interest is 90 days or more past due or when, in management's
judgment, such principal or interest will not be collectible in the ordinary
course of business. Consumer installment loans and credit card receivables
are not placed on nonaccrual status, but are charged off when past due 120 days
and 180 days, respectively. When interest accrual is stopped, outstanding
accrued interest receivable is reversed and charged to current operations.
Management may elect to continue the accrual of interest when the estimated net
realizable value of collateral is sufficient to recover the principal balance
and accrued interest. Generally, interest payments received on nonaccrual
loans are applied to principal.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is a valuation
reserve available for losses incurred on loans. 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 reserve through
periodic provisions charged to current operations or recovery of principal on
loans previously charged off.
The determination of the balance of the allowance for loan losses is based
upon a review and analysis of the loan portfolio. Management's objective in
determining the level of the allowance is to maintain a reserve which is
adequate to absorb losses inherent in the portfolio. Their assessment includes
the systematic evaluation of several factors: current and anticipated economic
conditions and their impact on specific borrowers and industry groups; the
level of classified and nonperforming loans; the historical loss experience by
loan type; the results of regulatory
37
examinations of the portfolio; and, in specific cases, the estimated value of
underlying collateral.
PREMISES AND EQUIPMENT. Premises and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation expense is computed
principally on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized on the straight-line method over
the lease periods or the estimated useful lives, whichever is shorter.
Estimated useful lives are 10 to 45 years for premises and three to eight years
for equipment.
Depreciation and amortization expense is included in noninterest expense.
Maintenance agreements are primarily amortized to expense over the period of
time covered. The cost of major renovations is capitalized. All other
maintenance and repair expenditures are expensed as incurred. Gains and losses
on dispositions are reflected in noninterest income and expense.
REAL ESTATE ACQUIRED BY FORECLOSURE. Real estate acquired by foreclosure
represents assets that have been acquired in satisfaction of debt. Property
is carried at the lower of the outstanding loan amount or the estimated fair
market value minus estimated cost to sell the real estate. Any excess of loan
amount over the estimated net realizable fair value at the time of acquisition
is charged to the allowance for loan losses. Required developmental costs
associated with foreclosed property under construction are capitalized and
considered in determining the estimated net realizable fair value of the
property. The estimated net realizable fair value is reviewed periodically
and any write-downs are charged against current earnings as market adjustments.
INTANGIBLE ASSETS. Intangible assets represent the premium on purchased
deposits and assets, the excess of cost over net assets of acquired
subsidiaries (goodwill), and purchased mortgage servicing rights. The "Premium
on purchased deposits and assets" represents identified intangible assets,
which are amortized over their estimated useful lives, with the exception of
those assets related to deposit bases which are primarily amortized over a 10
year period. Goodwill is being amortized using the straight-line method over
periods ranging from 15 to 40 years. Management evaluates whether events or
circumstances have occurred that would result in impairment in the value or
life of goodwill. If such impairment should occur, First Tennessee would use
internally generated management reports to determine the related business
contribution to the overall profitability of the corporation in revising the
value and remaining life to the related goodwill. The value of purchased
mortgage servicing rights is established using the lesser of: a discounted
cashflow analysis; current market value; or the amount of consideration
specifically paid by First Tennessee. The purchased mortgage servicing rights
are being amortized using an accelerated method over the estimated life of the
servicing income. A quarterly value impairment analysis is performed using
discounted, disaggregated methodology.
OFF BALANCE-SHEET FINANCIAL INSTRUMENTS. First Tennessee utilizes a variety of
off-balance sheet financial instruments to manage various financial risks.
These instruments include interest rate swaps, futures, forwards, and option
contracts. To qualify as a hedge used to manage interest rate risk, the
following criteria must be met: (1) the asset or liablilty to be hedged
exposes the institution, as a whole, 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 swaps used to hedge
interest rate risk, income and expense is accrued and recognized as an
adjustment to the interest income or expense of the related on-balance sheet
asset or liability. Fees on interest rate swaps are deferred and amortized
over the lives of the contracts. Realized gains and losses on all off- balance
sheet transactions used to manage interest rate risk that are terminated prior
to maturity are deferred and amortized as an adjustment to the hedged asset or
liability over the remaining original life of the agreement. For interest rate
forwards, futures, and options used to hedge interest rate risk, gains and
losses on contracts applicable to certain interest sensitive assets and
liabilities are deferred and amortized over the lives of the hedged assets and
liabilities as an adjustment to interest income and expense. Any contracts
that fail to qualify for hedge accounting are included in current earnings in
noninterest income. Customer related swaps are recorded at market value with
changes in market value recognized in noninterest income. Off-balance sheet
financial instruments held or issued by the bond division are valued at
prevailing market rates on a present value basis. Realized and unrealized
gains and losses are included in noninterest income as bond division income.
Realized and unrealized gains and losses related to foreign currency exchange
agreements with customers are included in noninterest income as foreign
exchange income.
TRUST SERVICES INCOME. Trust services income is reported on a cash basis,
which does not differ materially from the accrual basis.
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 consolidated federal and state
income tax returns with the exception of two credit life insurance companies
that file separate returns.
INCOME PER SHARE. Per share amounts for all periods presented are computed
based on the weighted average number of common shares outstanding for each
period. Options granted under the stock option plans are not included in the
computation since their dilutive effect is not material. Previously reported
per share amounts have been restated for the effect of acquisitions accounted
for as poolings of interests, with the exception of NSB which was immaterial on
a consolidated basis.
38
NOTE 2 -- BUSINESS COMBINATIONS
On January 4, 1994, First Tennessee acquired for approximately 1,751,000 shares
of its common stock all of the outstanding capital stock of SNMC Management
Corporation (SNMC). SNMC, the parent of Sunbelt National Mortgage Corporation
headquartered in Dallas, Texas, became a wholly owned subsidiary of First
Tennessee Bank National Association (FTBNA), the principal subsidiary of First
Tennessee. The acquisition was accounted for as a pooling of interests.
On March 1, 1994, First Tennessee acquired for approximately 468,000 shares
of its common stock all of the outstanding shares of Highland Capital
Management Corporation (HCMC). HCMC merged with First Tennessee Investment
Management, Inc., a wholly owned subsidiary of First Tennessee. The combined
organization became a wholly owned subsidiary of First Tennessee with the name
Highland Capital Management Corp. The acquisition was accounted for as a
pooling of interests.
First Tennessee acquired Cleveland Bank and Trust Company (CBT) of
Cleveland, Tennessee, on March 16, 1994, for approximately 1,153,000 shares of
its common stock and acquired Planters Bank (Planters) of Tunica, Mississippi,
on August 9, 1994, for approximately 334,000 shares of its common stock. Both
of these banks became wholly owned subsidiaries of First Tennessee and were
accounted for as poolings of interests.
The consolidated financial statements of First Tennessee give effect to
these four mergers occurring in 1994 which have been accounted for as poolings
of interests. Accordingly, the accounts of the acquired companies have been
combined with those of First Tennessee for all periods presented to reflect the
results of these companies on a combined basis, except for dividends. Certain
reclassifications of the historical results of these companies have been made
to conform to the current presentation. The following presents certain
financial data pertaining to the four poolings of interests.
(Dollars in thousands,
except per share data) 1993 1992
-----------------------------------------------------------------------------
Total revenue:*
First Tennessee, as originally reported $617,043 $547,943
SNMC ** 62,643 5,977
HCMC 3,927 3,412
CBT 12,095 11,169
Planters 2,557 2,184
-----------------------------------------------------------------------------
First Tennessee $698,265 $570,685
=============================================================================
Net income:
First Tennessee, as originally reported $120,665 $ 89,165
SNMC ** (18,279) (2,045)
HCMC 52 71
CBT 3,138 2,629
Planters 506 601
-----------------------------------------------------------------------------
First Tennessee $106,082 $ 90,421
=============================================================================
Net income per share:
First Tennessee, as originally reported $ 4.26 $ 3.19
SNMC ** (203.10) (135.96)
HCMC 520.00 710.00
CBT 31.38 26.29
Planters 8.43 10.02
First Tennessee 3.31 2.99
-----------------------------------------------------------------------------
* Total revenue is net interest income and noninterest income.
** SNMC began operations November 1, 1992.
On January 4, 1995, First Tennessee acquired for approximately 910,000
shares of its common stock all of the outstanding capital stock of Carl I.
Brown and Company (CIB) of Kansas City, Missouri. CIB became a wholly owned
subsidiary of FTBNA and was accounted for as a pooling of interests. At
December 31, 1994, CIB had a servicing portfolio of $2.2 billion and had
originated $2.1 billion in mortgages during 1994. The following presents on a
proforma basis certain financial data pertaining to the CIB acquisition.
39
(Dollars in thousands,
except per share data) 1994 1993 1992
-----------------------------------------------------------------------------
Total revenue:*
First Tennessee $769,735 $698,265 $570,685
CIB ** 71,242 55,965 19,808
-----------------------------------------------------------------------------
First Tennessee Proforma $840,977 $754,230 $590,493
=============================================================================
Net income:
First Tennessee $146,349 $106,082 $ 90,421
CIB ** (1,882) 1,328 1,106
-----------------------------------------------------------------------------
First Tennessee Proforma $144,467 $107,410 $ 91,527
=============================================================================
Net income per share:
First Tennessee $ 4.56 $ 3.31 $ 2.99
CIB ** (10.89) 7.68 6.40
First Tennessee Proforma 4.37 3.26 2.94
-----------------------------------------------------------------------------
* Total revenue is net interest income and noninterest income.
** Twelve months ended for CIB is October 31.
On October 1, 1994, First Tennessee acquired Emerald Mortgage Company
(Emerald) of Lynnwood, Washington, for approximately 152,000 shares of its
common stock. Emerald was merged into SNMC. At September 30, 1994, Emerald
had a servicing portfolio of $353 million. This acquisition was accounted for
as a purchase and was immaterial to First Tennessee.
On December 31, 1993, First Tennessee acquired for approximately 149,000
shares of its common stock all of the outstanding shares of New South Bancorp
(NSB), a Mississippi bank holding company. NSB was merged with and into First
Tennessee. At the same time NSB's principal subsidiary, New South Bank, was
merged with and into First Tennessee Bank National Association Mississippi, a
wholly owned subsidiary of First Tennessee. The consolidated financial
statements of First Tennessee give effect to the merger which was accounted for
as a pooling of interests. Due to immateriality, the transaction has been
recorded by a restatement of beginning shareholders' equity without restating
income statements for years prior to 1993.
On October 1, 1993, FTBNA acquired for cash Maryland National Mortgage
Corporation (MNMC) headquartered in Baltimore, Maryland. In 1994, MNMC changed
its name to MNC Mortgage Corp. The acquisition has been accounted for as a
purchase and accordingly, the purchase price has been allocated to the acquired
assets and liabilities at their respective estimated fair values at the date of
acquisition. The operating results of this acquisition are included in First
Tennessee's consolidated results of operations from the date of acquisition.
The cost of the acquisition, totaling approximately $114.8 million, exceeded
the estimated net fair value of tangible assets and liabilities acquired by
approximately $75.0 million. Intangible assets totaling approximately $31.9
million have been identified and are being amortized over the expected useful
lives of the individual components. The excess of the consideration paid over
the estimated net fair value of the tangible and intangible assets acquired,
totaling approximately $43.1 million, has been recorded as goodwill and is
being amortized using the straight-line method over 25 years.
On December 14, 1992, First Tennessee acquired for approximately 4,177,000
shares of its common stock all of the outstanding shares of Home Financial
Corporation (HFC), a Tennessee savings and loan holding company. At the same
time HFC's principal subsidiary, Home Federal Bank, FSB (HFB), became a wholly
owned subsidiary of First Tennessee. The consolidated financial statements of
First Tennessee give effect to the merger which has been accounted for as a
pooling of interests. Accordingly, the accounts of HFC have been combined with
those of First Tennessee to reflect the results of these companies on a
combined basis for all periods presented, except for dividends. On June 25,
1993, First Tennessee completed the final phase of the HFC acquisition with the
merging of HFB into FTBNA. Certain reclassifications of the historical results
of these companies have been made to conform to the current presentation.
40
NOTE 3 -- PENDING ACQUISITIONS
On September 22, 1994, First Tennessee and Community Bancshares, Inc. of
Germantown, Tennessee, announced the execution of a definitive agreement
pursuant to which First Tennessee will acquire Community Bancshares, the
parent company of Community First Bank, for approximately 1,420,000 shares
of its common stock. Pursuant to the agreement, Community Bancshares
will merge into First Tennessee and Community First Bank will merge into FTBNA.
At December 31, 1994, Community Bancshares had approximately $256 million in
assets, $192 million in deposits, and $22 million in equity. The acquisition
will be accounted for as a pooling of interests and is subject to regulatory
and shareholder approvals. The transaction is expected to be completed in the
first quarter of 1995.
On October 19, 1994, First Tennessee and Peoples Commercial Services
Corporation (PCS) of Senatobia, Mississippi, announced the execution of a
definitive agreement pursuant to which First Tennessee will acquire PCS, the
parent company of Peoples Bank, for approximately 430,000 shares of First
Tennessee common stock. This acquisition will be accounted for as a purchase,
and with the approval of the First Tennessee Board of Directors, the shares to
be issued in this transaction have been repurchased. Following the
acquisition, Peoples Bank will be a wholly owned subsidiary of First Tennessee.
At December 31, 1994, Peoples Bank had approximately $94 million in assets, $83
million in deposits, and $10 million in equity. The acquisition is expected to
be completed in the first half of 1995 following approval by regulators and PCS
shareholders.
41
NOTE 4 -- CASH AND DUE FROM BANKS
Commercial banking subsidiaries of First Tennessee are required to
maintain average reserve balances with the Federal Reserve Bank.
These reserve balances vary, depending on the types and amounts
of deposits received. Included in "Cash and due from banks" on
the Consolidated Statements of Condition are amounts so restricted
of $82,440,000 at December 31, 1994, and $103,288,000 at
December 31, 1993.
42
NOTE 5 -- INVESTMENT SECURITIES
Securities included in the Consolidated Statements of Condition of
$1,393,019,000 and $1,349,222,000 at December 31, 1994 and 1993, respectively,
were pledged to secure public deposits, securities sold under agreement to
repurchase, and for other purposes. Equity securities include venture capital
investment securities.
Reconciliations of the amortized cost to the estimated market values of
investments in securities at December 31, 1994 are provided below. Also
provided are the amortized cost and estimated market value by contractual
maturity. 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.
SECURITIES HELD TO MATURITY
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in thousands) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------
At December 31, 1994:
U.S. Treasury and other
U.S. government agencies $ 44,736 $ -- $ (1,266) $ 43,470
Government agency
issued MBS 126,410 -- (10,355) 116,055
Government agency
issued CMOs 710,878 -- (37,773) 673,105
States and municipalities 58,698 757 (1,285) 58,170
Private issued CMOs 1,664 -- (44) 1,620
---------------------------------------------------------------------------------------------------
Total $942,386 $757 $(50,723) $892,420
---------------------------------------------------------------------------------------------------
Estimated
By Contractual Maturity Amortized Market
(Dollars in thousands) Cost Value
---------------------------------------------------------------------------------------------------
At December 31, 1994:
Within 1 year $ 33,935 $ 34,020
After 1 year; within 5 years 41,473 41,039
After 5 years; within 10 years 13,014 12,445
After 10 years 15,012 14,136
---------------------------------------------------------------------------------------------------
Subtotal 103,434 101,640
---------------------------------------------------------------------------------------------------
Mortgage-backed securities and CMOs 838,952 790,780
---------------------------------------------------------------------------------------------------
Total $942,386 $892,420
---------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in thousands) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------
At December 31, 1994:
U.S. Treasury and other
U.S. government agencies $ 325,493 $ 253 $(10,810) $ 314,936
Government agency
issued MBS 179,058 2,903 (4,668) 177,293
Government agency
issued CMOs 614,551 64 (28,804) 585,811
States and municipalities 14,780 1,103 (224) 15,659
Private issued CMOs 409 -- -- 409
Private issued asset-backed 2,020 -- (42) 1,978
Other 6,272 18 (1,220) 5,070
Equity 48,096 3,941 (1,916) 50,121
---------------------------------------------------------------------------------------------------
Total $1,190,679 $8,282 $(47,684) $1,151,277
---------------------------------------------------------------------------------------------------
Estimated
By Contractual Maturity Amortized Market
(Dollars in thousands) Cost Value
---------------------------------------------------------------------------------------------------
At December 31, 1994:
Within 1 year $ 20,278 $ 20,875
After 1 year; within 5 years 310,143 299,032
After 5 years; within 10 years 14,899 14,583
After 10 years 3,245 3,153
---------------------------------------------------------------------------------------------------
Subtotal 348,565 337,643
---------------------------------------------------------------------------------------------------
Mortgage-backed securities and CMOs 794,018 763,513
Equity securities 48,096 50,121
---------------------------------------------------------------------------------------------------
Total $1,190,679 $1,151,277
---------------------------------------------------------------------------------------------------
Proceeds from the sales of available for sale debt securities during 1994
were $391,195,000. Gross gains of $264,000 and gross losses of $4,696,000 were
realized on the 1994 debt sales. Proceeds from the sales of equity securities
during 1994 were $18,845,000. Gross gains of $15,788,000 and gross losses of
$153,000 were realized on the 1994 equity sales. During 1994, First Tennessee
contributed $9,379,000 of equity securities to establish a charitable
foundation. Gross gains of $8,616,000 were realized on the contribution.
During 1994, $822,000 of recoveries were realized as gains on debt securities
that had previously been written down. There were no transfers from the
available for sale category into any other securities categories during 1994.
The change in net unrealized holding losses on trading securities inventory
recognized in bond division
43
income was $426,000 for 1994.
For years prior to the adoption SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities", the following information is provided.
Proceeds from the sales of investment in debt securities during 1993 were
$478,176,000 and included gross gains of $2,282,000 and gross losses of
$1,246,000 realized on the 1993 sales. Net investment debt securities
gains/(losses) from sales after taxes were ($2,743,000), $644,000, and
($310,000) for the years ended December 31, 1994, 1993, and 1992, respectively.
The applicable income tax expense/(benefits) were ($1,689,000), $392,000, and
($192,000) for the years ended December 31, 1994, 1993, and 1992, respectively.
At December 31, 1993, certain securities were classified as held for sale.
In 1993, a net recovery of $248,000 on previous write-downs was recorded, and
in 1992, a loss of $1,416,000 was recorded in marking these securities to the
lower of cost or market based on the specific identification method.
Reconciliations of the amortized cost to the estimated market values of
investments in securities at December 31, 1993 are provided below. Also
provided are the amortized cost and estimated market value by contractual
maturity. 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.
INVESTMENT SECURITIES
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in thousands) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------
At December 31, 1993:
U.S. Treasury and other
U.S. government agencies $ 397,253 $ 3,387 $ (120) $ 400,520
Government agency
issued MBS 401,102 10,951 (1,210) 410,843
Government agency
issued CMOs 1,238,010 5,874 (3,773) 1,240,111
States and municipalities 91,915 5,345 (337) 96,923
Private issued CMOs 4,133 25 -- 4,158
Private issued asset-backed 41,021 827 -- 41,848
Other 11,454 205 (278) 11,381
Equity 35,199 23,552 (1,279) 57,472
---------------------------------------------------------------------------------------------------
Total $2,220,087 $50,166 $(6,997) $2,263,256
---------------------------------------------------------------------------------------------------
Estimated
By Contractual Maturity Amortized Market
(Dollars in thousands) Cost Value
---------------------------------------------------------------------------------------------------
At December 31, 1993:
Within 1 year $ 190,392 $ 192,234
After 1 year; within 5 years 291,062 295,795
After 5 years; within 10 years 40,704 42,442
After 10 years 19,485 20,201
---------------------------------------------------------------------------------------------------
Subtotal 541,643 550,672
---------------------------------------------------------------------------------------------------
Mortgage-backed securities and CMOs 1,643,245 1,655,112
Equity securities 35,199 57,472
---------------------------------------------------------------------------------------------------
Total $2,220,087 $2,263,256
---------------------------------------------------------------------------------------------------
Detail concerning securities held for sale at December 31, 1993 is provided in
the following table:
Securities Held for Sale
Gross Estimated
Amortized Unrealized Market
(Dollars in thousands) Cost Gains Value
---------------------------------------------------------------------------------------------------
At December 31, 1993:
U.S. Treasury and other
U.S. government agencies $11,739 $ 204 $11,943
Government agency
issued MBS 37,114 2,064 39,178
Government agency
issued CMOs 3,389 14 3,403
States and municipalities 491 1,095 1,586
Private issued asset-backed 302 2 304
---------------------------------------------------------------------------------------------------
Total $53,035 $3,379 $56,414
---------------------------------------------------------------------------------------------------
44
NOTE 6 -- LOANS
The composition of the loan portfolio at December 31 is summarized
below:
(Dollars in thousands) 1994 1993
-----------------------------------------------------------------------------
Commercial $2,888,671 $2,611,024
Consumer 2,236,731 1,798,770
Permanent mortgage 569,729 497,293
Credit card receivables 475,471 428,075
Real estate construction 160,368 75,844
Nonaccrual 16,539 25,966
-----------------------------------------------------------------------------
Loans, net of unearned income 6,347,509 5,436,972
Allowance for loan losses 106,989 107,723
-----------------------------------------------------------------------------
Total net loans $6,240,520 $5,329,249
-----------------------------------------------------------------------------
Additional detail on consumer loans by product is provided in the following
table as of December 31:
(Dollars in thousands) 1994 1993
-----------------------------------------------------------------------------
Real estate $1,410,261 $1,144,247
Auto 499,304 359,987
Student 216,404 190,383
Other 110,762 104,153
-----------------------------------------------------------------------------
Total consumer loans, net of unearned income $2,236,731 $1,798,770
-----------------------------------------------------------------------------
At December 31, 1994 and 1993, real estate consumer loans included
$1,385,852,000 and $1,114,316,000 of first and second liens and home equity
loans, respectively.
The following table presents information concerning nonperforming loans at
December 31:
(Dollars in thousands) 1994 1993
-----------------------------------------------------------------------------
Nonaccrual loans $16,539 $25,966
Restructured loans 158 579
-----------------------------------------------------------------------------
Total $16,697 $26,545
-----------------------------------------------------------------------------
Total interest recorded on nonaccrual and restructured loans was $1,368,000
in 1994 and $1,622,000 in 1993. Interest income which would have been earned
under the original terms of these loans was approximately $1,549,000 in 1994
and $2,961,000 in 1993. At December 31, 1994, there were no outstanding
commitments to advance additional funds to customers whose loans had been
restructured.
Activity in the allowance for loan losses is summarized as follows:
(Dollars in thousands) 1994 1993 1992
------------------------------------------------------------------------------------------
Balance at beginning of year $107,723 $ 99,827 $92,464
Provision for loan losses 16,733 35,697 44,242
Allowance from acquisitions -- 971 --
Charge-offs 27,960 40,937 47,172
Less loan recoveries 10,493 12,165 10,293
------------------------------------------------------------------------------------------
Net charge-offs 17,467 28,772 36,879
------------------------------------------------------------------------------------------
Balance at end of year $106,989 $107,723 $99,827
------------------------------------------------------------------------------------------
In the ordinary course of business, First Tennessee makes loans to its
executive officers and directors as well as to other related persons and
expects to continue to do so in the future. These loans are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and
do not involve more than normal risk of collectibility or other unfavorable
features.
Loans to directors and executive officers of First Tennessee and their
associates were $94,470,000 and $81,278,000 at December 31, 1994 and 1993,
respectively. The following table summarizes the changes to these amounts:
(Dollars in thousands) 1994 1993
-----------------------------------------------------------------------------
Balance at beginning of year $ 81,278 $ 62,625
Additions 149,108 121,803
Deletions:
Repayments 128,263 96,252
No longer related 7,653 6,898
-----------------------------------------------------------------------------
Total deletions 135,916 103,150
-----------------------------------------------------------------------------
Balance at end of year $ 94,470 $ 81,278
-----------------------------------------------------------------------------
The amounts included from Due from Customers on Acceptances in "Bond
division receivables and other assets" and the amounts included from Bank
Acceptances Outstanding in "Bond division payables and other liabilities" were
$4,530,000 and $4,871,000 at December 31, 1994 and 1993, respectively.
45
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized below:
(Dollars in thousands) 1994 1993
---------------------------------------------------------------
Land $ 24,594 $ 23,241
Buildings 105,252 97,170
Leasehold improvements 14,152 12,311
Furniture, fixtures, and equipment 140,504 156,279
---------------------------------------------------------------
Premises and equipment, at cost 284,502 289,001
Less accumulated
depreciation and amortization 131,540 152,771
---------------------------------------------------------------
Premises and equipment, net $152,962 $136,230
---------------------------------------------------------------
46
NOTE 8 -- INTANGIBLE ASSETS
Following is a summary of intangible assets, net of accumulated
amortization, included in the Consolidated Statements of
Condition:
Purchased
Mortgage Premium on
Servicing Purchased Deposits
(Dollars in thousands) Goodwill Rights and Assets
----------------------------------------------------------------------------
At December 31,1991 $21,465 $ 7,058 $40,440
Amortization expense 1,168 3,916 8,582
Increase related to acquisitions 450 56,947 722
----------------------------------------------------------------------------
At December 31, 1992 20,747 60,089 32,580
Amortization expense 1,674 25,062 4,075
Increase related to acquisitions 43,492 47,598 400
----------------------------------------------------------------------------
At December 31, 1993 62,565 82,625 28,905
Amortization expense 3,029 14,385 3,266
Increase related to acquisitions 6,550 2,198 --
----------------------------------------------------------------------------
At December 31, 1994 $66,086 $70,438 $25,639
----------------------------------------------------------------------------
47
NOTE 9 -- CONTINGENCIES
Various claims and lawsuits are pending against First Tennessee and
its subsidiaries. Although the amount of any ultimate liability with
respect to such matters cannot be determined, in the opinion
of management, after consulting with counsel, these matters,
when resolved, will not have a material adverse effect on the
consolidated financial statements of First Tennessee and its
subsidiaries.
------------------------------------------------------------------------
48
NOTE 10 -- LEASE COMMITMENTS
Leased capital assets included in "Other assets" on the Consolidated
Statements of Condition at December 31 are summarized below:
(Dollars in thousands) 1994 1993
---------------------------------------------------------
Premises $1,525 $ 1,525
Less accumulated amortization 1,215 1,151
---------------------------------------------------------
Leased capital assets-net $ 310 $ 374
---------------------------------------------------------
Future minimum lease payments for capitalized leases together
with the present value of net minimum lease payments at
December 31, 1994, are as follows:
(Dollars in thousands) Premises
---------------------------------------------------------
1995 $ 146
1996 146
1997 146
1998 146
1999 101
2000 34
---------------------------------------------------------
Total 719
Less amount representing interest 132
---------------------------------------------------------
Present value of net minimum lease payments $ 587
---------------------------------------------------------
Rent expense under all operating lease obligations aggregated
$20,873,000 for 1994, $15,483,000 for 1993, and $12,358,000 for
1992. Rent expense was reduced by amortization of the deferred
building gain, the result of the sale of an office building in 1985.
This amortization totaled $585,000 in 1994, $1,062,000 in 1993,
and $1,399,000 in 1992. Rents received on non-cancelable sublease
agreements aggregated $410,000, $291,000, and $262,000 for these
years, respectively.
With respect to many leased locations, First Tennessee pays taxes,
insurance, and maintenance costs. Most of the leases are for terms
ranging from one to 30 years and include renewal options for
additional periods of one to 25 years. At December 31, 1994,
First Tennessee's long-term leases required minimum annual rentals
as follows:
(Dollars in thousands) Premises Equipment Total
---------------------------------------------------------
1995 $17,505 $ 244 $17,749
1996 15,850 85 15,935
1997 13,907 39 13,946
1998 12,467 21 12,488
1999 8,616 5 8,621
2000 and after 21,258 -- 21,258
---------------------------------------------------------
Total $89,603 $ 394 $89,997
---------------------------------------------------------
Aggregate minimum income under sublease agreements for these
periods is $1,281,000.
49
NOTE 11 -- SHORT-TERM BORROWINGS
Short-term borrowings include federal funds purchased and securities
sold under agreements to repurchase, commercial paper, and
other borrowed funds, including term federal funds purchased and cash
management advances from the Federal Home Loan Bank.
Federal funds purchased arise principally from First Tennessee's
market activity for its regional correspondent banks and generally
mature in one business day. To the extent that the proceeds of
these transactions exceed First Tennessee's funding requirements,
the excess funds are sold in the money markets. Securities sold
under agreements to repurchase are secured by U.S. government
and agency securities and certain investments in bank time
deposits and had original maturities ranging from three to 15 days
at December 31, 1994.
Commercial paper is an obligation of First Tennessee and had original
maturities ranging from three to 90 days at December 31, 1994.
Other short-term borrowings generally represent secured and
unsecured obligations to financial institutions, including the Federal
Reserve Bank, at various rates and terms and generally do not exceed
one year to maturity. Bank overdraft obligations are reclassified into
other short-term borrowings.
The following table reflects the average daily outstandings, year-end
outstandings, maximum month-end outstandings, average rates paid
during the year, and the average rates paid at year-end for the three
categories of short-term borrowings:
(Dollars in thousands) 1994 1993 1992
---------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase:
Balance:
Average $1,042,647 $1,022,478 $690,238
Year-end 1,453,802 1,014,644 753,409
Maximum month-end outstanding 1,453,802 1,235,273 823,201
Rate:
Average for the year 3.87 % 2.84 % 3.25 %
Average at year-end 5.15 2.73 2.75
Commercial paper:
Balance:
Average $ 34,351 $ 30,269 $ 22,401
Year-end 67,820 32,283 21,856
Maximum month-end outstanding 67,820 54,809 34,991
Rate:
Average for the year 3.77 % 3.06 % 3.74 %
Average at year-end 4.57 3.06 3.23
Other short-term borrowings:
Balance:
Average $ 471,815 $ 547,169 $143,852
Year-end 132,142 714,278 412,105
Maximum month-end outstanding 661,926 911,279 412,105
Rate:
Average for the year 5.01 % 4.59 % 6.49 %
Average at year-end 7.37 5.08 7.31
---------------------------------------------------------------------------
50
NOTE 12 -- LONG-TERM DEBT
The following table presents information pertaining to long-term
debt for First Tennessee and its subsidiaries at December 31:
(Dollars in thousands) 1994 1993
------------------------------------------------------------------------------------------
First Tennessee National Corporation:
Sinking fund debentures--7 3/8%
Sinking fund payments of $850,000
due annually 1995 and 1996 with
$12,250,000 due 1997 $13,950 $14,800
Subordinated capital notes--10 3/8%
Mature on June 1, 1999 74,602 74,512
First Tennessee Bank National Association:
Note payable to Federal Home Loan Bank--8.1%
Annual payments of approximately $200,000
due through 2009 2,984 --
Industrial development bond payable
to City of Alcoa, Tennessee--6.5%
Payment of $500,000 due 1999 500 650
Cleveland Bank and Trust Company:
Industrial development bond payable
to City of Cleveland, Tennessee--65% of prime
(5.5% and 3.9% at December 31,1994 and 1993,
respectively)
Annual payments of approximately $346,000
due through 1998 with balance of approximately
$351,000 due in 1999 1,735 2,081
------------------------------------------------------------------------------------------
Total $93,771 $92,043
------------------------------------------------------------------------------------------
Annual principal repayment requirements for the years 1995
through 1999 approximate $1,396,000, $1,396,000, $12,796,000,
$546,000, and $76,051,000, respectively. Annual repayment
requirements for 2000 through 2009 are approximately $200,000.
The subordinated capital notes were issued on June 10, 1987.
Interest is payable on June 1 and December 1 of each year. At
maturity, the notes will be exchanged for capital securities
having a market value equal to the principal amount of the
notes. First Tennessee may elect to pay the principal amount
in cash, in whole or in part, from designated proceeds.
A major portion of the long-term debt issued by the parent
company was downstreamed to FTBNA to support asset growth
and improve bank capital ratios. The bank previously issued
$75,000,000 in notes to the parent company corresponding to the
subordinated capital notes included in the table above. Interest
rate and maturity terms are identical to the corporate debt. The
subordinated capital notes meet bank regulatory capital guidelines.
51
NOTE 13 -- SAVINGS, PENSION, AND
OTHER EMPLOYEE BENEFITS
SAVINGS PLAN. Substantially all employees of First Tennessee and its
subsidiaries participate in a contributory savings plan in conjunction with
a flexible benefits plan. First Tennessee contributes during the year into
each eligible employee's flexible benefits plan account an amount based on
length of service and an amount based on a percentage of the employee's salary,
as determined by a committee of the board of directors. The employee may then
direct that all or a portion of the contribution be allocated to his savings
plan account. Employees may also make pre-tax and after-tax personal
contributions to the savings plan. Pre-tax contributions invested in First
Tennessee's common stock are matched at a rate of $.50 for each $1.00
invested up to 6 percent of the employee's salary. Employer contributions
to the flexible benefits plan were as follows:
(Dollars in thousands) 1994 1993 1992
----------------------------------------------------------------------
Flexible benefits contributions:
Performance dollars $ 4,144 $ 3,937 $ 3,555
Service dollars 1,758 1,716 1,595
----------------------------------------------------------------------
Total 5,902 5,653 5,150
Company matching contribution 2,374 1,976 1,556
----------------------------------------------------------------------
Total employer contribution $ 8,276 $ 7,629 $ 6,706
----------------------------------------------------------------------
The figures in the table above include 1994 flexible benefit
contributions and company matching contributions for employees of HCMC and
CBT, which were companies acquired by First Tennessee during 1994. Also
during 1994, First Tennessee acquired Planters, SNMC, and Emerald. Emerald
was merged into SNMC. Each of these companies sponsored a savings, thrift,
or ESOP plan.
The HCMC Profit Sharing Trust is a 401(k) savings plan. This plan was
frozen effective as of the acquisition. No further employee or employer
contributions are being made into this plan. Expense for this plan was
$28,000 for the two months preceding the acquisition date of March 1, 1994.
For the years ended December 31, 1993 and 1992, the expense for this plan was
$165,000 and $160,000, respectively.
The CBT Retirement Plan was a thrift plan for all eligible employees.
Expense for this plan was $75,000 for the period preceding the acquisition
date of March 16, 1994. For the years ended December 31, 1993 and 1992,
the expense for this plan was $298,000 and $305,000, respectively. Effective
as of the merger, CBT's retirement plan was terminated. In accordance with
the plan, and with ERISA, all amounts credited to the plan became fully
vested and nonforfeitable.
Planters' Retirement Plan is an Employee Stock Ownership Plan. The
benefits provided under the plan are funded by employer contributions to
eligible employees. Expense for this plan was $29,000, $45,000, and $44,000
for the years ended December 31, 1994, 1993, and 1992, respectively. This
plan has not been terminated or merged into another plan.
SNMC began sponsoring the SNMC Savings Plan, a defined contribution plan,
on April 1, 1993, which covers substantially all its employees. Employees
may contribute, in whole percentages, between 1 percent and 15 percent of
eligible compensation. Discretionary matching contributions by SNMC are
determined annually. During 1994 and 1993, SNMC matched 100 percent of
employee contributions up to 3 percent. Employee contributions between 4
percent and 6 percent were matched 25 percent, and no match was made for
employee contributions over 6 percent. All employer contributions begin to
vest after two years of service and are 100 percent vested after five years of
service. Expense under this plan was $650,000 and $600,000 for years ended
December 31, 1994 and 1993, respectively.
Emerald's 401(k) Savings Plan was frozen effective as of the acquisition.
Also, Emerald's Profit Sharing Plan was terminated effective as of the
acquisition. In accordance with the Profit Sharing Plan and with ERISA, all
amounts credited to the plan became fully vested and nonforfeitable.
Effective as of the acquisition, employees of Emerald are eligible to
participate in the SNMC Savings Plan.
During 1992, First Tennessee acquired HFB which had a contributory
retirement plan for all eligible employees. Retirement expense under this
plan was $568,000 for the year ended December 31, 1992. Effective as of the
merger with First Tennessee, HFB's retirement plan was terminated. In
accordance with the plan, and with ERISA, all amounts credited to the plan
became fully vested and nonforfeitable.
PENSION PLAN. Substantially all employees of First Tennessee and its
subsidiaries participate in a noncontributory, defined benefit pension plan.
Effective January 1, 1992, the annual funding is based on an actuarially
determined amount using the entry age cost method. Prior to 1992, the funding
was determined actuarially using credit cost method. As of January 1, 1986,
First Tennessee adopted SFAS No. 87, "Employers' Accounting for Pensions." At
52
the date of adoption, the projected benefit obligation of the First Tennessee
National Corporation Pension Plan was $40,093,000 and plan assets at fair
value were $51,139,000, resulting in an unrecognized net asset of $11,046,000.
The unrecognized net asset is being amortized over 17 years, the remaining
average service life of the eligible employees at implementation date.
The annual pension expense was $2,993,000 in 1994, $882,000 in 1993, and
$1,418,000 in 1992.
The components of net periodic pension cost were as follows:
(Dollars in thousands) 1994 1993 1992
----------------------------------------------------------------------
Service cost-benefits earned
during the year $ 6,792 $ 4,522 $ 3,771
Interest cost on projected
benefit obligation 6,459 5,683 5,000
Return on plan assets (676) (8,847) (5,978)
Net amortization and deferral (9,582) (476) (1,375)
----------------------------------------------------------------------
Net periodic pension cost $ 2,993 $ 882 $ 1,418
----------------------------------------------------------------------
The following table sets forth the plan's funded status at December 31:
(Dollars in thousands) 1994 1993
----------------------------------------------------------------------
Plan assets at fair value $110,574 $101,330
Actuarial present value of projected
benefit obligation* 83,648 86,355
----------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 26,926 14,975
Unrecognized net (gain) loss from past
experience different from that assumed
and effects of changes in assumptions 4,752 10,194
Prior service cost not yet recognized in
net periodic pension cost 1,194 1,370
Unrecognized net transitional asset (3,700) (4,160)
----------------------------------------------------------------------
Prepaid pension cost
recognized in the Consolidated
Statements of Condition $ 29,172 $ 22,379
----------------------------------------------------------------------
*At December 31, 1994 and 1993, respectively, the actuarial present values of
the accumulated benefit obligation were $60,026,000 and $61,228,000, of which
vested benefits were $57,769,000 and $60,053,000. The accumulated benefit
obligation excludes projected future increases in compensation.
The discount rate and weighted-average rate of increase in future compensation
levels used in determining the actuarial present value of the projected
benefit obligation were 8.5 percent and 7 percent, respectively, in 1994 and
7.25 percent and 7 percent, respectively, in 1993. The expected long-term
rate of return on assets was 9.5 percent for 1994 and 1993.
OTHER EMPLOYEE BENEFITS. In November 1992, FASB issued SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." It requires the
recognition of the obligation for benefits to former and inactive employees
after employment but before retirement. Those benefits include, but are not
limited to, salary continuation, supplemental unemployment benefits, severance
benefits, disability-related benefits, worker's compensation, job training and
counseling, and continuation of benefits such as health care and life
insurance coverage. On January 1, 1994, First Tennessee adopted SFAS No. 112
with the recognition of $2.3 million of pre-tax postemployment benefits
related to prior service rendered and the rights vested. Total expense
recognized in 1994 was $2.5 million.
First Tennessee adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective January 1, 1993.
This statement requires that the expected cost of providing postretirement
benefits be recognized in the financial statements during the employee's
active service period.
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. In 1992, First Tennessee made significant changes to the
postretirement medical plan for future retirees. The revised 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.
53
The following table sets forth the plans' funded status reconciled to
the amount shown in the Consolidated Statement of Condition at December 31:
(Dollars in thousands) 1994 1993
----------------------------------------------------------------------
Accumulated postretirement benefit obligation
(APBO):
Retirees $(15,039) $(14,788)
Actives (5,886) (7,775)
----------------------------------------------------------------------
Total APBO (20,925) (22,563)
Plan assets at fair value 10,637 8,873
----------------------------------------------------------------------
APBO in excess of plan assets (10,288) (13,690)
Unrecognized:
Net transition obligation 17,796 18,785
Prior service cost 47 --
Prepaid benefit cost (868) 2,023
----------------------------------------------------------------------
Prepaid postretirement benefit cost $ 6,687 $ 7,118
----------------------------------------------------------------------
Net periodic postretirement benefit cost for the periods ending
December 31 included the following components:
(Dollars in thousands) 1994 1993
----------------------------------------------------------------------
Service cost $ 556 $ 434
Interest cost on APBO 1,578 1,582
Actual return on assets (864) (388)
Amortization of transition obligation over
20 years 989 989
Total of other components 172 (292)
----------------------------------------------------------------------
Net periodic postretirement benefit cost $ 2,431 $ 2,325
----------------------------------------------------------------------
For measurement purposes, a 14 percent annual rate of increase in the
per capita cost of covered health care benefits was assumed for 1993; the
rate was assumed to decrease 1 percent per year to 7 percent and remain at
that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. The following table illustrates
the effect of increasing the assumed health care cost trend rate by 1 percent:
Current Increased Percent
(Dollars in thousands) Trend Trend Change
----------------------------------------------------------------------
APBO at December 31, 1994 $20,925 $22,325 6.7+
Service and interest cost 2,134 2,222 4.1+
----------------------------------------------------------------------
The discount rate used in determining the accumulated postretirement
benefit obligation was 8.5 percent in 1994 and 7.25 percent in 1993. The
funding policy for the plan is to fund the maximum amount allowable under the
current tax regulations. Plan assets consist primarily of equity and fixed
income securities. The trust holding the plan assets for employees that had
retired prior to January 1, 1993, is subject to federal income taxes at a
35 percent rate. The trust holding the plan assets for all other First
Tennessee employees, actives and those retired since 1992, is not subject to
federal income taxes. The expected long-term rate of return on plan assets
before income taxes was 8.0 percent for 1994 and 9.5 percent for 1993.
In 1994, medical plan expense based on claims incurred was $9,375,000
for 5,053 active participants. Medical plan expense in 1993 was $7,519,000
for 4,926 active participants. The 1992 medical plan expense was $7,658,000
for 4,669 active participants including 526 retirees. First Tennessee does
not currently provide group life insurance upon retirement; however, eight
employees, most of whom retired prior to August 1, 1963, are currently
provided coverage totaling $128,000. Group life insurance expense based on
benefits incurred was $1,073,000 for 6,066 participants in 1994, $1,083,000
for 6,147 participants in 1993, and $874,000 for 6,029 participants in 1992.
54
NOTE 14 -- SHAREHOLDER PROTECTION RIGHTS AGREEMENT
In September 1989, First Tennessee adopted a Shareholder Protection
Rights Agreement and distributed a dividend of one right on each outstanding
share of common stock held on September 18, 1989, or issued thereafter and
prior to the time the rights separate. Until a person or group acquires 10
percent or more of First Tennessee's common stock or commences a tender offer
that will result in such person or group owning 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 $76.67. 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 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 First Tennessee is involved in a
merger or sells more than 50 percent of its assets or earning power, each
right will entitle its holder to purchase, for the exercise price, a number of
shares of common stock of the acquiring company having a market value of twice
the exercise price. If any person or group acquires between 10 percent and 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. The
rights will expire on the earliest of one of the following three times: the
time of the exchange described in the preceding sentence; September 18, 1999;
or the date the rights are redeemed as described in the following sentence.
The rights may be redeemed by the board of directors for $0.01 per right prior
to the day when any person or group acquires 10 percent or more of First
Tennessee's common stock.
55
NOTE 15 -- RESTRICTIONS ON DIVIDENDS AND
INTERCOMPANY TRANSACTIONS
Dividends are paid by First Tennessee from its assets which are mainly
provided by dividends from the subsidiaries. However, 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, 1994, the banking subsidiaries had
undivided profits of $531,732,000 of which $242,226,000 was available
for distribution to First Tennessee as dividends without prior regulatory
approval.
Pursuant to provisions of the indenture relating to the sinking
fund debenture issued December 1, 1972, undivided profits
available for dividends are restricted using a calculation that takes
into account net income and total dividends paid or declared since
1971. At December 31, 1994, undivided profits of First Tennessee of
$560,216,000 were not restricted by the provisions of the indenture.
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, or $83,525,000 at December 31, 1994.
There were no extensions of credit to the parent from its
banking subsidiaries at December 31, 1994. Certain loan
agreements and indentures also define other restricted trans-
actions related to additional borrowings and public offerings of
capital stock.
56
NOTE 16 -- STOCK OPTION, RESTRICTIVE STOCK INCENTIVE,
AND DIVIDEND REINVESTMENT PLANS
STOCK OPTION PLANS. First Tennessee has two stock option plans which provide
for the granting of both non-qualified and incentive stock options to key
executives and employees. The options allow for the purchase of First
Tennessee's common stock at a price equal to its fair market value at the date
of grant. One of the plans allows the exercise price to 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 on the date of grant. In 1994, options for 13,824 shares
were granted in lieu of compensation and options for 528,923 shares were
granted where the exercise price was equal to the market value on the date of
grant under the 1990 Plan. In 1993, options for 14,485 shares were granted in
lieu of compensation under the 1990 Plan. In years 1994 and 1993, no options
were granted under the 1984 Plan. This plan has expired and is no longer
eligible to issue options.
The plans also provide for the grant of Stock Appreciation Rights (SARs)
exercisable for the economic appreciation of the stock in the form of cash
and/or stock. No SARs have been granted in the last six years. Under the 1984
stock option plan, total stock appreciation rights expense associated with
fluctuations in the market value of First Tennessee stock was $6,000, $67,000,
and $83,000 for the years 1994, 1993, and 1992, respectively. The expired 1984
Plan is also no longer eligible to grant SARs.
In November 1991, the First Tennessee Board of Directors approved the Bank
Advisory Director Deferral Plan for FTBNA's regional advisory board members.
Options are awarded to those electing to receive them in lieu of attendance
fees. Options for 7,174 and 5,640 shares were granted during 1994 and 1993,
respectively.
RESTRICTED STOCK INCENTIVE PLANS. First Tennessee has authorized a total of
427,500 shares of its common stock for awards under its 1983 and 1989
restricted stock incentive plans for executive employees who have a significant
impact on the profitability of First Tennessee. Shares awarded under the plans
are subject to risk of forfeiture during a restriction period determined by a
committee of the board of directors. All shares have been awarded under the
1983 Plan, subject to restrictions which lapse through 1996. Each award under
the 1983 Plan provides for supplemental cash payments when the restrictions
lapse. In 1993, 39,347 shares were granted under the 1989 Plan. No shares
were granted under the 1989 Plan in 1994. At December 31, 1994, the 1989 Plan
has 1,626 shares to be awarded.
On April 21, 1992, First Tennessee's shareholders approved the 1992
Restricted Stock Incentive Plan. The Plan authorized the issuance of up to
330,000 shares. Under the provisions of the Plan, each then-current
non-employee director of First Tennessee received an award of 1,500 shares of
restricted common stock. The restrictions on these shares lapse at a rate of
150 shares per year beginning April 30, 1993, and ending January 3, 2003, for
seven directors. The shares of the remaining directors lapse equally over
their remaining terms. The Plan provides for the grant of 1,500 shares of
restricted stock to each new non-employee director upon election to the Board
with restrictions lapsing at 150 shares per year over the 10 years following
the grant. Options for 48,000 and 21,794 shares were granted during 1994 and
1993, respectively. At December 31, 1994, the 1992 Plan has 246,556 shares
available to be awarded. Compensation expense related to these plans was
$1,374,000, $1,586,000, and $1,563,000 for the years 1994, 1993, and 1992,
respectively.
The summary of stock option and restricted stock activity is shown below:
Weighted
Exercise Average
Available Options Price Exercise
for Grant Outstanding Per Share Price
---------------------------------------------------------------------------------------------------
At January 1, 1993 1,416,388 1,260,133 $10.40-34.29 $22.93
Options granted (20,125) 20,125 $18.31-20.91 $20.50
Restricted stock incentive awards (61,141)
Stock options exercised (114,206) $10.40-34.29 $18.15
SARs exercised (3,292) $16.67-22.17 $21.11
Stock options cancelled 22,850 (22,850) $16.59-34.29 $27.23
-----------------------------------------------------------
At December 31, 1993 1,357,972 1,139,910 $10.40-34.29 $23.29
-----------------------------------------------------------
Options exercisable 562,105 $10.40-34.29 $19.80
---------------------------------------------------------------------------------------------------
At January 1, 1994 1,357,972 1,139,910 $10.40-34.29 $23.29
Options granted (549,921) 549,921 $19.00-44.63 $39.47
Restricted stock incentive awards (48,000)
Stock options exercised (139,674) $10.40-34.29 $17.97
SARs exercised (100) $22.17 $22.17
Unissued options lapsed (29,909)
Restricted stock cancelled 1,350
Stock options cancelled 27,557 (27,557) $16.59-40.25 $28.17
-----------------------------------------------------------
December 31, 1994 759,049 1,522,500 $16.37-44.63 $29.53
-----------------------------------------------------------
Options exercisable 644,250 $16.37-34.29 $21.53
---------------------------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN. The Dividend Reinvestment and Stock Purchase Plan,
originally adopted in 1979, was amended in 1986 to authorize the sale of
200,000 shares 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 optional cash
payments of $25 to $5,000 per quarter. In 1988, First Tennessee began
purchasing these shares 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.
57
NOTE 17 -- INCOME TAXES
The components of income tax expense/(benefit) are as follows:
(Dollars in thousands) 1994 1993 1992
--------------------------------------------------------------------------
Current:
Federal $ 54,313 $57,345 $ 45,642
State 9,176 9,116 6,397
Deferred:
Federal (2,041) (1,794) 4,178
State (499) 326 --
Tax law rate change -- (405) --
--------------------------------------------------------------------------
Total $ 60,949 $64,588 $ 56,217
--------------------------------------------------------------------------
The effective tax rates for 1994, 1993, and 1992, were 29.40 percent, 37.84
percent, and 38.34 percent, respectively. Income tax expense was less than
the amounts computed by applying the statutory federal income tax rate to
income before income taxes because of the following:
(Dollars in thousands) 1994 1993 1992
--------------------------------------------------------------------------
Federal income tax rate 35% 35% 34%
--------------------------------------------------------------------------
Tax computed at statutory rate $ 72,554 $59,735 $ 49,857
Increase (decrease) resulting from:
Tax-exempt interest (2,956) (3,800) (5,147)
State income taxes 6,109 5,258 4,138
Deferred income taxes on
retained earnings appropriated
to absorb bad debt deductions -- -- 7,436
Adjustment of prior years'
estimated liabilities (5,883) -- --
Valuation allowance (7,704) 6,924 780
Minimum tax credit
carryforward utilized -- -- (2,928)
Charitable foundation (2,921) -- --
Tax law rate changes -- (405) --
Other 1,750 (3,124) 2,081
--------------------------------------------------------------------------
Total $ 60,949 $64,588 $ 56,217
--------------------------------------------------------------------------
A deferred tax asset or liability is recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The temporary
differences which gave rise to these deferred tax (assets)/liabilities at
December 31, 1994, were as follows:
Deferred Deferred
(Dollars in thousands) Assets Liabilities Total
-----------------------------------------------------------------------------
Depreciation $ -- $ 3,263 $ 3,263
Loss reserves (44,195) -- (44,195)
Investments in debt and equity securities (15,286) -- (15,286)
Employee benefits -- 2,247 2,247
Purchase accounting adjustments -- 7,386 7,386
Foreclosed property (1,463) -- (1,463)
Lease operations -- 5,139 5,139
Retained earning appropriated to
absorb bad debt deductions --- 5,041 5,041
Net operating loss carryforwards (6,081) -- (6,081)
Other (1,563) 4,426 2,863
-----------------------------------------------------------------------------
Net deferred tax (asset)/liability at
end of year $(68,588) $27,502 $(41,086)
Less:
Net deferred tax asset
at beginning of year (25,259)
Other adjustments:
MNC Mortgage purchase
accounting adjustments 800
Emerald Mortgage Company 1,199
Investments in debt and equity
securities (15,286)
-----------------------------------------------------------------------------
Deferred tax benefit $ (2,540)
-----------------------------------------------------------------------------
58
NOTE 18 -- BUSINESS SEGMENT INFORMATION
First Tennessee is primarily engaged in the banking business. However,
significant operations are conducted in mortgage banking and the bond
division. The mortgage banking operations consist of units which originate
mortgages primarily to securitize and sell, and provide servicing for
mortgages. The bond division buys and sells certain securities and loans.
Total revenue, expense, and asset levels reflect those which are
specifically identifiable or which are allocated based on an internal
allocation method. 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, and assets for the three years ended December 31, for
each segment:
Banking Mortgage Bond
(Dollars in thousands) Group Banking Division Consolidated
------------------------------------------------------------------------------------
1994
Interest income $ 596,396 $ 47,279 $ 24,984 $ 668,659
Interest expense 246,920 16,976 24,198 288,094
------------------------------------------------------------------------------------
Net interest income 349,476 30,303 786 380,565
Other revenues 193,165 118,527 77,478 389,170
Other expenses 367,976 135,978 58,483 562,437
------------------------------------------------------------------------------------
Pre-tax income $ 174,665 $ 12,852 $ 19,781 $ 207,298
------------------------------------------------------------------------------------
Identifiable assets $9,606,021 $ 601,876 $314,514 $10,522,411
------------------------------------------------------------------------------------
1993
Interest income $ 567,212 $ 40,000 $ 17,770 $ 624,982
Interest expense 222,743 21,928 16,853 261,524
------------------------------------------------------------------------------------
Net interest income 344,469 18,072 917 363,458
Other revenues 156,848 86,434 91,525 334,807
Other expenses 349,216 115,075 63,304 527,595
------------------------------------------------------------------------------------
Pre-tax income $ 152,101 $ (10,569) $ 29,138 $ 170,670
------------------------------------------------------------------------------------
Identifiable assets $8,599,146 $1,340,096 $427,455 $10,366,697
------------------------------------------------------------------------------------
1992
Interest income $ 588,596 $ 13,208 $ 19,507 $ 621,311
Interest expense 261,778 6,429 18,461 286,668
------------------------------------------------------------------------------------
Net interest income 326,818 6,779 1,046 334,643
Other revenues 139,705 16,062 80,275 236,042
Other expenses 349,113 19,328 55,606 424,047
------------------------------------------------------------------------------------
Pre-tax income $ 117,410 $ 3,513 $ 25,715 $ 146,638
------------------------------------------------------------------------------------
Identifiable assets $8,684,720 $ 299,425 $416,481 $ 9,400,626
------------------------------------------------------------------------------------
Capital expenditures and depreciation and amortization occurred
primarily in the banking group. Capital expenditures were $38,451,000,
$33,397,000, and $18,071,000 for the years ended December 31, 1994, 1993,
and 1992, respectively. Depreciation and amortization was $53,683,000,
$72,534,000, and $42,189,000 for 1994, 1993, and 1992, respectively.
59
NOTE 19 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is disclosed to comply with
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments."
The following table presents estimates of fair value for First Tennessee's
financial instruments at December 31, 1994 and 1993:
Impact
Book Fair Favorable Percent
(Dollars in thousands) Value Value (Unfavorable) Change
--------------------------------------------------------------------------------------------------------------------
At December 31, 1994:
Assets:
Loans,net of unearned income:
Floating $ 2,789,567 $ 2,788,691 $ (876) --
Fixed 3,541,403 3,402,667 (138,736) 3.9 -
Nonaccrual 16,539 16,539 -- --
Allowance for
loan losses (106,989) (106,989) -- --
-------------------------------------------------------------------------------------------------------------------
Total net loans 6,240,520 6,100,908 (139,612) 2.2 -
Liquid assets 440,410 440,410 -- --
Mortgage warehouse loans held for sale 369,869 370,420 551 .1 +
Securities available for sale 1,151,277 1,151,277 -- --
Securities held to maturity 942,386 892,420 (49,966) 5.3 -
Nonearning assets 834,091 834,091 -- --
-------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Defined maturity $ 3,137,119 $ 3,110,514 $ 26,605 .8 +
Undefined maturity 4,551,303 4,551,303 -- --
-------------------------------------------------------------------------------------------------------------------
Total deposits 7,688,422 7,661,817 26,605 .3 +
Short-term borrowings 1,653,764 1,653,763 1 --
Long-term debt 93,771 99,946 (6,175) 6.6 -
Other noninterest-
bearing liabilities 156,035 153,413 2,622 1.7 +
Note: See Note 20 - Financial Instruments with Off-Balance Sheet Risk for 1994 off-balance sheet information.
-------------------------------------------------------------------------------------------------------------------
At December 31, 1993:
Assets:
Loans, net of unearned income:
Floating $ 2,457,980 $ 2,459,995 $ 2,015 .1 +
Fixed 2,953,026 3,076,258 123,232 4.2 +
Nonaccrual 25,966 25,966 -- --
Allowance for
loan losses (107,723) (107,723) -- --
--------------------------------------------------------------------------------------------------------------------
Total net loans 5,329,249 5,454,496 125,247 2.4 +
Liquid assets 323,963 323,963 -- --
Mortgage warehouse loans held for sale 1,099,686 1,103,116 3,430 .3+
Securities held for sale 53,035 56,414 3,379 6.4 +
Investment securities 2,220,087 2,263,256 43,169 1.9 +
Nonearning assets 794,630 794,630 -- --
--------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Defined maturity $ 2,694,537 $ 2,732,510 $ (37,973) 1.4 -
Undefined maturity 4,708,044 4,708,044 -- --
--------------------------------------------------------------------------------------------------------------------
Total deposits 7,402,581 7,440,554 (37,973) .5 -
Short-term borrowings 1,761,205 1,761,180 25 --
Long-term debt 92,043 108,961 (16,918) 18.4 -
Other noninterest-bearing liabilities 189,448 189,624 (176) .1 -
--------------------------------------------------------------------------------------------------------------------
Off-balance sheet:
Interest rate swaps
paying floating rates $ -- $ 291 $ 291
Futures and forwards -- 56 56
Standby letters of credit -- 2,124 2,124
Commitments to extend credit 3,493 3,493 --
--------------------------------------------------------------------------------------------------------------------
60
The following describes the assumptions and methodologies used to
calculate the fair value for financial instruments:
FLOATING RATE LOANS. With the exception of 1-4 family residential floating
rate mortgage loans, the fair value of floating rate loans 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 reprice monthly. The fair value for floating rate mortgage
loans is calculated by discounting future cash flows to their present value.
Future cash flows, consisting of principal payments, interest payments, and
repricings, are discounted with current First Tennessee prices for similar
instruments applicable to the remaining maturity. Prepayment assumptions based
on historical prepayment speeds have been applied to the 1-4 family residential
floating rate mortgage portfolio.
FIXED RATE LOANS. The fair value for fixed rate loans is calculated by
discounting future cash flows to their present value. Future cash flows,
consisting of both principal and interest payments, are discounted with current
First Tennessee prices for similar instruments applicable to the remaining
maturity. Prepayment assumptions based on historical prepayment speeds have
been applied to the fixed rate mortgage and installment loan portfolios.
NONACCRUAL LOANS. The fair value of nonaccrual loans is approximated by the
book value.
ALLOWANCE FOR LOAN LOSSES. The fair value of the allowance for loan losses 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 of liquid assets 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, trading securities
inventory, and investment in bank time deposits.
MORTGAGE WAREHOUSE LOANS HELD FOR SALE. Market quotes are used for the fair
value of mortgage warehouse loans held for sale.
SECURITIES AVAILABLE FOR SALE. Market quotes are used for the fair value of
securities available for sale.
SECURITIES HELD TO MATURITY. Market quotes are used for the fair value of
securities held to maturity.
INVESTMENT SECURITIES. Market quotes are used for the fair value of investment
securities.
SECURITIES HELD FOR SALE. Market quotes are used for the fair value of
securities held for sale.
NONEARNING ASSETS. The fair value of nonearning assets are approximated by the
book value. For the purpose of this disclosure, nonearning assets include cash
and due from banks, accrued interest receivable, bond division receivables, and
excess mortgage servicing fees.
DEFINED MATURITY DEPOSITS. The fair value for defined maturity deposits is
calculated by discounting future cash flows to their present value. Future
cash flows, consisting of both principal and interest payments, are discounted
with First Tennessee prices for 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 of undefined maturity deposits is
required by the statement to equal 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, and other short-term
borrowings is approximated by the book value. Market quotes are used for
Federal Home Loan Bank borrowings.
LONG-TERM DEBT. The fair value for long-term debt is calculated by discounting
future cash flows to their present value. Future cash flows, consisting of
both principal and interest payments, are discounted using the current yield to
maturity for First Tennessee's outstanding long-term debt as quoted by Keefe,
Bruyette and Woods, Inc.
OTHER NONINTEREST-BEARING LIABILITIES. For the purpose of this disclosure,
other noninterest-bearing liabilities include accrued interest payable and bond
division payables. Accrued interest, which is not payable until the maturity
of an instrument, has been discounted to its present value given current market
rates and the maturity structure of the financial instrument. The fair value
of bond division payables is approximated by the book value.
OFF-BALANCE SHEET. Market quotes are used for off-balance sheet hedging
instruments (interest rate swaps, futures, and forwards). Fair values for
standby letters of credit were estimated using fees currently charged to enter
into similar agreements with similar maturities. The book value for
commitments to extend credit, which approximates the fair value, represents
accruals or deferred income arising from related unrecognized financial
instruments.
61
NOTE 20 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the normal course of business, First Tennessee is a party to financial
instruments containing credit and market risks that are not required to be
reflected in a balance sheet. These financial instruments include commitments
to extend credit, commercial and standby letters of credit, and off-balance
sheet financial instruments. First Tennessee enters into transactions
involving these instruments in order to meet the financial needs of its
customers and manage its own exposure to fluctuations in interest rates.
RISKS
Credit risk is the possibility that a loss might occur from the failure of
a counterparty to perform according to the terms of a transaction. Currently,
First Tennessee enters into financial instrument transactions either through
national exchanges, primary dealers, or AAA rated counterparties. Whenever
possible mutual margining agreements are used to limit potential exposure.
The credit risk associated with exchange-traded futures contracts is limited to
the relevant clearing house. Options written do not expose First Tennessee to
credit risk, except to the extent of the underlying risk in a financial
instrument that First Tennessee may be obligated to acquire under certain
written put options. 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 not to be of sufficient value. The credit exposure
is limited to the amount of the fair value of the instrument rather than the
notional amount.
Although First Tennessee has a loan portfolio diversified by type of
risk, the ability of its customers to honor their contracts is to some extent
dependent upon their regional economic condition. In order to mitigate the
impact of credit risk, First Tennessee manages the concentration of this risk
across various geographical regions. First Tennessee grants commercial and
consumer loans primarily to customers throughout Tennessee and its contiguous
states. Mortgage loans are originated through offices in 20 states.
Settlement Risk-On some off-balance sheet financial instruments, First
Tennessee may have additional risk due to the underlying risk in the financial
instruments that First Tennessee is or may be obligated to acquire and/or
deliver under a contract but the counterparty fails to meet its obligations.
First Tennessee believes its credit and settlement procedures reduce these
risks.
Market risk is the possibility that future changes in market rates or
prices might decrease the value of First Tennessee's position. 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.
CONTROLS
First Tennessee follows the same credit policies and underwriting practices
in making commitments as it does for on-balance sheet instruments. Each
customer's creditworthiness is evaluated on a case-by-case basis. In addition,
for lending related off-balance sheet instruments, the amount of collateral
obtained, if any, is based on management's credit evaluation of the
counterparty.
The use of financial instruments is monitored by management's
Asset/Liability Committee (ALCO). The primary objective of ALCO is to manage
market and interest rate risk by controlling and limiting the degree of
earnings volatility attributable to changes in interest rates. Counterparty
credit limits are reviewed and revised periodically by ALCO, in conjunction
with senior credit officers, for each operating unit. In addition, controls
and monitoring procedures for these instruments have been established and are
routinely revised.
OFF-BALANCE SHEET CREDIT COMMITMENTS
Commitments to Extend Credit are agreements to lend to a customer at a
future date, which generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
62
are expected to expire without being drawn upon fully, the total commitment
amounts do not necessarily represent future cash requirements.
Commercial and Standby Letters of Credit 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. At December 31, 1994
and 1993, First Tennessee's outstanding contractual commitments to extend
credit and standby and commercial letters of credit included the following,
which represented the maximum credit exposure associated with these
instruments:
(Dollars in millions) 1994 1993
------------------------------------------------------
Commitments to extend credit:
Consumer credit card lines $1,735 $1,300
Consumer home equity 193 140
Commercial real estate,
construction and land
development 239 411
Mortgage Banking 625 560
Other 1,230 984
Standby and commercial letters of
credit 212 170
------------------------------------------------------
Total $4,234 $3,565
------------------------------------------------------
Mortgage Loans Sold with Recourse
In the normal course of business, First Tennessee may sell mortgage loans
with recourse. As of December 31, 1994 and 1993, the principal amount
outstanding was $607.7 million and $723.7 million, respectively. These loans
were sold with an agreement to repurchase the loan upon default. Credit risk,
to the extent of recourse, totaled approximately $312.3 million and $429.9
million at December 31, 1994 and 1993, respectively. A reserve has been
established in order to cover any future defaults. These loans are reviewed on
a regular basis to ensure that reserves are adequate to provide for foreclosure
losses. The reserve was $11.3 million and $14.5 million at December 31, 1994
and 1993, respectively.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
First Tennessee enters into a variety of off-balance sheet financial
instruments as loan commitments and customer requests ("other activities" as
shown in the following table), and as tools to alter the interest rate or
maturity of assets and liabilities in order to achieve a desired rate
sensitivity ("interest rate risk management activities"). These off-balance
sheet financial instruments are designed to modify First Tennessee's exposure
to changing interest and/or exchange rates.
HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING
Other Activities First Tennessee enters into fixed and variable rate loan
commitments with customers. Fixed rate loan commitments and variable rate
loans commitments with contract rate adjustments that lag changes in market
rates are financial instruments with characteristics similar to option
contracts. For the purposes of this note they are considered off-balance sheet
financial instruments.
Interest Rate Risk Management Activities In the normal course of
business, First Tennessee uses off-balance sheet financial instruments
primarily to hedge potential fluctuations in income or market values. ALCO
policy prohibits positions to generate speculative earnings. First Tennessee
utilizes off-balance sheet financial instruments as part of its asset/liability
management and mortgage banking hedging strategies. As a result of interest
rate fluctuations, these off-balance sheet financial instruments will develop
unrealized gains or losses that mitigate changes in the underlying hedged
portion of the balance sheet. These off-balance sheet financial instruments
when utilized effectively are designed to moderate the impact on earnings as
interest rates move either up or down.
The following table sets forth the notional or contractual amounts and
related fair values for First Tennessee's off-balance sheet financial
instruments at December 31, 1994, for both interest rate risk management and
other activities. First Tennessee's maximum exposure resulting from
off-balance sheet financial instruments at December 31, 1994, is represented by
the fair value amounts.
63
HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING
AT DECEMBER 31
1994 1994 1993
Notional Fair Notional
(Dollars in millions) Value Value Value
--------------------------------------------------------------------------------------
Other activities:
Loan commitments $4,022.3 2.3 $3,395.0
Commercial and Standby letters of credit 212.0 2.6 169.6
Foreign exchange contracts:
Contracts to buy (.3)
Contracts to sell .2
--------------------------------------------------------------------------------------
Net position (.1) --- 6.0*
Interest rate options contracts: (2.8) --- (252.8)
Written option contracts 2.8 --- 254.8
Purchased option contracts
Interest rate risk management activities:
Interest rate swaps agreements:
Receive fixed/pay floating - amortizing 550.0 (33.3) 420.1
Basis swap 1,000.0 (35.3) 1,000.0
Interest rate forward contracts:
Mortgage banking commitments to sell 246.7 863.4
Mortgage banking commitments to buy (22.6) ---
--------------------------------------------------------------------------------------
Net position 224.1 .6* 863.4
Interest rate option contracts:
Mortgage banking put option purchased 7.0 --- ---
--------------------------------------------------------------------------------------
* Only net position available
Interest Rate Swaps The rate sensitive position of a bank can be altered
either by holding fixed rate debt instruments in the securities portfolio
and/or by holding off-balance sheet financial instruments. During the fourth
quarter of 1993 and beginning of 1994, First Tennessee lengthened the maturity
of prime rate loans and thus restructured the asset sensitive position created
from the mortgage company acquisitions by executing index amortizing swaps.
With these swaps First Tennessee receives a fixed interest rate and pays a
floating rate applied to an amortizing notional principal amount. The notional
total of the index amortizing swaps held by First Tennessee is $550 million.
Approximately 54 percent of these have a final maturity in the fourth quarter
of 1996 and the remainder have a final maturity in 1997 with the opportunity
for $100 million of these to be called in 1995. As of December 31, 1994 and
1993, respectively, these swaps had depreciated market values of $33.3 million
and $2.8 million.
At December 31, 1994, First Tennessee had a $1 billion notional
principal swap (basis swap) on which the fed funds rate, limited to an increase
of 25 basis points each quarter (the cap), is received, and on which the prime
rate less a fixed spread is paid. This swap was executed in May of 1993 and
matures in May of 1996, and was intended to alter the relationship between the
rate on money market accounts and the national prime rate in expectation of a
narrowing between prime and short-term market rates. The notional amount
approximated one-half of First Tennessee's loans indexed to the prime rate.
Since the spread between the prime rate and fed funds rate has not narrowed
as expected, and since the increase in the funds received has been limited by
the cap, this swap had a depreciated market value of $35.3 million at
December 31, 1994, compared to the favorable value of $2.0 million at December
31, 1993. Subsequent to year end, half of this swap was terminated in order
to restructure the rate sensitive position and limit a portion of the loss
going forward in a rising rate scenario.
The following information illustrates the maturities, indices and weighted
average rates received on the interest rate swaps, used by First Tennessee in
its interest rate risk program as of December 31, 1994:
Final Maturity In
--------------------------------------------------------------------------
(Dollars in millions) 1995 1996 1997 Thereafter Total
--------------------------------------------------------------------------
Amortizing swaps:
Notional
principal
amount --- $300 $250* --- $550
First Tennessee receives a weighted average rate of 5.02 percent and pays
either 3 month or 6 month LIBOR depending on the contractual arrangements.
*$100 million has the opportunity of being called in 1995.
64
Final Maturity In
---------------------------------------------------------------------------
(Dollars in millions) 1995 1996 1997 Thereafter Total
---------------------------------------------------------------------------
Basis swap*:
Notional
principal
amount --- $1,000 --- --- $1,000
First Tennessee receives the effective fed funds rate, limited to an increase
of 25 basis points each quarter, and pays prime rate less 294 basis points.
*Does not reflect the early termination of $500 million notional amount
subsequent to year-end 1994 on which First Tennessee has no further
obligations.
-------------------------------------------------------------------------------
Interest Rate Forward and Futures Contracts Forward and futures contracts
are contracts for delayed delivery of securities or financial instruments in
which the seller agrees to make delivery at a specified future date of a
specified instrument at a specified price or yield. These obligations are
generally short term in nature. Risks arise from the possible inability of
counterparties to meet the terms of the contracts and from movements in the
instruments' value and interest rates. The contractual amounts significantly
exceed the future cash requirements, since First Tennessee has the ability to
offset open positions prior to settlement.
The mortgage banking companies use forwards to hedge interest rates between
the time the mortgage loan is committed to the customer and the time it is
funded and securitized. Mortgage banking is committed to deliver mortgage
loans under mandatory forward sales agreements. Such agreements may be filled
with mortgage loans held for sale, mortgage loans purchased, or mortgage loans
in process.
Interest Rate Options First Tennessee purchases interest rate options as
part of the interest rate risk management for the mortgage banking operations.
In an increasing interest rate environment, purchased option contracts which
give First Tennessee the right to sell mortgage loans to the seller of the
option, are used to cover the uncertainty of more loan applications closing
than expected.
HELD OR ISSUED BOND DIVISION:
In the normal course of business, the bond division buys and sells mortgage
securities, municipal bonds, and other securities that settle on a delayed
basis. These are considered forward contracts. These transactions are
measured at fair value, and gains or losses are recognized in earnings as they
occur. Futures contracts are utilized by the bond division, from time to time,
to manage exposure arising from the inventory position.
First Tennessee's ALCO policy allows the bond division the ability to
execute off-balance sheet derivative financial instruments. As shown in the
table below, the bond division's swap position is offset with a combination of
option and futures contracts.
HELD OR ISSUED FOR THE BOND DIVISION
1994 1993
----------------------------------------------- -----------
At For The Period Ended At
December 31 December 31 December 31
------------------ ------------------------- -----------
Notional Fair Net Average Notional
(Dollars in millions) Value Value Gain/(loss) Fair Value Value
----------------------------------------------------------------------------------------------------
Bond division activities:
Forward contracts:
Commitments to buy ($424.9) $ .9 $ $ ($656.7)
Commitments to sell 502.3 (1.7) 602.6
----------------------------------------------------------------------------------------------------
Net Position 77.4 (.8) $22.5 ($.8) (54.1)
Futures: contracts:
Contracts to buy (269.0) (.6) (.7) (.2) ---
Contracts to sell --- --- .7 .1 ---
---------------------------------------------------------------------------------------------------
Net Position (269.0) (.6) --- (.1) ---
Option contracts:
Option contract written (235.0) (.7) (.9) (.5) ---
Option contract purchased 5.0 --- .5 --- ---
---------------------------------------------------------------------------------------------------
Net position (230.0) (.7) (.4) (.5) ---
Interest rate swap:
Receive fixed /Pay
floating 75.0 1.3 1.3 .7 ---
---------------------------------------------------------------------------------------------------
65
NOTE 21 -- OTHER INCOME AND OTHER EXPENSE
Following is detail concerning "All other income" and "All other expense" as
presented in the Consolidated Statements of Income:
(Dollars in thousands) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------
All other income:
Check clearing fees $ 16,125 $ 14,569 $ 12,956
Other service charges 7,221 9,296 6,942
Other 25,731 20,553 17,834
-------------------------------------------------------------------------------------------------------------
Total $ 49,077 $ 44,418 $ 37,732
-------------------------------------------------------------------------------------------------------------
All other expense:
Legal and professional fees $ 12,665 $ 10,883 $ 11,228
Supplies 9,763 8,969 5,992
Advertising and public relations 9,635 7,335 5,852
Fed service fees 8,544 7,778 7,228
Contribution to charitable foundation 9,379 -- --
Travel and entertainment 8,112 7,255 5,301
Market adjustments to
foreclosed real estate 3,032 378 3,180
Other 38,791 41,471 31,530
-------------------------------------------------------------------------------------------------------------
Total $ 99,921 $ 84,069 $ 70,311
-------------------------------------------------------------------------------------------------------------
66
NOTE 22 -- CONDENSED FINANCIAL INFORMATION
Following are condensed statements of the parent company:
December 31
--------------------------
Statements of Condition
(Dollars in thousands) 1994 1993
----------------------------------------------------------------------------
Assets:
Cash $ 193 $ 222
Securities purchased from subsidiary
bank under agreements to resell 88,814 50,956
----------------------------------------------------------------------------
Total cash and cash equivalents 89,007 51,178
Securities held to maturity 5,012 --
Securities available for sale 1,209 --
Investment securities -- 5,906
Notes receivable--long-term 75,000 75,000
Investments in subsidiaries at equity:
Bank 734,117 671,420
Non-bank 13,605 11,168
Other assets 26,351 23,720
----------------------------------------------------------------------------
Total assets $944,301 $838,392
----------------------------------------------------------------------------
Liabilities and shareholders' equity:
Commercial paper and other
short-term borrowings $ 67,820 $ 32,283
Accrued employee benefits
and other liabilities 39,050 23,081
Long-term debt 88,660 89,444
----------------------------------------------------------------------------
Total liabilities 195,530 144,808
Shareholders' equity 748,771 693,584
----------------------------------------------------------------------------
Total liabilities and
shareholders' equity $944,301 $838,392
----------------------------------------------------------------------------
67
Statements of Income Year Ended December 31
------------------------------
(Dollars in thousands) 1994 1993 1992
----------------------------------------------------------------
Dividend income:
Bank $ 65,086 $ 41,837 $32,375
Non-bank 1,197 -- 6,283
----------------------------------------------------------------
Total dividend income 66,283 41,837 38,658
Interest income 9,672 9,412 10,626
Management fees 19,166 18,611 16,529
Other income 103 29 3
Equity security gain -- -- 71
----------------------------------------------------------------
Total income 95,224 69,889 65,887
----------------------------------------------------------------
Interest expense:
Short-term debt 1,296 927 838
Long-term debt 8,898 9,157 10,678
----------------------------------------------------------------
Total interest expense 10,194 10,084 11,516
Salaries, employee benefits, and
other expense 19,305 18,594 16,579
----------------------------------------------------------------
Total expense 29,499 28,678 28,095
----------------------------------------------------------------
Income before income taxes
and equity in undistributed
net income of subsidiaries 65,725 41,211 37,792
Applicable income taxes 743 (1,284) (2,342)
----------------------------------------------------------------
Income before equity in
undistributed net income
of subsidiaries 64,982 42,495 40,134
Equity in undistributed net
income of subsidiaries:
Bank 79,310 61,940 59,584
Non-bank 2,057 1,647 (9,297)
----------------------------------------------------------------
Net income $146,349 $106,082 $90,421
----------------------------------------------------------------
68
Statements of Cash Flows Year Ended December 31
--------------------------------------------
(Dollars in thousands) 1994 1993 1992
-----------------------------------------------------------------------------------------
Operating activities:
Net income $146,349 $106,082 $ 90,421
Less undistributed net income
of subsidiaries 81,367 63,587 50,287
-----------------------------------------------------------------------------------------
Income before undistributed
net income of subsidiaries 64,982 42,495 40,134
Adjustments to reconcile income
to net cash provided by
operating activities:
Provision for deferred income taxes (45) (1,228) (1,077)
Depreciation and amortization 2,282 2,405 2,149
Investment securities gains -- -- (71)
Net (increase)/decrease in:
Interest receivable (117) 291 156
Other assets (335) (611) 8,303
Net increase/(decrease) in:
Interest payable 39 (329) (236)
Other liabilities 1,385 2,942 (2,919)
-----------------------------------------------------------------------------------------
Total adjustments 3,209 3,470 6,305
-----------------------------------------------------------------------------------------
Net cash provided by
operating activities 68,191 45,965 46,439
-----------------------------------------------------------------------------------------
Investing activities:
Proceeds from maturity of
investment securities -- 5,000 --
Proceeds from sale of
investment securities -- -- 1,084
Payments for purchase of
investment securities (400) (5,439) --
Premises and equipment (1,139) (539) (378)
Net decrease in loans -- 25,046 --
Return of investments 66 13 13
Investment in subsidiaries (1,462) (971) --
-----------------------------------------------------------------------------------------
Net cash provided/(used) by
investing activities (2,935) 23,110 719
-----------------------------------------------------------------------------------------
Financing activities:
Proceeds from exercise
of stock options 2,457 2,014 5,272
Payments for:
Long-term debt (850) (36,850) (426)
Cash dividends (40,314) (50,730) (27,927)
Equity distributions related to acquisitions (47) -- --
Repurchase of common stock (24,211) (4,797) (1,138)
Increase/(decrease) in borrowings 35,538 10,427 198
-----------------------------------------------------------------------------------------
Net cash used by
financing activities (27,427) (79,936) (24,021)
-----------------------------------------------------------------------------------------
Net increase/(decrease) in cash
and cash equivalents 37,829 (10,861) 23,137
-----------------------------------------------------------------------------------------
Cash and cash equivalents
at beginning of year 51,178 62,039 38,902
-----------------------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 89,007 $ 51,178 $ 62,039
-----------------------------------------------------------------------------------------
Total interest paid $ 10,119 $ 10,377 $ 11,680
Total income taxes paid 56,408 55,484 40,000
-----------------------------------------------------------------------------------------
69
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, 1994 and 1993, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1994 . 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 generally accepted auditing
standards. 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, 1994 and 1993, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in Notes 5 and 13 to the consolidated financial statements,
effective January 1, 1994, the Company changed its methods of accounting for
certain investments in debt and equity securities and accounting for
postemployment benefits.
Arthur Andersen LLP
Memphis, Tennessee,
January 17, 1995.
70
CONSOLIDATED
HISTORICAL PERFORMANCE
STATEMENTS OF INCOME (Unaudited) First Tennessee National Corporation
-----------------------------------------------------------------------------------------------------------------------------------
Growth Rates (%)
---------------
(Dollars in millions except per share data) 1994 1993 1992 1991 1990 1989 94/93 94/89
-----------------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans:
Commercial $203.3 $171.8 $173.7 $204.9 $222.2 $236.7 18.3 + 3.0 -
Consumer 164.1 126.2 112.6 114.1 117.8 112.8 30.0 + 7.8 +
Mortgage warehouse loans held for sale 42.2 34.3 9.2 5.5 3.3 2.7 23.1 + 73.3 +
Permanent mortgage 42.3 44.3 57.4 62.3 58.3 56.8 4.4 - 5.7 -
Credit card receivables 56.6 51.1 53.2 53.0 46.2 38.5 10.7 + 8.0 +
Real estate construction 11.4 7.3 6.0 13.1 25.4 31.6 55.7 + 18.4 -
Investment securities:
Taxable 122.8 169.6 181.1 145.7 128.0 103.7 27.6 - 3.4 +
Tax-exempt 5.1 7.2 8.6 11.1 13.8 17.6 29.9 - 22.1 -
Other earning assets:
Investments in bank time deposits .2 .2 2.5 23.2 30.4 30.0 27.0 + 63.0 -
Federal funds sold and securities
purchased under agreements to resell 7.9 3.7 6.7 20.0 24.7 22.6 112.6 + 19.0 -
Trading securities inventory 12.8 9.3 10.3 9.5 12.0 7.6 37.7 + 10.9 +
--------------------------------------------------------------------------------------------------------------
Total interest income 668.7 625.0 621.3 662.4 682.1 660.6 7.0 + 0.2 +
--------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Checking/Interest 8.8 10.3 12.2 15.2 15.9 23.8 14.0 - 14.2 -
Savings 12.7 14.7 17.0 20.0 20.4 22.3 13.6 - 10.6 -
Money market account 55.3 42.4 51.2 70.0 74.4 51.2 30.3 + 0.3 +
Certificates of deposit under $100,000 and
other time 118.2 114.5 143.7 185.6 201.5 198.7 3.2 + 9.9 -
Certificates of deposit $100,000 and more 18.7 15.2 19.1 31.2 38.8 48.5 22.9 + 17.4 -
Federal funds purchased and securities
sold under agreements to repurchase 40.4 29.0 22.4 31.5 47.2 51.6 39.0 + 4.8 -
Commercial paper and other short-term borrowings 23.8 25.6 9.5 7.4 7.5 7.7 6.9 - 25.3 +
Federal Reserve Bank penalties 1.1 .5 .7 1.0 1.3 1.6 124.2 + 6.7 -
Long-term debt 9.1 9.3 10.9 11.8 12.4 12.9 2.7 - 6.8 -
--------------------------------------------------------------------------------------------------------------
Total interest expense 288.1 261.5 286.7 373.7 419.4 418.3 10.2 + 7.2 -
--------------------------------------------------------------------------------------------------------------
Net interest income 380.6 363.5 334.6 288.7 262.7 242.3 4.7 + 9.4 +
Provision for loan losses 16.7 35.7 44.2 55.4 64.8 64.5 53.1 - 23.7 -
--------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 363.9 327.8 290.4 233.3 197.9 177.8 11.0 + 15.4 +
--------------------------------------------------------------------------------------------------------------
Noninterest income:
Mortgage banking 118.4 85.7 16.3 8.3 7.7 6.0 38.3 + 81.2 +
Bond division 77.5 91.5 80.3 68.6 41.7 31.8 15.3 - 19.5 +
Deposit transactions and cash management 63.2 57.4 52.9 45.3 39.2 36.6 10.1 + 11.6 +
Bank card 31.4 28.5 26.6 25.8 22.3 20.5 10.3 + 8.9 +
Trust services 28.9 26.5 23.8 21.0 18.0 16.6 9.0 + 11.8 +
Equity securities gains/(losses) 24.2 (.5) .3 (.7) (1.0) 2.3 5,162.8 + 59.8 +
Debt securities gains/(losses) (3.6) 1.3 (1.9) (.8) (.9) (.2) 381.2 - 80.0 -
All other 49.1 44.4 37.7 27.5 32.0 32.6 10.5 + 8.5 +
--------------------------------------------------------------------------------------------------------------
Total noninterest income 389.1 334.8 236.0 195.0 159.0 146.2 16.2 + 21.6 +
--------------------------------------------------------------------------------------------------------------
Adjusted gross income after
provision for loan losses 753.0 662.6 526.4 428.3 356.9 324.0 13.6 + 18.4 +
--------------------------------------------------------------------------------------------------------------
Noninterest expense:
Employee salaries, incentives, and benefits 294.9 265.8 198.9 168.3 144.4 144.0 10.9 + 15.4 +
Operations services 33.2 28.5 24.2 21.8 18.4 3.8 16.6 + 54.1 +
Occupancy 30.0 24.9 23.0 20.4 18.6 18.4 20.7 + 10.3 +
Communications and courier 26.0 21.5 17.0 15.9 13.9 15.1 20.7 + 11.4 +
Equipment rentals, depreciation, and maintenance 24.6 20.3 17.0 13.6 12.5 22.5 21.4 + 1.8 +
Amortization of intangible assets 20.7 30.8 13.7 8.9 7.9 7.0 32.9 - 24.1 +
Deposit insurance premium 16.4 16.0 15.7 12.8 7.1 5.1 2.5 + 26.5 +
All other 99.9 84.1 70.3 64.3 53.5 55.7 18.9 + 12.4 +
--------------------------------------------------------------------------------------------------------------
Total noninterest expense 545.7 491.9 379.8 326.0 276.3 271.6 10.9 + 15.0 +
--------------------------------------------------------------------------------------------------------------
Income before income taxes 207.3 170.7 146.6 102.3 80.6 52.4 21.5 + 31.6 +
Applicable income taxes 61.0 64.6 56.2 27.6 21.5 12.8 5.6 - 36.6 +
--------------------------------------------------------------------------------------------------------------
Net income $146.3 $106.1 $ 90.4 $74.7 $ 59.1 $ 39.6 38.0 + 29.9 +
--------------------------------------------------------------------------------------------------------------
Fully taxable equivalent adjustment $ 4.8 $ 6.2 $ 8.4 $10.5 $ 13.9 $ 18.0 22.5 - 23.0 -
--------------------------------------------------------------------------------------------------------------
Net income per common share $ 4.56 $ 3.31 $ 2.99 $2.51 $ 1.96 $ 1.32 37.8 + 28.1 +
--------------------------------------------------------------------------------------------------------------
Certain previously reported amounts have been reclassified to agree with
current presentation.
71
SELECTED FINANCIAL DATA FIRST TENNESSEE NATIONAL CORPORATION
-----------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions except per share data) 1994 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------------------------------------
Summary Interest income $ 668.7 $ 625.0 $ 621.3 $ 662.4 $ 682.1 $ 660.6
Income Less interest expense 288.1 261.5 286.7 373.7 419.4 418.3
Statements ----------------------------------------------------------------------------------------------------------------------
Net interest income 380.6 363.5 334.6 288.7 262.7 242.3
Provision for loan losses 16.7 35.7 44.2 55.4 64.8 64.5
----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 363.9 327.8 290.4 233.3 197.9 177.8
Noninterest income 389.1 334.8 236.0 195.0 159.0 146.2
----------------------------------------------------------------------------------------------------------------------
Adjusted gross income after provision for loan losses 753.0 662.6 526.4 428.3 356.9 324.0
Noninterest expense 545.7 491.9 379.8 326.0 276.3 271.6
----------------------------------------------------------------------------------------------------------------------
Income before income taxes 207.3 170.7 146.6 102.3 80.6 52.4
Applicable income taxes 61.0 64.6 56.2 27.6 21.5 12.8
----------------------------------------------------------------------------------------------------------------------
Net income $ 146.3 $ 106.1 $ 90.4 $ 74.7 $ 59.1 $ 39.6
-----------------------------------------------------------------------------------------------------------------------------------
Common Net income per common share $ 4.56 $ 3.31 $ 2.99 $ 2.51 $ 1.96 $ 1.32
Stock Cash dividends declared per common share 1.73 1.50 1.26 1.14 1.09 .96
Data Year-end book value per common share 23.51 21.65 19.72 18.93 17.51 16.54
Closing price of common stock per share:
High 47 3/4 47 38 27 5/8 18 19 7/8
Low 37 3/8 36 1/8 26 3/8 14 3/8 12 15 7/8
Year-end 40 3/4 38 1/2 36 3/4 27 5/8 15 1/8 16 5/8
Dividends/price 3.6-4.6% 3.2-4.2% 3.3-4.8% 4.1-7.9% 6.1-9.1% 4.8-6.0%
Dividends/earnings 37.9 45.3 42.1 45.4 55.6 72.7
Closing price/earnings 8.9x 11.6x 12.3x 11.0x 7.7x 12.6x
Market capitalization $ 1,298.0 $ 1,233.2 $1,169.7 $ 821.2 $ 449.2 $ 502.6
Average shares outstanding (thousands) 32,114 32,031 30,220 29,716 30,114 30,103
Period-end shares outstanding (thousands) 31,853 32,032 31,829 29,727 29,701 30,234
Volume of shares traded (thousands) 23,346 25,486 21,394 15,714 8,620 9,928
-----------------------------------------------------------------------------------------------------------------------------------
Selected Total assets $10,127.9 $ 9,590.9 $8,591.9 $7,891.7 $7,433.4 $7,091.0
Average Total loans, net of unearned income* 6,431.0 5,360.9 4,689.2 4,477.8 4,330.7 4,265.8
Balances Investment securities 2,153.9 2,921.9 2,716.2 1,908.6 1,616.6 1,415.5
Earning assets 8,996.0 8,608.4 7,825.0 7,201.1 6,755.3 6,328.0
Deposits 7,513.1 6,984.2 6,822.8 6,354.4 5,915.6 5,636.9
Long-term debt 91.7 97.5 130.3 130.8 131.6 133.4
Shareholders' equity 730.3 660.3 603.5 540.1 509.1 490.7
-----------------------------------------------------------------------------------------------------------------------------------
Selected Total assets $10,522.4 $10,366.7 $9,400.6 $9,006.3 $7,721.1 $7,376.8
Period-End Total loans, net of unearned income* 6,717.4 6,536.7 4,890.4 4,689.3 4,481.5 4,299.6
Balances Investment securities 2,093.7 2,273.1 3,118.4 2,593.1 1,696.1 1,579.3
Earning assets 9,251.5 9,133.7 8,494.1 7,898.9 6,916.4 6,453.4
Deposits 7,688.4 7,402.6 7,161.9 7,007.3 6,222.6 5,794.4
Long-term debt 93.8 92.0 129.3 130.6 131.0 132.2
Shareholders' equity 748.8 693.6 627.6 562.6 520.2 500.1
-----------------------------------------------------------------------------------------------------------------------------------
Selected Return on average equity 20.04% 16.07% 14.98% 13.84% 11.61% 8.08%
Ratios Return on average assets 1.45 1.11 1.05 .95 .80 .56
Net interest margin 4.28 4.29 4.38 4.15 4.09 4.11
Allowance for loan losses
to loans, net of unearned income* 1.59 1.65 2.04 1.97 1.98 1.57
Net charge-offs to average
loans, net of unearned income* .27 .54 .79 1.36 1.01 1.18
Average equity to average assets 7.21 6.88 7.02 6.84 6.85 6.92
Average tangible equity to average tangible assets 5.68 5.62 6.23 6.25 6.38 6.38
Average equity to average net loans* 11.55 12.57 13.15 12.32 11.98 11.69
-----------------------------------------------------------------------------------------------------------------------------------
Return to Stock appreciation 5.8% 4.8% 33.0% 82.6% (9.0)% 1.5%
Shareholders Dividend yield 4.5 4.1 4.6 7.5 6.6 5.9
Annual return 10.3 8.9 37.6 90.1 (2.4) 7.4
-----------------------------------------------------------------------------------------------------------------------------------
* Includes mortgage warehouse loans held for sale reported on the
Consolidated Statements of Condition.
The notes to consolidated financial statements should be read in conjunction
with this table.
72
CONSOLIDATED AVERAGE First Tennessee
BALANCE SHEET AND National
RELATED YIELDS AND RATES (Unaudited) Corporation
------------------------------------------------------------------------------------------------------------------------------
1994 1993
----------------------------- ----------------------------
Interest Average Interest Average
(Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/
(Dollars in millions) Balance Expense Rates Balance Expense Rates
------------------------------------------------------------------------------------------------------------------------------
Assets:
Earning assets:
Loans, net of unearned income:
Commercial $ 2,684.0 $204.0 7.60% $2,358.0 $172.7 7.32%
Consumer 2,055.9 164.1 7.98 1,505.5 126.2 8.38
Mortgage warehouse loans held for sale 583.3 42.2 7.24 480.0 34.3 7.14
Permanent mortgage 539.3 42.3 7.85 511.5 44.3 8.66
Credit card receivables 432.7 56.6 13.08 396.5 51.1 12.90
Real estate construction 117.3 11.4 9.71 82.0 7.3 8.92
Nonaccrual loans 18.5 1.4 7.25 27.4 1.6 5.74
------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income 6,431.0 522.0 8.12 5,360.9 437.5 8.16
------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. Treasury and other U.S. government agencies 1,989.2 117.9 5.93 2,597.5 155.0 5.97
States and municipalities 81.6 7.7 9.45 108.0 10.8 10.00
Other 83.1 4.7 5.72 216.4 14.4 6.67
------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,153.9 130.3 6.05 2,921.9 180.2 6.17
------------------------------------------------------------------------------------------------------------------------------
Other earning assets:
Investment in bank time deposits 5.3 .2 3.88 4.3 .2 3.84
Federal funds sold and securities purchased
under agreements to resell 197.8 7.9 3.99 140.9 3.7 2.63
Trading securities inventory 208.0 13.1 6.28 180.4 9.6 5.34
------------------------------------------------------------------------------------------------------------------------------
Total other earning assets 411.1 21.2 5.15 325.6 13.5 4.15
------------------------------------------------------------------------------------------------------------------------------
Total earning assets 8,996.0 673.5 7.49 8,608.4 631.2 7.33
Allowance for loan losses (110.1) (106.4)
Cash and due from banks 637.3 555.2
Premises and equipment, net 143.0 120.9
Bond division receivables and other assets 461.7 412.8
------------------------------------------------------------------------------------------------------------------------------
Total assets / Interest income $10,127.9 $673.5 $9,590.9 $631.2
------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Checking/Interest $ 497.8 $ 8.8 1.77% $ 521.7 $ 10.3 1.97%
Savings 660.5 12.7 1.92 544.4 14.7 2.70
Money market account 1,735.2 55.3 3.19 1,634.2 42.4 2.60
Certificates of deposit under $100,000 and other time 2,469.3 118.2 4.79 2,377.0 114.5 4.82
Certificates of deposit $100,000 and more 437.3 18.7 4.27 398.2 15.2 3.81
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 5,800.1 213.7 3.68 5,475.5 197.1 3.60
Federal funds purchased and securities sold
under agreements to repurchase 1,042.6 40.4 3.87 1,022.5 29.0 2.84
Commercial paper and other short-term borrowings 506.2 24.9 4.92 577.4 26.1 4.51
Long-term debt 91.7 9.1 9.90 97.5 9.3 9.57
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 7,440.6 288.1 3.87 7,172.9 261.5 3.65
Demand deposits 1,713.0 1,508.7
Bond division payables and other liabilities 244.0 249.0
Shareholders' equity 730.3 660.3
------------------------------------------------------------------------------------------------------------------------------
Total liab. and shareholders' equity / Interest expense $10,127.9 $288.1 $9,590.9 $261.5
------------------------------------------------------------------------------------------------------------------------------
Net interest income-tax equivalent basis / Yield $385.4 4.28% $369.7 4.29%
Fully taxable equivalent adjustment (4.8) (6.2)
------------------------------------------------------------------------------------------------------------------------------
Net interest income $380.6 $363.5
------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.62% 3.68%
Effect of interest-free sources used to fund earning assets .66 .61
------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.28% 4.29%
------------------------------------------------------------------------------------------------------------------------------
1992 1991
----------------------------- ----------------------------
Interest Average Interest Average
(Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/
(Dollars in millions) Balance Expense Rates Balance Expense Rates
------------------------------------------------------------------------------------------------------------------------------
Assets:
Earning assets:
Loans, net of unearned income:
Commercial $2,256.9 $176.4 7.81% $2,173.2 $208.1 9.58%
Consumer 1,212.3 112.6 9.29 1,073.8 114.1 10.63
Mortgage warehouse loans held for sale 106.7 9.2 8.59 58.6 5.5 9.34
Permanent mortgage 627.7 57.4 9.15 617.3 62.3 10.09
Credit card receivables 388.1 53.2 13.72 370.4 53.0 14.31
Real estate construction 58.9 6.0 10.21 123.8 13.1 10.59
Nonaccrual loans 38.6 1.3 3.36 60.7 2.1 3.39
------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income 4,689.2 416.1 8.87 4,477.8 458.2 10.23
------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. Treasury and other U.S. government agencies 2,144.3 148.6 6.93 1,389.0 117.7 8.47
States and municipalities 125.5 12.9 10.25 152.7 16.0 10.50
Other 446.4 32.3 7.24 366.9 27.9 7.59
------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,716.2 193.8 7.13 1,908.6 161.6 8.47
------------------------------------------------------------------------------------------------------------------------------
Other earning assets:
Investment in bank time deposits 40.6 2.5 6.04 331.1 23.2 7.02
Federal funds sold and securities purchased
under agreements to resell 220.7 6.7 3.04 358.8 20.0 5.57
Trading securities inventory 158.3 10.6 6.70 124.8 9.9 7.94
------------------------------------------------------------------------------------------------------------------------------
Total other earning assets 419.6 19.8 4.71 814.7 53.1 6.52
------------------------------------------------------------------------------------------------------------------------------
Total earning assets 7,825.0 629.7 8.05 7,201.1 672.9 9.34
Allowance for loan losses (99.0) (95.1)
Cash and due from banks 472.2 434.0
Premises and equipment, net 112.7 102.8
Bond division receivables and other assets 281.0 248.9
------------------------------------------------------------------------------------------------------------------------------
Total assets / Interest income $8,591.9 $629.7 $7,891.7 $672.9
------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Checking/Interest $ 468.1 $ 12.2 2.61% $394.1 $ 15.2 3.85%
Savings 502.3 17.0 3.39 410.7 20.0 4.87
Money market account 1,551.5 51.2 3.30 1,339.7 70.0 5.22
Certificates of deposit under $100,000 and other time 2,550.7 143.7 5.63 2,624.7 185.6 7.07
Certificates of deposit $100,000 and more 452.7 19.1 4.21 487.8 31.2 6.41
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 5,525.3 243.2 4.40 5,257.0 322.0 6.13
Federal funds purchased and securities sold
under agreements to repurchase 690.2 22.4 3.25 597.8 31.5 5.28
Commercial paper and other short-term borrowings 166.3 10.2 6.12 100.8 8.4 8.32
Long-term debt 130.3 10.9 8.36 130.8 11.8 9.02
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 6,512.1 286.7 4.40 6,086.4 373.7 6.14
Demand deposits 1,297.5 1,097.4
Bond division payables and other liabilities 178.8 167.8
Shareholders' equity 603.5 540.1
------------------------------------------------------------------------------------------------------------------------------
Total liab. and shareholders' equity / Interest expense $8,591.9 $286.7 $7,891.7 $373.7
------------------------------------------------------------------------------------------------------------------------------
Net interest income-tax equivalent basis / Yield $343.0 4.38% $299.2 4.15%
Fully taxable equivalent adjustment (8.4) (10.5)
------------------------------------------------------------------------------------------------------------------------------
Net interest income $334.6 $288.7
------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.65% 3.20%
Effect of interest-free sources used to fund earning assets .73 .95
------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.38% 4.15%
------------------------------------------------------------------------------------------------------------------------------
73
1990 1989
----------------------------- ----------------------------
Interest Average Interest Average
(Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/
(Dollars in millions) Balance Expense Rates Balance Expense Rates
------------------------------------------------------------------------------------------------------------------------------
Assets:
Earning assets:
Loans, net of unearned income:
Commercial $2,094.1 $225.2 10.76% $2,120.6 $243.3 11.47%
Consumer 1,035.9 117.8 11.37 965.2 112.8 11.69
Mortgage warehouse loans held for sale 33.8 3.3 9.71 27.5 2.7 9.83
Permanent mortgage 571.8 58.3 10.20 567.7 56.8 10.00
Credit card receivables 313.7 46.2 14.73 264.1 38.5 14.56
Real estate construction 224.6 25.7 11.42 263.4 32.4 12.30
Nonaccrual loans 56.8 4.2 7.44 57.3 2.6 4.62
------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income 4,330.7 480.7 11.10 4,265.8 489.1 11.47
------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. Treasury and other U.S. government agencies 1,195.4 109.0 9.11 986.3 87.6 8.88
States and municipalities 189.7 20.1 10.60 240.6 25.7 10.69
Other 231.5 18.8 8.13 188.6 15.7 8.34
------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,616.6 147.9 9.15 1,415.5 129.0 9.12
------------------------------------------------------------------------------------------------------------------------------
Other earning assets:
Investment in bank time deposits 358.7 30.4 8.48 312.1 30.0 9.60
Federal funds sold and securities purchased
under agreements to resell 313.9 24.7 7.85 251.2 22.6 9.01
Trading securities inventory 135.4 12.3 9.07 83.4 7.9 9.48
------------------------------------------------------------------------------------------------------------------------------
Total other earning assets 808.0 67.4 8.34 646.7 60.5 9.36
------------------------------------------------------------------------------------------------------------------------------
Total earning assets 6,755.3 696.0 10.30 6,328.0 678.6 10.72
Allowance for loan losses (81.9) (68.1)
Cash and due from banks 442.9 521.3
Premises and equipment, net 93.4 91.8
Bond division receivables and other assets 223.7 218.0
------------------------------------------------------------------------------------------------------------------------------
Total assets / Interest income $7,433.4 $696.0 $7,091.0 $678.6
------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Checking/Interest $ 376.7 $ 15.9 4.22% $ 439.4 $ 23.8 5.41%
Savings 391.4 20.4 5.20 427.4 22.3 5.21
Money market account 1,145.6 74.4 6.50 829.1 51.2 6.18
Certificates of deposit under $100,000 and other time 2,480.0 201.5 8.13 2,292.2 198.7 8.67
Certificates of deposit $100,000 and more 490.2 38.8 7.92 572.5 48.5 8.47
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 4,883.9 351.0 7.19 4,560.6 344.5 7.55
Federal funds purchased and securities sold
under agreements to repurchase 631.0 47.2 7.47 601.2 51.6 8.59
Commercial paper and other short-term borrowings 91.1 8.8 9.67 70.5 9.3 13.20
Long-term debt 131.6 12.4 9.47 133.4 12.9 9.68
------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,737.6 419.4 7.31 5,365.7 418.3 7.80
Demand deposits 1,031.7 1,076.3
Bond division payables and other liabilities 155.0 158.3
Shareholders' equity 509.1 490.7
------------------------------------------------------------------------------------------------------------------------------
Total liab. and shareholders' equity / Interest expense $7,433.4 $419.4 $7,091.0 $418.3
------------------------------------------------------------------------------------------------------------------------------
Net interest income-tax equivalent basis / Yield $276.6 4.09% $260.3 4.11%
Fully taxable equivalent adjustment (13.9) (18.0)
------------------------------------------------------------------------------------------------------------------------------
Net interest income $262.7 $242.3
------------------------------------------------------------------------------------------------------------------------------
Net interest spread 2.99% 2.92%
Effect of interest-free sources used to fund earning assets 1.10 1.19
------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.09% 4.11%
------------------------------------------------------------------------------------------------------------------------------
Average Balance
Growth Rates (%)
(Fully taxable equivalent) -------------------------
(Dollars in millions) 94/93 94/89
----------------------------------------------------------------------------------------------
Assets:
Earning assets:
Loans, net of unearned income:
Commercial 13.8 + 4.8 +
Consumer 36.6 + 16.3 +
Mortgage warehouse loans held for sale 21.5 + 84.2 +
Permanent mortgage 5.4 + 1.0 -
Credit card receivables 9.1 + 10.4 +
Real estate construction 43.0 + 14.9 -
Nonaccrual loans 32.5 - 20.2 -
Total loans, net of unearned income 20.0 + 8.6 +
Investment securities:
U.S. Treasury and other U.S. government agencies 23.4 - 15.1 +
States and municipalities 24.4 - 19.4 -
Other 61.6 - 15.1 -
Total investment securities 26.3 - 8.8 +
Other earning assets:
Investment in bank time deposits 23.3 + 55.7 -
Federal funds sold and securities purchased
under agreements to resell 40.4 + 4.7 -
Trading securities inventory 15.3 + 20.1 +
Total other earning assets 26.3 + 8.7 -
Total earning assets 4.5 + 7.3 +
Allowance for loan losses 3.5 + 10.1 +
Cash and due from banks 14.8 + 4.1 +
Premises and equipment, net 18.3 + 9.3 +
Bond division receivables and other assets 11.8 + 16.2 +
Total assets / Interest income 5.6 + 7.4 +
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Checking/Interest 4.6 - 2.5 +
Savings 21.3 + 9.1 +
Money market account 6.2 + 15.9 +
Certificates of deposit under $100,000 and other time 3.9 + 1.5 +
Certificates of deposit $100,000 and more 9.8 + 5.2 -
Total interest-bearing deposits 5.9 + 4.9 +
Federal funds purchased and securities sold
under agreements to repurchase 2.0 + 11.6 +
Commercial paper and other short-term borrowings 12.3 - 48.3 +
Long-term debt 5.9 - 7.2 -
Total interest-bearing liabilities 3.7 + 6.8 +
Demand deposits 13.5 + 9.7 +
Bond division payables and other liabilities 2.0 - 9.0 +
Shareholders' equity 10.6 + 8.3 +
Total liab. and shareholders' equity / Interest expense 5.6 + 7.4 +
Net interest income-tax equivalent basis / Yield
Fully taxable equivalent adjustment
Net interest income
Net interest spread
Effect of interest-free sources used to fund earning assets
Net interest margin
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.
74
SUMMARY OF QUARTERLY FINANCIAL INFORMATION
-----------------------------------------------------------------------------------------------------------------------------------
1994 1993
----------------------------------------- --------------------------------------
Fourth Third Second First Fourth Third Second First
(Dollars in millions except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------------------------------------------------------------
Summary income information:
Interest income $178.1 $170.9 $162.0 $157.7 $163.7 $156.6 $152.4 $152.3
Interest expense 85.5 75.3 65.9 61.4 67.4 66.0 63.8 64.3
Provision for loan losses 4.2 4.1 2.7 5.7 8.1 9.1 9.2 9.3
Noninterest income before securities transactions 91.4 90.6 88.3 98.2 101.8 84.3 74.9 73.0
Securities gains/(losses) ( 2.0) .2 7.7 14.7 ( .8) ( .1) .7 1.0
Noninterest expense 128.1 128.1 141.5 148.0 149.5 121.5 113.6 107.3
Net income 37.1 36.7 35.7 36.8 22.9 27.3 26.0 29.9
-----------------------------------------------------------------------------------------------------------------------------------
Net income per common share $ 1.16 $ 1.14 $ 1.11 $ 1.15 $ .70 $ .86 $ .81 $ .94
-----------------------------------------------------------------------------------------------------------------------------------
Common stock information:
Closing price per share:
High $ 47 1/2 $ 47 3/4 $ 45 1/4 $ 39 3/4 $ 40 1/2 $ 43 1/2 $ 47 $ 43 1/4
Low 39 3/4 43 1/2 37 3/4 37 3/8 36 1/4 38 7/8 37 3/4 36 1/8
Period-end 40 3/4 45 43 3/4 38 1/4 38 1/2 40 40 1/2 43 1/4
-----------------------------------------------------------------------------------------------------------------------------------
During 1994, First Tennessee acquired SNMC Management Corp., Highland Capital
Management Corp., Cleveland Bank and Trust Co., and Planters Bank. Each of
these acquisitions was accounted for as a pooling of interests, and accordingly
the results of operations of all companies are reflected on a combined basis
from the earliest period presented. MNC Mortgage Corp. was acquired on October
1, 1993, and Emerald Mortgage Co. was acquired on October 1, 1994. Each was
accounted for as a purchase, and therefore, the results of operations of all
companies are not reflected on a combined basis prior to their respective
acquisition dates.