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EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
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OVERVIEW OF OPERATIONS
Earnings for 1995 reflect the fifth consecutive year of record earnings.
Income for the year increased 12 percent to $164.9 million from $147.1 million
earned in 1994. 1994 net income increased 34 percent from the $109.7 million
earned in 1993 while 1993 net income increased 18 percent. Net income per
share (adjusted for the 1996 two-for-one stock split) was $2.42 in 1995, up 13
percent over the $2.15 earned in 1994. In 1994, net income per share rose 33
percent from $1.61 earned in 1993. Return on average assets improved for the
year ended December 31, 1995, to 1.45 percent from 1.39 percent in 1994 and
1.10 percent for 1993. Return on average equity rose to 20.04 percent in 1995
from 19.36 percent in 1994 and 16.04 percent in 1993.
The growth in net income since 1993 was primarily the result of
increases in noninterest income. Excluding securities gains in all periods,
noninterest income, driven by the specialty lines of business, grew 13 percent
for both 1995 and 1994, and 52 percent for 1993. Net interest income, on a
fully taxable equivalent basis, declined 1 percent in 1995 from compression in
the net interest margin, following a 4 percent increase in 1994 and an 8
percent increase in 1993 due to growth in earning assets in both periods.
Noninterest expense decreased 2 percent during the year, after growth of 13
percent in 1994 and 37 percent in 1993. At December 31, 1995, First Tennessee
had assets of $12.1 billion and shareholders' equity of $873.2 million,
representing 10 percent and 13 percent growth, respectively, from year-end
1994.
ACQUISITIONS
First Tennessee completed the following acquisitions during the three years
ended December 31, 1995:
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ACQUISITIONS (TABLE 1)
Servicing
Portfolio Shares issued* Accounting
Acquisition/location Date (billions) (thousands) Methodology
- - -------------------------------------------------------------------------------------------------------------------
MORTGAGE COMPANIES:
Carl I. Brown and Company, January 1995 $2.2 1,731 pooling of interests
Kansas City, Missouri
ORIGINATION VOLUME IN
1995: $1.8 BILLION
HomeBanc Mortgage July 1995 none $7 million cash purchase
Corporation, Atlanta,
Georgia
ORIGINATION VOLUME IN
1995: $.4 BILLION
SNMC Management January 1994 6.1 3,502 pooling of interests
Corporation, parent company
of Sunbelt National Mortgage
Corporation, Dallas, Texas
(SNMC)
ORIGINATION VOLUME IN
1995: $2.5 BILLION
Emerald Mortgage Company, October 1994 .4 304 purchase
Lynnwood, Washington
ORIGINATION VOLUME IN
1995: $.2 BILLION
Maryland National Mortgage October 1993 4.4 $115 million cash purchase
Corporation, Baltimore,
Maryland (MNC)
ORIGINATION VOLUME IN
1995: $1.7 BILLION
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Assets
(millions)
----------
BANKS/BANK HOLDING COMPANIES:
Community Bancshares Inc., February 1995 $256 2,842 pooling of interests
parent company of Community
First Bank, Germantown,
Tennessee
Peoples Commercial Services April 1995 98 842 purchase
Corporation, parent company
of Peoples Bank, Senatobia,
Mississippi (Peoples)
Financial Investment October 1995 349 2,565 purchase
Corporation, parent company
of First National Bank of
Springdale, Springdale,
Arkansas (FIC)
Cleveland Bank and Trust March 1994 227 2,306 pooling of interests
Company, Cleveland,
Tennessee
Planters Bank, Tunica, August 1994 61 668 pooling of interests
Mississippi
New South Bancorp, parent December 1993 35 298 pooling of interests
company of New South Bank,
Como, Mississippi
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Assets Under
Management
(billions)
------------
ASSET MANAGEMENT COMPANY:
Highland Capital Management March 1994 $2.6 936 pooling of interests
Corp., Memphis, Tennessee
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*Approximate number; restated for 1996 two-for-one stock split
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For all purchase transactions, noted in Table 1 - Acquisitions, the
results of their operations are not included in the financial results prior to
their closing date. For transactions accounted for as poolings of interests,
the financial position and results of operations of all companies are reflected
on a combined basis from the earliest period presented. For additional
information related to acquisitions see Note 2 - Business Combinations.
At its January meeting, First Tennessee's board of directors approved
a two-for-one split of First Tennessee's common stock. On February 16, 1996,
each shareholder of record on February 2, 1996, received one additional share
for each share owned. As a result of the two-for-one stock split, First
Tennessee's outstanding number of shares doubled from 33.6 million to 67.2
million at year-end 1995. All share and per share data have been restated to
reflect this split.
The following financial review should be read with the accompanying
consolidated financial statements and accompanying notes.
INCOME STATEMENT ANALYSIS
NONINTEREST INCOME
Noninterest income, also called fee income, is a significant source of First
Tennessee's revenue, contributing approximately 56 percent, 53 percent, and 50
percent in 1995, 1994, and 1993, respectively. Total noninterest income
(excluding securities gains in all periods) increased 13 percent in both 1995
and 1994, compared with a 52 percent increase in 1993. Table 2 - Analysis of
Noninterest Income gives detail by category for the past six years with growth
rates for the one-year and the five-year periods.
MORTGAGE BANKING
Mortgage banking noninterest income consists of loan origination fees,
servicing fee income, net gains from the sale of mortgage loans, and gains from
the sale of mortgage servicing rights. During 1995, mortgage banking fee
income increased 13 percent, and during 1994 and 1993 increased 35 percent and
314 percent, respectively. The increase in 1995 was a result of $200 million
more originations, increased income from servicing fees as a result of a larger
servicing portfolio, and the benefit of a new accounting rule (SFAS No. 122,
"Accounting for Mortgage Servicing Rights an amendment of FASB Statement No.
65" [SFAS No. 122]) related to originated servicing rights. The adoption of
this rule in the second quarter, effective to the beginning of the year,
enabled First Tennessee to retroactively increase first quarter revenues $5.0
million. This rule benefits First Tennessee by treating originated and
purchased mortgage servicing rights equally, thus allowing First Tennessee the
opportunity to retain more servicing.
The acquisition of the mortgage companies had a significant impact on
the comparability of mortgage banking income for the periods presented. MNC,
as a purchase transaction, 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. Excluding the effects of the items just
mentioned, the growth during 1994 would have been 17 percent, and during 1993
would have been 133 percent. This growth in 1993 was primarily due to First
Tennessee's participation in the refinancing activity experienced in the
overall mortgage industry as interest rates declined during the year.
Originations in 1995 were $7.2 billion compared with $7.0 billion in
1994. The mortgage servicing portfolio, which includes servicing for ourselves
and others, totaled $16.7 billion at December 31, 1995, as compared with $14.2
billion at December 31, 1994. The change in the portfolio during 1995 was
created primarily from additions due to originations of $7.2 billion,
reductions from sales of servicing of $2.7 billion and principal reductions of
$2.0 billion as a result of payments being received in the normal course of
business. The change in the portfolio during 1994 was primarily from
additions due to originations of $7.0 billion and acquired servicing of $.4
billion, and reductions from sales of servicing of $6.7 billion and principal
reductions of $2.5 billion as a result of payments being received in the normal
course of business. Gains recognized from the sale of servicing during 1995
totaled $35.4 million as compared with $83.5 million during 1994, and $23.5
million during 1993. Less servicing was sold in 1995 due to the adoption of
SFAS No. 122.
BOND DIVISION
Bond division revenues increased 7 percent in 1995, following a 15 percent
decrease in 1994 and a 14 percent increase in 1993. Additional volume, through
expansion in the nonbank customer base, contributed to the growth in revenues
during 1995. The decrease in 1994 primarily resulted from strong loan growth
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in community banks, one of the principal customer segments of the bond
division, and a change in customer activities and product preferences because of
the regulatory environment and market conditions. The increase in 1993, a
record year, was a result of increased market penetration, additional products,
and a favorable interest rate environment which created a higher demand for
securities. 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.
DEPOSIT TRANSACTIONS AND CASH MANAGEMENT
Noninterest income for deposit transactions and cash management results from
fees charged for retail deposit products and cash management services. For
1995, fee income in this category increased 11 percent, with 3 percent growth
resulting from an accounting methodology change for business accounts from cash
basis to accrual basis. The remaining fee income increase was due to new
product sales, an expanded customer base, and improvement in the collection
process. The growth in fees collected from retail and business customers in
1995 was partially offset by the reduction in the Federal Deposit Insurance
Corporation (FDIC) premium. In 1991, when the FDIC increased deposit insurance
to $.23 per $100 of deposits, First Tennessee assessed only a portion of this
cost to its customers. In August 1995, the FDIC voted to lower deposit
insurance premiums paid by well-capitalized banks to $.04 per $100 of deposits.
These fees received from customers, that have partially offset the overall cost
of the deposit insurance premium, will no longer be assessed, thus reducing
revenues approximately $1.0 million per quarter going forward. Deposit
transactions and cash management fee income increased 10 percent and 8 percent
in 1994 and 1993, respectively. The growth in 1994 reflected increased sales
and the introduction of new retail deposit products and pricing changes. The
1993 increase was related to services sold to businesses and a lower earnings
credit rate on corporate demand deposit accounts.
CARDHOLDER AND MERCHANT PROCESSING
Noninterest income for cardholder and merchant processing, two separate
divisions related to the credit card business, increased 18 percent in 1995, 10
percent in 1994, and 7 percent in 1993. The increases experienced over the
last three years primarily reflect growth in the volume of merchant
transactions processed as well as the expansion of merchant services in
restaurant and hotel businesses.
TRUST SERVICES
During 1995, noninterest income from this specialty line of business grew 23
percent, from $28.9 million in 1994 to $35.6 million in 1995. Growth of $4.2
million or 15 percent was a result of an accounting change from cash basis to
accrual basis. The managed asset segment of the business grew appreciably in
1995. Fees from these products, including Personal Trust, Employee Benefits,
and Investment Management accounts, grew 13 percent over comparable 1994
levels. Fees from Corporate Trust Services, an indenture trustee business that
acts as trustee on public bond issues, declined due to significant reductions
in debt issuance by municipalities. Fee growth in the managed asset segment
during 1994 was 5 percent. Total trust assets, including custodial accounts,
were approximately $14.9 billion at the end of 1995, compared with $12.5
billion at the end of 1994. Managed assets grew 18 percent during 1995 and
reached $5.2 billion on December 31, 1995, compared with $4.4 billion at
December 31, 1994.
NET SECURITIES GAINS/LOSSES
The net securities gains of $2.4 million in 1995 included $.9 million in
recoveries from investments previously written down; $4.6 million realized as
venture capital gains; and the write-down of $3.6 million of securities that,
in the opinion of management, have been permanently impaired. In 1994, net
securities gains included $7.5 million of equity securities gains related to
the formation of a charitable foundation; $5.0 million of losses resulting from
securities being sold in the normal course of business; $.8 million in
recoveries from investments previously written down; and $16.7 million realized
as venture capital gains. The net securities gains in 1993 included $1.1
million of gains resulting from securities being sold in the normal course of
business, $.3 million in recoveries of held for sale securities marked to
market value, and $.5 million loss realized on venture capital.
ALL OTHER NONINTEREST INCOME
All other noninterest income grew 12 percent, 10 percent, and 18 percent for
the years 1995, 1994, and 1993, respectively. The largest sources of all other
noninterest income were check clearing fees and other service charges. Income
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from check clearing fees increased 9 percent, 11 percent, and 12 percent for
1995 through 1993, respectively. This growth was primarily due to the
increase in the volume of checks processed by First Express, First
Tennessee's national check clearing operation.
Other service charges are fees generated from banking services
performed, but are not directly related to deposit transactions, such as fees
for money orders, travelers checks, savings bonds, safety deposit rental,
mutual funds, and safekeeping. During 1995, these fees grew 5 percent
following a decrease of 21 percent in 1994 and growth of 34 percent in 1993.
The increase in 1993 revenues primarily related to additional sales of mutual
fund products by First Tennessee employees in response to a change in
customer's investment preferences. In 1994, this sales effort continued, but
with a third party vendor which received a portion of the fees related to these
products, thus reducing the amount of fees collected.
As previously discussed, the method of accounting for acquisitions impacts the
comparability of financial statements. The growth in total noninterest income
during 1995 would have been 11 percent, excluding securities gains, the
purchases of Peoples and FIC, and the changes in accounting methodology from
cash basis to accrual basis previously explained. The growth in 1994 would
have been 6 percent, excluding MNC from 1994 and 1993 results. The growth in
1993 would have been 25 percent, excluding MNC and SNMC from the 1993 and 1992
results.
NET INTEREST INCOME
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.
Earning assets increased 7 percent in 1995, 5 percent in 1994, and 10
percent in 1993 as a result of commercial and consumer loan growth during the
three-year period. Total interest-bearing liabilities grew 9 percent in 1995,
4 percent in 1994, and 11 percent in 1993. Table 4 - Analysis of Changes in
Net Interest Income gives volume and rate detail by category comparing 1995 to
1994 and 1994 to 1993.
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NET INTEREST INCOME AND EARNING ASSETS (TABLE 3)
Years Ended December 31
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(Dollars in thousands) 1995 1994 1993
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Investment securities $ 2,161.0 $2,248.7 $3,015.3
Loans 7,593.3 6,752.3 5,611.7
Other earning assets 340.4 405.2 326.6
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Total earning assets $10,094.7 $9,406.2 $8,953.6
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Net interest income - FTE $ 395.7 $ 399.3 $ 382.4
Yields on earning assets excluding swaps 8.26% 7.51% 7.34%
Impact from interest rate swaps (.06) (.01) .01
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Yields adjusted for swaps 8.20 7.50 7.35
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Rates paid on interest-bearing
liabilities excluding swaps 4.87 3.84 3.66
Impact from interest rate swaps .22 .09 .02
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Rates paid adjusted for swaps 5.09 3.93 3.68
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Net interest spread 3.11 3.57 3.67
Effect of interest-free sources .81 .68 .60
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Net interest margin 3.92 4.25 4.27
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Net interest margin excluding swaps 4.16% 4.32% 4.28%
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The extreme interest rate movements in 1994 and the flattening of the
yield curve in 1995 contributed to the decline in the net interest margin in
1995 as First Tennessee's balance sheet and off-balance sheet positions were
impacted from repricing mismatches. A $1 billion basis swap, executed in May
1993 and terminated at the beginning of 1995, negatively impacted the net
interest margin approximately 18 basis points in 1995 and 7 basis points in
1994, and will continue to affect the margin through May 1996 when the
amortization period for the swap ends.
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The net interest margin is affected by the activity levels and related
funding for First Tennessee's specialty lines of business, as these nonbank
business lines typically produce different margins than traditional
retail/commercial banking activities. Consequently, First Tennessee's
consolidated margin cannot be readily compared to that of other bank holding
companies. During 1995, mortgage banking negatively impacted the margin
approximately 9 basis points because the spread between the rates on mortgage
loans temporarily in the warehouse and the related short-term funding rates
were significantly less than the comparable spread earned in the
retail/commercial bank. The bond division also negatively impacted the margin
approximately 11 basis points in 1995. First Tennessee's strategy is to hedge
inventory in the cash markets, effectively eliminating net interest income on
these positions. In 1994 and 1993, the margin was negatively impacted 8 basis
points and 10 basis points, respectively, by mortgage banking, and 14 basis
points and 13 basis points, respectively, by the bond division.
The balance sheet was rate sensitive $518 million more assets than
liabilities scheduled to reprice within one year, as shown in Table 5 - Rate
Sensitivity Analysis, which is 5.0 percent of earning assets and within First
Tennessee guideline limits. This point-in-time measurement indicates that
over the course of a year a downward movement in rates may negatively impact
the net interest margin since assets will reprice faster than liabilities.
Net interest income increased during the year due to a higher volume
of average earning assets, as shown in the graph below. The results of
maturities and actions taken in 1995 have led to the improvement in the net
interest margin over the past quarter as also shown in the graph.
[Graph]
With First Tennessee's existing balance sheet mix and the current
interest rate environment, the retail/commercial bank's margin is expected to
continue to improve throughout 1996, especially once the costs associated with
the basis swap end. Going forward, the consolidated margin will continue to be
influenced by the activity levels in the specialty lines of business.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the charge to operating earnings that
management determines to be necessary to maintain the allowance for loan losses
at an adequate level, and reflects management's estimate of the risk of loss
inherent in the loan portfolio. The provision for loan losses was $20.6
million, $17.2 million, and $36.5 million for the years 1995, 1994, and 1993,
respectively. The provision for 1994, the lowest level since 1990, shows the
significant improvement in asset quality from 1993. While asset quality trends
remained favorable, the provision increased in 1995 to cover the growth in the
loan portfolio.
NONINTEREST EXPENSE
Noninterest expense, also called operating expense, decreased 2 percent in 1995
following increases of 13 percent in 1994 and 37 percent in 1993. Table 6 -
Analysis of Noninterest Expense provides details by category for the past six
years.
A number of transactions during the periods reviewed affected the
comparability of noninterest expense. One-time acquisition expenses of $5.8
million, $4.8 million, and $9.4 million were recognized in 1995, 1994, and
1992, respectively. There were no one-time acquisition expenses in 1993.
During 1995, $1.4 million in expenses was recognized related to the change in
accounting methodology from cash basis to accrual basis for trust services fees
and deposit transactions and cash management fees. Peoples and FIC were
included in the results of operations only from the dates of their acquisitions
which added $4.8 million to 1995 expenses. During 1994, nonrecurring expenses
included the adoption of a new accounting standard (SFAS No. 112, "Employers'
Accounting for Postemployment Benefits") which increased benefits expense $2.3
million related to prior services rendered and rights vested for postemployment
benefits. Also in 1994, a charitable foundation was established which
increased contribution expenses $9.4 million. Total expenses increased $20.4
million in 1993 from the impact of the acquisitions of MNC and New South
Bancorp. Included in the 1992 results were one-time costs of $1.6 million
related to the restructuring of remote data processing centers and benefit
awards. Finally, the acquisition of SNMC in 1994 added only two months of
expenses in 1992 due to a November start-up date. For comparative purposes,
excluding the one-time expenses and other items just discussed, the 1995
noninterest expenses still decreased 2 percent, following increases of 4
percent and 17 percent for 1994 and 1993, respectively.
Employee compensation, incentives, and benefits (staff expense), the
largest component of noninterest expense, decreased 3 percent in 1995,
following increases of 13 percent and 44 percent for 1994 and 1993,
respectively. Staff expense includes commissions paid in several lines of
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business, such as the bond division, mortgage banking, and the venture
capital companies. As the revenues increase or decrease in these business
lines, the commissions change accordingly. For comparative purposes, excluding
the previously mentioned one-time items, the 1995 decrease in staff expense
would still have been 3 percent compared with increases of 6 percent and 24
percent in 1994 and 1993, respectively. The 1995 decrease is primarily due to
the benefit of operating efficiences especially in mortgage banking from
consolidation synergies. The increase in 1994 was partially offset by a
reduction in the mutual fund sales force in 1994. The increases in 1994 and
1993 reflect the specialty lines of business which use commission-based
compensation.
Deposit insurance premium expense decreased $7.0 million or 41 percent
in 1995 following several years of stable premium expense. The premium, which
had been set at $.23 per $100 of deposits since 1991 was lowered to $.04 per
$100 of deposits in August 1995; and, as a result of the Bank Insurance Fund
(BIF) becoming fully capitalized, the FDIC voted in November of 1995 to reduce
insurance on BIF deposits to zero as of January 1, 1996, with only
adminstrative costs being assessed to the banks. Congress is currently
discussing various proposals to fully capitalize the Savings Association
Insurance Fund (SAIF). An assessment could potentially be charged to all
institutions that have SAIF-insured deposits. The timing of the assessment
could be as early as the first quarter of 1996. In management's opinion, under
current proposals, the maximum pre-tax, one-time cost to First Tennessee is
estimated to be approximately $6.1 million.
All Other expense consists of many smaller expense categories such as
supplies, Fed service fees, travel and entertainment, foreclosed real estate
expenses, contributions, and others. During 1995, the decrease in All Other
expense was 15 percent, following increases of 17 percent and 27 percent for
1994 and 1993, respectively. For comparative purposes, excluding the
nonrecurring expenses previously discussed, these expenses decreased 4 percent
and 2 percent for 1995 and 1994, respectively, after increasing 11 percent in
1993.
INCOME TAXES
The effective tax rate in 1995 was 34.8 percent compared with 29.2 percent in
1994 and 37.4 percent in 1993. The lower tax rate in 1994 resulted from the
elimination of $7.7 million of deferred tax valuation allowance related to the
acquisition of SNMC, and $2.9 million related to the establishment of a
charitable foundation. Without these items, the 1994 effective tax rate would
have been 34.3 percent. For further information see Note 16 - Income Taxes.
BALANCE SHEET REVIEW
At December 31, 1995, First Tennessee reported total assets of $12.1 billion
compared with $10.9 billion and $10.8 billion at the end of 1994 and 1993,
respectively. Average assets were $11.4 billion in 1995 compared with $10.6
billion in 1994 and $10.0 billion in 1993.
EARNING ASSETS
Investment securities and loans are the primary types of earning assets. For
1995, earning assets averaged $10.1 billion compared with $9.4 billion for 1994
and $9.0 billion for 1993. Average earning assets were 89 percent of total
average assets in 1995 and 1994, and 90 percent of total average assets in
1993.
INVESTMENT SECURITIES
The investment portfolio consists principally of debt securities that First
Tennessee uses as a source of income and liquidity, to balance interest rate
risk with other categories of the balance sheet, and to supply securities to
pledge as required collateral for certain deposits. Table 7 - Maturities of
Investment Securities shows information pertaining to the composition, yields,
and maturities of the securities portfolio. Average investment securities
peaked in 1993 at more than $3 billion, and decreased 25 percent in 1994 and 4
percent in 1995, as mortgage warehouse loans increased in 1994. Excluding the
impact of purchase acquisitions in 1995, the decrease would have been 7 percent
in 1995. Investment securities represented 21 percent and 24 percent of
earning assets for 1995 and 1994, respectively.
The investment portfolio is classified into two categories:
securities held to maturity and securities available for sale. Securities that
management has the positive intent and ability to hold to maturity are included
in the securities held to maturity (HTM) category and are carried at amortized
cost. The designation of securities as available for sale (AFS) applies to all
other securities that may be held for indefinite periods, including securities
that may be sold in response to changes in interest rates, changes in
prepayment risk, increases in loan demand, general liquidity needs, and other
similar factors. These securities are carried at their fair values with
unrealized gains and losses excluded from operating results and reported, net of
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deferred taxes, as a component of shareholders' equity.
During the fourth quarter of 1995, the Financial Accounting Standards
Board (FASB) released a report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." As a result
of this report, banks were allowed to reclassify their AFS and HTM securities
before January 1, 1996, without any adverse ramifications. First Tennessee did
reclassify a portion of the investment portfolio on December 1, 1995. Prior to
the reclassification, the AFS portfolio was approximately 52 percent of the
total investment securities portfolio; after reclassification, the AFS
portfolio was approximately 96 percent of the total.
At December 31, 1995, the securities portfolio totaled $2.1 billion of
which $2.0 billion of securities were classified as AFS with an average life of
2.1 years. These securities consisted primarily of mortgage-backed securities,
collateralized mortgage obligations (CMOs), U.S. Treasuries, and U.S.
government agencies. At December 31, 1995, these securities had approximately
$18.2 million of net unrealized gains that resulted in an increase in book
equity of approximately $10.6 million, net of $7.6 million of deferred income
taxes. At December 31, 1994, the $1.2 billion of AFS securities had
approximately $39.6 million of net unrealized losses that resulted in a
decrease in equity of approximately $24.3 million, net of $15.3 million of
deferred income taxes. The increase in the market value of this portfolio
during 1995 came primarily from an improved interest rate environment.
HTM securities totaled $74.7 million and were primarily municipal
bonds at December 31, 1995, with an average life of 6.9 years. The HTM
securities portfolio had a net unrealized gain at December 31, 1995 of $1.0
million. At December 31, 1994, the securities classified as HTM totaled $1.0
billion and had a net unrealized loss of $52.7 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 92 percent of the
investment portfolio at December 31, 1995.
LOANS
Loans grew 12 percent during 1995 and 20 percent during 1994. For purposes of
this discussion, loans are expressed as averages, net of unearned income,
unless otherwise noted. Loans represented 75 percent of earning assets in 1995
and 72 percent in 1994. Additional loan information is provided in Table 8 -
Maturities of Loans and Note 4 - Loans. The purchase acquisitions of Peoples
and FIC were responsible for approximately 1 percent of the total loan growth
in 1995. The impact by individual loan category was similar.
Commercial loans continued as the single largest loan category,
representing 41 percent of total loans in both 1995 and 1994. During 1995,
commercial loans grew 13 percent compared with 14 percent in 1994. The
increase in commercial loans generally reflects the economic growth experienced
in Tennessee during this period, as well as new customers and the result of
cross-selling efforts to existing deposit and cash management customers.
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 represented 31 percent of
total loans in both 1995 and 1994. During 1995, consumer loans grew 14 percent
compared with 37 percent in 1994. Growth in consumer loans has primarily been
due to successes with direct marketing efforts and increases in automobile
loans and second mortgages. First Tennessee is active in selling second
mortgages not only in Tennessee through First Tennessee Bank National
Association (FTBNA) but also outside of this market through Gulf Pacific
Mortgage, a division of FTBNA. Growth in 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.
Mortgage warehouse loans held for sale are loans awaiting
securitization. These loans represented approximately 9 percent of total loans
in 1995 and 11 percent of total loans in 1994. The mortgage warehouse declined
8 percent during 1995 with a 53 percent increase in period-end balances between
December 31, 1994, and 1995, as the majority of loan originations did not occur
until the latter half of 1995. The mortgage warehouse grew 25 percent in 1994,
primarily due to the purchase acquisition of MNC.
The permanent mortgage portfolio includes certain mortgage loans,
principally adjustable rate mortgages, that First Tennessee periodically
decides to retain. During 1995, the permanent mortgage portfolio represented
9 percent of total loans compared with 8 percent in 1994. This portfolio of
loans grew 18 percent in 1995 and 6 percent in 1994.
Credit card receivables represent outstanding balances on credit card
accounts. During both 1995 and 1994, credit card receivables represented
9
6 percent of total loans. During 1995, credit card receivables increased 11
percent compared with an increase of 9 percent in 1994. The growth was a
result of increased use by consumers of debt, cross-selling opportunities, and
targeted promotional campaigns.
The real estate construction loan portfolio represented 3 percent of
total loans in 1995 and 2 percent in 1994. During 1995, this loan portfolio
increased $99 million or 84 percent compared with a $35 million increase or 43
percent in 1994. Growth during this period was a result of economic growth and
favorable market conditions.
DEPOSITS, OTHER SOURCES OF FUNDS, AND LIQUIDITY MANAGEMENT
Core deposits are First Tennessee's primary source of funding and one of the
most stable sources of liquidity for a bank. During 1995, these deposits
averaged $7.6 billion and represented 75 percent of First Tennessee's earning
asset funding compared with $7.3 billion and 77 percent, respectively, in 1994
and $6.8 billion and 76 percent, respectively, in 1993. Approximately
two-thirds of the growth in 1995 came from growth in the depositor base as the
number of households increased approximately 6 percent. The other third of the
growth came from the purchases of Peoples and FIC. Interest-bearing core
deposits grew 6 percent during 1995 compared with 5 percent in 1994, while
noninterest-bearing demand deposits were relatively flat during 1995 and grew
13 percent in 1994. Excluding the purchase acquisitions, interest-bearing core
deposits grew 5 percent and noninterest-bearing demand deposits decreased 1
percent in 1995.
Purchased funds averaged $2.4 billion for 1995, up 11 percent, or $238
million from the previous year. Purchased funds represented 24 percent of the
corporation's funding in 1995 and 23 percent in 1994. The purchase
acquisitions represented $27 million or 1 percent of the growth in purchased
funds in 1995.
Term borrowings include senior and subordinated long-term debt and
borrowings from the Federal Home Loan Bank with maturities greater than one
year. Term borrowings increased $107 million during 1995. In November 1995,
First Tennessee (the parent company) completed a $75 million subordinated debt
issuance in the form of 10-year noncallable notes. The notes have a coupon of
6.75 percent.
The objective of liquidity management is to ensure the continuous
availability of funds to meet the demands of depositors, investors, and
borrowers. ALCO (Asset/Liability Committee) is responsible for managing these
needs which take into account the marketability of assets, the sources and
stability of funding, and the level of unfunded commitments. 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 subsidiaries is subject to certain regulatory
restrictions, which is presented in Note 19 - Restrictions on Dividends and
Intercompany Transactions. 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, 1995, may offer from
time to time, at its discretion, debt securities and common and preferred stock
up to $225 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 in Table 9 - Credit Ratings.
=================================================================================================
CREDIT RATINGS AT DECEMBER 31, 1995 (TABLE 9)
Standard Thomson
& Poor's Moody's BankWatch IBCA Fitch
- - --------------------------------------------------------------------------------------------------
FIRST TENNESSEE
Overall credit rating B
Subordinated capital
notes due 1999 BBB+ Baa1 A-
Subordinated capital
notes due 2005 BBB+ Baa1 A- A
Commercial paper TBW-1
- - --------------------------------------------------------------------------------------------------
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
Short-term/Long-term
deposits A-1/A P-1/A1 TBW-1 A1/A
Counterparty credit rating A A1
- - --------------------------------------------------------------------------------------------------
10
CAPITAL
Total shareholders' equity at December 31, 1995, was $873.2 million, up $98.3
million, or 13 percent from the balance at the end of 1994. This followed an
increase of $53.8 million, or 7 percent from year-end 1993. In both years, the
increase was principally due to the retention of net income after dividends.
The Consolidated Statements of Shareholders' Equity highlight the detailed
changes in equity since December 31, 1993.
Capital adequacy is an important indicator of financial stability and
performance. Management's objectives are to maintain a level of capitalization
that is sufficient to sustain asset growth, take advantage of profitable growth
opportunities, and promote depositor and investor confidence. Overall, First
Tennessee's capital position remained strong with a ratio of average equity to
assets of 7.24 percent and 7.18 percent for 1995 and 1994, respectively. The
period-end equity to assets ratio improved 14 basis points from 7.09 percent at
December 31, 1994, to 7.23 percent at December 31, 1995. Double leverage
increased to 107.2 percent at December 31, 1995, from 99.7 percent at
December 31, 1994.
Banking industry regulators define minimum capital ratios for bank
holding companies and their subsidiaries. Based on the risk-based capital
rules and definitions prescribed by the banking regulators, should an
institution's capital ratios decline below predetermined levels, it would
become subject to a series of increasingly restrictive regulatory actions. The
system categorizes a financial institution's capital position into one of five
categories ranging from well-capitalized to critically under-capitalized. For
an institution to qualify as well-capitalized, Tier 1, Total Capital and
Leverage capital ratios must be at least 6 percent, 10 percent, and 5 percent,
respectively. First Tennessee and its affiliates, on December 31, 1995, had
sufficient capital to qualify as well-capitalized institutions as shown in
Table 10 - Regulatory Capital.
At December 31, 1995, book value per common share was $13.00 based on
shares outstanding of approximately 67.2 million compared with $11.37 based on
shares outstanding of 68.1 million at December 31, 1994. First Tennessee's
shares are traded on The Nasdaq Stock Market under the symbol FTEN. The sales
price ranges, earnings per share, and dividends by quarter for each of the last
two years are presented in Table 16 - Summary of Quarterly Financial
Information. At December 31, 1995, the closing sales price was $30.25 per
share. This price was 233 percent of year-end book value per share, and the
dividend yield is 3.5 percent for 1996 based on current dividends per share.
The quarterly dividend was last increased at the October 24, 1995, board
meeting to $.265 per share, up from $.235 per share. The two-for-one stock
split, effective February 16, 1996, changed the par value of First Tennessee's
common stock from $2.50 to $1.25 per share and the shares of common stock
authorized doubled from 100 million to 200 million.
At the October 1995 board of directors meeting, authority was given to
management to purchase up to $60 million of First Tennessee stock to manage the
capital balance between debt and equity and reduce excess equity levels. The
purchase of these shares was completed prior to year-end 1995 and is expected
to have a positive impact on future earnings. In total during 1995, First
Tennessee purchased approximately 4.8 million shares of its common stock.
Approximately 3.4 million shares were issued for acquisitions closed during the
year, and approximately 438,000 shares were issued for benefit programs. The
company plans to continue to purchase shares pursuant to board authority for
various stock option plans, and from time to time, will evaluate the level of
capital and take action designed to generate or use the capital to maximize the
benefit to shareholders. During 1994, approximately 1.1 million shares were
repurchased, with 304,000 shares being issued for acquisitions and 322,000
shares being issued for benefit plans. This share information has been
restated for the two-for-one stock split that occurred in the first quarter of
1996.
ASSET QUALITY
First Tennessee manages asset quality through diversification in the loan
portfolio and adherence to its credit policy. Management 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, and to include credit risk as part of the pricing
decision of each product. At December 31, 1995, First Tennessee had no
concentrations of 10 percent or more of total loans in any single industry.
ALLOWANCE FOR LOAN LOSSES
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 for loan losses is increased by the provision for loan losses and
11
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. While management uses available information to recognize
potential losses on loans, future additions to the reserve may be necessary
based on changes in economic conditions. Table 11 - Analysis of Allowance for
Loan Losses summarizes loans charged off and recoveries of loans previously
charged off by loan category, and additions to the reserve which have been
charged to operating expense. The allowance for loan losses is allocated
according to the amount systematically estimated as necessary to provide for
the inherent losses within the various categories of loans. This allocation is
based primarily on previous charge-off experience adjusted for changes in the
risk characteristics of each category. In addition, classified loans over $1
million are evaluated separately and a specific reserve is set based on the
expected loss of the individual loan. The anticipated effect of economic
conditions on loan categories is another factor used in determining the
quantifying amounts. A general reserve is also maintained to supplement
specific allocations. Table 12 - Loans and Foreclosed Real Estate gives a
breakdown of the allowance allocation by major loan types and commercial loan
grades at December 31, 1995, compared with the same period in 1994.
The total allowance for loan losses for 1995 increased 2 percent from
the 1994 and 1993 levels. The ratio of allowance for loan losses to loans, net
of unearned income, was reduced to 1.39 percent at December 31, 1995, from 1.57
percent at December 31, 1994, as a result of the loan growth experienced in
1995. Excluding mortgage warehouse loans, this ratio was 1.54 percent and 1.69
percent in 1995 and 1994, respectively.
NET CHARGE-OFFS
Each lending product has, as a normal course of business, an expected level of
net charge-offs based on the profit margin of that product. The level of
charge-offs can vary from period to period due to the size, type, and number of
individual credits; all of which may be cyclical, depending on economic
conditions.
In 1995, net charge-offs increased $2.5 million to $20.5 million at
December 31. Net charge-offs were $18.0 million and $29.9 million for 1994 and
1993, respectively. The ratio of net charge-offs to total loans remained at
.27 percent for 1995 and 1994. This ratio for 1993 was .53 percent of total
loans.
Commercial and real estate loan recoveries exceeded charge-offs by
$1.0 million in 1995. This compares with net charge-offs of $2.5 million in
1994, a more normal level of charge-offs. Consumer loan net charge-offs in
1995 were $6.6 million, an increase of $1.8 million from 1994; and credit card
receivables net charge-offs were $14.9 million, an increase of $4.1 million in
1995; both reflecting growth in these consumer loan portfolios and a return
toward a more historical level of charge-offs.
Asset quality levels were at their best in 1994. Going forward, in
light of current expected economic conditions and trends, the absolute level of
net charge-offs will continue to increase from the low levels experienced in
1994 and 1995. Despite a possible increase, management believes that during
1996 there will be no significant deterioration in the asset quality ratios.
NONPERFORMING ASSETS
Nonaccrual and restructured loans constitute nonperforming loans, and these,
along with foreclosed real estate and other assets, represent nonperforming
assets. Nonaccrual loans consist of those loans on which recognition of
interest income was discontinued. Restructured loans generally take the form
of an extension of the original repayment period and/or a reduction or deferral
of interest or principal because of a deterioration in the financial position
of the borrower.
Nonperforming assets decreased 17 percent in 1995 and 41 percent in
1994. Nonperforming loans increased $2.0 million, or 12 percent in 1995,
compared with a decrease of $12 million or 41 percent in 1994. At December 31,
1995, foreclosed properties amounted to $11.8 million, a decrease of 39 percent
from the $19.2 million of foreclosed properties reported in 1994. Nonperforming
assets along with past due loans are presented in Table 14 - Nonperforming
Assets. Table 15 - Changes in Nonperforming Assets, gives additional
information for 1993 to 1995.
PAST DUE LOANS AND POTENTIAL PROBLEM ASSETS
Past due loans are loans contractually past due 90 days or more as to interest
or principal payments, but have not yet been put on nonaccrual status. Past
due loans were $33.3 million or .4 percent of loans at December 31, 1995, a
$10.0 million increase from the $23.3 million or .3 percent of loans at
December 31, 1994, reflecting the overall trends in both permanent mortgage and
12
consumer loan delinquencies, the change in the loan mix, and the return to
more historical past due levels.
Potential problem assets, which are not included in nonperforming
assets, decreased to $66.6 million at December 31, 1995, from the previous
year's level, and were less than 1 percent of total loans in 1995. Potential
problem assets represent those assets where information about possible credit
problems of borrowers has caused management to have serious doubts about the
borrower's ability to comply with present repayment terms. This definition is
believed to be substantially consistent with the standards established by the
Office of the Comptroller of the Currency for loans classified substandard and
doubtful.
13
ANALYSIS OF NONINTEREST INCOME (TABLE 2)
(Dollars in thousands) 1995 1994 1993 1992
- - ---------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking $212,579 $187,340 $138,960 $ 33,539
Bond division 82,814 77,478 91,525 80,275
Deposit transactions and cash management 70,957 64,169 58,377 53,914
Cardholder and merchant processing 36,984 31,402 28,467 26,556
Trust services 35,632 28,933 26,532 23,819
Equity securities gains/(losses) 3,195 24,251 (479) 342
Debt securities gains/(losses) (751) (4,298) 1,371 (1,535)
All other:
Check clearing fees 17,585 16,124 14,569 12,956
Other service charges 7,709 7,334 9,296 6,942
Other 29,859 26,006 21,303 18,532
- - ---------------------------------------------------------------------------------------
Total other income 55,153 49,464 45,168 38,430
- - ---------------------------------------------------------------------------------------
Total noninterest income $496,563 $458,739 $389,921 $255,340
=======================================================================================
ANALYSIS OF NONINTEREST INCOME
Growth rates (%)
---------------------
(Dollars in thousands) 1991 1990 95/94 95/90
- - ---------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking $ 17,593 $ 19,483 13.5 + 61.3 +
Bond division 68,628 41,704 6.9 + 14.7 +
Deposit transactions and cash management 46,300 40,246 10.6 + 12.0 +
Cardholder and merchant processing 25,834 22,299 17.8 + 10.6 +
Trust services 20,996 17,994 23.2 + 14.6 +
Equity securities gains/(losses) (713) (1,039) 86.8 - 38.4 +
Debt securities gains/(losses) (47) (932) 82.5 + 3.6 +
All other:
Check clearing fees 8,879 8,610 9.1 + 15.4 +
Other service charges 5,539 4,936 5.1 + 9.3 +
Other 13,652 19,798 14.8 + 8.6 +
- - --------------------------------------------------------------
Total other income 28,070 33,344 11.5 + 10.6 +
- - --------------------------------------------------------------
Total noninterest income $206,661 $173,099 8.2 + 23.5 +
===============================================================
Certain previously reported amounts have been reclassified to agree with
current presentation.
14
ANALYSIS OF CHANGES IN NET INTEREST INCOME (Table 4)
1995 Compared to 1994 1994 Compared to 1993
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 $22,727 $ 30,160 $ 52,887 $ 7,161 $ 25,836 $ 32,997
Consumer 15,284 23,987 39,271 (6,269) 44,906 38,637
Mortgage warehouse loans held for sale 3,400 (4,664) (1,264) (40) 11,117 11,077
Permanent mortgage 43 7,978 8,021 (4,344) 2,530 (1,814)
Credit card receivables 2,463 6,431 8,894 735 4,722 5,457
Real estate construction 1,191 10,462 11,653 697 3,379 4,076
Nonaccrual 213 (162) 51 357 (786) (429)
- - ------------------------------------------------ ------- --------
Total loans 47,800 71,713 119,513 (2,663) 92,664 90,001
- - ------------------------------------------------ ------- --------
Investment securities:
U.S. Treasury and other U.S.government agencies 6,728 (3,583) 3,145 (1,288) (36,689) (37,977)
States and municipalities (521) (271) (792) (679) (2,347) (3,026)
Other 582 (1,627) (1,045) (1,410) (7,539) (8,949)
- - ------------------------------------------------- -------- --------
Total investment securities 6,751 (5,443) 1,308 (3,340) (46,612) (49,952)
- - ------------------------------------------------- -------- --------
Other earning assets:
Investment in bank time deposits 79 (104) (25) 1 43 44
Federal funds sold and securities
purchased under agreements to resell 2,447 (1,532) 915 2,297 1,589 3,886
Broker/dealer securities inventory 1,811 (1,896) (85) 1,836 1,595 3,431
- - ------------------------------------------------- -------- --------
Total other earning assets 4,466 (3,661) 805 3,706 3,655 7,361
- - ------------------------------------------------- -------- --------
Total earning assets 67,849 53,777 121,626 13,635 33,775 47,410
- - ------------------------------------------------------------------------------------------------------------------------------
Total interest income - FTE $121,626 $ 47,410
==============================================================================================================================
INTEREST EXPENSE:
Interest-bearing deposits:
Checking/Interest $ (552) $ (888) $ (1,440) $(1,055) $ (557) $ (1,612)
Savings (1,096) (1,568) (2,664) (4,832) 2,840 (1,992)
Money market account 27,022 4,588 31,610 10,147 2,807 12,954
Certificates of deposit under $100,000 and
other time 27,890 17,923 45,813 424 4,343 4,767
Certificates of deposit $100,000 and more 8,674 3,239 11,913 616 1,856 2,472
- - ------------------------------------------------- -------- --------
Total interest-bearing deposits 69,142 16,090 85,232 4,571 12,018 16,589
Federal funds purchased and securities
sold under agreements to repurchase 19,623 20,820 40,443 10,818 478 11,296
Commercial paper and other short-term borrowings 8,658 (17,502) (8,844) 4,661 (2,023) 2,638
Term borrowings (862) 9,309 8,447 21 (87) (66)
- - ------------------------------------------------- -------- --------
Total interest-bearing liabilities 96,428 28,850 125,278 19,025 11,432 30,457
- - -----------------------------------------------------------------------------------------------------------------------------
Total interest expense $125,278 $ 30,457
=============================================================================================================================
Net interest income - FTE $ (3,652) $ 16,953
=============================================================================================================================
* 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.
15
RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1995 (TABLE 5)
Interest Sensitivity Period
---------------------------------------------------------------
Within 3 After 3 Months After 6 Months
(Dollars in millions) Months Within 6 Months Within 12 Months Other Total
- - --------------------------------------------------------------------------------------------------------------
EARNING ASSETS:
Loans $4,114 $421 $ 857 $2,731 $ 8,123
Investment securities 154 133 334 1,490 2,111
Other earning assets 250 -- -- -- 250
- - --------------------------------------------------------------------------------------------------------------
Total earning assets $4,518 $554 $1,191 $4,221 $10,484
==============================================================================================================
EARNING ASSET FUNDING:
Interest-bearing deposits $2,389 $673 $ 577 $2,959 $ 6,598
Short-term purchased funds 1,761 -- -- -- 1,761
Term borrowings 21 1 3 235 260
Noninterest-bearing funds 309 (66) (11) 1,633 1,865
- - --------------------------------------------------------------------------------------------------------------
Total earning asset funding $4,480 $608 $ 569 $4,827 $10,484
==============================================================================================================
RATE SENSITIVITY GAP:
Period $ 38 $(54) $ 622 $ (606)
Cumulative 38 (16) 606 --
- - ---------------------------------------------------------------------------------------------------
RATE SENSITIVITY GAP ADJUSTED FOR INTEREST
RATE FUTURES AND INTEREST RATE SWAPS:
Period $ (307) $ (1) $ 826 $ (518)
Cumulative (307) (308) 518 --
- - ---------------------------------------------------------------------------------------------------
ADJUSTED GAP AS A PERCENT OF EARNING ASSETS:
Period (2.9)% -- % 7.9 % (5.0)%
Cumulative (2.9) (2.9) 5.0 --
- - ---------------------------------------------------------------------------------------------------
Interest-sensitive categories represent ranges in which assets and liabilities
can be repriced, not necessarily their actual maturities. The 'Other' column
amounts include assets and liabilities with interest sensitivity of more than
12 months or with indefinite repricing schedules.
16
ANALYSIS OF NONINTEREST EXPENSE (TABLE 6)
(Dollars in thousands) 1995 1994 1993 1992
- - ---------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives,
and benefits $340,508 $349,769 $308,601 $214,303
Operations services 38,798 33,679 28,705 24,252
Occupancy 37,867 34,102 27,673 24,738
Equipment rentals, depreciation,
and maintenance 31,845 29,202 22,246 17,516
Communications and courier 29,880 30,653 24,775 18,049
Amortization of mortgage servicing rights 14,980 14,936 25,478 4,482
Legal and professional fees 13,403 13,747 11,274 11,391
Advertising and public relations 12,972 10,678 7,987 6,165
Deposit insurance premium 9,957 16,923 16,585 16,177
Amortization of intangible assets 8,100 6,406 5,871 9,866
All other:
Supplies 11,866 11,472 10,312 6,520
Fed service fees 9,489 8,544 7,778 7,228
Travel and entertainment 8,211 10,144 8,868 5,774
Foreclosed real estate 4,962 3,862 1,542 4,935
Contribution to charitable foundation -- 9,379 -- --
Other 40,829 44,760 46,683 34,734
- - ---------------------------------------------------------------------------------------
Total other expense 75,357 88,161 75,183 59,191
- - ---------------------------------------------------------------------------------------
Total noninterest expense $613,667 $628,256 $554,378 $406,130
=======================================================================================
ANALYSIS OF NONINTEREST EXPENSE
Growth rates (%)
---------------------
(Dollars in thousands) 1991 1990 95/94 95/90
- - ---------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives,
and benefits $177,648 $154,918 2.6 - 17.1 +
Operations services 21,860 18,517 15.2 + 15.9 +
Occupancy 22,036 20,542 11.0 + 13.0 +
Equipment rentals, depreciation,
and maintenance 13,944 12,918 9.1 + 19.8 +
Communications and courier 16,515 14,617 2.5 - 15.4 +
Amortization of mortgage servicing rights 1,361 917 .3 + 74.8 +
Legal and professional fees 8,348 6,621 2.5 - 15.1 +
Advertising and public relations 4,941 4,499 21.5 + 23.6 +
Deposit insurance premium 13,373 7,597 41.2 - 5.6 +
Amortization of intangible assets 7,711 7,075 26.4 + 2.7 +
All other:
Supplies 5,752 5,808 3.4 + 15.4 +
Fed service fees 5,311 4,960 11.1 + 13.9 +
Travel and entertainment 4,898 5,161 19.1 - 9.7 +
Foreclosed real estate 7,449 3,048 28.5 + 10.2 +
Contribution to charitable foundation -- -- -- --
Other 32,563 28,553 8.8 - 7.4 +
- - ---------------------------------------------------------------
Total other expense 55,973 47,530 14.5 - 9.7 +
- - ---------------------------------------------------------------
Total noninterest expense $343,710 $295,751 2.3 - 15.7 +
===============================================================
Certain previously reported amounts have been reclassified to agree with
current presentation.
17
MATURITIES OF INVESTMENT SECURITIES AT DECEMBER 31, 1995 (AMORTIZED COST)
(TABLE 7)
After 1 Year After 5 Years
Within 1 Year Within 5 Years Within 10 Years After 10 Years
--------------- ------------------ ---------------- -----------------
Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
- - -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
States and municipalities** $ 9,493 8.97% $ 18,944 8.22 % $ 20,274 8.37 % $ 26,020 9.19 %
- - -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE:
Mortgage-backed securities and collateralized
mortgage obligations* $ 2,516 6.08% $101,427 6.36 % $310,075 6.18 % $1,233,896 6.45 %
U.S. Treasury and other U.S. government agencies 112,533 5.37 145,233 6.34 12,270 6.65 1,224 7.52
States and municipalities** 1,889 7.19 9,271 9.05 16,285 8.92 602 8.94
Other 498 9.01 15,474 7.10 1,394 9.39 53,927*** 6.14
- - ----------------------------------------------------------------------------------------------------------------------------------
Total $117,436 5.43% $271,405 6.48 % $340,024 6.34 % $1,289,649 6.44 %
==================================================================================================================================
* Includes $1,646.1 million of government agency issued mortgage-backed
securities and collateralized mortgage obligations which, when adjusted
for early paydowns, have an estimated average life of 2.2 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.
18
MATURITIES OF LOANS AT DECEMBER 31, 1995 (TABLE 8)
After 1 Year
(Dollars in thousands) Within 1 Year Within 5 Years After 5 Years Total
- - ----------------------------------------------------------------------------------------------------------
Commercial $2,217,072 $ 960,715 $ 153,142 $3,330,929
Consumer 96,233 1,270,674 1,158,982 2,525,889
Credit card receivables 529,104 -- -- 529,104
Real estate construction 172,950 56,223 9,690 238,863
Permanent mortgage 80,753 75,634 533,071 689,458
Nonaccrual 8,547 7,286 3,207 19,040
- - ----------------------------------------------------------------------------------------------------------
Total loans, net of unearned income* $3,104,659 $2,370,532 $1,858,092 $7,333,283
==========================================================================================================
For maturities over one year:
Interest rates - floating $ 762,474 $ 469,911 $1,232,385
Interest rates - fixed 1,608,058 1,388,181 2,996,239
- - ----------------------------------------------------------------------------------------------------------
Total $2,370,532 $1,858,092 $4,228,624
==========================================================================================================
* Excludes $789.2 million of mortgage warehouse loans held for sale with
maturities greater than 5 years. These loans are sold within one year of
origination.
19
REGULATORY CAPITAL AT DECEMBER 31, 1995 (Table 10)
Peoples
(Dollars in thousands) First Tennessee (1) FTBNA (2) CBT (3) and Union (4)
- - ------------------------------------------------------------------------------------------------------------------
CAPITAL:
Tier 1 capital:
Shareholders' common equity $ 873,224 $ 790,003 $ 25,224 $ 15,221
Disallowed intangibles (98,933) (69,669) -- --
Adjust for unrealized (gains)/losses on
available for sale securities (10,582) (8,303) (968) (119)
- - ------------------------------------------------------------------------------------------------------------------
Total Tier 1 capital 763,709 712,031 24,256 15,102
- - ------------------------------------------------------------------------------------------------------------------
Tier 2 capital:
Qualifying debt 148,969 75,000 -- --
Qualifying allowance for loan losses 111,325 104,279 1,881 864
- - ------------------------------------------------------------------------------------------------------------------
Total Tier 2 capital 260,294 179,279 1,881 864
- - ------------------------------------------------------------------------------------------------------------------
Total capital $ 1,024,003 $ 891,310 $ 26,137 $ 15,966
==================================================================================================================
Risk-adjusted assets $ 8,904,769 $ 8,341,667 $149,266 $ 69,027
Quarterly average assets* 11,984,206 11,042,163 240,657 122,127
- - ------------------------------------------------------------------------------------------------------------------
RATIOS:
Tier 1 capital to risk-adjusted assets 8.58 % 8.54 % 16.25 % 21.88 %
Tier 2 capital to risk-adjusted assets 2.92 2.15 1.26 1.25
- - ------------------------------------------------------------------------------------------------------------------
Total capital to risk-adjusted assets 11.50 % 10.69 % 17.51 % 23.13 %
==================================================================================================================
Leverage - Tier 1 capital to
adjusted quarterly average assets
less disallowed intangibles 6.43 % 6.49 % 10.08 % 12.37 %
- - ------------------------------------------------------------------------------------------------------------------
Peoples FNB
(Dollars in thousands) Planters (5) FTBNA-MS (6) Bank (7) Springdale (8)
- - ------------------------------------------------------------------------------------------------------------------
CAPITAL:
Tier 1 capital:
Shareholders' common equity $ 6,639 $ 6,878 $ 17,996 $ 50,006
Disallowed intangibles -- (665) (8,885) (23,099)
Adjust for unrealized (gains)/losses on
available for sale securities 23 (88) (416) (494)
- - ------------------------------------------------------------------------------------------------------------------
Total Tier 1 capital 6,662 6,125 8,695 26,413
- - ------------------------------------------------------------------------------------------------------------------
Tier 2 capital:
Qualifying debt -- -- -- --
Qualifying allowance for loan losses 394 345 625 1,520
- - ------------------------------------------------------------------------------------------------------------------
Total Tier 2 capital 394 345 625 1,520
- - ------------------------------------------------------------------------------------------------------------------
Total capital $ 7,056 $ 6,470 $ 9,320 $ 27,933
==================================================================================================================
Risk-adjusted assets $ 30,968 $ 39,331 $ 49,750 $184,161
Quarterly average assets* 58,886 61,895 103,576 356,629
- - ------------------------------------------------------------------------------------------------------------------
RATIOS:
Tier 1 capital to risk-adjusted assets 21.51 % 15.57 % 17.48 % 14.34 %
Tier 2 capital to risk-adjusted assets 1.27 .88 1.25 .83
- - ------------------------------------------------------------------------------------------------------------------
Total capital to risk-adjusted assets 22.78 % 16.45 % 18.73 % 15.17 %
==================================================================================================================
Leverage - Tier 1 capital to
adjusted quarterly average assets
less disallowed intangibles 11.31 % 10.00 % 9.18 % 7.92 %
- - ------------------------------------------------------------------------------------------------------------------
* Adjusted for unrealized (gains)/losses on available for sale securities.
(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
(7) Peoples Bank of Senatobia
(8) First National Bank of Springdale
Based on regulatory guidelines.
20
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (TABLE 11)
(Dollars in thousands) 1995 1994 1993 1992 1991 1990
- - --------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES:
Beginning balance $ 109,859 $ 110,720 $ 103,223 $ 97,550 $ 93,187 $ 70,374
Provision for loan losses 20,592 17,182 36,461 45,248 60,694 71,156
Allowance from acquisitions 2,632 -- 971 -- 9,327 --
Charge-offs:
Commercial 5,614 6,458 16,905 20,597 34,589 28,278
Consumer 12,373 9,180 8,909 10,524 14,614 12,905
Credit card receivables 16,874 12,674 13,357 17,013 16,913 11,510
Real estate construction 44 -- 2,320 173 6,888 6,214
Permanent mortgage 326 884 1,170 2,339 2,546 1,756
- - --------------------------------------------------------------------------------------------------------------------------
Total charge-offs 35,231 29,196 42,661 50,646 75,550 60,663
- - --------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 6,728 4,001 6,266 5,833 5,481 8,321
Consumer 5,732 4,415 3,590 2,759 2,921 2,552
Credit card receivables 2,022 1,890 2,262 1,985 1,278 1,141
Real estate construction 59 373 159 215 150 286
Permanent mortgage 174 474 449 279 62 20
- - --------------------------------------------------------------------------------------------------------------------------
Total recoveries 14,715 11,153 12,726 11,071 9,892 12,320
- - --------------------------------------------------------------------------------------------------------------------------
Net charge-offs 20,516 18,043 29,935 39,575 65,658 48,343
- - --------------------------------------------------------------------------------------------------------------------------
Ending balance $ 112,567 $ 109,859 $ 110,720 $ 103,223 $ 97,550 $ 93,187
==========================================================================================================================
LOANS, OUTSTANDING AT DECEMBER 31* $8,122,466 $ 7,013,449 $6,823,566 $ 5,105,048 $ 4,870,568 $ 4,677,996
- - --------------------------------------------------------------------------------------------------------------------------
AVERAGE LOANS, OUTSTANDING
DURING THE YEAR* $7,593,272 $ 6,752,290 $5,611,668 $ 4,887,215 $ 4,666,672 $ 4,542,714
- - --------------------------------------------------------------------------------------------------------------------------
RATIOS* :
Allowance to loans 1.39 % 1.57 % 1.62 % 2.02 % 2.00 % 1.99 %
Net charge-offs to average loans .27 .27 .53 .81 1.41 1.06
Net charge-offs to allowance 18.2 16.4 27.0 38.3 67.3 51.9
- - --------------------------------------------------------------------------------------------------------------------------
* Net of unearned income.
21
LOANS AND FORECLOSED REAL ESTATE AT DECEMBER 31 (TABLE 12)
1995 1994
---------------------------------------------------------------------- --------------------
Construction Allowance Allowance
and Commercial For Loan For Loan
(Dollars in millions) Commercial Development Real Estate TOTAL Losses Total Losses
- - ----------------------------------------------------------------------------------------------------------------------------------
Internal grades:
A $ 256 $ -- $ 3 $ 259 $ -- $ 210 $ --
B 415 18 60 493 1 402 1
C 2,009 172 477 2,658 27 2,361 27
D 60 1 13 74 5 75 7
E 24 -- 9 33 3 27 4
F 27 1 2 30 7 41 9
- - ----------------------------------------------------------------------------------------------------------------------------------
2,791 192 564 3,547 43 3,116 48
Impaired loans:
Contractually past due 5 2 1 8 2 -- --
Contractually current 1 -- 3 4 1 -- --
Nonaccrual loans:
Contractually past due 1 -- -- 1 -- 6 2
Contractually current -- -- -- -- -- 4 2
- - ----------------------------------------------------------------------------------------------------------------------------------
Total commercial and
commercial real estate loans $2,798 $194 $568 $3,560 $ 46 $3,126 $ 52
- - ----------------------------------------------------------------------------------------------------------------------------------
Retail:
Consumer 2,526 21 2,263 20
Credit card 529 21 475 19
Permanent mortgages 689 4 591 2
Mortgage warehouse loans held for sale 789 -- 515 --
Mortgage banking nonaccrual loans 6 1 6 1
- - ----------------------------------------------------------------------------------------------------------------------------------
Total retail loans 4,539 47 3,850 42
- - ----------------------------------------------------------------------------------------------------------------------------------
Other/Unfunded commitments 23 3 37 3
General reserve -- 17 -- 13
- - ----------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income $8,122 $113 $7,013 $110
==================================================================================================================================
Foreclosed real estate:
Foreclosed property $ 1 $ 8 $ 2 $ 11 $ 14
Foreclosed property - mortgage banking 1 5
- - ----------------------------------------------------------------------------------------------------------------------------------
Total foreclosed real estate $ 12 $ 19
==================================================================================================================================
All amounts in the Allowance for Loan Losses columns have been rounded to the
nearest million dollars. Grade A Loans have reserve amounts of less than
$500,000.
Definitions of each credit grade are provided below:
*GRADE A -- Established, stable companies with excellent earnings, liquidity,
and capital. Possess many of the same characteristics as Standard & Poor's
(S&P) AA rated companies.
*GRADE B -- Established, stable companies with good earnings, liquidity,
and capital. Possess many of the same characteristics as S&P A rated
companies.
*GRADE C -- Established, stable companies with satisfactory earnings,
liquidity, and capital and with consistent, positive trends relative to
industry norms.
*GRADE D -- Financial condition adversely affected by temporary lack of
earnings or liquidity or changes in the operating environment. An action
plan is required to rehabilitate the credit or have it refinanced elsewhere.
*GRADE E -- Significant developing weaknesses or adverse trends in earnings,
liquidity, capital, or operating environment. No discernable market for
refinancing is available.
*GRADE F -- Significantly higher than normal probability that: (1) legal
action or liquidation of collateral is required; (2) there will be a loss;
or (3) both will occur. This grade is believed to be substantially
equivalent to the regulators' classifications of substandard and doubtful.
*IMPAIRED - A loan for which it is probable that all amounts due, according to
the contractual terms of the loan agreement, will not be collected.
*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.
22
NET CHARGE-OFFS AS A PERCENT OF AVERAGE LOANS (TABLE 13)
Net of unearned income 1995 1994
- - --------------------------------------------------------
Commercial and commercial real estate (.03) % .07%
Consumer .28 .23
Credit card receivables 3.09 2.49
Permanent mortgage .02 .07
- - --------------------------------------------------------
23
NONPERFORMING ASSETS AT DECEMBER 31 (TABLE 14)
(Dollars in thousands) 1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------------
AMOUNTS:
Impaired loans* $ 11,865
Other nonaccrual loans 7,175
- - ---------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 19,040 $ 16,853 $ 27,599
Restructured loans -- 158 1,195
- - ---------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 19,040 17,011 28,794
Foreclosed real estate 11,794 19,215 35,048
Other assets 1,022 2,055 1,292
- - ---------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 31,856 $ 38,281 $ 65,134
=====================================================================================================================
Non-government guaranteed past due loans** $ 21,942 $ 13,297 $ 13,634
Government guaranteed past due loans** 11,331 10,030 11,560
Past due loans**
- - ---------------------------------------------------------------------------------------------------------------------
RATIOS***:
Nonperforming loans to total loans .23 % .24 % .42 %
Nonperforming assets to total loans
plus foreclosed real estate and other assets .39 .54 .95
Nonperforming assets and non-government guaranteed past due loans
to total loans plus foreclosed real estate and other assets**** .66 .73 1.15
- - ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1992 1991 1990
- - ---------------------------------------------------------------------------------------------------------------------
AMOUNTS:
Impaired loans*
Other nonaccrual loans
- - ---------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans $ 32,761 $ 50,729 $ 73,701
Restructured loans 2,493 4,526 1,128
- - ---------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 35,254 55,255 74,829
Foreclosed real estate 29,690 45,816 34,101
Other assets 1,292 723 109
- - ---------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 66,236 $ 101,794 $ 109,039
=====================================================================================================================
Non-government guaranteed past due loans** $ 15,000
Government guaranteed past due loans** 8,906
Past due loans** $ 23,758 $ 19,732
- - ---------------------------------------------------------------------------------------------------------------------
RATIOS***:
Nonperforming loans to total loans .69 % 1.13 % 1.60 %
Nonperforming assets to total loans
plus foreclosed real estate and other assets 1.29 2.07 2.31
Nonperforming assets and non-government guaranteed past due loans
to total loans plus foreclosed real estate and other assets**** 1.58
- - --------------------------------------------------------------------------------------------------------------------
* Includes $303,000 of restructured loans.
** Loans that are 90 days or more past due as to principal and/or interest
and not yet impaired or on nonaccrual status. Detail on government
guaranteed and non-government guaranteed past due loans is unavailable
for years prior to 1992.
*** Total loans are expressed net of unearned income.
**** Not available for years prior to 1992.
24
CHANGES IN NONPERFORMING ASSETS (TABLE 15)
(Dollars in millions) 1995 1994 1993
- - -----------------------------------------------------------
Beginning balance $ 38.3 $ 65.1 $ 67.6
New nonperformers 23.5 18.0 22.4
Acquisitions 1.1 -- 22.8
Return to accrual (.2) (2.0) (3.4)
Payments (26.0) (37.5) (31.0)
Charge-offs (4.8) (5.3) (13.2)
Market writedowns -- -- (.1)
- - ------------------------------------------------------------
Ending balance $ 31.9 $ 38.3 $ 65.1
============================================================
25
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (TABLE 16)
1995 1994
--------------------------------------- -----------------------------------------
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 $216.8 $211.5 $202.8 $191.4 $185.6 $179.0 $170.2 $166.3
Interest expense 112.4 112.9 107.4 99.1 90.0 79.7 70.7 66.2
Provision for loan losses 7.3 5.9 3.2 4.2 4.3 4.2 2.9 5.8
Noninterest income before
securities transactions 139.2 126.4 114.8 113.7 102.0 105.5 110.4 120.9
Securities gains/(losses) 1.9 -- -- .5 (2.7) .2 7.7 14.7
Noninterest expense 169.1 151.1 145.5 147.9 147.8 145.5 165.4 169.5
Net income 45.7 43.8 40.8 34.6 32.9 37.6 36.8 39.8
- - ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ .67 $ .65 $ .60 $ .50 $ .48 $ .56 $ .53 $ .58
- - ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK INFORMATION:
Closing price per share:
High $ 30 7/8 $ 27 13/16 $ 23 1/8 $ 21 1/2 $ 23 3/4 $ 23 7/8 $ 22 5/8 $ 19 7/8
Low 26 3/4 23 1/8 20 5/8 19 5/8 19 7/8 21 3/4 18 7/8 18 11/16
Period-end 30 1/4 27 3/4 23 1/8 20 7/8 20 3/8 22 1/2 21 7/8 19 1/8
Dividends declared per share .265 .235 .235 .235 .235 .21 .21 .21
- - ---------------------------------------------------------------------------------------------------------------------------------
Per share data reflects the 1996 two-for-one stock split.
26
GRAPH TITLE: 1995 Net Interest Income and
Net Interest Margin
NARRATIVE DESCRIPTION: This is a combination line and bar graph with the
x-axis representing 1995 quarterly periods and the
left y-axis representing ranges from $0 to $105.8
million and the right y-axis ranges from 0 percent to
4.00 percent. The bars represent the fully taxable
equivalent of the net interest income in dollars and
the line represents the net interest margin percent.
The bars begin in the first quarter of 1995 at $93.5
million and increase to $105.8 million in the fourth
quarter of 1995. The net interest margin line begins
in the first quarter of 1995 at 3.92 percent,
decreases to 3.91 percent in the second quarter,
decreases to 3.85 percent in the third quarter and
finally increases to 4.00 percent in the fourth
quarter of 1995.
DATA POINTS: 1995 NET NET
QUARTERLY INTEREST INTEREST
PERIOD INCOME MARGIN
(in millions)
---------- ------------- ---------
FIRST $ 93.5 3.92
SECOND 96.6 3.91
THIRD 99.8 3.85
FOURTH 105.8 4.00
27
GLOSSARY
ALLOWANCE FOR LOAN LOSSES--Valuation reserve representing the amount considered
by management to be adequate to cover estimated losses inherent in the loan
portfolio.
BASIS POINT--The equivalent of one-hundredth of one percent (0.01). One
hundred basis points equals one percent. This unit is generally used to measure
movements in interest yields and rates.
BASIS RISK--Refers to changes in the relationship between various interest rate
segments (e.g. the difference between the Prime and Fed Funds Rates).
BOOK VALUE PER SHARE--A ratio determined by dividing assets, net of
liabilities, at the end of a period by the number of common shares outstanding
at the end of that period.
CHARGE-OFFS--The amount charged against the allowance for loan losses to reduce
specific loans to their collectible amount.
CLASSIFIED LOAN--A loan that has caused management to have serious doubts about
the borrower's ability to comply with present repayment terms. Included in
this category are grade F performing and nonperforming loans. In compliance
with the standards established by the Office of the Comptroller of the Currency
(OCC) these loans are classified as substandard, doubtful, and loss depending
on the severity of the loan's deterioration.
COMMERCIAL AND STANDBY LETTERS OF CREDIT--Commercial letters of credit are
issued or confirmed by an entity to ensure the payment of its customers'
payables and receivables. Standby letters of credit are issued by an entity to
ensure its customers' performance in dealing with others.
COMMITMENT TO EXTEND CREDIT--Agreements to make or acquire a loan or lease as
long as agreed-upon terms (e.g., 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 deposit accounts, time
and other savings, plus demand deposits.
DERIVATIVE FINANCIAL INSTRUMENT--Futures, forwards, swaps, option contracts,
or other financial instruments with similar characteristics, such as interest
rate caps or floors, or fixed-rate loan commitments.
DIVIDEND PAYOUT RATIO--Cash dividends per share paid as a percent of net income
per share.
DOUBLE LEVERAGE RATIO--A ratio that measures the degree to which parent company
debt supports investments in subsidiaries. It is calculated by dividing the
parent company's investment in subsidiaries by total consolidated equity.
EARNING ASSETS--Assets that generate interest or dividend income or
yield-related fee income, such as loans and investment securities.
EARNINGS PER 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 anticipating exposures to changes in interest rates.
INTEREST FREE SOURCES--Noninterest bearing liabilities (such as demand
deposits, other liabilities, and shareholders' equity) net of nonearning assets
(such as cash, fixed assets, and other assets).
INTEREST RATE CAPS AND FLOORS--Contracts with notional principal amounts that
require the seller, in exchange for a fee, to make payments to the purchaser if
a specified market interest rate exceeds a fixed upper "capped" level or falls
below a fixed lower "floor" level on specified future dates.
INTEREST RATE FORWARD 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 OPTION (OPTIONS)--A contract that grants the holder (purchaser),
for a fee, the right to either purchase or sell a financial instrument at a
specified price within a specified period of time or on a specified date from
the writer (seller) of the option.
INTEREST RATE SENSITIVITY--The relationship of changes in interest income and
interest expense to fluctuations in interest rates over a defined period of
time.
INTEREST RATE SWAP (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.
28
INTEREST SENSITIVITY GAP--The difference between interest-rate sensitive assets
and interest-rate sensitive liabilities over a designated time period. A net
asset position is the amount by which interest-rate sensitive assets exceed
interest-rate sensitive liabilities. An excess of liabilities would represent
LEVERAGE RATIO -- Tier 1 capital divided by quarterly average assets excluding
the adjustment for available for sale securities unrealized gains or losses,
goodwill, and certain other intangible assets.
LIQUIDITY -- The ability of a corporation to generate adequate funds to meet
its cash flow requirements. It is measured by the ability to quickly convert
assets into cash with minimal exposure to interest rate risk, by the size and
stability of the core deposit base, and by additional borrowing capacity within
the money markets.
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.
NET INTEREST INCOME (NII) -- Interest income less interest expense.
NET INTEREST MARGIN -- A measurement of how effectively the bank utilizes its
earning assets in relationship to the interest cost of funding them. It is
computed by dividing fully taxable-equivalent net interest income by average
interest earning assets.
NET INTEREST SPREAD -- The difference between the average yield earned on
earning assets on a fully taxable equivalent basis and the average rate paid
for interest-bearing liabilities.
NONACCRUAL LOANS -- Loans on which interest accruals have been discontinued due
to the borrower's financial difficulties. Interest income on these loans is
reported on a cash basis as it is collected after recovery of principal.
NONPERFORMING ASSETS -- Interest earning assets on which interest income is not
being accrued, restructured loans on which interest rates or terms of repayment
have been materially revised, real estate properties acquired through
foreclosure, and repossessed assets.
NOTIONAL PRINCIPAL AMOUNT -- An amount on which interest rate swaps and
interest rate options, caps and floors payments are based. The "notional
amount" is not paid or received.
OPERATING MARGIN (ALSO CALLED RETURN ON REVENUE - ROR) -- A measure of
profitability that indicates operational efficiency and productivity. It is
calculated by dividing the fully taxable equivalent pre-tax profit before loan
loss provision by the fully taxable equivalent net interest income plus
noninterest income.
PRICE/EARNINGS RATIO -- The relationship of the market price of a share of
common stock to the earnings per share of the stock, expressed as a multiple.
PROVISION FOR LOAN LOSSES -- The periodic charge to earnings for potential
losses in the loan portfolio.
PURCHASED FUNDS -- The combination of certificates of deposit greater than
$100,000, federal funds purchased, securities sold under agreement to
repurchase, commercial paper, and other short-term borrowings.
RECOVERIES -- The amount added to the allowance for loan losses when funds are
received on a loan which was previously charged off.
RESTRUCTURED LOANS -- The institution, for economic or legal reasons related to
the debtor's financial difficulties, grants a concession to the debtor that it
would not otherwise consider.
RETURN ON AVERAGE ASSETS (ROA) -- A measure of profitability that indicates how
effectively an institution utilized its assets. It is calculated by dividing
annualized net income by total average assets.
RETURN ON AVERAGE EQUITY (ROE) -- A measure of profitability that indicates
what an institution earned on its shareholders' investment. ROE is calculated
by dividing net income by total average shareholders' equity.
REVENUE -- The sum of net interest income and noninterest income. For some
comparisons, securities gains/losses are excluded.
RISK-ADJUSTED ASSETS -- A regulatory risk-based capital measure for assessing
capital adequacy that takes into account the broad differences 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 ratio consists of
shareholders' equity before any adjustments for available for sale securities
unrealized gains (losses) reduced by goodwill and certain other intangible
assets divided by risk-adjusted assets, while TOTAL CAPITAL ratio is Tier 1
capital plus the allowable portion of the allowance for loan losses and
qualifying subordinated debt divided by risk-adjusted assets.
29
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.
SECURITIES HELD TO MATURITY -- Investment securities that the bank has the
ability and the intent to hold until maturity.
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.
30
CONSOLIDATED STATEMENTS OF CONDITION First Tennessee National Corporation
- - -----------------------------------------------------------------------------------------------------
December 31
---------------------------
(Dollars in thousands) 1995 1994
- - -----------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 710,870 $ 724,828
Federal funds sold and securities purchased under
agreements to resell 64,978 253,124
- - -----------------------------------------------------------------------------------------------------
Total cash and cash equivalents 775,848 977,952
- - -----------------------------------------------------------------------------------------------------
Investment in bank time deposits 2,119 2,534
Broker/dealer securities inventory 182,655 170,031
Securities available for sale 2,036,668 1,166,738
Securities held to maturity (market value of $75,750 at
December 31, 1995, and $951,444 at December 31,1994) 74,731 1,004,177
Loans, net of unearned income 8,122,466 7,013,449
Less: Allowance for loan losses 112,567 109,859
- - -----------------------------------------------------------------------------------------------------
Total net loans 8,009,899 6,903,590
- - -----------------------------------------------------------------------------------------------------
Premises and equipment, net 177,400 159,036
Real estate acquired by foreclosure 11,794 19,215
Intangible assets 128,985 91,725
Mortgage servicing rights 149,220 72,722
Bond division receivables and other assets 527,563 365,229
- - -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $12,076,882 $10,932,949
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 1,983,994 $ 1,733,336
Checking/Interest 103,860 508,741
Savings 592,320 605,388
Money market account 2,499,817 1,819,825
Certificates of deposit under $100,000 and other time 2,882,094 2,771,012
Certificates of deposit $100,000 and more 520,112 442,004
- - -----------------------------------------------------------------------------------------------------
Total deposits 8,582,197 7,880,306
- - -----------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under
agreements to repurchase 1,674,225 1,457,517
Commercial paper and other short-term borrowings 86,520 352,522
Bond division payables and other liabilities 600,699 353,928
Term borrowings 260,017 113,771
- - -----------------------------------------------------------------------------------------------------
Total liabilities 11,203,658 10,158,044
- - -----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock - no par value (5,000,000 shares
authorized, but unissued) -- --
Common stock - $1.25 par value (shares authorized - 200,000,000;
shares issued - 67,178,236 at December 31, 1995, and
68,147,916 at December 31, 1994) 83,973 85,185
Capital surplus 63,610 91,558
Undivided profits 716,861 625,231
Unrealized market adjustment on available for sale securities 10,582 (24,273)
Deferred compensation on restricted stock incentive plan (1,802) (2,796)
- - -----------------------------------------------------------------------------------------------------
Total shareholders' equity 873,224 774,905
- - -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,076,882 $10,932,949
=====================================================================================================
See accompanying notes to consolidated financial statements.
31
CONSOLIDATED STATEMENTS OF INCOME First Tennessee National Corporation
- - --------------------------------------------------------------------------------------------------
Year Ended December 31
---------------------------------------------
(Dollars in thousands except per share data) 1995 1994 1993
- - --------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 665,727 $ 546,385 $ 455,988
Interest on investment securities:
Taxable 130,830 128,895 175,828
Tax-exempt 4,621 5,139 7,204
Interest on broker/dealer securities inventory 12,630 12,810 9,304
Interest on other earning assets 8,720 7,829 3,899
- - --------------------------------------------------------------------------------------------------
Total interest income 822,528 701,058 652,223
- - --------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Checking/Interest 7,734 9,174 10,786
Savings 10,789 13,453 15,445
Money market account 88,090 56,480 43,526
Certificates of deposit under $100,000 and other time 167,850 122,037 117,270
Certificates of deposit $100,000 and more 30,579 18,666 16,194
Interest on short-term borrowings 108,815 77,216 63,282
Interest on term borrowings 18,018 9,571 9,637
- - --------------------------------------------------------------------------------------------------
Total interest expense 431,875 306,597 276,140
- - --------------------------------------------------------------------------------------------------
NET INTEREST INCOME 390,653 394,461 376,083
Provision for loan losses 20,592 17,182 36,461
- - --------------------------------------------------------------------------------------------------
NET INEREST INCOME AFTER PROVISION FOR LOAN LOSSES 370,061 377,279 339,622
- - --------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 212,579 187,340 138,960
Bond division 82,814 77,478 91,525
Deposit transactions and cash management 70,957 64,169 58,377
Cardholder and merchant processing 36,984 31,402 28,467
Trust services 35,632 28,933 26,532
Equity securities gains/(losses) 3,195 24,251 (479)
Debt securities gains/(losses) (751) (4,298) 1,371
All other 55,153 49,464 45,168
- - --------------------------------------------------------------------------------------------------
Total noninterest income 496,563 458,739 389,921
- - --------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION
FOR LOAN LOSSES 866,624 836,018 729,543
- - --------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives, and benefits 340,508 349,769 308,601
Operations services 38,798 33,679 28,705
Occupancy 37,867 34,102 27,673
Equipment rentals, depreciation, and maintenance 31,845 29,202 22,246
Communications and courier 29,880 30,653 24,775
Amortization of mortgage servicing rights 14,980 14,936 25,478
Legal and professional fees 13,403 13,747 11,274
Advertising and public relations 12,972 10,678 7,987
Deposit insurance premium 9,957 16,923 16,585
Amortization of intangible assets 8,100 6,406 5,871
All other 75,357 88,161 75,183
- - --------------------------------------------------------------------------------------------------
Total noninterest expense 613,667 628,256 554,378
- - --------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 252,957 207,762 175,165
Applicable income taxes 88,069 60,694 65,449
- - --------------------------------------------------------------------------------------------------
NET INCOME $ 164,888 $ 147,068 $ 109,716
==================================================================================================
NET INCOME PER COMMON SHARE $ 2.42 $ 2.15 $ 1.61
- - --------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 68,024,794 68,441,382 68,145,768
- - --------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
32
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY First Tennessee National Corporation
- - --------------------------------------------------------------------------------------------------------------
Common Common Capital Undivided
(Dollars in thousands) Shares Total Stock Surplus Profits
- - --------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 63,955,238 $ 630,244 $79,944 $ 88,294 $463,442
Adjustments for poolings of interests 3,914,448 19,998 4,893 10,417 4,688
- - --------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992, RESTATED 67,869,686 650,242 84,837 98,711 468,130
Net income -- 109,716 -- -- 109,716
Cash dividends declared -- (43,582) -- -- (43,582)
Common stock issued:
For exercise of stock options 231,508 2,093 289 1,804 --
Restricted: employee benefit plan 119,282 -- 149 2,132 --
incentive to non-employee
directors 3,000 -- 4 51 --
Converted subordinated debt 576,898 3,860 721 3,139 --
Common stock repurchased (241,100) (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 68,559,274 721,108 85,699 103,780 534,004
Net income -- 147,068 -- -- 147,068
Cash dividends declared -- (55,871) -- -- (55,871)
Common stock issued:
Emerald Mortgage Company acquisition 303,852 7,105 380 6,725 --
For exercise of stock options 321,914 2,808 402 2,406 --
Restricted: employee benefit plan 90,000 -- 113 1,603 --
incentive to non-employee
directors 3,300 -- 4 75 --
Common stock repurchased (1,137,816) (26,583) (1,422) (25,161) --
Change in unrealized market adjustment
on available for sale securities -- (24,273) -- -- --
Amortization of deferred compensation
on restricted stock incentive plan -- 1,374 -- -- --
Other 7,392 2,169 9 2,130 30
- - --------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 68,147,916 774,905 85,185 91,558 625,231
Adjustment related to change in reporting
date for acquisition accounted for as a
pooling of interests -- (7,757) -- -- (7,757)
- - --------------------------------------------------------------------------------------------------------------
ADJUSTED BALANCE, JANUARY 1, 1995 68,147,916 767,148 85,185 91,558 617,474
Net income -- 164,888 -- -- 164,888
Cash dividends declared -- (65,576) -- -- (65,576)
Common stock issued:
Peoples Commercial Services
Corporation acquisition 841,810 17,865 1,052 16,813 --
Financial Investment Corp.
acquisition 2,565,482 69,997 3,207 66,790 --
For exercise of stock options 437,778 4,834 547 4,287 --
Restricted employee benefit plan 8,200 -- 11 160 --
Common stock repurchased (4,827,108) (122,796) (6,034) (116,762) --
Change in unrealized market adjustment
on available for sale securities -- 34,855 -- -- --
Amortization of deferred compensation
on restricted stock incentive plan -- 1,165 -- -- --
Other 4,158 844 5 764 75
- - --------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 67,178,236 $ 873,224 $83,973 $ 63,610 $716,861
==============================================================================================================
33
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- - ----------------------------------------------------------------
Unrealized Deferred
Market Compen-
(Dollars in thousands) Adjustment sation
- - ----------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 $ -- $ (1,436)
Adjustments for poolings 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)
Converted subordinated debt -- --
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 (24,273) --
Amortization of deferred compensation
on restricted stock incentive plan -- 1,374
Other -- --
- - ----------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 (24,273) (2,796)
Adjustment related to change in reporting
date for acquisition accounted for as a -- --
pooling of interests
- - ----------------------------------------------------------------
ADJUSTED BALANCE, JANUARY 1, 1995 (24,273) (2,796)
Net income -- --
Cash dividends declared -- --
Common stock issued:
Peoples Commercial Services
Corporation acquisition -- --
Financial Investment Corp.
acquisition -- --
For exercise of stock options -- --
Restricted employee benefit plan -- (171)
Common stock repurchased -- --
Change in unrealized market adjustment
on available for sale securities 34,855 --
Amortization of deferred compensation
on restricted stock incentive plan -- 1,165
Other -- --
- - ----------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $ 10,582 $ (1,802)
================================================================
See accompanying notes to consolidated financial statements.
34
CONSOLIDATED
STATEMENTS
OF CASH FLOWS First Tennessee National Corporation
- - --------------------------------------------------------------------------------------------------
Year Ended December 31
----------------------------------
(Dollars in thousands) 1995 1994 1993
- - --------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $164,888 $147,068 $ 109,716
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Provision for loan losses 20,592 17,182 36,461
Provision/(benefit) for deferred income tax 33,508 (3,036) (2,228)
Depreciation and amortization of premises and equipment 25,289 21,081 17,311
Amortization of mortgage servicing rights 14,980 14,936 25,478
Amortization of intangibles 8,100 6,406 5,871
Net amortization of premiums and accretion of discounts 20,575 13,695 25,542
Market value adjustment on foreclosed property 4,266 1,808 927
Market value adjustment on securities held for sale -- -- (248)
Securities contributed to charitable trust -- 9,379 --
Equity securities/(gains) losses (3,195) (24,251) 479
Debt securities/(gains) losses 751 4,298 (1,123)
Net gain on disposal of branch -- -- (672)
Net (gain)/loss on disposal of fixed assets 1,421 108 (709)
Net (increase)/decrease in:
Broker/dealer securities inventory (12,624) 8,632 9,944
Mortgage warehouse loans held for sale (273,217) 748,002 (488,893)
Bond division receivables (34,024) 39,667 (30,178)
Interest receivable (5,145) (6,237) 9,245
Other assets (266,296) (7,784) (93,541)
Net increase/(decrease) in:
Bond division payables 39,104 (50,511) 30,760
Interest payable 18,046 14,492 713
Other liabilities 152,854 (54,526) 48,638
- - --------------------------------------------------------------------------------------------------
Total adjustments (255,015) 753,341 (406,223)
- - --------------------------------------------------------------------------------------------------
Net cash (used)/provided by operating activities (90,127) 900,409 (296,507)
- - --------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of:
Held to maturity securities 89,457 352,299 --
Available for sale securities 189,229 299,928 --
Investment securities -- -- 1,618,957
Proceeds from sale of:
Available for sale securities 443,135 423,817 --
Debt securities -- -- 481,173
Equity securities -- -- 6,248
Premises and equipment 2,756 1,320 1,284
Payments for purchase of:
Held to maturity securities (38,709) (488,710) --
Available for sale securities (375,926) (416,288) --
Debt securities -- -- (1,290,599)
Equity securities -- -- (17,597)
Premises and equipment (38,545) (40,045) (35,216)
Net increase in loans (658,230) (940,878) (754,120)
Decrease/(increase) in investment in bank time deposits 415 5,103 (2,484)
Branch sale, including cash and cash equivalents sold -- -- (18,339)
Acquisitions, net of cash and cash equivalents acquired 58,527 130 (102,577)
- - --------------------------------------------------------------------------------------------------
Net cash used by investing activities (327,891) (803,324) (113,270)
- - --------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from:
Exercise of stock options 4,977 2,777 2,052
Issuance of long-term debt 164,182 2,984 --
Payments for:
Capital lease obligations (234) (233) (232)
Long-term debt (18,035) (1,346) (37,971)
Stock repurchase (122,796) (26,583) (4,797)
Cash dividends (62,694) (41,022) (51,970)
Equity distributions related to acquisitions (23) (47) --
Net increase/(decrease) in:
Deposits 306,737 277,653 226,056
Short-term borrowings (56,200) (127,949) 240,697
- - --------------------------------------------------------------------------------------------------
Net cash provided by financing activities 215,914 86,234 373,835
- - --------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents (202,104) 183,319 (35,942)
- - --------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 977,952 794,633 830,575
- - --------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $775,848 $977,952 $ 794,633
==================================================================================================
Total interest paid $396,063 $291,985 $ 273,704
Total income taxes paid 53,065 69,036 72,590
- - -------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
35
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. First Tennessee offers a full range of banking and
bank-related services. First Tennessee's banking subsidiaries offer general
banking products in 21 Tennessee counties including the five major metropolitan
areas and in northern Mississippi and northwest Arkansas. Mortgage banking
provides services in 28 states. First Tennessee offers related financial
services including bond broker, agency, capital markets services, merchant
credit card processing, nationwide check clearing, integrated check processing
solutions, trust services, brokerage, venture capital, and credit life
insurance.
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. All significant intercompany accounts and
transactions have been eliminated. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the balance sheet dates and
revenues and expenses for the periods shown. Actual results could differ from
the estimates and assumptions used in the consolidated financial statements.
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. 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. The following significant stock
transactions have been adjusted for a two-for-one stock split that First
Tennessee effected in February 1996. In 1995, First Tennessee issued
approximately 7,980,000 shares of its common stock related to the acquisitions
of Carl I. Brown and Company, Community Bancshares, Inc., Peoples Commercial
Services Corporation, and Financial Investment Corp. In 1994, First Tennessee
issued approximately 7,716,000 shares of its common stock related to the
acquisitions of SNMC Management Corporation, Highland Capital Management Corp.,
Cleveland Bank and Trust Company, Planters Bank, and Emerald Mortgage Company.
In 1993, approximately 298,000 shares of First Tennessee common stock were
issued in exchange for all of the common stock of New South Bancorp (see
Note 2 - Business Combinations).
BROKER/DEALER SECURITIES INVENTORY. Securities purchased in connection with
underwriting or dealer activities are carried at market value. Realized and
unrealized gains and losses on these 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.
36
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 impaired loans, as defined in SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures," and
other nonaccrual loans. Also included are loans which have been restructured
in accordance with criteria in SFAS No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructuring."
Impaired loans are generally carried on a nonaccrual status. 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. Once all principal has been received, additional
interest payments are recognized as interest income on a cash basis.
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 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 and the excess of cost over net assets of acquired
subsidiaries (goodwill). 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
37
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 events or
circumstances 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.
CAPITALIZED MORTGAGE SERVICING RIGHTS. In May 1995, the Financial Accounting
Standards Board issued SFAS No. 122, "Accounting for Mortgage Servicing Rights
an amendment of FASB Statement No. 65." SFAS No. 122, among other provisions,
requires the recognition of originated mortgage servicing rights (OMSRs), as
well as purchased mortgage servicing rights (PMSRs), as assets by allocating
the total cost incurred between the loan and the servicing right based on their
relative fair value. Under SFAS No. 65, the cost of the OMSRs was included
with the cost of the related loans and written off against proceeds when the
loans were sold. PMSRs were previously recorded as assets under SFAS No. 65.
First Tennessee elected to adopt this statement as of January 1, 1995. SFAS
No. 122 prohibits retroactive application; therefore, First Tennessee's
financial reporting for prior periods was accounted for under the original SFAS
No. 65.
The value of pre-SFAS No. 122 PMSRs was established using the lesser
of: a discounted cash flow analysis; current market value; or the amount of
consideration specifically paid by First Tennessee. The PMSRs were being
amortized using an accelerated method over the estimated life of the servicing
income. A quarterly value impairment analysis was performed using a discounted
methodology that was disaggregated by purchase transaction. This was the basis
of presentation for years prior to 1995.
During 1995, the value of OMSRs was established by allocating the
total costs incurred between the loan and the servicing rights based on their
relative fair values. To determine the fair value of the servicing rights
created, First Tennessee uses the market prices under current sales contracts
which are tested against prices obtained from flow and bulk purchasers of
servicing and prices determined using a valuation model that calculates the
present value of future cash flows. For purposes of impairment evaluation and
measurement, the mortgage servicing rights are stratified based on the
predominant risk characteristics of the underlying loans. For First Tennessee
these risk characteristics include adjustable rate conventional and government;
fixed rate conventional and government by interest rate band; and multifamily.
In addition the pre-SFAS No. 122 PMSRs have been restratified using the same
risk characteristics with the reallocated basis being determined by current
discount cash flow analysis. The combined PMSRs and OMSRs are being amortized
as noninterest expense over the period of and in proportion to the estimated
net servicing revenues. A quarterly value impairment analysis is performed
using a discounted cash flow methodology that is disaggregated by predominant
risk characteristics. Impairment shall be recognized through a valuation
allowance for individual stratum.
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 liability to be hedged
exposes the institution 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.
38
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. Prior to January 1, 1995, trust services income was
reported on a cash basis, which was not materially different 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 have been
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. All references to per share amounts
for all years presented have been adjusted for the two-for-one stock split on
February 16, 1996.
39
NOTE 2 -- BUSINESS COMBINATIONS
All of the share information provided in this footnote has been adjusted to
reflect the two-for-one stock split effected by First Tennessee in February
1996. Additional information including asset size and origination volume can
be found in Table 1 - Acquisitions in the Management Discussion and Analysis.
The following acquisitions occurred during 1995 and were accounted for as
poolings of interests; therefore, the financial statements for all periods
presented reflect the combined companies.
On January 3, 1995, First Tennessee acquired for approximately 1,731,000
shares of its common stock all of the outstanding capital stock of Carl I.
Brown and Company (Carl I. Brown), a mortgage company in Kansas City, Missouri.
Carl I. Brown became a wholly owned subsidiary of First Tennessee Bank National
Association (FTBNA), the principal subsidiary of First Tennessee. On February
24, 1995, First Tennessee acquired for approximately 2,842,000 shares of its
common stock all of the outstanding capital stock of Community Bancshares, Inc.
(CBI), of Germantown, Tennessee. CBI, the parent company of Community First
Bank, merged into First Tennessee, and Community First Bank merged into FTBNA.
The following presents certain financial data pertaining to the combination
of First Tennessee with Carl I. Brown and CBI for the years ended 1994 and
1993:
(Dollars in thousands,
except per share data) 1994 1993
- - ------------------------------------------------------------------------------------
TOTAL REVENUE:*
First Tennessee, as originally reported $769,735 $698,265
Carl I. Brown** 71,138 55,975
CBI 12,420 11,764
Eliminations (93) --
- - ------------------------------------------------------------------------------------
First Tennessee $853,200 $766,004
====================================================================================
NET INCOME:
First Tennessee, as originally reported $146,349 $106,082
Carl I. Brown** (1,882) 1,328
CBI 2,601 2,306
- - ------------------------------------------------------------------------------------
First Tennessee $147,068 $109,716
====================================================================================
NET INCOME PER SHARE:
First Tennessee, as originally reported $ 2.28 $ 1.66
Carl I. Brown** (10.89) 7.68
CBI .81 .81
First Tennessee 2.15 1.61
- - ------------------------------------------------------------------------------------
* Total revenue is net interest income and noninterest income.
** Twelve months ended for Carl I. Brown is October 31.
Carl I. Brown had a fiscal reporting period ending October 31, and the
results of its operations for the two-month period ended December 31, 1994, are
not included in the Consolidated Statements of Income. These results were
recognized directly through an adjustment to beginning retained earnings for
1995 on the Consolidated Statements of Shareholders' Equity. The following
presents certain financial data for Carl I. Brown's two-month period ended
December 31, 1994:
For the Two
Months Ended
(Dollars in thousands) December 31, 1994
- - ---------------------------------------------------------------------------
Total revenue* $ 6,425
Total expense** 14,182
- - ---------------------------------------------------------------------------
Net income $(7,757)
===========================================================================
* Total revenue is net interest income and noninterest income.
** Total expense includes income tax expense.
The following acquisitions occurred in 1995 and were accounted for as
purchases. Accordingly, the purchase price has been allocated to the acquired
assets and liabilities at their respective estimated fair values at the date of
acquisition. This allocation has been based on preliminary estimates which may
be revised at a later date. The operating results of these acquisitions are
included in First Tennessee's consolidated results of operations from the date
of acquisition.
On April 1, 1995, First Tennessee acquired for approximately 842,000 shares
40
of its common stock all of the outstanding shares of Peoples Commercial
Services Corporation (Peoples), parent company of Peoples Bank, headquartered
in Senatobia, Mississippi. As approved by the First Tennessee Board of
Directors, the shares issued in this transaction had been repurchased in the
open market. Peoples was merged with and into First Tennessee while Peoples
Bank became a wholly owned subsidiary of First Tennessee. The cost of the
acquisition, totaling approximately $17.9 million of First Tennessee's common
stock, exceeded the estimated net fair value of tangible assets and liabilities
acquired by approximately $9.5 million. Intangible assets totaling
approximately $2.7 million have been identified and are being amortized over
the expected useful lives of the individual components. The excess of
consideration paid over the estimated net fair value of the tangible and
intangible assets acquired, totaling approximately $6.8 million, has been
recorded as goodwill and is being amortized using the straight-line method over
25 years.
On October 1, 1995, First Tennessee acquired for approximately 2,565,000
shares of its common stock all of the outstanding shares of Financial
Investment Corp. (FIC), parent company of First National Bank of Springdale
(FNB), headquartered in Springdale, Arkansas. As approved by the First
Tennessee Board of Directors, the shares issued in this transaction had been
repurchased in the open market. FIC was merged with and into First Tennessee
while FNB became a wholly owned subsidiary of First Tennessee. The cost of the
acquisition, totaling approximately $70.0 million of First Tennessee's common
stock, exceeded the estimated net fair value of tangible assets and liabilities
acquired by approximately $27.2 million. Intangible assets totaling
approximately $9.2 million have been identified and are being amortized over
the expected useful lives of the individual components. The excess of
consideration paid over the estimated net fair value of the tangible and
intangible assets acquired, totaling approximately $18.0 million, has been
recorded as goodwill and is being amortized using the straight-line method over
25 years.
The following presents on a proforma basis certain financial data pertaining
to the Peoples and FIC transactions as if they had been acquired at the
beginning of the periods. The proforma results presented are not necessarily
indicative of the future results of operations of the combined company or the
results of operations that would have actually occurred had the merger been in
effect for the periods presented.
(Dollars in thousands,
except per share data) 1995 1994
- - -------------------------------------------------------------------------------------
TOTAL REVENUE:*
First Tennessee, as originally reported $887,216 $769,735
Peoples 1,232 3,679
FIC 10,312 14,801
Purchase accounting adjustments (1,674) (3,503)
- - -------------------------------------------------------------------------------------
First Tennessee proforma $897,086 $784,712
=====================================================================================
NET INCOME:
First Tennessee, as originally reported $164,888 $146,349
Peoples 430 919
FIC 2,158 4,695
Purchase accounting adjustments (1,896) (3,728)
- - -------------------------------------------------------------------------------------
First Tennessee proforma $165,580 $148,235
=====================================================================================
NET INCOME PER SHARE:
First Tennessee, as originally reported $ 2.42 $ 2.28
Peoples 3.23 6.91
FIC 1.21 2.63
First Tennessee proforma 2.36 2.32
- - -------------------------------------------------------------------------------------
*Total revenue is net interest income and noninterest income.
On July 1, 1995, First Tennessee acquired certain assets and certain
liabilities of HomeBanc Mortgage Corporation (HomeBanc) of Atlanta, Georgia,
for approximately $6.7 million. HomeBanc was merged into Sunbelt National
Mortgage Corporation. This acquisition was accounted for as a purchase and was
immaterial to First Tennessee.
The following four acquisitions occurred in 1994 and were accounted for as
poolings of interests; therefore, the financial statements for all periods
presented reflect the combined companies.
On January 4, 1994, First Tennessee acquired for approximately 3,502,000
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
FTBNA.
41
On March 1, 1994, First Tennessee acquired for approximately 936,000 shares
of its common stock all of the outstanding shares of Highland Capital
Management Corp. (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.
First Tennessee acquired Cleveland Bank and Trust Company (CBT) of
Cleveland, Tennessee, on March 16, 1994, for approximately 2,306,000 shares of
its common stock and acquired Planters Bank (Planters) of Tunica, Mississippi,
on August 9, 1994, for approximately 668,000 shares of its common stock. Both
of these banks became wholly owned subsidiaries of First Tennessee.
On October 1, 1994, First Tennessee acquired Emerald Mortgage Company
(Emerald) of Lynnwood, Washington, for approximately 304,000 shares of its
common stock. Emerald was merged into SNMC. This acquisition was accounted
for as a purchase and was immaterial to First Tennessee.
On December 31, 1993, First Tennessee acquired for approximately 298,000
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.
42
NOTE 3 -- INVESTMENT SECURITIES
Reconciliations of the amortized cost to the estimated market values of
investments in securities at December 31, 1995, 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, 1995:
States and municipalities $ 74,731 $ 1,289 $ (270) $ 75,750
- - ------------------------------------------------------------------------------------
Estimated
BY CONTRACTUAL MATURITY Amortized Market
(Dollars in thousands) Cost Value
- - ------------------------------------------------------------------------------------
AT DECEMBER, 1995:
Within 1 year $ 9,493 $ 9,556
After 1 year; within 5 years 18,944 19,224
After 5 years; within 10 years 20,274 20,658
After 10 years 26,020 26,312
- - ------------------------------------------------------------------------------------
Total $ 74,731 $ 75,750
====================================================================================
SECURITIES AVAILABLE FOR SALE
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in thousands) Cost Gains Losses Value
- - ------------------------------------------------------------------------------------
AT DECEMBER 31, 1995:
U.S. Treasury and other
U.S. government agencies $ 271,260 $ 3,289 $ (708) $ 273,841
Government agency
issued MBS 294,731 6,239 (1,266) 299,704
Government agency
issued CMOs 1,351,342 11,154 (2,586) 1,359,910
States and municipalities 28,047 1,388 (26) 29,409
Private issued CMOs 1,841 22 -- 1,863
Other 17,366 591 (500) 17,457
Equity 53,927 2,163 (1,606) 54,484
- - ------------------------------------------------------------------------------------
Total $2,018,514 $24,846 $ (6,692) $2,036,668
====================================================================================
Estimated
BY CONTRACTUAL MATURITY Amortized Market
(Dollars in thousands) Cost Value
- - ------------------------------------------------------------------------------------
AT DECEMBER 31, 1995:
Within 1 year $ 114,920 $ 114,975
After 1 year; within 5 years 169,978 172,880
After 5 years; within 10 years 29,949 30,933
After 10 years 1,826 1,919
- - ------------------------------------------------------------------------------------
Subtotal 316,673 320,707
- - ------------------------------------------------------------------------------------
Mortgage-backed securities and CMOs 1,647,914 1,661,477
Equity securities 53,927 54,484
- - ------------------------------------------------------------------------------------
Total $2,018,514 $2,036,668
====================================================================================
Proceeds from the sales of available for sale debt securities were
$428,590,000 and $404,972,000 in 1995 and 1994, respectively. Gross gains of
$514,000 and $264,000 and gross losses of $742,000 and $5,384,000 were realized
on 1995 and 1994 debt sales, respectively. Proceeds from the sales of equity
securities during 1995 and 1994 were $14,545,000 and $18,845,000, respectively.
43
Gross gains of $5,466,000 and $15,788,000 and gross losses of $114,000 and
$153,000 were realized on the 1995 and 1994 equity sales, respectively. In
1995, losses totaling $1,400,000 on debt securities and $2,157,000 on equity
securities were recognized for securities, that in the opinion of management,
have been permanently impaired. 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 1995 and 1994,
$877,000 and $822,000 of recoveries were realized as gains on debt securities
that had previously been written down. There was no change in net unrealized
holding gain or loss on broker/dealer securities inventory for 1995. The
change in net unrealized losses on broker/dealer securities inventory
recognized in bond division income was $426,000 for 1994.
Securities included in the Consolidated Statements of Condition of
$1,590,984,000 and $1,424,466,000 at December 31, 1995 and 1994, respectively,
were pledged to secure public deposits, securities sold under agreement to
repurchase, and for other purposes. Equity securities include venture capital
investment securities.
As a result of the report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities," issued by
the Financial Accounting Standards Board, First Tennessee reclassified certain
of its securities from the Held to Maturity category to the Available for Sale
category on December 1, 1995. The following table provides certain information
related to the reclassification:
Estimated Net
Amortized Market Unrealized
(Dollars in thousands) Cost Value Gain/(Loss)
- - ----------------------------------------------------------------------
AT DECEMBER 1, 1995:
U.S. Treasury and other
U.S. government agencies $ 38,578 $ 38,843 $ 265
Government agency
issued MBS 120,820 119,208 (1,612)
Government agency
issued CMOs 742,032 745,949 3,917
States and municipalities 13,968 14,631 663
Private issued CMOs 12,718 12,920 202
- - ----------------------------------------------------------------------
Total $928,116 $931,551 $3,435
======================================================================
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 obligation 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 $ 63,550 $ 55 $ (1,791) $ 61,814
Government agency
issued MBS 139,954 15 (11,265) 128,704
Government agency
issued CMOs 724,682 -- (38,487) 686,195
States and municipalities 61,723 757 (1,517) 60,963
Private issued CMOs 2,493 -- (55) 2,438
Other 11,775 52 (497) 11,330
- - ------------------------------------------------------------------------------------
Total $1,004,177 $879 $(53,612) $951,444
====================================================================================
44
Estimated
BY CONTRACTUAL MATURITY Amortized Market
(Dollars in thousands) Cost Value
- - -----------------------------------------------------------------------------------
AT DECEMBER 31, 1994:
Within 1 year $ 38,725 $38,825
After 1 year; within 5 years 66,853 65,434
After 5 years; within 10 years 16,458 15,712
After 10 years 15,012 14,136
- - -----------------------------------------------------------------------------------
Subtotal 137,048 134,107
- - -----------------------------------------------------------------------------------
Mortgage-backed securities and CMOs 867,129 817,337
- - -----------------------------------------------------------------------------------
Total $1,004,177 $951,444
===================================================================================
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 $ 333,469 $ 295 $(10,810) $ 322,954
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 55,834 3,941 (2,211) 57,564
- - ------------------------------------------------------------------------------------
Total $1,206,393 $8,324 $(47,979) $1,166,738
====================================================================================
Estimated
BY CONTRACTUAL MATURITY Amortized Market
(Dollars in thousands) Cost Value
- - ---------------------------------------------------------------------------------
AT DECEMBER 31, 1994:
Within 1 year $ 25,293 $ 25,918
After 1 year; within 5 years 313,104 302,007
After 5 years; within 10 years 14,899 14,583
After 10 years 3,245 3,153
- - ---------------------------------------------------------------------------------
Subtotal 356,541 345,661
- - ---------------------------------------------------------------------------------
Mortgage-backed securities and CMOs 794,018 763,513
Equity securities 55,834 57,564
- - ---------------------------------------------------------------------------------
Total $ 1,206,393 $1,166,738
=================================================================================
45
NOTE 4 -- LOANS
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 28 states, with the majority
of these being securitized and sold.
The composition of the loan portfolio at December 31 is summarized below:
(Dollars in thousands) 1995 1994
- - ----------------------------------------------------------------------------
Commercial $3,330,929 $2,991,231
Consumer 2,525,889 2,263,007
Mortgage warehouse loans held for sale 789,183 515,407
Permanent mortgage 689,458 591,094
Credit card receivables 529,104 475,489
Real estate construction 238,863 160,368
Nonaccrual 19,040 16,853
- - ----------------------------------------------------------------------------
Loans, net of unearned income 8,122,466 7,013,449
Allowance for loan losses 112,567 109,859
- - ----------------------------------------------------------------------------
Total net loans $8,009,899 $6,903,590
============================================================================
Additional detail on consumer loans by product is provided in the following
table as of December 31:
(Dollars in thousands) 1995 1994
- - -----------------------------------------------------------------------------
Real estate $1,576,215 $1,416,275
Auto 606,199 499,304
Student 231,732 216,404
Other 111,743 131,024
- - -----------------------------------------------------------------------------
Total consumer loans, net of unearned income $2,525,889 $2,263,007
=============================================================================
At December 31, 1995 and 1994, real estate consumer loans included
$1,537,064,000 and $1,384,656,000 of first and second liens and home equity
loans, respectively.
On January 1, 1995, First Tennessee adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." On that date,
impaired loans totaling $9,742,000 were identified. These impaired loans had a
related allowance that totaled $2,542,000.
The following table presents information concerning nonperforming loans at
December 31, 1995:
(Dollars in thousands) 1995
- - ---------------------------------------------------------------
Impaired loans $11,865
Other nonaccrual loans 7,175
- - ---------------------------------------------------------------
Total $19,040
===============================================================
Total interest income recognized on impaired loans was $1,405,000 for the
year ended December 31, 1995. Interest income which would have been earned
under the original terms of these loans was approximately $1,374,000 in 1995.
The average balance of impaired loans was approximately $10,441,000 for the
year ended December 31, 1995. Total restructured impaired loans at
December 31, 1995 were $303,000. At December 31, 1995, there were no
outstanding commitments to advance additional funds to customers whose loans
had been restructured.
An allowance for loan losses is maintained for all impaired loans.
Activity in the allowance for loan losses related to non-impaired loans,
impaired loans, and for the total allowance for the year ended December 31,
1995, is summarized as follows:
46
1995
(Dollars in thousands) Non-impaired Impaired Total
- - ---------------------------------------------------------------------------
Balance at beginning of year $109,859 $ -- $109,859
Transfer of allowance (2,542) 2,542 --
Allowance from acquisitions 2,632 -- 2,632
Provision for loan losses 14,388 6,204 20,592
Charge-offs 29,766 5,465 35,231
Less loan recoveries 14,480 235 14,715
- - ---------------------------------------------------------------------------
Net charge-offs 15,286 5,230 20,516
- - ---------------------------------------------------------------------------
Balance at end of year $109,051 $3,516 $112,567
===========================================================================
The following table presents information concerning nonperforming loans at
December 31, 1994:
(Dollars in thousands) 1994
- - ---------------------------------------------------------------
Nonaccrual loans $16,853
Restructured loans 158
- - ---------------------------------------------------------------
Total $17,011
===============================================================
Total interest recorded on nonaccrual and restructured loans was
$1,368,000 in 1994. Interest income which would have been earned under the
original terms of these loans was approximately $1,591,000 in 1994. At
December 31, 1994,there were no outstanding commitments to advance additional
funds to customers whose loans had been restructured.
The allowance for loan losses includes management's estimate of the
amounts expected to be lost on specific loans and for losses on other as yet
unidentified loans included in loans outstanding. In estimating the potential
losses on specific loans, management relies on a combination of in-house
prepared discounted cash flow analyses and valuations by independent
appraisers. In estimating the reserve component for unidentified losses within
the portfolio, management relies on historical experience by loan type adjusted
for any known trends in the portfolio. The amounts that will ultimately be
realized could differ materially in the near term from the amounts assumed in
arriving at the allowance for possible loan losses reported in the financial
statements.
Activity in the allowance for loan losses for the years ended December
31, 1994 and 1993, is summarized as follows:
(Dollars in thousands) 1994 1993
- - ---------------------------------------------------------------
Balance at beginning of year $110,720 $103,223
Allowance from acquisitions -- 971
Provision for loan losses 17,182 36,461
Charge-offs 29,196 42,661
Less loan recoveries 11,153 12,726
- - ---------------------------------------------------------------
Net charge-offs 18,043 29,935
- - ---------------------------------------------------------------
Balance at end of year $109,859 $110,720
===============================================================
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 $128,911,000 and $94,470,000 at December 31, 1995 and 1994,
respectively. The following table summarizes the changes to these amounts:
(Dollars in thousands) 1995 1994
- - ---------------------------------------------------------------
Balance at beginning of year $ 94,470 $ 81,278
Additions 202,652 149,108
Deletions:
Repayments 167,720 128,263
No longer related 491 7,653
- - ---------------------------------------------------------------
Total deletions 168,211 135,916
- - ---------------------------------------------------------------
Balance at end of year $128,911 $ 94,470
===============================================================
Included on the Consolidated Statements of Condition in "Bond division
receivables and other assets" are amounts due from customers on acceptances and
in "Bond division payables and other liabilities" are bank acceptances
outstanding of $4,663,000 and $4,530,000 at December 31, 1995 and 1994,
respectively.
47
NOTE 5 -- PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized below:
(Dollars in thousands) 1995 1994
- - -------------------------------------------------------------
Land $ 27,564 $ 25,515
Buildings 121,932 106,770
Leasehold improvements 18,260 16,037
Furniture, fixtures, and equipment 160,535 147,096
- - -------------------------------------------------------------
Premises and equipment, at cost 328,291 295,418
Less accumulated depreciation
and amortization 150,891 136,382
- - -------------------------------------------------------------
Premises and equipment, net $177,400 $159,036
=============================================================
48
NOTE 6 -- INTANGIBLE ASSETS
Following is a summary of intangible assets, net of accumulated amortization,
included in the Consolidated Statements of Condition:
Premium on
Purchased Deposits
(Dollars in thousands) Goodwill and Assets
- - --------------------------------------------------------
December 31, 1992 $20,747 $32,761
Amortization expense 1,674 4,197
Acquisitions/Divestitures 43,492 408
- - --------------------------------------------------------
December 31, 1993 62,565 28,972
Amortization expense 3,073 3,333
Acquisitions/Divestitures 6,594 -
- - --------------------------------------------------------
December 31, 1994 66,086 25,639
Amortization expense 3,676 4,424
Acquisitions/Divestitures 29,382 15,978
- - --------------------------------------------------------
DECEMBER 31, 1995 $91,792 $37,193
========================================================
49
NOTE 7 -- 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.
50
NOTE 8:-- CAPITALIZED MORTGAGE SERVICING RIGHTS
Following is a summary of capitalized mortgage servicing rights, net of
accumulated amortization, included in the Consolidated Statements of Condition:
Capitalized
Mortgage
Servicing
(Dollars in thousands) Rights
- - -------------------------------------------------------
December 31, 1992 $ 62,537
Amortization expense (25,478)
Acquisitions/Divestitures 48,924
- - -------------------------------------------------------
December 31, 1993 $ 85,983
Amortization expense (14,936)
Acquisitions/Divestitures 1,675
- - -------------------------------------------------------
December 31, 1994 $ 72,722
Amortization expense (14,980)
Acquisitions/Divestitures 91,478
- - -------------------------------------------------------
DECEMBER 31, 1995* $ 149,220
- - -------------------------------------------------------
Fair value at December 31, 1995 $ 166,247
- - -------------------------------------------------------
* Includes $11.3 million of originated loan servicing rights which are related
to loans held for sale to investors.
The mortgage servicing rights capitalized at December 31, 1995, represents
the rights to service approximately $12 billion of mortgage loans. In
addition, First Tennessee has approximately $5.3 billion of loans for which the
mortgage servicing rights were not capitalized. The estimated fair value of
the servicing for these loans was $43.6 million. No valuation allowance was
required as of December 31, 1995.
51
NOTE 9 -- SHORT-TERM BORROWINGS
Short-term borrowings include federal funds purchased and securities
sold under agreements to repurchase, commercial paper, and other borrowed
funds, 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 two to 30 days at December 31, 1995.
Commercial paper is an obligation of First Tennessee and had original
maturities ranging from two to 90 days at December 31, 1995.
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) 1995 1994 1993
- - --------------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase:
Balance:
Average $1,491,033 $1,045,571 $1,028,981
Year-end 1,674,225 1,457,517 1,025,124
Maximum month-end outstanding 1,953,448 1,457,517 1,239,396
Rate:
Average for the year 5.43 % 3.87 % 2.84 %
Average at year-end 4.96 5.15 2.73
Commercial paper:
Balance:
Average $ 35,579 $ 34,351 $ 30,269
Year-end 29,402 67,820 32,283
Maximum month-end outstanding 44,755 67,820 54,809
Rate:
Average for the year 5.14 % 3.77 % 3.06 %
Average at year-end 4.59 4.57 3.06
Other short-term borrowings:
Balance:
Average $ 368,630 $ 645,447 $ 694,236
Year-end 57,118 284,702 900,390
Maximum month-end outstanding 547,131 894,840 1,114,552
Rate:
Average for the year 7.07 % 5.46 % 4.78 %
Average at year-end 6.52 8.05 5.30
- - --------------------------------------------------------------------------------
52
NOTE 10 -- 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 $24,297,000 at December 31, 1995, and $82,440,000
at December 31, 1994.
53
NOTE 11 -- LEASE COMMITMENTS
Leased capital assets included in "Bond division receivables and other assets"
on the Consolidated Statements of Condition at December 31 are summarized
below:
(Dollars in thousands) 1995 1994
- - -----------------------------------------------------------------
Premises $2,243 $2,243
Less accumulated amortization 1,706 1,599
- - -----------------------------------------------------------------
Leased capital assets, net $ 537 $ 644
=================================================================
Future minimum lease payments for capitalized leases together with the
present value of net minimum lease payments at December 31, 1995, are as
follows:
(Dollars in thousands) Premises
- - -----------------------------------------------------------------
1996 $ 234
1997 234
1998 237
1999 193
2000 124
2001 and after 137
- - -----------------------------------------------------------------
Total 1,159
Less amount representing interest 242
- - -----------------------------------------------------------------
Present value of net minimum lease payments $ 917
=================================================================
Rent expense under all operating lease obligations aggregated $27,779,000 for
1995, $27,865,000 for 1994, and $18,875,000 for 1993. Rent expense was reduced
in 1994 and 1993 by amortization of a deferred gain resulting from the sale of
an office building in 1985. This amortization totaled $585,000 in 1994, and
$1,062,000 in 1993. Rent income received aggregated $1,776,000, $2,498,000,
and $2,117,000 for the years 1995, 1994, and 1993, 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 15
years and include renewal options for additional periods of one to 25 years. At
December 31, 1995, First Tennessee's long-term leases required minimum annual
rentals as follows:
(Dollars in thousands) Premises Equipment Total
- - -------------------------------------------------------------------
1996 $18,403 $ 2,594 $20,997
1997 16,327 1,982 18,309
1998 14,271 902 15,173
1999 9,797 728 10,525
2000 7,641 365 8,006
2001 and after 13,924 -- 13,924
- - -------------------------------------------------------------------
Total $80,363 $ 6,571 $86,934
===================================================================
Aggregate minimum income under sublease agreements for these periods is
$2,739,000.
54
NOTE 12 -- TERM BORROWINGS
Term borrowings on the financial statements consist of borrowings with
maturities greater than one year. The following table presents information
pertaining to term borrowings for First Tennessee and its subsidiaries at
December 31:
(Dollars in thousands) 1995 1994
- - ----------------------------------------------------------------------------
FIRST TENNESSEE NATIONAL CORPORATION:
Subordinated capital notes:
Matures on June 1, 1999 -- 10 3/8% $ 74,692 $ 74,602
Matures on November 15, 2005 -- 6 3/4% 74,193 --
Sinking fund debentures -- 7 3/8% -- 13,950
FIRST TENNESSEE BANK NATIONAL ASSOCIATION:
Notes payable to Federal Home Loan Bank:
Matures on January 3, 1997 -- 7.95% 25,000 --
Matures on April 3, 1997 -- 7.95% 25,000 --
Matures on October 3, 1997 -- 8.05% 10,000 --
Principal payments of approximately $4,898,000,
$5,279,000, and $1,382,000 due 1996, 1997,
and 1998, respectively -- 7.50% 11,559 --
Matures on January 29, 1999 -- 7.95% 15,000 --
Matures on June 30, 1999 -- One month LIBOR + .05%
(5.7375% and 6.175% at December 31, 1995 and
1994, respectively) 20,000 20,000
Monthly payments of approximately $17,000 due
through November 1, 2009 -- 8.10% 2,783 2,984
Industrial development bond payable to
City of Alcoa, Tennessee -- 6.50%;
payment of $400,000 due 1999 400 500
CLEVELAND BANK AND TRUST COMPANY:
Industrial development bond payable to City of
Cleveland, Tennessee -- 65% of prime (5.525%
and 5.520% at December 31, 1995 and 1994,
respectively); monthly payments of
approximately $29,000 due through 1999 1,390 1,735
- - ----------------------------------------------------------------------------
Total $260,017 $113,771
============================================================================
Annual principal repayment requirements for the years 1996 through 2000
approximate $5,446,000, $65,827,000, $1,930,000, $110,946,000, and $200,000,
respectively. Total repayment requirements for 2001 through 2009 are
approximately $76,783,000.
Subordinated capital notes were issued on June 10, 1987, at 10.375 percent
with interest 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.
Subordinated capital notes were also issued on November 9, 1995, at 6.75
percent with interest payable on May 15 and November 15 of each year beginning
on May 15, 1996. Proceeds from this issuance were used to purchase First
Tennessee common stock and redeem the outstanding sinking fund debentures.
A 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 issued in 1987. Interest rate
and maturity terms are identical to the corporate debt. The subordinated
capital notes meet bank regulatory capital guidelines.
55
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 employees may then
direct that all or a portion of the contribution be allocated to their savings
plan accounts. 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) 1995 1994 1993
- - -----------------------------------------------------------------------------------------
Flexible benefits contributions:
Performance dollars $ 4,675 $ 4,144 $ 3,937
Service dollars 1,866 1,758 1,716
- - -----------------------------------------------------------------------------------------
Total 6,541 5,902 5,653
Company matching contribution 3,455 2,374 1,976
- - -----------------------------------------------------------------------------------------
Total employer contribution $ 9,996 $ 8,276 $ 7,629
=========================================================================================
The figures in the table above include 1995 flexible benefit contributions
and company matching contributions for employees of CBI, Peoples, and FIC,
companies acquired by First Tennessee during 1995. Also during 1995, First
Tennessee acquired Carl I. Brown. The 1994 totals include HCMC and CBT,
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.
Community First Bank Profit Sharing Trust is a 401(k) savings plan. This
plan was frozen effective as of the acquisition. Expense for this plan was
$3,000 for the period preceding the acquisition date of February 24, 1995. For
the years ended December 31, 1994 and 1993, the expense was $258,000 and
$122,000 respectively. In 1995, the Community First Bank Profit Sharing Trust
was merged into the First Tennessee Savings Plan.
The Peoples Bank of Senatobia Profit Sharing Plan 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 $13,000 for the period preceding the acquisition date of April 1,
1995.
The First National Bank of Springdale 401(k) Profit Sharing Plan was
frozen as of the acquisition. No further employee or employer contributions
are being made into this plan. Expense for this plan was $14,000 for the
period preceding the acquisition date of October 1, 1995.
The Carl I. Brown and Company Employee Savings Trust is a 401(k) savings
plan. This plan was frozen as of December 31, 1995. No further employee or
employer contributions are being made into this plan. Expense under this plan
was $134,000, $ 145,000, and $91,000 for the years ended December 31, 1995,
1994, and 1993, respectively.
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. In 1994, expense for this plan
was $28,000 for the two months preceding the acquisition date of March 1, 1994.
For the year ended December 31, 1993, the expense for this plan was $165,000.
The CBT Retirement Plan was a thrift plan for all eligible employees.
Expense for this plan in 1994 was $75,000 for the period preceding the
acquisition date of March 16, 1994. For the year ended December 31, 1993, the
expense for this plan was $298,000. 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 and $45,000 for the
years ended December 31, 1994 and 1993, respectively. This plan was terminated
in 1994.
SNMC began sponsoring on April 1, 1993, the SNMC Savings Plan, a defined
contribution plan which covered substantially all its employees. The SNMC
Savings Plan was frozen as of December 31, 1995. No further employee or
employer contributions are being made into this plan. Expense under this plan
was $621,000, $650,000, and $600,000 for years ended December 31, 1995, 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.
56
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 the unit credit cost method. As of
January 1, 1986, First Tennessee adopted SFAS No. 87, "Employers'Accounting
for Pensions." At 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 $278,000 in 1995, $2,993,000 in 1994, and
$882,000 in 1993.
The components of net periodic pension cost were as follows:
(Dollars in thousands) 1995 1994 1993
- - ------------------------------------------------------------------------------------------
Service cost-benefits earned
during the year $ 5,210 $ 6,792 $ 4,522
Interest cost on projected
benefit obligation 6,907 6,459 5,683
Return on plan assets (27,516) (676) (8,847)
Net amortization and deferral 15,677 (9,582) (476)
- - ------------------------------------------------------------------------------------------
Net periodic pension cost $ 278 $ 2,993 $ 882
==========================================================================================
The following table sets forth the plan's funded status at December 31:
(Dollars in thousands) 1995 1994
- - ------------------------------------------------------------------------------------------
Plan assets at fair value $ 150,685 $ 110,574
Actuarial present value of projected
benefit obligation* 108,215 83,648
- - ------------------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 42,470 26,926
Unrecognized net (gain)/loss from past
experience different from that assumed
and effects of changes in assumptions 72 4,752
Prior service cost not yet recognized in
net periodic pension cost 3,138 1,194
Unrecognized net transitional asset (3,240) (3,700)
- - ------------------------------------------------------------------------------------------
Prepaid pension cost
recognized in the Consolidated
Statements of Condition $ 42,440 $ 29,172
==========================================================================================
*At December 31, 1995 and 1994, respectively, the actuarial present values of
the accumulated benefit obligation were $86,495,000 and $60,026,000, of which
vested benefits were $84,302,000 and $57,769,000. 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 7.25 percent and 4.7 percent, respectively,
in 1995 and 8.5 percent and 4.8 percent, respectively, in 1994. The expected
long-term rate of return on assets was 10 percent for 1995 and 9.5 percent for
1994.
FIC sponsored the First National Bank of Springdale Pension Plan and Trust,
which is a defined benefit pension plan. This plan was frozen as of the
acquisition. No further employer contributions are being made into this plan.
This plan will be merged into the First Tennessee plan. Participants employed
at the time of the acquisition will receive vesting and benefit service credit
in the First Tennessee plan from their original date of hire by FIC.
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, workers' compensation, job training and
counseling, and continuation of benefits such as health care and life insurance
coverage. On January 1, 1994, First Tennessee adopted SFAS No. 112 with the
recognition of $2.3 million of pre-tax postemployment benefits related to prior
service rendered and rights vested. Total expense recognized in 1995 and 1994
was $1.9 million and $2.5 million, respectively.
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.
57
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.
The following table sets forth the plans' funded status reconciled to the
amount shown in the Consolidated Statements of Condition at December 31:
(Dollars in thousands) 1995 1994
- - ------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation (APBO):
Retirees $ (14,236) $ (15,039)
Actives (8,948) (5,886)
- - ------------------------------------------------------------------------------------------
Total APBO (23,184) (20,925)
Plan assets at fair value 11,055 10,637
- - ------------------------------------------------------------------------------------------
APBO in excess of plan assets (12,129) (10,288)
Unrecognized:
Net transition obligation 16,807 17,796
Prior service cost 44 47
Prepaid benefit cost (394) (868)
- - ------------------------------------------------------------------------------------------
Prepaid postretirement benefit cost $ 4,328 $ 6,687
==========================================================================================
Net periodic postretirement benefit cost for the periods ending December
31 included the following components:
(Dollars in thousands) 1995 1994 1993
- - ------------------------------------------------------------------------------------------
Service cost $ 427 $ 556 $ 434
Interest cost on APBO 1,762 1,578 1,582
Actual return on assets (1,867) (864) (388)
Amortization of transition obligation over 20 years 989 989 989
Total of other components 1,048 172 (292)
- - ------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 2,359 $ 2,431 $ 2,325
==========================================================================================
For measurement purposes, in 1995 the annual rate of increase in the per
capita cost of covered health care benefits was assumed to be 10.75 percent
decreasing evenly to a rate of 5.75 percent by the year 2000 and remaining at
that level thereafter. In 1994, the annual rate of increase was assumed to be
13 percent decreasing evenly to a rate of 7 percent by the year 2000 and
remaining at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. 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, 1995 $23,184 $24,688 6.5+
Service and interest cost 2,189 2,320 6.0+
- - ----------------------------------------------------------------------------------------
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.25 percent in 1995 and 8.5 percent in 1994. 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 expected long-term rate of return on plan assets before
income taxes was 6.5 percent for 1995 and 1994. 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 10 percent for 1995 and 9.5
percent for 1994.
In 1995, medical plan expense based on claims incurred was $8,673,000 for
5,304 active participants. Medical plan expense in 1994 was $9,841,000 for
5,400 active participants. The 1993 medical plan expense was $8,195,000 for
5,187 active participants. First Tennessee does not currently provide group
life insurance upon retirement; however, seven employees, most of whom retired
prior to August 1, 1963, are currently provided coverage totaling $125,000.
Group life insurance expense based on benefits incurred was $783,000 for 7,744
participants in 1995; $1,088,000 for 6,413 participants in 1994; and $1,132,000
for 6,408 participants in 1993.
58
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 $38.34 which has been
adjusted for the two-for-one stock split on February 16, 1996.
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 $0.0033 per right prior to the day when any person or group
acquires 10 percent or more of First Tennessee's common stock.
59
NOTE 15 -- STOCK OPTION, RESTRICTIVE STOCK INCENTIVE,
AND DIVIDEND REINVESTMENT PLANS
At its January meeting, the board of directors authorized a two-for-one split
of First Tennessee's common stock. The shares were distributed February 16,
1996, to shareholders of record on February 2, 1996. Share and per share
amounts in the accompanying text and table have been adjusted for the split.
STOCK OPTION PLANS. In 1995, First Tennessee's shareholders approved a new
stock option plan that provides for the granting of non-qualified and incentive
stock options to all employees of First Tennessee. The Plan authorizes the
issuance of 3,000,000 shares. The Plan is designed to give employees a
proprietary interest in First Tennessee. The options granted under this Plan
allow for the purchase of First Tennessee's common stock at a price equal to
its fair market value at the date of grant; however, the exercise price may be
less than 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. Options for 1,062,800 shares
were granted in 1995. These options are exercisable three years from the date
of grant and expire ten years from the date of grant. The plan also provides
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 under this plan.
Also approved in 1995 was the Non-Employee Directors' Deferred
Compensation Stock Option Plan. Under this plan options of 450,000 shares may
be granted to non-employee members of the Board of Directors electing to
receive them in lieu of retainer/fees. Options for 69,036 shares were granted
during 1995.
First Tennessee also has a stock option plan, approved in 1990, which
provides for the granting of both non-qualified and incentive stock options to
key executives and employees. The options granted under this plan allow for
the purchase of First Tennessee's common stock at a price equal to its fair
market value at the date of grant; however, the exercise price may be less than
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 1995, options for 54,612 shares
were granted in lieu of compensation and options for 9,000 shares were granted
where the exercise price was equal to the market value on the date of grant
under this Plan. In 1994, options for 27,648 shares were granted in lieu of
compensation and options for 1,057,846 shares were granted where the exercise
price was equal to the market value on the date of grant under the Plan. The
plan also provides for the grant of SARs exercisable for the economic
appreciation of the stock in the form of cash and/or stock. No SARs have been
granted under this plan.
Under a stock option plan established in 1984, similar to the
aforementioned 1990 Plan, stock options and SARs may no longer be granted;
however, options for 785,196 shares remained outstanding at the end of 1995.
In addition, there were 46,292 SARs outstanding under this Plan at the end of
1995. Total stock appreciation rights expense associated with fluctuations in
the market value of First Tennessee stock was $26,000, $6,000, and $67,000 for
the years 1995, 1994, and 1993, respectively.
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 15,720 and 14,348 shares were granted during 1995
and 1994, respectively.
On February 24, 1995, First Tennessee acquired CBI which had a stock
option plan that provided for the granting of stock options to certain key
employees. All outstanding options were exercised prior to the acquisition.
Options for 127,804 shares were outstanding at December 31, 1994.
RESTRICTED STOCK INCENTIVE PLANS. First Tennessee has authorized a total of
855,000 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 lapsed in 1995. Each award under
the 1983 Plan provides for supplemental cash payments when the restrictions
lapse. No shares were granted under the 1989 Plan in 1995 or 1994. At
December 31, 1995, the 1989 Plan had 3,252 shares available to be awarded.
In 1992, First Tennessee's shareholders approved the 1992 Restricted
Stock Incentive Plan for awards to executive employees who have a significant
impact on the profitability of First Tennessee. The Plan authorized the
issuance of 660,000 shares. In addition, the Plan provides for 3,000 shares of
restricted stock to be granted to each new non-employee director upon election
to the Board with restrictions lapsing at 300 shares per year over the 10 years
following the grant. One officer was granted 8,200 restricted shares in 1995.
In 1994, 96,000 restricted shares were granted. At December 31, 1995, the 1992
Plan had 484,912 shares available to be awarded.
Compensation expense related to these plans was $1,165,000,
$1,374,000, and $1,586,000 for the years 1995, 1994, and 1993, respectively.
60
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
- - -------------------------------------------------------------------------------------
JANUARY 1, 1994,
AS ORIGINALLY REPORTED 1,357,972 1,139,910 $10.40-34.29 $23.29
Adjustments for
two-for-one stock split 1,357,972 1,139,910
Adjustments for
pooling of interests 158,008
---------- ---------
JANUARY 1, 1994, RESTATED 2,715,944 2,437,828 $ 5.20-17.15 $11.35
Options granted (1,099,842) 1,116,844 $ 9.50-22.32 $19.66
Restricted stock incentive awards (96,000)
Stock options exercised (324,232) $ 5.20-17.15 $ 8.70
SARs exercised (200) $11.09 $11.09
Unissued options lapsed (59,818)
Restricted stock canceled 2,700
Stock options canceled 55,114 (57,436) $ 6.94-20.13 $13.80
--------- ---------
DECEMBER 31, 1994 1,518,098 3,172,804 $ 6.94-22.32 $14.50
========= =========
Options exercisable 1,399,302 $ 6.94-17.15 $10.47
- - ------------------------------------------------------------------------------------
JANUARY 1, 1995 1,518,098 3,172,804 $ 6.94-22.32 $14.50
Options granted (1,211,168) 1,211,168 $10.19-27.82 $20.64
Restricted stock incentive awards (8,200)
Shares authorized 3,450,000
Stock options exercised (439,372) $ 6.94-20.13 $11.05
Unissued options lapsed (9,914)
Stock options canceled 260,366 (260,366) $ 8.34-21.13 $20.49
---------- ---------
DECEMBER 31, 1995 3,999,182 3,684,234 $ 8.19-27.82 $16.50
========== =========
Options exercisable 1,653,598 $ 8.19-25.63 $12.40
- - ------------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN. The Dividend Reinvestment and Stock Purchase
Plan, originally adopted in 1979, was amended in 1995 to authorize the sale of
600,000 additional 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 $10,000 per quarter. The number of shares of
common stock now authorized totals 1,000,000. 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.
61
NOTE 16 -- INCOME TAXES
The components of income tax expense/(benefit) are as follows:
(Dollars in thousands) 1995 1994 1993
- - ---------------------------------------------------------------------------
Current:
Federal $46,502 $55,435 $ 58,573
State 8,059 9,325 9,275
Deferred:
Federal 29,734 (3,272) (2,276)
State 3,774 (794) 282
Tax law rate change -- -- (405)
- - ---------------------------------------------------------------------------
Total $88,069 $60,694 $ 65,449
===========================================================================
The effective tax rates for 1995, 1994, and 1993, were 34.82 percent, 29.21
percent and 37.36 percent, respectively. Income tax expense was different than
the amounts computed by applying the statutory federal income tax rate to
income before income taxes because of the following:
(Dollars in thousands) 1995 1994 1993
- - ----------------------------------------------------------------------------
Federal income tax rate 35% 35% 35%
- - ----------------------------------------------------------------------------
Tax computed at statutory rate $88,535 $72,712 $61,263
Increase/(decrease) resulting from:
Tax-exempt interest (2,922) (2,989) (3,808)
State income taxes 7,691 6,059 5,363
Adjustment of prior years'
estimated liabilities (5,675) (5,883) --
Valuation allowance -- (8,038) 6,128
Charitable foundation -- (2,921) --
Tax law rate changes -- -- (405)
Other 440 1,754 (3,092)
- - ----------------------------------------------------------------------------
Total $88,069 $60,694 $65,449
============================================================================
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, 1995, were as follows:
Deferred Deferred
(Dollars in thousands) Assets Liabilities Total
- - ------------------------------------------------------------------------------
Depreciation $ -- $ 4,628 $ 4,628
Loss reserves (36,264) -- (36,264)
Originated mortgage servicing rights -- 22,299 22,299
Investments in debt and equity securities -- 6,736 6,736
Employee benefits -- 6,119 6,119
Purchase accounting adjustments -- 4,510 4,510
Intangible assets -- 5,600 5,600
Lease operations -- 3,728 3,728
Hedging transactions -- 4,453 4,453
Net operating loss carryforwards (7,499) -- (7,499)
Other (2,822) 5,601 2,779
- - -------------------------------------------------------------------------------
Net deferred tax (asset)/liability at
end of year $(46,585) $63,674 $ 17,089
===============================================================================
62
NOTE 17 -- BUSINESS SEGMENT INFORMATION
The following information is presented to comply with the business
segment requirements of SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise." First Tennessee has several specialty lines of business
which include mortgage banking and the bond division. The mortgage banking
operations consist of units which originate loans, primarily to securitize and
sell, and service mortgages. The bond division distributes certain securities
and loans to its customer base. For purposes of this disclosure, all of the
other specialty lines of business are included in the banking group.
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
- - ---------------------------------------------------------------------------
1995
Interest income $ 735,377 $ 59,718 $ 27,433 $ 822,528
Interest expense 371,238 33,093 27,544 431,875
- - --------------------------------------------------------------------------
Net interest
income 364,139 26,625 (111) 390,653
Other revenues 200,380 213,369 82,814 496,563
Other expenses 380,007 195,419 58,833 634,259
- - --------------------------------------------------------------------------
Pre-tax income $ 184,512 $ 44,575 $ 23,870 $ 252,957
==========================================================================
Identifiable assets $10,559,010 $1,168,010 $349,862 $ 12,076,882
- - --------------------------------------------------------------------------
1994
Interest income $ 615,048 $ 61,026 $ 24,984 $ 701,058
Interest expense 253,757 28,642 24,198 306,597
- - --------------------------------------------------------------------------
Net interest
income 361,291 32,384 786 394,461
Other revenues 193,677 187,584 77,478 458,739
Other expenses 376,770 210,185 58,483 645,438
- - --------------------------------------------------------------------------
Pre-tax income $ 178,198 $ 9,783 $ 19,781 $ 207,762
==========================================================================
Identifiable assets $ 9,838,270 $ 772,410 $322,269 $ 10,932,949
- - --------------------------------------------------------------------------
1993
Interest income $ 583,853 $ 50,600 $ 17,770 $ 652,223
Interest expense 229,330 29,957 16,853 276,140
- - --------------------------------------------------------------------------
Net interest
income 354,523 20,643 917 376,083
Other revenues 158,558 139,838 91,525 389,921
Other expenses 358,670 168,865 63,304 590,839
- - --------------------------------------------------------------------------
Pre-tax income $ 154,411 $ (8,384) $ 29,138 $ 175,165
==========================================================================
Identifiable assets $ 8,832,189 $1,533,675 $434,880 $ 10,800,744
- - --------------------------------------------------------------------------
Capital expenditures and depreciation and amortization occurred primarily
in the banking group. Capital expenditures were $38,545,000, $40,045,000, and
$35,216,000 for the years ended December 31, 1995, 1994, and 1993,
respectively. Depreciation and amortization was $68,944,000, $56,118,000, and
$74,202,000 for 1995, 1994, and 1993, respectively.
63
NOTE 18 -- OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the normal course of business, First Tennessee enters into transactions
involving financial instruments that are subject to credit and market risks but
are not required to be reflected on the balance sheet. First Tennessee
utilizes these financial instruments, which include credit commitments and
other off-balance sheet financial instruments, in order to meet the financial
needs of its customers and to 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
through national exchanges, primary dealers, or approved 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. For non-exchange traded instruments,
credit risk may occur when there is a gain in the fair value of the financial
instrument and the counterparty fails to perform according to the terms of the
contract and/or when the collateral proves to be of insufficient value. The
credit exposure is limited to the amount of the fair value of the instrument
rather than the notional amount. Options written do not expose First Tennessee
to credit risk, except to the extent of the underlying risk associated with any
financial instrument that First Tennessee may be obligated to acquire under
certain written put options.
Settlement Risk is an underlying risk when the financial instrument
obligates First Tennessee 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. 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. First Tennessee has no financial instruments with leverage
features.
OFF-BALANCE SHEET CREDIT COMMITMENTS
Commitments to Extend Credit are agreements to lend to a customer at a
future date that generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being fully drawn upon, the total commitment amounts
do not necessarily represent future cash requirements.
Commercial and Standby Letters of Credit are conditional commitments
issued by First Tennessee to guarantee the performance of a customer to a third
party. 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, 1995 and 1994, First Tennessee's outstanding
off-balance sheet credit commitments included the following, which represented
the maximum credit exposure associated with these instruments:
(Dollars in millions) 1995 1994
- - ----------------------------------------------------------------------
Commitments to extend credit:
Consumer credit card lines $1,596 $1,735
Consumer home equity 249 199
Commercial real estate and
construction and land development 330 257
Mortgage banking 569 753
Other 1,381 1,237
Commercial and standby letters of credit 255 216
- - ----------------------------------------------------------------------
Mortgage Loans Sold with Recourse First Tennessee has sold certain
mortgage loans with an agreement to repurchase the loans upon default. As of
December 31, 1995 and 1994, the outstanding principal amount of these loans
was $682.1 million and $607.7 million, respectively. Credit risk, to the
extent of recourse, totaled approximately $421.0 million and $312.3 million at
December 31, 1995 and 1994, respectively. A reserve has been established in
64
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 $14.1 million and $11.3 million at December 31, 1995 and 1994,
respectively.
OTHER OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
First Tennessee enters into a variety of off-balance sheet financial
instruments as part of its boker/dealer operations and for purposes other than
broker/dealer operations. These other activities include interest rate risk
management and meeting customer needs.
HELD OR ISSUED FOR PURPOSES OTHER THAN BROKER/DEALER OPERATIONS
Interest Rate Risk Management Activities First Tennessee uses
off-balance sheet financial instruments primarily to hedge potential
fluctuations in income or market values as part of its overall asset/liability
management and mortgage banking hedging strategies. As a result of interest
rate fluctuations, these 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 up or
down. ALCO policy prohibits positions to generate speculative earnings.
Other Activities First Tennessee enters into fixed and variable rate
loan commitments with customers. Fixed rate loan commitments and variable rate
loan commitments with contract rate adjustments that lag changes in market
rates are financial instruments with characteristics similar to option
contracts.
The following tables set forth the notional or contractual amounts and
related fair values for First Tennessee's off-balance sheet financial
instruments at December 31, 1995 and 1994, for both interest rate risk
management and other activities. First Tennessee's maximum exposure resulting
from these off-balance sheet financial instruments at December 31, 1995 and
1994, is represented by the fair value amounts.
HELD OR ISSUED FOR PURPOSES OTHER THAN BROKER/DEALER OPERATIONS
AT DECEMBER 31
1995 1994
----------------- -----------------
Notional Fair Notional Fair
(Dollars in millions) Value Value Value Value
- - ---------------------------------------------------------------------------------
INTEREST RATE RISK MANAGEMENT ACTIVITIES:
Interest rate swap agreements:
Receive fixed/pay floating -
amortizing $378.2 $(1.3) $ 550.0 $(33.3)
Basis swap - - 1,000.0 (35.3)
Interest rate forward contracts:
Mortgage banking
commitments to sell 952.1 (4.5) 447.8
Mortgage banking
commitments to buy - - (22.6)
- - ---------------------------------------------------------------------------------
Net position 952.1 (4.5) 425.2 .7*
Interest rate option contracts:
Mortgage banking put option
purchased 32.0 (.3) 13.0 -
Mortgage banking call option
purchased - - 6.0 -
- - ---------------------------------------------------------------------------------
*Only net position available.
Mortgage banking loan commitments have an additional off-balance sheet value
resulting from originated mortgage servicing rights of approximately $4.1
million at December 31, 1995.
HELD OR ISSUED FOR PURPOSES OTHER THAN BROKER/DEALER OPERATIONS
AT DECEMBER 31
1995 1994
---------------- -----------------
Notional Fair Notional Fair
(Dollars in millions) Value Value Value Value
- - -------------------------------------------------------------------------
OTHER ACTIVITES:
Loan commitments $4,123.6 $4.7 $4,180.3 $2.8
Commercial and Standby letters
of credit 254.7 3.2 216.4 2.7
Foreign exchange contracts:
Contracts to buy (.5) (.3)
Contracts to sell .3 .2
- - -------------------------------------------------------------------------
Net position (.2) - (.1) -
Interest rate option contracts:
Written option contracts - - (2.8) -
Purchased option contracts - - 2.8 -
- - -------------------------------------------------------------------------
65
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 certain off-balance sheet financial instruments.
During the fourth quarter of 1993 and beginning of 1994, First Tennessee
lengthened the maturity of its 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 $378.2 million. Approximately 74 percent of these have a
final maturity in the fourth quarter of 1996 and the remainder have a final
maturity in 1997. All of these have the opportunity to be called in 1996. As
of December 31, 1995 and 1994, respectively, these swaps had depreciated market
values of $1.3 million and $33.3 million.
At December 31, 1994, First Tennessee had a $1 billion notional
principal swap (basis swap). This swap was terminated in 1995 in order to
restructure the rate sensitive position and limit the loss going forward in a
rising rate scenario. As of December 31, 1995, deferred losses from terminated
swap transactions were $6.9 million and will be amortized through May 1996.
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, 1995:
Final Maturity In
-----------------
(Dollars in millions) 1996 1997 Total
- - --------------------------------------------------------------------
AMORTIZING SWAPS:
Notional value $280 $98 $378*
Weighted average
rate received 4.58% 5.59% 4.84%
- - --------------------------------------------------------------------
* All have the opportunity of being called in 1996.
First Tennessee pays either 3 month or 6 month LIBOR depending on the
contractual arrangements.
Interest Rate Forward Contracts Forward contracts are commitments 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 forward contracts 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 a tool to manage interest rate risk in the mortgage banking operations. In
a rising interest rate environment, purchased put option contracts give First
Tennessee the right to sell mortgage loans to the seller of the option and are
used to cover the uncertainty of more loan applications closing than expected.
HELD OR ISSUED FOR BROKER/DEALER OPERATIONS
The bond division buys and sells mortgage securities, municipal bonds,
and other securities that settle on a delayed basis as part of its
broker/dealer operations. 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 1994 swap position was offset with a
combination of option and futures contracts.
66
HELD OR ISSUED FOR BROKER/DEALER OPERATIONS
1995
At For The Period Ended
December 31 December 31
--------------- --------------------
Net Average
Notional Fair Gain/ Fair
(Dollars in millions) Value Value (Loss) Value
- - -----------------------------------------------------------------------------
BROKER/DEALER ACTIVITIES:
Forward contracts:
Commitments to buy:
Gain position $(268.9) $ 1.8
Loss position (704.0) (3.6)
Commitments to sell:
Gain position 744.3 3.5
Loss position 278.8 (2.2)
- - -----------------------------------------------------------------------------
Net position 50.2 (.5) $58.6 $(1.6)
Futures contracts:
Contracts to buy - - .9 *
Contracts to sell - - (.3) *
- - -----------------------------------------------------------------------------
Net position - - .6 *
Option contracts:
Option contract written - - .6 *
Option contract purchased - - .1 *
- - -----------------------------------------------------------------------------
Net position - - .7 *
Interest rate swap - floating - - (1.6) *
- - -----------------------------------------------------------------------------
*Amount is less than $100,000.
HELD OR ISSUED FOR BROKER/DEALER OPERATIONS
1994
At For The Period Ended
December 31 December 31
---------------- --------------------
Net Average
Notional Fair Gain/ Fair
(Dollars in millions) Value Value (Loss) Value
- - ----------------------------------------------------------------------------
BROKER/DEALER ACTIVITIES:
Forward contracts:
Commitments to buy $(424.9) $ .9
Commitments to sell 502.3 (1.7)
- - ----------------------------------------------------------------------------
Net position 77.4 (.8) $22.5 $ (.8)
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
- - ----------------------------------------------------------------------------
67
NOTE 19 -- 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, 1995, the banking subsidiaries had undivided profits of
$610,313,000 of which $236,281,000 was available for distribution to First
Tennessee as dividends without prior regulatory approval.
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 $99,349,000 at December 31, 1995. There were no extensions of
credit to the parent from its banking subsidiaries at December 31, 1995.
Certain loan agreements and indentures also define other restricted trans-
actions related to additional borrowings and public offerings of capital stock.
68
NOTE 20 -- 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) 1995 1994 1993
- - ------------------------------------------------------------
ALL OTHER INCOME:
Check clearing fees $ 17,585 $16,124 $14,569
Other service charges 7,709 7,334 9,296
Other 29,859 26,006 21,303
- - ------------------------------------------------------------
Total $ 55,153 $49,464 $45,168
============================================================
ALL OTHER EXPENSE:
Supplies $ 11,866 $11,472 $10,312
Fed service fees 9,489 8,544 7,778
Travel and entertainment 8,211 10,144 8,868
Foreclosed real estate 4,962 3,862 1,542
Contribution to charitable
foundation -- 9,379 --
Other 40,829 44,760 46,683
- - ------------------------------------------------------------
Total $ 75,357 $88,161 $75,183
============================================================
69
NOTE 21 - 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 recorded in the Consolidated Statements of Condition at
December 31, 1995 and 1994:
Impact
Book Fair Favorable/ Percent
(Dollars in thousands) Value Value (Unfavorable) Change
- - ------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1995:
ASSETS:
Loans, net of unearned income:
Floating $3,162,016 $3,162,016 $ - -
Fixed 4,152,227 4,115,773 (36,454) .88 -
Nonaccrual 19,040 19,040 - -
Allowance for
loan losses (112,567) (112,567) - -
- - --------------------------------------------------------------------------------------
Total net loans 7,220,716 7,184,262 (36,454) .50 -
Liquid assets 249,752 249,752 - -
Mortgage warehouse loans held for sale 789,183 791,349 2,166 .27 +
Securities available for sale 2,036,668 2,036,668 - -
Securities held to maturity 74,731 75,750 1,019 1.36 +
Nonearning assets 909,289 909,289 - -
- - --------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Defined maturity $3,402,206 $3,366,434 $ 35,772 1.05 +
Undefined maturity 5,179,991 5,179,991 - -
- - --------------------------------------------------------------------------------------
Total deposits 8,582,197 8,546,425 35,772 .42 +
Short-term borrowings 1,760,745 1,760,745 - -
Term borrowings 260,017 274,799 (14,782) 5.69 -
Other noninterest-
bearing liabilities 216,544 214,553 1,991 .92 +
- - --------------------------------------------------------------------------------------
AT DECEMBER 31, 1994:
ASSETS:
Loans, net of unearned income:
Floating $2,859,796 $2,856,298 $ (3,498) .12 -
Fixed 3,621,393 3,479,671 (141,722) 3.91 -
Nonaccrual 16,853 16,853 - -
Allowance for
loan losses (109,859) (109,859) - -
- - --------------------------------------------------------------------------------------
Total net loans 6,388,183 6,242,963 (145,220) 2.27 -
Liquid assets 425,689 425,689 - -
Mortgage warehouse loans held for sale 515,407 516,520 1,113 .22 +
Securities available for sale 1,166,738 1,166,738 - -
Securities held to maturity 1,004,177 951,444 (52,733) 5.25 -
Nonearning assets 870,615 870,615 - -
- - --------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Defined maturity $3,213,016 $3,186,387 $ 26,629 .83 +
Undefined maturity 4,667,290 4,667,290 - -
- - --------------------------------------------------------------------------------------
Total deposits 7,880,306 7,853,677 26,629 .34 +
Short-term borrowings 1,810,039 1,810,038 1 -
Term borrowings 113,771 119,946 (6,175) 5.43 -
Other noninterest-
bearing liabilities 157,646 155,024 2,622 1.66 +
- - -------------------------------------------------------------------------------------------------
See Note 18 - Off-Balance Sheet Financial Instruments for information
on the fair value of off-balance sheet financial instruments.
70
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 account
securities, 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.
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. The fair value for Federal Home
Loan Bank borrowings was determined using discounted future cash flows.
TERM BORROWINGS. The fair value for term borrowings 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 term borrowings 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.
71
NOTE 22 -- CONDENSED FINANCIAL INFORMATION
Following are condensed statements of the parent company:
STATEMENTS OF CONDITION December 31
---------------------------
(Dollars in thousands) 1995 1994
- - ------------------------------------------------------------------------------------
Assets:
Cash $ 1,732 $ 892
Securities purchased from subsidiary
bank under agreements to resell 72,868 88,814
- - ------------------------------------------------------------------------------------
Total cash and cash equivalents 74,600 89,706
Investment in bank time deposits 100 -
Securities held to maturity - 5,012
Securities available for sale 1,515 1,465
Notes receivable--long-term 75,000 75,000
Investments in subsidiaries at equity:
Bank 924,916 758,829
Non-bank 11,263 13,605
Other assets 29,572 26,850
- - ------------------------------------------------------------------------------------
Total assets $1,116,966 $970,467
====================================================================================
Liabilities and shareholders' equity:
Commercial paper and other
short-term borrowings $ 49,401 $ 67,820
Accrued employee benefits
and other liabilities 45,372 39,082
Term borrowings 148,969 88,660
- - ------------------------------------------------------------------------------------
Total liabilities 243,742 195,562
Shareholders' equity 873,224 774,905
- - ------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,116,966 $970,467
====================================================================================
72
STATEMENTS OF INCOME Year Ended December 31
---------------------------------------
(Dollars in thousands) 1995 1994 1993
- - -------------------------------------------------------------------------------------
Dividend income:
Bank $ 97,791 $ 65,086 $ 42,425
Non-bank 3,982 1,197 -
- - -------------------------------------------------------------------------------------
Total dividend income 101,773 66,283 42,425
Interest income 9,950 9,687 9,423
Management fees - 19,166 18,611
Other income 248 103 320
- - -------------------------------------------------------------------------------------
Total income 111,971 95,239 70,779
- - -------------------------------------------------------------------------------------
Interest expense:
Short-term debt 2,395 1,296 927
Term borrowings 9,569 8,898 9,157
- - -------------------------------------------------------------------------------------
Total interest expense 11,964 10,194 10,084
Compensation, employee benefits, and
other expense 15,685 19,143 19,030
- - -------------------------------------------------------------------------------------
Total expense 27,649 29,337 29,114
- - -------------------------------------------------------------------------------------
Income before income taxes
and equity in undistributed
net income of subsidiaries 84,322 65,902 41,665
Applicable income taxes (6,825) 803 (1,284)
- - -------------------------------------------------------------------------------------
Income before equity in
undistributed net income
of subsidiaries 91,147 65,099 42,949
Equity in undistributed net
income of subsidiaries:
Bank 73,073 79,912 65,120
Non-bank 668 2,057 1,647
- - -------------------------------------------------------------------------------------
Net income $164,888 $147,068 $109,716
=====================================================================================
73
STATEMENTS OF CASH FLOWS Year Ended December 31
----------------------------------------
(Dollars in thousands) 1995 1994 1993
- - -------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $164,888 $147,068 $109,716
Less undistributed net income
of subsidiaries 73,741 81,969 66,767
- - -------------------------------------------------------------------------------------
Income before undistributed
net income of subsidiaries 91,147 65,099 42,949
Adjustments to reconcile income
to net cash provided by
operating activities:
Provision for deferred income taxes (17) (45) (1,228)
Depreciation and amortization 1,926 2,328 2,429
Gain on disposal of fixed assets (225) - -
Net (increase)/decrease in:
Interest receivable 184 (117) 291
Other assets (4,226) (245) (657)
Net increase/(decrease) in:
Interest payable 580 39 (329)
Other liabilities 3,497 1,354 2,944
- - -------------------------------------------------------------------------------------
Total adjustments 1,719 3,314 3,450
- - -------------------------------------------------------------------------------------
Net cash provided by
operating activities 92,866 68,413 46,399
- - -------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturity of
investment securities 5,000 20 5,000
Proceeds from sale of
premises and equipment 1,608 - -
Payments for purchase of:
Investment securities (202) (400) (5,715)
Investment in bank time deposits (100) - -
Premises and equipment (426) (1,139) (539)
Net decrease in loans - - 25,046
Return of investments 151 66 13
Investment in subsidiaries 2,656 (1,462) (971)
Cash received from acquisitions 22,063 - -
- - -------------------------------------------------------------------------------------
Net cash provided/(used) by
investing activities 30,750 (2,915) 22,834
- - -------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from exercise
of stock options 4,977 2,777 2,046
Proceeds from issuance of
subordinated capital notes 74,183 - -
Payments for:
Term borrowings (13,950) (850) (37,476)
Cash dividends (62,694) (40,314) (50,730)
Equity distributions related to acquisitions (23) (47) -
Repurchase of common stock (122,796) (24,211) (4,797)
Increase/(decrease) in borrowings (18,419) 35,538 10,427
- - -------------------------------------------------------------------------------------
Net cash used by
financing activities (138,722) (27,107) (80,530)
- - -------------------------------------------------------------------------------------
Net increase/(decrease) in cash
and cash equivalents (15,106) 38,391 (11,297)
- - -------------------------------------------------------------------------------------
Cash and cash equivalents
at beginning of year 89,706 51,315 62,612
- - -------------------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 74,600 $ 89,706 $ 51,315
=====================================================================================
Total interest paid $ 11,281 $ 10,119 $ 10,377
Total income taxes paid 42,400 56,923 55,869
- - -------------------------------------------------------------------------------------
74
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, 1995 and 1994, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1995. 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, 1995 and 1994, and the results
of their operations and their cash flow for each of the three years in the
period ended December 31, 1995, in confromity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1995, the Company changed its method of accounting for mortgage
servicing rights.
Memphis, Tennessee, Arthur Andersen LLP
January 16, 1996.
75
SELECTED FINANCIAL DATA First Tennessee National Corporation
- - -------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions except per share data) 1995 1994 1993 1992 1991 1990
- - -------------------------------------------------------------------------------------------------------------------------------
SUMMARY INCOME STATEMENTS
Interest income $ 822.5 $ 701.1 $ 652.2 $ 644.3 $ 686.0 $ 710.7
Less interest expense 431.8 306.6 276.1 298.7 388.9 439.3
- - -------------------------------------------------------------------------------------------------------------------------------
Net interest income 390.7 394.5 376.1 345.6 297.1 271.4
Provision for loan losses 20.6 17.2 36.5 45.2 60.7 71.2
- - -------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 370.1 377.3 339.6 300.4 236.4 200.2
Noninterest income 496.5 458.7 389.9 255.3 206.7 173.1
- - -------------------------------------------------------------------------------------------------------------------------------
Adjusted gross income after
provision for loan losses 866.6 836.0 729.5 555.7 443.1 373.3
Noninterest expense 613.6 628.2 554.4 406.1 343.7 295.8
- - -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 253.0 207.8 175.1 149.6 99.4 77.5
Applicable income taxes 88.1 60.7 65.4 56.9 27.6 20.0
- - -------------------------------------------------------------------------------------------------------------------------------
Net income $ 164.9 $ 147.1 $ 109.7 $ 92.7 $ 71.8 $ 57.5
===============================================================================================================================
COMMON STOCK DATA
Net income per common share $ 2.42 $ 2.15 $ 1.61 $ 1.44 $ 1.14 $ .90
Cash dividends declared per common share .97 .87 .75 .63 .57 .55
Year-end book value per common share 13.00 11.37 10.52 9.58 9.16 8.54
Closing price of common stock per share:
High 30 7/8 23 7/8 23 1/2 19 13 13/16 9
Low 19 5/8 18 11/16 18 1/16 13 3/16 7 3/16 6
Year-end 30 1/4 20 3/8 19 1/4 18 3/8 13 13/16 7 9/16
Dividends/price 3.1-4.9 % 3.6-4.6 % 3.2-4.2 % 3.3-4.8 % 4.1-7.9 % 6.1-9.1 %
Dividends/earnings 40.1 40.5 46.6 43.8 50.0 61.1
Closing price/earnings 12.5 x 9.5 x 12.0 x 12.8 x 12.1 x 8.4 x
Market capitalization $ 2,032.1 $ 1,388.5 $ 1,319.8 $ 1,241.6 $ 875.3 $ 478.8
Average shares outstanding (thousands) 68,025 68,442 68,146 64,354 63,346 64,142
Period-end shares outstanding (thousands) 67,178 68,148 68,560 67,572 63,368 63,316
Volume of shares traded (thousands) 65,648 46,692 50,972 42,788 31,428 17,240
- - -------------------------------------------------------------------------------------------------------------------------------
SELECTED AVERAGE BALANCES
Total assets $11,359.5 $ 10,579.8 $ 9,982.4 $ 8,911.5 $ 8,188.6 $ 7,741.2
Total loans* 7,593.3 6,752.3 5,611.7 4,887.2 4,666.7 4,542.7
Investment securities 2,161.0 2,248.7 3,015.3 2,803.9 1,981.3 1,671.0
Earning assets 10,094.7 9,406.2 8,953.6 8,112.9 7,469.3 7,031.4
Deposits 8,132.4 7,714.4 7,186.0 7,030.2 6,579.2 6,142.6
Term borrowings 208.9 101.8 102.8 132.8 131.4 132.2
Shareholders' equity 822.8 759.5 684.1 622.5 559.4 530.3
- - -------------------------------------------------------------------------------------------------------------------------------
SELECTED PERIOD-END BALANCES
Total assets $12,076.9 $ 10,932.9 $ 10,800.7 $ 9,749.4 $ 9,296.7 $ 8,024.5
Total loans* 8,122.5 7,013.4 6,823.6 5,105.1 4,870.6 4,678.0
Investment securities 2,111.4 2,170.9 2,364.3 3,214.0 2,672.9 1,761.6
Earning assets 10,483.6 9,610.1 9,511.8 8,806.4 8,162.3 7,189.4
Deposits 8,582.2 7,880.3 7,602.7 7,365.6 7,218.3 6,461.1
Term borrowings 260.0 113.8 92.0 133.8 131.2 131.6
Shareholders' equity 873.2 774.9 721.1 647.6 580.7 540.7
- - -------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average equity 20.04 % 19.36 % 16.04 % 14.88 % 12.84 % 10.85 %
Return on average assets 1.45 1.39 1.10 1.04 .88 .74
Net interest margin 3.92 4.25 4.27 4.36 4.12 4.07
Allowance for loan losses to loans* 1.39 1.57 1.62 2.02 2.00 1.99
Net charge-offs to average loans* .27 .27 .53 .81 1.41 1.06
Average equity to average assets 7.24 7.18 6.85 6.99 6.83 6.85
Average tangible equity to average
tangible assets 6.36 6.38 6.28 6.38 6.34 6.47
Average equity to average net loans 11.00 11.44 12.43 13.01 12.25 11.90
- - -------------------------------------------------------------------------------------------------------------------------------
RETURN TO SHAREHOLDERS
Stock appreciation 48.5 % 5.8 % 4.8 % 33.0 % 82.6 % (9.0)%
Dividend yield 4.8 4.5 4.1 4.6 7.5 6.6
Annual return 53.3 10.3 8.9 37.6 90.1 (2.4)
- - -------------------------------------------------------------------------------------------------------------------------------
* Net of unearned income.
The notes to consolidated financial statements should be read in conjunction
with this table. Common stock data reflects the 1996 two-for-one stock split.
76
CONSOLIDATED HISTORICAL PERFORMANCE STATEMENTS OF INCOME (Unaudited) First Tennessee National Corporation
- - -----------------------------------------------------------------------------------------------------------------------------
Growth Rates (%)
(Dollars in millions except -------------------
per share data) 1995 1994 1993 1992 1991 1990 95/94 95/90
- - -----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans:
Commercial $264.4 $211.6 $178.7 $180.4 $214.4 $234.7 25.0 + 2.4 +
Consumer 206.0 166.8 128.1 114.6 116.9 121.4 23.5 + 11.2 +
Mortgage warehouse loans held for sale 54.7 56.0 44.9 15.7 8.7 8.5 2.3 - 45.1 +
Permanent mortgage 52.1 44.0 45.9 59.0 64.3 60.8 18.4 + 3.0 -
Credit card receivables 65.5 56.6 51.1 53.2 53.0 46.2 15.7 + 7.2 +
Real estate construction 23.0 11.4 7.3 6.0 13.1 25.4 101.8 + 2.0 -
Investment securities:
Taxable 130.9 128.9 175.8 187.1 150.7 130.7 1.6 + -
Tax-exempt 4.6 5.2 7.2 8.7 11.9 15.2 11.5 - 21.3 -
Other earning assets:
Investments in bank time deposits .2 .2 .2 2.5 23.3 30.4 - 63.4 -
Federal funds sold and securities
purchased under agreements to resell 8.5 7.6 3.7 6.8 20.2 25.4 11.8 + 19.7 -
Broker/dealer securities inventory 12.6 12.8 9.3 10.3 9.5 12.0 1.6 - 1.0 +
- - --------------------------------------------------------------------------------------------------------
Total interest income 822.5 701.1 652.2 644.3 686.0 710.7 17.3 + 3.0 +
- - --------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
Checking/Interest 7.7 9.2 10.8 12.7 16.1 16.8 16.3 - 14.4 -
Savings 10.8 13.4 15.4 17.5 20.5 20.9 19.4 - 12.4 -
Money market account 88.1 56.5 43.5 52.7 73.3 78.8 55.9 + 2.3 +
Certificates of deposit under
$100,000 and other time 167.8 122.0 117.3 147.3 191.0 207.9 37.5 + 4.2 -
Certificates of deposit
$100,000 and more 30.6 18.7 16.2 20.5 33.1 41.2 63.6 + 5.8 -
Federal funds purchased and
securities sold under
agreements to repurchase 80.9 40.5 29.2 22.5 31.7 47.2 99.8 + 11.4 +
Commercial paper and other
short-term borrowings 25.7 35.6 33.6 13.7 10.3 12.6 27.8 - 15.3 +
Federal Reserve Bank penalties 2.2 1.1 .5 .7 1.0 1.3 100.0 + 11.1 +
Term borrowings 18.0 9.6 9.6 11.1 11.9 12.6 87.5 + 7.4 +
- - --------------------------------------------------------------------------------------------------------
Total interest expense 431.8 306.6 276.1 298.7 388.9 439.3 40.8 + .3 -
- - --------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 390.7 394.5 376.1 345.6 297.1 271.4 1.0 - 7.6 +
Provision for loan losses 20.6 17.2 36.5 45.2 60.7 71.2 19.8 + 22.0 -
- - --------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 370.1 377.3 339.6 300.4 236.4 200.2 1.9 - 13.1 +
- - --------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 212.6 187.3 138.9 33.5 17.6 19.5 13.5 + 61.3 +
Bond division 82.8 77.5 91.5 80.3 68.6 41.7 6.9 + 14.7 +
Deposit transactions and cash management 71.0 64.2 58.4 53.9 46.3 40.2 10.6 + 12.0 +
Cardholder and merchant processing 37.0 31.4 28.5 26.6 25.8 22.3 17.8 + 10.6 +
Trust services 35.6 28.9 26.5 23.8 21.0 18.0 23.2 + 14.6 +
Equity securities gains/(losses) 3.2 24.2 (.5) .3 (.7) (1.0) 86.8 - 38.4 +
Debt securities gains/(losses) (.8) (4.3) 1.4 (1.5) - (.9) 82.5 + 3.6 +
All other 55.1 49.5 45.2 38.4 28.1 33.3 11.5 + 10.6 +
- - --------------------------------------------------------------------------------------------------------
Total noninterest income 496.5 458.7 389.9 255.3 206.7 173.1 8.2 + 23.5 +
- - --------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER
PROVISION FOR LOAN LOSSES 866.6 836.0 729.5 555.7 443.1 373.3 3.7 + 18.3 +
- - --------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives,
and benefits 340.5 349.8 308.6 214.3 177.6 154.9 2.6 - 17.1 +
Operations services 38.8 33.7 28.7 24.3 21.9 18.5 15.2 + 15.9 +
Occupancy 37.9 34.1 27.7 24.7 22.0 20.6 11.0 + 13.0 +
Equipment rentals, depreciation,
and maintenance 31.8 29.2 22.2 17.5 14.0 12.9 9.1 + 19.8 +
Communications and courier 29.9 30.7 24.8 18.0 16.5 14.6 2.5 - 15.4 +
Amortization of mortgage servicing rights 15.0 14.9 25.5 4.5 1.4 .9 .3 + 74.8 +
Legal and professional fees 13.4 13.7 11.3 11.4 8.3 6.6 2.5 - 15.1 +
Advertising and public relations 13.0 10.7 8.0 6.2 4.9 4.5 21.5 + 23.6 +
Deposit insurance premium 9.9 16.9 16.6 16.2 13.4 7.6 41.2 - 5.6 +
Amortization of intangible assets 8.1 6.4 5.8 9.8 7.7 7.1 26.4 + 2.7 +
All other 75.3 88.1 75.2 59.2 56.0 47.6 14.5 - 9.7 +
- - --------------------------------------------------------------------------------------------------------
Total noninterest expense 613.6 628.2 554.4 406.1 343.7 295.8 2.3 - 15.7 +
- - --------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 253.0 207.8 175.1 149.6 99.4 77.5 21.8 + 26.7 +
Applicable income taxes 88.1 60.7 65.4 56.9 27.6 20.0 45.1 + 34.5 +
- - --------------------------------------------------------------------------------------------------------
NET INCOME $164.9 $147.1 $109.7 $ 92.7 $ 71.8 $ 57.5 12.1 + 23.5 +
========================================================================================================
FULLY TAXABLE EQUIVALENT ADJUSTMENT $ 5.0 $ 4.8 $ 6.3 $ 8.4 $ 10.9 $ 14.5 4.2 + 19.2 -
- - --------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 2.42 $ 2.15 $ 1.61 $ 1.44 $ 1.14 $ .90 12.6 + 21.9 +
- - --------------------------------------------------------------------------------------------------------
Certain previously reported amounts have been reclassified to agree with
current presentation. Per share data reflects the 1996 two-for-one stock split.
77
CONSOLIDATED AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES (Unaudited) First Tennessee National Corporation
- - ------------------------------------------------------------------------------------------------------------------------------------
1995 1994
---------------------------------- ----------------------------------
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 $ 3,148.4 $265.3 8.43% $ 2,775.7 $212.4 7.65%
Consumer 2,367.1 206.0 8.70 2,082.6 166.8 8.01
Mortgage warehouse loans held for sale 706.1 54.7 7.75 767.9 56.0 7.29
Permanent mortgage 658.4 52.1 7.91 557.5 44.0 7.90
Credit card receivables 480.4 65.5 13.63 432.7 56.6 13.08
Real estate construction 216.4 23.0 10.65 117.3 11.4 9.71
Nonaccrual loans 16.5 1.4 8.48 18.6 1.3 7.25
- - ------------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income 7,593.3 668.0 8.80 6,752.3 548.5 8.12
- - ------------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. Treasury and other U.S. government agencies 2,004.3 125.9 6.28 2,063.4 122.8 5.95
States and municipalities 81.4 7.0 8.63 84.3 7.8 9.26
Other 75.3 4.9 6.53 101.0 5.9 5.91
- - ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,161.0 137.8 6.38 2,248.7 136.5 6.07
- - ------------------------------------------------------------------------------------------------------------------------------------
Other earning assets:
Investment in bank time deposits 3.1 .2 5.79 5.3 .2 3.88
Federal funds sold and securities purchased
under agreements to resell 157.5 8.5 5.42 191.9 7.6 3.97
Broker/dealer securities inventory 179.8 13.0 7.22 208.0 13.1 6.28
- - ------------------------------------------------------------------------------------------------------------------------------------
Total other earning assets 340.4 21.7 6.37 405.2 20.9 5.16
- - ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 10,094.7 827.5 8.20 9,406.2 705.9 7.50
Allowance for loan losses (113.0) (113.1)
Cash and due from banks 659.0 659.7
Premises and equipment, net 166.0 149.1
Bond division receivables and other assets 552.8 477.9
- - ------------------------------------------------------------------------------------------------------------------------------------
Total assets / Interest income $11,359.5 $827.5 $10,579.8 $705.9
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing deposits:
Checking/Interest $ 466.6 $ 7.7 1.66% $ 518.8 $ 9.2 1.77%
Savings 602.2 10.8 1.79 686.5 13.4 1.96
Money market account 1,912.3 88.1 4.61 1,776.8 56.5 3.18
Certificates of deposit under $100,000 and
other time 2,872.6 167.8 5.84 2,529.4 122.0 4.82
Certificates of deposit $100,000 and more 531.9 30.6 5.75 460.2 18.7 4.06
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,385.6 305.0 4.78 5,971.7 219.8 3.68
Federal funds purchased and securities sold
under agreements to repurchase 1,491.1 80.9 5.43 1,045.6 40.5 3.87
Commercial paper and other short-term borrowings 404.2 27.9 6.90 683.2 36.7 5.37
Term borrowings 208.9 18.0 8.63 101.8 9.6 9.41
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 8,489.8 431.8 5.09 7,802.3 306.6 3.93
Demand deposits 1,746.8 1,742.7
Bond division payables and other liabilities 300.1 275.3
Shareholders' equity 822.8 759.5
- - ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity /
Interest expense $11,359.5 $431.8 $10,579.8 $306.6
====================================================================================================================================
Net interest income-tax equivalent basis / Yield $395.7 3.92% $399.3 4.25%
Fully taxable equivalent adjustment (5.0) (4.8)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $390.7 $394.5
====================================================================================================================================
Net interest spread 3.11% 3.57%
Effect of interest-free sources used to fund
earning assets .81 .68
- - ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.92% 4.25%
====================================================================================================================================
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 interest income.
78
CONSOLIDATED AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES (Unaudited) First Tennessee National Corporation
- - ------------------------------------------------------------------------------------------------------------------------------------
1993 1992
---------------------------------- ---------------------------------
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 $2,435.3 $179.4 7.37% $2,332.2 $182.9 7.84%
Consumer 1,524.9 128.1 8.40 1,231.8 114.6 9.30
Mortgage warehouse loans held for sale 615.3 44.9 7.29 188.8 15.7 8.29
Permanent mortgage 527.4 45.9 8.70 643.2 59.0 9.17
Credit card receivables 396.5 51.1 12.90 388.1 53.2 13.72
Real estate construction 82.0 7.3 8.92 58.9 6.0 10.21
Nonaccrual loans 30.3 1.8 5.86 44.2 1.5 3.48
- - -----------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income 5,611.7 458.5 8.17 4,887.2 432.9 8.86
- - -----------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. Treasury and other U.S. government agencies 2,679.9 160.8 6.00 2,224.4 154.3 6.94
States and municipalities 109.2 10.8 9.92 127.2 13.0 10.26
Other 226.2 14.9 6.60 452.3 32.6 7.21
- - -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 3,015.3 186.5 6.19 2,803.9 199.9 7.13
- - -----------------------------------------------------------------------------------------------------------------------------------
Other earning assets:
Investment in bank time deposits 4.2 .2 3.84 40.6 2.5 6.08
Federal funds sold and securities purchased
under agreements to resell 142.0 3.7 2.63 222.8 6.8 3.05
Broker/dealer securities inventory 180.4 9.6 5.34 158.4 10.6 6.70
- - -----------------------------------------------------------------------------------------------------------------------------------
Total other earning assets 326.6 13.5 4.14 421.8 19.9 4.71
- - -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 8,953.6 658.5 7.35 8,112.9 652.7 8.05
Allowance for loan losses (109.6) (103.3)
Cash and due from banks 582.5 487.7
Premises and equipment, net 126.3 117.3
Bond division receivables and other assets 429.6 296.9
- - -----------------------------------------------------------------------------------------------------------------------------------
Total assets / Interest income $9,982.4 $658.5 $8,911.5 $652.7
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing deposits:
Checking/Interest $ 548.1 $ 10.8 1.97% $ 491.4 $ 12.7 2.59%
Savings 567.9 15.4 2.72 518.0 17.5 3.38
Money market account 1,673.8 43.5 2.60 1,598.9 52.7 3.29
Certificates of deposit under $100,000 and
other time 2,439.4 117.3 4.81 2,621.5 147.3 5.62
Certificates of deposit $100,000 and more 414.0 16.2 3.91 472.7 20.5 4.34
- - -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 5,643.2 203.2 3.60 5,702.5 250.7 4.40
Federal funds purchased and securities sold
under agreements to repurchase 1,029.0 29.2 2.84 691.7 22.5 3.26
Commercial paper and other short-term borrowings 724.5 34.1 4.70 251.1 14.4 5.75
Term borrowings 102.8 9.6 9.39 132.8 11.1 8.33
- - -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 7,499.5 276.1 3.68 6,778.1 298.7 4.41
Demand deposits 1,542.8 1,327.7
Bond division payables and other liabilities 256.0 183.2
Shareholders' equity 684.1 622.5
- - -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity /
Interest expense $9,982.4 $276.1 $8,911.5 $298.7
====================================================================================================================================
Net interest income-tax equivalent basis / Yield $382.4 4.27% $354.0 4.36%
Fully taxable equivalent adjustment (6.3) (8.4)
- - -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $376.1 $345.6
====================================================================================================================================
Net interest spread 3.67% 3.64%
Effect of interest-free sources used to fund
earning assets .60 .72
- - -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.27% 4.36%
====================================================================================================================================
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 interest income.
79
CONSOLIDATED AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES (Unaudited) First Tennessee National Corporation
- - ------------------------------------------------------------------------------------------------------------------------------------
1991 1990
---------------------------------- ---------------------------------
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 $2,264.8 $217.4 9.60% $2,199.2 $237.5 10.80%
Consumer 1,098.8 116.9 10.64 1,065.2 121.4 11.39
Mortgage warehouse loans held for sale 58.6 8.7 14.88 86.3 8.5 9.87
Permanent mortgage 684.0 64.3 9.41 593.8 60.8 10.23
Credit card receivables 370.4 53.0 14.31 313.7 46.2 14.73
Real estate construction 123.8 13.1 10.59 224.6 25.6 11.42
Nonaccrual loans 66.3 2.3 3.43 59.9 4.5 7.48
- - ------------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income 4,666.7 475.7 10.19 4,542.7 504.5 11.11
- - ------------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. Treasury and other U.S. government agencies 1,449.7 122.6 8.46 1,230.6 111.6 9.07
States and municipalities 163.0 17.2 10.57 207.9 22.1 10.61
Other 368.6 28.0 7.58 232.5 18.9 8.14
- - ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,981.3 167.8 8.47 1,671.0 152.6 9.13
- - ------------------------------------------------------------------------------------------------------------------------------------
Other earning assets:
Investment in bank time deposits 331.3 23.3 7.03 358.8 30.4 8.49
Federal funds sold and securities purchased
under agreements to resell 365.2 20.2 5.52 323.5 25.4 7.86
Broker/dealer securities inventory 124.8 9.9 7.94 135.4 12.3 9.07
- - ------------------------------------------------------------------------------------------------------------------------------------
Total other earning assets 821.3 53.4 6.50 817.7 68.1 8.34
- - ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 7,469.3 696.9 9.33 7,031.4 725.2 10.31
Allowance for loan losses (100.0) (85.6)
Cash and due from banks 447.3 459.2
Premises and equipment, net 107.8 99.2
Bond division receivables and other assets 264.2 237.0
- - ------------------------------------------------------------------------------------------------------------------------------------
Total assets / Interest income $8,188.6 $696.9 $7,741.2 $725.2
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing deposits:
Checking/Interest $ 414.5 $ 16.1 3.87% $ 395.0 $ 16.8 4.25%
Savings 420.1 20.5 4.88 399.3 20.9 5.24
Money market account 1,401.4 73.3 5.23 1,208.7 78.8 6.52
Certificates of deposit under $100,000 and
other time 2,704.8 191.0 7.06 2,561.9 207.9 8.12
Certificates of deposit $100,000 and more 513.1 33.1 6.46 519.2 41.2 7.94
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 5,453.9 334.0 6.12 5,084.1 365.6 7.19
Federal funds purchased and securities sold
under agreements to repurchase 598.1 31.7 5.30 632.0 47.2 7.47
Commercial paper and other short-term borrowings 147.7 11.3 7.68 144.0 13.9 9.66
Term borrowings 131.4 11.9 9.08 132.2 12.6 9.52
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 6,331.1 388.9 6.14 5,992.3 439.3 7.33
Demand deposits 1,125.3 1,058.5
Bond division payables and other liabilities 172.8 160.1
Shareholders' equity 559.4 530.3
- - ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity /
Interest expense $8,188.6 $388.9 $7,741.2 $439.3
====================================================================================================================================
Net interest income-tax equivalent basis / Yield $308.0 4.12% $285.9 4.07%
Fully taxable equivalent adjustment (10.9) (14.5)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $297.1 $271.4
====================================================================================================================================
Net interest spread 3.19% 2.98%
Effect of interest-free sources used to fund
earning assets .93 1.09
- - ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.12% 4.07%
====================================================================================================================================
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 interest income.
80
CONSOLIDATED AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES (Unaudited) First Tennessee National Corporation
- - --------------------------------------------------------------------------------------------------------------------------------
Average Balance
(Fully taxable equivalent) Growth Rates (%)
-----------------------------------------
(Dollars in millions) 95/94 95/90
- - --------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Earning assets:
Loans, net of unearned income:
Commercial 13.4 + 7.4 +
Consumer 13.7 + 17.3 +
Mortgage warehouse loans held for sale 8.0 - 52.3 +
Permanent mortgage 18.1 + 2.1 +
Credit card receivables 11.0 + 8.9 +
Real estate construction 84.5 + .7 -
Nonaccrual loans 11.3 - 22.7 -
- - -------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income 12.5 + 10.8 +
- - -------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. Treasury and other U.S. government agencies 2.9 - 10.2 +
States and municipalities 3.4 - 17.1 -
Other 25.4 - 20.2 -
- - -------------------------------------------------------------------------------------------------------------------------------
Total investment securities 3.9 - 5.3 +
- - -------------------------------------------------------------------------------------------------------------------------------
Other earning assets:
Investment in bank time deposits 41.5 - 61.3 -
Federal funds sold and securities purchased
under agreements to resell 17.9 - 13.4 -
Broker/dealer securities inventory 13.6 - 5.8 +
- - -------------------------------------------------------------------------------------------------------------------------------
Total other earning assets 16.0 - 16.1 -
- - -------------------------------------------------------------------------------------------------------------------------------
Total earning assets 7.3 + 7.5 +
Allowance for loan losses .1 - 5.7 +
Cash and due from banks .1 - 7.5 +
Premises and equipment, net 11.3 + 10.8 +
Bond division receivables and other assets 15.7 + 18.5 +
- - -------------------------------------------------------------------------------------------------------------------------------
Total assets / Interest income 7.4 + 8.0 +
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing deposits:
Checking/Interest 10.1 - 3.4 +
Savings 12.3 - 8.6 +
Money market account 7.6 + 9.6 +
Certificates of deposit under $100,000 and
other time 13.6 + 2.3 +
Certificates of deposit $100,000 and more 15.6 + .5 +
- - -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6.9 + 4.7 +
Federal funds purchased and securities sold
under agreements to repurchase 42.6 + 18.7 +
Commercial paper and other short-term borrowings 40.8 - 22.9 +
Term borrowings 105.2 + 9.6 +
- - -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 8.8 + 7.2 +
Demand deposits .2 + 10.5 +
Bond division payables and other liabilities 9.0 + 13.4 +
Shareholders' equity 8.3 + 9.2 +
- - -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity /
Interest expense 7.4 + 8.0 +
===============================================================================================================================
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 interest income.