-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, EqAdNBM8smLwRC3OKlp5Pt0ldVCuAm/FKea9nbfFb2YC83R2foNnd9RbxObCn02M Ul9z06KG1lAZ5mZo+LGbeg== 0000950144-94-000569.txt : 19940309 0000950144-94-000569.hdr.sgml : 19940309 ACCESSION NUMBER: 0000950144-94-000569 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST TENNESSEE NATIONAL CORP CENTRAL INDEX KEY: 0000036966 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 620803242 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 000-04491 FILM NUMBER: 94514957 BUSINESS ADDRESS: STREET 1: 165 MADISON AVE CITY: MEMPHIS STATE: TN ZIP: 38103 BUSINESS PHONE: 9015234027 MAIL ADDRESS: STREET 1: P O BOX 84 CITY: MEMPHIS STATE: TN ZIP: 38101-0084 FORMER COMPANY: FORMER CONFORMED NAME: FIRST TENNESSEE BANKS INC DATE OF NAME CHANGE: 19600201 10-K 1 FIRST TENNESSEE 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) /x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1993 - or - / / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the Transition period from __________ to__________ Commission File Number 0-4491 FIRST TENNESSEE NATIONAL CORPORATION (Exact name of registrant as specified in its charter) TENNESSEE 62-0803242 (State or other jurisdiction of (I.R.S. Employer Identi- incorporation or organization) fication Number) 165 Madison Avenue, Memphis, Tennessee 38103 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including Area Code: 901-523-5630 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: $2.50 Par Value Common Capital Stock (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X YES NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ----- Page 1 of 2 2 At February 23, 1994, the aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant was approximately $1,116,000,000. At February 23, 1994, the registrant had 30,175,456 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE 1. Annual Report To Shareholders for the year ended 12/31/93 - Parts I, II, and IV. 2. Proxy Statement furnished to shareholders in connection with Annual Meeting of Shareholders scheduled for 04/19/94 - Part III (to be provided by amendment not later than 120 days after the end of the 1993 fiscal year per General Instruction G(3) to Form 10-K). Page 2 of 2 3 PART I ITEM 1 BUSINESS General. First Tennessee National Corporation (the "Corporation") is a Tennessee corporation incorporated in 1968 and registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. At December 31, 1993, the Corporation had total assets of $9.6 billion and ranked first in terms of total assets among Tennessee-headquartered bank holding companies and ranked in the top 65 nationally. Through its principal subsidiary, First Tennessee Bank National Association (the "Bank"), and its other banking and banking-related subsidiaries, the Corporation provides a broad range of financial services. The Corporation derives substantially all of its consolidated total pre-tax operating income and consolidated revenues from the banking business. As a bank holding company, the Corporation coordinates the financial resources of the consolidated enterprise and maintains systems of financial, operational and administrative control that allows coordination of selected policies and activities. The Corporation assesses the Bank and its subsidiaries for services they receive on a formula basis it believes to be reasonable. The Bank is a national banking association with principal offices in Memphis, Tennessee. It received its charter in 1864 and operates primarily on a regional basis. During 1993 it generated gross revenue of approximately $841 million and contributed 96.1% of consolidated net income from continuing operations. At December 31, 1993, the Bank had $9.4 billion in total assets, $7.0 billion in total deposits, and $5.8 billion in net loans. Within the State of Tennessee on December 31, 1993, it ranked first among banks in terms of total assets and deposits. Nationally, it ranked in the top 100 in terms of total assets and deposits as of December 31, 1993. On December 31, 1993, the Corporation's subsidiary banks had 214 banking locations in 20 Tennessee counties, including all of the major metropolitan areas of the state, and 4 banking locations in Mississippi. An element of the Corporation's business strategy is to seek acquisitions that would enhance long-term shareholder value. The Corporation has an acquisitions department charged with this responsibility which is constantly reviewing and developing opportunities to achieve this element of the Corporation's strategy. The Corporation significantly expanded its mortgage banking operations at the end of 1993. On October 1, 1993, the Bank acquired Maryland National Mortgage Corporation, Baltimore, Maryland ("MNMC") and its wholly-owned subsidiary, Atlantic Coast 4 Mortgage Company, in a transaction accounted for as a purchase. At the time of acquisition, MNMC had total assets of approximately $538 million and a mortgage servicing portfolio of approximately $4.0 billion. On January 4, 1994, the Corporation acquired SNMC Management Corporation, the parent of Sunbelt National Mortgage Corporation, Dallas, Texas ("SNMC") in a transaction accounted for as a pooling-of-interests. SNMC became a subsidiary of the Bank at the close of the transaction. At the time of the acquisition, SNMC had total assets of approximately $451 million and a mortgage servicing portfolio of approximately $6.0 billion. The Corporation provides the following services through its subsidiaries: . general banking services for consumers, small businesses, corporations, financial institutions, and governments . bond division-primarily sales and underwriting of bank-eligible securities and mortgage loans and advisory services to other financial institutions . mortgage banking services . trust, fiduciary, and agency services . a nationwide check clearing service . merchant credit card and automated teller machine transaction processing . discount brokerage, brokerage, venture capital, equipment finance and credit life insurance services . investment and financial advisory services . mutual fund sales as agent . check processing software and systems. All of the Corporation's subsidiaries are listed in Exhibit 21. The Bank has filed notice with the Comptroller of the Currency as a government securities broker/dealer. The bond division of the Bank is registered with the Securities and Exchange Commission ("SEC") as a municipal securities dealer with offices in Memphis and Knoxville, Tennessee; Mobile, Alabama; and Overland Park, Kansas. The subsidiary banks are supervised and regulated as described below. First Tennessee Investment Management, Inc., is registered with the SEC as an investment adviser. Hickory Venture Capital Corporation is licensed as a Small Business Investment Company. First Tennessee Brokerage, Inc. is registered with the SEC as a broker-dealer. Expenditures for research and development activities were not material for the years 1991, 1992 or 1993. Neither the Corporation nor any of its significant subsidiaries is dependent upon a single customer or very few customers. At December 31, 1993, the Corporation and its subsidiaries had approximately 5,653 full-time-equivalent employees, not including 2 5 contract labor for certain services, such as guard and house-keeping. Supervision and Regulation. The Corporation is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHCA"), and is registered with the Board of Governors of the Federal Reserve System (the "Board"). The Corporation is required to file with the Board annual and quarterly reports and such additional information as the Board may require pursuant to the Act. The Board may also make examinations of the Corporation and its subsidiaries. The following summary of the Act and of the other acts described herein is qualified in its entirety by express reference to each of the particular acts and the applicable rules and regulations thereunder. GENERAL As a bank holding company, the Corporation is subject to the regulation and supervision of the Board under the BHCA. Under the BHCA, bank holding companies may not in general directly or indirectly acquire the ownership or control of more than 5% of the voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board. The BHCA also restricts the types of activities in which a bank holding company and its subsidiaries may engage. Generally, activities are limited to banking and activities found by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. In addition, the BHCA generally prohibits, subject to certain limited exceptions, the Federal Reserve Board from approving an application by a bank holding company to acquire shares of a bank or bank holding company located outside the acquiror's principal state of operations unless such an acquisition is specifically authorized by statute in the state in which the bank or bank holding company whose shares are to be acquired is located. Tennessee has adopted legislation that authorizes nationwide interstate bank acquisitions, subject to certain state law reciprocity requirements, including the filing of an application with and approval of the Tennessee Commissioner of Financial Institutions. The Tennessee Bank Structure Act of 1974 prohibits a bank holding company from acquiring any bank in Tennessee if the banks that it controls hold 16 1/2% or more of the total deposits in individual, partnership and corporate demand and other transaction accounts, savings accounts and time deposits in all federally insured financial institutions in Tennessee, 3 6 subject to certain limitations and exclusions. As of December 31, 1993, the Corporation estimates that its subsidiary banks (the "Subsidiary Banks") held approximately 12% of such deposits. Also, under this act, no bank holding company may acquire any bank in operation for less than five years or begin a de novo bank in any county in Tennessee with a population, in 1970, of 200,000 or less, subject to certain exceptions. Under Tennessee law, branch banking is permitted in any county in the state. The Subsidiary Banks are subject to supervision and examination by applicable federal and state banking agencies. The Bank is a national banking association subject to regulation and supervision by the Comptroller of the Currency (the "Comptroller") as its primary federal regulator, as is First Tennessee Bank National Association Mississippi, which is headquartered in Southaven, Mississippi. The remaining Subsidiary Bank, Peoples and Union Bank, is a Tennessee state-chartered bank that is not a member of the Federal Reserve System, and therefore is subject to the regulations of and supervision by the Federal Deposit Insurance Corporation (the "FDIC") as its primary federal regulator, as well as state banking authorities. In addition all of the Subsidiary Banks are insured by, and subject to regulation by, the FDIC. The Subsidiary Banks are subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon and limitations on the types of investments that may be made, activities that may be engaged in, and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Subsidiary Banks. In addition to the impact of such regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. PAYMENT OF DIVIDENDS The Corporation is a legal entity separate and distinct from its banking and other subsidiaries. The principal source of cash flow of the Corporation, including cash flow to pay dividends on its stock or principal (premium, if any) and interest on debt securities, is dividends from the Subsidiary Banks. There are statutory and regulatory limitations on the payment of dividends by the Subsidiary Banks to the Corporation, as well as by the Corporation to its shareholders. Each Subsidiary Bank that is a national bank is required by federal law to obtain the prior approval of the Comptroller for the payment of dividends if the total of all dividends declared by the board of directors of such Subsidiary Bank in any year will exceed the total of (i) its net profits (as 4 7 defined and interpreted by regulation) for that year plus (ii) the retained net profits (as defined and interpreted by regulation) for the preceding two years, less any required transfers to surplus. A national bank also can pay dividends only to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined by regulation). State-chartered banks are subject to varying restrictions on the payment of dividends under applicable state laws. With respect to Peoples and Union Bank, Tennessee law imposes dividend restrictions substantially similar to those imposed under federal law on national banks, as described above. If, in the opinion of the applicable federal bank regulatory authority, a depository institution or a holding company is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the depository institution or holding company, could include the payment of dividends), such authority may require that such institution or holding company cease and desist from such practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution's or holding company's capital base to an inadequate level would be such an unsafe and unsound banking practice. Moreover, the Federal Reserve Board, the Comptroller and the FDIC have issued policy statements which provide that bank holding companies and insured depository institutions generally should only pay dividends out of current operating earnings. In addition, under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a FDIC-insured depository institution may not make any capital distributions (including the payment of dividends) or pay any management fees to its holding company or pay any dividend if it is undercapitalized or if such payment would cause it to become undercapitalized. See "--FDICIA." At December 31, 1993, under dividend restrictions imposed under applicable federal and state laws, the Subsidiary Banks, without obtaining regulatory approval, could legally declare aggregate dividends of approximately $168.2 million. The payment of dividends by the Corporation and the Subsidiary Banks may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. TRANSACTIONS WITH AFFILIATES There are various legal restrictions on the extent to which the Corporation and its nonbank subsidiaries can borrow 5 8 or otherwise obtain credit from the Subsidiary Banks. There are also legal restrictions on the Subsidiary Banks' purchases of or investments in the securities of and purchases of assets from the Corporation and its nonbank subsidiaries, a Subsidiary Bank's loans or extensions of credit to third parties collateralized by the securities or obligations of the Corporation and its nonbank subsidiaries, the issuance of guaranties, acceptances and letters of credit on behalf of the Corporation and its nonbank subsidiaries, and certain bank transactions with the Corporation and its nonbank subsidiaries, or with respect to which the Corporation and its nonbank subsidiaries act as agent, participate or have a financial interest. Subject to certain limited exceptions, a Subsidiary Bank (including for purposes of this paragraph all subsidiaries of such Subsidiary Bank) may not extend credit to the Corporation or to any other affiliate (other than another Subsidiary Bank and certain exempted affiliates) in an amount which exceeds 10% of the Subsidiary Bank's capital stock and surplus and may not extend credit in the aggregate to all such affiliates in an amount which exceeds 20% of its capital stock and surplus. Further, there are legal requirements as to the type, amount and quality of collateral which must secure such extensions of credit by these banks to the Corporation or to such other affiliates. Also, extensions of credit and other transactions between a Subsidiary Bank and the Corporation or such other affiliates must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to such Subsidiary Bank as those prevailing at the time for comparable transactions with non-affiliated companies. Also, the Corporation and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. CAPITAL ADEQUACY The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. The minimum guideline for the ratio of total capital ("Total Capital") to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8%. At least half of the Total Capital must be composed of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, less goodwill and other intangible assets, subject to certain exceptions ("Tier 1 Capital"). The remainder may consist of qualifying subordinated debt, certain types of mandatory convertible securities and perpetual debt, other preferred stock and a limited amount of loan loss reserves. At December 31, 1993, the Corporation's consolidated Tier 1 Capital and Total Capital ratios were 9.60% and 12.14%, respectively. 6 9 In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other intangible assets, subject to certain exceptions (the "Leverage Ratio"), of 3% for bank holding companies that meet certain specific criteria, including having the highest regulatory rating. All other bank holding companies generally are required to maintain a Leverage Ratio of at least 3%, plus an additional cushion of at least 100 to 200 basis points. The Corporation's Leverage Ratio at December 31, 1993 was 6.55%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve Board has indicated that it will consider a "tangible Tier 1 Capital leverage ratio" (deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities. Each of the Subsidiary Banks is subject to risk-based and leverage capital requirements similar to those described above adopted by the Comptroller or the FDIC, as the case may be. The Corporation believes that each of the Subsidiary Banks was in compliance with applicable minimum capital requirements as of December 31, 1993. Neither the Corporation nor any of the Subsidiary Banks has been advised by any federal banking agency of any specific minimum Leverage Ratio requirement applicable to it. Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, to certain restrictions on its business and, in certain situations, the appointment of a conservator or receiver. See "--FDICIA." All of the federal banking agencies have proposed regulations that would add an additional risk-based capital requirement based upon the amount of an institution's exposure to interest rate risk. HOLDING COMPANY STRUCTURE AND SUPPORT OF SUBSIDIARY BANKS Because the Corporation is a holding company, its right to participate in the assets of any subsidiary upon the latter's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors (including 7 10 depositors in the case of the Subsidiary Banks) except to the extent that the Corporation may itself be a creditor with recognized claims against the subsidiary. In addition, depositors of a bank, and the FDIC as their subrogee, would be entitled to priority over other creditors in the event of liquidation of a bank subsidiary. Under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to, and commit resources to support, each of the Subsidiary Banks. This support may be required at times when, absent such Federal Reserve Board policy, the Corporation may not be inclined to provide it. In addition, any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. CROSS-GUARANTEE LIABILITY Under the Federal Deposit Insurance Act (the "FDIA"), a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution "in danger of default." "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. The FDIC's claim for damages is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution. The Subsidiary Banks are subject to these cross-guarantee provisions. As a result, any loss suffered by the FDIC in respect of any of the Subsidiary Banks would likely result in assertion of the cross-guarantee provisions, the assessment of such estimated losses against the Corporation's other Subsidiary Banks and a potential loss of the Corporation's investment in such other Subsidiary Banks. FDICIA The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), which was enacted on December 19, 1991, substantially revised the depository institution regulatory and funding provisions of the FDIA and made revisions to several other federal banking statutes. Among other things, FDICIA requires the federal banking regulators to take "prompt corrective action" in respect of FDIC-insured depository 8 11 institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." Under applicable regulations, an FDIC-insured depository institution is defined to be well capitalized if it maintains a Leverage ratio of at least 5%, a risk adjusted Tier 1 Capital Ratio of at least 6% and a Total Capital Ratio of at least 10% and is not subject to a directive, order or written agreement to meet and maintain specific capital levels. An insured depository institution is defined to be adequately capitalized if it meets all of its minimum capital requirements as described above. An insured depository institution will be considered undercapitalized if it fails to meet any minimum required measure, significantly undercapitalized if it has a Total Risk-Based Capital Ratio of less than 6%, a Tier 1 Risk-Based Capital Ratio of less than 3% or a Leverage Ratio of less than 3% and critically undercapitalized if it fails to maintain a level of tangible equity equal to at least 2% of total assets. An insured depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. The capital-based prompt corrective action provisions of FDICIA and their implementing regulations apply to FDIC-insured depository institutions and are not directly applicable to holding companies which control such institutions. However, the Federal Reserve Board has indicated that, in regulating bank holding companies, it will take appropriate action at the holding company level based on an assessment of the supervisory actions imposed upon subsidiary depository institutions pursuant to such provisions and regulations. FDICIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution's holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan for the plan to be accepted by the applicable federal regulatory authority. The federal banking agencies 9 12 may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator, generally within 90 days of the date on which they become critically undercapitalized. The Corporation believes that at December 31, 1993 all of the Subsidiary Banks were well capitalized under the criteria discussed above. Various other legislation, including proposals to revise the bank regulatory system and to limit the investments that a depository institution may make with insured funds, is from time to time introduced in Congress. See the "Effect of Governmental Policies" subsection. BROKERED DEPOSITS AND "PASS-THROUGH" INSURANCE The FDIC has adopted regulations under FDICIA governing the receipt of brokered deposits and pass-through insurance. Under the regulations, a bank cannot accept or rollover or renew brokered deposits unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank that cannot receive brokered deposits also cannot offer "pass-through" insurance on certain employee benefit accounts. Whether or not it has obtained such a waiver, an adequately capitalized bank may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates specified by regulation. There are no such restrictions on a bank that is well capitalized. Because it believes that all the Subsidiary Banks were well capitalized as of December 10 13 31, 1993, the Corporation believes the brokered deposits regulation will have no present effect on the funding or liquidity of any of the Subsidiary Banks. FDIC INSURANCE PREMIUMS The Subsidiary Banks are required to pay semiannual FDIC deposit insurance assessments. As required by FDICIA, the FDIC adopted a risk-based premium schedule which has increased the assessment rates for most FDIC-insured depository institutions. Under the new schedule, the premiums initially range from $.23 to $.31 for every $100 of deposits. Each financial institution is assigned to one of three capital groups -- well capitalized, adequately capitalized or undercapitalized -- and further assigned to one of three subgroups within a capital group, on the basis of supervisory evaluations by the institution's primary federal and, if applicable, state supervisors and other information relevant to the institution's financial condition and the risk posed to the applicable FDIC deposit insurance fund. The actual assessment rate applicable to a particular institution will, therefore, depend in part upon the risk assessment classification so assigned to the institution by the FDIC. The FDIC is authorized by federal law to raise insurance premiums in certain circumstances. Any increase in premiums would have an adverse effect on the Subsidiary Banks' and the Corporation's earnings. Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a federal bank regulatory agency. DEPOSITOR PREFERENCE The Omnibus Budget Reconciliation Act of 1993 provides that deposits and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the "liquidation or other resolution" of such an institution by any receiver. Competition. The Corporation and its subsidiaries face substantial competition in all aspects of the businesses in which they engage from national and state banks located in Tennessee and large out- 11 14 of-state banks as well as from savings and loan associations, credit unions, other financial institutions, consumer finance companies, trust companies, investment counseling firms, money market mutual funds, insurance companies, securities firms, mortgage banking companies and others. For information on the competitive position of the Corporation and the Bank, refer to page 1. Also, refer to the subsections entitled "Supervision and Regulation" and "Effect of Governmental Policies," both of which are relevant to an analysis of the Corporation's competitors. Due to the intense competition in the financial industry, the Corporation makes no representation that its competitive position has remained constant, nor can it predict whether its position will change in the future. Sources and Availability of Funds. Specific reference is made to the Consolidated Financial Review section, including the subsections entitled "Deposits" and "Liquidity," contained in the Corporation's 1993 Annual Report to Shareholders (the "1993 Annual Report"), which is specifically incorporated herein by reference, along with all of the tables and graphs in the 1993 Annual Report, which are identified separately in response to Item 7 of Part II of this Form 10-K, which are incorporated herein by reference. As permitted by SEC rules, attached to this Form 10-K as Exhibit 13 are only those sections of the 1993 Annual Report that have been incorporated by reference into this Form 10-K. Interest Ceiling. The maximum rates that can be charged by lenders are governed by specific state and federal laws. Most loans made by the Corporation's banking subsidiaries are subject to the limits contained in Tennessee's general usury law (the "Usury Law") or the Industrial Loan and Thrift Companies Act (the "Industrial Loan Act"), with certain categories of loans subject to other state and federal laws. The Usury Law provides for a maximum rate of interest which is the lesser of 4% above the average prime loan rate published by the Board of Governors of the Federal Reserve System or 24% per annum. The Industrial Loan Act generally provides for a maximum rate of 24% per annum plus certain additional loan charges. In addition, state statutory interest rate ceilings on most first mortgage loans on residential real estate are preempted by federal law. Also, Tennessee law permits interest on credit card balances not to exceed 21% per annum plus certain fees established by contract. Effect of Governmental Policies. The Bank is affected by the policies of regulatory authorities, including the Federal Reserve System and the Comptroller. An important function of the Federal Reserve System is to regulate the national money supply. Among the instruments of monetary policy used by the Federal Reserve are: purchases and sales of U.S. Government securities in the marketplace; changes in the discount rate, which is the rate any depository institution must pay to borrow from the Federal 12 15 Reserve; and changes in the reserve requirements of depository institutions. These instruments are effective in influencing economic and monetary growth, interest rate levels and inflation. The monetary policies of the Federal Reserve System and other governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the national economy and in the money market, as well as the result of actions by monetary and fiscal authorities, it is not possible to predict with certainty future changes in interest rates, deposit levels, loan demand or the business and earnings of the Corporation and the Bank or whether the changing economic conditions will have a positive or negative effect on operations and earnings. Bills are pending before the United States Congress and the Tennessee General Assembly which could affect the business of the Corporation and its subsidiaries, and there are indications that other similar bills may be introduced in the future. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which the business of the Corporation and its subsidiaries may be affected thereby. Statistical Information Required by Guide 3. The statistical information required to be displayed under Item I pursuant to Guide 3, "Statistical Disclosure by Bank Holding Companies," of the Exchange Act Industry Guides is incorporated herein by reference to the Consolidated Financial Statements and the notes thereto and the Consolidated Financial Review Section in the 1993 Annual Report along with all of the tables and graphs identified in response to Item 7 of Part II of this Form 10-K; certain information not contained in the Annual Report, but required by Guide 3, is contained in the tables on the immediately following pages: 13 16 FIRST TENNESSEE NATIONAL CORPORATION ADDITIONAL GUIDE 3 STATISTICAL INFORMATION BALANCES AT DECEMBER 31 (Thousands) (Unaudited)
II. Investment Portfolio (Book Value): 1993 1992 1991 - ------------------------------------------------------------------------------- Mortgage-backed securitites & collateralized mortgage obligations $ 1,634,873 $ 2,330,943 $ 1,831,526 U.S. Treasury and other U. S. government agencies 338,447 341,799 368,791 States and political subdivisions 56,430 88,276 115,411 Other 86,951 150,925 210,424 - ------------------------------------------------------------------------------- Total $ 2,116,701 $ 2,911,943 $ 2,526,152 ===============================================================================
III. Loan Portfolio 1993 1992 1991 1990 1989 - ----------------------------------------------------------------------------------------------------------- Commercial $ 2,518,980 $ 2,199,965 $ 2,231,366 $ 2,106,626 $ 2,031,667 Consumer 1,735,579 1,265,993 1,061,018 1,029,262 1,014,583 Credit card receivables 428,074 412,207 402,822 366,706 304,548 Real estate construction 75,844 48,598 107,466 197,217 258,970 Real estate mortgage 495,855 586,597 633,850 632,877 589,550 Nonaccrual 24,805 28,712 43,479 69,685 48,411 - ----------------------------------------------------------------------------------------------------------- Total $ 5,279,137 $ 4,542,072 $ 4,480,001 $ 4,402,373 $ 4,247,729 ===========================================================================================================
VII. Short-Term Borrowings 1993 1992 1991 - ------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase $ 1,009,473 $ 753,409 $ 677,687 Commercial paper 32,283 21,856 21,658 Other short-term borrowings 288,292 235,018 49,608 - ------------------------------------------------------------------------------- Total $ 1,330,048 $ 1,010,283 $ 748,953 ===============================================================================
14 17 FOREIGN OUTSTANDINGS AT DECEMBER 31
1993 1992 1991 ----------------- ---------------- ------------------ % Total % Total % Total (Dollars in thousands) Amount Assets Amount Assets Amount Assets - -------------------------------------------------------------------------------------------------------- BY COUNTRY: United Kingdom $ 2,454 .03 % $ 72 -- % $ 280 -- % Israel 2,142 .02 1,707 .02 1,506 .02 Indonesia 715 .01 356 -- 384 -- Japan 585 .01 404 .01 50 -- Canada 296 -- 86 -- 30,529 .35 Saudi Arabia 241 -- 120 -- -- -- France 20 -- 83 -- 71,582 .82 All other 145 -- 1,797 .02 1,574 .02 - -------------------------------------------------------------------------------------------------------- Total $ 6,598 .07 % $ 4,625 .05 % $ 105,905 1.21 % ======================================================================================================== BY TYPE: Loans: Banks and other financial institutions $ 4,073 .04 % $ 2,227 .03 % $ 2,112 .03 % Governments and other institutions 2,000 .02 1,812 .02 1,825 .02 - -------------------------------------------------------------------------------------------------------- Total loans 6,073 .06 4,039 .05 3,937 .05 Cash 478 .01 315 -- 225 -- Investment in bank time deposits -- -- -- -- 100,000 1.14 Customers' acceptances 47 -- 226 -- 17 -- Accrued interest receivable -- -- 45 -- 1,726 .02 - -------------------------------------------------------------------------------------------------------- Total $ 6,598 .07 % $ 4,625 .05 % $ 105,905 1.21 % ========================================================================================================
MATURITIES OF SHORT-TERM PURCHASED FUNDS AT DECEMBER 31, 1993
0-3 3-6 6-12 Over 12 (Dollars in thousands) Months Months Months Months Total - ----------------------------------------------------------------------------------------------------------------------- Certificates of deposit $100,000 and more $ 223,187 $ 60,846 $ 37,071 $ 59,897 $ 381,001 Federal funds purchased and securities sold under agreements to repurchase 1,009,473 -- -- -- 1,009,473 Commercial paper and other short-term borrowings 312,276 799 2,500 5,000 320,575 - ----------------------------------------------------------------------------------------------------------------------- Total $ 1,544,936 $ 61,645 $ 39,571 $ 64,897 $ 1,711,049 =======================================================================================================================
15 18 ITEM 2 PROPERTIES The Corporation has no properties that it considers materially important to its financial statements. ITEM 3 LEGAL PROCEEDINGS The Corporation is a party to no material pending legal proceedings the nature of which are required to be disclosed pursuant to the Instructions contained in the Form of this Report. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted during the fourth quarter of this fiscal year to a vote of security holders, through the solicitation of proxies or otherwise. ITEM 4A EXECUTIVE OFFICERS OF REGISTRANT The following is a list of executive officers of the Corporation as of March 1, 1994. Officers are elected for a term of one year and until their successors are elected and qualified.
Name and Age Offices and Positions - Year First ------------ ---------------------------------- Elected to Office ----------------- Susan Schmidt Bies Executive Vice President (1985) and Age: 46 Chief Financial Officer (1984) of the Corporation and the Bank J. Kenneth Glass President - Tennessee Banking Group Age: 47 of the Bank (1993) Ralph Horn President and Chief Operating Age: 52 Officer of the Corporation (1991) and the Bank (1993) Harry A. Johnson, III Executive Vice President (1990) and Age: 45 General Counsel (1988) of the Corporation and the Bank James F. Keen Senior Vice President (1988) of the Age: 43 Corporation and the Bank, Controller (1988) of the Corporation and principal accounting officer
16 19 John C. Kelley. Jr. President - Memphis Banking Group of Age: 49 the Bank (1993) George Perry Lewis Executive Vice President of the Age: 55 Bank (1976) and Money Management Group Manager John P. O'Connor, Jr. Executive Vice President of the Age: 50 Bank (1987) and Chief Credit Officer (1988) Ronald Terry Chairman of the Board and Chief Age: 63 Executive Officer of the Corporation (1973) and of the Bank (1979) G. Robert Vezina Executive Vice President of the Age: 59 Corporation and the Bank (1989) and Personnel Division Manager
Each of the executive officers has been employed by the Corporation or its subsidiaries during each of the last five years. Mr. Terry was President of the Corporation prior to August 1991. Mr. Horn was Vice Chairman of the Bank from August 1991 through January 1993. Prior to August 1991, Mr. Horn was Executive Vice President of the Bank and Manager of its Bond Division. Mr. Glass was Executive Vice President of the Bank and Tennessee Banking Group Manager prior to January 1993. Mr. Kelley was Executive Vice President of the Bank and Corporate Services Group Manager prior to January of 1993. Mr. Keen was Controller of the Bank prior to January 1993. Prior to October 1990, Mr. Johnson was a Senior Vice President of the Corporation and the Bank. Prior to October 1989, Mr. Vezina was a Senior Vice President of the Corporation and the Bank. PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Corporation's common stock, $2.50 par value, trades over-the-counter on the National Association of Securities Dealers Automated Quotation System -- National Market System under the symbol FTEN. As of December 31, 1993, there were 7,893 shareholders of record of the Corporation's common stock. Generally, quarterly dividend payments are made on the first day of January, April, July and October. The Corporation has declared the following respective quarterly dividends per share during each quarter, commencing with first quarter 1992: $.28, $.28, $.28, $.36, $.36, $.36, $.36, and $.42. Additional information called for by this Item is incorporated herein by reference to the Summary of Quarterly Financial Information Table, the Selected Financial Data Table, Note 16 to the Consolidated Financial Statements, and the Liquidity subsection of the Consolidated Financial Review section in the 1993 Annual Report and to The Payment of Dividends subsection contained in Item 1 of Part I of this Form 10-K, which is incorporated herein by reference. 17 20 ITEM 6 SELECTED FINANCIAL DATA The information called for by this Item is incorporated herein by reference to Selected Financial Data Table in the 1993 Annual Report. ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information called for by this Item is incorporated herein by reference to Consolidated Financial Review Section in the 1993 Annual Report and the following tables and graphs in the 1993 Annual Report: GRAPHS: - ------- Return on Average Equity Return on Average Assets Earnings Per Share Earnings Trend Net Interest Margin and Spread Profitability Per Employee Earning Asset Mix as a Percentage of Average Assets Average Loan Composition Deposits and Other Interest-Bearing Liabilities as a Percentage of Average Assets Net Charge-Offs Nonperforming Loans Nonperforming Assets to Total Loans Cumulative Changes in Nonaccrual Loans and Other Real Estate since Year-End 1988 (Quarterly) Cumulative Changes in Classified Assets Since Year-End 1988 (Quarterly) TABLES: - ------- Analysis of Changes in Net Interest Income Analysis of Noninterest Income and Noninterest Expense Summary of Quarterly Financial Information Rate Sensitivity Analysis at December 31, 1993 Maturities of Investment Securities at December 31, 1993 Maturities of Loans at December 31, 1993 Consumer Loans by Product at December 31 Regulatory Capital at December 31 Net Loans and Foreclosed Real Estate at December 31 FTBNA Loans Secured by Real Estate at December 31 Analysis of Allowance for Loan Losses Changes in Nonperforming Assets at December 31 Nonperforming Assets at December 31 Selected Financial Data Credit Ratings at December 31,1993 Net-Charge Offs as a Percentage of Average Loans, Net of Unearned Income Obligations of States and Municipalities by Quality Rating at December 31, 1993 Consolidated Average Balance Sheet and Related Yields and Rates ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this Item is incorporated herein by reference to Consolidated Financial Statements and the notes there to and to the Summary of Quarterly Financial Information Table. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The information called for by this Item is inapplicable. PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by this Item as it relates to directors and nominees for director of the Corporation is incorporated herein by reference to the "Election of Directors" section of the Corporation's Proxy Statement to be mailed to shareholders in connection with the Corporation's Annual Meeting of Shareholders scheduled for April 19, 1994, (the "1994 Proxy Statement"), which will be filed by amendment to this Form 10-K, pursuant to General Instruction G(3) to such form. The information required by this Item as it relates to executive officers of the Corporation is incorporated herein by reference to Item 4A in Part I of this Report. The information required by this Item as it relates to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the "Compliance with Section 16(a) of the Exchange Act" Section of the 1994 Proxy Statement. ITEM 11 EXECUTIVE COMPENSATION The information called for by this Item is incorporated herein by reference to the "Executive Compensation" section of the 1994 Proxy Statement (excluding the Board Compensation Committee Report and the Total Shareholder Return 18 21 Performance Graph). ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this Item is incorporated herein by reference to the Stock Ownership Table and the two paragraphs preceding the table in the 1994 Proxy Statement. The Corporation is unaware of any arrangements which may result in a change in control of the Corporation. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this Item is incorporated herein by reference to the "Certain Relationships and Related Transactions" section of the 1994 Proxy Statement. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: Financial Statements: The consolidated financial statements of the Corporation, and the notes thereto, for the three years ended December 31, 1993, in the 1993 Annual Report, are incorporated herein by reference. The Report of Independent Public Accountants, in the 1993 Annual Report, is incorporated herein by reference. The report of the other auditors referenced in the Report of Independent Public Accountants, attached hereto as Exhibit 99(b), is incorporated herein by reference. Financial Statement Schedules: Not applicable. Exhibits: (2) Stock Purchase Agreement dated as of August 19, 1993, by and between the Bank and MNC Financial, Inc. (3)(i) Restated Charter of the Corporation, as amended, attached as Exhibit 3(a) to Corporation's 1991 Annual Report on Form 10-K and incorporated herein by reference. (3)(ii) Bylaws of the Corporation, as amended. (4)(a) Shareholder Protection Rights Agreement, dated as of 9-7-89 between the Corporation and First Tennessee Bank National Association, as Rights Agent, including as Exhibit A the forms of 19 22 Rights Certificate and of Election to Exercise and as Exhibit B the form of Charter Amendment designating a series of Participating Preferred Stock of the Corporation with terms as specified, attached as an exhibit to the Corporation's Registration Statement on Form 8-A filed 9-8-89, and incorporated herein by reference. (4)(b) Indenture, dated as of 6-1-87, between the Corporation and Security Pacific National Trust Company (New York), Trustee, attached as an exhibit to the Corporation's Annual Report on Form 10-K for the year ended 12-31-91, and incorporated herein by reference. (4)(c) The Corporation and certain of its consolidated subsidiaries have outstanding certain long-term debt. See Note 13 in the Corporation's 1993 Annual Report to Shareholders. None of such debt exceeds 10% of the total assets of the Corporation and its consolidated subsidiaries. Thus, copies of constituent instruments defining the rights of holders of such debt are not required to be included as exhibits. The Corporation agrees to furnish copies of such instruments to the Securities and Exchange Commission upon request. *(1O)(a) Management Incentive Plan, as amended.(1) *(1O)(b) 1983 Restricted Stock Incentive Plan, as amended.(1) *(1O)(c) 1989 Restricted Stock Incentive Plan, as amended.(1) *(1O)(d) 1992 Restricted Stock Incentive Plan.(1) *(10)(e) 1984 Stock Option Plan, as amended.(1) *(1O)(f) 1990 Stock Option Plan, as amended.(1) *(1O)(g) Survivor Benefits Plan, as amended.(1) *(1O)(h) Directors and Executives Deferred Compensation Plan, as amended.(1) *(1O)(i) Pension Restoration Plan.(2) *(1O)(j) Director Deferral Agreements with Schedule.(2) *(10)(k) Severance Agreements dated 12-15-92 with schedule.(2) (11) Statement re: computation of per share earnings. (13) The portions of the 1993 Annual Report to Shareholders which have been incorporated by reference into this Form 10-K. (21) Subsidiaries of the Corporation. (24) Power of Attorney (99)(a) Annual Report on Form ll-K for the Corporation's Savings Plan and Trust, for fiscal year ended 12- 31-93, as authorized by 20 23 SEC Rule 15d-21 (to be filed as an amendment to Form lO-K). (99)(b) Report of other auditors. *Exhibits marked with an "*" represent management contract or compensatory plan or arrangement required to be filed as an exhibit. (1) These documents are incorporated herein by reference to the exhibit with the corresponding number contained in the Corporation's 1992 Annual Report on Form 10-K. (2) These documents are incorporated herein by reference to exhibits 10(j), 10(k), and 10(l), respectively, contained in the Corporation's 1992 Annual Report on Form 10-K. (b) A report on Form 8-K was filed on October 18, 1993 (with a date of report of October 1, 1993), disclosing under Item 2 ("Acquisition or Disposition of Assets") the closing of the acquisition of MNMC by the Bank. The report contained audited MNMC consolidated financial statements of financial condition as of 12-31-92 and 12-31-91, and statements of income, statements of changes in stockholders' equity, and statements of cash flows, each for the years ended 12-31-92 and 12-31-91 and contained FTNC pro forma combined condensed statement of condition as of 6-30-93, statements of income for the six months ended 6-30-93 and statements of income for the year ended 12-31-92. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 7th day of March, 1994. FIRST TENNESSEE NATIONAL CORPORATION By: James F. Keen ------------------------------------- James F. Keen, Senior Vice President and Controller 21 24 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- Ronald Terry* Chairman of the Board March 7, 1994 - ---------------------- and Chief Executive Officer Ronald Terry (principal executive officer) Susan Schmidt Bies* Executive Vice President March 7, 1994 - ---------------------- and Chief Financial Officer Susan Schmidt Bies (principal executive officer) James F. Keen* Senior Vice President and March 7, 1994 - ---------------------- Controller James F. Keen (principal accounting officer) Jack A. Belz* Director March 7, 1994 - ---------------------- Jack A. Belz Robert C. Blattberg* Director March 7, 1994 - ---------------------- Robert C. Blattberg John Hull Dobbs* Director March 7, 1994 - ---------------------- John Hull Dobbs Ralph Horn* Director March 7, 1994 - ---------------------- Ralph Horn Director March , 1994 - ---------------------- - J. R. Hyde, III Director March , 1994 - ---------------------- - Joseph Orgill, III Cameron E. Perry* Director March 7, 1994 - ---------------------- Cameron E. Perry Richard E. Ray* Director March 7 , 1994 - ---------------------- Richard E. Ray
22 25 Vicki G. Roman* Director March 7, 1994 - ---------------------- Vicki G. Roman Michael D. Rose* Director March 7, 1994 - ---------------------- Michael D. Rose William B. Sansom* Director March 7, 1994 - ---------------------- William B. Sansom Gordon P. Street, Jr.* Director March 7, 1994 - ---------------------- Gordon P. Street, Jr. Norfleet R. Turner* Director March 7, 1994 - ---------------------- Norfleet R. Turner By: Clyde A. Billings, Jr. March 7, 1994 ----------------------------- Clyde A. Billings, Jr. * Attorney-in-Fact
23 26 EXHIBIT INDEX
Item No. Description Page - -------- ----------- ---- (3)(i) Restated Charter of the Corporation, as amended, attached as Exhibit 3(a) to Corporation's 1991 Annual Report on Form 10-K and incorporated herein by reference. ---- (3)(ii) Bylaws of the Corporation, as amended. ---- (4)(a) Shareholder Protection Rights Agreement dated as of 9-7-89 between the Corporation and First Tennessee Bank National Association, as Rights Agent, including as Exhibit A the forms of Rights Certificate and of Election to Exercise and as Exhibit B the form of Charter Amendment designating a series of Participating Preferred Stock of the Corporation with terms as specified, attached as an exhibit to the Corporation's Current Report on Form 8-A dated 9-7-89, and incorporated herein by reference. (4)(b) Indenture, dated as of June 1, 1987, between the Corporation and Security Pacific National Trust Company (New York), Trustee, attached as an exhibit to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference. (4)(c) The Corporation and certain of its consolidated subsidiaries have outstanding certain long-term debt. See Note 13 in the Corporation's 1993 Annual Report to Shareholders. None of such debt exceeds 10% of the total assets of the Corporation and its consolidated subsidiaries. Thus, copies of constituent instruments defining the rights of holders of such debt are not required to be included as exhibits. The Corporation agrees to furnish copies of such instruments to the Securities and Exchange Commission upon request. *(1O)(a) Management Incentive Plan, as amended. (1) ---- *(1O)(b) 1983 Restricted Stock Incentive Plan, as amended. (1) ---- *(1O)(c) 1989 Restricted Stock Incentive Plan, as amended. (1) ---- *(1O)(d) 1992 Restricted Stock Incentive Plan. (1) *(10)(e) 1984 Stock Option Plan, as amended. (1) ----
24 27 *(1O)(f) 1990 Stock Option Plan, as amended.(1) ---- *(1O)(g) Survivor Benefits Plan, as amended.(1) ---- *(10)(h) Directors and Executives Deferred Compensation Plan, as amended.(1) ---- *(10)(i) Pension Restoration Plan.(2) ---- *(1O)(j) Director Deferral Agreements with Schedule.(2) ---- *(1O)(k) Severance Agreements dated 12-15-92 with schedule.(2) (11) Statement re: computation of per share earnings. ---- (13) The portions of the 1993 Annual Report to Shareholders which have been incorporated by reference into this Form 10-K. ---- (21) Subsidiaries of the Corporation. ---- (24) Powers of Attorney (99)(a) Annual Report on Form ll-K for the Corporation's Savings Plan and Trust, for fiscal year ended December 31, 1993, as authorized by SEC Rule 15d-21 (to be filed as an amendment to Form 10-K). (99) (b) Report of other auditors.
*Exhibits marked with an "*" represent management contract or compensatory plan or arrangement required to be filed as an exhibit. (1) These documents are incorporated herein by reference to the exhibit with the corresponding number contained in the Corporation's 1992 Annual Report on Form 10-K. (2) These documents are incorporated herein by reference to exhibits 10(j), 10(k), and 10(l), respectively, contained in the Corporation's 1992 Annual Report on Form 10-K. 25 EX-3.(II) 2 FIRST TENNESSEE BY LAWS 1 EXHIBIT 3 (ii) BY LAWS OF FIRST TENNESSEE NATIONAL CORPORATION (As Amended and Restated March 15, 1977) ARTICLE I. OFFICES 1. The principal office shall be in Memphis, Tennessee. 2. The Corporation may also have offices in such other places as the Board of Directors may from time to time appoint, or the business of the Corporation may require. ARTICLE II. SHAREHOLDERS' MEETINGS 1. Meetings of the shareholders of the Corporation may be held either in the State of Tennessee or elsewhere: but in the absence of notice to the contrary, shareholders' meetings shall be held at the office of the Corporation in Memphis, Tennessee. 2. The annual meeting of shareholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held each year on the Third Tuesday in April, or if that day is a legal holiday, on the next succeeding day not a legal holiday, at a time to be fixed by resolution of the Board of Directors; at which meeting they shall elect by ballot, by plurality vote, a Board of Directors and may transact such other business as may properly come before the meeting. 3. The holders of a majority of the shares issued and out- standing and entitled to vote thereat, present in person or repre- sented by proxy, shall be requisite, and shall constitute a quorum at all meetings of the shareholders, for the transaction of busi- ness, except as otherwise provided by law, by the Charter of Incorporation, and these Bylaws. If, however, such majority shall not be present or represented at the meeting of the shareholders, the shareholders entitled to vote thereat, present in person or by Proxy, shall have power to adjourn the meeting from time to time 2 without notice other than announcement at the meeting until the requisite amount of voting shares shall be present. At such ad- journed meeting at which the requisite amount of voting shares shall be represented, any business may be transacted which might have been transacted at the meeting as originally notified. 4. Written notice of the annual meeting stating the place, day and hour of the meeting shall be mailed to each shareholder entitled to vote thereat at such address as appears on the stock records of the Corporation, at least ten (10), but not more than sixty (60), days prior to the meeting. 5. Special meetings of the shareholders for any purpose or purposes, unless otherwise prescribe by statute, may be called (i) by the Chairman of the Board of Directors, and shall be called by the Chairman of the Board of Directors or the Secretary at the request in writing of a majority of the Board of Directors, or (ii). by the holders of not less than one-tenth (1/10) of all the shares entitled to vote at such meeting. Such call shall state the purpose or purposes of the proposed meeting. 6. Written notice of a special meeting of shareholders, stating the place, day and hour and the purpose or purposes for which the meeting is called and the person or persons calling the meeting, shall be mailed, postage prepaid, at least ten (10) days before the date of such meeting, to each shareholder entitled to vote thereat at such address as appears on the stock transfer records of the Corporation. 7. Special meetings of the shareholders may be held at any time on written waiver of notice or by consent of all of the share- holders. 8. Any shareholder may waive notice of any meeting either before, at or after the meeting. 9. At each meeting of shareholders, each shareholder shall have one vote for each share of stock having voting power registered in his name on the records of the Corporation on the record date for that meeting, and every shareholder having the right to vote shall be entitled to vote in person or by proxy appointed by instrument in writing. -2- 3 10. Any director may be removed by the shareholders with or without cause, at any time by the affirmative vote of the holders of a majority of the stock entitled to vote, by resolution adopted at any meeting of shareholders, whether an annual or a special meeting. ARTICLE III DIRECTORS 1. The business and affairs of the Corporation shall be directed by a Board of Directors, which shall consist of 19 members. Directors need not be shareholders. 2. Each director shall serve for the term of one year and until his successor shall have been duly elected and qualified: subject, however, to the right of the removal of any director at any time by the affirmative vote of the majority of the shares entitled to vote by resolution adopted at any meeting of shareholders, whether an annual or a special meeting. 3. The directors may hold their meetings at the office of the Corporation in Memphis, Tennessee, or at such other place or places, either in the State of Tennessee or elsewhere, as they may from time to time determine. 4. A majority of the Board of Directors at a meeting duly assembled shall be necessary to constitute a quorum for the trans- action of business, and the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless the vote of a greater number is required by law, by the Charter, or these Bylaws. 5. As compensation, the directors, for their services, shall be paid such amounts at such time as may, from tine to time, be determined by resolution of the entire Board of Directors; provide that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and being compensated therefor. 6. The directors, by resolution adopted by a majority of the entire Board, may designate any executive committee, consisting of three or more directors, and other committees, consisting of three or more directors, officers or employees, and may delegate to such -3- 4 committee or committees all such authority of the Board that it deems desirable, including, without limitation, authority to elect corporate officers, fix their salaries and, to the extent such is not provided by law, the Charter or these Bylaws, to establish their authority and responsibility, except that no such committee or committees, unless specifically so authorized by the Board, shall have and exercise the authority of the Board to: (a) Adopt, amend or repeal the Bylaws; (b) Submit to shareholders any action that needs shareholders' authorization under Chapters 1 through 14, Title 48, Tennessee Code Annotated, and any and all amendments and supplements thereto; (c) Fill vacancies in the Board or in any committee; and (d) Declare dividends or make other corporate distributions. Regular and special meetings of committees may be held with or with- out notice as prescribed by resolution of the directors. ARTICLE IV. POWERS OF DIRECTORS 1. The Board of Directors shall have, in addition to such powers as are hereinafter expressly conferred on it and all such powers as may be conferred on it by law, all such powers as may be exercised by the Corporation, subject to the provisions of the law, the Charter and these Bylaws. 2. The Corporation shall be managed by the Board of Directors, which shall exercise all powers conferred under the laws of the State of Tennessee, including without limitation the powers speci- fied in the Charter of the Corporation, as amended, and the power: (a) To purchase or otherwise acquire property, rights or privileges for the Corporation which the Corpora- tion has power to take, at such prices and on such terms as the Board of Directors may deem proper; (b) To pay for such property, rights or privileges in whole or in part with money, stocks, bonds, deben- tures or other securities of the Corporation, or -4- 5 by the delivery of other property of the Corporation; (c) To create, make and issue mortgages, bonds, deeds of trust, trust agreements and negotiable or trans- ferable instruments end securities, secured by mortgage or otherwise, and to do every act and thing necessary to effectuate the same; (d) To elect the corporate officers and fix their salaries; to appoint employees and trustees; and to dismiss them at its discretion; to fix their duties and emoluments, and to change them from time to time; and to require security as it may deem proper; (e) To confer on any Officer of the Corporation the power of selecting, discharging or suspending such employees; and (f) To determine by whom and in what manner the Corporation's bills, notes, receipts, acceptances, guaranties, endorse- ments, checks, releases, contracts or other documents shall be signed. ARTICLE V. MEETINGS OF DIRECTORS 1. Following each annual election of directors, the newly elected directors shall meet for the purpose of organization, the election of officers and the transaction of other business, and, if a majority of the directors be present at such place, day and hour, no prior notice of such meeting shall be required to be given to the directors. The place, day and hour of such meeting may also be fixed by written consent of the directors. 2. Meetings of the directors shall be held at least once each calendar quarter at such time and place as the Board of Directors may by resolution determine. Notice of the time and place of the meetings shall be given as specified for a special meeting. 3. Special meetings of the directors may be called by the Chairman or the Board of Directors or the President on two days' -5- 6 notice in writing or on one day's notice by telegram to each direc- tor, and shall be called by the Chairman in like manner on the written request of two directors. The notice shall state thou place, day and hour where it is to be held. 4. Special meetings of the directors may be held at any time on written waiver of notice or by consent of all the directors. 5. A majority of the directors shall constitute a quorum, but a smaller number may adjourn from time to time, without further notice, if the time and place to which the meeting is adjourned are fixed at the meeting at which the adjournment is taken and if the period of adjournment does not exceed thirty (30) days in any one (1) adjournment. 6. The directors may take action which they are required or permitted to take, without a meeting, on written consent setting forth the action so taken, signed by all of the directors entitled to vote thereon. ARTICLE VI. OFFICERS 1. The officers of the Corporation shall be chosen at the annual organizational meeting following the annual meeting of share- holders, for a term of one (1) year and until their successors are elected and qualified. The officers of the Corporation shall con- sist of a Chairman of the Board of Directors, a President, such number of Vice Chairmen as the Board may from time to time determine and appoint, a Financial Vice President, a Secretary, a Treasurer, a Controller and an Auditor, and such number of Executive Vice Presidents. Senior Vice Presidents and Vice Presidents, Assistant Secretaries, Assistant Controllers, Assistant Auditors, and Corporate Officers as the Board may from time to time determine and appoint. Any person may hold two or more offices, except that the President shall not also be the Secretary or an Assistant Secretary. The officers, other than the Chairman of the Board of Directors, need not be directors or shareholders. -6- 7 2. The Board may appoint such other officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. 3. If the office of any officer or officers appointed by the Board of Directors becomes vacant for any reason, the vacancy may be filled by the Board of Directors. 4. The officers of the Corporation shall hold office until their successors are elected and qualified. Any officer shall be subject to removal at any time with or without cause by the affirma- tive vote of a majority of the Board of Directors. 5. The salaries and compensation of all officers of the Corporation shall be fixed by the Board. ARTICLE VII. CHAIRMAN OF THE BOARD OF DIRECTORS 1. The Chairman of the Board of Directors shall be the Chief Executive Officer of the Corporation; he shall preside at all meetings of the shareholders; he shall have general management of the business of the Corporation and shall exercise general super- vision over all of its affairs and shall see that all orders and resolutions of the Board are carried into effect. 2. He shall have the general powers and duties of supervision. and management usually vested in the office of Chairman of the Board of Directors and Chief Executive Officer of a Corporation. ARTICLE VIII. THE PRESIDENT 1. The President, in the absence of the Chairman of the Board, shall preside at all meetings of shareholders, and he shall be charged with the active management and administration of the business of the Corporation with power to make all contracts in the conduct of the regular and ordinary business of the Corporation; and he may appoint and discharge agents and employees of the Corporation and fix their compensation, subject to the general supervisory powers -7- 8 of the Chairman of the Board of Directors and of the Board of Directors, and do and perform such other duties as from time to time may be assigned to him by the Board of Directors and as may be authorized by law. ARTICLE IX. VICE CHAIRMAN 1. Vice Chairmen shall perform such of the duties and exer- cise such of the powers as may be prescribed by the Board of Direc- tors or the Chairman of the Board of Directors. ARTICLE X. CHAIRMAN OF THE CREDIT POLICY COMMITTEE 1. The Chairman of the Credit Policy Committee shall perform such of the duties and exercise such of the powers as may be pre- scribed by the Board of Directors or the Chairman of the Board of Directors. ARTICLE XI. FINANCIAL VICE PRESIDENT 1. The Financial Vice President shall perform such of the duties and exercise such of the powers as may be prescribed by the Board of Directors or the Chairman of the Board of Directors. ARTICLE XII. VICE PRESIDENT 1. Vice Presidents shall perform such of the duties and exercise such of the powers as may be prescribed by the Board of Directors, the Chairman of the Board of Directors or the President. ARTICLE XIII. SECRETARY 1. The Secretary shall attend all sessions of the Board and of the shareholders and record all votes and the minutes of all -8- 9 proceedings in a book to be kept for that purpose. He shall give or cause to be given notice of all meetings or the shareholders and of the Board of Directors and shall perform such other duties as are incident to his office or as may be prescribed by the Board of Directors or the Chairman of the Board of Directors. 2. In the absence or disability of the Secretary, the Assistant Secretary shall perform all the duties and exercise all of the powers of the Secretary and shall perform such other duties as the Board of Directors or the Chairman of the Board of Directors shall prescribe. ARTICLE XIV. TREASURER 1. The Treasurer shall have custody of the funds and securi- ties of the Corporation and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation such depositories as may be designated by the Board of Directors. 2. He shall disburse the funds of the Corporation as may be ordered by the Board, or by the Chairman of the Board of Directors, or by the President, taking proper vouchers for such disbursements, and shall render to the Board, the Chairman of the Board, or the President, whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the Corporation, and at a regular meeting of the Board preceding the annual shareholders' meeting, a like report for the preceding year. 3. He shall keep or cause to be kept an account of stock registered and transferred in such manner and subject to such regulations as the Board of Directors may prescribe 4. He shall give the Corporation a bond, if required by the Board of Directors, in such sum and in form and with security satis- factory to the Board of Directors for the faithful performance of the duties of his office end the restoration to the Corporation, in case of his death, resignation or removal from office, of all books, -9- 10 papers, vouchers, money and other property of whatever kind in his possession, belonging to the corporation. He shall perform such other duties as the Board of Directors may from time to time pre- scribe or require. 5. In the absence or disability of the Treasurer, the Assis- tant Treasurer shall perform all the duties and exercise all of the powers of the Treasurer and shall perform such other duties as the Board of Directors or the Chairman of the Board of Directors shall prescribe. ARTICLE XV. AUDITOR 1. The Auditor shall perform such of the duties and exercise such of the powers as may be prescribed by the Board of Directors. 2. In the absence or disability of the Auditor, the Assistant Auditor shall perform all the duties and exercise all the powers of the Auditor and shall perform such other duties as the Board of Directors shall prescribe. ARTICLE XVI. CONTROLLER 1. The Controller shall assist the management of the Corpora- tion in setting the financial goals and policies of the Corporation; shall provide financial and statistical information to the share- holders and to the management of the Corporation and shall perform such other duties and exercise such other powers as may be pre- scribed by the Board of Directors, the Chairman of the Board of Directors or the President. 2. In the absence or disability of the Controller, the Assis- tant Controller shall perform all duties and exercise all Powers of the Controller and shall perform such other duties as the Board of Directors or the Chairman of the Board of Directors shall prescribe. -10- 11 ARTICLE XVII CORPORATE OFFICER 1. Corporate Officers shall have such authority and perform such of the duties and exercise such of the powers as may be pre- scribed by the Board of Directors, the President or any Vice Chair- man. ARTICLE XVIII. DUTIES OF OFFICERS MAY BE DELEGATED 1. In case of the absence of any officer of the Corporation, or for any other reason that the Board may deem sufficient, the Board may delegate, for the time being, the powers or duties, or any of them, of such officer to any other officer, or to any director, provided a majority of the entire Board concur therein. ARTICLE XIX. CERTIFICATES OF STOCK 1. The certificates of stock of the Corporation shall be numbered, shall be entered in the book or records of the Corpora- tion as they are issued, and shall be signed by the Chairman of the Board and any one of the following: the President, the Treasurer or the Secretary. Each certificate shall include the following upon the face thereof: (a) That the Corporation is organized under the laws of this state; (b) The name of the Corporation; (c) The name of the person to whom issued; (d) The number and class of shares, and the designation of the series, if any, which such certificate represents; (e) The par value of each share represented by such certifi- cate: or a statement that the shares are without par value; and (f) Such other provisions as the Board may from time to time require. -11- 12 Either or both of the signatures upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent, or regis- tered by a registrar other than an officer or employee of the Corporation. ARTICLE XX. TRANSFERS OF STOCK AND RECORD DATE 1. Transfers of shares of stock shall be made upon the books of the Corporation by the person named in the certificate or by an attorney, lawfully constituted in writing, and upon surrender of the certificate therefor. The Board of Directors may appoint suitable agents in Memphis, Tennessee, and elsewhere to facilitate transfers by shareholders under such regulations as the Board may from time to time prescribe. The transfer books may be closed by the Board for such period, not to exceed 40 days, as may be deemed advisable for dividend or other purposes, or in lieu of closing the books, the Board may fix in advance a date as the record date for determining shareholders entitled notice of and to vote at a meeting of shareholders, or entitled to payment of any dividend. The record date shall not be less than 10 days prior to the date on which the particular action requiring such determination is to be taken. All certificates surrendered the the Corporation for transfer shall be canceled, and no new certificate shall be issued until the former certificate for like number of shares shall have been surrendered and canceled, except that in case of a lost or destroyed certificate a new one may be issued on the terms prescribe by Article XXII of these Bylaws. ARTICLE XXI REGISTERED SHAREHOLDERS 1. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact there- of; and, accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other -12- 13 person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Tennessee. ARTICLE XXII. LOST CERTIFICATE 1. The agent for transfer of the Corporation's stock may issue new share certificates in place of certificates represented to have been lost, destroyed, stolen or mutilated upon receiving an indemnity satisfactory to the agent and the Secretary or Treasurer of the Corporation, without further action of the Board of Directors. ARTICLE XXIII. FISCAL YEAR. 1. The Board of Directors of the Corporation shall have authority from time to time to determine whether the Corporation shall operate upon a calendar year basis or upon a fiscal year basis, and if the latter, said Board shall have power to determine when the said fiscal year shall begin and end. ARTICLE XXIV. DIVIDENDS 1. Dividends on the capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting pursuant to law. 2. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discre- tion, think proper as a reserve fund to meet contingencies, or for equalizing dividends or for repairing or maintaining any property of the Corporation, or for such other purposes as the directors shall think conducive to the interest of the Corporation. -13- 14 ARTICLE XXV SEAL 1. This Corporation shall have a Corporate Seal which shall consist of an imprint of the name of the Corporation, the state of its incorporation, the year of incorporation and the words "Corporate Seal." ARTICLE XXVI. NOTICES 1. Whenever under the provisions of these Bylaws notice is required to be given to any director, officer or shareholder, it shall not be construed to mean personal notice, but such notice may be given in writing by depositing the same in the United States Mail, or by telegram addressed to such shareholder, at such address as appears on the stock transfer books of the Corporation, and addressed to such director or officer at such address as appears on the records of the Corporation, and such notice shall be deemed to be given at the time when the same shall be thus deposited, or the telegram sent. 2. Any director, officer or shareholder may waive any notice of any meeting required to be given under these Bylaws either be- fore, at or after the meeting. ARTICLE XXVII. AMENDMENTS 1. The Board of Directors shall have power to make, amend and repeal the Bylaws of the Corporation by vote of a majority of all the directors, at any regular or special meeting of the Board. 2. The shareholders may make, alter, amend and repeal the Bylaws of this Corporation at any annual meeting or at a special meeting called for that purpose, and all Bylaws made by the direc- tors may be altered or repealed by vote of the majority of the shareholders. -14- 15 ARTICLE XXVIII INDEMNIFICATION 1. If any current or former director or officer of First Tennessee National Corporation ("First Tennessee") shall be wholly successful, on the merits or otherwise, in any threatened or actual criminal or civil suit or proceeding other than by or in the right of First Tennessee to procure a judgement in its favor, including any suit or proceeding instituted as a result of such director or officer serving another corporation or other business entity in any capacity at the request of First Tennessee, which was commenced by reason of the fact that he is or was a director or officer of First Tennessee or served such other corporation or other business entity in any capacity, he shall be indemnified by First Tennessee against all reasonable expenses, including attorney fees, actually and necessarily incurred as a result of such threatened or actual suit or proceeding, or any appeal therein. 2. If any current or former director or officer of First Tennessee shall be wholly successful, on the merits or otherwise, in any actual suit by or in the right of First Tennessee to procure a judgment in its favor, which was commenced by reason of the fact that he is or was a director or officer of First Tennessee, he shall be indemnified by First Tennessee against all reasonable expenses; including attorney fees, actually and necessarily incurred as a result of such suit or proceeding, or any appeal therein. 3. If any current or former director or officer of First Tennessee has not been wholly successful, on the merits or other- wise, in defense of a threatened or actual suit or proceeding of the character described in Section 1 of this bylaw or a civil action of the character described in Section 2, unless ordered by the Court under Section 48-410 of the Tennessee Code Annotated ("T.C.A."), he shall be indemnified by First Tennessee (1) in a suit or proceeding of the character described in Section 1, against judgments and fines; and (2) in a suit or proceeding of the character described in Sections 1 or 2, against amounts paid in settlement and reasonable expenses, including attorney fees, actually and necessarily incurred as a result of such suit or proceeding, or any appeal therein, only if authorized in the specific case: -15- 16 a. By the Board of First Tennessee acting by a quorum consisting of Directors who are not parties to such action or proceeding upon a finding that: (1) In a suit or proceeding other than by or in the right of First Tennessee, the director or officer has acted in good faith for a purpose which he has reasonably believed to be in the best interest of First Tennessee, and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his conduct was unlawful; or (2) In a suit or proceeding by or in the right of First Tennessee, the director or officer has not breached his duty to First Tennessee under T.C.A. 48-813; and (3) In the case of any settlement, in addition to the appropriate standard of conduct under 3.a. (1) or (2), the settlement is in the best interest of First Tennes- ee; and if the settlement has been approved by a court, that the indemnification would not be inconsistent with any condition with respect to indemnification imposed by the court in approving the settlement. b. If a quorum under 3.a. is not available with due diligence: (1) By the Board of First Tennessee upon the opinion in writing of independent legal counsel that indemnification is proper in the circumstances because the applicable standard of conduct set forth in 3.a.(1), (2) or (3) has been met by such director or officer; or (2) By the shareholders of First Tennessee upon finding that the director or officer has met the applicable standard of conduct set forth in 3.a.(1), (2) or (3). 4. A director or officer of First Tennessee shall be deemed to be serving another corporation or other business entity at the request of First Tennessee only if such request is reflected in the records of a committee appointed by the Board of first Tennessee for the purpose of making such requests. 5. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by first Tennessee in advance of the -16- 17 final disposition of such action, suit or proceeding if authorized by the procedure established under 3.a. or b. of this bylaw. 6. If any expenses or other amounts are paid by way of in- demnification otherwise than by court order under T.C.A. 48-410 or action by the shareholders, First Tennessee shall give notice to the shareholders as provided in T.C.A. 48-411(3). 7. Every employee of First Tennessee shall be indemnified by First Tennessee to the same extent as directors or officers of First Tennessee. 8. a. The right of indemnification set forth above shall not be deemed to restrict any right of indemnifica- tion provided to any director, officer or employee of First Tennessee or any of its subsidiaries pursuant to a contract, agreement or resolution executed upon the approval or ratification of the Board of First Tennessee acting by a quorum of dis- interested directors, provided that any such con- tract shall not enlarge the rights of indemnification permitted under the Tennessee Central Corporation Act. b. This bylaw shall not be construed to affect or re- strict in any manner any right of indemnification granted by First Tennessee to persons other than directors, officers and employees of First Tennessee or any of its subsidiaries. 9. a. No combination of rights shall permit any current or former director, officer or employee of First Tennes- see to receive a double recovery. b. The right of indemnification provided in this bylaw shall inure to the benefit of the heirs, executors or administrators of each such current or former direc- tor, officer of employee of First Tennessee and shall or in no event be construed to enlarge the rights of indemnification permitted under the Tennessee General Corporation Act. -17- 18 ARTICLE XXIX RETIREMENT 1. Directors. Any director who shall attain the age of seventy (70) shall be automatically retired from the Board at time of the next succeeding annual meeting of shareholders. How- ever, a director may be retired before age seventy (70) as herein- after provided. Effective December 31, 1978, directors shall be retired from the Board as follows: (1) The retirement age for Directors will be sixty-five (65). Any Director who becomes sixty-five prior to December 31; 1978 or any December 31 thereafter will be retired as of the December 31 following his sixty-fifth birthday. (2) For the purpose of maintaining Boards of active business and professional men, Directors leaving their present occupation or the position held at their last election (by retirement or otherwise), will be expected to tender their resignation from the Board upon such occasion. The resig- nation will ordinarily be accepted unless (a) the Director assumes another management position deemed appropriate by the Board for continuation, or (b) the Director is so en- gaged in some specific project for the Board as to make his resignation detrimental to the Corporation. Under this circumstance, the Board may elect to set a subsequent date for his retirement timed to coincide with the comple- tion of the project. (3) Directors who are also Officers of the Corporation shall be retired from the Board on the date they retire from or otherwise discontinue active service with the Corporation or its affiliates. Any director of the Corporation who has retired from the Board is eligible for election to a position on the Honorary Advisory Board, the duties of which shall be as specified by such resolutions as the Board of Directors may from time to time adopt. Membership on the Honorary Advisory Board shall continue at the discretion of the Board of Directors. -18- 19 2. Officers and Employees. As each officer or employee attains the age of sixty-five years, his employment by the Corpora- tion shall automatically be terminated and his salary discontinued on the first day of the month coincident with or immediately following his sixty-fifth birthday; however, the Board of Directors, in its discretion, may continue any such officer or employee in service and designate the capacity in which he shall serve, and shall fix the remuneration he shall receive. The Board may also re-employ any former officer who had theretofore been retired. ARTICLE XXX. CONVEYANCES 1. All transfers and conveyances of real estate made by the Corporation shall be executed by any officer of the Corporation, ex- cept the Auditor and Assistant Auditor, with seal attested by any other officer of the Corporation. 2. Any officer of the Corporation, except the Auditor and Assistant Auditor, is authorized and empowered to sell, assign, transfer, and deliver any and all bonds, stocks, or other indicia of ownership of personal property which may now or hereafter be assigned to it, or owned or held by it, and to execute releases of assignments and conveyances made to the Corporation or instruments in which the Corporation is named beneficiary. -19- 20 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION JANUARY 17, 1978 RESOLVED, that Article III, Section 1, of the Bylaws of the Company be, and hereby is, amended to provide for a board of directors to consist of 18, rather than 19, members effective as of April 18, 1978, by deleting the number 19 from said section of the Bylaws and substituting therefor the number 18. RESOLVED, that Article XXIX, Section 1, of the Bylaws of the Company be, and hereby is, amended and restated so as to read as follows: "1. Directors. Any director who shall attain the age of seventy (70) shall be automatically retired from the Board at the time of the next succeeding annual meeting of shareholders. However, a director may be retired before age seventy (70) as hereinafter provided. Effective December 31, 1978, directors who are not also officers of the Corporation or its affiliates shall be retired- from the Board as follows: (1) Any director who shall attain the age of sixty- five (65) shall be automatically retired from the Board at the time of the next succeeding annual meeting of shareholders. (2) For the purpose of maintaining Boards of active business and professional men, directors leaving their present occupation or the position held at their last election (by retirement or otherwise), will be expected to tender their resignation from the Board upon such occasion. The resignation will ordinarily be accepted unless (a) the director assumes another management position deemed appro- priate by the Board for continuation, or (b) the director is so engaged in some specific project for the Board as to make his resignation detri- mental to the Corporation. Under this circumstance, the Board may elect to set a subsequent date for his retirement timed to coincide with the completion of the project. Effective January 17, 1978, directors who are also officers of the Corporation or its affiliates shall be retired from the Board on the date they retire from or otherwise discontinue active service with the Corporation or its affiliates. Any director of the Corporation who has retired from the Board is eligible for election to a position on the Honorary Advisory Board, the duties of which shall be as specified by such resolutions as the Board of Directors may from time to time adopt. Membership on the Honorary Advisory Board shall continue at the discretion of the Board of Directors." A-1, p.1 21 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION MAY 16, 1978 RESOLVED, that Article XXIX, Section 1 of the Bylaws of the Company be, and in hereby, amended to delete the word "Advisory" from the phrase "Honorary Advisory Board" where- ever that phrase appears in said section. A-1, p.3 22 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION DECEMBER 19, 1978 RESOLVED, that as a result of the Age Discrimination in Employment Act Amendments of 1978, Article XXIX, Section 2, of the Bylaws of the Company be, and hereby is, amended and restated as of January 1, 1979, so as to read as follows= "2. Officers and Employees. As each officer or employee attains the age of 70 years, his or her employment by the Corporation shall auto- matically be terminated and his or her salary discontinued on the first day of the month coincident with or immediately following the 70th birthday. Provided, however, each officer or employee who meets the exclusion for execu- tives and top policy makers under the Age Discrimination in Employment Act; as amended from time to time, shall automatically be ter- minated and his or salary discontinued on the first day of the month coincident with or immediately following the 65th birthday. The Board of Directors, in its discretion, may continue any such officer or employee in service and designate the capacity in which he or she shall serve, and shall fix the remuneration he or she shall receive. The Board of Directors may also re-employ any former officer who had theretofore been retired." A-1, p.5 23 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION APRIL 15, 1980 RESOLVED, that Article III, Section 6 of the Bylaws be, and hereby is, amended to provide for committees to consist of two, rather than three, members by deleting the number three, wherever it appears, from said section of Bylaws and substituting therefor the number two. 24 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION OCTOBER 21, 1980 RESOLVED, that Article VI, Section 5, of the Bylaws of the Company be, and hereby is, amended and restated to read as follows: "5. The Board, or a committee thereof, shall fix the remuneration of executive officers. The renumeration of non-executive officers shall be fixed by the Board or by management under such policies and procedures as shall be established by the Board or a committee there- of." 25 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION JANUARY 19, 1982 RESOLVED, that Article V, Section 2, of the Bylaws of the Company be, and hereby is, amended by deleting the words "at least once each calendar quarter" from said section of Bylaws. 26 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION January 20, 1987 A new section 11 of Article II of the Bylaws of the Company is adopted as follows: "11. At an annual or special meeting of shareholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before an annual or special meeting of shareholders. To be properly brought before an annual or special meeting of shareholders, business must be (i) in the case of a special meeting called by or at the direction of the Board of Directors, specified in the notice of the special meeting (or any supplement thereto), or (ii) in the case of an annual meeting properly brought before the meeting by or at the direction of the Board of Directors or otherwise properly brought before the annual meeting by a shareholder. For business to be properly brought before such a meeting of shareholders by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 30 days nor more than 60 days prior to the date of the meeting; provided, however, that if less than 40 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so delivered or received not later than the close of business on the 10th day following the earlier of (i) the day on which such notice of the date of the meeting was mailed or (ii) the day on which such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before a meeting of shareholders (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business and any other shareholders known by such shareholder to be supporting such proposal, (iii) the class and number of shares of the Corporation which are beneficially owned by such shareholder on the date of such shareholder's notice and by any other shareholders known by such shareholder to be supporting such proposal on the date of such shareholder's notice, and (iv) any material interest of the shareholder in such proposal. Notwithstanding anything in these Bylaws to the contrary, no business shall be 27 conducted at a meeting of shareholders except in accordance with the procedures set forth in this Section 11. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that the business was not properly brought before the meeting in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted." 2386p 28 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION January 20, 1987 A new Section 7 of Article III of the Bylaws of the Company is adopted as follows: "7. Only persons nominated in accordance with the procedures set forth in this Section 7 shall be eligible for election as directors. Nominations of persons for election to the Board may be made at a meeting of shareholders (i) by or at the direction of the Board, or (ii) by any shareholder of the Corporation entitled to vote for the election of directors at such meeting who complies with the notice procedures set forth in this Section 7. Such nominations, other than those made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 30 days nor more than 60 days prior to the date of a meeting; provided, however, that if fewer than 40 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so delivered or received not later than the close of business on the 10th day following the earlier of (i) the day on which such notice of the date of such meeting was mailed or (ii) the day on which such public disclosure was made. A shareholder's notice to the Secretary shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a director (a) the name, age, business address and residence address of such person. (b) the principal occupation or employment of such person, (c) the class and number of shares of the Corporation which are beneficially owned by such person on the date of such shareholder's notice and (d) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors or, is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the shareholder giving the notice (a) the name and address, as they appear on the Corporation's books; of such shareholder and any other shareholders known by such shareholder to be supporting such nominees and (b) the class and number of shares of the Corporation which are beneficially owned by such shareholder on the date of such 29 shareholder's notice and by any other shareholders known by such shareholder to be supporting such nominees on the date of such shareholder's notice. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 7. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded." 2386p 30 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION January 20, 1987 Article V, Section 3 of the Bylaws of the Company is amended to read as follows: "3. Special meetings of the directors may be called by the Chairman of the Board of Directors or the President on two days' notice by mail, or on one day's notice by telegram or cablegram, or on two hours' notice given personally or by telephone to each director, and shall be called by the Chairman in like manner on the written request of a majority of directors then in office. The notice shall state the place, day and hour where the meeting is to be held." 2386p 31 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION JANUARY 20, 1987 ADOPTED SUBJECT TO APPROVAL OF PROPOSAL 3 BY THE SHAREHOLDERS APRIL 21, 1987 RESOLVED, that Article III, Section 2 of the Bylaws of First Tennessee National Corporation ("Company") is amended to read as follows: "2. Except as otherwise provided by law or by the Charter, the term of each director hereafter elected shall be from the time of his election and qualification until the third annual meeting next following his election and until his successor shall have been duly elected and qualified; subject, however, to the right of the removal of any director as provided by law, by the Charter or by these Bylaws." 2386p11 32 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION JANUARY 20, 1987 ADOPTED SUBJECT TO APPROVAL OF PROPOSAL 3 BY THE SHAREHOLDERS APRIL 21, 1987 RESOLVED, that a new Section 8 of Article III of the Bylaws of the Company is adopted as follows: "8. Except as otherwise provided by law or by the Charter, newly created directorships resulting from any increase in the authorized number of directors or any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification or any other cause (except removal from office) shall be filled only by the Board of Directors, provided that a quorum is then in office and present, or only by a majority of the directors then in office, if less than a quorum is then in office or by the sole remaining director. Any vacancies on the Board of Directors resulting from removal from office may be filled by the affirmative vote of the holders of at least a majority of the voting power of all outstanding voting stock or, if the shareholders do not so fill such a vacancy, by a majority of the directors then in office. Directors elected to fill a newly created directorship or other vacancy shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor has been duly elected and qualified. The directors of any class of directors of the Corporation may be removed by the shareholders only for cause by the affirmative vote of the holders of at least a majority of the voting power of all outstanding voting stock." 2386p12 33 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION JANUARY 20, 1987 ADOPTED SUBJECT TO APPROVAL OF PROPOSAL 3 BY THE SHAREHOLDERS APRIL 21, 1987 RESOLVED, that Article 11, Section 10 of the Bylaws of the Company is repealed, and Section 11 of Article II of the Bylaws of the Company is renumbered to become Section 10. 2386p14 34 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION JANUARY 20, 1987 ADOPTED SUBJECT TO APPROVAL OF PROPOSAL 3 BY THE SHAREHOLDERS APRIL 21, 1987 RESOLVED, that Article XXVII, Section 2 of the Bylaws of the Company is amended to read as follows: "2. The shareholders may make, alter, amend and repeal the Bylaws of this Corporation at any annual meeting or at a special meeting called for that purpose only by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all outstanding voting stock, and all Bylaws made by the directors may be altered or repealed only by the vote of the holders of at least eighty percent (80%) of the voting power of all outstanding voting stock." 2386p13 35 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION October 16, 1990 RESOLVED, that Article XXIX, Section 1, of the Bylaws of the Company be, and it hereby is, amended to read as follows: Directors who are not also officers of the Corporation or its affiliates shall be retired from the Board of Directors as follows: (1) Any director who shall attain the age of sixty-five (65) shall not thereafter be nominated for a directorship and shall be automatically retired from the Board at the expiration of the term for which he or she was elected. (2) For the purpose of maintaining boards of active business and professional persons, directors leaving the occupation or the position held at their last election (by retirement or otherwise) will be expected to tender their resignation from the Board upon such occasion. A resignation will ordinarily be accepted unless (a) the director assumes another management position deemed appropriate by the Board for continuation, or (b) the director is so engaged in some specific project for the Board as to make his or her resignation detrimental to the Corporation. Under this circumstance, the Board may elect to set a subsequent date for his or her retirement to coincide with the completion of the project. Directors who are also officers of the Corporation or any of its affiliates will be retired from the Board on the date they retire from or otherwise discontinue active Service with the Corporation and its affiliates. All directors of the Corporation who have served until retirement, as specified herein, will be asked to serve on the Honorary Board of Directors. Those directors who do not serve until retirement but who have served for a minimum of 10 years as an active member of the Board and who retire in good standing will also be asked to serve. Members of the Honorary Board shall have no authority to bind the Corporation. They shall not attend Board meetings of the Corporation and Shall not have any authority to vote on any matter being considered by the Board. 3455p 36 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION January 22, 1991 RESOLVED, that Article III, Section 1 of the Bylaws of First Tennessee National Corporation be, and hereby is, amended to provide for a Board of Directors to consist of 13, rather than 15 members, effective as of the Annual Meeting of Shareholders, April 16, 1991, by deleting the number 15 from said section of the Bylaws and substituting therefor the number 13. 2319p11 37 Amendment to Bylaws of First Tennessee National Corporation, adopted 4-16-91 ARTICLE XXVIII INDEMNIFICATION 1. If any current or former officer of the Corporation [including for purposes of this Article an individual who, while an officer, is or was serving another corporation or other enterprise (including an employee benefit plan) in any capacity at the request of the Corporation and unless the context requires otherwise the estate or personal representative of such officer] is wholly successful, on the merits or otherwise, in the defense of any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal ("Proceeding"), to which he was a party because he is or was an officer of the Corporation, he shall be indemnified by the Corporation against all reasonable expenses, including attorney fees, incurred in connection with such Proceeding, or any appeal therein. 2. If any current or former officer of the Corporation has not been wholly successful on the merits or otherwise, in the defense of a Proceeding, to which he was or was threatened to be made a party because he was or is an officer, he shall be indemnified by the Corporation against any judgment, settlement, penalty, fine (including any excise tax assessed with respect to an employee benefit plan), or other liability and any reasonable expenses, including attorney fees, incurred as a result of such Proceeding, or any appeal therein, if authorized in the specific case after a determination has been made that indemnification is permissible because the following standard of conduct has been met: (1) He conducted himself in good faith, and (2) He reasonably believed: (A) In the case of conduct in his official capacity as an officer of the Corporation that his conduct was in the Corporation's best interest; and (B) In all other cases that his conduct was at least not opposed to its best interests; and (3) In the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful; provided, however, the Corporation may not indemnify an officer in connection with a Proceeding by or in the right of the Corporation in which the officer was adjudged liable to the Corporation or in connection with any other proceeding charging improper benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him. -31- 38 3. The determination required by Section 2 herein shall be made as follows: (1) By the Board of Directors by a majority vote of a quorum consisting of directors not at the time parties to the Proceeding; (2) If a quorum cannot be obtained, by majority vote of a committee duly designated by the Board of Directors (in which designation directors who are parties may participate) consisting solely of two or more directors not at the time parties to the Proceeding; (3) By independent special legal counsel; (A) Selected by the Board of Directors or its committee in the manner prescribed in subsection (1) or (2); or (B) If a quorum of the Board of Directors cannot be obtained under Subsection (1) and a committee cannot be designated under subsection (2), selected by majority vote of the full Board of Directors (in which selection directors who are parties may participate); or, if a determination pursuant to Subsections 1, 2, or 3 of this Section 3 cannot be obtained, then (4) By the shareholders, but Shares owned by or voted under the control of directors who are at the time parties to the Proceeding may not be voted on the determination. 4. An officer of the Corporation shall be deemed to be serving another corporation or other enterprise or employee benefit plan at the request of the Corporation only if such request is reflected in the records of the Board of Directors or a committee appointed by the Board of Directors for the purpose of making such requests. 5. The Corporation shall pay for or reimburse reasonable expenses, including attorney fees, incurred by an officer who is a party to a Proceeding in advance of the final disposition of the Proceeding if: (1) The officer furnishes to the Corporation a written affirmation of his good faith belief that he has met the standard of conduct described in Section 2 herein; (2) The officer furnishes to the Corporation a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that he is not entitle to indemnification; and -32- 39 (3) A determination is made that the facts then known to those making the determination would not preclude indemnification under this bylaw. 6. The undertaking required by Section 5 herein must be an unlimited general obligation of the officer but need not be secured and may be accepted without reference to financial ability to make repayment. 7. Determinations and authorizations of payments under Section 5 herein shall be made in the same manner as is specified in Section 3 herein. 8. Every employee and every former director of the Corporation shall be indemnified by the Corporation to the same extent as officers of the Corporation. 9. The right of indemnification set forth above shall not be deemed exclusive of any other rights to which an officer, employee, or former director seeking indemnification may be entitled. No combination of rights shall permit any officer, employee or former director of the Corporation to receive a double or greater recovery. 10. The Corporation shall indemnify each of its directors and such of the non-director officers of the Corporation or any of its subsidiaries as the Board of Directors may designate, and shall advance expenses, including attorney's fees, to each director and such designated officers, to the maximum extent permitted (or not prohibited) by law, and in accordance with the foregoing, the Board of Directors is expressly authorized to enter into individual indemnity agreements on behalf of the Corporation with each director and such designated officers which provide for such indemnification and expense advancement and to adopt resolutions, which provide for such indemnification and expense advancement. 3777p47 -33- 40 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION July 16, 1991 RESOLVED, that Article III, Section 1 of the Bylaws of First Tennessee National Corporation be, and hereby is, amended to provide for a Board Of Directors to consist of 14, rather than 13 members, effective as of August 1, 1991, by deleting the number 13 from said section of the Bylaws and substituting therefor the number 14. January 19, 1993 RESOLVED, that Article III, Section 1 of the Bylaws of First Tennessee National Corporation be, and hereby is, amended to provide for a Board of Directors to consist of 13, rather than 14 members, effective as of January 31, 1993, by deleting the number 14 from said section of the Bylaws and substituting therefor the number 13. 2319p11 41 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION October 20, 1993 RESOLVED, that Article XXIX, Section 1, of the Bylaws of the Company be, and it hereby is, amended be deleting it in its entirety and amending it to read as follows: Directors who are not also officers of the Corporation or its affiliates shall be retired from the Board of Directors as follows: (1) Any director who shall attain the age of sixty-five (65) on or before the last day of the term for which he or she was elected shall not be nominated for re-election and shall be retired from the Board at the expiration of such term. (2) For the purpose of maintaining boards of active business and professional persons, directors leaving the occupation or the position held at their last election (by retirement or otherwise) will be expected to tender their resignation from the Board upon such occasion. A resignation will ordinarily be accepted unless (a) the director assumes another management position deemed appropriate by the Board for continuation, or (b) the director is so engaged in some specific project for the Board as to make his or her resignation detrimental to the Corporation. Under this circumstance, the Board may elect to set a subsequent date for his or her retirement to coincide with the completion of the project. Directors who are also officers of the Corporation or any of its affiliates will be retired from the Board on the date they retire from or otherwise discontinue active service with the Corporation and its affiliates. All directors of the Corporation who have served until retirement, as specified herein, will be asked to serve on the Honorary Board of Directors. Those directors who do not serve until retirement but who have served for a minimum of 10 years as an active member of the Board and who retire in good standing will also be asked to serve. Members of the Honorary Board shall have no authority to bind the Bank. They shall not attend Board meetings of the Corporation and shall not have any authority to vote on any matter being considered by the Board. 42 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION December 21, 1993 RESOLVED, that Article III, Section 1 of the Bylaws of First Tennessee National Corporation be, and hereby is, amended to provide for a Board of Directors to consist of 14, rather than 13 members, effective as of December 21, 1993, by deleting the number 13 from said section of the Bylaws and substituting therefor the number 14. RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION March 2, 1994 RESOLVED, that Article III, Section 1 of the Bylaws of First Tennessee National Corporation be, and hereby is, amended to provide for a Board of Directors to consist of 11, rather than 14 members, effective as of April 19, 1994, by deleting the number 14 from said section of the Bylaws and substituting therefor the number 11. EX-11 3 FIRST TENNESSEE PRIMARY EARNINGS PER SHARE 1 EXHIBIT 11 FIRST TENNESSEE NATIONAL CORPORATION PRIMARY EARNINGS PER SHARE AND FULLY DILUTED EARNINGS PER SHARE
Computation for Statements of Income: 1993 1992 1991 - -------------------------------------- ------------------------------------------------ Per statements of income (Thousands): Net income $120,665 $89,165 $73,022 ================================================ Per statements of income: Weighted average shares outstanding 28,325,005 27,971,865 27,761,007 ================================================ Primary earnings per share (a): Net income $4.26 $3.19 $2.63 ================================================ Additional Primary computation - ------------------------------------- Adjustment to weighted average shares outstanding: Weighted average shares outstanding per primary computation above 28,325,005 27,971,865 27,761,007 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 503,103 530,044 312,859 ----------------------------------------------- Weighted average shares outstanding, as adjusted 28,828,108 28,501,909 28,073,866 ================================================ Primary earnings per share, as adjusted (b): Net income $4.19 $3.13 $2.60 ================================================ Additional Fully Diluted Computation - -------------------------------------- Adjustment to weighted average shares outstanding: Weighted average shares outstanding per primary computation above 28,828,108 28,501,909 28,073,866 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 11,970 36,751 41,914 ----------------------------------------------- Weighted average shares outstanding, as adjusted 28,840,078 28,538,660 28,115,780 =============================================== Fully diluted earnings per share, as adjusted (b): Net income $4.18 $3.12 $2.60 ===============================================
(a) These figures agree with the related amounts in the statements of income. (b) This calculation is submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although not required by footnote 2 paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. EX-13 4 FIRST TENNESSEE CONSOLIDATED STATEMENTS OF COND 1 EXHIBIT 13 CONSOLIDATED First Tennessee STATEMENTS OF National CONDITION Corporation
-------------------------------------------------------------------------------------------------------- December 31 (Dollars in thousands) 1993 1992 ------------------------------------------------------------------------------------------------------- ASSETS: Cash and due from banks $ 602,416 $ 496,526 Federal funds sold and securities purchased under agreements to resell 137,663 284,299 ------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 740,079 780,825 ------------------------------------------------------------------------------------------------------- Investment in bank time deposits 7,537 2,062 Trading account securities 178,663 188,607 Mortgage warehouse loans held for sale 719,500 87,590 Securities held for sale 53,035 119,162 Investment securities: Mortgage-backed securities and collateralized mortgage obligations 1,634,873 2,330,943 U.S. Treasury and other U.S. government agencies 338,447 341,799 States and municipalities 56,430 88,276 Other 86,951 150,925 ------------------------------------------------------------------------------------------------------- Total investment securities (market value of $2,156,243 in 1993 and $2,971,053 in 1992) 2,116,701 2,911,943 ------------------------------------------------------------------------------------------------------- Loans: Commercial: Taxable 2,441,217 2,093,352 Tax-exempt 77,763 106,613 ------------------------------------------------------------------------------------------------------- Total commercial loans 2,518,980 2,199,965 Consumer 1,735,579 1,265,993 Credit card receivables 428,074 412,207 Real estate construction 75,844 48,598 Permanent mortgage 495,855 586,597 Nonaccrual 24,805 28,712 ------------------------------------------------------------------------------------------------------- Total gross loans 5,279,137 4,542,072 Less: Unearned income 11,069 19,644 Allowance for loan losses 103,734 96,795 ------------------------------------------------------------------------------------------------------- Total net loans 5,164,334 4,425,633 ------------------------------------------------------------------------------------------------------- Premises and equipment, net 125,729 106,885 Real estate acquired by foreclosure 31,609 23,559 Customers' acceptances 4,871 4,397 Intangible assets 131,230 59,291 Bond division receivables and other assets 335,560 215,820 ------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 9,608,848 $ 8,925,774 ======================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Demand $ 1,888,333 $ 1,467,839 Checking/Interest 520,005 508,150 Savings 494,969 509,083 Money market account 1,656,211 1,594,820 Certificates of deposit under $100,000 and other time 2,206,232 2,385,748 Certificates of deposit $100,000 and more 381,001 451,122 ------------------------------------------------------------------------------------------------------- Total deposits 7,146,751 6,916,762 Federal funds purchased and securities sold under agreements to repurchase 1,009,473 753,409 Commercial paper and other short-term borrowings 320,575 256,874 Acceptances outstanding 4,871 4,397 Bond division payables and other liabilities 358,231 269,947 Long-term debt 89,962 126,872 ------------------------------------------------------------------------------------------------------- Total liabilities 8,929,863 8,328,261 ------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY: Preferred stock - no par value (5,000,000 shares authorized, but unissued) -- -- Common stock - $2.50 par value (shares authorized - 50,000,000; shares issued - 28,325,565 at December 31, 1993, and 28,122,606 at December 31, 1992) 70,814 70,307 Capital surplus 86,429 84,309 Undivided profits 524,117 444,333 Less deferred compensation on restricted stock incentive plan 2,375 1,436 ------------------------------------------------------------------------------------------------------- Total shareholders' equity 678,985 597,513 ------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,608,848 $ 8,925,774 =======================================================================================================
See accompanying notes to consolidated financial statements. 2 CONSOLIDATED First Tennessee STATEMENTS OF National INCOME Corporation
----------------------------------------------------------------------------------------------------- Year Ended December 31 (Dollars in thousands except per share data) 1993 1992 1991 ----------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $ 402,649 $ 395,710 $ 437,156 Interest on investment and held for sale securities: Taxable 165,484 177,203 141,394 Tax-exempt 5,318 7,191 9,775 Interest on trading account securities 9,304 10,285 9,563 Interest on other earning assets 3,712 8,848 42,708 ----------------------------------------------------------------------------------------------------- Total interest income 586,467 599,237 640,596 ----------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on deposits: Checking/Interest 9,648 11,609 14,331 Savings 13,567 16,334 19,348 Money market account 41,318 49,805 68,283 Certificates of deposit under $100,000 and other time 111,326 139,096 178,897 Certificates of deposit $100,000 and more 14,171 17,909 29,436 Interest on short-term borrowings 40,657 30,789 39,897 Interest on long-term debt 9,226 10,761 11,611 ----------------------------------------------------------------------------------------------------- Total interest expense 239,913 276,303 361,803 ----------------------------------------------------------------------------------------------------- NET INTEREST INCOME 346,554 322,934 278,793 Provision for loan losses 34,540 43,171 53,943 ----------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 312,014 279,763 224,850 ----------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Bond division 91,525 80,275 68,628 Service charges on deposit accounts 56,199 51,679 44,060 Mortgage banking 28,233 10,502 8,246 Bank card 26,417 24,177 22,322 Trust services 22,264 20,103 17,949 Equity securities gains (losses) (479) 342 (713) Investment and held for sale securities gains (losses) 1,204 (2,020) (140) Other 45,126 39,951 30,848 ----------------------------------------------------------------------------------------------------- Total noninterest income 270,489 225,009 191,200 ----------------------------------------------------------------------------------------------------- ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 582,503 504,772 416,050 ----------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Employee compensation, incentives, and benefits 219,560 187,569 161,923 Operations services 26,289 23,585 21,752 Occupancy 21,998 20,705 19,704 Communications and courier 19,063 16,977 15,872 Equipment rentals, depreciation, and maintenance 17,645 16,157 12,757 Deposit insurance premium 15,465 15,194 12,769 Amortization of intangible assets 10,339 12,148 8,910 Other 68,027 68,141 62,299 ----------------------------------------------------------------------------------------------------- Total noninterest expense 398,386 360,476 315,986 ----------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 184,117 144,296 100,064 Applicable income taxes 63,452 55,131 27,042 ----------------------------------------------------------------------------------------------------- NET INCOME $ 120,665 $ 89,165 $ 73,022 ===================================================================================================== NET INCOME PER COMMON SHARE $ 4.26 $ 3.19 $ 2.63 ===================================================================================================== WEIGHTED AVERAGE SHARES OUTSTANDING 28,325,005 27,971,865 27,761,007 =====================================================================================================
See accompanying notes to consolidated financial statements. 3 CONSOLIDATED First Tennessee STATEMENTS OF National SHAREHOLDERS' EQUITY Corporation
--------------------------------------------------------------------------------------------------------------------------------- Deferred Common Common Capital Undivided Compen- (Dollars in thousands) Shares Total Stock Surplus Profits sation --------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1990 19,890,879 $ 497,042 $ 49,727 $ 99,845 $ 349,534 $ (2,064) Net income -- 73,022 -- -- 73,022 -- Cash dividends declared -- (32,194) -- -- (32,194) -- Common stock issued: For exercise of stock options 149,334 2,729 373 2,356 -- -- Restricted: employee benefit plans 30,000 -- 75 891 -- (966) Common stock repurchased (215,200) (4,227) (538) (3,689) -- -- Change in valuation allowance for equity securities -- 1,246 -- -- 1,246 -- Amortization of deferred compensation on restricted stock incentive plan -- 844 -- -- -- 844 --------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1991 19,855,013 538,462 49,637 99,403 391,608 (2,186) Net income -- 89,165 -- -- 89,165 -- Cash dividends declared -- (36,440) -- -- (36,440) -- Common stock issued: Three-for-two stock split 7,960,571 (27) 19,902 (19,929) -- -- For exercise of stock options 329,436 5,386 824 4,562 -- -- Under employee benefit plans 1,086 50 3 47 -- -- Restricted: incentive to non-employee directors 10,000 -- 25 490 -- (515) Tax benefit from exercise of employee stock options -- 740 -- 740 -- -- Common stock repurchased (33,500) (1,138) (84) (1,054) -- -- Stock options issued to non-employee advisory board members in lieu of fees -- 50 -- 50 -- -- Amortization of deferred compensation on restricted stock incentive plan -- 1,265 -- -- -- 1,265 --------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1992, AS ORIGINALLY REPORTED 28,122,606 597,513 70,307 84,309 444,333 (1,436) Adjustments for pooling of interests 148,895 2,605 372 772 1,461 -- --------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1992, RESTATED 28,271,501 600,118 70,679 85,081 445,794 (1,436) Net income -- 120,665 -- -- 120,665 -- Cash dividends declared -- (42,342) -- -- (42,342) -- Common stock issued: For exercise of stock options 113,473 2,061 283 1,778 -- -- Restricted: employee benefit plans 59,641 -- 149 2,132 -- (2,281) incentive to non-employee directors 1,500 -- 4 51 -- (55) Tax benefit from exercise of employee stock options -- 884 -- 884 -- -- Tax benefit from restricted stock incentives -- 586 -- 586 -- -- Common stock repurchased (120,550) (4,797) (301) (4,496) -- -- Stock options issued to non-employee advisory board members in lieu of fees -- 110 -- 110 -- -- Stock options issued to employees in lieu of annual bonus -- 303 -- 303 -- -- Amortization of deferred compensation on restricted stock incentive plan -- 1,397 -- -- -- 1,397 ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1993 28,325,565 $ 678,985 $ 70,814 $ 86,429 $ 524,117 $ (2,375) ===================================================================================================================================
See accompanying notes to consolidated financial statements. 4 CONSOLIDATED First Tennessee STATEMENTS National OF CASH FLOWS Corporation
-------------------------------------------------------------------------------------------------------- Year Ended December 31 (Dollars in thousands) 1993 1992 1991 -------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 120,665 $ 89,165 $ 73,022 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 34,540 43,171 53,943 Provision for deferred income tax (1,698) 4,391 (234) Depreciation and amortization of premises and equipment 15,397 13,311 12,324 Amortization of intangibles 10,336 12,148 8,910 Net amortization of premiums and accretion of discounts 25,740 14,997 4,664 Market value adjustment on foreclosed property 193 3,180 6,846 Market value adjustment on securities held for sale (248) 1,416 -- Equity securities losses (gains) 479 (342) 713 Investment and held for sale securities (gains) losses (956) 604 140 Net gain from sale of branch (672) -- -- Net (gain) loss on disposal of fixed assets (915) 1,600 967 Net (increase) decrease in: Trading account securities 9,944 (89,013) (11,228) Mortgage warehouse loans held for sale (174,085) 5,714 (56,533) Bond division receivables (30,178) 167,398 (201,583) Interest receivable 6,675 18,033 (8,214) Other assets (60,202) (2,318) (7,626) Net increase (decrease) in: Bond division payables 30,760 (150,989) 200,068 Interest payable (984) (5,730) (16,966) Other liabilities 10,474 (6,061) 9,901 -------------------------------------------------------------------------------------------------------- Total adjustments (125,400) 31,510 (3,908) -------------------------------------------------------------------------------------------------------- Net cash (used) provided by operating activities (4,735) 120,675 69,114 -------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Proceeds from maturities of investment and held for sale securities 1,568,913 859,355 648,476 Proceeds from sale of: Investment and held for sale securities 476,339 217,503 337,311 Equity securities 6,248 46,318 330 Premises and equipment 2,861 377 230 Payments for purchase of: Investment securities (1,226,038) (1,761,586) (1,566,957) Equity securities (15,807) (6,808) (9,799) Premises and equipment (31,150) (16,289) (20,324) Net (increase) decrease in loans (728,884) (104,084) 83,491 (Increase) decrease in investment in bank time deposits (2,504) 239,598 32,088 Branch sale, including cash and cash equivalents sold (18,339) -- -- Acquisitions, net of cash and cash equivalents acquired (102,577) -- 35,852 -------------------------------------------------------------------------------------------------------- Net cash used by investing activities (70,938) (525,616) (459,302) -------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from exercise of stock options 2,014 5,272 2,679 Payments for: Capital lease obligations (146) (146) (181) Long-term debt (37,000) (1,046) (190) Repurchase of common stock (4,797) (1,138) (4,227) Cash dividends (50,730) (27,927) (38,695) Net increase (decrease) in: Deposits 219,005 125,951 294,579 Short-term borrowings (93,419) 261,330 72,581 -------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 34,927 362,296 326,546 -------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (40,746) (42,645) (63,642) -------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 780,825 823,470 887,112 -------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 740,079 $ 780,825 $ 823,470 ======================================================================================================== Total interest paid $ 239,301 $ 281,251 $ 378,856 Total income taxes paid 68,786 56,341 29,228
See accompanying notes to consolidated financial statements. 5 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of First Tennessee National Corporation (FTNC) and its subsidiaries conform to generally accepted accounting principles and, as to its banking subsidiaries, with general practice within the banking industry. The following is a summary of the most significant of these policies. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of FTNC and its banking and non-banking subsidiaries more than 50 percent owned. Subsidiaries not more than 50 percent owned are recorded using the equity method. Whereas banking is the most significant aspect of FTNC's business, non-banking subsidiaries engage in business activities which complement banking, such as credit life and accident insurance, brokerage, and financial investment and trust advisory services. All significant intercompany accounts and transactions have been eliminated. BASIS OF PRESENTATION. Prior period financial statements are restated to include the accounts of companies that are acquired and accounted for as poolings of interests, with the exception of New South Bancorp (NSB) which was recorded by restatement of beginning shareholders' equity without restating statements of income or condition for the years prior to 1993 based on materiality. Business combinations accounted for as purchases are included in the consolidated financial statements from the respective dates of acquisition. The consolidated financial statements for prior periods also reflect certain reclassifications to conform to current presentation. None of these reclassifications had any effect on net income or earnings per share. STATEMENTS OF CASH FLOWS. Cash and cash equivalents as presented in the statements include cash and due from banks, federal funds sold, and securities purchased under agreements to resell. Generally, federal funds are sold for one-day periods and securities purchased under agreements to resell are short-term, highly liquid investments. In the fourth quarter, FTNC issued approximately 149,000 shares of its common stock in exchange for all of the common stock of NSB (Note 2). In the fourth quarter of 1992, FTNC issued approximately 4,177,000 shares of its common stock in exchange for all of the common stock of Home Financial Corporation (HFC) (Note 2). There were no material noncash transactions in 1991. TRADING ACCOUNT SECURITIES. Trading account assets include securities purchased in connection with underwriting or dealer activities and are carried at market value. Realized and unrealized gains and losses on trading account assets are reflected in noninterest income as bond division income. SECURITIES HELD FOR SALE. Securities to be held for indefinite periods of time, including securities that management intends to use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital or other similar factors, are classified as held for sale. Gains and losses on debt and equity securities are computed by the specific identification method and are included 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. Gains and losses realized from the sale of these assets and adjustments to market value are included in noninterest income. INVESTMENT SECURITIES. Investment securities include both debt and equity securities. FTNC has both the intent and ability to carry these securities into the foreseeable future. Debt securities are carried at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income. Unrealized losses resulting from permanent impairments in value are reported in noninterest income. Equity securities, principally venture capital investments, are stated at the lower of aggregate cost or market value. Realized gains and losses and unrealized permanent impairments in value are reported in noninterest income. Gains and losses on the sale of equity securities are computed by the specific identification method. LOANS. Loans are stated at principal amounts outstanding. 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 the nonperforming loans category are nonaccrual loans and loans which have been restructured in accordance with the criteria set forth in SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructuring." 6 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 in a nonaccrual status, but are charged off when past due 120 days and 180 days, respectively. When interest accrual is stopped, outstanding accrued interest receivable is reversed and charged to current operations. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to recover the principal balance and accrued interest. Generally, interest payments received on nonaccrual loans are applied to principal. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is a valuation reserve available for losses incurred on loans. All losses of principal are charged to the account when the loss actually occurs or when a determination is made that a loss is probable. Additions are made to the reserve through periodic provisions charged to current operations or recovery of principal on loans previously charged off. The determination of the balance of the allowance for loan losses is based upon a review and analysis of the loan portfolio. Management's objective in determining the level of the allowance is to maintain a reserve which is adequate to absorb losses inherent in the portfolio. Their assessment includes the systematic evaluation of several factors: current and anticipated economic conditions and their impact on specific borrowers and industry groups; the level of classified and nonperforming loans; the historical loss experience by loan type; the results of regulatory 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 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 includes assets that have been either acquired in satisfaction of debt or substantively repossessed ("in-substance foreclosures"). In-substance foreclosures occur when the debtor has little or no equity in the collateral; repayment of the loan can come only from the operation or sale of the collateral; and the debtor has either abandoned control of the collateral or is unable to rebuild equity in the collateral or otherwise repay the loan in the foreseeable future. Property is carried at the lower of the outstanding loan amount or the estimated fair market value minus estimated cost to sell the real estate. Any excess of loan amount over the estimated net realizable fair value at the time of acquisition is charged to the allowance for loan losses. Required developmental costs associated with foreclosed property under construction are capitalized and considered in determining the estimated net realizable fair value of the property. The estimated net realizable fair value is reviewed periodically and any write-downs are charged against current earnings as market adjustments. INTANGIBLE ASSETS. Intangible assets represent the premium on purchased deposits and assets, the excess of cost over net assets of acquired subsidiaries (goodwill), and purchased mortgage servicing rights. The "Premium on purchased deposits and assets" represents identified intangible assets, which are amortized over their estimated useful lives, with the exception of those assets related to deposit bases which are primarily amortized over a 10 year period. Goodwill is being amortized using the straight-line method over periods ranging from 15 to 40 years. Management evaluates whether events or circumstances have occurred that would result in impairment in the value or life of goodwill. If such impairment should occur, FTNC 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 of the related goodwill. The value of purchased mortgage servicing rights is established using the lesser of: a discounted cash flow analysis; current market value; or the amount of consideration specifically paid by FTNC. The purchased mortgage servicing rights are being amortized using an accelerated method over the estimated life of the servicing income. A quarterly value impairment analysis is performed using discounted, disaggregated methodology. 7 INTEREST RATE MANAGEMENT INSTRUMENTS. FTNC and its banking subsidiaries enter into a variety of interest rate contracts in their trading activities, and as part of their asset/liability management activities. Interest rate futures, options, and forward contracts are utilized in trading activities and to manage interest rate exposure. Contracts related to trading activities are marked-to-market with gains and losses being included in bond division income. 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. Interest rate swap contracts are utilized as a further means of balancing rate sensitivity. The interest differential applicable to interest rate swaps which hedge specific assets and liabilities is accrued over the lives of the contracts and reported as an adjustment to the yield and rate of the underlying assets and liabilities. Fees on interest rate swaps are deferred and amortized over the lives of the contracts. TRUST SERVICES INCOME. Trust services income is reported on a cash basis, which does not differ materially from the accrual basis. INCOME TAXES. The provision for income taxes is based on income reported for consolidated financial statement purposes and includes deferred taxes resulting from the recognition of certain revenues and expenses in different periods for tax reporting purposes. FTNC 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 adjusted for the three-for-two stock split in 1992, and are computed based on the weighted average number of common shares outstanding for each period. Options granted under the stock option plans are not included in the computation since their dilutive effect is not material. Previously reported per share amounts have been restated for the effect of acquisitions accounted for as a pooling of interests, with the exception of NSB which was immaterial on a consolidated basis. 8 NOTE 2 -- BUSINESS COMBINATIONS On January 4, 1994, FTNC acquired for approximately 1,799,000 shares of its common stock all of the outstanding capital stock of SNMC Management Corporation (SNMC), the parent of Sunbelt National Mortgage Corporation, headquartered in Dallas, Texas. SNMC became a wholly owned subsidiary of First Tennessee Bank National Association (FTBNA), the principal subsidiary of FTNC. At December 31, 1993, SNMC had total assets of $451 million and a servicing portfolio of approximately $6.1 billion. The acquisition will be accounted for as a pooling of interests. On December 31, 1993, FTNC acquired for approximately 149,000 shares of its common stock all of the outstanding shares of New South Bancorp (NSB), a Mississippi bank holding company. NSB was merged with and into FTNC. 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 FTNC. The consolidated financial statements of FTNC for 1993 give effect to the merger which has been 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. The following presents on a pro forma basis certain financial data pertaining to the FTNC transactions with NSB and SNMC.
(Dollars in thousands except FTNC & NSB per share data) FTNC NSB Combined SNMC Pro Forma ------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1993 Total revenue* $ 615,018 $ 2,025 $ 617,043 $ 71,559 $ 688,602 Net income 120,164 501 120,665 (17,918) 102,747 Net income per share: Primary 4.26 3.90 4.26 (199.09) 3.41 Fully diluted 4.19 3.90 4.18 (199.09) 3.35 ------------------------------------------------------------------------------------------------- * Total revenue is net interest income and noninterest income. -------------------------------------------------------------------------------------------------
On October 1, 1993, FTBNA acquired for cash Maryland National Mortgage Corporation (MNMC) headquartered in Baltimore, Maryland. 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. This allocation has been based on preliminary estimates which may be revised at a later date. The operating results of this acquisition are included in FTNC's consolidated results of operations from the date of acquisition. The cost of the acquisition, totaling approximately $114.7 million, exceeded the estimated fair value of tangible assets and liabilities acquired by approximately $73.9 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 fair value of the tangible and intangible assets acquired, totaling approximately $42 million, has been recorded as goodwill and is being amortized using the straight-line method over 25 years. The following presents on a pro forma basis certain financial data pertaining to the FTNC and MNMC transaction as if it had been acquired at the beginning of each of the periods presented. The pro forma summary does not necessarily reflect the results of operations as they would have been if the acquisitions had been consummated at the beginning of the periods presented.
(Dollars in thousands except per share data) FTNC MNMC Adjustments Pro Forma ----------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1993 Total revenue* $ 595,058 $ 84,100 $ (3,178) $ 675,980 Net income 119,231 1,522 (4,163) 116,590 Net income per share: Primary 4.21 15.22 4.12 Fully diluted 4.13 15.22 4.04 ---------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1992 Total revenue* $ 547,943 $ 95,848 $ (2,530) $ 641,261 Net income 89,165 16,198 (5,585) 99,778 Net income per share: Primary 3.19 161.98 3.57 Fully diluted 3.12 161.98 3.50 ---------------------------------------------------------------------------------- * Total revenue is net interest income and noninterest income. ----------------------------------------------------------------------------------
9 On December 14, 1992, FTNC acquired for approximately 4,177,000 shares of its common stock all of the outstanding shares of HFC, a Tennessee savings and loan holding company. At the same time HFC's principal subsidiary, Home Federal Bank, FSB (HFB), became a wholly owned subsidiary of FTNC. The consolidated financial statements of FTNC give effect to the merger which has been accounted for as a pooling of interests. Accordingly, the accounts of HFC have been combined with those of FTNC to reflect the results of these companies on a combined basis for all periods presented, except for dividends. On June 25, 1993, FTNC completed the final phase of the HFC acquisition with the merging of HFB into its principal subsidiary, FTBNA. Certain reclassifications of the historical results of these companies have been made to conform to the current presentation. On October 25, 1991, FTNC purchased from Resolution Trust Corporation (RTC) certain assets and assumed certain liabilities of the Mercantile Federal Savings Bank of Southaven, Mississippi, in a regulatory-assisted transaction. The purchase price totaled approximately $402,000. The transaction was accounted for as a purchase, and the results of operations are included in FTNC's consolidated results of operations from the date of acquisition. On September 1, 1991, FTBNA acquired for cash all of the outstanding shares of Valley Fidelity Bank and Trust Company of Knoxville, Tennessee. The acquisition was not material to FTNC and 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 FTNC's consolidated results of operations from the date of acquisition. The cost of the acquisition, totaling approximately $72.9 million, exceeded the estimated fair value of tangible assets and liabilities acquired by approximately $36.1 million. Intangible assets totaling approximately $23.5 million have been identified and are being amoritized over the expected useful lives of the individual components. The excess of the consideration paid over the estimated fair value of the tangible and intangible net assets acquired, totaling approximately $12.6 million, has been recorded as goodwill and is being amortized using the straight-line method over 25 years. On July 8, 1991, HFC through its subsidiary, HFB, acquired from the RTC certain assets and assumed certain liabilities of George Washington Savings and Loan Associates formerly headquartered in Johnson City, Tennessee. The purchase price totaled approximately $2.6 million. The transaction was accounted for as a purchase, and the results of operations are included in FTNC's consolidated results of operations from the date of acquisition. 10 NOTE 3 -- PENDING ACQUISITION On July 28, 1993, FTNC and Cleveland Bank and Trust (CBT) of Cleveland, Tennessee, announced the execution of a definitive agreement pursuant to which a wholly owned subsidiary of FTNC would be merged with and into CBT for approximately $43.8 million in FTNC common stock. The acquisition price is based on FTNC's common stock per share price being within a range of $34.50 to $41.70, inclusive. The Agreement may be terminated if the per share price falls below $34.50. Based on the purchase price and the range of the per share price, FTNC will issue between 1,050,000 and 1,270,000 shares of its common stock. At December 31, 1993, CBT had approximately $227 million in assets and $23 million in capital. The acquisition will be accounted for as a pooling of interests and is subject to regulatory and CBT shareholder approvals. The transaction is expected to close in the first quarter of 1994. 11 NOTE 4 -- CASH AND DUE FROM BANKS Commercial banking subsidiaries of FTNC 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 $103,013,000 at December 31, 1993, and $77,728,000 at December 31, 1992. 12 NOTE 5 -- INVESTMENT AND HELD FOR SALE SECURITIES Securities included in the Consolidated Statements of Condition of $1,317,948,000 and $1,097,164,000 at December 31, 1993 and 1992, respectively, were pledged to secure public deposits, securities sold under agreement to repurchase, and for other purposes. Equity securities include venture capital investment securities. Separate reconciliations of the amortized cost to the estimated market values of investment securities at December 31, 1993 and 1992, are provided below:
INVESTMENT SECURITIES Gross Gross Estimated Amortized Unrealized Unrealized Market (Dollars in thousands) Cost Gains Losses Value -------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1993: U.S. Treasury and other U.S. government agencies $338,447 $2,353 $ (3) $340,797 Government agency issued MBS 392,730 10,708 (1,198) 402,240 Government agency issued CMOs 1,238,010 5,874 (3,773) 1,240,111 States and municipalities 56,430 2,817 (288) 58,959 Private issued CMOs 4,133 25 -- 4,158 Private issued asset-backed 41,021 827 -- 41,848 Other 11,454 205 (278) 11,381 Equity 34,476 23,552 (1,279) 56,749 -------------------------------------------------------------------------------------------------- Total $2,116,701 $46,361 $ (6,819) $2,156,243 ================================================================================================== AT DECEMBER 31, 1992: U.S. Treasury and other U.S. government agencies $341,799 $5,601 $ (179) $347,221 Government agency issued MBS 399,795 15,333 (366) 414,762 Government agency issued CMOs 1,806,089 19,375 (4,393) 1,821,071 States and municipalities 88,276 4,442 (287) 92,431 Private issued CMOs 125,059 1,405 (2) 126,462 Private issued asset-backed 94,564 2,500 (21) 97,043 Other 31,654 285 (7) 31,932 Equity 24,707 16,870 (1,446) 40,131 -------------------------------------------------------------------------------------------------- Total $2,911,943 $65,811 $ (6,701) $2,971,053 ==================================================================================================
The amortized cost and estimated market value of investment securities at December 31, 1993 and 1992, by contractual maturity, are shown below. 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.
Estimated Amortized Market (Dollars in thousands) Cost Value -------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1993: Within 1 year $176,476 $178,069 After 1 year; within 5 years 250,896 254,221 After 5 years; within 10 years 14,686 15,345 After 10 years 5,294 5,350 -------------------------------------------------------------------------------------------------- Subtotal 447,352 452,985 -------------------------------------------------------------------------------------------------- Mortgage-backed securities and CMOs 1,634,873 1,646,509 Equity 34,476 56,749 -------------------------------------------------------------------------------------------------- Total $2,116,701 $2,156,243 ================================================================================================== AT DECEMBER 31, 1992: Within 1 year $151,466 $153,487 After 1 year; within 5 years 348,103 357,706 After 5 years; within 10 years 49,858 50,659 After 10 years 6,866 6,775 -------------------------------------------------------------------------------------------------- Subtotal 556,293 568,627 -------------------------------------------------------------------------------------------------- Mortgage-backed securities and CMOs 2,330,943 2,362,295 Equity 24,707 40,131 -------------------------------------------------------------------------------------------------- Total $2,911,943 $2,971,053 ==================================================================================================
13 Proceeds from sales of investments in debt securities were $476,339,000 during 1993 and were $217,503,000 during 1992. Gross gains of $2,202,000 and gross losses of ($1,246,000) were realized on the 1993 sales while gross gains of $1,744,000 and gross losses of ($2,348,000) were realized on the 1992 sales. Net investment debt securities gains/(losses) after taxes were $592,000, ($381,000), and ($87,000) for the years ended December 31, 1993, 1992, and 1991, respectively. The applicable income tax expense/(benefits) were $364,000, ($223,000), and ($53,000) for the years ended December 31, 1993, 1992, and 1991, respectively. For 1991, a loss in value of $1,043,000 is included in the investment debt securities losses for securities that in the opinion of management had been permanently impaired. At December 31, 1993, and 1992, certain securities were classified as held for sale. In 1993, a net recovery of $248,000 on previous write-downs was recorded, and in 1992 a loss of $1,416,000 was recorded in marking these securities to the lower of cost or market based on the specific identification method. Detail concerning the securities held for sale at December 31, 1993 and 1992, is provided in the table below: SECURITIES HELD FOR SALE
Estimated Gross Amortized Market Unrealized (Dollars in thousands) Cost Value Gains ------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1993: U.S. Treasury and other U.S. government agencies $11,739 $11,943 $204 Government agency issued MBS 37,114 39,178 2,064 Government agency issued CMOs 3,389 3,403 14 States and municipalities 491 1,586 1,095 Private issued asset-backed 302 304 2 -------------------------------------------------------------------------------------------------- Total $53,035 $56,414 $3,379 ================================================================================================== AT DECEMBER 31, 1992: U.S. Treasury and other U.S. government agencies $22,095 $22,233 $138 Government agency issued MBS 72,601 75,406 2,805 Government agency issued CMOs 10,703 10,714 11 States and municipalities 491 997 506 Private issued CMOs 1,068 1,070 2 Private issued asset-backed 3,908 3,953 45 Other 8,296 8,296 -- -------------------------------------------------------------------------------------------------- Total $119,162 $122,669 $3,507 ==================================================================================================
14 NOTE 6 -- NONPERFORMING LOANS The following table presents information concerning nonperforming loans at December 31:
(Dollars in thousands) 1993 1992 ---------------------------------------------------------------- Nonaccrual loans $ 24,805 $ 28,712 Restructured loans 579 1,288 ---------------------------------------------------------------- Total $ 25,384 $ 30,000 ================================================================
Total interest recorded on nonaccrual and restructured loans was $1,622,000 in 1993 and $1,302,000 in 1992. Interest income which would have been earned under the original terms of these loans was approximately $2,904,000 in 1993 and $4,995,000 in 1992. At December 31, 1993, there were no outstanding commitments to advance additional funds to customers whose loans had been restructured. 15 NOTE 7 -- ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses are as follows:
(Dollars in thousands) 1993 1992 1991 ------------------------------------------------------------------- Balance at beginning of year $ 96,795 $ 90,048 $ 86,663 Provision for loan losses 34,540 43,171 53,943 Allowance from acquisitions 785 -- 9,327 Charge-offs 40,349 46,499 69,088 Less loan recoveries 11,963 10,075 9,203 ------------------------------------------------------------------- Net charge-offs 28,386 36,424 59,885 ------------------------------------------------------------------- Balance at end of year $ 103,734 $ 96,795 $ 90,048 ===================================================================
16 NOTE 8 -- PREMISES AND EQUIPMENT Premises and equipment at December 31 are summarized below:
(Dollars in thousands) 1993 1992 ---------------------------------------------------------------------- Land $ 22,016 $ 21,510 Buildings 91,010 82,504 Leasehold improvements 12,311 9,770 Furniture, fixtures, and equipment 147,699 120,976 ---------------------------------------------------------------------- Premises and equipment, at cost 273,036 234,760 Less accumulated depreciation and amortization 147,307 127,875 ---------------------------------------------------------------------- Premises and equipment, net $ 125,729 $ 106,885 ======================================================================
17 NOTE 9 -- CONTINGENCIES Various claims and lawsuits are pending against FTNC 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 FTNC and its subsidiaries. 18 NOTE 10 -- INTANGIBLE ASSETS Following is a summary of intangible assets (net of accumulated amortization) included in the Consolidated Statements of Condition at December 31:
(Dollars in thousands) 1993 1992 - ---------------------------------------------------------------- Goodwill $ 61,143 $20,747 Purchased mortgage servicing rights 41,182 5,964 Premium on purchased deposits and assets 28,905 32,580 - ---------------------------------------------------------------- Total intangible assets $131,230 $59,291 ================================================================
During 1993, goodwill and purchased mortgage servicing rights increased approximately $42.0 million and $31.9 million, respectively, due to the acqusition of MNMC. 19 NOTE 11 -- LEASE COMMITMENTS Leased capital assets included in "Other assets" on the Consolidated Statements of Condition at December 31 are summarized below:
(Dollars in thousands) 1993 1992 - --------------------------------------------------------- Premises $ 1,525 $ 1,525 Less accumulated amortization 1,151 1,087 - --------------------------------------------------------- Leased capital assets-net $ 374 $ 438 =========================================================
Future minimum lease payments for capitalized leases together with the present value of net minimum lease payments at December 31, 1993, are as follows:
(Dollars in thousands) Premises - --------------------------------------------------------- 1994 $ 146 1995 146 1996 146 1997 146 1998 146 1999 and after 136 - --------------------------------------------------------- Total 866 Less amount representing interest 186 - --------------------------------------------------------- Present value of net minimum lease payments $ 680 =========================================================
Rent expense under all operating lease obligations aggregated $12,649,000 for 1993, $11,917,000 for 1992, and $12,131,000 for 1991. Rent expense was reduced by amortization of the deferred building gain, the result of the sale of an office building in 1985. This amortization totalled $1,062,000 in 1993, $1,399,000 in 1992, and $1,820,000 in 1991. Rents received on non-cancelable sublease agreements aggregated $94,000, $52,000, and $52,000 for these years, respectively. With respect to many leased locations, FTNC pays taxes, insurance, and maintenance costs. Most of the leases are for terms ranging from one to 30 years and include renewal options for additional periods of one to 25 years. At December 31, 1993, FTNC's long-term leases required minimum annual rentals as follows:
(Dollars in thousands) Premises Equipment Total - --------------------------------------------------------- 1994 $ 12,231 $ 153 $ 12,384 1995 10,200 140 10,340 1996 8,996 40 9,036 1997 8,127 15 8,142 1998 7,562 -- 7,562 1999 and after 21,720 -- 21,720 - --------------------------------------------------------- Total $ 68,836 $ 348 $ 69,184 =========================================================
Aggregate minimum income under sublease agreements for these periods is $1,203,000. 20 NOTE 12 -- 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. Federal funds purchased arise principally from FTNC'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 FTNC'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 3 to 30 days at December 31, 1993. Commercial paper is an obligation of FTNC and had original maturities ranging from 14 to 187 days at December 31, 1993. 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) 1993 1992 1991 - ----------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase: Balance: Average $ 1,020,678 $ 690,238 $ 597,813 Year-end 1,009,473 753,409 677,687 Maximum month-end outstanding 1,234,541 823,201 691,342 Rate: Average for the year 2.84 % 3.25 % 5.28 % Average at year-end 2.73 2.75 3.63 Commercial paper: Balance: Average $ 30,269 $ 22,401 $ 27,232 Year-end 32,283 21,856 21,658 Maximum month-end outstanding 54,809 34,991 32,210 Rate: Average for the year 3.06 % 3.74 % 6.03 % Average at year-end 3.06 3.23 4.65 Other short-term borrowings: Balance: Average $ 247,714 $ 114,337 $ 73,605 Year-end 288,292 235,018 49,608 Maximum month-end outstanding 467,493 235,018 114,057 Rate: Average for the year 4.33 % 6.56 % 9.09 % Average at year-end 3.69 7.01 6.39 =============================================================================
21 NOTE 13 -- LONG-TERM DEBT The following table presents information pertaining to long-term debt for FTNC and its subsidiaries at December 31:
(Dollars in thousands) 1993 1992 - ------------------------------------------------------------------- FIRST TENNESSEE NATIONAL CORPORATION: Sinking fund debentures--7 3/8% Sinking fund payments of $850,000 due annually 1994 to 1996 with $12,250,000 due 1997 $ 14,800 $ 15,650 Subordinated capital notes--10 3/8% Mature on June 1, 1999 74,512 74,422 Subordinated promissory note to the FDIC Matured February 15, 1993 --- 36,000 FIRST TENNESSEE BANK NATIONAL ASSOCIATION: Industrial development bond payable to City of Alcoa, Tennessee-- 6.10% to 6.50% Annual payment of $150,000 due 1994 and $500,000 due 1999 650 800 - -------------------------------------------------------------------- Total $ 89,962 $ 126,872 ====================================================================
Annual principal repayment requirements for the years 1994 through 1997 approximate $1,000,000, $850,000, $850,000, and $12,250,000, respectively. Annual repayment requirements for 1999 are $75,500,000. The subordinated capital notes were issued on June 10, 1987. Interest is payable on June 1 and December 1 of each year. At maturity, the notes will be exchanged for capital securities having a market value equal to the principal amount of the notes. FTNC may elect to pay the principal amount in cash, in whole or in part, from designated proceeds. Interest on the promissory note to the FDIC was the average equivalent yield of the 1-year Treasury bill plus 50 basis points, adjusted quarterly. The average interest rate on this note was 4.13 percent in 1993 and 4.56 percent in 1992. A major portion of the long-term debt issued by the parent company was downstreamed to First Tennessee Bank National Association to support asset growth and improve bank capital ratios. The bank previously issued $100,000,000 in notes to the parent company corresponding to the subordinated capital notes and subordinated promissory note to the FDIC as indicated in the table above. In 1993, $25,000,000 of notes issued by the bank to the parent company matured. Interest rate and maturity terms are identical to the corporate debt. The remaining note meets bank regulatory capital guidelines. 22 NOTE 14 -- SAVINGS, PENSION AND OTHER POSTRETIREMENT BENEFITS SAVINGS PLAN. Substantially all employees of FTNC and its subsidiaries participate in a contributory savings plan in conjunction with a flexible benefits plan. FTNC contributes during the year into each eligible employee's flexible benefits plan account an amount based on length of service and an amount based on a percentage of the employee's salary, as determined by a committee of the board of directors. The employee may then direct that all or a portion of the contribution be allocated to his savings plan account. Employees may also make pre-tax and after-tax personal contributions to the savings plan. Pre-tax contributions invested in FTNC'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) 1993 1992 1991 - ----------------------------------------------------------------------- Flexible benefits contributions: Performance dollars $ 3,937 $ 3,555 $ 2,467 Service dollars 1,716 1,595 1,415 - ----------------------------------------------------------------------- Total 5,653 5,150 3,882 Company matching contribution 1,976 1,556 1,255 - ----------------------------------------------------------------------- Total employer contribution $ 7,629 $ 6,706 $ 5,137 =======================================================================
PENSION PLAN. Substantially all employees of FTNC 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, FTNC 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 $882,000 in 1993, $1,418,000 in 1992, and $933,000 in 1991. The components of net periodic pension cost were as follows:
(Dollars in thousands) 1993 1992 1991 - ------------------------------------------------------------------------ Service cost-benefits earned during the year $ 4,522 $ 3,771 $ 3,210 Interest cost on projected benefit obligation 5,683 5,000 4,554 Return on plan assets (8,847) (5,978) (11,353) Net amortization and deferral (476) (1,375) 4,522 - ------------------------------------------------------------------------ Net periodic pension cost $ 882 $ 1,418 $ 933 ========================================================================
23 The following table sets forth the plan's funded status at December 31:
(Dollars in thousands) 1993 1992 - ----------------------------------------------------------------------- Plan assets at fair value $ 101,330 $ 86,097 Actuarial present value of projected benefit obligation* 86,355 71,854 - ------------------------------------------------------------------------ Plan assets in excess of projected benefit obligation 14,975 14,243 Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions 10,194 3,765 Prior service cost not yet recognized in net periodic pension cost 1,370 1,492 Unrecognized net transitional asset (4,160) (4,620) - ------------------------------------------------------------------------- Prepaid pension cost recognized in the Consolidated Statements of Condition $ 22,379 $ 14,880 =========================================================================
*At December 31, 1993 and 1992, respectively, the actuarial present values of the accumulated benefit obligation were $61,228,000 and $51,153,000, of which vested benefits were $60,053,000 and $50,173,000. 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 7 percent, respectively, in 1993 and 8.25 percent and 7 percent, respectively, in 1992. The expected long-term rate of return on assets was 9.5 percent and 10 percent for 1993 and 1992, respectively. OTHER POSTRETIREMENT BENEFITS. FTNC 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. FTNC provides postretirement medical insurance to full-time employees retiring under the provisions of the FTNC Pension Plan. The postretirement medical plan is contributory with retiree contributions adjusted annually. In 1992, FTNC 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, FTNC 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 Statement of Condition at December 31:
(Dollars in thousands) 1993 - ------------------------------------------------------------------------ Accumulated postretirement benefit obligation (APBO): Retirees $ (14,788) Actives (7,775) - ------------------------------------------------------------------------- Total APBO (22,563) Plan assets at fair value 8,873 - ------------------------------------------------------------------------- APBO in excess of plan assets (13,690) Unrecognized: Net transition obligation 18,785 Prepaid benefit cost 2,023 - ------------------------------------------------------------------------- Prepaid postretirement benefit cost $ 7,118 =========================================================================
Net periodic postretirement benefit cost for the period ending December 31, 1993, included the following components:
(Dollars in thousands) 1993 - ------------------------------------------------------------------------- Service cost $ 434 Interest cost on APBO 1,582 Actual return on assets (388) Amortization of transition obligation over 20 years 989 Total of other components (292) - ------------------------------------------------------------------------- Net periodic postretirement benefit cost $ 2,325 =========================================================================
24 For measurement purposes, a 14 percent annual rate of increase in the per capita cost of covered health care benefits was assumed; the rate was assumed to decrease 1 percent per year to 7 percent and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. The following table illustrates the effect of increasing the assumed health care cost trend rate by 1 percent.
Current Increased Percent (Dollars in thousands) Trend Trend Change - ---------------------------------------------------------------------- APBO at December 31, 1993 $22,563 $24,081 6.7+ Service and interest cost 2,016 2,144 6.4+ - ----------------------------------------------------------------------
The discount rate used in determining the accumulated postretirement benefit obligation was 7.25 percent. The funding policy for the plan is to fund the maximum amount allowable under the current tax regulations. Plan assets consist primarily of equity and fixed income securities. The trust holding the plan assets for employees that had retired prior to January 1, 1993, is subject to federal income taxes at a 35 percent rate. The trust holding the plan assets for all other FTNC employees, actives and those retired in 1993, is not subject to federal income taxes. The expected long-term rate of return on plan assets before income taxes is 9.5 percent. In 1993 medical plan expense based on claims incurred was $5,317,000 for 3,925 active participants. Medical plan expense in 1992 was $5,796,000 for 3,742 participants including 527 retirees. The 1991 medical plan expense was $4,595,000 for 3,542 participants including 500 retirees. Medical plan expense based on claims paid for retirees only was $760,000 in 1992, and $912,000 in 1991. FTNC does not currently provide group life insurance upon retirement; however, 9 employees, most of whom retired prior to August 1, 1963, are currently provided coverage totaling $130,500. Group life insurance expense based on benefits incurred was $1,031,000 for 5,981 participants in 1993, $801,000 for 4,292 participants in 1992, and $656,000 for 4,014 participants in 1991. During 1992, FTNC acquired HFB which had a contributory retirement plan for all eligible employees. The benefits provided under the plan were funded by HFB's monthly payments equal to the employees' contributions, which were 5% of salaries, plus an additional annual discretionary contribution, with all contributions by HFB being limited to 15% of all participants' salaries paid during the year. Retirement expense under this plan was $568,000, and $515,000 for the years ended December 31, 1992, and 1991, respectively. Effective as of the merger with FTNC, HFB's retirement plan was terminated. In accordance with the plan, and with ERISA, all amounts credited to the plan became fully vested and nonforfeitable. 25 NOTE 15 -- STOCK OPTION, RESTRICTIVE STOCK INCENTIVE, AND DIVIDEND REINVESTMENT PLANS On April 21, 1992, the board of directors authorized a three-for-two stock split to be effected in the form of a 50 percent stock dividend. The shares were distributed May 22, 1992, to shareholders of record on May 8, 1992. Per share amounts in the accompanying text and table have been adjusted for the split. STOCK OPTION PLANS. FTNC has two stock option plans which provide for the granting of both non-qualified and incentive stock options to key executives and employees. The options allow for the purchase of FTNC's common stock at a price equal to its fair market value at the date of grant. The plans allow the exercise price to be less than the fair market value if the grantee has agreed to receive the options in lieu of compensation. The foregone compensation plus the exercise price must equal the fair market value on the date of grant. In 1993, options for 14,485 shares were granted in lieu of compensation under the 1990 Plan. In 1993, no options were granted under the 1984 Plan. In 1992, options for 110,804 and 314,228 shares were granted under the 1984 and 1990 Plans, respectively. For the 1992 grants, the exercise price was equal to the market value on the date of grant. The plans also provide for the grant of Stock Appreciation Rights (SARs) exercisable for the economic appreciation of the stock in the form of cash and/or stock. No SARs have been granted in the last five years. Under the 1984 stock option plan, total stock appreciation rights expense associated with fluctuations in the market value of FTNC stock was $67,000, $83,000, and $149,000 for the years 1993, 1992, and 1991, respectively. In November 1991, the FTNC Board of Directors approved the Bank Advisory Director Deferral Plan for non-employee advisory directors of First Tennessee Bank National Association. Options are awarded to those directors electing to receive them in lieu of attendance fees. The board authorized 120,000 shares to satisfy this plan. Options for 5,640 and 2,727 shares were granted during 1993 and 1992, respectively. RESTRICTED STOCK INCENTIVE PLANS. FTNC has authorized a total of 427,500 shares of its common stock for awards under its 1983 and 1989 restricted stock incentive plans for executive employees who have a significant impact on the profitability of FTNC. Shares awarded under the plans are subject to risk of forfeiture during a restriction period determined by a committee of the board of directors. All shares have been awarded under the 1983 Plan, subject to restrictions which lapse through 1996. Each award under the 1983 Plan provides for supplemental cash payments when the restrictions lapse. In 1993, options for 39,347 shares were granted under the 1989 Plan. At December 31, 1993, the 1989 Plan has 1,622 shares available to be awarded. On April 21, 1992, FTNC's shareholders approved the 1992 Restricted Stock Incentive Plan. The Plan authorized the issuance of up to 330,000 shares. Under the provisions of the Plan, each current director of FTNC shall receive an award of 1,500 shares of restricted common stock. The restrictions on these shares lapse at a rate of 150 shares per year beginning April 30, 1993, and ending January 3, 2003, for seven directors. The shares of the remaining directors lapse equally over their remaining terms. In 1993, options for 21,794 shares were granted. At December 31, 1993, the 1992 Plan has 293,206 shares available to be awarded. Compensation expense related to these plans was $1,586,000, $1,563,000, and $1,123,000 for the years 1993, 1992, and 1991, respectively. 26 The summary of stock option and restricted stock activity is shown below:
Exercise Average Available Options Price Exercise for Grant Outstanding Per Share Price - -------------------------------------------------------------------------------------------- JANUARY 1, 1992 1,506,169 1,230,146 $10.40-25.59 $16.48 Options granted (427,759) 427,759 $18.13-34.29 $34.19 Restricted stock incentive awards (16,500) Shares authorized 330,000 Stock options exercised (371,566) $10.40-22.37 $14.51 SARs exercised (3,228) $10.40-21.25 $14.18 Restricted stock cancelled 1,500 Stock options cancelled 22,978 (22,978) $16.59-34.29 $24.39 ---------- ---------- DECEMBER 31, 1992 1,416,388 1,260,133 $10.40-34.29 $22.93 ========== ========== Options exercisable 393,464 $10.40-22.46 $17.48 - -------------------------------------------------------------------------------------------- JANUARY 1, 1993 1,416,388 1,260,133 $10.40-34.29 $22.93 Options granted (20,125) 20,125 $18.31-20.91 $20.50 Restricted stock incentive awards (61,141) Stock options exercised (114,206) $10.40-34.29 $18.15 SARs exercised (3,292) $16.67-22.17 $21.11 Stock options cancelled 22,850 (22,850) $16.59-34.29 $27.23 ---------- ----------- DECEMBER 31, 1993 1,357,972 1,139,910 $10.40-34.29 $23.29 ========== =========== Options exercisable 562,105 $10.40-34.29 $19.80 - --------------------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN. The Dividend Reinvestment and Stock Purchase Plan, originally adopted in 1979, was amended in 1986 to authorize the sale of 200,000 shares of FTNC's common stock from authorized but unissued common stock or from shares acquired on the open market to shareholders who choose to invest all or a portion of their cash dividends and optional cash payments of $25 to $5,000 per quarter. In 1988, FTNC began purchasing these shares on the open market. The price of the shares purchased directly from FTNC 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. 27 NOTE 16 -- RESTRICTIONS ON DIVIDENDS AND INTERCOMPANY TRANSACTIONS Dividends are paid by FTNC 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 FTNC in the form of cash dividends, loans, or advances. As of December 31, 1993, the banking subsidiaries had undivided profits of $431,944,000 of which $168,215,000 was available for distribution to FTNC as dividends without prior regulatory approval. Pursuant to provisions of the indenture relating to the sinking fund debenture issued December 1, 1972, undivided profits available for dividends are restricted using a calculation that takes into account net income and total dividends paid or declared since 1971. At December 31, 1993, undivided profits of FTNC of $469,901,000 were not restricted by the provisions of the indenture. Under Federal Banking law, banking subsidiaries may not extend credit to the parent company in excess of 10 percent of the banks' capital stock and surplus, or $75,794,000 at December 31, 1993. There were no extensions of credit to the parent from its banking subsidiaries at December 31, 1993. Certain loan agreements and indentures also define other restricted trans- actions related to additional borrowings and public offerings of capital stock. 28 NOTE 17 -- OTHER INCOME AND OTHER EXPENSE Following is detail concerning "Other income" and "Other expense" as presented in the Consolidated Statements of Income:
(Dollars in thousands) 1993 1992 1991 ------------------------------------------------------------------------- OTHER INCOME: Check clearing fees $14,569 $12,956 $ 8,879 Other service charges 9,296 6,942 5,539 All other 21,261 20,053 16,430 ------------------------------------------------------------------------- Total $45,126 $39,951 $30,848 ========================================================================= OTHER EXPENSE: Legal and professional fees $ 8,380 $11,158 $ 7,886 Fed service fees 7,778 7,228 5,311 Supplies 6,937 5,928 5,318 Advertising and public relations 6,947 5,826 4,657 Travel and entertainment 6,242 5,255 4,585 Market adjustments to foreclosed real estate 193 3,180 6,846 All other 31,550 29,566 27,696 ------------------------------------------------------------------------- Total $68,027 $68,141 $62,299 =========================================================================
29 NOTE 18--INCOME TAXES The components of income tax expense (benefit) are as follows:
(Dollars in thousands) 1993 1992 1991 --------------------------------------------------------------------------- Current: Federal $56,240 $44,499 $24,164 State 8,910 6,241 3,112 Deferred Federal (1,619) 4,391 (234) State 326 - Tax law rate change (405) - - --------------------------------------------------------------------------- Total $63,452 $55,131 $27,042 ===========================================================================
The effective tax rates for 1993, 1992, and 1991 were 34.46, 38.21, and 27.02 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) 1993 1992 1991 --------------------------------------------------------------------------- Federal income tax rate 35% 34% 34% --------------------------------------------------------------------------- Tax computed at statutory rate $64,441 $49,061 $34,022 Increase (decrease) resulting from: Tax-exempt interest (3,292) (4,752) (6,545) State income taxes 5,848 4,120 2,053 Minimum tax credit carryforward utilized - (2,903) (4,038) Deferred income taxes on HFC's retained earnings appropriated to absorb bad debt deductions - 7,436 - Tax law rate changes (405) - - Other (3,140) 2,169 1,550 --------------------------------------------------------------------------- Total $63,452 $55,131 $27,042 ===========================================================================
30 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, 1993, were as follows:
Deferred Deferred (Dollars in thousands) Assets Liabilities Total --------------------------------------------------------------------------- Depreciation $ - $ 2,982 $ 2,982 Loss reserves (43,023) - (43,023) Purchase accounting adjustments - 7,738 7,738 Foreclosed property (2,235) - (2,235) Lease operations - 7,527 7,527 Retained earnings appropriated to absorb bad debt deductions - 6,145 6,145 Other (4,840) 1,459 (3,381) --------------------------------------------------------------------------- Net deferred tax (asset) liability at end of year $(50,098) $25,851 (24,247) ============================================================== Less: Net deferred tax (asset) liability at beginning of year (14,301) Impact of MNMC acquisition (8,248) ------------ Deferred tax expense (benefit) $ (1,698) ============
31 NOTE 19 -- LOANS TO RELATED PARTIES In the ordinary course of business, FTNC 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 made to directors and executive officers of FTNC and their associates were $81,278,000 and $62,625,000 at December 31, 1993 and 1992, respectively. The following table summarizes the changes to these amounts:
(Dollars in thousands) 1993 1992 ---------------------------------------------------------------- Balance at beginning of year $ 62,625 $ 88,861 Additions 121,803 87,074 Deletions: Repayments 96,252 106,339 No longer related 6,898 6,971 ---------------------------------------------------------------- Total deletions 103,150 113,310 ---------------------------------------------------------------- Balance at end of year $ 81,278 $ 62,625 ================================================================
32 NOTE 20 -- BUSINESS SEGMENT INFORMATION FTNC is primarily engaged in the banking business. However, significant operations are conducted in the bond division. The bond division operations consist of units which buy and sell certain securities and loans. Total revenue, expense, and asset levels reflect those which are specifically identifiable or which are allocated 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 from period-to-period has been consistently applied. The following table reflects the approximate amounts of consolidated revenue, expense, and assets for the three years ended December 31, for each segment:
(Dollars in thousands) Banking Group Bond Division Consolidated -------------------------------------------------------------------------- 1993 Interest income $ 574,430 $ 12,037 $ 586,467 Interest expense 228,797 11,116 239,913 -------------------------------------------------------------------------- Net interest income 345,633 921 346,554 Other revenues 178,964 91,525 270,489 Other expenses 369,622 63,304 432,926 -------------------------------------------------------------------------- Pre-tax income $ 154,975 $ 29,142 $ 184,117 ========================================================================== Identifiable assets $9,181,411 $427,437 $9,608,848 -------------------------------------------------------------------------- 1992 Interest income $ 586,082 $ 13,155 $ 599,237 Interest expense 264,195 12,108 276,303 -------------------------------------------------------------------------- Net interest income 321,887 1,047 322,934 Other revenues 144,734 80,275 225,009 Other expenses 348,041 55,606 403,647 -------------------------------------------------------------------------- Pre-tax income $ 118,580 $ 25,716 $ 144,296 ========================================================================== Identifiable assets $8,507,588 $418,186 $8,925,774 -------------------------------------------------------------------------- 1991 Interest income $ 627,449 $ 13,147 $ 640,596 Interest expense 349,235 12,568 361,803 -------------------------------------------------------------------------- Net interest income 278,214 579 278,793 Other revenues 122,572 68,628 191,200 Other expenses 320,545 49,384 369,929 -------------------------------------------------------------------------- Pre-tax income $ 80,241 $ 19,823 $ 100,064 ========================================================================== Identifiable assets $8,338,591 $422,124 $8,760,715 --------------------------------------------------------------------------
Capital expenditures and depreciation and amortization occurred primarily in the banking group. Capital expenditures were $31,150,000, $16,289,000, and $20,324,000 for the three years ended December 31, 1993, 1992, and 1991, respectively. Depreciation and amortization was $51,473,000, $40,456,000, and $25,897,000 for 1993, 1992, and 1991, respectively. 33 NOTE 21 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, FTNC is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers and to manage its own exposure to fluctuation in interest rates. These instruments expose FTNC to elements of credit and interest rate risk in addition to amounts reflected in the accompanying consolidated financial statements. These financial instruments include commitments to extend credit; standby, commercial, and similar letters of credit; commitments to sell securities; foreign exchange contracts; futures and forwards contracts; interest rate contracts; and mortgage loans sold with recourse. FTNC follows the same credit policies and underwriting practices in making commitments and conditional obligations as it does for on-balance sheet instruments. In addition, controls for these instruments related to approval, monetary limits, and monitoring procedures are established and reviewed by management's Asset/Liability Committee. In the opinion of management, these outstanding commitments and obligations do not represent unusual risk for FTNC. A summary of FTNC's off-balance sheet financial instruments at December 31, 1993 and 1992, is provided below:
(Dollars in millions) 1993 1992 - ---------------------------------------------------------------------------------- FINANCIAL INSTRUMENTS WHOSE CONTRACT AMOUNTS REPRESENT CREDIT RISK: Commitments to extend credit: Credit card lines $1,300 $1,173 Commercial real estate, construction, and land development 395 82 Home equity 139 121 Other 1,013 828 Standby and commercial letters of credit 169 177 - ----------------------------------------------------------------------------------- FINANCIAL INSTRUMENTS WHOSE NOTIONAL OR CONTRACTUAL AMOUNTS EXCEED CREDIT RISK: Forward and futures contracts: Bond division commitments to purchase $ 656 $ 418 Bond division commitments to sell 603 410 Mortgage banking commitments to sell 634 104 Interest rate swap agreements 1,420 56 Interest rate caps and floors and options written 503 1 Mortgage loans sold with recourse 710 - Foreign exchange rate contracts 6 7 - -----------------------------------------------------------------------------------
Commitments to extend credit are agreements to lend to a customer at a future date. Commitments 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 drawn upon, the total commitment amounts do not necessarily represent future cash requirements. FTNC evaluates each customer's creditworthiness on a case-by-case basis. Standby and commercial letters of credit are conditional commitments issued by FTNC to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. FTNC evaluates each customer's creditworthiness on a case-by-case basis. Mortgage loans sold with recourse are mortgages sold with provisions for recourse by MNMC, a mortgage banking affiliate acquired by FTBNA in 1993. These loans were sold with an agreement to repurchase the loan upon default. Credit risk exists to the extent of recourse, which totaled approximately $416 million at December 31, 1993. A reserve of $14.5 million has been established for these loans that may default in the future. These loans are reviewed on a regular basis to ensure that reserves are adequate to provide for foreclosure losses. The amount of collateral obtained, if deemed necessary by FTNC upon the extension of credit under these instruments, is based on management's credit evaluation of the counterparty. Collateral held varies but may include marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Access to that collateral is maintained in various ways, mainly through the holding of notes, deeds, titles and receipts, through UCC filings, and through dual control over access to certain pledged marketable securities. Forward and futures contracts are contracts for delayed delivery of securities or financial instruments in which the seller agrees to make delivery at a specified future date of a specified instrument at a specified price or yield. These obligations are generally short term in nature. Risks arise from the possible inability of counterparties to meet the terms of the contracts and from movements in the instruments' value and interest rates. The contractual amounts significantly exceed the future cash requirements, since FTNC has the ability to close open positions to purchase prior to settlement and thus would be subject only 34 to the change in value of the instruments. 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. An interest rate swap generally involves the exchange of interest payment obligations on a specified notional principal amount of assets or liabilities for an agreed-upon period of time without the exchange of the underlying principal amounts. Notional principal amounts often are used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. During 1993, FTNC entered into a $1 billion interest rate swap agreement in order to minimize the impact from the expected narrowing of the spread earned between base rate loans and short-term market rate funding instruments. The agreement will mature in 1996. The 1993 impact on net interest income was a reduction of $200,000. An additional $400 million of swaps in index amortizing fixed rate instruments vs floating rate instruments were purchased as part of the on-going interest rate sensitivity management. These swaps have an embedded amortization feature which causes the maturity of these instruments to accelerate as interest rate levels change. The maturity can vary between two years and four years depending on the level of the three month LIBOR beginning in 1995. The 1993 impact on net interest income was an increase of $1 million. FTNC is party to a similar agreement that was entered into during 1990. The remaining portion, $20 million, is scheduled to mature throughout 1994. The 1993 impact on net interest income was a reduction of $1.6 million. Interest rate caps and floors obligate one of the parties to make payments if an interest rate index exceeds a specified upper "capped" level or if the index falls below a specified lower "floor" level. During 1993, $250 million in federal funds caps were purchased and $250 million in base rate caps were sold, creating an interest rate collar that matures in 1996. At December 31, 1993, there was $540,000 in deferred collar expense. This expense is being amortized by the straight-line method over the life of the collar. During 1993, $210,000 of collar expense was recognized as a reduction to net interest income. Options written are contracts that allow the holder of the option to purchase or sell a financial instrument at a specified price and within a specified period of time from or to the "seller" or "writer" of the option. As a writer of options, FTNC receives a premium at the outset and then bears the risk of an unfavorable change in the price of the financial instrument underlying the options. Typically, FTNC purchases an option to offset the option written to reduce its risk exposure. At December 31, 1993, the exposure was immaterial to FTNC. FTNC also enters into commitments to purchase foreign currencies and U.S. dollar exchange which are agreements for delayed delivery of a foreign currency or U.S. dollar exchange in which the seller agrees to deliver, at a specified future date, a specified amount at a specified exchange rate. Risks arise from the possible inability of counterparties to meet the terms of their contracts. To reduce the exposure to risk, FTNC purchases a contract to offset the contract written. The exposure to these instruments at December 31, 1993, was immaterial. At December 31, 1993, there was also a $132,000 deferred loss resulting from an interest rate hedge related to the 1989 subordinated capital note issue. These notes mature in 1999. The loss is being amortized by the straight-line method over the life of the notes. The 1993 impact was to reduce net interest income by $24,000. For information related to the estimated fair value of the instruments refer to Note 23. CONCENTRATION OF CREDIT RISK. FTNC grants commercial, agribusiness, residential, and consumer loans primarily to customers throughout Tennessee and its contiguous states through its banking facilities. Through the purchase of MNMC, mortgage loan originations have advanced into Maryland, Virginia, Pennsylvania, Delaware, New Jersey, and Colorado. Although FTNC has a diversified loan portfolio, the ability of its debtors to honor their contracts is to some extent dependent upon the economic conditions of the geographic regions in which they operate. 35 NOTE 22 -- SHAREHOLDER PROTECTION RIGHTS AGREEMENT In September 1989, FTNC 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 FTNC's common stock or commences a tender offer that will result in such person or group owning 10 percent or more of FTNC's common stock, the rights will be evidenced by the common stock certificates, will automatically trade with the common stock, and will not be exercisable. Thereafter, separate rights certificates will be distributed and each right will entitle its holder to purchase one one-hundredth of a share of participating preferred stock having economic and voting terms similar to those of one share of common stock for an exercise price of $76.67. If any person or group acquires 10 percent or more of FTNC'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 FTNC common stock or participating preferred stock having a market value of twice the exercise price. Also, if FTNC 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 FTNC's common stock, FTNC'S Board of Directors may, at its option, exchange one share of FTNC common stock or one one-hundredth of a share of participating preferred stock for each right. The rights will expire on the earliest of one of the following three times: the time of the exchange described in the preceding sentence; September 18, 1999; or the date the rights are redeemed as described in the following sentence. The rights may be redeemed by the board of directors for $0.01 per right prior to the day when any person or group acquires 10 percent or more of FTNC's common stock. 36 NOTE 23 -- 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 FTNC's financial instruments at December 31, 1993 and 1992:
Impact Book Fair Favorable Percent (Dollars in thousands) Value Value (Unfavorable) Change --------------------------------------------------------------------------------------------- AT DECEMBER 31, 1993: ASSETS: Loans (net of unearned income): Floating $2,408,824 $2,410,839 $ 2,015 -- Fixed 2,834,439 2,953,342 118,903 4.2 + Nonaccrual 24,805 24,805 -- -- Allowance for loan losses (103,734) (103,734) -- -- ----------------------------------------------------------------------------------- Total net loans 5,164,334 5,285,252 120,918 2.3 + Liquid assets 323,863 323,863 -- -- Mortgage warehouse loans held for sale 719,500 722,056 2,556 0.4 + Securities held for sale 53,035 56,414 3,379 6.4 + Investment securities 2,116,701 2,156,243 39,542 1.9 + Nonearning assets 772,646 772,646 -- -- ----------------------------------------------------------------------------------- LIABILITIES: Deposits: Defined maturity $2,587,233 $2,624,550 $(37,317) 1.4 - Undefined maturity 4,559,518 4,559,518 -- -- ----------------------------------------------------------------------------------- Total deposits 7,146,751 7,184,068 (37,317) 0.5 - Short-term borrowings 1,330,048 1,330,023 25 -- Long-term debt 89,962 106,548 (16,586) 18.4 - Other noninterest- bearing liabilities 188,575 188,751 (176) 0.1 - ----------------------------------------------------------------------------------- OFF-BALANCE SHEET: Interest rate swaps paying floating rates $ -- $ 291 $ 291 Futures and forwards -- 470 470 Standby letters of credit -- 2,117 2,117 Commitments to extend credit 3,493 3,493 -- --------------------------------------------------------------------------------------------- AT DECEMBER 31, 1992: ASSETS: Loans (net of unearned income): Floating $2,349,498 $2,349,999 $ 501 -- Fixed 2,144,218 2,205,637 61,419 2.9 + Nonaccrual 28,712 28,712 -- -- Allowance for loan losses (96,795) (96,795) -- -- ----------------------------------------------------------------------------------- Total net loans 4,425,633 4,487,553 61,920 1.4 + Liquid assets 474,968 474,968 -- -- Mortgage warehouse loans held for sale 87,590 87,900 310 0.4 + Securities held for sale 119,162 122,669 3,507 2.9 + Investment securities 2,911,943 2,971,053 59,110 2.0 + Nonearning assets 641,885 641,885 -- -- ----------------------------------------------------------------------------------- LIABILITIES: Deposits: Defined maturity $2,836,870 $2,863,953 $(27,083) 1.0 - Undefined maturity 4,079,892 4,079,892 -- -- ----------------------------------------------------------------------------------- Total deposits 6,916,762 6,943,845 (27,083) 0.4 - Short-term borrowings 1,010,283 1,010,383 (100) -- Long-term debt 126,872 135,353 (8,481) 6.7 - Other noninterest- bearing liabilities 157,261 157,006 255 0.2 + ----------------------------------------------------------------------------------- OFF-BALANCE SHEET: Interest rate swaps paying fixed rates $ -- $ (1,585) $ (1,585) Futures and forwards -- (663) (663) Standby letters of credit -- 1,330 1,330 Commitments to -- extend credit 3,107 3,107 -- ---------------------------------------------------------------------------------------------
37 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 FTNC 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 FTNC 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. INVESTMENT SECURITIES. Market quotes are used for the fair value of investment securities. SECURITIES HELD FOR SALE. Market quotes are used for the fair value of securities held for sale. NONEARNING ASSETS. The fair value of nonearning assets is 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 FTNC prices for similar instruments applicable to the remaining maturity. For the purpose of this disclosure, defined maturity deposits include all certificates of deposit and other time deposits. UNDEFINED MATURITY DEPOSITS. The fair value of undefined maturity deposits is required by the statement to equal the book value. For the purpose of this disclosure, undefined maturity deposits include demand deposits, checking interest accounts, savings accounts, and money market accounts. SHORT-TERM BORROWINGS. The fair value of federal funds purchased, securities sold under agreements to repurchase, commercial paper, and other short-term borrowings is approximated by the book value. Market quotes are used for Federal Home Loan Bank borrowings. LONG-TERM DEBT. The fair value for long-term debt is calculated by discounting future cash flows to their present value. Future cash flows, consisting of both principal and interest payments, are discounted using the current yield to maturity for FTNC's outstanding long-term debt as quoted by Keefe, Bruyette and Woods, Inc. OTHER NONINTEREST-BEARING LIABILITIES. For the purpose of this disclosure, other noninterest-bearing liabilities include accrued interest payable and bond division payables. Accrued interest, which is not payable until the maturity of an instrument, has been discounted to its present value given current market rates and the maturity structure of the financial instrument. The fair value of bond division payables is approximated by the book value. 38 OFF-BALANCE SHEET. Market quotes are used for off-balance sheet hedging instruments (interest rate swaps, futures, and forwards). Fair values for standby letters of credit were estimated using fees currently charged to enter into similar agreements with similar maturities. The book value for commitments to extend credit, which approximates the fair value, represents accruals or deferred income arising from related unrecognized financial instruments. 39 NOTE 24 -- CONDENSED FINANCIAL INFORMATION Following are condensed statements of the parent company:
STATEMENTS OF CONDITION December 31 ---------------------- (Dollars in thousands) 1993 1992 - ------------------------------------------------------------------- Assets: Cash $ 222 $ 6,327 Securities purchased from subsidiary bank under agreements to resell 50,956 55,712 - ------------------------------------------------------------------- Total cash and cash equivalents 51,178 62,039 Other securities 5,906 5,502 Notes receivable--short-term -- 25,000 Notes receivable--long-term 75,000 75,046 Investments in subsidiaries at equity: Bank 657,513 491,250 Non-bank 10,476 95,078 Other assets 23,720 20,760 - ------------------------------------------------------------------- Total assets $ 823,793 $ 774,675 =================================================================== Liabilities and shareholders' equity: Commercial paper and other short-term borrowings $ 32,283 $ 21,856 Accrued employee benefits and other liabilities 23,081 29,077 Long-term debt 89,444 126,229 - ------------------------------------------------------------------- Total liabilities 144,808 177,162 Shareholders' equity 678,985 597,513 - ------------------------------------------------------------------- Total liabilities and shareholders' equity $ 823,793 $ 774,675 ===================================================================
40
STATEMENTS OF INCOME Year Ended December 31 --------------------------------- (Dollars in thousands) 1993 1992 1991 - --------------------------------------------------------------------- Dividend income: Bank $ 41,837 $ 32,375 $ 29,920 Non-bank -- 6,283 5,191 - --------------------------------------------------------------------- Total dividend income 41,837 38,658 35,111 Interest income 9,412 10,626 12,248 Management fees 18,611 16,529 13,448 Other income 29 3 8 Equity security gain (loss) -- 71 (558) - --------------------------------------------------------------------- Total income 69,889 65,887 60,257 - --------------------------------------------------------------------- Interest expense: Short-term debt 927 838 1,641 Long-term debt 9,157 10,678 11,477 - --------------------------------------------------------------------- Total interest expense 10,084 11,516 13,118 Salaries, employee benefits and other expense 18,594 16,579 13,822 - --------------------------------------------------------------------- Total expense 28,678 28,095 26,940 - --------------------------------------------------------------------- Income before income taxes and equity in undistributed net income of subsidiaries 41,211 37,792 33,317 Applicable income taxes (1,284) (2,342) (1,350) - --------------------------------------------------------------------- Income before equity in undistributed net income of subsidiaries 42,495 40,134 34,667 Equity in undistributed net income of subsidiaries: Bank 76,575 58,399 33,107 Non-bank 1,595 (9,368) 5,248 - --------------------------------------------------------------------- Net income $ 120,665 $ 89,165 $ 73,022 =====================================================================
41
STATEMENTS OF CASH FLOWS Year Ended December 31 ------------------------------- (Dollars in thousands) 1993 1992 1991 - ---------------------------------------------------------------------------- Operating activities: Net income $ 120,665 $ 89,165 $ 73,022 Less undistributed net income of subsidiaries 78,170 49,031 38,355 - ---------------------------------------------------------------------------- Income before undistributed 42,495 40,134 34,667 net income of subsidiaries Adjustments to reconcile income to net cash provided by operating activities: Provision for deferred income taxes (1,228) (1,077) (1,654) Depreciation and amortization 2,405 2,149 1,414 Investment securities losses (gains) -- (71) 558 Net (increase) decrease in: Interest receivable 291 156 153 Other assets (611) 8,303 (1,331) Net increase (decrease) in: Interest payable (329) (236) (272) Other liabilities 2,942 (2,919) 6,421 - ---------------------------------------------------------------------------- Total adjustments 3,470 6,305 5,289 - ---------------------------------------------------------------------------- Net cash provided by operating activities 45,965 46,439 39,956 - ---------------------------------------------------------------------------- Investing activities: Proceeds from maturity of investment securities 5,000 -- 5,000 Proceeds from sale of investment securities -- 1,084 -- Payments for purchase of: Investment securities (5,439) -- (5,047) Premises and equipment (539) (378) (265) Net decrease in loans 25,046 -- -- Return of investments 13 13 19 Investment in subsidiaries (971) -- (2,902) - ---------------------------------------------------------------------------- Net cash provided (used) by investing activities 23,110 719 (3,195) - ---------------------------------------------------------------------------- Financing activities: Proceeds from exercise of stock options 2,014 5,272 2,679 Payments for: Long-term debt (36,850) (426) -- Cash dividends (50,730) (27,927) (38,695) Repurchase of common stock (4,797) (1,138) (4,227) Increase (decrease) in borrowings 10,427 198 (6,535) - ---------------------------------------------------------------------------- Net cash used by financing activities (79,936) (24,021) (46,778) - ---------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (10,861) 23,137 (10,017) - ---------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 62,039 38,902 48,919 - ---------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 51,178 $ 62,039 $ 38,902 ============================================================================ Total interest paid $ 10,377 $ 11,680 $ 13,348 Total income taxes paid 55,484 40,000 20,091 ============================================================================
42 ___________________________________________________________________ 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, 1993 and 1992, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993. 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 did not audit the 1991 financial statements of Home Financial Corporation, a company acquired during 1992 in a transaction accounted for as a pooling of interests, as discussed in Note 2. Such statements are included in the consolidated financial statements of First Tennessee National Corporation. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for Home Financial Corporation for 1991, is based solely upon the report of the other auditors. 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, 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, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Note 14 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for postretirement benefits other than pensions. Memphis, Tennessee, January 18, 1994 Arthur Andersen & Co. 43 MANAGEMENT DISCUSSION & ANALYSIS CONSOLIDATED FINANCIAL REVIEW First Tennessee National Corporation (FTNC) is the largest Tennessee-based bank holding company. FTNC offers a wide range of financial services to consumers, businesses, financial institutions, and governments. On October 1, 1993, First Tennessee Bank National Association (FTBNA), a subsidiary of FTNC, completed the acquisition of Maryland National Mortgage Corporation (MNMC) for approximately $114 million in cash. The total purchase price included value for purchased mortgage servicing rights and approximately $41 million for tangible net assets. MNMC, which became a subsidiary of FTBNA at the close of the transaction, was the wholly owned mortgage banking subsidiary of MNC Financial, Inc., a Baltimore-based bank holding company. MNMC and its subsidiary, Atlantic Coast Mortgage Company, originate and service residential mortgage loans through a network of 31 offices primarily in Maryland, Virginia, Pennsylvania, Delaware, New Jersey, and Colorado. In 1993, MNMC originated $3.1 billion in mortgage loans and at year-end serviced $4.4 billion in mortgage loans. MNMC will continue to operate from its current headquarters in Baltimore. On December 31, 1993, FTNC completed its acquisition of New South Bancorp (NSB) by merging into FTNC, NSB, the parent of New South Bank which has offices in Southaven, Como, and Crenshaw, Mississippi. Simultaneously, New South Bank merged into First Tennessee Bank National Association Mississippi. At December 31, 1993, NSB had $35 million in total assets, $32 million in total deposits, and $3 million in capital. On January 4, 1994, FTNC completed the acquisition of SNMC Management Corporation (SNMC) for approximately $68 million in FTNC common stock. SNMC, which became a subsidiary of FTBNA at the close of the transaction, is the parent of Sunbelt National Mortgage Corporation (Sunbelt), both of which are headquartered in Dallas. Sunbelt originates and services residential mortgage loans primarily through a network of 40 offices in 14 states, with most of the originations occurring in the Southwest, Florida, and North Carolina. In 1993, Sunbelt originated $3.3 billion in mortgage loans and at year-end serviced $6.1 billion in mortgage loans. SNMC will continue to operate from its current headquarters in Dallas. On March 1, 1994, Highland Capital Management Corp. (HCMC) merged with First Tennessee Investment Management, Inc. (FTIM), a wholly owned subsidiary of FTNC. The combined organization became a subsidiary of FTNC with the name Highland Capital Management Corp. and manages $2.6 billion in fixed income and equity securities. On July 28, 1993, FTNC and Cleveland Bank and Trust Company (CBT) of Cleveland, Tennessee, announced the execution of a definitive agreement providing for the acquisition of CBT by FTNC. CBT had $227 million in assets, $200 million in deposits, and $23 million in capital at December 31, 1993. This transaction is expected to close in the first quarter of 1994. In addition to expanding the core banking franchise in Tennessee markets, FTNC's strategy is to extend its market presence into attractive markets outside of Tennessee. Further expansion of other key business lines, such as the bond division, mortgage banking, credit card, merchant credit card processing, check processing, and trust services is expected to occur as appropriate opportunities are identified. This section provides a narrative discussion and analysis intended to cover the significant factors that affected FTNC's financial condition and results of operations for the last three years. The consolidated financial statements and accompanying notes should be read in conjunction with this discussion and the tables and graphs which are set forth immediately following this Consolidated Financial Review. FINANCIAL PERFORMANCE SUMMARY FTNC reported record earnings for 1993. Net income per share for 1993 was $4.26 compared to $3.19 per share for 1992 and $2.63 per share for 1991. Net income totaled $120.7 million in 1993 versus $89.2 million in 1992 and $73.0 million in 1991. 44 Two key measures of profitability in the banking industry are return on average equity (ROE) and return on average assets (ROA). ROE was 18.99 percent in 1993 versus 15.44 percent in 1992 and 14.14 percent in 1991. ROA rose to 1.35 percent in 1993 from 1.07 percent in 1992 and .95 percent in 1991. The 1992 earnings were impacted by the one-time acquisition expenses of Home Financial Corporation (HFC) during the fourth quarter. These expenses reduced earnings per share by 56 cents, and after adjusting for this impact, the return on equity would have been 18.14 percent and the return on assets would have been 1.26 percent. In addition, higher net interest income (NII), a lower provision for loan losses, and strong growth in noninterest income contributed to the improved profitability. Increased noninterest expense partially offset the improvement in earnings. Supporting the growth in NII was a higher level of average earning assets. The net interest margin (NIM) remained stable at 4.35 percent in 1993 compared to 4.37 percent in 1992. The decline in the loan loss provision reflected the continued improvement in asset quality which has occurred over the last three years. Noninterest income provided a significant contribution to 1993 earnings, reaching approximately 44 percent of total revenues. Growth in noninterest income was led by a substantial increase in mortgage banking revenues, primarily related to the MNMC acquisition followed by increases in income from the bond division, service charges on deposit accounts, bank card fees, trust services, and other noninterest income. The increase in noninterest expense was primarily due to the acquisitions in 1993 which were included in the results of operations from the dates of acquisition without restating prior years, and from higher personnel costs in the commission-driven businesses of the bond division and mortgage banking. The earnings improvement in 1992 was also achieved through higher NII, growth in noninterest income, and a lower loan loss provision. NII growth was the result of growth in average earning assets and an increase in the NIM. The growth in noninterest income was due primarily to an increase in bond division revenues followed by increases in income from service charges on deposit accounts, bank card fees, trust services, and mortgage banking. The reduction in the loan loss provision was the result of improvements in credit quality during the year. An increase in noninterest expenses between years reduced the overall improvement in earnings in 1992. The increase in noninterest expense was primarily due to the one-time merger costs related to the HFC acquisition and higher personnel costs. The 1991 earnings reflected improvements in NII, growth in noninterest income, and a lower loan loss provision. Higher NII resulted from an increase in average earning assets and a wider NIM. The growth in noninterest income was due primarily to an increase in bond division revenues, followed by increased income from service charges on deposit accounts, bank card fees, trust services, and mortgage banking. The reduction in the loan loss provision was the result of improvements in credit quality during the year. An increase in noninterest operating expenses between years reduced the overall improvement in earnings in 1991. The 1991 results include the acquisition of Valley Fidelity Bank and Trust Company (Valley) from September 1, 1991, forward. EARNINGS ANALYSIS NET INTEREST INCOME NII is the principal source of earnings for FTNC. For purposes of this discussion, NII has been adjusted to a fully taxable equivalent basis for certain tax-exempt loans and investments included in earning assets. NII for 1993 was $351.9 million, an increase of 6.4 percent from the $330.6 million reported for 1992. NII grew 14.6 percent in 1992 from the $288.6 million reported for 1991. The improvement in NII for 1993 was due to a higher volume of average earning assets. The NIM changed to 4.35 percent in 1993 from 4.37 percent in 1992, slightly 45 reducing NII growth through the year. The acquisition of MNMC during the fourth quarter increased NII due to the substitution of higher yielding mortgage warehouse loans for investment securities. In 1992 and 1991 a higher level of earning assets also contributed to the increase in NII; moreover, an increase in the NIM positively impacted NII. In addition, the acquisition of Valley during the third quarter of 1991 supported the growth in NII for 1992 and 1991 by providing a significant portion of the increase in earning assets and core deposits for the two-year period. Growth in average earning assets of 7.0 percent to $8.1 billion provided almost all of the increase in NII in 1993. Average earning assets increased 8.4 percent to $7.6 billion in 1992. In 1991 average earning assets reached $7.0 billion, a 6.7 percent increase from the preceding year. Improved loan growth returned in 1993, stabilizing the earning asset mix. Average loans, net of unearned income, grew 9.6 percent for the year and raised its percentage of average earning assets to 61.1 percent while holding the percentage of average investment and held for sale securities to earning assets flat at 34.9 percent. This was in contrast to the two previous years when the increase in average earning assets was primarily allocated to the purchase of securities due to the weak demand for commercial loans. In 1992 average investment and held for sale securities comprised 34.9 percent of average earning assets compared to 26.4 percent in 1991. At the same time, average loans, net of unearned income, grew at a much slower rate, causing its percentage of average earning assets to decline. In 1992 average loans, net of unearned income, comprised 59.7 percent of average earning assets compared to 62.0 percent in 1991. The growth in average earning assets was funded by increases in short-term purchased money and net free funding during 1993. Average interest-bearing core deposits, which had primarily funded the previous years' increases, remained flat in 1993, as low interest rates forced many depositors into alternative investments. Average interest-bearing core deposits continued to be FTNC's largest source of funding, providing 60.4 percent of the required earning asset funding. NIM averaged 4.35 percent in 1993, compared to 4.37 percent in 1992 and 4.13 percent in 1991. In contrast to the margin, the net interest spread continued to widen. The net interest spread increased to 3.70 percent in 1993 from 3.62 percent in 1992 and 3.19 percent in 1991. These increases in the spread reflect the repricing and rate sensitivity characteristics of FTNC's balance sheet; however, the low interest rate environment has reduced the impact of net free funds on NIM, offsetting the improvement in the net interest spread. NIM should remain stable in 1994 as the mortgage banking acquisitions impact the full year, the percentage of loans to earning assets rises further, and the economy continues to grow. PROVISION 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 is increased by the provision and decreased by loan charge-offs, net of recoveries. The evaluation process to determine potential losses includes consideration of the industry, specific conditions of the individual borrower, and the general economic environment. As these factors change, the level of loan loss provision changes. In 1993 the provision totaled $34.5 million, an $8.7 million decrease from the $43.2 million reported in 1992 and a $19.4 million decline from the 1991 provision of $53.9 million. These substantial decreases in the provision reflect the significant improvement that has occurred in asset quality since 1990. Additional discussion of asset quality can be found under Credit Risk Management and Asset Quality. NONINTEREST INCOME Total noninterest income for the year rose 20.2 percent compared to a 17.7 percent increase in 1992 and a 23.2 percent increase in 1991. The increase in 1993 over 1992 was 19.0 percent after adjusting for the impact of securities transactions in both years. Details of noninterest 46 income components are presented in the Analysis of Noninterest Income and Noninterest Expense table. Mortgage banking income grew 168.8 percent in 1993. This increase was primarily related to the MNMC acquisition, which was accounted for as a purchase. MNMC added approximately $4.4 billion to the mortgage loan servicing portfolio at December 31 and originated $908 million in mortgage loans during the fourth quarter. Excluding the impact of MNMC, mortgage banking income grew 8.5 percent in 1993. The 1992 increase was 27.4 percent compared to a 6.7 percent increase in 1991. In general, FTNC's mortgage banking fee income growth was due to increased mortgage servicing fees and increased loan origination volume. Bond division revenues increased 14.0 percent in 1993 following a 17.0 percent increase in 1992 and a 64.6 percent increase in 1991. The improved performance has primarily been the result of increased market penetration across the nation, additional products, and the diversification of the customer base. Further discussion of bond division revenues is included in the Bond Division discussion. Net securities gains amounted to $725,000 in 1993, as securities were sold in the normal course of business and in anticipation of the adoption of a new accounting standard on January 1, 1994, while venture capital had net losses. Securities losses totaled $1.7 million in 1992 compared to an $853,000 loss in 1991. The net losses in 1992 included a markdown of $1.4 million on the investment securities classified as securities held for sale at December 31, 1992. In 1991 net losses were primarily related to valuation adjustments on equity and debt securities which in the opinion of management had been permanently impaired. Excluding bond division revenues, mortgage banking revenues, and security transaction gains or losses, noninterest income increased 10.4 percent in 1993 over 1992. Income from service charges on deposit accounts rose 8.7 percent in 1993 after a 17.3 percent increase in 1992 and 15.4 percent growth in 1991. The growth in 1993 was primarily related to an increase in services sold to businesses and a lower earnings credit rate on corporate demand deposit accounts. The 1992 and 1991 growth rates were also impacted by an increased level of services sold to businesses; moreover, the combination of a larger number of accounts and an increase in the fee for FDIC insurance contributed to the higher growth in income from service charges. Bank card income, which includes both cardholder and merchant processing fees, increased 9.3 percent in 1993 compared to an 8.3 percent increase in 1992 and a 16.5 percent increase in 1991. The increases experienced over the last three years primarily reflect growth in the volume of merchant credit card transactions processed. In addition, the 1991 increase was positively impacted by a significant change in pricing during the year. Trust services income rose 10.7 percent compared to 12.0 percent growth in 1992 and 16.2 percent in 1991. Growth in trust services income was the result of increased customer activity in personal trusts and employee benefit plans. The addition of Valley's trust business during 1991 contributed to the higher growth rates in trust services fees in 1992 and 1991. Assets under management by the trust division and FTIM at the end of 1993 approximated $3.5 billion and total trust assets including custodial accounts were approximately $13.1 billion. Total other noninterest income grew 13.0 percent in 1993 compared to a 29.5 percent increase in 1992 and a decrease of 11.7 percent in 1991. The largest source of the growth in 1993 was a 33.9 percent increase in income from other service charges, primarily related to the additional sales of mutual fund products, reflecting FTNC's response to changing customer needs. Income from check clearing fees increased 12.4 percent in 1993 as the volume of checks processed by First Express, FTNC's national check processing operation, continued to grow. The remainder of the increase was spread among several other noninterest categories. One-third of the 17.7 percent increase in noninterest income in 1992 was attributable to an increase in bond division revenue, reflecting a continuation of the national market share growth and an expanded product line. Also contributing to the increase in noninterest income was a 17.3 percent increase in income from service charges on deposit accounts, followed by an 8.3 percent increase in bank card income, and a 12.0 percent increase in trust services income. The remainder of the 47 increase was spread among several other income categories including check clearing fees and other service charges. Noninterest income increased 23.2 percent in 1991 due to a 64.6 percent increase in bond division income, a 15.4 percent increase in income from service charges on deposits accounts, a 16.5 percent increase in bank card income, and a 16.2 percent increase in trust services income. NONINTEREST EXPENSE Noninterest operating expense increased 10.5 percent in 1993. The increase was 14.1 percent in 1992 and 18.3 percent in 1991. Details of the components of noninterest operating expense are listed in the Analysis of Noninterest Income and Noninterest Expense table. The 10.5 percent, or $37.9 million, increase in 1993 includes the impact of the MNMC and NSB acquisitions in the fourth quarter of 1993. These acquisitions added $20.4 million to expenses in the fourth quarter of 1993. One-time expenses of $10.4 million, primarily related to the HFC merger, were recorded in 1992. Excluding these expenses from both years, noninterest expense increased $27.9 million, or 8.0 percent, in 1993. Salaries and employee benefits, the single largest expense category of noninterest expense, accounted for approximately 75 percent of the $27.9 million increase between 1993 and 1992. A significant portion of the increase in personnel costs was an increase of 15.0 percent in personnel expenses from bond division activities. These expenses generally move in direct relationship with the revenues generated by the bond division. In addition, the personnel expense in FTNC's mortgage banking division also rose significantly as customer activity increased in 1993. These expenses grew 33.1 percent in 1993 as originations rose from $469 million in 1992 to $685 million in 1993. Like the bond division, these expenses generally move in direct relationship with revenue. Excluding these expenses, salaries and employee benefits increased 8.9 percent compared to 1992. The remainder of the increase was primarily due to the expansion of several other lines of business, regular salary increases, and higher medical claims. Operations services expense grew 10.9 percent in 1993 from the previous year. These costs are related to management of data processing functions by third parties. The largest part of the expense is represented by an agreement FTNC has with International Business Machines Corporation to manage FTNC's computer and telecommunications operations and related maintenance contracts. Excluding the amortization related to the MNMC acquisition, the amortization of intangible assets declined by $4.2 million in 1993 as a portion of the core deposit intangible assets related to acquisitions in East Tennessee became fully amortized in the first half of 1993. However, the acquisition of MNMC partially offset this favorable impact when it added $73.9 million to intangible assets during the fourth quarter. This expense item will increase in 1994 as the amortization of MNMC's intangible assets impacts the entire year, and the acquisition of SNMC adds additional intangible assets. Other noninterest expense increased 5.0 percent in 1993 compared to 1992. The increase in other noninterest expense was spread among several expense items including advertising, travel and entertainment, fed service fees, supplies, and employee training. One noninterest expense category declined significantly during 1993. Market writedowns on foreclosed property decreased by approximately $3 million in 1993 due to the substantial improvement in asset quality. The increase of 14.1 percent, or $44.5 million, in noninterest expense during 1992 was related to several factors. The largest single factor was the $10.4 million in one-time expenses, primarily related to the HFC acquisition. Secondly, the bond division contributed $6.2 million of the growth due to higher volume. Amortization of intangible assets increased $3.2 million, as the Valley acquisition in September 1991 increased intangible assets by $34.5 million. Lastly, an increase in the FDIC premium rate added $2.4 million to expenses. Excluding these amounts, noninterest operating expenses increased 7.1 percent in 1992, primarily related to the acquisition of Valley. 48 The 18.3 percent increase in noninterest expense during 1991 was primarily attributable to four items. The largest, accounting for $16.1 million of the increase, was bond division expense. Expenses associated with the Valley acquisition, including one-time merger costs of $1.0 million, accounted for another $7.1 million of the increase. The third item, an increase in the FDIC premium rate over the prior year, contributed $5.7 million of the increase. Finally, $5.9 million was the result of writedowns, losses, and other costs of foreclosed properties during the period. Excluding these amounts, noninterest operating expenses increased 5.3 percent in 1991 over the previous year. INCOME TAXES The Omnibus Budget Reconciliation Act of 1993 was enacted in August and raised the federal income tax rate from 34 percent to 35 percent retroactively to January 1, 1993. The law also further limited the deductibility of certain expenses of FTNC and changed the amortization of certain intangible assets for tax purposes. The net impact of the increased statutory rate was partially reduced by lower deferred taxes related to the rate change. Effective income tax rates, or taxes as a percentage of pre-tax income, were 34.5 percent in 1993, 38.2 percent in 1992, and 27.0 percent in 1991. The tax rate for 1992 was higher than the statutory rate primarily due to the recognition of $7.4 million of deferred taxes on HFC's retained earnings appropriated to absorb bad debt deductions. The effective tax rate for each year was lowered as a result of income earned from tax-exempt loans and securities. Had interest earned on tax-exempt investments been adjusted to a fully taxable equivalent basis, the effective tax rates would have been 36.3 percent in 1993, 41.3 percent in 1992, and 33.5 percent in 1991. In February 1992, the Financial Accounting Standards Board (FASB) issued SFAS No. 109, "Accounting for Income Taxes," which supersedes SFAS No. 96. SFAS No. 109, which requires an asset and liability approach for financial accounting and reporting of income taxes, was effective for fiscal years beginning after December 15, 1992. FTNC adopted SFAS No. 109 as of January 1, 1993. The adoption of SFAS No. 109 did not have a significant impact on FTNC's financial statements. Based on the average national federal funds rate, indirect taxes in the form of foregone interest on balances maintained with the Federal Reserve amounted to $3.0 million in 1993. BOND DIVISION The bond division buys and sells fixed income securities and provides securitization and advisory services for customers across the country. The customer base is primarily comprised of commercial banks, thrift institutions, credit unions and other institutional investors. The fixed income securities include various types of U.S. Treasury securities, other federal agency obligations, mortgage-backed securities, municipal bonds, and money market instruments. The division is active in underwriting federal agency securities and municipal bonds. In addition to dealer activities, it also provides management consulting services in areas such as financial analysis, asset/liability management, tax planning, portfolio accounting, and regulatory compliance. A subsidiary of FTBNA, First Tennessee Capital Assets Corporation, operates in conjunction with the bond division to securitize, buy and sell mortgage loans, and provide consulting for financial institution mergers and acquisitions. Bond division revenues are obtained primarily from the sale of securities as both principal and as agent. Trading activity is limited to the procurement of inventory for distribution to customers by the sales staff. Inventory is hedged to protect against movements in interest rates. Commissions paid to the sales force represent the largest expense category for the division. Pre-tax income for the division was $29.1 million, an increase of 13.3 percent from the $25.7 million reported for 1992. This compares to pre-tax income of $19.8 million in 1991. Revenue growth has been the source of these increases over the last three years as increased market penetration across the nation resulted in a larger customer base and 49 increased customer activity. Additional products and diversification of the customer base also contributed to the revenue growth during this period. The 1993 revenues reached $103.6 million, exceeding the $93.4 million and $81.8 million in 1992 and 1991, respectively. The division has institutional customers located throughout the country. It competes with other regional and national firms on the basis of service quality and price. During the last several years, the division has also become one of the nation's leading underwriters of large federal agency issues, furthering its national presence. MORTGAGE BANKING During 1993, FTNC executed a mortgage banking acquisition strategy. The objective of this strategy was to create a mortgage banking operation with a diverse nationwide origination base, an optimal mix of mortgage loan originations and servicing, and the size to capture the economies of scale related to mortgage banking activities. If MNMC and SNMC results are added to FTNC, FTNC would have reached the top 25 in mortgage loan originations and the top 30 in mortgage loan servicing nationally. FTNC originated approximately $1.5 billion in mortgage loans in 1993. Adding the first nine months of MNMC and the full year of SNMC originations for 1993, the total mortgage banking operations would have originated $7.2 billion in mortgage loans. Approximately 47 percent of the total originated volume was related to refinancings. As interest rates begin to rise gradually in 1994, the refinancing activity is expected to decline. At December 31, 1993, FTNC had approximately $7.2 billion in servicing. The total combined servicing portfolio for FTNC, MNMC, and SNMC would have been $13.2 billion. As mortgage loans are originated and servicing retained, the servicing portfolio should increase to build a significant future earnings stream. As interest rates begin to rise and the average coupons on the servicing portfolios approach current market rates, the prepayments are expected to slow, reducing the amount of mortgage loan servicing run-off experienced. As a continuation of its acquisition strategy, FTNC will continue to evaluate potential mortgage banking acquisitions with the objective of completing its geographic diversification. ASSET/LIABILITY MANAGEMENT Two factors affecting efficient asset/liability management are interest rate risks and liquidity needs. The primary objective of interest rate sensitivity management is to maintain NII growth while reducing exposure to the risks inherent in interest rate movements. Liquidity is provided by a well-structured balance sheet. Management's Asset/Liability Committee meets regularly to review FTNC's interest rate sensitivity position and liquidity. INTEREST RATE SENSITIVITY FTNC's Asset/Liability Committee, an executive-level management committee, subjects earnings projections to a variety of interest rate scenarios as well as pricing, maturity, growth and mix strategies to make informed decisions to increase income and limit interest rate risk. FTNC's goal is to stabilize the NIM by minimizing the size of the rate sensitivity position. One Asset/Liability Committee guideline is to maintain an interest sensitivity gap position between the volume of assets and the volume of liabilities repricing within one year below 5 percent of earning assets. At December 31, 1993, the balance sheet was rate sensitive by $65 million more liabilities than assets scheduled to reprice within one year. At .8 percent of earning assets, this position was within guideline limits and represented a relatively neutral position. In addition, the Asset/Liability Committee monitors the impact of changes in the level of interest rates, the steepness of the yield 50 curve, and market spreads on NII. Results from recent NII simulations estimated that NII was relatively unchanged given a 200 basis point parallel shift in the level of interest rates. In addition, management periodically analyzes the effect on NII of severe stress test scenarios in which the current steepness of the yield curve is reduced significantly and loan and deposit spreads narrow sharply. Off-balance sheet transactions such as interest rate swaps, forwards, and options are used to manage rate sensitivity and to increase flexibility and profitability in an increasingly competitive environment. These transactions are only used to hedge potential fluctuations in income or market values and are not used to generate speculative earnings. Forward contracts at the bond division represent pending customer transactions that are non-regular way settlements. These totaled $1.3 billion at December 31, 1993. Mortgage banking hedges mortgage commitments that management expects to fund and securitize. These mortgage banking forwards totaled $634 million at year-end. This year's increase in futures and forwards contracts is primarily related to FTNC's mortgage banking expansion. The forward contracts at the bond division normally settle within 30 days and mortgage banking hedges usually close within three months. The notional value of interest rate swaps, caps, floors, and options written at December 31, 1993, was $1.9 billion compared to $57 million at December 31, 1992. The volume of these off-balance sheet instruments increased significantly in 1993 as FTNC recognized several opportunities to hedge potential NII risks. A $1 billion prime rate versus fed funds rate swap was added in order to minimize the impact from the eventual narrowing in the spread between base rate loans and short-term market rates. The notional amount of this swap which matures in 1996 approximated one-half of FTNC's loans indexed to this rate. Additionally, $250 million in fed funds caps were purchased and $250 million in prime rate caps were sold, creating an interest rate collar which will reduce the potential impact of a lag in the prime rate as the fed funds rate begins to rise. Another $400 million in index amortizing fixed vs. floating rate swaps were purchased as part of FTNC's on-going interest rate sensitivity management. The Asset/Liability Committee continuously reviews the opportunities available from off-balance sheet instruments in its effort to hedge the rate sensitivity position. The current limits and exposure to counterparties is reviewed in the counterparty credit risk management process which is discussed further in the Credit Risk Management and Asset Quality section. Currently FTNC has only primary dealers and AAA rated swap counterparties and includes mutual margining agreements whenever possible to limit potential exposure. LIQUIDITY FTNC's goal is to maintain adequate liquidity to meet potential funding needs of loan and deposit customers. This is achieved by maintaining a stable base of core deposits and other interest-bearing funds; accessibility to local, regional, and national funding sources; readily marketable assets; and diversity in customers, products, and market areas. The ability to maintain liquidity also is enhanced by adequate earnings power and adequate capital. The Asset/Liability Committee establishes management guidelines which monitor the current liquidity position and ensure an adequate funding capacity. Long-term liquidity needs are provided by a large core deposit base and a strong capital position. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with deposit customers and the insurance on deposits provided by the FDIC. In 1993, 71.0 percent of total average assets were funded by core deposits, below the 74.3 percent in 1992. At this percentage, core deposits represent the primary funding source for FTNC's balance sheet activities. Shareholders' equity and long-term debt contribute to long-term liquidity by reducing the need to access short-term funding sources continually, especially those that must be obtained from the national 51 money markets. In 1993, the average equity to average assets ratio improved to 7.08 percent, the strongest capital position in more than a decade. Furthermore, average long-term debt as a percentage of equity amounted to 15.0 percent in 1993 compared to 22.1 percent in 1992. Maintaining adequate credit ratings on debt issues is critical to liquidity because it affects the ability of FTNC to attract funds from various sources on a cost competitive basis. During 1993, FTNC received upgrades from two rating agencies, reflecting FTNC's strong earnings performance and capital position. The Fitch credit rating for FTNC's sinking fund debenture was raised to A from A- and the Moody's credit rating on FTNC's subordinated debt was improved to Baa1 from Baa2. Short-term needs for funds can arise from reductions in deposits or other funding sources, drawdowns of commitments, requests for new loans, and incremental investment portfolio needs. Relationships with an extensive local and regional customer base plus a substantial network of downstream correspondent banks meet the majority of these needs; however, additional funds can be raised from national money markets when necessary. Short-term funding sources, including certificates of deposits over $100,000 and other interest-bearing liabilities, were purchased primarily from existing customers and averaged 18.6 percent of average assets in 1993, compared to 15.1 percent in 1992. Securities held for sale and other earning assets, including federal funds sold, securities purchased under agreements to resell, investments in bank time deposits, and trading account securities, are highly liquid. These funds were 8.3 percent of average total assets in 1993 compared to 6.9 percent in 1992. Liquidity is also important at the parent company level. Parent company cash requirements are met, in part, by dividends from its subsidiaries, which represent the primary source of funds for dividends paid to shareholders. The amount of dividends from bank subsidiaries is subject to certain regulatory restrictions as detailed in Note 16. At December 31, 1993, $168.2 million in dividends could be paid to the parent by its subsidiary banks. The parent company also enhances its liquidity position and provides funds to invest in its subsidiaries by raising equity and incurring debt. A double leverage ratio close to or lower than 100 percent represents greater reliance on equity, which is more cost effective and reduces parent company cash flow requirements. FTNC's double leverage ratio was approximately 98 percent at December 31, 1993. Of the $89.4 million in outstanding debt obligations of the parent company at December 31, 1993, $75 million has been downstreamed to FTBNA on similar terms to improve bank capital and to support parent company cash flow needs. Parent company statements are presented in Note 24. BALANCE SHEET COMPOSITION At December 31, 1993, FTNC reported $9.6 billion in total assets compared to $8.9 billion at the end of 1992. Average total assets were $9.0 billion in 1993 compared to $8.3 billion in 1992. INVESTMENT SECURITIES Investment securities and securities held for sale are comprised of U.S. Treasury and other U.S. government agency obligations, government agency issued mortgage-backed securities, government agency issued collateralized mortgage obligations (CMOs), state and municipal securities, private issued CMOs, private issued asset-backed securities (ABSs), and equity securities. These investments provide a stable, yet diversified, income stream and are a source of collateral for repurchase agreements and government accounts. The Maturities of Investment Securities table presents maturities and yields for the investment securities at December 31, 1993. On that date, the portfolio showed a duration of 2.0 years and an average life of 2.4 years based upon historical prepayment patterns for the mortgage-backed and derivative securities. The market value of investment securities was 101.9 percent 52 of book value at December 31, 1993, compared to 102.0 percent at year-end 1992. Items classified as investment securities are purchased with the intent to hold the securities to maturity. Securities which are expected to be sold prior to their stated maturity are carried as held for sale and are accounted for at the lower of cost or market, as opposed to historical amortized cost. On December 31, 1993, FTNC had classified $53.0 million of securities as securities held for sale. As a result of the intent to hold securities to their maturity, management pays close attention to forecasted cash flows on its portfolio of mortgage derivative securities, principally Planned Amortization Class CMOs. These cash flows are relatively predictable and satisfy FTNC's need for liquidity resulting from changing economic conditions or increases in customer demand for loans. Current credit guidelines call for all purchases of securities 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 93 percent of the investment portfolio at December 31, 1993. All CMOs and other ABSs are AAA rated. LOANS Average loans, net of unearned income, grew 9.6 percent to $4.9 billion in 1993. This compares to a 4.2 percent increase to $4.5 billion in 1992. The loan portfolio consists of commercial loans, consumer loans, credit card receivables, real estate construction loans, and real estate mortgage loans. Growth has occurred in each of the loan categories for the last two years except for permanent mortgages. Average commercial loans, the single largest loan category, increased 4.4 percent to $2.3 billion and represented 45.7 percent of average total loans, net of unearned income, in 1993. This compares to a 3.8 percent increase to $2.2 billion in commercial loans in 1992, which represented 48.0 percent of average total loans, net of unearned income. The increasing growth rate in commercial loans is the result of Tennessee's recent economic growth. The consumer loan portfolio consists of real estate, automobile, student, and other consumer installment loans that require periodic payments of principal and interest. The payment schedules for these loans are typically based on equal monthly installments. The average consumer loan portfolio increased 25.2 percent to reach $1.4 billion in 1993 compared to a 13.3 percent increase to $1.2 billion in 1992. The significant increase during 1993 was consistent with management's goal of increasing the consumer loan portfolio as a percentage of average total loans. In 1993, total consumer loans represented 29.1 percent of average total loans, net of unearned income, compared to 25.5 percent in 1992. Real estate loans, principally secured by first and second liens on residential property, contributed significantly to the increase in the consumer loan portfolio in 1993. There were three factors responsible for this significant increase: aggressive promotional campaigns to attract refinancing of consumer real estate in the low interest rate environment; the additional regional markets penetrated during the year through Gulf Pacific Mortgage, a part of FTBNA's consumer lending division with offices in Alabama, Georgia, Mississippi, North Carolina, and Tennessee; and an increased focus on cross-selling current deposit customers into consumer lending products within FTNC's branch network. This strategy is in line with FTNC's goal of increasing the consumer loan portfolio through well-secured lending. Average credit card balances grew modestly at 2.2 percent to reach $396.5 million in 1993. The slow growth was related to a general consumer trend to consolidate debt and take advantage of the current low fixed interest rates as well as a continued increase in competition. Average credit card receivables rose 4.8 percent to $388.1 million in 1992. The 1992 improvement primarily resulted from the acquisition of the Valley credit card loans. The real estate permanent mortgage loan portfolio decreased 18.4 percent to $509.1 million in 1993. This compares to a 1.7 percent increase in 1992 and a 7.9 percent increase in 1991. The majority of 53 this portfolio was originated by Home Federal Bank (HFB). The large decline in 1993 was related to the high prepayments as interest rates reached record low levels. Furthermore, FTNC's policy over the last several years has been to securitize and sell the major portion of its mortgage loan originations and to maintain the servicing as a source of fee income; therefore, the permanent loan volume was not replaced with new originations. Average mortgage warehouse loans increased to $229.6 million in 1993 from $86.4 million in 1992 and $58.6 million in 1991 primarily due to the acquisition of MNMC, which averaged $437 million during the fourth quarter of 1993. These loans, which are mortgage loans awaiting securitization, will continue to grow as the current mortgage banking expansion continues. OTHER EARNING ASSETS Other earning assets include investments in bank time deposits, federal funds sold, securities purchased under agreements to resell, and trading account securities. Collectively, these categories comprised approximately 4.0 percent of average earning assets in 1993 compared to 5.4 percent in 1992 and 11.6 percent in 1991. The decline in investment in other earning assets was primarily the result of replacing Eurodollar time deposits with higher yielding investment securities with short average life and significant cash flows over their life. DEPOSITS FTNC is the leading banking organization in Tennessee in total deposits and is the first in market share in total deposits in three of the five major metropolitan statistical areas across the state. Market leadership has been maintained by providing continually improved service quality to customers, increasing product sales, paying competitive rates, and providing convenient bank offices. Average interest-bearing core deposits, FTNC's largest source of funding, remained flat at $4.9 billion in 1993, following a 6.3 percent increase in 1992. The lower interest rates slowed the rate of growth of bank deposits over the last two years as customers looked for higher yielding investment alternatives. Nonmarket rate core deposits, primarily checking interest and savings accounts, grew 7.9 percent in 1993 and 19.8 percent in 1992. The growth in 1992 was primarily the result of the Valley acquisition. Market rate core deposits, primarily CDs less than $100,000 and money market accounts, decreased 2.1 percent in 1993 compared to a 3.5 percent increase in 1992. This represents a shift in the concentration of deposit growth to the nonmarket rate accounts. This change has occurred primarily because the rates paid on the market accounts moved closer to the nonmarket accounts as interest rates dropped. By maintaining funds in the nonmarket accounts, depositors are able to remain more liquid, enabling them to take advantage of positive interest rate fluctuations. Noninterest-bearing demand deposits are comprised of individual and business accounts including correspondent banks and other check clearing customers. Average demand deposits represented 23.2 percent of average core deposits in 1993 compared to 20.5 percent in 1992. The increase in the level of demand deposits reflected an increase in the number of demand deposit accounts as well as the maintenance of larger balances in existing accounts. The larger balances were required to offset the impact of lower earning credit rates on corporate demand deposit accounts. Management expects continued slow growth in core deposits in 1994 provided interest rates remain relatively low. CAPITAL Average shareholders' equity was $635.3 million in 1993, a 10.0 percent increase from the $577.4 million reported in 1992. The primary source of growth in shareholders' equity during 1993 was the retention of net income. The Consolidated Statements of Shareholders' Equity highlight the detailed changes in shareholders' equity during 1993. 54 Capital adequacy refers to the level of capital required to sustain asset growth over time and to absorb losses. Management's objective is to maintain a level of capitalization that is sufficient to take advantage of profitable growth opportunities while meeting regulatory requirements. This is achieved by improving profitability through effectively allocating resources to more profitable businesses, improving asset quality, strengthening service quality, and streamlining costs. The primary measures used by management to monitor the results of these efforts are the ratios of average equity to average assets, average tangible equity to average tangible assets, and average equity to net loans. For each of these ratios, a long-term goal is established. At least once a year the goals are re-evaluated to ensure that they continue to meet management's objective and reflect changes in market conditions and the regulatory environment. Management's long-term goal is to maintain an average equity to average assets ratio between 6.75 percent and 7.50 percent. Average equity to average assets was 7.08 percent in 1993 compared to 6.96 percent in 1992 and 6.75 percent in 1991. The improvement in 1993 and 1992 compared to the previous years was the result of higher earnings and slower balance sheet growth. Management's other long-term capital goals are to maintain a minimum ratio of 10.50 percent average equity to average net loans and an average tangible equity to average tangible assets ratio equal to or above 5.00 percent. Both of these goals are currently being met. During 1993, average equity to average net loans was 13.11 percent compared to 13.07 percent in 1992 and 12.18 percent in 1991. Average tangible equity to average tangible assets was 6.29 percent compared with 6.23 percent in 1992 and 6.14 percent in 1991. In addition to managing these three ratios, FTNC ensures that it satisfies all external capital requirements. The Federal Reserve Board and the Office of the Comptroller of the Currency have several capital guidelines governing the activities of bank holding companies and national banks. These guidelines require the maintenance of an amount of capital based on risk-adjusted assets so that categories of assets with potentially higher credit risk will have more capital backing than assets with lower risk. In addition, banks and bank holding companies are required to maintain capital to support, on a risk-adjusted basis, certain off-balance sheet activities such as loan commitments. The capital guidelines classify capital into two tiers, referred to as Tier I and Tier II. Total capital consists of Tier I capital which for FTNC is common stock less goodwill and certain other intangible assets; and Tier II capital which for FTNC is qualifying subordinated debt and a limited amount of loan loss reserves. In determining risk-based capital requirements, assets are assigned risk-weights of 0 percent to 100 percent, depending on the regulatory assigned levels of risk associated with such assets. Off-balance sheet items are considered in the calculation of risk-adjusted assets through conversion factors established by the regulators. Furthermore, regulators monitor a leverage ratio which compares Tier I capital to total average assets less goodwill and certain other intangible assets. On December 31, 1993, FTNC and its bank subsidiaries qualified as well-capitalized institutions. The FDIC also monitors risk-based capital guidelines and requires weaker banks to pay higher premium rates while allowing healthy, well-capitalized banks to pay less. Assessments for banks range from 23 cents for well-capitalized institutions to 31 cents for the weakest, undercapitalized institutions. CREDIT RISK MANAGEMENT AND ASSET QUALITY FTNC manages and controls risk in the loan portfolio through its credit policy, diversity in the mix of loans in the portfolio, intensive analysis of credit requests, continuous monitoring of existing loans, and the credit judgment of experienced credit officers. FTNC's goal is not to avoid risk, but rather to manage it. 55 CREDIT POLICY Management believes the objective of a sound credit policy is to extend quality loans to customers while controlling risk affecting shareholders and depositors. Credit policies are determined by carefully evaluating current economic, financial, and market conditions as well as direction and strategy of FTNC. The Executive Committee, made up of members of the board of directors, approves all credit policies and reviews underwriting guidelines. The Executive Committee maintains a review process to monitor asset quality and compliance with credit policy and underwriting guidelines. Credit policics set underwriting standards, limits on exposure by borrower and by industry, and such other limits as currently deemed prudent. COMMERCIAL LENDING FTNC manages credit risk in the commercial loan portfolio through the approval process, monitoring the quality of loans after they have been made, and a management of concentrations in the portfolio. The objective of FTNC's credit process is to make approval of routine credits relatively simple and to increase the degree of involvement by experienced and independent credit officers as the credit risk becomes more complex. FTNC places primary reliance for risk analysis on its lending officers who are supported by a group of credit officers in evaluating creditworthiness of the borrower and structuring the transaction. To ensure fair and independent evaluations, these credit officers have no business development or profit responsibility. FTNC's credit officers have an average of 18 years of experience. Because of the nature of commercial lending, the focus is on the quality of individual loans as well as on trends in the portfolio. The average commercial loan portfolio represented 45.7 percent of average total loans, net of unearned income in 1993. To assess the quality of individual commercial loans, all commercial loans are internally assigned a credit rating, ranging from A to F, to assist in the credit risk management of these loans. The credit rating assigned to a particular loan is based on the financial condition of the borrower and collateral on the loan. FTNC uses a lender initiated system of grading loans to provide timely asset quality information to management. Lenders assign loan grades at the inception of the loan, and are responsible for continually revising the loan grade to accurately reflect the quality of the loan. The majority of commercial loans at FTNC are graded C at inception. This reflects a commercial customer base of smaller businesses, defined as companies with annual sales of $50 million or less. Due to increased business activity and generally improving economic conditions throughout 1993, loans graded C and above, expressed as a percentage of total graded loans, improved to 93.2 percent at December 31, 1993, from 88.8 percent at the end of 1992. The Net Loans and Foreclosed Real Estate table gives a breakdown of the commercial loan portfolio by grades and major loan types at December 31, 1993. The totals in each grade are compared to the totals at December 31, 1992. Definitions of each credit rating are provided as a note to the table. A loan review staff, independent of the lending functions, is engaged in the continuous process of examining the loan portfolio to ensure that the loans are properly graded. The loan review staff also reviews collateral values and compliance with bank policy and underwriting guidelines. FTNC maintains an internal list of loans for management purposes known as the Watch List. The Watch List includes performing loans and lending commitments that have been identified by management as requiring a closer level of monitoring and active management, but that have not yet been classified as potential problem loans. The Watch List decreased to approximately $125 million at December 31, 1993, compared 56 to $170 million at year-end 1992. Contributing to this reduction in the Watch List are the improving economy and the management process. Two executive level committees oversee FTNC's asset quality. First, the Credit Policy Committee monitors on a monthly basis the progress of Watch List credits requiring an action plan for rehabilitation or refinancing. In addition to the Credit Policy Committee, the Asset Quality Committee, comprised of executive management, senior lending officers, and senior credit officers, performs a regular review of loan quality. Industry concentrations are a measure of the diversification of the commercial loan portfolio. Diversification is an important means of reducing the investment risk associated with fluctuations in economic conditions. At December 31, 1993, FTNC had no concentrations of 10 percent or more of total loans in any single industry. At December 31, 1993, highly leveraged loans totaled $6.8 million compared to $6.3 million in 1992. There were no highly leveraged commercial loan transactions on nonperforming status at December 31, 1993. COMMERCIAL REAL ESTATE FTNC has two principal types of commercial real estate lending. One, construction and development lending, involves the extension of credit to build or otherwise develop real estate properties which are later sold, operated for income-producing purposes, or occupied by the owner for other business reasons. The real property and improvements serve as collateral for the loan. The other category consists of commercial real estate loans and loans to businesses secured by real estate collateral. Commercial real estate loans generally have intermediate or long-term maturities with payment schedules designed to amortize the loans over their terms. Business loans in this category are made to finance real estate used in business operations or for general business purposes. Construction and development loans are moved to the commercial real estate loan category when the construction is completed. As a part of the commercial loan portfolio, all commercial real estate loans are assigned a risk grade. In addition to the grading process, one of the tools management employs in monitoring the risk of loss in commercial real estate lending activities is to assign all commercial real estate loans to either of two risk categories. The higher risk loan category contains loans where the primary source of repayment comes from either the sale of the real estate property or the cash flow from the project, and a substantial secondary source of repayment is not available. Consequently, the risk potential for loss on these loans is subject to the fluctuations in the market value of the real estate collateral. For this reason, more stringent underwriting standards, including equity requirements and loan to value ratios, debt service coverage ratios, capitalization rates, discount rates, and hold periods are applied to these loans. The other risk category contains loans which have a substantial secondary source in addition to having real estate as the primary source of repayment. These loans are generally considered to have less risk of loss due to the additional source of repayment. Commercial real estate loans at December 31, 1993, were $546.4 million compared to $450.9 million at the end of 1992. Construction and development loans increased to $75.8 million at the end of 1993 from $48.6 million on December 31, 1992, as additional funding for existing construction projects increased. Maintaining a diverse commercial real estate portfolio by project type is another important way commercial real estate lending risk is managed. The Loans Secured by Real Estate table reflects the diversity in real estate by project type. CONSUMER LENDING FTNC manages credit risk in consumer loans through standardized products, uniform underwriting guidelines, and centralized process controls. Credit underwriting guidelines are established for loan 57 maturities, collateral, and credit qualifications including credit scores, bankruptcy scores, and debt to income levels. These underwriting guidelines are developed and monitored centrally to ensure consistent application across FTNC. The application and approval processes are controlled through an enhanced computer system. The borrower's application is programmatically compared to the credit underwriting guidelines. The system informs the lender if the loan does or does not meet the credit standard established for that type of loan. For loans that meet the credit standards the system automatically produces the loan documents and records the loan. Loans which do not meet the standards are rejected and moved to a higher level of lending authority which has the ability to make exceptions. Exceptions are monitored by the senior management of consumer lending. The application and the data used in making the loan decision is stored in an electronic format for further analysis. Collections and loan operations are two important centralized process controls for risk in the consumer portfolio. Collections is centralized to capitalize on the collection specialization and economies of scale as well as consistent application of collection procedures. The collection process is automated to ensure timely collection of accounts and consistent management of risk associated with delinquent accounts. Loan operations is centralized and provides a final independent document review and notifies the loan officer of any document exception. COUNTERPARTY CREDIT RISK MANAGEMENT Counterparty credit risk includes FTNC's exposure to other financial institutions. These risks arise from the extension of direct credit or from agreements that require some exchange of future payments or securities. As a financial intermediary, FTNC continuously has exposure to these types of transactions. In order to limit its concentration to any individual financial institution, FTNC's Asset/Liability Committee (ALCO), in conjunction with the chief credit officer and senior credit officers, has a corporate-wide process to monitor, manage, and limit the risk to financial counterparties. Also, formal policies have been approved by the FTNC Board of Directors which quantify potential exposure and create corporate-wide risk limits based on the creditworthiness of the financial institution. Recently regulatory agencies have initiated several new proposals to address this issue. Being one of the first banks of its size to analyze and create controls for this type of risk, FTNC is continuing its overall effort to manage risk proactively, including credit assessment of the credit risk of swap counterparties. ALLOWANCE FOR LOAN LOSSES AND NET CHARGE-OFFS Management's policy is to maintain the allowance for loan losses at a level sufficient to absorb all estimated losses inherent in the loan portfolio. The allowance amount consists of two principal components: amounts specifically provided for loans reviewed on an individual or pool basis and a general portion designed to supplement the specific allocations. The Net Loans and Foreclosed Real Estate table shows the allowance account allocations by internal grades for the commercial loan portfolio and by loan type for those loans not graded. The data is presented for periods ended December 31, 1993 and 1992. For each of the periods, the general portion of the allowance account is between $10 million and $12 million. At the same time, the specific allocations have changed among the loan types or grades in each period, reflecting the changing circumstances of individual credits or groups of loans. The allowance for loan losses is increased by the provision for loan losses and recoveries and is decreased by charged-off loans. On December 31, 1993, the total allowance for loan losses was $103.7 million compared to $96.8 million for the same period last year. The allowance for loan losses to loans, net of unearned income, was 1.73 percent in 1993 versus 2.10 percent in 1992. Excluding the mortgage warehouse loans, these ratios would have been 1.97 percent in 1993 and 2.14 percent in 1992. 58 Net charge-offs decreased 22.1 percent to $28.4 million in 1993 from the $36.4 million reported in 1992. Net charge-offs to average loans, net of unearned income, decreased to .57 percent for 1993 compared to .81 percent during 1992 due to the extensive improvement in asset quality. In management's opinion, 1994 net charge-offs are expected to remain stable, provided the economy continues to grow. FTNC's asset quality has improved significantly over the last several years as the economy has improved and management policies, procedures, and information have been developed to appropriately manage the credit risk inherent in the loan portfolio. As a result, FTNC has achieved its strategic objective in regards to asset quality ratios. As the loan portfolio grows, it is expected that there will be a core amount of net charge-offs that are a part of the normal course of business. Therefore, the level of net charge-offs should eventually begin to rise as the size of the loan portfolio increases; however, the asset quality ratios are expected to continue to be consistent with high performing standards for each of the loan products, reflecting the sound management of asset quality. NONPERFORMING ASSETS Nonperforming assets, consisting of nonaccrual and restructured loans, foreclosed real estate and other assets, increased 6.3 percent to $58.1 million at December 31, 1993. This compares to $54.7 million reported in 1992. This increase was due to the $22.8 million in nonperforming assets related to the MNMC acquisition. Nonperforming loans are those loans where, in the opinion of management, the full collection of principal or interest is unlikely. Nonperforming loans decreased 15.4 percent to $25.4 million in 1993 from the $30.0 million reported at year-end 1992. This decrease would have been 44.4 percent if the $8.7 million in nonperforming loans related to the MNMC acquisition was not included. Foreclosed real estate, the largest nonperforming asset category includes foreclosed property and in-substance foreclosures. Foreclosed properties are obtained when FTNC actually forecloses on real property or when a title is obtained to the collateral supporting certain loans in full or partial satisfaction of a debt. Such real property, including land, buildings or partially completed construction projects, is generally placed for sale immediately. When partially completed construction projects are obtained, FTNC may attempt to sell the project "as is" or complete construction prior to placing it for sale. Expenses incurred while the bank holds foreclosed properties include all customary costs that are incidental to holding and managing real property. At December 31, 1993, foreclosed properties amounted to $31.6 million, an increase of 62.1 percent from the $19.5 million of foreclosed properties reported in 1992. This increase was due primarily to the $14.1 million in foreclosed properties related to the MNMC acquisition. FTNC recognizes in-substance foreclosures when actual transfer of title does not take place but the borrower has little or no equity in the collateral relative to its fair market value; when repayment of the loan can only be expected to come from the operation or sale of the collateral; or when the debtor has formally or effectively abandoned control of the collateral. At December 31, 1993, FTNC had no in-substance foreclosures compared to $4.1 million at year-end 1992. When the supporting collateral of a loan is placed in the foreclosed real estate category, either through actual foreclosure or in-substance foreclosure, it is transferred at the lower of either the recorded investment in the loan or net realizable value based upon recent appraisals. The difference between the book value of the loan and the net realizable value of the collateral is charged against the allowance for loan losses. The amount of foreclosed real estate at December 31, 1993, valued at 54 percent of original loan amounts, excluding residential mortgage loans in foreclosure from MNMC, is not expected to decline significantly during 1994. The improvement in nonperforming assets during the last three years was due to significantly reduced levels of new nonperformers, an improving economic environment, and management efforts to identify deteriorating assets early enough in the 59 cycle to ensure their prompt resolution. The Nonperforming Assets Activity table details the activity in nonperforming assets for the past three years. In management's opinion, the level of nonperforming assets is expected to remain flat in 1994, provided the economy continues to grow. Similar to the level of net charge-offs experienced over a period of time, there is a core amount of nonperforming assets which are related to normal lending acitivities. FTNC has reached this point as it has achieved its objective for a reasonable level of nonperforming assets in relation to the current portfolio mix. As a result, changes in the level of total loans and the mix of the loan portfolio will primarily determine the level of nonperforming assets. PAST DUE LOANS Past due loans are loans that are 90 days or more past due as to principal or interest but have not been placed on nonaccrual status. FTNC continues accruing interest on these loans if they are currently in the process of collection and are well-secured. Past due loans amounted to $23.2 million at December 31, 1993, a $1.1 million increase from the $22.1 million reported at year-end 1992. POTENTIAL PROBLEM ASSETS Potential problem assets are not included in nonperforming assets, and 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 (OCC) for assets classified substandard and doubtful. At December 31, 1993, potential problem assets declined 29.8 percent to $65.9 million compared to $93.9 million at year-end 1992. The primary reason for the decrease in 1993 is the substantial improvement in asset quality. SUBSEQUENT EVENTS SIGNIFICANT FIRST QUARTER EVENTS In January 1994, Hickory Venture Capital Corporation (HVCC), a subsidiary of FTBNA, realized a net after-tax gain of approximately $8 million from one of its investments. The acquisition of SNMC, parent of Sunbelt, was closed in January, and FTNC incurred one-time after-tax expenses of approximately $3 million. SFAS NO. 112 - "EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS" In November 1992, FASB issued SFAS No. 112. 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. SFAS No. 112 is effective for fiscal years beginning after December 15, 1993, with early adoption permitted. On January 1, 1994, FTNC adopted SFAS No. 112 with the recognition of $2.3 million of postemployment benefits related to prior service rendered and rights vested. 60 SFAS NO. 114 - "ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN" In May 1993, the FASB issued SFAS No. 114. It requires that impaired loans that are within the scope of this statement be measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate; at the loan's observable market price; or the fair value of the collateral, if the loan is collateral dependent. SFAS No. 114 is effective for fiscal years beginning after December 15, 1994, with earlier adoption permitted. FTNC expects to adopt SFAS No. 114 on January 1, 1995. Management expects the impact of SFAS No. 114 to be immaterial. SFAS NO. 115 - "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES" In May 1993, the FASB issued SFAS No. 115. This statement requires that investment securities be classified as either held to maturity securities, which are reported at amortized cost; trading securities, which are reported at fair value, with unrealized gains and losses included in earnings; and available for sale securities, which are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity. SFAS No. 115 is effective for fiscal years beginning after December 15, 1993. On January 1, 1994, FTNC adopted SFAS No. 115 with the recognition of approximately $1.4 billion of securities being classified as available for sale. These securities had approximately $23.6 million of aggregate holding gains that resulted in an increase in equity for unrealized holding gains of approximately $14.4 million net of $9.2 million of deferred income taxes. 61 GLOSSARY ALLOWANCE FOR LOAN LOSSES - This reserve represents the amount considered by management to be adequate to cover estimated losses inherent to the loan portfolio. A valuation reserve for possible loan losses. BASIS POINT - The equivalent of one-hundredth of one percent (0.01). One hundred basis points equals one percent. This unit is generally used to measure movements in interest rates. CHARGE-OFFS - The amount charged against the allowance for loan losses to reduce a specific loan to its collectible amount. CLASSIFIED ASSET - A bank asset that has caused management to have serious doubts about the borrower's ability to comply with present repayment terms. Included in this category are grade F performing and nonperforming loans, foreclosed property, repossessed assets and other assets. In compliance with the standards established by the Office of the Comptroller of the Currency (OCC) these assets are classified as substandard, doubtful, and loss depending on the severity of the asset's deterioration. CORE DEPOSITS - Core deposits consist of all interest-bearing and noninterest-bearing deposits, except certificates of deposit over $100,000, and are obtained through a broad range of customers. They include checking interest deposits, money market certificates, time and other savings, plus demand deposits and are the most important source of funds for FTNC. 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 and dividend income and yield-related fee income, such as loans, short-term investments, and investment securities. 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 from partially tax-exempt securities that has been grossed up by the amount of taxes which would have been paid if the instrument had been taxable for comparative purposes. FORWARD CONTRACT - A legal contract between two parties to purchase and sell a specific quantity of a financial instrument or commodity at a price specified now, with delivery and settlement at a specified future date. FUTURES CONTRACTS - A legal agreement to buy or sell a standardized quantity of a standardized financial instrument at a specified future date and price. Futures contracts are traded in organized exchanges. INTEREST RATE CAPS AND FLOORS - These financial instruments obligate one of the parties to make payments if an interest rate index exceeds a specified upper "capped" level or if the index falls below a specified lower "floor" level. INTEREST RATE SENSITIVITY - The change in net interest income due to differences in the timing and amount of changes in rates paid on assets and liabilities. 62 INTEREST-RATE SWAP - Agreements entered into with other financial intermediaries in which one party agrees to pay/receive a fixed payment over the term of the agreement and the other party agrees to receive/pay a payment which varies with changes in market interest rate indices, such as LIBOR, the Federal Funds overnight rate, or Prime. Interest rate swaps are used to reduce the impact of changes in market interest rates on interest income and interest expense. INTEREST SENSITIVITY GAP - The amount by which interest-rate sensitive assets exceed interest-rate sensitive liabilities for a designated time period is referred to as a net asset position. An excess of liabilities would represent a net liability position. LEVERAGE RATIO - Tier I capital divided by total assets less goodwill and certain other intangible assets. LIQUIDITY - The ability of a corporation to generate adequate funds to meet its cash flow requirements. MORTGAGE SERVICING RIGHTS - The right to service mortgage loans, generally owned by someone else, for a fee. Loan servicing includes collecting payments; remitting funds to investors, insurance companies, and taxing authorities; collecting delinquent payments; and foreclosing on properties when necessary. Purchased mortgage servicing rights (PMSRs) are intangibles created when mortgage servicing rights are acquired from another party. NET FREE FUNDING - Noninterest bearing liabilities (such as demand deposits, other liabilities, and shareholders' equity) less nonearning assets (such as cash, fixed assets, and other assets) is a low-cost source of funds. NET INTEREST INCOME (NII) - The amount of income generated by earning assets reduced by the interest cost of funding those assets. NET INTEREST MARGIN (NIM)- 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 tax-equivalent net interest income by average earning assets. NET INTEREST SPREAD - The difference between the average yield earned on earning assets on a FTE basis and the average rate paid for interest-bearing liabilities. NONACCRUAL LOANS - Loans on which interest accruals have been discontinued due to the borrower's financial difficulties. Interest income on these loans is reported on the cash basis as it is collected after recovery of principal. NONPERFORMING ASSETS - Loans on which interest income is not being accrued, restructured loans on which interest rates or terms of repayment have been materially revised, real estate properties acquired through foreclosure, repossessed assets, and other assets. OPTIONS - These contracts allow the holder of the option to purchase or sell a financial instrument at a specified price and within a specified period of time from or to the "seller" or "writer" of the option. PROVISION FOR LOAN LOSSES - The provision for loan losses is the periodic charge to earnings for potential losses in the loan portfolio. The evaluation process to determine potential losses includes consideration of the industry, specific conditions of individual borrowers, and the general economic environment. RECOVERIES - The amount added to the reserve for loan losses when a recovery is made on a loan which was previously charged off. RESTRUCTURED LOANS - A loan is considered restructured when an institution for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. 63 RETURN ON AVERAGE ASSETS (ROA) - A measure of profitability that indicates how effectively an institution utilized its assets. It is calculated by dividing 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. 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 items. 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 I capital consists of shareholders' equity reduced by goodwill and certain other intangible assets, while total capital is Tier I capital plus a limited amount of the allowance for loan losses and qualifying subordinated debt. TOTAL REVENUES - The sum of net interest income and noninterest income. WATCH LIST - Identified loans and commitments 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. 64 ANALYSIS OF CHANGES IN NET INTEREST INCOME
1993 Compared to 1992 1992 Compared to 1991 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: Taxable $ (8,018) $ 9,443 $ 1,425 $ (35,789) $ 9,525 $ (26,264) Tax-exempt (1,803) (3,135) (4,938) (1,914) (2,593) (4,507) - --------------------------------------------------- ------ ------ Total commercial loans (10,556) 7,043 (3,513) (38,226) 7,455 (30,771) Consumer (10,719) 24,679 13,960 (14,802) 13,577 (1,225) Credit card receivables (3,193) 1,097 (2,096) (2,314) 2,551 237 Real estate construction (818) 2,118 1,300 (483) (6,607) (7,090) Permanent mortgage (2,843) (10,215) (13,058) (5,862) 1,055 (4,807) Mortgage warehouse loans held for sale (1,409) 9,981 8,572 (688) 2,373 1,685 Nonaccrual 739 (466) 273 (20) (737) (757) - --------------------------------------------------- ------ ------ Total loans (30,658) 36,096 5,438 (61,225) 18,497 (42,728) - --------------------------------------------------- ------ ------ Investment and held for sale securities: U.S. Treasury and other U.S. government agencies (21,605) 27,763 6,158 (23,864) 55,048 31,184 States and municipalities (17) (2,663) (2,680) (158) (3,215) (3,373) Other (2,302) (15,576) (17,878) (1,320) 5,846 4,526 - --------------------------------------------------- ------ ------ Total investment and held for sale securities (26,855) 12,455 (14,400) (27,565) 59,902 32,337 - --------------------------------------------------- ------ ------ Other earning assets: Investment in bank time deposits (714) (1,580) (2,294) (2,973) (17,797) (20,770) Federal funds sold and securities purchased under agreements to resell (763) (2,085) (2,848) (6,989) (6,094) (13,083) Trading account securities (2,316) 1,339 (977) (1,726) 2,421 695 - --------------------------------------------------- ------ ------ Total other earning assets (2,137) (3,982) (6,119) (11,924) (21,234) (33,158) - --------------------------------------------------- ------ ------ Total earning assets (55,090) 40,009 (15,081) (95,933) 52,384 (43,549) - -------------------------------------------------------------------------------------------------------------------------------- Total interest income - FTE $ (15,081) $ (43,549) ================================================================================================================================ INTEREST EXPENSE: Interest-bearing deposits: Checking/Interest $ (3,098) $ 1,137 $ (1,961) $ (5,064) $ 2,342 $ (2,722) Savings (3,597) 830 (2,767) (6,639) 3,624 (3,015) Money market account (10,956) 2,469 (8,487) (28,155) 9,677 (18,478) Certificates of deposit under $100,000 and other time (18,854) (8,915) (27,769) (34,975) (4,827) (39,802) Certificates of deposit $100,000 and more (1,495) (2,244) (3,739) (9,474) (2,052) (11,526) - --------------------------------------------------- ------ ------ Total interest-bearing deposits (41,810) (2,913) (44,723) (90,643) 15,100 (75,543) Federal funds purchased and securities sold under agreements to repurchase (3,065) 9,615 6,550 (13,488) 4,378 (9,110) Commercial paper and other short-term borrowings (3,202) 6,520 3,318 (2,534) 2,537 3 Long-term debt 1,467 (3,002) (1,535) (839) (11) (850) - --------------------------------------------------- ------ ------ Total interest-bearing liabilities (51,847) 15,457 (36,390) (108,003) 22,503 (85,500) - -------------------------------------------------------------------------------------------------------------------------------- Total interest expense $ (36,390) $ (85,500) ================================================================================================================================ Net interest income - FTE $ 21,309 $ 41,951 ================================================================================================================================
* 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. 65 ANALYSIS OF NONINTEREST INCOME AND NONINTEREST EXPENSE
Growth rates (%) --------------- (Dollars in thousands) 1993 1992 1991 1990 1989 1988 93/92 93/88 - ----------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Bond division $ 91,525 $ 80,275 $ 68,628 $ 41,704 $ 31,769 $ 23,418 14.0 + 31.3 + Service charges on deposit accounts 56,199 51,679 44,060 38,185 35,657 34,849 8.7 + 10.0 + Mortgage banking 28,233 10,502 8,246 7,725 6,059 5,838 168.8 + 37.1 + Bank card 26,417 24,177 22,322 19,163 18,347 18,944 9.3 + 6.9 + Trust services 22,264 20,103 17,949 15,451 14,155 13,203 10.7 + 11.0 + Equity securities gains (losses) (479) 342 (713) (1,039) 2,326 239 240.1 - 32.0 - Investment and held for sale securities gains (losses) 1,204 (2,020) (140) (949) (219) 188 159.6 + 45.0 + Other: Check clearing fees 14,569 12,956 8,879 8,610 9,251 10,093 12.4 + 7.6 + Other service charges 9,296 6,942 5,539 4,936 5,331 5,232 33.9 + 12.2 + All other 21,261 20,053 16,430 21,391 19,978 14,076 6.0 + 8.6 + - ------------------------------------------------------------------------------------------------------------------ Total other income 45,126 39,951 30,848 34,937 34,560 29,401 13.0 + 8.9 + - ------------------------------------------------------------------------------------------------------------------ Total noninterest income $270,489 $225,009 $191,200 $155,177 $142,654 $126,080 20.2 + 16.5 + ================================================================================================================== NONINTEREST EXPENSE: Employee compensation, incentives, and benefits $219,560 $187,569 $161,923 $138,368 $138,587 $127,113 17.1 + 11.6 + Operations services 26,289 23,585 21,752 18,380 3,769 3,220 11.5 + 52.2 + Occupancy 21,998 20,705 19,704 17,880 17,647 15,779 6.2 + 6.9 + Communications and courier 19,063 16,977 15,872 13,823 15,124 15,606 12.3 + 4.1 + Equipment rentals, depreciation, and maintenance 17,645 16,157 12,757 11,651 21,583 20,429 9.2 + 2.9 - Deposit insurance premium 15,465 15,194 12,769 7,090 5,035 4,600 1.8 + 27.4 + Amortization of intangible assets 10,339 12,148 8,910 7,931 7,026 6,544 14.9 - 9.6 + Other: Legal and professional fees 8,380 11,158 7,886 6,113 6,346 5,626 24.9 - 8.3 + Fed service fees 7,778 7,228 5,311 4,960 5,178 5,817 7.6 + 6.0 + Supplies 6,937 5,928 5,318 5,286 6,419 6,216 17.0 + 2.2 + Advertising and public relations 6,947 5,826 4,657 4,227 5,132 3,678 19.2 + 13.6 + Travel and entertainment 6,242 5,255 4,585 4,658 4,774 4,356 18.8 + 7.5 + Market adjustments to foreclosed real estate 193 3,180 6,846 1,846 1,816 34 93.9 - 41.5 + All other 31,550 29,566 27,696 24,797 24,594 23,244 6.7 + 6.3 + - ------------------------------------------------------------------------------------------------------------------ Total other expense 68,027 68,141 62,299 51,887 54,259 48,971 0.2 - 6.8 + - ------------------------------------------------------------------------------------------------------------------ Total noninterest expense $398,386 $360,476 $315,986 $267,010 $263,030 $242,262 10.5 + 10.5 + ==================================================================================================================
Certain previously reported amounts have been reclassified to agree with current presentation. 66 SUMMARY OF QUARTERLY FINANCIAL INFORMATION
1993 1992 ----------------------------------- ---------------------------------- 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 $151.7 $145.8 $143.7 $145.3 $145.8 $146.8 $152.0 $154.6 Interest expense 60.6 60.2 58.8 60.3 62.2 65.1 71.8 77.2 Provision for loan losses 7.5 9.0 9.0 9.0 10.5 10.7 10.6 11.4 Noninterest income before securities transactions 83.9 65.0 60.1 60.7 56.2 59.2 57.9 53.4 Securities gains (losses) (0.8) (0.1) 0.7 0.9 (0.8) (0.6) 0.2 (0.5) Noninterest expense 119.4 95.5 91.3 92.2 99.4 90.0 88.8 82.2 Net income 30.7 29.5 30.3 30.2 11.8 26.5 26.1 24.8 - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE $1.06 $1.05 $1.08 $1.07 $0.42 $0.95 $0.93 $0.89 - ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK INFORMATION: Closing price per share: High $40 1/2 $43 1/2 $47 $43 1/4 $37 1/4 $38 $36 3/4 $34 7/8 Low 36 1/4 38 7/8 37 3/4 36 1/8 35 33 1/8 32 7/8 26 3/8 Period-end 38 1/2 40 40 1/2 43 1/4 36 3/4 36 36 1/2 34 7/8 - -------------------------------------------------------------------------------------------------------------------------------
Per share data have been retroactively adjusted to reflect the 1992 stock split. 67 RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1993
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 $ 3,162 $ 262 $ 573 $ 1,990 $ 5,987 Investment and held for sale securities 343 159 333 1,335 2,170 Other earning assets 324 -- -- -- 324 - -------------------------------------------------------------------------------------------------------------------------------- Total earning assets $ 3,829 $ 421 $ 906 $ 3,325 $ 8,481 ================================================================================================================================ EARNING ASSET FUNDING: Interest-bearing deposits $ 1,904 $ 543 $ 385 $ 2,426 $ 5,258 Short-term purchased funds 1,329 1 -- -- 1,330 Long-term debt -- -- 1 89 90 Noninterest-bearing funds 658 -- -- 1,145 1,803 - -------------------------------------------------------------------------------------------------------------------------------- Earning asset funding $ 3,891 $ 544 $ 386 $ 3,660 $ 8,481 ================================================================================================================================ RATE SENSITIVITY GAP: Period $ (62) $ (123) $ 520 $ (335) Cumulative (62) (185) 335 -- - --------------------------------------------------------------------------------------------------------------------- RATE SENSITIVITY GAP ADJUSTED FOR INTEREST RATE FUTURES AND INTEREST RATE SWAPS: Period $ (446) $ (128) $ 509 $ (65) Cumulative (446) (574) (65) -- - --------------------------------------------------------------------------------------------------------------------- ADJUSTED GAP AS A PERCENT OF EARNING ASSETS: Period (5.3)% (1.5)% 6.0 % 0.8 % Cumulative (5.3) (6.8) (0.8) -- - ---------------------------------------------------------------------------------------------------------------------
Interest-sensitive categories represent ranges in which assets and liabilities can be repriced, not necessarily their actual maturities. Other amounts include assets and liabilities with interest sensitivity of more than 12 months or with indefinite repricing schedules. 68 MATURITIES OF INVESTMENTS SECURITIES AT DECEMBER 31,1993 (At book value)
After 1 Year After 5 Year Within 1 Year Within 5 Years Within 10 Years After 10 Years --------------- -------------- --------------- ------------------ (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield - ------------------------------------------------------------------------------------------------------------------------------------ Mortgage-backed securities and collateralized mortgage obligations* $ 5,471 6.92% $ 61,095 6.13% $407,669 5.70% $1,160,638 5.62% U.S. Treasury and other U.S. government agencies 136,318 5.55 188,958 4.75 12,648 7.59 523 7.31 States and municipalities** 15,804 9.58 34,636 9.32 1,219 7.51 4,771 8.08 Other 24,354 7.47 27,302 7.35 819 19.27 34,476*** 6.04 - ------------------------------------------------------------------------------------------------------------------------------------ Total $181,947 6.20% $311,991 5.75% $422,355 5.78% $1,200,408 5.65% ====================================================================================================================================
* Includes $1,630.8 million of government agency issued mortgage-backed securities and collateralized mortgage obligations which, when adjusted for early paydowns, have an estimated average life of 2.35 years. Also includes $4.1 million of private issued collateralized mortgage obligations which, when adjusted for early paydowns, have an estimated average life of .18 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%. *** Represents equity securities with no stated maturity. 69 MATURITIES OF LOANS AT DECEMBER 31, 1993
After 1 Year (Dollars in thousands) Within 1 Year Within 5 Years After 5 Years Total - ----------------------------------------------------------------------------------------------------------- Commercial $1,278,397 $1,045,719 $ 194,864 $2,518,980 Consumer 65,962 816,928 852,689 1,735,579 Credit card receivables 428,074 -- -- 428,074 Real estate construction 48,972 22,869 4,003 75,844 Permanent mortgage 53,440 61,359 381,056 495,855 Nonaccrual 7,689 5,057 12,059 24,805 - ----------------------------------------------------------------------------------------------------------- Total $1,882,534 $1,951,932 $1,444,671 $5,279,137 =========================================================================================================== For maturities over one year: Interest rates - floating $ 690,383 $ 314,694 $1,005,077 Interest rates - fixed 1,261,549 1,129,977 2,391,526 - ----------------------------------------------------------------------------------------------------------- Total $1,951,932 $1,444,671 $3,396,603 ===========================================================================================================
70
======================================================= CONSUMER LOANS BY PRODUCT AT DECEMBER 31 (Dollars in thousands) 1993 1992 - ------------------------------------------------------- Real estate $1,097,976 $714,999 Auto 348,799 278,728 Student 190,266 163,159 Other 98,538 109,107 - ------------------------------------------------------- Total $1,735,579 $1,265,993 =======================================================
At December 31, 1993, real estate consumer loans included $1,072,677,000 of first and second liens and home equity loans 71 REGULATORY CAPITAL AT DECEMBER 31
FTNC* FTBNA** Well-Capitalized ---------------- ----------------- Regulatory (Dollars in thousands) 1993 1992 1993 1992 Minimums - -------------------------------------------------------------------------------------------------------------------- CAPITAL: Tier I capital: Shareholders' common equity $ 678,985 $ 597,513 $ 627,371 $ 552,305 Less disallowed intangibles 62,152 20,747 66,413 36,297 - --------------------------------------------------------------------------------------------------- Total Tier I capital 616,833 576,766 560,958 516,008 - --------------------------------------------------------------------------------------------------- Tier II capital: Qualifying debt 82,505 85,399 75,000 75,000 Qualifying allowance for loan losses 80,569 68,705 79,332 67,659 - --------------------------------------------------------------------------------------------------- Total Tier II capital 163,074 154,104 154,332 142,659 - --------------------------------------------------------------------------------------------------- Total capital $ 779,907 $ 730,870 $ 715,290 $ 658,667 =================================================================================================== Risk-adjusted assets $ 6,422,329 $ 5,468,328 $ 6,323,351 $ 5,384,338 Quarterly average assets 9,478,513 8,498,442 9,338,303 8,381,031 - --------------------------------------------------------------------------------------------------- RATIOS: Tier I capital to risk-adjusted assets 9.60 % 10.55 % 8.87 % 9.58 % 6.00 % Tier II capital to risk-adjusted assets 2.54 2.82 2.44 2.65 -- - -------------------------------------------------------------------------------------------------------------------- Total capital to risk-adjusted assets 12.14 % 13.37 % 11.31 % 12.23 % 10.00 % ==================================================================================================================== Leverage - Tier I capital to quarterly average assets less disallowed intangibles 6.55 % 6.80 % 6.05 % 6.18 % 5.00 % - --------------------------------------------------------------------------------------------------------------------
* First Tennessee National Corporation **First Tennessee Bank National Association Based on regulatory guidelines. 72 NET LOANS AND FORECLOSED REAL ESTATE AT DECEMBER 31
1993 1992 -------------------------------------------------------------- ----------------- Construction Allowance Allowance and Commercial For Loan For Loan (Dollars in millions) Commercial Development Real Estate Total Losses Total Losses - ------------------------------------------------------------------------------------------------------------------------------------ Internal grades: A $ 111 $ - $ - $ 111 $ - $ 82 $ - B 360 - 10 370 1 330 1 C 1,387 59 470 1,916 23 1,573 20 D 43 1 21 65 5 91 2 E 32 - 26 58 5 63 3 F 24 - 12 36 11 68 14 - ------------------------------------------------------------------------------------------------------------------------------------ 1,957 60 539 2,556 45 2,207 40 Nonaccrual loans: Contractually past due with: Substantial performance - - - - - 1 - Limited performance 5 - 2 7 4 5 1 No performance 1 - 1 2 1 12 5 Contractually current 3 - 4 7 2 11 3 - ------------------------------------------------------------------------------------------------------------------------------------ Total commercial and commercial real estate loans $1,966 $60 $546 $2,572 $ 52 $2,236 $ 49 Retail: Consumer 1,733 15 1,262 12 Credit card 428 17 412 18 Permanent mortgage 495 4 586 5 Mortgage warehouse loans held for sale 720 - 88 - Mortgage banking nonaccrual 9 1 - - - ------------------------------------------------------------------------------------------------------------------------------------ Total retail loans 3,385 37 2,348 35 Other/unfunded commitments 31 3 26 3 General reserve - 12 - 10 - ------------------------------------------------------------------------------------------------------------------------------------ Total net loans $5,988 $104 $4,610 $ 97 ==================================================================================================================================== Foreclosed real estate: Foreclosed property $ 2 $12 $ 4 $ 18 $ 20 Foreclosed property - mortgage banking - - - 14 - Insubstance foreclosure - - - - 4 - ------------------------------------------------------------------------------------------------------------------------------------ Total foreclosed real estate $ 32 $ 24 ====================================================================================================================================
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. *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. For internal management purposes, nonaccrual loans are divided into four sub-categories: (1) contractually current, or payments are less than 90 days past due; (2) contractually past due 90 days or more with substantial performance (more than 85 percent of contractual payments being received); (3) contractually past due with limited performance (between 1 percent and 85 percent of contractual payments being received); and (4) contractually past due with no performance. Based on internal loan classifications. 73 FTBNA LOANS SECURED BY REAL ESTATE AT DECEMBER 31
1993 1992 ----------------------------------- ------------------------------------ Construction Commercial Construction Commercial (Dollars in millions) & Development Real Estate Total & Development Real Estate Total - ----------------------------------------------------------------------------------------------------------------------------- RISK CATEGORIES: Real estate collateral serves as only source of repayment $ 46 $ 180 $ 226 $ 37 $ 156 $ 193 Real estate collateral is primary source of repayment with a substantial secondary source 14 366 380 17 295 312 - ----------------------------------------------------------------------------------------------------------------------------- Total $ 60 $ 546 $ 606 $ 54 $ 451 $ 505 ============================================================================================================================= PROJECT TYPE: Apartments $ - $ 78 $ 78 $ 2 $ 51 $ 53 Hotels/Motels - 62 62 - 48 48 Office buildings - multi-tenant 1 60 61 4 55 59 Shopping centers 1 106 107 12 90 102 Commercial/Special purpose units 1 74 75 2 64 66 All Other 57 166 223 34 143 177 - ----------------------------------------------------------------------------------------------------------------------------- Total $ 60 $ 546 $ 606 $ 54 $ 451 $ 505 =============================================================================================================================
Based on internal loan classifications. 74 ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) 1993 1992 1991 1990 1989 1988 ----------------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES: Beginning balance $ 96,795 $ 90,048 $ 86,663 $ 65,725 $ 51,540 $ 65,484 Provision for loan losses 34,540 43,171 53,943 64,231 64,116 25,827 Allowance of acquired bank 785 -- 9,327 -- -- 3,442 Charge-offs: Commercial 15,509 17,899 30,539 24,110 33,968 28,719 Consumer 8,487 9,807 13,838 12,422 12,348 10,352 Credit card receivables 13,357 17,013 16,913 11,510 8,773 7,770 Real estate construction 2,320 173 6,888 6,214 2,410 2,338 Permanent mortgage 676 1,607 910 1,020 216 494 ------------------------------------------------------------------------------------------------------------------------------ Total charge-offs 40,349 46,499 69,088 55,276 57,715 49,673 ------------------------------------------------------------------------------------------------------------------------------ Recoveries: Commercial 5,837 5,228 5,061 8,106 5,009 3,213 Consumer 3,322 2,545 2,684 2,432 1,746 2,232 Credit card receivables 2,262 1,985 1,278 1,141 934 843 Real estate construction 159 215 150 286 79 36 Permanent mortgage 383 102 30 18 16 136 -------------------------------------------------------------------------------------------------------------------------------- Total recoveries 11,963 10,075 9,203 11,983 7,784 6,460 -------------------------------------------------------------------------------------------------------------------------------- Net charge-offs 28,386 36,424 59,885 43,293 49,931 43,213 -------------------------------------------------------------------------------------------------------------------------------- Ending balance $ 103,734 $ 96,795 $ 90,048 $ 86,663 $ 65,725 $ 51,540 ================================================================================================================================= LOANS (NET OF UNEARNED INCOME) OUTSTANDING AT DECEMBER 31* $ 5,987,568 $ 4,610,018 $ 4,537,392 $ 4,338,916 $ 4,169,534 $ 4,076,679 ================================================================================================================================= AVERAGE LOANS (NET OF UNEARNED INCOME) OUTSTANDING DURING THE YEAR $ 4,948,050 $ 4,514,229 $ 4,330,545 $ 4,194,371 $ 4,142,559 $ 4,029,453 ================================================================================================================================= RATIOS: Allowance to loans (net of unearned income)* 1.73 % 2.10 % 1.98 % 2.00 % 1.58 % 1.26 % Net charge-offs to average loans (net of unearned income) 0.57 0.81 1.38 1.03 1.21 1.07 Net charge-offs to allowance 27.4 37.6 66.5 50.0 76.0 83.8 ================================================================================================================================= *Includes mortgage warehouse loans held for sale reported on the Consolidated Statements of Condition. Excluding the LDC reserve for 1988, the allowance to loans ratio would have been 1.18 percent, net charge-offs would have been $28,731,000, the net charge-off to average loan ratio would have been .71 percent, and the net charge-off to allowance ratio would have been 59.6 percent.
75 CHANGES IN NONPERFORMING ASSETS AT DECEMBER 31
(Dollars in millions) 1993 1992 1991 ------------------------------------------------------------ Beginning balance $ 54.7 $ 83.6 $ 102.7 New nonperformers 22.4 31.2 67.1 Valley acquisition -- -- 2.0 MNMC acquisition 22.8 -- -- Return to accrual (3.4) (0.5) (11.7) Payments (25.1) (39.5) (32.8) Charge-offs (13.2) (17.8) (36.0) Market writedowns (0.1) (2.3) (7.7) ------------------------------------------------------------ Ending balance $ 58.1 $ 54.7 $ 83.6 =============================================================
76 NONPERFORMING ASSETS AT DECEMBER 31
(Dollars in thousands) 1993 1992 1991 1990 1989 1988 ------------------------------------------------------------------------------------------------------------------------------ AMOUNTS: Nonaccrual loans $ 24,805 $ 28,712 $ 43,479 $ 69,685 $ 48,411 $ 36,383 Restructured loans 579 1,288 2,346 965 47 50 ------------------------------------------------------------------------------------------------------------------------------ Total nonperforming loans 25,384 30,000 45,825 70,650 48,458 36,433 Foreclosed real estate 31,609 23,559 37,197 31,933 25,346 10,829 Other assets 1,120 1,127 558 109 394 48 ------------------------------------------------------------------------------------------------------------------------------ Total nonperforming assets $ 58,113 $ 54,686 $ 83,580 $ 102,692 $ 74,198 $ 47,310 ============================================================================================================================== Non-government guaranteed past due loans*** $ 12,215 $ 13,177 $ N/A $ N/A $ N/A $ N/A Government guaranteed past due loans*** 11,024 8,906 N/A N/A N/A N/A Past due loans* 20,514 15,796 12,004 17,421 ------------------------------------------------------------------------------------------------------------------------------- RATIOS: Nonperforming loans to total loans (net of unearned income)** 0.42 % 0.65 % 1.01 % 1.63 % 1.16 % 0.89 % Nonperforming assets to total loans (net of unearned income) plus foreclosed real estate and other assets** 0.97 1.18 1.83 2.35 1.77 1.16 Nonperforming assets and past due loans to total loans (net of unearned income) plus foreclosed real estate and other assets** 1.35 1.53 2.28 2.71 2.05 1.58 ==============================================================================================================================
* Past due loans are loans that are 90 days or more past due as to principal and/or interest and not yet on nonaccrual status. ** Total loans includes mortgage warehouse loans held for sale reported on the Consolidated Statements of Condition. *** Not available for years prior to 1992. 77 SELECTED First Tennessee FINANCIAL National DATA Corporation
(Dollars in millions except per share data) 1993 1992 1991 1990 1989 1988 - --------------------------------------------------------------------------------------------------------------------------- SUMMARY Interest income $ 586.5 $ 599.3 $ 640.6 $ 659.3 $ 639.6 $ 550.5 INCOME Less interest expense 239.9 276.3 361.8 405.9 405.6 327.0 STATEMENTS -------------------------------------------------------------------------------------------------------------- Net interest income 346.6 323.0 278.8 253.4 234.0 223.5 Provision for loan losses 34.5 43.2 53.9 64.2 64.1 25.8 ------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 312.1 279.8 224.9 189.2 169.9 197.7 Noninterest income 270.4 225.0 191.2 155.1 142.7 126.1 ------------------------------------------------------------------------------------------------------------- Adjusted gross income after provision for loan losses 582.5 504.8 416.1 344.3 312.6 323.8 Noninterest expense 398.4 360.5 316.0 267.0 263.0 242.3 ------------------------------------------------------------------------------------------------------------- Income before income taxes 184.1 144.3 100.1 77.3 49.6 81.5 Applicable income taxes 63.4 55.1 27.1 20.7 12.2 20.1 ------------------------------------------------------------------------------------------------------------- Net income $ 120.7 $ 89.2 $ 73.0 $ 56.6 $ 37.4 $ 61.4 =========================================================================================================================== COMMON Net income per common share $ 4.26 $ 3.19 $ 2.63 $ 2.01 $ 1.33 $ 2.20 STOCK Cash dividends declared per common share 1.50 1.26 * 1.14 1.09 0.96 0.86 DATA Year-end book value per common share 23.97 21.25 19.39 17.91 16.92 16.54 Closing price of common stock per share: High 47 38 27 5/8 18 19 7/8 19 3/8 Low 36 1/8 26 3/8 14 3/8 12 15 7/8 14 3/8 Year-end 38 1/2 36 3/4 27 5/8 15 1/8 16 5/8 16 3/8 Dividends/price 3.2-4.2 % 3.3-4.8 % 4.1-7.9 % 6.1-9.1 % 4.8-6.0 % 4.4-6.0 % Dividends/earnings 35.2 39.5 43.3 54.2 72.2 39.1 Closing price/earnings 9.0 x 11.5 x 10.5 x 7.5 x 12.5 x 7.4 x Market capitalization $ 1,090.6 $ 1,033.5 $ 767.2 $ 419.7 $ 470.1 $ 459.9 Average shares outstanding (thousands) 28,325 27,972 27,761 28,159 28,148 27,876 Period-end shares outstanding (thousands) 28,326 28,123 27,772 27,746 28,279 28,084 Volume of shares traded (thousands) 25,486 21,394 15,714 8,620 9,928 6,410 - -------------------------------------------------------------------------------------------------------------------------- SELECTED Total assets $ 8,968.1 $ 8,297.8 $ 7,650.9 $ 7,201.8 $ 6,873.6 $ 6,485.1 AVERAGE Total loans, net of unearned income* 4,948.1 4,514.2 4,330.5 4,194.4 4,142.6 4,029.5 BALANCES Investment and held for sale securities 2,826.3 2,639.6 1,842.3 1,548.1 1,348.6 1,244.8 Earning assets 8,095.3 7,565.4 6,981.1 6,543.7 6,129.8 5,666.0 Deposits 6,736.4 6,592.3 6,143.2 5,713.0 5,447.4 5,076.0 Long-term debt 95.3 127.7 127.8 128.3 129.8 132.7 Shareholders' equity 635.3 577.4 516.3 486.6 469.6 442.1 - --------------------------------------------------------------------------------------------------------------------------
78 SELECTED First Tennessee FINANCIAL National DATA (Continued) Corporation SELECTED Total assets $ 9,608.8 $ 8,925.8 $ 8,760.7 $ 7,485.2 $ 7,149.4 $ 6,697.9 PERIOD-END Total loans, net of unearned income* 5,987.6 4,610.0 4,537.4 4,338.9 4,169.5 4,076.7 BALANCES Investment and held for sale securities 2,169.7 3,031.1 2,526.6 1,630.1 1,508.3 1,272.1 Earning assets 8,481.2 8,116.1 7,674.7 6,700.6 6,246.0 5,782.9 Deposits 7,146.8 6,916.8 6,791.3 6,016.3 5,595.4 5,283.2 Long-term debt 90.0 126.9 127.8 127.9 128.7 131.9 Shareholders' equity 679.0 597.5 538.5 497.0 478.5 464.5 - --------------------------------------------------------------------------------------------------------------------------- SELECTED Return on average equity 18.99 % 15.44 % 14.14 % 11.63 % 7.95 % 13.89 % RATIOS Return on average assets 1.35 1.07 0.95 0.79 0.54 0.95 Net interest margin 4.35 4.37 4.13 4.07 4.10 4.30 Allowance for loan losses to loans (net of unearned income)* 1.73 2.10 1.98 2.00 1.58 1.26 Net charge-offs to average loans (net of unearned income) 0.57 0.81 1.38 1.03 1.21 1.07 Average equity to average assets 7.08 6.96 6.75 6.76 6.83 6.82 Average tangible equity to average tangible assets 6.29 6.23 6.14 6.27 6.28 6.19 Average equity to average net loans 13.11 13.07 12.18 11.83 11.52 11.14 - -------------------------------------------------------------------------------------------------------------------------- RETURN TO Stock appreciation 4.8 % 33.0 % 82.6 % (9.0)% 1.5 % 10.1 % SHAREHOLDERS Dividend yield 4.1 4.6 7.5 6.6 5.9 5.8 Annual return 8.9 37.6 90.1 (2.4) 7.4 15.9 - -------------------------------------------------------------------------------------------------------------------------- * Includes mortgage warehouse loans held for sale reported on the Consolidated Statements of Condition. The notes to consolidated financial statements should be read in conjunction with this table.
79 CREDIT RATINGS AT DECEMBER 31, 1993
Standard Thomson Rating Agency Moody's & Poor's Fitch BankWatch -------------------------------------------------------------------------------------------- Senior sinking fund debentures A Subordinated debt Baa1 BBB+ Long-term certificates of deposit* A1 A- Short-term certificates of deposit* Prime-1 A-2 Overall credit rating B Commercial paper TBW-1 --------------------------------------------------------------------------------------------
*FTBNA 80 NET-CHARGE OFFS AS A PERCENTAGE OF AVERAGE LOANS, NET OF UNEARNED INCOME 1993 1992 ----------------------------------------------------------------- Commercial and commercial real estate .50% .57% Consumer .36 .63 Credit card receivables 2.80 3.87 Permanent mortgage .06 .24 -----------------------------------------------------------------
81 OBLIGATIONS OF STATES AND MUNICIPALITIES BY QUALITY RATING AT DECEMBER 31, 1993
Book Percent (Dollars in thousands) Value of Total ----------------------------------------------------------------- Moody's Rating: Investment securities A or better $ 46,401 81% BAA1/Baa 6,154 11 Ba/B 45 - Not rated 3,830 7 Securities held for sale: D 491 1 ---------------------------------------------------------------- Total $ 56,921 100% =================================================================
82
CONSOLIDATED AVERAGE BALANCE SHEET AND First Tennessee RELATED YIELDS AND RATES (Unaudited) 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: Taxable $2,175.2 $157.7 7.25 % $2,044.6 $156.3 7.64 % Tax-exempt 87.2 7.3 8.33 122.1 12.2 9.99 - ------------------------------------------------------------------------------------------------------------------------------ Total commercial loans 2,262.4 165.0 7.29 2,166.7 168.5 7.78 Consumer 1,441.3 120.3 8.35 1,151.3 106.4 9.24 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 Permanent mortgage 509.1 44.1 8.65 624.2 57.1 9.15 Mortgage warehouse loans held for sale 229.6 15.7 6.85 86.4 7.2 8.28 Nonaccrual loans 27.2 1.6 5.79 38.6 1.3 3.37 - ------------------------------------------------------------------------------------------------------------------------------ Total loans (net of unearned income) 4,948.1 405.1 8.19 4,514.2 399.7 8.85 - ------------------------------------------------------------------------------------------------------------------------------ Investment and held for sale securities: U.S. Treasury and other U.S. government agencies 2,535.3 151.1 5.96 2,093.1 145.0 6.93 States and municipalities 76.2 7.9 10.34 101.7 10.5 10.39 Other 214.8 14.3 6.67 444.8 32.2 7.24 - ------------------------------------------------------------------------------------------------------------------------------ Total investment and held for sale securities 2,826.3 173.3 6.13 2,639.6 187.7 7.11 - ------------------------------------------------------------------------------------------------------------------------------ Other earning assets: Investment in bank time deposits 4.0 0.2 3.55 40.6 2.5 6.01 Federal funds sold and securities purchased under agreements to resell 136.5 3.6 2.62 212.6 6.4 3.02 Trading account securities 180.4 9.6 5.34 158.4 10.6 6.70 - ------------------------------------------------------------------------------------------------------------------------------ Total other earning assets 320.9 13.4 4.16 411.6 19.5 4.73 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets 8,095.3 591.8 7.31 7,565.4 606.9 8.02 Allowance for loan losses (102.9) (96.3) Cash and due from banks 534.6 458.4 Premises and equipment, net 112.1 106.3 Bond division receivables and other assets 329.0 264.0 - ------------------------------------------------------------------------------------------------------------------------------ Total assets / Interest income $8,968.1 $591.8 $8,297.8 $606.9
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: Taxable $1,940.4 $182.5 9.41 % $1,830.4 $193.3 10.60 % Tax-exempt 146.8 16.7 11.38 184.2 22.7 12.34 - ------------------------------------------------------------------------------------------------------------------------------ Total commercial loans 2,087.2 199.2 9.55 2,014.6 216.0 10.72 Consumer 1,016.0 107.6 10.59 982.1 111.3 11.34 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 25.7 11.42 Permanent mortgage 613.9 61.9 10.09 568.8 58.0 10.20 Mortgage warehouse loans held for sale 58.6 5.5 9.34 33.8 3.3 9.71 Nonaccrual loans 60.6 2.1 3.39 56.8 4.2 7.44 - ------------------------------------------------------------------------------------------------------------------------------ Total loans (net of unearned income) 4,330.5 442.4 10.22 4,194.4 464.7 11.08 - ------------------------------------------------------------------------------------------------------------------------------ Investment and held for sale securities: U.S. Treasury and other U.S. government agencies 1,343.7 113.8 8.47 1,147.2 104.4 9.09 States and municipalities 133.0 13.9 10.48 171.1 18.0 10.53 Other 365.6 27.7 7.57 229.8 18.6 8.10 - ------------------------------------------------------------------------------------------------------------------------------ Total investment and held for sale securities 1,842.3 155.4 8.44 1,548.1 141.0 9.11 - ------------------------------------------------------------------------------------------------------------------------------ Other earning assets: Investment in bank time deposits 330.6 23.2 7.02 357.0 30.3 8.49 Federal funds sold and securities purchased under agreements to resell 352.8 19.5 5.53 308.8 24.3 7.87 Trading account securities 124.8 9.9 7.94 135.4 12.3 9.07 - ------------------------------------------------------------------------------------------------------------------------------ Total other earning assets 808.2 52.6 6.51 801.2 66.9 8.35 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets 6,981.0 650.4 9.32 6,543.7 672.6 10.28 Allowance for loan losses (92.9) (80.0) Cash and due from banks 422.3 432.0 Premises and equipment, net 96.7 87.0 Bond division receivables and other assets 243.8 219.1 - ------------------------------------------------------------------------------------------------------------------------------ Total assets / Interest income $7,650.9 $650.4 $7,201.8 $672.6
1989 1988 ------------------------ --------------------------- 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: Taxable $1,823.8 $206.0 11.29 % $1,794.8 $181.0 10.08 % Tax-exempt 224.9 28.8 12.82 276.7 32.4 11.70 - ------------------------------------------------------------------------------------------------------------------------------ Total commercial loans 2,048.7 234.8 11.46 2,071.5 213.4 10.30 Consumer 916.7 107.0 11.67 819.6 90.7 11.07 Credit card receivables 264.1 38.4 14.56 226.3 32.0 14.12 Real estate construction 263.4 32.4 12.30 316.9 35.6 11.25 Permanent mortgage 564.9 56.5 10.00 530.8 53.3 10.04 Mortgage warehouse loans held for sale 27.5 2.7 9.83 23.2 2.4 10.40 Nonaccrual loans 57.2 2.7 4.63 41.2 2.0 4.82 - ------------------------------------------------------------------------------------------------------------------------------ Total loans (net of unearned income) 4,142.5 474.5 11.46 4,029.5 429.4 10.66 - ------------------------------------------------------------------------------------------------------------------------------ Investment and held for sale securities: U.S. Treasury and other U.S. government agencies 938.8 83.4 8.88 780.6 67.2 8.62 States and municipalities 223.3 23.9 10.70 274.3 28.7 10.46 Other 186.4 15.5 8.34 189.9 14.5 7.61 - ------------------------------------------------------------------------------------------------------------------------------ Total investment and held for sale securities 1,348.5 122.8 9.11 1,244.8 110.4 8.87 - ------------------------------------------------------------------------------------------------------------------------------ Other earning assets: Investment in bank time deposits 309.6 29.7 9.60 215.8 16.8 7.77 Federal funds sold and securities purchased under agreements to resell 245.8 22.1 8.98 141.9 10.7 7.56 Trading account securities 83.4 7.9 9.48 34.1 3.2 9.44 - ------------------------------------------------------------------------------------------------------------------------------ Total other earning assets 638.8 59.7 9.34 391.8 30.7 7.84 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets 6,129.8 657.0 10.72 5,666.1 570.5 10.07 Allowance for loan losses (66.4) (61.9) Cash and due from banks 511.3 616.8 Premises and equipment, net 85.1 78.2 Bond division receivables and other assets 213.8 185.9 - ------------------------------------------------------------------------------------------------------------------------------ Total assets / Interest income $6,873.6 $657.0 $6,485.1 $570.5
Average Balance (Fully taxable equivalent) Growth Rates (S) (Dollars in millions) 93/92 93/88 - ------------------------------------------------------------------------------------------------------------------------------ ASSETS: Earning assets: Loans net of unearned income: Commercial: Taxable 6.4 + 3.9 + Tax-exempt 28.6 - 20.6 - - ------------------------------------------------------------------------------------------------------------------------------ Total commercial loans 4.4 + 1.8 + Consumer 25.2 + 12.0 + Credit card receivables 2.2 + 11.9 + Real estate construction 39.2 + 23.7 - Permanent mortgage 18.4 - .8 - Mortgage warehouse loans held for sale 165.7 + 58.2 + Nonaccrual loans 29.5 - 8.0 - - ------------------------------------------------------------------------------------------------------------------------------ Total loans (net of unearned income) 9.6 + 4.2 + - ------------------------------------------------------------------------------------------------------------------------------ Investment and held for sale securities: U.S. Treasury and other U.S. government agencies 21.1 + 26.6 + States and municipalities 25.1 - 22.6 - Other 51.7 - 2.5 + - ------------------------------------------------------------------------------------------------------------------------------ Total investment and held for sale securities 7.1 + 17.8 + - ------------------------------------------------------------------------------------------------------------------------------ Other earning assets: Investment in bank time deposits 90.1 - 55.0 - Federal funds sold and securities purchased under agreements to resell 35.8 - .8 - Trading account securities 13.9 + 39.5 + - ------------------------------------------------------------------------------------------------------------------------------ Total other earning assets 22.0 - 3.9 - - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets 7.0 + 7.4 + Allowance for loan losses 6.9 + 10.7 + Cash and due from banks 16.6 + 2.8 - Premises and equipment, net 5.5 + 7.5 + Bond division receivables and other assets 24.6 + 12.1 + - ------------------------------------------------------------------------------------------------------------------------------ Total assets / Interest income 8.1 + 6.7 +
83
CONSOLIDATED AVERAGE BALANCE SHEET AND First Tennessee RELATED YIELDS AND RATES (Unadited) National (continued) 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 - ------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing deposits: Checking/Interest $ 492.0 $ 9.6 1.96 % $ 444.4 $ 11.6 2.61 % Savings 508.3 13.6 2.67 482.4 16.3 3.39 Money market account 1,592.9 41.3 2.59 1,513.5 49.8 3.29 Certificates of deposit under $100,000 and other time 2,296.4 111.3 4.85 2,459.7 139.1 5.65 Certificates of deposit $100,000 and more 370.3 14.2 3.83 426.0 17.9 4.20 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 5,259.9 190.0 3.61 5,326.0 234.7 4.41 Federal funds purchased and securities sold under agreements to repurchase 1,020.7 29.0 2.84 690.3 22.5 3.25 Commercial paper and other short-term borrowings 278.0 11.7 4.19 136.7 8.3 6.10 Long-term debt 95.3 9.2 9.70 127.7 10.8 8.44 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 6,653.9 239.9 3.61 6,280.7 276.3 4.40 Demand deposits 1,476.5 1,266.2 Bond division payables and other liabilities 202.4 173.5 Shareholders' equity 635.3 577.4 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity / Interest expense $8,968.1 $239.9 $8,297.8 $276.3 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income-tax equivalent basis / Yield $351.9 4.35 % $330.6 4.37 % Fully taxable equivalent adjustment (5.3) (7.6) - ------------------------------------------------------------------------------------------------------------------------------- Net interest income $346.6 $323.0 - ------------------------------------------------------------------------------------------------------------------------------- Net interest spread 3.70 % 3.62 % Effect of interest-free sources used to fund earning assets .65 .75 - ------------------------------------------------------------------------------------------------------------------------------- Net interest margin 4.35 % 4.37 % - -------------------------------------------------------------------------------------------------------------------------------
1991 1990 ----------------------------- --------------------------- Interest Average Interest Average (Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/ (Dollars in millions) Balance Expense Rates Balance Expense Rates - ------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing deposits: Checking/Interest $ 375.6 $ 14.3 3.82 % $ 357.1 $ 14.9 4.17 % Savings 397.9 19.4 4.86 380.8 19.8 5.19 Money market account 1,307.0 68.3 5.22 1,115.4 72.3 6.48 Certificates of deposit under $100,000 and other time 2,530.3 178.9 7.07 2,388.9 194.3 8.13 Certificates of deposit $100,000 and more 460.4 29.4 6.39 462.4 36.5 7.89 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 5,071.2 310.3 6.12 4,704.6 337.8 7.18 Federal funds purchased and securities sold under agreements to repurchase 597.8 31.6 5.28 631.0 47.2 7.47 Commercial paper and other short-term borrowings 100.8 8.3 8.26 91.1 8.7 9.60 Long-term debt 127.8 11.6 9.10 128.3 12.2 9.55 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 5,897.6 361.8 6.13 5,555.0 405.9 7.31 Demand deposits 1,072.1 1,008.4 Bond division payables and other liabilities 164.8 151.8 Shareholders' equity 516.4 486.6 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity / Interest expense $7,650.9 $361.8 $7,201.8 $405.9 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income-tax equivalent basis / Yield $288.6 4.13 % $266.7 4.07 % Fully taxable equivalent adjustment (9.8) (13.3) - ------------------------------------------------------------------------------------------------------------------------------- Net interest income $278.8 $253.4 - ------------------------------------------------------------------------------------------------------------------------------- Net interest spread 3.19 % 2.97 % Effect of interest-free sources used to fund earning assets .94 1.10 - ------------------------------------------------------------------------------------------------------------------------------- Net interest margin 4.13 % 4.07 % - -------------------------------------------------------------------------------------------------------------------------------
1989 1988 ----------------------------- --------------------------- Interest Average Interest Average (Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/ (Dollars in millions) Balance Expense Rates Balance Expense Rates - ------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Interest-bearing liabilities: Interest-bearing deposits: Checking/Interest $ 420.0 $ 22.9 5.44 % $ 510.2 $ 23.0 4.51 % Savings 416.3 21.7 5.20 492.6 25.6 5.19 Money market account 803.1 49.3 6.14 571.3 31.1 5.45 Certificates of deposit under $100,000 and other time 2,207.7 191.8 8.69 1,794.3 142.5 7.94 Certificates of deposit $100,000 and more 547.1 46.4 8.49 536.6 38.9 7.25 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 4,394.2 332.1 7.56 3,905.0 261.1 6.69 Federal funds purchased and securities sold under agreements to repurchase 601.2 51.6 8.58 603.4 43.3 7.18 Commercial paper and other short-term borrowings 70.5 9.3 13.14 95.5 10.3 10.75 Long-term debt 129.8 12.6 9.76 132.7 12.3 9.30 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 5,195.7 405.6 7.81 4,736.6 327.0 6.90 Demand deposits 1,053.1 1,171.0 Bond division payables and other liabilities 155.2 135.4 Shareholders' equity 469.6 442.1 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity / Interest expense $6,873.6 $405.6 $6,485.1 $327.0 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income-tax equivalent basis / Yield $251.4 4.10 % $243.5 4.30 % Fully taxable equivalent adjustment (17.4) (20.0) - ------------------------------------------------------------------------------------------------------------------------------- Net interest income $234.0 $223.5 - ------------------------------------------------------------------------------------------------------------------------------- Net interest spread 2.91 % 3.17 % Effect of interest-free sources used to fund earning assets 1.19 1.13 - ------------------------------------------------------------------------------------------------------------------------------- Net interest margin 4.10 % 4.30 % - -------------------------------------------------------------------------------------------------------------------------------
Average Balance (Fully taxable equivalent) Growth Rates (%) (Dollars in millions) 93/92 93/88 - ------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing deposits: Checking/Interest 10.7 + 0.7 - Savings 5.4 + 0.6 + Money market account 5.2 + 22.8 + Certificates of deposit under $100,000 and other time 6.6 - 5.1 + Certificates of deposit $100,000 and more 13.1 - 7.2 - - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 1.2 - 6.1 + Federal funds purchased and securities sold under agreements to repurchase 47.9 + 11.1 + Commercial paper and other short-term borrowings 103.4 + 23.8 + Long-term debt 25.4 - 6.4 - - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 5.9 + 7.0 + Demand deposits 16.6 + 4.7 + Bond division payables and other liabilities 16.7 + 8.4 + Shareholders' equity 10.0 + 7.5 + - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity / Interest expense 8.1 + 6.7 + - ------------------------------------------------------------------------------------------------------------------------------- Net interest income-tax equivalent basis / Yield Fully taxable equivalent adjustment - ------------------------------------------------------------------------------------------------------------------------------- Net interest income - ------------------------------------------------------------------------------------------------------------------------------- Net interest spread Effect of interest-free sources used to fund earning assets - ------------------------------------------------------------------------------------------------------------------------------- Net interest margin - -------------------------------------------------------------------------------------------------------------------------------
Certain previously reported amounts have been reclassified to agree with current presentation. Yields and corresponding income amounts are adjusted to a fully taxable equivalent. Earning assets yields are expressed net of unearned income. Rates are expressed net of unamortized debenture cost for long-term debt. Net interest margin is computed using total net interest income. 84 ANNUAL REPORT GRAPHS GRAPH TITLE: Return on Average Equity NARRATIVE DESCRIPTION: This is a bar graph with the x-axis representing annual periods from 1988 to 1993 and the y-axis ranging from 0.00 percent to 20.00 percent. The bars begin in 1988 at 13.89 percent, fall to 7.95 percent in 1989, and then generally increase until reaching 18.99 percent in 1993. DATA POINTS: (Percent) Return on Equity 1988 13.89 1989 7.95 1990 11.63 1991 14.14 1992 15.44 1993 18.99 NOTE: In 1993 ROE reached 18.99 percent, the fourth consecutive year with improving profitability. Excluding the one-time expenses related to the HFC acquisition, 1992 ROE would have been 18.14 percent. REFERENCE: Financial Performance Summary Section 85 ANNUAL REPORT GRAPHS GRAPH TITLE: Return on Average Assets NARRATIVE DESCRIPTION: This is a bar graph with the x-axis representing annual periods from 1988 to 1993 and the y-axis ranging from 0.00 percent to 1.40 percent. The bars begin in 1988 at .95 percent, fall to .54 percent in 1989, and then generally increase until reaching 1.35 percent in 1993. DATA POINTS: (Percent) Return on Assets 1988 0.95 1989 0.54 1990 0.79 1991 0.95 1992 1.07 1993 1.35 NOTE: Profitability, as measured by ROA, improved to 1.35 percent in 1993, reflecting strong growth in noninterest revenue, a lower loan loss provision, and a stable net interest margin. Excluding the one-time expenses related to the HFC acquisition, 1992 ROA would have been 1.26 percent. REFERENCE: Financial Performance Summary Section 86 ANNUAL REPORT GRAPHS GRAPH TITLE: Earnings Per Share NARRATIVE DESCRIPTION: This is a bar graph with the x-axis representing annual periods from 1988 to 1993 and the y-axis ranging from $0.00 to $4.00. The bars begin in 1988 at $2.20, fall to $1.33 in 1989, and then generally increase until reaching $4.26 in 1993. DATA POINTS: (Dollars) Earnings Per Share 1988 2.20 1989 1.33 1990 2.01 1991 2.63 1992 3.19 1993 4.26 NOTE: Earnings per share increased 33.5 percent in 1993 and has had a 14.1 percent compounded annual growth rate since 1988, adjusted for the 1992 three-for-two stock dividend. REFERENCE: Financial Performance Summary Section 87 ANNUAL REPORT GRAPHS GRAPH TITLE: Earnings Trend NARRATIVE DESCRIPTION: This is a line graph with the x-axis representing annual periods from 1988 to 1993 and the y-axis ranging from $0 to $200 million. There are two lines: net income and pre-tax, fully-taxable equivalent income before provision for loan losses. The net income line begins at approximately $60 million in 1988, falls to approximately $35 million in 1989, and then increases steadily to approximately $120 million in 1993. The pre-tax, fully-taxable equivalent income before provision for loan losses line begins at approximately $125 million and generally increases until it reaches approximately $225 million in 1993. Two numbers have been added to the graph which report that over the five year period net income experienced a 14.5 percent annual compounded growth rate while pre-tax, fully-taxable equivalent income before provision for loan losses experienced a 12.0 percent annual compounded growth rate. DATA POINTS:
Pre-Tax, Fully-Taxable (Millions of Equivalent Income Before Dollars) Net Income Provision for Loan Losses 1988 61.4 127.3 1989 37.4 131.1 1990 56.6 154.8 1991 73.0 163.8 1992 89.2 195.0 1993 120.7 223.9
NOTE: FTNC's pre-tax earnings before loan loss provisions have steadily improved over the last five years, experiencing approximately a 12 percent annual compounded growth rate over the last five years. REFERENCE: Financial Performance Summary Section 88 ANNUAL REPORT GRAPHS GRAPH TITLE: Net Interest Margin and Spread NARRATIVE DESCRIPTION: This is a line graph with the x-axis representing annual periods from 1988 to 1993 and the y-axis not shown. There are two lines: net interest spread and net interest margin. The net interest spread line begins at 3.17 percent in 1988, falls to 2.91 percent in 1989, and then increases steadily to 3.70 percent in 1993. The net interest margin line begins at 4.30 percent in 1988, decreases until 1990 when it reaches 4.07 percent, increases to 4.37 percent in 1992, and falls to 4.35 percent in 1993. DATA POINTS:
Net Net Interest Interest (Percent) Spread Margin 1988 3.17 4.30 1989 2.91 4.10 1990 2.97 4.07 1991 3.19 4.13 1992 3.62 4.37 1993 3.70 4.35
NOTE: Despite an increase in the net interest spread, the net interest margin dropped 2 basis points as the historically low interest rate environment reduced the value of the net free funding. REFERENCE: Net Interest Income Section 89 ANNUAL REPORT GRAPHS GRAPH TITLE: Profitability Per Employee NARRATIVE DESCRIPTION: This is a bar graph with the x-axis representing annual periods from 1988 to 1993 and the y-axis ranging from $0 to $50 thousand. The bars begin in 1988 at $30 thousand, generally increase until reaching $47 thousand in 1992, and then falls to $46 thousand in 1993. DATA POINTS:
(Thousand of $) Profitability Per Employee 1988 30 1989 32 1990 38 1991 39 1992 47 1993 46
NOTE: FTNC maintained its high level of profitability in 1993, even though several expansions impacted the level of profitability. Profitability per employee is calculated by dividing by average full-time equivalent employees the fully taxable equivalent, pre-tax, pre-provision income adjusted for significant non-recurring items and securities gains and losses. REFERENCE: No Specific Reference Section 90 ANNUAL REPORT GRAPHS GRAPH TITLE: Earning Asset Mix as a Percentage of Average Assets NARRATIVE DESCRIPTION: This is a stacked bar graph with the x-axis representing annual periods from 1988 to 1993 and the y-axis ranging from 0 percent to 80 percent. The total of the stacked bars, which represents the percent of average assets that are earning assets, begins at 87 percent in 1988, increases to 91 percent in 1991 and 1992, and then falls to 90 percent in 1993. The stacked bar is comprised of three different shaded areas: loans, net of unearned income, investment securities, and other earning assets. The area highlighting the percentage of loans, net of unearned income to earning assets, began at 62 percent in 1988 and generally declined to 54 percent in 1992 before rising to 55 percent in 1993. The area highlighting the percentage of investments to earnings assets began at 19 percent in 1988 and generally rose until it reached 32 percent for 1992 and 1993. The top area of the stacked bar represented the percentage of other earning assets to total assets and began at 6 percent in 1988, rose to 11 percent in 1990 and 1991, and generally fell in 1992 and 1993 before reaching 4 percent in 1993. DATA POINTS:
Loans, Net of Investment Other (Percent) Unearned Income Securities Earning Assets 1988 62.1 19.2 6.1 1989 60.3 19.6 9.3 1990 58.2 21.5 11.2 1991 56.6 24.0 10.6 1992 54.4 31.8 5.0 1993 55.2 31.5 3.6
NOTE: The percentage of loans, net of unearned income, to earning assets increased for the first time in six years. REFERENCE: Balance Sheet Composition Section 91 ANNUAL REPORT GRAPHS GRAPH TITLE: Average Loan Composition NARRATIVE DESCRIPTION: This is a stacked bar graph with the x-axis representing annual periods from 1988 to 1993 and the y-axis ranging from 0 percent to 100 percent. The total of the stacked bars is equal to 100 percent since the bars are highlighting the composition of the loan portfolio. The stacked bar is comprised of two different shaded areas: consumer, credit card receivables, and mortgage loans; and commercial and commercial real estate. The area highlighting the percentage of loans from consumer, credit card receivables, and mortgage loans began at 39 percent in 1988 and increased every year until it reached 52 percent in 1993. The area highlighting the percentage of loans which are commercial and commercial real estate began at 61 percent in 1988 and declined every year until it reached 48 percent in 1993. DATA POINTS:
Consumer, Credit Card Commercial Receivables and and Commercial (Percent) Mortgages Real Estate 1988 39.7 60.3 1989 42.8 57.2 1990 45.3 54.7 1991 47.5 52.5 1992 49.8 50.2 1993 52.1 47.9
NOTE: Consumer loans continue to represent a higher percentage of the total loan portfolio. REFERENCE: Balance Sheet Composition Section 92 ANNUAL REPORT GRAPHS GRAPH TITLE: Deposits and Other Interest-Bearing Liabilities as a Percentage of Average Assets NARRATIVE DESCRIPTION: This is a stacked bar graph with the x-axis representing annual periods from 1988 to 1993 and the y-axis ranging from 0 percent to 80 percent. The total of the stacked bars, which represents the percent of average assets that are funded with market rate core deposits, non-market rate core deposits, and other purchased funds, begins at 73 percent in 1988, increases to 77 percent in 1991 and 1992, and then falls to 74 percent in 1993. The stacked bar is comprised of three different shaded areas: market rate core deposits, non-market rate core deposits, and other purchased funds. The area highlighting the percentage of funding from market rate core deposits began at 37 percent in 1988 and generally increased to 50 percent in 1991 before falling to 43 percent in 1993. The area highlighting the percentage of funding from non-market rate core deposits began at 16 percent in 1988 and generally fell until it reached 11 percent for 1992 and 1993. The top area of the stacked bar represented the percentage of funding from other purchased funds and began at 21 percent in 1988, fell to 17 percent in 1991 and 1992, and increased to 20 percent in 1993. DATA POINTS:
Market Rate Non-Market Rate Other (Percent) Core Deposits Core Deposits Purchased Funds 1988 36.5 15.4 21.1 1989 43.8 12.2 19.6 1990 48.7 10.2 18.2 1991 50.2 10.1 16.8 1992 47.9 11.2 16.6 1993 43.4 11.1 19.7
NOTE: As interest rates remained low and the difference between the rates on non-market rate accounts and market rate accounts continued to be small, customers invested their additional funds in non-market rate core deposits. REFERENCE: Balance Sheet Composition Section 93 ANNUAL REPORT GRAPHS GRAPH TITLE: Net Charge-Offs NARRATIVE DESCRIPTION: This is a bar graph with the x-axis representing annual periods from 1988 to 1993 and the y-axis ranging from $0 to $80 million. The bars begin in 1988 at $43 million, generally increase until reaching $60 million in 1991, and then fall to $28 million in 1993. DATA POINTS:
(Millions of $) Net Charge-Offs 1988 43.2 1989 49.9 1990 43.3 1991 59.9 1992 36.4 1993 28.4
NOTE: The low level of net charge-offs is a result of a recent renewal in economic growth and improvements in the asset quality management process. REFERENCE: Allowance for Loan Losses and Net Charge-Offs Section 94 ANNUAL REPORT GRAPHS GRAPH TITLE: Nonperforming Loans NARRATIVE DESCRIPTION: This is a bar graph with the x-axis representing annual periods from 1988 to 1993 and the y-axis ranging from $0 to $100 million. The bars begin in 1988 at $36 million, generally increase until reaching $71 million in 1990, and then fall to $25 million in 1993. DATA POINTS:
(Millions of $) Nonperforming Loans 1988 36.4 1989 48.5 1990 70.7 1991 45.8 1992 30.0 1993 25.4
NOTE: The improvement in nonperforming loans reflects FTNC's positive asset quality trends over the last three years. REFERENCE: Nonperforming Assets Section 95 ANNUAL REPORT GRAPHS GRAPH TITLE: Nonperforming Assets to Total Loans* *Note: Net of unearned income plus foreclosed real estate and other assets NARRATIVE DESCRIPTION: This is a bar graph with the x-axis representing annual periods from 1988 to 1993 and the y-axis ranging from 0 percent to 2.50 percent. The bars begin in 1988 at 1.16 percent, generally increase until reaching 2.35 percent in 1990, and then fall to .97 percent in 1993. DATA POINTS:
Nonperforming Assets (Percent) to Total Loans 1988 1.16 1989 1.77 1990 2.35 1991 1.83 1992 1.18 1993 .97
NOTE: The improvement in the nonperforming assets to total loans ratio reflects the substantial decrease in nonperforming loans and foreclosed real estate over the last three years. REFERENCE: Nonperforming Assets Section 96 ANNUAL REPORT GRAPHS GRAPH TITLE: Cumulative Changes in Nonaccrual Loans and Other Real Estate Since Year-End 1988 (Quarterly) NARRATIVE DESCRIPTION: This is a line graph with the x-axis representing quarterly periods from 1988 to 1993 and the y-axis ranges from $0 to $210 million. There are two lines: nonaccrual loans and OREO net of charge-offs and adjustments and nonaccrual loans and OREO. The nonaccrual loans and OREO net of charge-offs and adjustments line begins at $0 at December 31, 1988, generally increases until it reaches $59 million in the first quarter of 1991, then decreases steadily to $(6) million in the third quarter of 1993, and then rises to $11 million in the fourth quarter of 1993. The nonaccrual loans and OREO line begins at $0 at December 31, 1988, generally increases until it reaches $144 million in the fourth quarter of 1991, then decreases steadily to $127 million in the third quarter of 1993, and then rises to $149 million in the fourth quarter of 1993. The area between the two lines is shaded and represents the impact to nonaccrual loans and OREO from net charge-offs and adjustments. DATA POINTS:
Nonaccrual Loans and OREO Net of Charge-Offs and Nonaccrual Loans (Millions of $) Adjustments and OREO 12/31/88 0 0 1Q89 13 15 2Q89 45 49 3Q89 35 57 12/31/89 27 63 1Q90 37 77 2Q90 35 82 3Q90 35 91 12/31/90 56 123 1Q91 59 134 2Q91 50 137 3Q91 43 142 12/31/91 35 144 1Q92 32 144 2Q92 24 142 3Q92 20 142 12/31/92 7 134
97 ANNUAL REPORT GRAPHS 1Q93 3 133 2Q93 0 133 3Q93 -6 127 12/31/93 11 149
NOTE: Over the last three years extensive charge-offs and improving asset quality trends reduced nonperforming loans and OREO below their 1988 levels. The MNMC acquisition added $22.8 million in assets in the fourth quarter of 1993. REFERENCE: Allowance for Loan Losses and Net Charge-Offs and Nonperforming Assets Sections 98 ANNUAL REPORT GRAPHS GRAPH TITLE: Cumulative Changes in Classified Assets Since Year-End 1988 (Quarterly) NARRATIVE DESCRIPTION: This is a line graph with the x-axis representing quarterly periods from 1988 to 1993 and the y-axis ranges from $0 to $210 million. There are two lines: classified assets net of charge-offs and adjustments and classified assets. The classified assets net of charge-offs and adjustments line begins at $0 at December 31, 1988, generally increases until it reaches $99 million in the third quarter of 1991, then decreases steadily to $(6) million in the third quarter of 1993, and then rises to $(5) million in the fourth quarter of 1993. The classified assets line begins at $0 at December 31, 1988, generally increases until it reaches $202 million in the third quarter of 1991, then decreases steadily to $128 million in the third quarter of 1993, and then rises to $134 million in the fourth quarter of 1993. The area between the two lines is shaded and represents the impact to nonaccrual loans and OREO from net charge-offs and adjustments. DATA POINTS:
Classified Assets Net of Charge-Offs and (Millions of $) Adjustments Classified Assets 12/31/88 0 0 1Q89 17 19 2Q89 59 67 3Q89 46 68 12/31/89 30 68 1Q90 74 115 2Q90 83 131 3Q90 83 141 12/31/90 80 154 1Q91 95 173 2Q91 95 186 3Q91 99 202 12/31/91 78 190 1Q92 73 189 2Q92 59 179 3Q92 51 175 12/31/92 24 151 1Q93 17 147 2Q93 -4 130
99 ANNUAL REPORT GRAPHS 3Q93 -6 128 12/31/93 -5 134
NOTE: Classified assets include all potential problem and nonperforming assets. Improvements in asset quality since mid-1990 are reflected by the reduction in classified assets, net of charge-offs and adjustments. The MNMC acquisition added $22.8 million in assets in the fourth quarter of 1993. REFERENCE: Allowance for Loan Losses and Net Charge-Offs and Nonperforming Assets Sections EX-21 5 FIRST TENNESSEE PARENTS & SUBSIDIARIES 1 EXHIBIT 21 PARENTS AND SUBSIDIARIES The following is a list of all subsidiaries of First Tennessee National Corporation at December 31, 1993. Each subsidiary is 100% owned by its immediate parent, and all are included in the Consolidated Financial Statements:
Type of Ownership Jurisdiction of Subsidiary By the Corporation Incorporation ---------- ------------------ --------------- Crown Finance Corporation* Direct Missouri Corona National Life Insurance Company* Indirect Arizona Crown Agency Corporation Indirect Missouri Crown Lending Corporation* Indirect Missouri First Tennessee Advisory Corporation* Direct Tennessee First Tennessee Bank National Association Direct United States Check Consultants, Incorporated Indirect Tennessee Check Consultants Company of Tennessee, Inc. Indirect Tennessee Countrywood Development Corporation* Indirect Tennessee East Tennessee Service Corporation Indirect Tennessee Tri-City Title Company* Indirect Tennessee Upper East Tennessee Insurance Agency Indirect Tennessee First Funds, Inc.* Indirect Tennessee First Tennessee Capital Assets Corporation Indirect Tennessee First Tennessee Data Services Corporation* Indirect Tennessee First Tennessee Brokerage, Inc. Indirect Tennessee First Tennessee Equipment Finance Corporation Indirect Tennessee Hickory Venture Capital Corporation Indirect Alabama JPO, Inc. Indirect Tennessee Maryland National Mortgage Corporation Indirect Maryland Atlantic Coast Mortgage Company Indirect Virginia Norlen, Inc.* Indirect Tennessee Northeast Arkansas Computer Service Center, Inc.* Indirect Arkansas Northeast Mississippi Computer Service Center, Inc.* Indirect Mississippi Southeast Missouri Computer Service Center, Inc.* Indirect Missouri West Tennessee Computer Service Center, Inc.* Indirect Tennessee TSMM Corporation Indirect Tennessee First Tennessee Bank National Association Mississippi Direct United States First Tennessee Investment Management, Inc. Direct Tennessee FTB Futures Corporation* Direct Tennessee Hickory Capital Corporation Direct Tennessee Mountain Financial Company* Direct Tennessee Norlen Life Insurance Company . Direct Arizona Pence Mortgage Company* Direct Kentucky Peoples and Union Bank Direct Tennessee *Inactive.
2
CONSOLIDATED AVERAGE BALANCE SHEET AND First Tennessee RELATED YIELDS AND RATES (Unaudited) 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: Taxable $2,175.2 $157.7 7.25 % $2,044.6 $156.3 7.64 % Tax-exempt 87.2 7.3 8.33 122.1 12.2 9.99 - ------------------------------------------------------------------------------------------------------------------------------ Total commercial loans 2,262.4 165.0 7.29 2,166.7 168.5 7.78 Consumer 1,441.3 120.3 8.35 1,151.3 106.4 9.24 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 Permanent mortgage 509.1 44.1 8.65 624.2 57.1 9.15 Mortgage warehouse loans held for sale 229.6 15.7 6.85 86.4 7.2 8.28 Nonaccrual loans 27.2 1.6 5.79 38.6 1.3 3.37 - ------------------------------------------------------------------------------------------------------------------------------ Total loans (net of unearned income) 4,948.1 405.1 8.19 4,514.2 399.7 8.85 - ------------------------------------------------------------------------------------------------------------------------------ Investment and held for sale securities: U.S. Treasury and other U.S. government agencies 2,535.3 151.1 5.96 2,093.1 145.0 6.93 States and municipalities 76.2 7.9 10.34 101.7 10.5 10.39 Other 214.8 14.3 6.67 444.8 32.2 7.24 - ------------------------------------------------------------------------------------------------------------------------------ Total investment and held for sale securities 2,826.3 173.3 6.13 2,639.6 187.7 7.11 - ------------------------------------------------------------------------------------------------------------------------------ Other earning assets: Investment in bank time deposits 4.0 0.2 3.55 40.6 2.5 6.01 Federal funds sold and securities purchased under agreements to resell 136.5 3.6 2.62 212.6 6.4 3.02 Trading account securities 180.4 9.6 5.34 158.4 10.6 6.70 - ------------------------------------------------------------------------------------------------------------------------------ Total other earning assets 320.9 13.4 4.16 411.6 19.5 4.73 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets 8,095.3 591.8 7.31 7,565.4 606.9 8.02 Allowance for loan losses (102.9) (96.3) Cash and due from banks 534.6 458.4 Premises and equipment, net 112.1 106.3 Bond division receivables and other assets 329.0 264.0 - ------------------------------------------------------------------------------------------------------------------------------ Total assets / Interest income $8,968.1 $591.8 $8,297.8 $606.9
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: Taxable $1,940.4 $182.5 9.41 % $1,830.4 $193.3 10.60 % Tax-exempt 146.8 16.7 11.38 184.2 22.7 12.34 - ------------------------------------------------------------------------------------------------------------------------------ Total commercial loans 2,087.2 199.2 9.55 2,014.6 216.0 10.72 Consumer 1,016.0 107.6 10.59 982.1 111.3 11.34 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 25.7 11.42 Permanent mortgage 613.9 61.9 10.09 568.8 58.0 10.20 Mortgage warehouse loans held for sale 58.6 5.5 9.34 33.8 3.3 9.71 Nonaccrual loans 60.6 2.1 3.39 56.8 4.2 7.44 - ------------------------------------------------------------------------------------------------------------------------------ Total loans (net of unearned income) 4,330.5 442.4 10.22 4,194.4 464.7 11.08 - ------------------------------------------------------------------------------------------------------------------------------ Investment and held for sale securities: U.S. Treasury and other U.S. government agencies 1,343.7 113.8 8.47 1,147.2 104.4 9.09 States and municipalities 133.0 13.9 10.48 171.1 18.0 10.53 Other 365.6 27.7 7.57 229.8 18.6 8.10 - ------------------------------------------------------------------------------------------------------------------------------ Total investment and held for sale securities 1,842.3 155.4 8.44 1,548.1 141.0 9.11 - ------------------------------------------------------------------------------------------------------------------------------ Other earning assets: Investment in bank time deposits 330.6 23.2 7.02 357.0 30.3 8.49 Federal funds sold and securities purchased under agreements to resell 352.8 19.5 5.53 308.8 24.3 7.87 Trading account securities 124.8 9.9 7.94 135.4 12.3 9.07 - ------------------------------------------------------------------------------------------------------------------------------ Total other earning assets 808.2 52.6 6.51 801.2 66.9 8.35 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets 6,981.0 650.4 9.32 6,543.7 672.6 10.28 Allowance for loan losses (92.9) (80.0) Cash and due from banks 422.3 432.0 Premises and equipment, net 96.7 87.0 Bond division receivables and other assets 243.8 219.1 - ------------------------------------------------------------------------------------------------------------------------------ Total assets / Interest income $7,650.9 $650.4 $7,201.8 $672.6
1989 1988 ------------------------ --------------------------- 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: Taxable $1,823.8 $206.0 11.29 % $1,794.8 $181.0 10.08 % Tax-exempt 224.9 28.8 12.82 276.7 32.4 11.70 - ------------------------------------------------------------------------------------------------------------------------------ Total commercial loans 2,048.7 234.8 11.46 2,071.5 213.4 10.30 Consumer 916.7 107.0 11.67 819.6 90.7 11.07 Credit card receivables 264.1 38.4 14.56 226.3 32.0 14.12 Real estate construction 263.4 32.4 12.30 316.9 35.6 11.25 Permanent mortgage 564.9 56.5 10.00 530.8 53.3 10.04 Mortgage warehouse loans held for sale 27.5 2.7 9.83 23.2 2.4 10.40 Nonaccrual loans 57.2 2.7 4.63 41.2 2.0 4.82 - ------------------------------------------------------------------------------------------------------------------------------ Total loans (net of unearned income) 4,142.5 474.5 11.46 4,029.5 429.4 10.66 - ------------------------------------------------------------------------------------------------------------------------------ Investment and held for sale securities: U.S. Treasury and other U.S. government agencies 938.8 83.4 8.88 780.6 67.2 8.62 States and municipalities 223.3 23.9 10.70 274.3 28.7 10.46 Other 186.4 15.5 8.34 189.9 14.5 7.61 - ------------------------------------------------------------------------------------------------------------------------------ Total investment and held for sale securities 1,348.5 122.8 9.11 1,244.8 110.4 8.87 - ------------------------------------------------------------------------------------------------------------------------------ Other earning assets: Investment in bank time deposits 309.6 29.7 9.60 215.8 16.8 7.77 Federal funds sold and securities purchased under agreements to resell 245.8 22.1 8.98 141.9 10.7 7.56 Trading account securities 83.4 7.9 9.48 34.1 3.2 9.44 - ------------------------------------------------------------------------------------------------------------------------------ Total other earning assets 638.8 59.7 9.34 391.8 30.7 7.84 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets 6,129.8 657.0 10.72 5,666.1 570.5 10.07 Allowance for loan losses (66.4) (61.9) Cash and due from banks 511.3 616.8 Premises and equipment, net 85.1 78.2 Bond division receivables and other assets 213.8 185.9 - ------------------------------------------------------------------------------------------------------------------------------ Total assets / Interest income $6,873.6 $657.0 $6,485.1 $570.5
Average Balance (Fully taxable equivalent) Growth Rates (S) (Dollars in millions) 93/92 93/88 - ------------------------------------------------------------------------------------------------------------------------------ ASSETS: Earning assets: Loans net of unearned income: Commercial: Taxable 6.4 + 3.9 + Tax-exempt 28.6 - 20.6 - - ------------------------------------------------------------------------------------------------------------------------------ Total commercial loans 4.4 + 1.8 + Consumer 25.2 + 12.0 + Credit card receivables 2.2 + 11.9 + Real estate construction 39.2 + 23.7 - Permanent mortgage 18.4 - .8 - Mortgage warehouse loans held for sale 165.7 + 58.2 + Nonaccrual loans 29.5 - 8.0 - - ------------------------------------------------------------------------------------------------------------------------------ Total loans (net of unearned income) 9.6 + 4.2 + - ------------------------------------------------------------------------------------------------------------------------------ Investment and held for sale securities: U.S. Treasury and other U.S. government agencies 21.1 + 26.6 + States and municipalities 25.1 - 22.6 - Other 51.7 - 2.5 + - ------------------------------------------------------------------------------------------------------------------------------ Total investment and held for sale securities 7.1 + 17.8 + - ------------------------------------------------------------------------------------------------------------------------------ Other earning assets: Investment in bank time deposits 90.1 - 55.0 - Federal funds sold and securities purchased under agreements to resell 35.8 - .8 - Trading account securities 13.9 + 39.5 + - ------------------------------------------------------------------------------------------------------------------------------ Total other earning assets 22.0 - 3.9 - - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets 7.0 + 7.4 + Allowance for loan losses 6.9 + 10.7 + Cash and due from banks 16.6 + 2.8 - Premises and equipment, net 5.5 + 7.5 + Bond division receivables and other assets 24.6 + 12.1 + - ------------------------------------------------------------------------------------------------------------------------------ Total assets / Interest income 8.1 + 6.7 +
3
CONSOLIDATED AVERAGE BALANCE SHEET AND First Tennessee RELATED YIELDS AND RATES (Unadited) National (continued) 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 - ------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing deposits: Checking/Interest $ 492.0 $ 9.6 1.96 % $ 444.4 $ 11.6 2.61 % Savings 508.3 13.6 2.67 482.4 16.3 3.39 Money market account 1,592.9 41.3 2.59 1,513.5 49.8 3.29 Certificates of deposit under $100,000 and other time 2,296.4 111.3 4.85 2,459.7 139.1 5.65 Certificates of deposit $100,000 and more 370.3 14.2 3.83 426.0 17.9 4.20 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 5,259.9 190.0 3.61 5,326.0 234.7 4.41 Federal funds purchased and securities sold under agreements to repurchase 1,020.7 29.0 2.84 690.3 22.5 3.25 Commercial paper and other short-term borrowings 278.0 11.7 4.19 136.7 8.3 6.10 Long-term debt 95.3 9.2 9.70 127.7 10.8 8.44 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 6,653.9 239.9 3.61 6,280.7 276.3 4.40 Demand deposits 1,476.5 1,266.2 Bond division payables and other liabilities 202.4 173.5 Shareholders' equity 635.3 577.4 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity / Interest expense $8,968.1 $239.9 $8,297.8 $276.3 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income-tax equivalent basis / Yield $351.9 4.35 % $330.6 4.37 % Fully taxable equivalent adjustment (5.3) (7.6) - ------------------------------------------------------------------------------------------------------------------------------- Net interest income $346.6 $323.0 - ------------------------------------------------------------------------------------------------------------------------------- Net interest spread 3.70 % 3.62 % Effect of interest-free sources used to fund earning assets .65 .75 - ------------------------------------------------------------------------------------------------------------------------------- Net interest margin 4.35 % 4.37 % - -------------------------------------------------------------------------------------------------------------------------------
1991 1990 ----------------------------- --------------------------- Interest Average Interest Average (Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/ (Dollars in millions) Balance Expense Rates Balance Expense Rates - ------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing deposits: Checking/Interest $ 375.6 $ 14.3 3.82 % $ 357.1 $ 14.9 4.17 % Savings 397.9 19.4 4.86 380.8 19.8 5.19 Money market account 1,307.0 68.3 5.22 1,115.4 72.3 6.48 Certificates of deposit under $100,000 and other time 2,530.3 178.9 7.07 2,388.9 194.3 8.13 Certificates of deposit $100,000 and more 460.4 29.4 6.39 462.4 36.5 7.89 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 5,071.2 310.3 6.12 4,704.6 337.8 7.18 Federal funds purchased and securities sold under agreements to repurchase 597.8 31.6 5.28 631.0 47.2 7.47 Commercial paper and other short-term borrowings 100.8 8.3 8.26 91.1 8.7 9.60 Long-term debt 127.8 11.6 9.10 128.3 12.2 9.55 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 5,897.6 361.8 6.13 5,555.0 405.9 7.31 Demand deposits 1,072.1 1,008.4 Bond division payables and other liabilities 164.8 151.8 Shareholders' equity 516.4 486.6 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity / Interest expense $7,650.9 $361.8 $7,201.8 $405.9 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income-tax equivalent basis / Yield $288.6 4.13 % $266.7 4.07 % Fully taxable equivalent adjustment (9.8) (13.3) - ------------------------------------------------------------------------------------------------------------------------------- Net interest income $278.8 $253.4 - ------------------------------------------------------------------------------------------------------------------------------- Net interest spread 3.19 % 2.97 % Effect of interest-free sources used to fund earning assets .94 1.10 - ------------------------------------------------------------------------------------------------------------------------------- Net interest margin 4.13 % 4.07 % - -------------------------------------------------------------------------------------------------------------------------------
1989 1988 ----------------------------- --------------------------- Interest Average Interest Average (Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/ (Dollars in millions) Balance Expense Rates Balance Expense Rates - ------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Interest-bearing liabilities: Interest-bearing deposits: Checking/Interest $ 420.0 $ 22.9 5.44 % $ 510.2 $ 23.0 4.51 % Savings 416.3 21.7 5.20 492.6 25.6 5.19 Money market account 803.1 49.3 6.14 571.3 31.1 5.45 Certificates of deposit under $100,000 and other time 2,207.7 191.8 8.69 1,794.3 142.5 7.94 Certificates of deposit $100,000 and more 547.1 46.4 8.49 536.6 38.9 7.25 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 4,394.2 332.1 7.56 3,905.0 261.1 6.69 Federal funds purchased and securities sold under agreements to repurchase 601.2 51.6 8.58 603.4 43.3 7.18 Commercial paper and other short-term borrowings 70.5 9.3 13.14 95.5 10.3 10.75 Long-term debt 129.8 12.6 9.76 132.7 12.3 9.30 - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 5,195.7 405.6 7.81 4,736.6 327.0 6.90 Demand deposits 1,053.1 1,171.0 Bond division payables and other liabilities 155.2 135.4 Shareholders' equity 469.6 442.1 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity / Interest expense $6,873.6 $405.6 $6,485.1 $327.0 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income-tax equivalent basis / Yield $251.4 4.10 % $243.5 4.30 % Fully taxable equivalent adjustment (17.4) (20.0) - ------------------------------------------------------------------------------------------------------------------------------- Net interest income $234.0 $223.5 - ------------------------------------------------------------------------------------------------------------------------------- Net interest spread 2.91 % 3.17 % Effect of interest-free sources used to fund earning assets 1.19 1.13 - ------------------------------------------------------------------------------------------------------------------------------- Net interest margin 4.10 % 4.30 % - -------------------------------------------------------------------------------------------------------------------------------
Average Balance (Fully taxable equivalent) Growth Rates (%) (Dollars in millions) 93/92 93/88 - ------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing deposits: Checking/Interest 10.7 + 0.7 - Savings 5.4 + 0.6 + Money market account 5.2 + 22.8 + Certificates of deposit under $100,000 and other time 6.6 - 5.1 + Certificates of deposit $100,000 and more 13.1 - 7.2 - - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 1.2 - 6.1 + Federal funds purchased and securities sold under agreements to repurchase 47.9 + 11.1 + Commercial paper and other short-term borrowings 103.4 + 23.8 + Long-term debt 25.4 - 6.4 - - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 5.9 + 7.0 + Demand deposits 16.6 + 4.7 + Bond division payables and other liabilities 16.7 + 8.4 + Shareholders' equity 10.0 + 7.5 + - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity / Interest expense 8.1 + 6.7 + - ------------------------------------------------------------------------------------------------------------------------------- Net interest income-tax equivalent basis / Yield Fully taxable equivalent adjustment - ------------------------------------------------------------------------------------------------------------------------------- Net interest income - ------------------------------------------------------------------------------------------------------------------------------- Net interest spread Effect of interest-free sources used to fund earning assets - ------------------------------------------------------------------------------------------------------------------------------- Net interest margin - -------------------------------------------------------------------------------------------------------------------------------
Certain previously reported amounts have been reclassified to agree with current presentation. Yields and corresponding income amounts are adjusted to a fully taxable equivalent. Earning assets yields are expressed net of unearned income. Rates are expressed net of unamortized debenture cost for long-term debt. Net interest margin is computed using total net interest income. EX-24 6 FIRST TENNESSEE POWER OF ATTORNEY 1 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint SUSAN SCHMIDT BIES, JAMES F. KEEN, and CLYDE A. BILLINGS, JR., jointly and each of them severally, his or her true and lawful attorney-in- fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to execute and sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1993 to be filed with the Securities and Exchange Commission, pursuant to the provisions of the Securities Exchange Act of 1934, by First Tennessee National Corporation ("Corporation") and, further, to execute and sign any and all amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission , granting unto said attorneys-in-fact and agents, and each of them, or their or his or her substitute or substitutes, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all the acts that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title Date --------- ----- ---- Ronald Terry Chairman of Board and Chief March 4, 1994 - -------------------------------- Executive Officer & Director Ronald Terry (principal executive officer) Susan Schmidt Bies Executive Vice President March 4, 1994 - -------------------------------- and Chief Financial Officer Susan Schmidt Bies (principal financial officer) James F. Keen Senior Vice President and March 4, 1994 - -------------------------------- Controller (principal James F. Keen accounting officer) Jack A. Belz Director March 4, 1994 - -------------------------------- Jack A. Belz Robert C. Blattberg Director March 4, 1994 - -------------------------------- Robert C. Blattberg John Hull Dobbs Director March 4, 1994 - -------------------------------- John Hull Dobbs Ralph Horn Director March 4, 1994 - -------------------------------- Ralph Horn
Page 1 of 2 2 Director March , 1994 - -------------------------------- --- J. R. Hyde, III Director March , 1994 - -------------------------------- --- Joseph Orgill, III Cameron E. Perry Director March 4, 1994 - -------------------------------- Cameron E. Perry Richard E. Ray Director March 4, 1994 - -------------------------------- Richard E. Ray Vicki G. Roman Director March 4, 1994 - -------------------------------- Vicki G. Roman Michael D. Rose Director March 4, 1994 - -------------------------------- Michael D. Rose William B. Sansom Director March 4, 1994 - -------------------------------- William B. Sansom Gordon P. Street, Jr. Director March 4, 1994 - -------------------------------- Gordon P. Street, Jr. Norfleet R. Turner Director March 4, 1994 - -------------------------------- Norfleet R. Turner
Page 2 of 2 EX-99.(B) 7 FIRST TENNESSEE REPORT OF INDEPENDENT CER PUB ACC 1 EXHIBIT 99(b) BAYLOR AND BACKUS CERTIFIED PUBLIC ACCOUNTANTS 2112 NORTH ROAN STREET HOME FEDERAL BUILDING, SUITE 801 P.O. BOX 1736 JOHNSON CITY, TENNESSEE 37605 TELEPHONE 615-282-9000 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders and the Board of Directors of Home Financial Corporation We have audited the accompanying consolidated statements of financial condition of Home Financial Corporation (the "Company") and subsidiaries as of December 31, 1991 and 1990, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1991. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these consolidated 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. As discussed in Note 27 to the financial statements, certain errors resulting in understatement of previously recorded tax expense and related liabilities in each of the three years ended December 31, 1991 and overstatement of the recorded value of foreclosed real estate as of December 31, 1991, were discovered during the current year. Accordingly, the 1991, 1990 and 1989 financial statements have been restated to correct those errors. In our opinion, the consolidated financial statements referred to above, as restated, present fairly, in all material respects, the finanical position of Home Financial Corporation and subsidiaries as of December 31, 1991 and 1990, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1991, in conformity with generally accepted accounting principles. BAYLOR AND BACKUS - --------------------- BAYLOR AND BACKUS Johnson City, Tennessee February 21, 1992, Except with Respect to the Information Discussed in Note 27, as to Which the Date is October 21, 1992. -----END PRIVACY-ENHANCED MESSAGE-----