-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mftg1yrbpAyMwAauKDcSxLq0ezjdAjkNCGHBxdt4kgmqdVwSB7ln31ulQS9Ryp7q 9P8RGR3hiMSuemIZMQz82w== 0000950144-96-001142.txt : 19981222 0000950144-96-001142.hdr.sgml : 19981222 ACCESSION NUMBER: 0000950144-96-001142 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960325 DATE AS OF CHANGE: 19981221 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: SEC FILE NUMBER: 000-04491 FILM NUMBER: 96537947 BUSINESS ADDRESS: STREET 1: 165 MADISON AVE CITY: MEMPHIS STATE: TN ZIP: 38103 BUSINESS PHONE: 9015234444 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 NATIONAL CORPORATION 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, 1995 - 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 incorporation or organization) Identification 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: $1.25 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. ----- At February 23, 1996, the aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant was approximately $2.05 billion. At February 23, 1996, the registrant had 67,314,733 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Annual Report to Shareholders for the year ended 12/31/95 - Parts I, II, and IV. 2. Portions of Proxy Statement furnished to shareholders in connection with Annual Meeting of Shareholders scheduled for 4/16/95 - Part III. 2 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, 1995, the Corporation had total assets of $12.1 billion and ranked first in terms of total assets among Tennessee-headquartered bank holding companies and ranked 50th 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 is primarily engaged in the commercial banking business. Significant operations are, however, conducted in mortgage banking and the bond division, which are described in more detail in the response to Item 7 of Part II hereof and Note 18 to the Consolidated Financial Statements. During 1995 approximately 44% of revenues were provided by net interest income and approximately 56% of revenues were provided by fee income-based business lines. 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 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 1995 it generated gross revenue of approximately $845.5 million and contributed 97.5% of consolidated net income from continuing operations. At December 31, 1995, the Bank had $11.1 billion in total assets, $7.8 billion in total deposits, and $7.5 billion in net loans. Within the State of Tennessee on December 31, 1995, it ranked first among banks in terms of total assets and deposits. Nationally, it ranked 63rd in terms of total assets as of September 30, 1995. On December 31, 1995, the Corporation's subsidiary banks had 232 banking locations in 20 Tennessee counties, including all of the major metropolitan areas of the state, 11 banking locations in Mississippi and 4 banking locations in Arkansas. Subsidiaries of the Bank at December 31, 1995, provided mortgage banking services through approximately 145 offices in 28 states. 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. Acquisitions which closed during the past three years are described in Note 2 to the Consolidated Financial Statements contained in the Corporation's 1995 Annual Report to Shareholders (the "1995 Annual Report"), which note is incorporated herein by reference. The Corporation provides the following services through its subsidiaries: - general banking services for consumers, small businesses, corporations, financial institutions, and governments - mortgage banking services - bond division--primarily sales and underwriting of bank-eligible securities and mortgage loans and advisory services - trust, fiduciary, and agency services - nationwide check clearing services - credit card products - merchant credit card and automated teller machine transaction processing - discount brokerage, brokerage, venture capital, equipment finance and credit life insurance - investment and financial advisory services - mutual fund sales as agent - check processing software and systems. 3 All of the Corporation's subsidiaries are listed in Exhibit 21. The Bank has filed notice with the Comptroller of the Currency ("Comptroller") 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; Overland Park, Kansas; and Dallas, Texas. The subsidiary banks are supervised and regulated as described below. Highland Capital Management Corp. 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 1993, 1994 or 1995. Neither the Corporation nor any of its significant subsidiaries is dependent upon a single customer or very few customers. At December 31, 1995, the Corporation and its subsidiaries had approximately 7,476 full-time-equivalent employees, not including 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 "Federal Reserve Board"). The Corporation is required to file with the Board annual 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. General As a bank holding company, the Corporation is subject to the regulation and supervision of the Federal Reserve 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 permits the Federal Reserve Board to approve an application by a bank holding company to acquire a bank located outside the acquiror's principal state of operations without regard to whether the transaction is prohibited under state law. See " --Interstate Act." Effective September 29, 1995, the Tennessee Bank Structure Act of 1974 was amended to, among other things, prohibit (subject to certain exceptions) a bank holding company from acquiring a bank for which the home state is Tennessee (a "Tennessee bank") if, upon consummation, the company would directly or indirectly control 30% or more of the total deposits in insured depository institutions in Tennessee. As of September 30, 1995, the Corporation estimates that it held approximately 17% of such deposits. Subject to certain exceptions, the Tennessee Bank Structure Act prohibits a bank holding company from acquiring a bank in Tennessee which has been in operation for less than five years. Tennessee law permits a Tennessee Bank to establish branches in any county in Tennessee. Management cannot predict the extent to which the business of the Corporation and its subsidiaries may be affected by recent federal and Tennessee legislation relating to interstate and intrastate acquisitions and branching activities. The Corporation's subsidiary banks (the "Subsidiary Banks") are subject to supervision and examination by applicable federal and state banking agencies. The Bank, First National Bank of Springdale, Springdale, Arkansas, and First Tennessee Bank National Association Mississippi, Southaven, Mississippi, are national banking associations subject to regulation and supervision by the Comptroller as their primary federal regulator. The remaining Subsidiary Banks are Cleveland Bank and Trust Company, Cleveland, Tennessee, and Peoples and 2 4 Union Bank, Lewisburg, Tennessee, which are Tennessee state-chartered banks and Peoples Bank, Senatobia, Mississippi, and Planters Bank, Tunica, Mississippi, which are Mississippi state-chartered banks, none of which are members of the Federal Reserve System, and therefore are subject to the regulations of and supervision by the Federal Deposit Insurance Corporation (the "FDIC") 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 also 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 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 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 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. Tennessee law imposes dividend restrictions on Tennessee state banks substantially similar to those imposed under federal law on national banks, as described above. Mississippi law prohibits Mississippi state banks from declaring a dividend without the prior written approval of the Mississippi Banking Commissioner. 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, 1995, under dividend restrictions imposed under applicable federal and state laws, the Subsidiary Banks, without obtaining regulatory approval, could legally declare aggregate dividends of approximately $236 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 and debt 3 5 covenants. Transactions with Affiliates There are various legal restrictions on the extent to which the Corporation and its nonbank subsidiaries can borrow 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 the Subsidiary 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%, and the minimum ratio of Tier 1 Capital (defined below) to risk-weighted assets is 4%. 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 certain other intangible assets ("Tier 1 Capital"). The remainder may consist of subordinated debt, other preferred stock and a limited amount of loan loss reserves. At December 31, 1995, the Corporation's consolidated Tier 1 Capital and Total Capital ratios were 8.58% and 11.50%, respectively. 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 certain 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 100 to 200 basis points. The Corporation's Leverage Ratio at December 31, 1995 was 6.43%. 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, 1995. 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. 4 6 Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business and in certain circumstances to 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. Management of the Corporation is unable to predict whether or when capital requirements may be changed and, if so, at what levels and on what schedule. 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 depositors in the case of bank subsidiaries) 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 the 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 to 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 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 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, a 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 5 7 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. 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 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, 1995 all of the Subsidiary Banks were well capitalized under the criteria discussed above. FDICIA contains numerous other provisions, including new accounting, audit and reporting requirements, beginning in 1995 termination of the "too big to fail" doctrine except in special cases, limitations on the FDIC's payment of deposits at foreign branches, new regulatory standards in such areas as asset quality, earnings and compensation and revised regulatory standards for, among other things, powers of state banks, real estate lending and capital adequacy. FDICIA also requires that a depository institution provide 90 days prior notice of the closing of any branches. 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. Interstate Act Subject to certain limitations, the federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Act"), which was enacted on September 29, 1994, permits on an interstate basis (i) bank holding company acquisitions after September 29, 1995, of banks which satisfy a minimum age requirement, if any, imposed by state law, which cannot exceed five years; (ii) bank mergers after May 31, 1997, unless the home state of either bank has enacted legislation to "opt out" of this provision of the federal Interstate Act; (iii) bank branching de novo if the host state has enacted legislation to "opt in" to this provision of the federal Interstate Act; and (iv) certain bank agency activities after September 29, 1995. The federal Interstate Act imposes a 30% intrastate deposit cap on interstate acquisitions, except for the initial acquisition in the state, unless a different intrastate cap has been adopted by the applicable state, and a 10% national deposit cap. With respect to the Interstate Act, Tennessee has adopted a five year minimum age requirement for banks (see "--General"), has not "opted out" of the bank merger provisions, and has not "opted in" to the de novo bank branching provision. 6 8 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 a rollover or renew brokered deposits unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDICIA. 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 31, 1995, 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 increased the assessment rates for most FDIC-insured depository institutions. Under the schedule, the premiums initially range from $.23 to $.31 for every $100 of deposits. The FDIC revised the assessment rate schedule for the Bank Insurance Fund ("BIF") on August 8, 1995 (effective retroactively to June 1, 1995) to provide for a range of $.04 to $.31 for every $100 of deposits. The FDIC again revised the BIF schedule on November 14, 1995 (effective January 1, 1996) to provide for a range of $.00 to $.27, subject to a minimum assessment of $1,000 per semiannual period. 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. A portion of the deposits of the Bank are insured by the Savings Association Insurance Fund ("SAIF") as a result of the acquisition of Home Financial Corporation in 1992. The assessment rate schedule for SAIF remains at $.23 to $.31 for every $100 of deposits. The FDIC is authorized by federal law to raise insurance premiums in certain circumstances. The law specifies a designated reserve ratio target of 1.25 percent of estimated insured deposits and requires the FDIC to set assessments at a level to maintain the target or, if the reserve ratio is less than the target, to set assessments rates at a level sufficient to increase the reserve ratio to the target within one year or as otherwise specified by the FDIC under the law. The target ratio has been achieved with respect to BIF. 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-of-state banks as well as from savings and loan 7 9 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 certain 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 Management's Discussion and Analysis and Glossary sections, including the subsection entitled "Deposits, Other Sources of Funds, and Liquidity Management," contained in the 1995 Annual Report, which sections are specifically incorporated herein by reference, along with all of the tables and graph in the 1995 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 1995 Annual Report that have been incorporated by reference into this Form 10-K. 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 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 and other state legislatures 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 Management's Discussion and Analysis and Glossary sections in the 1995 Annual Report along with all of the tables and graph identified in response to Item 7 of Part II of this Form 10-K; certain information not contained in the 1995 Annual Report, but required by Guide 3, is contained in the tables immediately following: 8 10 FIRST TENNESSEE NATIONAL CORPORATION ADDITIONAL GUIDE 3 STATISTICAL INFORMATION BALANCES AT DECEMBER 31 (Thousands) (Unaudited)
II. Investment Portfolio (Book Value): 1995 * 1994 * 1993 ** - - ----------------------------------------------------------------------------------------------- Mortgage-backed securities & collateralized mortgage obligations $1,681,593 $1,678,238 $1,677,277 U.S. Treasury and other U.S. government agencies 264,837 350,276 443,848 States and political subdivisions 104,082 77,522 93,900 Other 60,887 64,879 96,280 --------------------------------------------------------- Total $2,111,399 $2,170,915 $2,311,305 - - ------------------------------------------------------------------------------------------------ * Balances represent securities held - to - maturity and securities available - for - sale. ** Balances represent the investment portfolio. III. Loan Portfolio 1995 1994 1993 1992 1991 - - --------------------------------------------------------------------------------------------------------------------------------- Commercial $3,330,929 $2,991,231 $2,694,416 $2,348,739 $2,376,048 Consumer 2,525,889 2,263,007 1,819,950 1,342,650 1,131,176 Credit card receivables 529,104 475,489 428,075 412,207 402,822 Real estate construction 238,863 160,368 75,844 48,598 107,466 Permanent mortgage 689,458 591,094 514,424 603,572 651,856 Nonaccrual 19,040 16,853 27,639 32,782 50,729 --------------------------------------------------------------------------------------- Total $7,333,283 $6,498,042 $5,560,348 $4,788,548 $4,720,097 - - --------------------------------------------------------------------------------------------------------------------------------- VII. Short-Term Borrowings 1995 1994 1993 - - ----------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase $1,674,225 $1,457,517 $1,025,124 Commercial paper 29,402 67,820 32,283 Other short-term borrowings 57,118 284,702 900,390 ----------------------------------------------------- Total $1,760,745 $1,810,039 $1,957,797 - - -----------------------------------------------------------------------------------------------
9 11 FOREIGN OUTSTANDINGS AT DECEMBER 31
1995 1994 1993 ---------------------- --------------------- ----------------------- % TOTAL % Total % Total (Dollars in thousands) AMOUNT ASSETS Amount Assets Amount Assets - - ---------------------------------------------------------------------------------------------------------------- BY COUNTRY: Israel $2,085 .02% $2,118 .02% $2,142 .02% Canada 185 -- 124 -- 296 -- Indonesia 153 -- -- -- 715 .01 Japan 119 -- 645 .01 585 .01 United Kingdom 101 -- 68 -- 2,454 .02 Saudi Arabia 74 -- -- -- 241 -- Thailand -- -- 446 -- -- -- All other 245 -- 177 -- 165 -- - - ---------------------------------------------------------------------------------------------------------------- Total $2,962 .02% $3,578 .03% $6,598 .06% ================================================================================================================ BY TYPE: Loans: Banks and other financial institutions $ 364 --% $ 657 .01% $4,073 .04% Governments and other institutions 2,000 .02 2,000 .02 2,000 .02 - - ---------------------------------------------------------------------------------------------------------------- Total loans 2,364 .02 2,657 .03 6,073 .06 Cash 425 -- 344 -- 478 -- Customers' acceptances 88 -- 523 -- 47 -- Accrued interest receivable 85 -- 54 -- -- -- - - ---------------------------------------------------------------------------------------------------------------- Total $2,962 .02% $3,578 .03% $6,598 .06% ================================================================================================================
MATURITIES OF SHORT-TERM PURCHASED FUNDS AT DECEMBER 31, 1995
0-3 3-6 6-12 Over 12 (Dollars in thousands) Months Months Months Months Total - - --------------------------------------------------------------------------------------------------------------------- Certificates of deposit $100,000 and more $ 260,519 $86,488 $76,376 $ 96,729 520,112 Federal funds purchased and securities sold under agreements to repurchase 1,674,225 -- -- -- 1,674,225 Commercial paper and other short-term borrowings 80,735 76 151 5,558 86,520 - - --------------------------------------------------------------------------------------------------------------------- Total $2,015,479 $86,564 $76,527 $102,287 $2,280,857 =====================================================================================================================
10 12 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, 1996. 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) Age: 48 of the Corporation and the Bank and Manager of Risk Management (1995) J. Kenneth Glass President - Tennessee Banking Group Age: 49 of the Bank (1993) and Executive Vice President of the Corporation (1995) Ralph Horn Chairman of the Board (1996) and Chief Executive Age: 54 Officer (1994) of the Corporation and the Bank and President of the Corporation (1991) and the Bank (1993) Harry A. Johnson, III Executive Vice President (1990) and Age: 47 General Counsel (1988) of the Corporation and the Bank James F. Keen Senior Vice President Age: 45 and Controller of the Corporation (1988) and principal accounting officer John C. Kelley. Jr. President - Memphis Banking Group of Age: 51 the Bank (1993) and Executive Vice President of the Corporation (1991)
11 13 George Perry Lewis Executive Vice President of the Age: 57 Bank (1976) and Money Management Group Manager (1984) John P. O'Connor, Jr. Executive Vice President of the Age: 52 Corporation (1990) and the Bank (1987) and Chief Credit Officer (1988) Elbert L. Thomas, Jr. Executive Vice President (1995) and Age: 47 Chief Financial Officer (1995) of the Corporation and the Bank G. Robert Vezina Executive Vice President of the Age: 61 Corporation and the Bank (1990) and Personnel Division Manager (1984)
Each of the executive officers has been employed by the Corporation or its subsidiaries during each of the last five years. Prior to February of 1995, Ms. Bies was Chief Financial Officer of the Corporation and Bank. Mr. Glass was Executive Vice President of the Bank and Tennessee Banking Group Manager prior to January 1993. 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. Keen was Senior Vice President of the Bank prior to April 1993 and Controller of the Bank prior to January 1993. Mr. Kelley was Executive Vice President of the Bank and Corporate Services Group Manager prior to January of 1993. Mr. Thomas was a Senior Vice President of the Corporation and the Bank prior to December 1995. From January of 1993 to February of 1995, Mr. Thomas was Manager of Corporate Development. Prior to January of 1993, he was Manager of Corporate Tax. PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Corporation's common stock, $1.25 par value, trades over-the-counter on the Nasdaq Stock Market's National Market System under the symbol FTEN. As of December 31, 1995, there were 8,796 shareholders of record of the Corporation's common stock. 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 19 to the Consolidated Financial Statements, and the Deposits, Other Sources of Funds, and Liquidity Management subsection of the Management's Discussion and Analysis section of the 1995 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. ITEM 6 SELECTED FINANCIAL DATA The information called for by this Item is incorporated herein by reference to the Selected Financial Data Table in the 1995 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 the Management's Discussion and Analysis section and Glossary section in the 1995 Annual Report and the following tables and graph in the 1995 Annual Report: 12 14
Tables: Graph: - - ------- ------ Acquisitions 1995 Net Interest Income and Net Analysis of Noninterest Income Interest Margin Net Interest Income and Earning Assets Analysis of Changes In Net Interest Income Rate Sensitivity Analysis at December 31, 1995 Analysis of Noninterest Expense Maturities of Investment Securities at December 31, 1995 Maturities of Loans at December 31, 1995 Credit Ratings at December 31, 1995 Regulatory Capital at December 31, 1995 Analysis of Allowance for Loan Losses Loans and Foreclosed Real Estate at December 31 Net Charge-Offs as a Percentage of Average Loans Nonperforming Assets at December 31 Changes in Nonperforming Assets Summary of Quarterly Financial Information Consolidated Average Balance Sheet and Related Yields and Rates Consolidated Historical Performance Statements of Income Selected Financial Data
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this Item is incorporated herein by reference to the Consolidated Financial Statements and the notes thereto and to the Summary of Quarterly Financial Information Table in the 1995 Annual Report. 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 mailed to shareholders in connection with the Corporation's Annual Meeting of Shareholders scheduled for April 16, 1996, (the "1996 Proxy Statement"). 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 1996 Proxy Statement. 13 15 ITEM 11 EXECUTIVE COMPENSATION The information called for by this Item is incorporated herein by reference to the "Executive Compensation" section of the 1996 Proxy Statement (excluding the Board Compensation Committee Report and the Total Shareholder Return 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 1996 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 1996 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: - Consolidated Statements of Condition as of December 31, 1995 and 1994 - Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993 - Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993 - Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 - Notes to the Consolidated Financial Statements - Report of Independent Public Accountants The consolidated financial statements of the Corporation, the notes thereto, and the report of independent public accountants, in the 1995 Annual Report, as listed above, are incorporated herein by reference. Financial Statement Schedules: Not applicable. Exhibits: (3)(i) Restated Charter of the Corporation, as amended. (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 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 14 16 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 12 in the Corporation's 1995 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. *(10)(a) Management Incentive Plan, as amended.(1) *(10)(b) 1983 Restricted Stock Incentive Plan, as amended.(1) *(10)(c) 1989 Restricted Stock Incentive Plan, as amended.(1) *(10)(d) 1992 Restricted Stock Incentive Plan.(1) *(10)(e) 1984 Stock Option Plan, as amended.(1) *(10)(f) 1990 Stock Option Plan, as amended.(1) *(10)(g) Survivor Benefits Plan, as amended.(1) *(10)(h) Directors and Executives Deferred Compensation Plan, as amended.(1) *(10)(i) Pension Restoration Plan, as amended and restated. *(10)(j) Director Deferral Agreements (2) with schedule. *(10)(k) Severance Agreements dated 12-15-92 (2) with schedule. *(10)(l) 1995 Employee Stock Option Plan. *(10)(m) Non-Employee Directors' Deferred Compensation Stock Option Plan. *(10)(n) Ronald Terry post-retirement arrangement. (11) Statement re: computation of per share earnings. (13) The portions of the 1995 Annual Report to Shareholders which have been incorporated by reference into this Form 10-K. (21) Subsidiaries of the Corporation. (23) Accountants' Consents (24) Powers of Attorney (27) Financial Data Schedule (for SEC use only) (99) Annual Report on Form ll-K for the Corporation's Savings Plan and Trust, for fiscal year ended 12-31-95, as authorized by SEC Rule 15d-21 (to be filed as an amendment to Form lO-K). * 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(k) and 10(l), respectively, contained in the Corporation's 1992 Annual Report on Form 10-K. (b) A report on Form 8-K (with a Date of Report of November 1, 1995) was filed on November 2, 1995, in response to Item 5, Other Events, disclosing the Corporation's earnings release for the third quarter of 1995. The Report contained as exhibits the earnings release which had attached to it unaudited summary statements of income and average balance sheets for the three and six month periods ended September 30, 1995, and a September 30, 1995 period end balance sheet; the form of Indenture for Subordinated Debt Securities to be entered into by the Corporation and The Bank of New York ("BONY"), as Trustee; and The Statement of Eligibility, Form T-1, for BONY. 15 17 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. FIRST TENNESSEE NATIONAL CORPORATION Date: March 25, 1996 By: Elbert L. Thomas, Jr. ----------------------------------- Elbert L. Thomas, Jr. Executive Vice President and Chief Financial Officer 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 --------- ----- ---- Ralph Horn* Chairman of the Board, President and March 25, 1996 - - ---------------------- Chief Executive Officer (principal executive Ralph Horn officer) and a Director Elbert L. Thomas, Jr.* Executive Vice President March 25, 1996 - - ---------------------- and Chief Financial Officer Elbert L. Thomas, Jr. (principal financial officer) James F. Keen* Senior Vice President March 25, 1996 - - ---------------------- and Controller (principal James F. Keen accounting officer) Jack A. Belz* Director March 25, 1996 - - ---------------------- Jack A. Belz Robert C. Blattberg* Director March 25, 1996 - - ---------------------- Robert C. Blattberg J. R. Hyde, III* Director March 25, 1996 - - ---------------------- J. R. Hyde, III R. Brad Martin* Director March 25, 1996 - - ---------------------- R. Brad Martin Joseph Orgill, III* Director March 25, 1996 - - ---------------------- Joseph Orgill, III Richard E. Ray* Director March 25, 1996 - - ---------------------- Richard E. Ray Vicki G. Roman* Director March 25, 1996 - - ---------------------- Vicki G. Roman
16 18 Michael D. Rose* Director March 25, 1996 - - ---------------------- Michael D. Rose William B. Sansom* Director March 25, 1996 - - ---------------------- William B. Sansom Gordon P. Street, Jr.* Director March 25, 1996 - - ---------------------- Gordon P. Street, Jr. Ronald Terry* Director March 25, 1996 - - ---------------------- Ronald Terry *By: March 25, 1996 Clyde A. Billings, Jr. ----------------------------------------- Clyde A. Billings, Jr. As Attorney-in-Fact
17 19 EXHIBIT INDEX
Item No. Description - - -------- ----------- (3)(i) Restated Charter of the Corporation, as amended. (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 Registration Statement on Form 8-A filed 9-8-89, 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 12 in the Corporation's 1995 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. *(10)(a) Management Incentive Plan, as amended. (1) *(10)(b) 1983 Restricted Stock Incentive Plan, as amended. (1) *(10)(c) 1989 Restricted Stock Incentive Plan, as amended. (1) *(10)(d) 1992 Restricted Stock Incentive Plan. (1) *(10)(e) 1984 Stock Option Plan, as amended. (1) *(10)(f) 1990 Stock Option Plan, as amended. (1) *(10)(g) Survivor Benefits Plan, as amended. (1) *(10)(h) Directors and Executives Deferred Compensation Plan, as amended. (1) *(10)(i) Pension Restoration Plan, as amended and restated. *(10)(j) Director Deferral Agreements (2) with Schedule. *(10)(k) Severance Agreements dated 12-15-92 (2) with schedule. *(10)(l) 1995 Employee Stock Option Plan. *(10)(m) Non-Employee Directors Deferred Compensation Stock Option Plan. *(10)(n) Ronald Terry post-retirement arrangement. (11) Statement re: computation of per share earnings.
18 20 (13) The portions of the 1995 Annual Report to Shareholders which have been incorporated by reference into this Form 10-K. (21) Subsidiaries of the Corporation. (23) Accountants' Consents (24) Powers of Attorney (27) Financial Data Schedule (for SEC use only) (99) Annual Report on Form ll-K for the Corporation's Savings Plan and Trust, for fiscal year ended December 31, 1995, as authorized by SEC Rule 15d-21 (to be filed as an amendment to Form 10-K).
* 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(k) and 10(1), respectively, contained in the Corporation's 1992 Annual Report on Form 10-K. 19 EX-3.I 2 RESTATED CHARTER OF THE CORPORATION 1 EXHIBIT 3(i) RESTATED CHARTER OF FIRST NATIONAL HOLDING CORPORATION Under Section 48-304 of the General Corporation Act Pursuant to the provisions of Section 48-304 of the Tennessee General Corporation Act, the undersigned Corporation adopts the follow- ing Restated Charter: PART I. 1. NAME. The name of the Corporation shall be: FIRST TENNESSEE NATIONAL CORPORATION. 2. DURATION. The duration of the Corporation is perpetual. 3. ADDRESS. The address of the principal office of the Corporation in the State of Tennessee shall be: 165 Madison Avenue, Memphis, Tennessee 38103. 4. PROFIT. The Corporation is for profit. 5. PURPOSES. The purpose or purposes for which the Corporation is organized are, to the extent permitted by law: (a) To subscribe for, purchase, lease or otherwise acquire and to receive, own, hold, sell, exchange, lease, mortgage, pledge, assign or otherwise dispose of, and otherwise deal in and with "securities" (as such term is herein defined) issued or created by, or other property (real or personal) of any person, corporation, associa- tion, firm, trust, organization or other entity whatso- ever, including but not limited to this corporation and any national banking association, state-chartered bank, savings bank and trust company, wherever located or organized and whether public, private or municipal, of this state, or any district territory, subdivision, municipality or department thereof, or any other state or any district, territory, subdivision, municipality or department thereof, or any country, nation or government, or any district, territory, subdivision, municipality or 2 department thereof; to possess and exercise any and all rights, powers and privileges of ownership of such securi- ties or other property, including without limitation the right to vote on such securities; and to issue or deliver in payment or exchange, in whole or in part, for any such securities or other property, its own stock, bonds, notes or other obligations, or to make payment for any such securities or other property by any other lawful means; and to do any and all acts and things necessary or advisable for the preservation, protection, improvement or enhance- ment in value of any such securities or other property. The term "securities" as used in this Article 5 shall mean any and all shares, stocks, bonds, debentures, notes, mortgages, acceptances, evidences of indebtedness or obligations, certificates of interest or participation in any property or venture, scrip, interim receipts, voting trust certificates, instruments or interests commonly known as securities, and any and all certificates of interest or participation in, or of deposit of, any of the foregoing, or receipts for, guaranties of, or warrants or rights to subscribe for or purchase any of the foregoing. (b) To promote, finance and assist, financially or otherwise, whether by loan, guaranty, subsidy or otherwise, any person, corporation, partnership, association, firm, trust, organization or other entity in which the Corpora- tion shall have any interest; to guarantee the payment of dividends on any stock or the payment of the obligations issued or incurred by any such person, corporation, partnership, association, firm, trust, organization or other entity, to issue its own stock, bonds or other obligations in payment or exchange for any securities or other property acquired (pursuant to a merger, consolida- tion or otherwise) by any such person, corporation, partnership, association, firm, trust, organization or other entity; and to do any and all other acts and things for the enhancement, protection or preservation of any securities which are in any manner, directly or indirectly, owned, held or guaranteed by the Corporation. (c) To render assistance, service, counsel and advice to, and to act as representative in any capacity (whether managing, operating, financial, purchasing, selling, advertising or otherwise) of any person, corporation, partnership, association, firm, trust, organization or other entity, including without limitation those in which the Corporation shall have any interest. (d) To acquire by purchase, lease, exchange or otherwise, to own, hold, use, manage, develop, improve and to sell, lease, mortgage, exchange and otherwise deal in, real estate and any interest or right therein and personal property of every class and description, either for its own account on for the account of others, to erect, construct, rebuild, repair, manage and control, lease, buy and sell, any and all kinds of and interest in real estate and personal property; and to engage generally in the business of operating and leasing real estate and personal property of every character and description. (e) To buy, sell, produce, manufacture and dispose of all kinds of goods, documents, instruments, general intangibles, chattel paper, accounts, contract rights, -2- 3 wares, foods, potables, merchandise, manufactures, commodities, furniture, machinery, tools, supplies and products of any kind, character or description whatsoever, and generally to engage in any mercantile, manufacturing or commercial business of any kind or character whatsoever throughout the world, and to do all things incidental to any such business or businesses. (f) To enter into any lawful arrangements for sharing profits, union of interest, reciprocal concession or cooperation, with any corporation, association, partner- ship, syndicate, entity, person or governmental, municipal or public authority, domestic or foreign in the carrying on of any business which the Corporation is authorized to carry on or any business or transaction deemed necessary, convenient or incidental to carrying out any of the purposes of the Corporation. (g) To issue bonds, debentures, convertible deben- tures, notes, commercial paper, or other obligations of this Corporation, from time to time for any of the objects or purposes of the Corporation and to secure the same by mortgage, pledge, deed of trust or otherwise. (h) To guarantee obligations of any other entity and to secure such guaranties by mortgage, pledge or otherwise by vote of a majority of the entire Board of Directors. (i) To indemnify the officers and directors during their term of office or thereafter for actions arising during their term of office, either directly or through the purchase of insurance, for expenditures as parties to suits by or in the right of the Corporation or other than by or in the right of the Corporation to the extent permitted by the statutes of Tennessee. (j) Without in any way limiting any of the objects or purposes or powers, whether primary or secondary of the Corporation, it is hereby expressly declared and provided that the Corporation shall have power to do all acts or things necessary, incidental or convenient to do, or calculated, directly or indirectly, to promote the interest of the Corporation, or enhance the value or render profitable any of its property or rights; and in carrying on its business or businesses, or for the purpose of obtaining or furthering any of its objects, to do any and all things and exercise any and all powers, rights and privileges which a corporation for profit may now or hereafter be permitted to do or to exercise under the laws of the State of Tennessee; and to do any and all of the acts and things herein set forth to the sane extent as natural persons could do, and in any part of the world, as principal, factor, agent, contractor, trustee or otherwise, either alone or in syndicates, or otherwise in conjunction with any person, entity, syndi- cate, partnership, association or corporation, governmen- tal or public bodies or authorities of any kind, domestic or foreign; to establish and maintain offices and agencies and to exercise all or any of its corporate powers and rights throughout the world. (k) To engage, in addition to the foregoing, in any lawful act or activity for which corporations may be -3- 4 organized under the Tennessee General Corporation Act. (1) It is the intention that the objects, purposes and powers specified in the fifth paragraph hereof shall, except where otherwise specified in said paragraph, be no- wise limited or restricted by reference to or inference from the terms of any other clause or paragraph in this Charter, but that the objects, purposes and powers specified in the fifth paragraph and in each of the clauses or paragraphs of this Charter shall be regarded as independent objects, purposes and powers. The foregoing clauses shall be construed both as purposes and powers, and it is hereby expressly provided that the foregoing enumera- tion of specific powers shall not be held to limit or restrict in any manner the powers of this Corporation. 6. SHARES. The maximum number of shares which the Corporation shall have authority to issue is as follows: (a) Five Million (5,000,000) shares of common stock of a par value of $5.00 each; (b) Five Hundred Thousand (500,000) shares of preferred stock, having no par value. 7. COMMENCEMENT OF BUSINESS. The Corporation will not commence business until consideration of One Thousand Dollars ($1,000.00) has been received for the issuance of shares. 8. PREEMPTIVE RIGHTS. No shareholder of the Corporation shall because of his ownership of stock have a preemptive or other right to purchase, subscribe for or take any part of any stock or any part of the notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase stock of the Corporation issued, optioned or sold by it after its incorporation. Any part of the capital stock and any part of the notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase stock of the Corporation authorized by this Restated Charter or by any amendment duly filed, may at any time be issued, optioned for sale and sold or disposed of by the Corporation pursuant to a resolution of its Board of Directors -4- 5 to such persons and upon such terms as may to such Board seem proper without first offering such stock or securities or any part thereof to existing shareholders. 9. COMMON STOCK. The entire voting power of the Corporation shall be vested in the common stock, provided, however, that the Board of Directors is authorized by this Charter to issue, from time to time, serial preferred stock of the Corporation in one or more series each of which constitutes a separate class, and prior to issuance to fix and determine the distinguishing characteristics and rights, privileges and immunities of each such series. Such characteristics and rights, privileges and immunities may include, but are not limited to, the voting rights of such serial preferred stock and such voting rights of such serial preferred stock may, if so determined by the Board of Directors prior to the issuance of such serial preferred stock, give to the holders of such serial preferred stock voting rights equal to those of the holders of the common stock. 10. SERIAL PREFERRED STOCK. The shares of any preferred class may be divided into and issued in series. If the shares of any such class are to be issued in series, then each series shall be so designated to distinguish the series thereof from all the shares of all other series and classes. All shares of the same series shall be identical. Any or all of the series of any class may vary in the relative rights and preferences as between the different series to the extent permitted by the statutes of Tennessee. The Board of Directors shall have the authority to divide any or all such classes into series and, within the limitation of the statutes of the State of Tennessee and particularly Sections 48-502 and 48-503, fix and determine the relative rights and preferences of the shares of any series so established. The Board of Directors is authorized to issue the preferred stock, without par value, in one or more series, from time to time with such voting powers, full or limited, but not to exceed one vote -5- 6 per share or without voting powers, and with such designations, preferences and relative participating, optional or other special rights and qualifications, limitations and restrictions thereof, as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors shall include, but not be limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (1) the number of shares and designation; (2) the dividend rate and whether dividends are to be cumulative; (3) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund for the purchase or redemption of such shares; (4) whether shares shall be convertible and, if so, the terms and provisions applying; (5) what voting rights are to apply, if any, not to exceed one vote per share; and (6) what restrictions are to apply, if any, on the issue or re-issue of any additional preferred stock. 11. ADDITIONAL POWERS. (a) The Corporation shall have the right to purchase, take, receive or otherwise acquire, hold, own, pledge, transfer or otherwise dispose of its own shares; but purchases of its own shares, whether direct or indirect, shall be made only to the extent of unreserved and unrestricted earned or capital surplus available therefor. (b) Other provisions: Management. 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 power: (1) To hold meetings, to have one or more offices, and to keep the books of the corporation, except as other- wise expressly provided by law, at such places, whether within or without the State of Tennessee, as may from time to time be designated by the Board. (2) To make, alter and repeal bylaws of the cor- poration, subject to the reserved power of the share- holders to make, alter and repeal bylaws. (3) To approve the issuance or sale of any of its authorized but unissued shares of any class, bonds or other securities and rights or options entitling the holders thereof to purchase from the corporation shares -6- 7 of any class or classes to approve the purchase or other acquisition of or the reissuance, sale or other disposi- tion of treasury shares; to fix the consideration to be received for such shares of any class, bonds or other securities, rights or options and to cause to be issued any such shares of any class, bonds or other securities, rights or options. (4) To use or apply any funds of the corporation lawfully available therefor for the purchase or acquisi- tion of shares of the capital stock or bonds or other securities of the corporation, in the market or otherwise, at such price as may be fixed by the Board, and to such extent and in such manner and for such purposes and upon such terms as the Board may deem expedient and as may be permitted by law, and to sell, exchange, transfer, re- issue or cancel such shares of the capital stock of the corporation upon such terms and for such consideration as it may deem proper. (5) To determine whether and to what extent and at what times and places and under what conditions and regu- lations the accounts and books of the corporation, or any of them, shall be open to the inspection of the share- holders, and no shareholder shall have any right to inspect any account, record, book or document of the corporation, except as conferred by the laws of the State of Tennessee or as authorized by the Board. (6) To remove any director for cause as defined by the laws of the State of Tennessee by a vote of a majority of the entire Board of Directors. (7) To fill any newly created directorships. resulting from an increase in the number of directors and any vacancies occurring in the Board for any reason, (including removal of directors without cause by the shareholders or for cause by the Board of Directors or the shareholders.) (8) To designate an executive committee consisting of three or more directors and such other committees consisting of three or more directors and to delegate to such executive committee or other committees all such authority of the Board that it deems desirable within the limits prescribed by the statutes of the State of Tennessee. (9) To designate the officer or officers of the corporation who shall vote the shares of capital stock held by the corporation in other corporations and to authorize the execution of any proxy that may be necessary in connection therewith. PART II. 1. The date of filing of the original Charter by the Secretary of State was September 23, 1968. 2. The Restated Charter restates the text of the Charter, as previously amended and restated, and further amends or changes the -7- 8 Charter as specified below. The Restated Charter was duly authorized at a meeting of the shareholders on October 26, 1971: PART I: (a) Paragraph 1 hereby deleted in its entirety and Article 1 of Part I is substituted therefor; (b) Paragraph 3 is hereby deleted in its entirety and Article 3 of Part I is substituted therefor; (c) Paragraph 5 is hereby deleted in its entirety and Article 5 of Part I is substituted therefor; (d) Paragraph 6 is hereby deleted in its entirety and Article 6 of Part I is substituted therefor; (e) Paragraph 8 is hereby deleted in its entirety and there are added to the Charter the following Articles of Part 1: Article 8, which restates but does not change the provisions on preemptive rights; Article 9; Article 10; Article 11. DATED October 26, 1971. FIRST NATIONAL HOLDING CORPORATION By: /s/ Lee Welch Secretary 9 ARTICLES OF AMENDMENT TO THE CHARTER OF FIRST TENNESSEE NATIONAL CORPORATION Pursuant to the provisions of Section 48-303 of the Tennessee General Corporation Act, the undersigned Corporation adopts the following articles of amendment to its Charter: 1. The name of the corporation is First Tennessee National Corporation. 2. The amendment adopted is: Article VI is hereby amended to read as follows: 6. SHARES. The maximum number of shares which the Corporation shall have authority to issue is as follows: (a) Fifteen million (15,000,000) shares of common stock of a par value of $2.50 each; (b) Five hundred thousand (500,000) shares of preferred stock, having no par value. 3. The amendment was duly adopted at a meeting of the shareholders on April 17, 1973. 4. The increase in authorized shares provides sufficient shares for issuance in connection with a two for one stock split approved by the shareholders on April 17, 1973. The authorized common shares with a par value of $5.00 a share are hereby changed to common shares with a par value of $2.50 a share. The aggregate amount of the stated capital of the Corporation which shall be represented by the common shares of the par value of $2.50 a share that shall be issued and outstanding upon the taking effect of the stock split, shall be the same as the aggregate amount of the stated capital of the Corporation which shall be represented by the common shares of the par value of $5.00 a share that shall be issued as outstanding immediately prior to the taking effect of the stock split. 5. The amendment is to be effective April 27, 1973. DATE: April 17, 1973 FIRST TENNESSEE NATIONAL CORPORATION BY: /s/ Lee Welch Lee Welch, Secretary 10 ARTICLES OF AMENDMENT TO THE CHARTER OF FIRST TENNESSEE NATIONAL CORPORATION Pursuant to the provisions of Section 48-303 of the Tennessee General Corporation Act, the undersigned Corporation adopts the follow- ing Articles of Amendment to its Charter: 1. The name of the Corporation is First Tennessee National Corporation. 2. The Amendment is that Section 11(b) (8) be amended to read as follows and Section 11(b) (10) be adopted to read as follows: "(8) To designate an Executive Committee consisting of two or more directors and such other committees consisting of two or more persons, who may or may not be directors, and to delegate to such Executive Committee and other committees all such authority of the Board that it deems desirable within the limits prescribed by the statutes of the State of Tennessee." "(10) To take any action required or permitted of the Board without a meeting on written consent, setting forth the action so taken, signed by all directors entitled to vote thereon." 3. The Amendment was duly adopted at a meeting of the shareholders on April 15, 1980. 4. The Amendment shall be effective when filed by the Secretary of State. Date: April 15, 1980 First Tennessee National Corporation By: /s/ Harry A. Johnson, III Harry A. Johnson, III, Assistant Secretary 11 ARTICLES OF AMENDMENT TO CHARTER OF FIRST TENNESSEE NATIONAL CORPORATION Pursuant to the provisions of Section 48-1-303 of the Tennessee General Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Charter: 1. The name of the corporation is First Tennessee National Corporation. 2. The amendment adopted is as follows: Delete Article 6 of the Charter in its entirety and substitute therefor the following: 6. SHARES. The maximum number of shares which the Corporation shall have authority to issue is as follows: (a) Twenty-five million (25,000,000) shares of common stock of a par value of $2.50 each; and (b) Five hundred thousand (500,000) shares of preferred stock having no par value. 3. The amendment was duly adopted at a meeting of the shareholders on April 16, 1985. 4. The amendment is to be effective when filed by the Secretary of State. FIRST TENNESSEE NATIONAL CORPORATION /s/ Lenore S. Halle By: Lenore S. Halle, Secretary Date: April 16, 1985 12 ARTICLES OF AMENDMENT TO CHARTER OF FIRST TENNESSEE NATIONAL CORPORATION Pursuant to the provisions of Section 48-1-303 of the Tennessee General Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Charter: 1. The name of the corporation is First Tennessee National Corporation. 2. The amendments adopted are as follows: (1) Section (a) of Article 6 of the Company's Charter is amended to read as follows: "(a) Fifty million (50,000,000) shares of common stock of a par value of $2.50 each; and". (2) Section (b) of Article 6 of the Company's Charter is amended to read as follows: "(b) Five million (5,000,000) shares of preferred stock, having no par value." (3) Article 9 of the Company's Charter is amended to read in its entirety as follows: "9. COMMON STOCK. The entire voting power of the Corporation shall be vested in the common stock; provided, however, that the Board of Directors is authorized by this Charter to issue, from time to time, serial preferred stock of the Corporation in one or more series each of which constitutes a separate class, and prior to issuance to fix and determine the distinguishing characteristics and rights, privileges and immunities of each such series. Such characteristics and rights, privileges and immunities may include, but are not limited to, the voting rights of such serial preferred stock, and such voting rights of such serial preferred stock may, if so determined by the Board of Directors prior to the issuance of such serial preferred stock, give to the holders of such serial preferred stock voting rights equal to, greater than or less than those of the holders of common stock." (4) The second paragraph of Article 10 of the Company's Charter is amended to read as follows: "The Board of Directors is authorized to issue the preferred stock, without par value, in one or more series, from time to time, with such voting powers, full or limited, or without voting powers, and with such designations, preferences and relative partici- pating, optional or other special rights and quali- fications, limitations and restrictions thereof, as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors shall include, but not be limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (1) the number of shares and designation; (2) the dividend rate and whether dividends are to be cumulative; (3) whether shares are to be redeemable and, if so, the 13 terms and amount of any sinking fund for the purchase or redemption of such shares; (4) whether shares shall be convertible and, if so, the terms and provisions applying; (5) what voting rights are to apply, if any; and (6) what restrictions are to apply, if any, on the issue or re-issue of any additional preferred stock." (5) A new Article 12 of the Company's Charter is hereby adopted as follows: "12. NUMBER, ELECTION AND TERMS OF DIRECTORS. (a) The number of directors of the Corporation which shall constitute the entire Board of Directors shall be fixed from time to time in the Bylaws of the Corpo- ration. Any such determination shall continue in effect unless and until changed, but no such changes shall affect the term of any director then in office. Upon the adoption of this Article 12, the directors shall be divided into three classes (I, II and III), as nearly equal in number as possible. The initial term of office for members of Class I shall expire at the annual meeting of stockholders in 1988; the initial term of office for members of Class II shall expire at the annual meeting of shareholders in 1989; and the initial term of office for members of Class III shall expire at the annual meeting of shareholders in 1990. At each annual meeting of shareholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of shareholders after their election, and shall continue to hold office until their respective successors are duly elected and qualified. In the event of any increase in the number of directors of the Corpora- tion, the additional directors shall be so classified that all classes of directors have as nearly equal numbers of directors as may be possible. In the event of any decrease in the number of directors of the Corporation, all classes of directors shall be decreased equally as nearly as may be possible. (b) 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. -2- 14 (c) The Bylaws or any Bylaw of the Corporation may be adopted, amended or repealed only by the affirmative vote of not less than a majority of the directors then in office at any regular or special meeting of directors or by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all outstanding voting stock at any annual meeting or any special meeting called for that purpose. Any provision of the Charter which is inconsistent with any provision of the Bylaws of the Corporation may be adopted only by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all outstanding voting stock at any annual meeting or any special meeting called for that purpose. (d) Notwithstanding any other provisions of this Charter or the Bylaws of the Corporation (and notwithstanding the fact that a lesser percentage or separate class vote may be specified by law, this Charter, the Bylaws of the Corporation or otherwise), the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all outstanding voting stock shall be required to adopt any provisions inconsistent with, or to amend or repeal, this Article 12. (e) Notwithstanding the foregoing, whenever the holders of any one or more classes or series of preferred stock issued by the Corporation shall have the right, voting separately by class or by series, to elect directors at an annual or special meeting of shareholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Charter applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article 12 unless expressly provided by such terms." 3. The amendments were duly adopted at a meeting of the shareholders on April 21, 1987. 4. The amendments are to be effective when filed by the Secretary of State. FIRST TENNESSEE NATIONAL CORPORATION By: /s/ Lenore S. Halle Lenore S. Halle, Secretary Date: April 21, 1987 2480p 15 ARTICLES OF AMENDMENT TO CHARTER OF FIRST TENNESSEE NATIONAL CORPORATION Pursuant to the provisions of Section 48-20-106 of the Tennessee Business Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Charter: 1. The name of the corporation is First Tennessee National Corporation. 2. The amendment adopted is as follows: A new Article 13 of the Company's Charter is hereby adopted as follows: "13. DIRECTOR LIABILITY. No director shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) under Section 48-18-304, or any successor provision thereto, of the Tennessee Business Corporation Act." 3. The amendment was duly adopted at a meeting of the shareholders on April 19, 1988. 4. The amendment shall be effective when filed by the Secretary of State. First Tennessee National Corporation By: /s/ Lenore S. Halle, Secretary Lenore S. Halle, Secretary DATE: April 19, 1988 2995p2 16 EXHIBIT 3(i) ARTICLES OF AMENDMENT TO CHARTER OF FIRST TENNESSEE NATIONAL CORPORATION Pursuant to the provisions of Section 48-20-106 of the Tennessee Business Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Charter: 1. The name of the corporation is First Tennessee National Corporation. 2. The amendment adopted is as follows: Section (a) of Article 6 of the Company's Charter is amended to read as follows: "(a) One Hundred Million (100,000,000) shares of common stock of a par value of $2.50 each; and". 3. The amendment was duly adopted at a meeting of the shareholders on April 19, 1994. 4. The amendment shall be effective when filed by the Secretary of State. First Tennessee National Corporation By: Lenore S. Creson --------------------------- Lenore S. Creson, Secretary DATE: April 19, 1994. 17 ARTICLES OF AMENDMENT TO CHARTER OF FIRST TENNESSEE NATIONAL CORPORATION Pursuant to the provisions of Section 48-20-106 of the Tennessee Business Corporation Act, the undersigned corporation adopts the following Articles of Amendments to its Restarted Charter: 1. The name of the corporation is First Tennessee National Corporation. 2. The amendment adopted is as follows: Section (a) of Article 6 of the Company's Restated Charter is amended to read as follows: "(a) Two hundred million (200,000,000) shares of common stock of a par value of $1.25 each; and". 3. The amendment was duly adopted by the Board of Directors on January 16, 1996, without shareholder action, no such shareholder action being required. 4. The amendment shall become effective on February 16, 1996. First Tennessee National Corporation By: Lenore S. Creson ----------------------------------- Lenore S. Creson, Secretary DATE: January 16, 1996. EX-3.II 3 BYLAWS, AS AMENDED 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." 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." 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." 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." 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." 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. 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." 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. 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. 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. -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. 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. 43 RESOLUTIONS OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION April 19, 1994 RESOLVED, that Article VII of the Bylaws of First Tennessee National Corporation be, and it hereby is, amended by deleting it in its entirety and substituting therefor the following: ARTICLE VII. The Chairman of the Board of Directors and The Chief Executive Officer 1. The Chairman of the Board of Directors shall preside at all meetings of the shareholders and of the Board of Directors and shall have such powers and perform such duties as may be provided for herein and as may be incident to the office and as may be assigned by the Board of Directors. If and at such times as the Board of Directors so determines, the Chairman of the Board may also serve as the Chief Executive Officer of the Corporation. 2. The Chief Executive Officer, in the absence of the Chairman of the Board of Directors, shall preside at all meetings of the shareholders and of the Board of Directors. The Chief Executive Officer shall be responsible for carrying out the orders of and the resolutions and policies adopted by the Board of Directors and shall have general management of the business of the Corporation and shall exercise general supervision over all of its affairs. In addition, the Chief Executive Officer shall have such powers and perform such duties as may be provided for herein and as may be incident to the office and as may be assigned by the Board of Directors. FURTHER RESOLVED, that Article VIII of the Bylaws be, and it hereby is, amended by deleting it in its entirety and substituting therefore the following: ARTICLE VIII The President. 1. The President, in the absence of the Chairman of the Board of Directors and the Chief Executive Officer, shall preside at all meetings of the shareholders and of the Board of Directors and shall be charged with the active management and administration of the business of the Corporation with the 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 of the Chairman of the Board of Directors and of the Chief Executive Officer and of the Board of Directors. In addition, he shall have such powers and perform such duties as may be provided for herein and as may be incident to the office and as may be assigned by the Board of Directors or the chairman of the Board of Directors or the Chief Executive Officer. FURTHER RESOLVED, that Articles IX, X, XI, XII, XIII, XIV, XVI and XIX be, and they hereby are, amended by substituting the phrase "the Chairman of the Board of Directors or the Chief Executive Officer" for the phrase "the Chairman of the Board of Directors" or the phrase "the Chairman of the Board" wherever either of such phrases appears in such Articles. 44 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION JULY 19, 1994 ------------------------------------ RESOLVED, that Article XXIX, Section 2, of the Bylaws of the Company be, and it hereby is, amended by deleting it in its entirety and amending it to read as follows: "2. Officers and Employees. Except as provided in the following sentence, the Corporation has no compulsory retirement age for its officers or employees. Each officer or employee who has attained 65 years of age and who, for the two-year period immediately before attaining such age, has been employeed in a "bona fide executive" or a "high policy-making" position as those terms are used and defined in the Age Discrimination in Employment Act, Section 12(c), and the regulations relating to that section prescribed by the Equal Employment Opportunity Commission, all as amended from time to time (collectively, the "ADEA"), shall automatically be terminated by way of compulsory retirement and his or her salary discontinued on the first day of the month coincident with or immediately following the 65th birthday, provided such employee is entitled to an immediate nonforfeitable annual retirement benefit, as specified in the ADEA, in the aggregate amount of at least $44,000. Notwithstanding the prior sentence, 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 reemploy any former officer who had theretofor been retired." 45 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION October 18, 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 12, rather than 11 members, effective as of October 18, 1994, by deleting the number 11 from said section of the Bylaws and substituting therefor the number 12. 46 RESOLUTION OF BOARD OF DIRECTORS OF FIRST TENNESSEE NATIONAL CORPORATION December 19, 1995 RESOLVED, that the second paragraph of Section 1 of Article XXIX of the Bylaws of the Corporation be, and it hereby is, amended by deleting it in its entirety and substituting therefor the following: Directors who are also officers of the Corporation or any of its affiliates will be retired from the Board on the date of the annual meeting coincident with or next following the date of the Director's retirement from or other discontinuation of active service with the Corporation and its affiliates. EX-10.I 4 PENSION RESTORATION PLAN 1 EXHIBIT 10(i) FIRST TENNESSEE NATIONAL CORPORATION AMENDED AND RESTATED PENSION RESTORATION PLAN ADOPTED OCTOBER 25, 1995 I. PURPOSE This Plan is established by First Tennessee National Corporation and its subsidiaries (herein collectively referred to as "the Company") for the purpose of encouraging and enabling the Company to attract, motivate and retain key executives and for the purpose of providing benefits for certain members of the First Tennessee National Corporation Pension Plan (hereinafter called "the Program") in excess of the limitations of benefits and contributions imposed in respect to such Program by Section 415 and any excess that may result from any limitation on compensation that may be considered by the Program pursuant to Section 401(a)(17), of the Internal Revenue Code of 1986 ("IRC"), as amended. II. EFFECTIVE DATE The original effective date of the Pension Restoration Plan (hereinafter referred to as the "Plan") was January 1, 1984. The effective date of this Amended and Restated Pension Restoration Plan shall be October 25, 1995. III. ADMINISTRATION AND ELIGIBILITY A. The Plan will be administered by the Administration Committee (hereinafter referred to as the "Committee") consisting of the Executive Vice President, Division Manager-Personnel and the Vice-President, Manager Compensation. The executives of the Company who will participate will be a select group of management or highly compensated employees and occupy a position in salary grades 1 through 6, as determined by the Human Resources Committee of the Board of Directors, and will receive benefits in accordance with the provisions of the Plan. B. The Committee will have the discretion, authority and responsibility (1) of interpreting the Plan and any agreement evidencing benefits granted hereunder, and (2) making all other determinations in connection with the administration of the Plan, all of which shall be final and conclusive. IV. PAYMENT OF BENEFITS A. In order to qualify to receive the benefits set forth in Paragraph VI, below, a participant must remain employed until age 65, unless an early retirement date is approved by the Human Resources Committee of the Board of Directors. B. Benefits payable pursuant to the terms of the Plan shall be paid directly from the general assets of the Company. Should the Company establish any advance reserve, such reserve or fund shall not under any circumstances be deemed to be an asset of the Plan nor a source of payment of any claims under the Plan but, at all times, shall remain a part of the general assets of the Company. V. RETIREMENT DATE A participant shall be retired under this Plan on the same Retirement Date applicable for him/her under the Program. VI. CALCULATION OF BENEFITS Commencing with the first month immediately following retirement, each Participant shall receive a monthly 1 2 payment equal to the difference between (A) and (B) below: A. The monthly pension that would have been payable from the Program; determined under its rules on the Participant's Retirement Date, but as if the limitations imposed by IRC Section 415 and Section 401(a)(17) did not apply. B. The actual monthly pension payable to the Participant from the Program. Any monthly payment under the Plan shall be payable in the same manner and under the same terms and conditions as payments due from the Program. VII. CLAIMS PROCEDURES All claims for benefits under the Plan shall be submitted in writing to the Committee. A Participant whose claim for benefits is denied shall have the right to a written explanation of the specific reasons for such denial and may request the Committee to reconsider such denial. Upon such a request for reconsideration the Committee shall review its decision with the Participant who may submit in writing such facts and issues, and may review such documents as may be pertinent. The Committee shall render its decision in writing within sixty days. The Committee's decision shall then be final and conclusive. VIII. MISCELLANEOUS A. Nonalienability. No benefit payable at any time hereunder shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment or other legal process, or encumbrances of any kind. Any attempt to alienate, sell, transfer, assign, pledge or otherwise encumber any such benefit, whether currently or hereafter payable, shall be void. Except as otherwise specifically provided by law, no such benefit shall, in any manner, be liable for or subject to the debts or liabilities of any participant or any other person entitled to such benefit. B. No Rights to Employment. The Plan shall not be construed as providing any participant with the right to be retained in the Company's employ or to receive any benefit not specifically provided hereunder. C. Amendment and Termination. The Company shall have the right, at any time and from time to time, to amend in whole or in part, or to terminate any of the provisions of the Plan, and such amendment or termination shall be binding upon all participants and parties interest. Notwithstanding the foregoing, the benefits payable hereunder may not be reduced or terminated for those participants who have attained age 65, or for whom an early retirement date has been approved by the Human Resources Committee of the Board of Directors, acting pursuant to Section IV(A) hereof. D. Governing Law. The Plan shall be governed by and construed in accordance with the Employee Retirement Income Security Act of 1974 (P.L. 93-406) and to the extent not pre-empted thereby, by the laws of the State of Tennessee. E. Successors and Assigns. The Plan and all the provisions hereof shall be binding upon the Company and its subsidiaries and its successors and assigns. IX. CHANGE IN CONTROL A. A "Change in Control" means the occurrence of (and shall be deemed to have occurred on the date of the earliest to occur of) any of the following events: (i) The shareholders of the Company approve a definitive agreement or plan to merge, reorganize, 2 3 exchange shares or consolidate (a "Business Combination") or the issuance of voting securities of the Company pursuant to a Business Combination, other than a Business Combination which will result in the voting securities of the Company outstanding immediately prior to such Business Combination continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity) more than 50 percent of the voting power of the voting securities of the Company or such surviving or acquiring entity outstanding immediately after such Business Combination; or (ii) The shareholders of the Company approve a definitive agreement or plan to dissolve and/or liquidate the Company or to sell, lease, exchange, or otherwise dispose of, all or substantially all of the Company's property and assets (a "transaction") to any other corporation or any other legal person, other than a transaction which will result in the voting securities of the Company outstanding immediately prior to such transaction continuing to represent more than 50 percent of the voting power of the voting securities of such other corporation or other legal person outstanding immediately after such transaction; or (iii) A report is filed or required to be filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended ("1934 Act"), disclosing that any person (as such terms is used in Section 13(d) or Section 14(d) of the 1934 Act) ("Person"), other than the Company, an entity in which the Company directly or indirectly beneficially owns more than 50 percent of the voting securities (a "Majority-owned subsidiary"), or any employee stock ownership or other employee benefit plan sponsored by the Company or a majority-owned subsidiary, is or has become the beneficial owner (as such term is defined in Rule 13d-3 promulgated under the 1934 Act, or any successor rule or regulation) of securities representing 20 percent or more of the voting power of the then outstanding voting securities of the Company; or (iv) Individuals who are Continuing Directors (as defined below) of the Company cease for any reason to constitute at least a majority of the Board of Directors of the Company. Computations required by subsections (i) and (ii) shall be made on and as of the date of shareholder approval and shall be based on reasonable assumptions that will result in the lowest percentage obtainable. Computations required by subsection (iii) shall be made on and as of the earlier of the date a report is filed or is required to be filed and shall be based on reasonable assumptions that will result in the highest percentage obtainable. For purposes of determining voting power pursuant to subsections (i), (ii), and (iii), all voting securities of a corporation (whether the Company or another entity) shall be considered as a single class. For purposes of subsection (iv), a "Continuing Director" means (a) any director of the Company who was a director of the Company on December 15, 1992, and (b) any other director of the Company whose nomination for election or election as a director was approved by a vote of at least a majority of the directors of the Company who at the time of such vote were Continuing Directors pursuant to clause (a) or (b) hereof. Notwithstanding the prior sentence, there shall be excluded from the definition of "Continuing Director" any director whose initial nomination for election or election occurs as a result of an actual or threatened election contest with respect to the election or removal of directors of the Company or any other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Continuing Directors, and a threatened election contest or solicitation shall be conclusively presumed to have existed if the Continuing Directors have made such a determination by the time of such director's election. 3 4 B. Notwithstanding anything herein to the contrary, the benefits payable under the Plan may not be reduced or terminated after a Change in Control for those participants who, at the time of the Change in Control, were eligible for a Deferred Vested Benefit under the Program. 4 EX-10.J 5 DIRECTOR REFERRAL AGREEMENT 1 Exhibit 10(J) SCHEDULE OF DEFERRAL AGREEMENTS
NAME DATE AMOUNT TERMS(1) ---- ---- ------ -------- Jack Belz 12-29-92 Director Fees 30 Semi-Annual upon Retirement Jack Belz 12-20-93 Director Fees 20 Semi-Annual upon Retirement Jack Belz 06-30-94 Director Fees 20 Semi-Annual upon Retirement Robert Blattberg 04-16-84 Director Fees Five annual 01-91 Robert Blattberg 10-30-91 Director Fees Five annual 01-07 Robert Blattberg 06-06-92 Director Fees Lump Sum 01-01-02 Robert Blattberg 12-31-92 Director Fees Lump Sum 10-19-07 Robert Blattberg 12-31-93 Director Fees Five annual 2003 Robert Blattberg 06-19-94 Director Fees Lump Sum 01-01-03 J.R. Hyde, III 11-07-91 Director Fees Lump Sum upon Retirement J.R. Hyde, III 06-08-92 Director Fees 10 Annual at age 65 J.R. Hyde, III 12-31-92 Director Fees 10 Annual at age 65 J.R. Hyde, III 12-31-93 Director Fees 10 Annual at age 65 J.R. Hyde, III 06-94 Director Fees 10 Annual at age 65 Richard E. Ray 10-31-91 Director Fees Lump Sum upon Retirement Richard E. Ray 06-09-92 Director Fees 2 Semi-Annual 05-96 Richard E. Ray 12-16-92 Director Fees Lump Sum 05-01-96 Richard E. Ray 12-10-93 Director Fees Lump Sum 05-01-96 Richard E. Ray 06-17-94 Director Fees Lump Sum 05-01-96 Michael D. Rose 04-16-84 Director Fees Company's Discretion Michael D. Rose 12-10-92 Director Fees Lump Sum 01-01-98 Michael D. Rose 12-21-93 Director Fees Lump Sum 01-01-98 Michael D. Rose 06-16-94 Director Fees 5 Annual 01-01-00 William Sansom 12-21-93 Director Fees 4 Annual 2002 William Sansom 06-24-94 Director Fees 4 Annual 2002 Ronald Terry 01-01-82 1982 Bonus Company's Discretion
2 Ronald Terry 12-31-82 1983 Bonus Company's Discretion Ronald Terry 12-30-83 1984 Bonus Company's Discretion Ronald Terry 12-31-94 1995 Bonus 10 Annual 03-96 Jack Belz 12-23-94 1-95 Director Fees 30 Semi-annual upon retirement J.R. Hyde 12-28-94 1-95 Director Fees 10 Annual at age 65 Richard E. Ray 12-22-94 1-95 Director Fees Lump Sum 5-1-96 Vicki G. Roman 12-30-94 1-95 Director Fees Lump Sum on retirement Michael D. Rose 12-27-94 1-95 Director Fees Lump Sum 1-1-00 William Sansom 12-27-94 1-95 Director Fees Lump Sum 7-17-01 Gordon Street 12-29-94 1-95 Director Fees Lump Sum on retirement
(1) Terms column lists (1) the number of payments, (2) whether semiannually, annually or lump sum, and (3) payment commencement date. All agreements dated prior to 1991 provide that interest shall accrue at the Corporation's annual cost of money, as determined by the Corporation. All other agreements accrue interest at a rate based on 10-year U.S. Treasury securities. EX-10.K 6 SEVERANCE AGREEMENTS 1 Exhibit 10(k) Schedule of Severance Agreement Recipients Ralph Horn Ronald Terry J. Kenneth Glass John C. Kelley, Jr. George P. Lewis EX-10.L 7 1995 EMPLOYEE STOCK OPTION PLAN 1 Exhibit 10(L) FIRST TENNESSEE NATIONAL CORPORATION 1995 EMPLOYEE STOCK OPTION PLAN 1. Purpose. The 1995 Employee Stock Option Plan (the "Plan") of First Tennessee National Corporation (the "Company") is designed to enable employees of the Company and its subsidiaries to obtain a proprietary interest in the Company, and thus to share in the future success of the Company's business. Accordingly, the Plan is intended as a further means not only of attracting and retaining outstanding personnel, but also of promoting a closer identity of interest between employees and shareholders. 2. DEFINITIONS. As used in the Plan, the following terms shall have the respective meanings set forth below: (a) "Change in Control" means the occurrence of (and shall be deemed to have occurred on the date of the earliest to occur of) any of the following events: (i) The shareholders of the Company approve a definitive agreement or plan to merge, reorganize, exchange shares or consolidate (a "Business Combination") or the issuance of voting securities of the Company pursuant to a Business Combination, other than a Business Combination which will result in the voting securities of the Company outstanding immediately prior to such Business Combination continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity) more than 50 percent of the voting power of the voting securities of the Company or such surviving or acquiring entity outstanding immediately after such Business Combination; or (ii) The shareholders of the Company approve a definitive agreement or plan to dissolve and/or liquidate the Company or to sell, lease, exchange, or otherwise dispose of, all or substantially of the Company's property and assets (a "transaction") to any other corporation or any other legal person, other than a transaction which will result in the voting securities of the Company outstanding immediately prior to such transaction continuing to represent more than 50 percent of the voting power of the voting securities of such other corporation or other legal person outstanding immediately after such transaction; or (iii) A report is filed or required to be filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended ("1934 Act"), disclosing that any person (as such term is used in Section 13(d) or Section 14(d) of the 1934 Act) ("Person"), other than the Company, an entity in which the Company directly or indirectly beneficially own more than 50 2 percent of the voting securities (a "majority-owned subsidiary"), or any employee stock ownership or other employee benefit plans sponsored by the Company or a majority-owned subsidiary, is or has become the beneficial owner (as such term is defined in Rule 13d-3 promulgated under the 1934 Act, or any successor rule or regulation) of securities representing 20 percent or more of the voting power of the then outstanding voting securities of the Company: or (iv) Individuals who are Continuing Directors (as defined below) of the Company cease for any reason to constitute at least a majority of the Board of Directors of the Company. Computations required by subsections (i) and (ii) shall be made on and as of the date of shareholder approval and shall be based on reasonable assumptions that will result in the lowest percentage obtainable. Computations required by subsection (iii) shall be made on and as of the earlier of the date a report is filed or is required to be filed and shall be based on reasonable assumptions that will result in the highest percentage obtainable. For purposes of determining voting power pursuant to subsections (i), (ii), and (iii), all voting securities of a corporation (whether the Company or another entity) shall be considered as a single class. For purposes of subsection (iv), a "Continuing Director" means (a) any director of the Company who was a director of the Company on December 15, 1992 and (b) any other director of the Company whose nomination for election or election as a director was approved by a vote of at least a majority of the directors of the Company who at the time of such vote were Continuing Directors pursuant to clause (a) or (b) hereof. Notwithstanding the prior sentence, there shall be excluded from the definition of "Continuing Director" any director whose initial nomination for election or election occurs as a result of an actual or threatened election contest with respect to the election or removal of directors of the Company or an other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Continuing Directors, and a threatened election contest or solicitation shall be conclusively presumed to have existed if the Continuing Directors have made such a determination by the time of such director's election. (b) "Committee" means the Stock Option Committee or any successor committee designate by the Board of Directors to administer the Stock Option Plan, as provided in Section 5(a) hereof. (c) "Early Retirement" means termination of employment after an employee has fulfilled all service requirements for an early pension, and before his or her Normal Retirement Date, under the terms of the First Tennessee National Corporation Pension Plan, as amended from time to time. (d) "Quota" means the portion of the total number of shares subject to an option which the grantee of the option may purchase during B-2 3 several periods of the term of the option (if the option is subject to quotas), as provided in Section 8(b) hereof. SAR's are granted, if at all, at the time of granting a stock option. If a stock option is subject to quotas, the related SAR is subject to the same quotas. (e) "Retirement" means termination of employment after an employee has fulfilled all service requirements for a pension under the terms of the First Tennessee National Corporation Pension Plan, as amended from time to time. (f) "Subsidiary" means a subsidiary corporation as defined in Section 425 of the Internal Revenue Code. (g) "Successor" means the legal representative of the estate of a deceased grantee or the person or persons who shall acquire the right to exercise an option or related SAR by bequest or inheritance or by reason of the death of the grantee, as provided in Section 10 hereof. (h) "Term of the Option" means the period during which a particular option or related SAR may be exercised in Section 8(a) hereof. (i) "Three months after cessation of employment" means a period of time beginning at 12:01 A.M. on the day following the date notice of termination of employment was given and ending at 11:59 P.M. on the date in the third following month corresponding numerically with the date notice of termination of employment was given (or in the event that the third following month does not have a date so corresponding, then the last day of the third following month). (j) "Five years after (an event occurring on day x)" and "five years from (an event occurring on day x)" means a period of time beginning at 12:01 A.M. on the day following day x and ending at 11:59 P.M. on the date in the fifth following year corresponding numerically with day x (or in the event that the fifth following year does not have a date so corresponding, then the last day of the sixtieth following month). (k) "Voluntary Resignation" means any termination of employment that is not involuntary and that is not the result of the employee's death, disability, early retirement or retirement. 3. EFFECTIVE DATE OF PLAN. The Plan shall become effective when approved at a shareholder's meeting by the holders of a majority of the shares of Company common stock present or represented at the meeting and entitled to vote on the Plan. No options or related SAR's may be granted under the Plan after the month and day in the year 2005 corresponding to the day before the month and day on which the Plan becomes effective. The term of option granted on or before such date may, however, extend beyond that date, but no incentive stock options may be granted which are exercisable after the expiration of ten (10) years after the date of the grant. B-3 4 4. SHARES SUBJECT TO THE PLAN. (a) The Company may grant options and related SAR's under the Plan authorizing the issuance of no more than 1,500,000 shares of its $2.50 par value common stock, which will be provided from shares purchased in the open market or privately (that became authorized but unissued shares under state corporation law) or by the issuance of previously authorized but unissued shares. (b) When an option is granted under the Plan, the Committee in its sole discretion may include the grant of a SAR permitting the grantee to elect to receive stock or cash or a combination thereof in exchange for the surrender the unexercised related option or portion thereof. Solely with respect to grantees subject to the reporting and short- swing profits provisions of Section 16 of the Securities Exchange Act of 1934 ("Section 16 grantees"), the Committee shall have the sole discretion to consent to or disapprove the election of the grantee to receive cash in full or partial settlement of the SAR. With respect to all other grantees, the election is final without any action by the Committee. (c) Shares as to which options and related SAR's previously granted under this Plan shall for any reason lapse shall be restored to the total number available for grant of options. Shares subject to options surrendered in exchange for the exercise of a SAR shall not be restored to the total number available for the grant of options or related SAR's. 5. PLAN ADMINISTRATION. (a) The Plan shall be administered by a Stock Option Committee (the "Committee") whose members shall be appointed from time to time by, and shall serve at the pleasure of, the Board of Directors of the Company. In addition, all members shall be directors and shall meet the definitional requirements for "disinterested person" (with any exceptions therein permitted) contained in the then current SEC Rule 16b-3 or any successor provision. (b) The Committee shall adopt such rules of procedure as it may deem proper. (c) The powers of the Committee shall include plenary authority to interpret the Plan, and subject to the provisions hereof, to determine the persons to whom options and related SAR's shall be granted, the number of shares subject to each option and related SAR, the term of option and related SAR, and the date on which options and related SAR's shall be granted. 6. ELIGIBILITY. (a) Options and related SAR's may be granted under the Plan to employees of the Company or any subsidiary selected by the Committee. Determination by the Committee of the employees to B-4 5 whom options and related SAR's shall be granted shall be conclusive. (b) An individual may receive more than one option and related SAR, subject, however, to the following limitations: (i) in the case of an incentive stock option (as described in Section 422A of the Internal Revenue Code of 1986), the aggregate fair market value (determined at the time the options are granted) of the Company's common stock with respect to which incentive stock options are exercisable for the first time during any calendar year by any individual employee (under this Plan and all other similar plans of the Company and its subsidiaries) shall not exceed $100,000 and (ii) the maximum number of shares with respect to which options or SAR's are granted to an individual during the term of the Plan, as defined in Section 3 hereof, shall not exceed 100,000 shares. Incentive stock options granted hereunder shall be clearly identified as such at the time of grant. 7. OPTION PRICE. The option price per share to be paid by the grantee to the Company upon exercise of the option shall be determined by the Committee, but shall not be less than 100% of the fair market value of the share at the time the option is granted, nor shall the price per share be less than the par value of the share. Notwithstanding the prior sentence, the option price per share may be less than 100% of the fair market value of the share at the time the option is granted if: (a) The grantee of the option has entered into an agreement with the Company pursuant to which the grant of the option is in lieu of the payment of compensation; and (b) The amount of such compensation when added to the cash exercise price of the option equals at least 100% of the fair market value (at the time the option is granted) of the shares subject to option. "Fair market value" for purposes of the Plan shall be the mean between the high and low sales prices at which shares of the Company were sold on the valuation day as quoted by the Nasdaq Stock Market or, if there were no sales on that day, then on the last day prior to the valuation day during which there were sales. In the event that this method of valuation is not practicable, then the Committee, in its discretion, shall establish the method by which fair market value shall be determined. 8. TERMS OR QUOTAS OF OPTIONS AND RELATED SAR'S: (a) TERM. Each option and related SAR granted under the Plan shall be exercisable only during a term (the "Term of the Option") commencing one year, or such other period of time (which may be less than or more than one year) as is determined to be appropriate by the Committee, after the date when the option or related SAR was granted and ending (unless the option and related SAR shall have terminated earlier under other provisions of the Plan) on a date to be fixed by the Committee. Notwithstanding the foregoing, each option and related SAR granted under the Plan shall become exercisable in full immediately upon a Change in Control. B-5 6 (b) QUOTAS. The Committee shall have authority to grant options and related SAR's exercisable in full at any time during their term, or exercisable in quotas. Quotas or portions thereof not purchased in earlier periods shall be cumulated and be available for purchase in later periods. In exercising his or her option or related SAR, the grantee may purchase less than the full quota available to him or her. (c) EXERCISE OF STOCK OPTIONS. Stock options shall be exercised by delivering, mailing, or transmitting to the Committee or its designee the following items: (i) A notice, in the form, by the method, and at times prescribed by the Committee, specifying the number of shares to be purchased; and (ii) A check or money order payable to the Company for the full option price. In addition, the Committee in its sole discretion may determine that it is an appropriate method of payment for grantees to pay, or make partial payment of, the option price with shares of Company common stock, $2.50 par value, in lieu of cash. In addition, in its sole discretion the Committee may determine that it is an appropriate method of payment for grantees to pay for any shares subject to an option by delivering a properly executed exercise notice together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the purchase price. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. The value of Company common stock surrendered in payment of the exercise price shall be its fair market value, determined pursuant to Section 7, on the date of exercise. Upon receipt of such notice of exercise of a stock option and upon payment of the option price, the Company shall promptly deliver to the grantee a certificate or certificates for the shares purchased, without charge to him or her for issue or transfer tax. (d) EXERCISE OF SAR'S. Except as required by subsection 8(e), a SAR shall be exercised by delivering, mailing, or transmitting to the Committee or its designee a notice in the form, by the method, and at times prescribed by the Committee, specifying the grantee's election, in accordance with Subsection 4(b), to receive cash, stock, or a combination thereof in full or partial settlement of the SAR, or a portion thereof. (e) CASH SETTLEMENTS OF SAR'S BY SECTION 16 GRANTEES. Notwithstanding subsection 8(d), solely with respect to Section 16 grantees, an election to receive cash in full or partial settlement of a SAR or a portion thereof and the actual exercise of such SAR shall be made by delivering, mailing, or transmitting, to the Committee or its designee during the period beginning on the third business day following the release for B-6 7 publication of the Company's quarterly or annual sales and earnings and ending on the twelfth business day following such date a notice, in the form and by the method prescribed by the Committee, specifying the grantee's election to receive cash in full or partial settlement of the SAR, or a portion thereof. Such notice shall constitute both the grantee's election to receive cash and the actual exercise of the SAR for a cash settlement. (f) SAR PAYMENTS. Upon the exercise of a SAR in accordance with subsection 8(d), the Company shall promptly deliver to the grantee stock or cash or a combination thereof, in such proportion as has been elected by the grantee pursuant to subsection 8(d), equal to: (i) The fair market value, as determined in Section 7, of one share of Company common stock on the date of exercise of the SAR: minus (ii) The option price of the related option; multiplied by (iii) The number of shares subject to option which are being surrendered in exercise of the SAR, or portion thereof. Provided, however, solely for the purpose of exercising an SAR, the per share gain to the grantee as measured by the difference between the fair market value, as described in (i), and the option price, as described in (ii), shall not exceed 200% of the option price. For example, if the option price is $12 per share, the gain may not exceed $24 per share or, in this example, be based on a fair market value at the time of exercise in excess of $36. (g) SAR PAYMENTS TO SECTION 16 GRANTEES. Upon the exercise of a SAR in accordance with subsection 9(e), the Company shall promptly deliver to the grantee cash or the combination of stock and cash, in such proportion as has been elected by the grantee and consented to by the Committee pursuant to subsections 4(b) and 8(e), equal to: (i) The highest fair market value, as determined in Section 7, of one share of Company common stock occurring during ten business day period specified in subsection 8(e) during which the grantee makes his election and exercises the SAR; minus (ii) The option price of the related option; multiplied by (iii) The number of shares subject to option which are being surrendered in exercise of the SAR, or portion thereof. Provided, however, solely for the purpose of exercising an SAR, the per share gain to the grantee as measured by the difference between the fair market value, as described in (i), and the option price, as described in (ii), shall not exceed 200% of the option price. For example, if the option price is $12 per share, the gain may not exceed $24 per share or, in this example, be B-7 8 based on a fair market value at the time of exercise in excess of $36. (h) POSTPONEMENTS. The Committee may postpone any exercise of an option or related SAR for such period of time as the Committee in its discretion reasonably believes necessary to prevent any acts or omissions that the Committee reasonably believes will be or will result in the violation of any state or federal law; and the Company shall not be obligated by virtue of any provision of the Plan or the terms of any prior grant of an option or related SAR to recognize the exercise of an option or related SAR or to sell or issue shares during the period of such postponement. Any such postponement shall automatically extend the time within which the option or related SAR may be exercised, as follows: The exercise period shall be extended for a period of time equal to the number of days of the postponement, but in no event shall the exercise period be extended beyond the last day of the postponement for more days than there were remaining in the option or related SAR's exercise period on the first day of the postponement. Neither the Company, nor its directors of officers, shall have any obligation or liability to the grantee of an option or related SAR or to a successor with respect to any shares as to which the option or related SAR shall lapse because of such postponement. (i) NON-TRANSFERABILITY. All options and related SAR's granted under the Plan shall be non-transferable other than by will or by the laws of descent and distribution, subject to Section 10 hereof, and an option or related SAR may be exercised during the lifetime of the grantee only by him or her or by his/her guardian or legal representative. Also, if required by the then current Rule 16b-3, or any successor provision, and solely with respect to Section 16 grantees, common stock acquired upon the exercise of an option or related SAR may not be sold for at least six months after acquisition, except in the case of such grantee's death or disability. Also, if required by the then current Rule 16b-3, or any successor provision, and solely with respect to Section 16 grantees, then notwithstanding anything hereunto the contrary, options and SAR's are not exercisable for at least six months after grant except in the case of death or disability. (j) CERTIFICATES. The stock certificate or certificates to be delivered under this Plan may, at the request of the grantee, be issued in his or her name or, with the consent of the Company, the name of another person as specified by the grantee. (k) RESTRICTIONS. This subsection (k) shall be void and of no legal effect in the event of a Change of Control. Notwithstanding anything in any other section or subsection herein to the contrary, the following provisions shall apply to all options and related SAR's, exercises and grantees. An amount equal to the spread realized in connection with the exercise of an option or SAR within six months prior to a grantee's voluntary resignation shall be paid to the Company by the grantee in the event that the B-8 9 grantee, within six months following voluntary resignation, engages, directly or indirectly, in any activity determined by the Committee to be competitive with any activity of the Company or any of its subsidiaries. (l) TAXES. The Company shall be entitled to withhold the amount of any tax attributable to amounts payable or shares deliverable under the Plan, and the Company may defer making payment or delivery of any benefits under the Plan if any tax is payable until indemnified to its satisfaction. The Committee may, in its discretion and subject to such rules which it may adopt, permit a grantee to satisfy, in whole or in part, any federal, state and local withholding tax obligation which may arise in connection with the exercise of a stock option or SAR, by electing either: (i) To have the Company withhold shares of Company common stock from the shares to be issued upon the exercise of the option or SAR; (ii) To permit a grantee to tender back shares of Company common stock issued upon the exercise of an option or SAR; or (iii) To deliver to the Company previously owned shares of Company common stock having a fair market value equal to the amount of the federal, state, and local withholding tax associated with the exercise of the option or SAR. (m) ADDITIONAL PROVISIONS APPLICABLE TO OPTION AGREEMENTS IN LIEU OF COMPENSATION. If the Committee, in its discretion permits participants to enter into agreements as contemplated by Section 7 herein, then such agreements must be irrevocable and cannot be changed by the participant once made, and such agreements must be made at least prior to the performance of any services with respect to which an option may be granted. Also, solely with respect to Section 16 grantees, the date of the grant of any option pursuant to an agreement contemplated by Section 7 herein must be at least six months after the date on which a participant enters into such agreement, and the exercise price must be determined by reference to the fair market value of the Company's shares on the date of grant. If any participant who enters into such an agreement terminates employment prior to the grant of the option, then the option will not be granted and all compensation which would have been covered by the option will be paid to the participant in cash. 9. EXERCISE OF OPTION BY GRANTEE ON CESSATION OF EMPLOYMENT. If a person to whom an option has been granted shall cease, for a reason other than his or her death, disability, early retirement, retirement, or voluntary resignation, to be employed by the Company or a subsidiary, the option and related SAR shall terminate three months after the cessation of employment, unless it terminates earlier under other provisions of the Plan. Until the option or related SAR terminates, it may be exercised by the grantee for all or a portion of the shares as to which the right to purchase had accrued under the Plan at the time of cessation of employment, subject to B-9 10 all applicable conditions and restrictions provided in Section 8 hereof. If a person to whom an option or related SAR has been granted shall retire or become disabled, the option and related SAR shall terminate five years after the date of early retirement, retirement or disability, unless it terminates earlier under the Plan. Although such exercise by a retiree or disabled grantee is not limited to the exercise rights which had accrued at the date of early retirement, retirement or disability, such exercise shall be subject to all applicable conditions and restrictions prescribed in Section 8 hereof. If a person shall voluntarily resign, his option and related SAR to the extent not previously exercised shall terminate at once. 10. EXERCISE OF OPTION OR RELATED SAR AFTER DEATH OF GRANTEE. If the grantee of an option and related SAR shall die while in the employ of the Company or within three months after ceasing to be an employee, and if the option and related SAR was in effect at the time of his or her death (whether or not its term had then commenced), the option and related SAR may, until the expiration of five years from the date of death of the grantee or until the earlier expiration of the term of the option and related SAR, be exercised by the successor of the deceased grantee. Although such exercise is not limited to the exercise rights which had accrued at the date of death of the grantee, such exercise shall be subject to all applicable conditions and restrictions prescribed in Section 8 hereof. 11. PYRAMIDING OF OPTIONS. The Committee in its sole discretion may from time to time permit the method of exercising options known as pyramiding (the automatic application of shares received upon the exercise of a portion of a stock option to satisfy the exercise price for additional portions of the option). 12. SHAREHOLDER RIGHTS. No person shall have any rights of a shareholder by virtue of a stock option and related SAR except with respect to shares actually issued to him or her, and issuance of shares shall confer no retroactive right to dividends. 13. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. Any increase in the number of outstanding shares of common stock of the Company occurring through stock splits or stock dividends after the adoption of the Plan shall be reflected proportionately: (a) In an increase in the aggregate number of shares then available for the grant of options and related SAR's under the Plan, or becoming available through the termination of options and related SAR's previously granted but unexercised; (b) In the number available to grant to any one person; (c) In the number subject to options and related SAR's then outstanding; and (d) In the quotas remaining available for exercise under outstanding options and related SAR's, and a proportionate reduction shall be made in the per-share option price B-10 11 as to any outstanding options and related SAR's or portions thereof not yet exercised. Any fractional shares resulting from such adjustments shall be eliminated. If changes in capitalization other than those considered above shall occur, the Board of Directors shall make such adjustments in the number and class of shares for which options and related SAR's may thereafter be granted, and in the number and class of shares remaining subject to options and related SAR's previously granted and in the per-share option price as the Board in its discretion may consider appropriate, and all such adjustments shall be conclusive; provided, however, that the Board shall not make any adjustments with respect to the number of shares subject to previously granted incentive stock options or available for grant as options if such adjustment would constitute the adoption of a new plan requiring shareholder approval before further incentive stock options could be granted. 14. TERMINATION, SUSPENSION, OR MODIFICATION OF PLAN. The Board of Directors may at any time terminate, suspend, or modify the Plan, except that the Board of Directors shall not amend the Plan in violation of law and shall not, without shareholder approval, make any amendment to the Plan (other than amendments pursuant to Section 13 herein) that would: (a) Increase the number of shares specified in Section 4(a); (b) Extend the duration of the Plan specified in Section 3; or (c) Modify the class of employees eligible to receive options and related SAR's under the Plan. No termination, suspension, or modification of the Plan shall adversely affect any right acquired by any grantee, or by any successor of a grantee (as provided in Section 10 hereof), under the terms of an option and related SAR's granted before the date of such termination, suspension, or modification, unless such grantee or successor shall consent, but it shall be conclusively presumed that any adjustment for changes in capitalization as provided in Section 13 does not adversely affect any such right. 15. APPLICATION OF PROCEEDS. The proceeds received by the Company from the sale of its shares under the Plan will be used for general corporate purposes. 16. NO RIGHT TO EMPLOYMENT. Neither the adoption of the Plan nor the granting of any stock option or SAR shall confer upon the grantee any right to continue in the employ of the Company or any of its subsidiaries or interfere in any way with the right of the Company or the subsidiary to terminate such employment at any time. B-11 EX-10.M 8 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN 1 EXHIBIT 10(m) FIRST TENNESSEE NATIONAL CORPORATION NON-EMPLOYEE DIRECTORS' DEFERRED COMPENSATION STOCK OPTION PLAN 1. PURPOSE. The Non-Employee Directors' Deferred Compensation Stock Option Plan of the First Tennessee National Corporation has been adopted to advance the interests of shareholders by encouraging non-employee members of the Board of Directors to acquire proprietary interests in the Company in the form of Stock Options granted in lieu of Retainer/Fees that otherwise would have been paid in cash for serving on the Board of Directors or any committee thereof. 2. DEFINITIONS. As used in the Plan, the following terms shall have the respective meanings set forth below: (a) "Board" means the Board of Directors of the Company. (b) "Common Stock" means the common stock, par value $2.50 per share, of the Company. (c) "Company" means the First Tennessee National Corporation, a corporation established under the laws of the State of Tennessee. (d) "Deferred Compensation Stock Option" or "Stock Option" means a right granted at the election of a Non-Employee Director pursuant to Section 6. (e) "Disability" means total and permanent disability, which if the Participant were an employee of the Company, would be treated as a total and permanent disability under the terms of the Company's long-term disability plan for employees, as may be in effect from time to time. (f) "Early Retirement" means retirement from Board service after the age of 55 with 120 or more full months of aggregate Board service. (g) "Fair Market Value" means the average of the high and low sales prices at which shares of Common Stock are traded, as publicly reported by the Wall Street Journal, on the applicable date or, if there were no sales of Common Stock reported for such date, the last prior date for which a sale is reported. (h) "Grant Date" means the applicable date, as specified in Section 7, on which a Stock Option is granted to a Non- Employee Director by reason of an election made pursuant to Section 6. 2 (i) "Non-Employee Director" means a member of the Board who is not an employee of the Company or any subsidiary or affiliate of the Company at the time such person elects to receive Retainer/Fees in the form of Stock Options. (j) "Normal Retirement" means the date at which any Non-Employee Director is no longer qualified to serve on the Board based on the then-current retirement age policy contained in the Company's by-laws or, if not in the by-laws, as adopted by the Board. (k) "Participant" means a person who has received one or more Stock Options or the legal representative, heir or estate of such person. (l) "Plan" means the Non-Employee Directors' Deferred Compensation Stock Option Plan. (m) "Retainer/Fees" means the retainer and meeting attendance fees payable to a Non-Employee Director for service as member of the Board and/or member of any committee of the Board. (n) "1934 Act" means the Securities Exchange Act of 1934, as amended from time to time. 3. EFFECTIVE DATE. The Plan shall be effective on the date it is approved by the shareholders of the Company and shall remain in effect through the last Grant Date occurring in calendar year 1999, unless the Plan is terminated by the Board earlier than such date subject to the provisions of Section 11. If shareholder approval is not obtained by June 30, 1995, the Plan shall be nullified and all elections to receive Stock Options shall be rescinded and all Non-Employee Directors shall receive cash equal to all Retainer/Fees that had been the subject of an election hereunder. Upon termination of the Plan, the applicable terms of the Plan shall continue to apply to all Stock Options which are outstanding on the date the Plan is terminated and to any Stock Options which are granted subsequent to such date pursuant to Section 11. 4. PLAN OPERATION. The Plan is intended to meet the requirements of a "formula" plan" for purposes of Rule 16b-3 under the 1934 Act as currently applicable to the Plan and accordingly is intended to be self-governing. To this end the Plan is expected to require no discretionary action by any administrative body except as contemplated by Section 5(b). However, should any questions of interpretation arise, they shall be resolved by the Human Resources Committee of the Board or such other Committee as the Board may from time to time designate. The Plan shall be interpreted to comply with Rule 16b-3 under the 1934 Act, as then applicable to the Company's employee benefit plans, and any action under this Plan that would be inconsistent with the requirements of Rule 16b-3 as then applicable shall be null and void. 2 3 5. COMMON STOCK AVAILABLE FOR STOCK OPTIONS. (a) A maximum of 225,000 shares of Common Stock may be issued upon the exercise of Stock Options granted under the Plan. Shares of Common Stock shall not be deemed issued until the applicable Stock Option has been exercised and, accordingly, any shares of Common Stock represented by Stock Options which expire unexercised or which are cancelled shall remain available for issuance under the Plan. (b) The Board, as it deems appropriate to preserve Particpant's benefits and to meet the intent of the Plan, may make equitable adjustments to the number of shares available under the Plan and covered by outstanding Stock Options and to the exercise prices of outstanding Stock Options in the event of any change in capitalization or similar action affecting Common Stock. Such actions may include, but are not limited to, any stock dividend, stock split, combination or exchange of shares, merger, consolidation, recapitalization, spin-off or other distribution (other than normal cash dividends) of Company assets to shareholders, or any other change affecting the Common Stock. 6. ELECTIONS TO RECEIVE STOCK OPTIONS. Each Non-Employee may make a one-time irrevocable election to receive Stock Options under the Plan, provided that such election conforms to the following: (a) Each Non-Employee Director serving as of January 1, 1995, must make his or her election under the Plan no later than January 31, 1995. Such election, if any, shall be applicable to Retainer/Fees otherwise payable to such Non-Employee Director for service from February 1, 1995 through December 31, 1999, subject to the requirements of Section 9. (b) Each Non-Employee Director who is newly appointed or elected to the Board after January 1, 1995, must make his or her election, if any, under the Plan no later than 30 days following the commencement of such person's Board service. Such election, if any, shall be applicable to Retainer/Fees earned by such Non-Employee Director from the date of such election through December 31, 1999, subject to the requirements of Section 9. The above notwithstanding, no election under the Plan shall be permitted after June 30, 1999. (c) In making an irrevocable election to receive Retainer/Fees in the form of Stock Options, the Non-Employee Director must designate that the election is for all or a specified portion of the Retainer/Fees payable to him or her through December 31, 1999. 3 4 7. EFFECTIVE GRANT DATES. (a) The Grant Dates for Stock Options granted pursuant to an election covered by Section 6(a) made by a Non-Employee Director serving on the Board as of January 1, 1995 shall be June 30 and December 31 for each of the calendar years such election is in effect. (b) The Grant Dates for Stock Options granted pursuant to an election covered by Section 6(b) made by a Non-Employee Director elected or appointed to the Board after January 1, 1995, shall be: (i) For the initial Stock Option granted, the earliest calendar date specified by Section 7(a) to occur after such election, or, if then required by Rule 16b-3 under the 1934 Act as then applicable to the Plan, the last day of the second full calendar quarter of Board service after an election pursuant to Section 6 has been made. (ii) For all Stock Options granted subsequent to the initial Stock Option, each subsequent June 30 and December 31 for each of the calendar years such election is in effect. 8. STOCK OPTION GRANTS. Stock Options granted under the Plan shall have the following terms and conditions: (a) Each Stock Option shall have a per share exercise price equal to 85% of the Fair Market Value on the Grant Date. (b) Each Stock Option shall cover the number of shares determined by the following formula: Amount of Retainer/Fees Earned ------------------------------ = Number of Common Shares Fair Market Value - 85% x Fair Market Value If the number of Common Shares resulting from this calculation is not a whole number, the amount will be rounded up to the next whole number. The "Amount of Retainer/Fees Earned" for purposes of this calculation shall be such amount as was payable to the Participant since the prior applicable Grant Date or since February 1, 1995, in the case of an election pursuant to Section 6(a), or the date of the election in the case of an election pursuant to Section 6(b). (c) Each Stock Option shall expire on the twentieth anniversary of its Grant Date, subject to earlier or later expiration in accordance with Section 9. 4 5 (d) Each Stock Option shall be immediately exercisable upon grant, except, however, that the Board may postpone the exercise of a Stock Option during such period of time that is deemed reasonably necessary to prevent any acts or omissions that the Board reasonably believes could result in the violation of any state or federal law. 9. TERMINATION OF BOARD SERVICE. (a) If a Non-Employee Director terminates Board service for any reason (or becomes an employee of the Company) prior to a Grant Date upon which he or she would otherwise receive a Stock Option under the Plan, no future Stock Options shall be granted to him or her and any Retainer/Fees that have been earned, but which were to be paid in the form of a Stock Option will be paid in cash instead. (b) If a Participant terminates Board service with less than 120 full months of aggregate Board service or prior to Normal or Early Retirement for any reason other than death or Disability, all outstanding Stock Options held by such Participant shall expire on the first anniversary of such person's termination of Board service. (c) If a Participant terminates Board service due to death, Disability or because of Normal or Early Retirement, each outstanding Stock Option held by such Participant shall terminate at the earlier of the fifth anniversary of such Participant's termination of Board service or the end of the term of the Stock Option. (d) The above notwithstanding, any Stock Option held by a Participant at the time of the Participant's death shall expire on the later of the date provided for by Section 9(b) or 9(c), or the first anniversary of the Participant's death. 10. EXERCISE PAYMENT. A Stock Option, or portion thereof, may be exercised by written notice of the exercise delivered to the Human Resources Committee of the Board, or its designee, accompanied by payment of the exercise price. Such payment may be made by cash, personal check or Common Stock already owned by the Participant, valued at the Fair Market Value on the date of exercise, or a combination of such payment methods. As soon as practicable after notice of exercise and receipt of full payment for shares of Common Stock being acquired, the Company shall deliver a certificate to the Participant representing the Common Stock purchased through the Stock Option. 11. TERMINATION, SUSPENSION AND AMENDMENT OF THE PLAN. The Board may at any time terminate, suspend or amend the Plan, except that the Plan may not be amended in any manner which knowingly would: (a) cause the Plan not to comply with Rule 16b-3 under the 1934 Act as then applicable to the Company's employee benefit 5 6 plans; (b) cause Participants not to be deemed "disinterested persons" for purposes of Rule 16b-3 under the 1934 Act as then applicable to the Company's employee benefits plans; or (c) adversely affect a Participant's rights under the Plan, without the consent of the Participant. If the Plan is terminated or suspended prior to December 31, 1999, any Retainer/Fees which have been earned but not paid as of the effective date of termination of the Plan and which are the subject of an election pursuant to Section 6, will be delivered in the form of Stock Options on the appropriate Grant Date, notwithstanding that such date is subsequent to the date the Plan has otherwise been terminated or suspended. 12. GENERAL PROVISIONS. (a) Stock Options shall not be transferable or assignable other than by (a) will or the laws of descent and distribution, or (b) to the extent permitted by Rule 16b-3 under the 1934 Act as then applicable to the Company's employee benefits plans, by gift or other transfer to either (i) any trust or estate in which the original award recipient or such person's spouse or other immediate relative has a substantial beneficial interest or (ii) a spouse or other immediate relative, provided that such a transfer will continue to require such Stock Options to be disclosed pursuant to Item 403 of Regulation S-K under the Securities Act of 1933, as amended from time to time. (b) Stock Options shall be evidenced by written agreements or such other appropriate documentation prescribed by the Human Resources Committee of the Board or its designee. (c) Neither the Plan nor the granting of Stock Options nor any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that the Company shall retain the services of a Participant for any period of time or at any particular rate of compensation as a member of the Board. Nothing in the Plan shall in any way limit or affect the right of the Board or the shareholders of the Company to remove any Participant from the Board or otherwise terminate his or her service as a member of the Board. (d) The validity, construction and effect of the plan and any such actions taken under or relating to the Plan shall be determined in accordance with the laws of the State of Tennessee and applicable federal law. 6 EX-10.N 9 RONALD TERRY AGREEMENT 1 Exhibit 10(n) Ronald Terry Post-Retirement Arrangement The following is a written description of action taken by the Human Resources Committee of the Corporation's Board of Directors concerning an arrangement which is not set forth in a written document: The Human Resources Committee approved the provision of the following for Ronald Terry, the former Chairman of the Corporation: a company automobile for three years, future financial counseling and tax services and a waiver of Bank service fees. EX-11 10 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 FIRST TENNESSEE NATIONAL CORPORATION PRIMARY EARNINGS PER SHARE AND FULLY DILUTED EARNINGS PER SHARE
Twelve Months Ended December 31 -------------------------------------------- Computation for Statements of Income: 1995 1994 1993 - - ------------------------------------- ------------- ------------- ---------- Per statements of income (Thousands): Net income $ 164,888 $ 147,068 $ 109,716 ============ ============ ============ Per statements of income: Weighted average shares outstanding 68,024,794 68,441,382 68,145,768 ============ ============ ============ Primary earnings per share (a): Net income $ 2.42 $ 2.15 $ 1.61 ============ ============ ============ Additional Primary computation - - ------------------------------ Adjustment to weighted average shares outstanding: Weighted average shares outstanding per primary computation above 68,024,794 68,441,382 68,145,768 Add dilutive effect of outstanding options (as determined by the application of the treasury stock method) 1,225,616 1,101,176 1,110,824 ------------ ----------- ----------- Weighted average shares outstanding, as adjusted 69,250,410 69,542,558 69,256,592 ============ =========== =========== Primary earnings per share, as adjusted (b): Net income $ 2.38 $ 2.11 $ 1.58 ============ =========== =========== Additional Fully Diluted Computation - - ------------------------------------ Adjustment to net income: Net income per primary computation above $ 164,888 $ 147,068 $ 109,716 Effect of conversion of subordinated debt - - 132 ------------ ----------- ----------- Fully diluted net income, as adjusted: $ 164,888 $ 147,068 $ 109,848 ============ =========== =========== Adjustment to weighted average share outstanding: Weighted average shares outstanding per primary computation above 69,250,410 69,542,558 69,256,592 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 131,096 25,964 24,872 Additional dilutive effect of conversion of subordinated debt - - 406,200 ------------ ----------- ----------- Weighted average shares outstanding, as adjusted 69,381,506 69,568,522 69,687,664 ============ =========== =========== Fully diluted earnings per share, as adjusted (b): Net income $ 2.38 $ 2.11 $ 1.58 ============ =========== ===========
(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%. Per share data reflects the 1996 two-for-one stock split. EX-13 11 PORTIONS OF 1995 ANNUAL REPORT 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS ==================================== OVERVIEW OF OPERATIONS Earnings for 1995 reflect the fifth consecutive year of record earnings. Income for the year increased 12 percent to $164.9 million from $147.1 million earned in 1994. 1994 net income increased 34 percent from the $109.7 million earned in 1993 while 1993 net income increased 18 percent. Net income per share (adjusted for the 1996 two-for-one stock split) was $2.42 in 1995, up 13 percent over the $2.15 earned in 1994. In 1994, net income per share rose 33 percent from $1.61 earned in 1993. Return on average assets improved for the year ended December 31, 1995, to 1.45 percent from 1.39 percent in 1994 and 1.10 percent for 1993. Return on average equity rose to 20.04 percent in 1995 from 19.36 percent in 1994 and 16.04 percent in 1993. The growth in net income since 1993 was primarily the result of increases in noninterest income. Excluding securities gains in all periods, noninterest income, driven by the specialty lines of business, grew 13 percent for both 1995 and 1994, and 52 percent for 1993. Net interest income, on a fully taxable equivalent basis, declined 1 percent in 1995 from compression in the net interest margin, following a 4 percent increase in 1994 and an 8 percent increase in 1993 due to growth in earning assets in both periods. Noninterest expense decreased 2 percent during the year, after growth of 13 percent in 1994 and 37 percent in 1993. At December 31, 1995, First Tennessee had assets of $12.1 billion and shareholders' equity of $873.2 million, representing 10 percent and 13 percent growth, respectively, from year-end 1994. ACQUISITIONS First Tennessee completed the following acquisitions during the three years ended December 31, 1995: 2
=================================================================================================================== ACQUISITIONS (TABLE 1) Servicing Portfolio Shares issued* Accounting Acquisition/location Date (billions) (thousands) Methodology - - ------------------------------------------------------------------------------------------------------------------- MORTGAGE COMPANIES: Carl I. Brown and Company, January 1995 $2.2 1,731 pooling of interests Kansas City, Missouri ORIGINATION VOLUME IN 1995: $1.8 BILLION HomeBanc Mortgage July 1995 none $7 million cash purchase Corporation, Atlanta, Georgia ORIGINATION VOLUME IN 1995: $.4 BILLION SNMC Management January 1994 6.1 3,502 pooling of interests Corporation, parent company of Sunbelt National Mortgage Corporation, Dallas, Texas (SNMC) ORIGINATION VOLUME IN 1995: $2.5 BILLION Emerald Mortgage Company, October 1994 .4 304 purchase Lynnwood, Washington ORIGINATION VOLUME IN 1995: $.2 BILLION Maryland National Mortgage October 1993 4.4 $115 million cash purchase Corporation, Baltimore, Maryland (MNC) ORIGINATION VOLUME IN 1995: $1.7 BILLION - - ------------------------------------------------------------------------------------------------------------------- Assets (millions) ---------- BANKS/BANK HOLDING COMPANIES: Community Bancshares Inc., February 1995 $256 2,842 pooling of interests parent company of Community First Bank, Germantown, Tennessee Peoples Commercial Services April 1995 98 842 purchase Corporation, parent company of Peoples Bank, Senatobia, Mississippi (Peoples) Financial Investment October 1995 349 2,565 purchase Corporation, parent company of First National Bank of Springdale, Springdale, Arkansas (FIC) Cleveland Bank and Trust March 1994 227 2,306 pooling of interests Company, Cleveland, Tennessee Planters Bank, Tunica, August 1994 61 668 pooling of interests Mississippi New South Bancorp, parent December 1993 35 298 pooling of interests company of New South Bank, Como, Mississippi - - ------------------------------------------------------------------------------------------------------------------- Assets Under Management (billions) ------------ ASSET MANAGEMENT COMPANY: Highland Capital Management March 1994 $2.6 936 pooling of interests Corp., Memphis, Tennessee - - ------------------------------------------------------------------------------------------------------------------- *Approximate number; restated for 1996 two-for-one stock split
3 For all purchase transactions, noted in Table 1 - Acquisitions, the results of their operations are not included in the financial results prior to their closing date. For transactions accounted for as poolings of interests, the financial position and results of operations of all companies are reflected on a combined basis from the earliest period presented. For additional information related to acquisitions see Note 2 - Business Combinations. At its January meeting, First Tennessee's board of directors approved a two-for-one split of First Tennessee's common stock. On February 16, 1996, each shareholder of record on February 2, 1996, received one additional share for each share owned. As a result of the two-for-one stock split, First Tennessee's outstanding number of shares doubled from 33.6 million to 67.2 million at year-end 1995. All share and per share data have been restated to reflect this split. The following financial review should be read with the accompanying consolidated financial statements and accompanying notes. INCOME STATEMENT ANALYSIS NONINTEREST INCOME Noninterest income, also called fee income, is a significant source of First Tennessee's revenue, contributing approximately 56 percent, 53 percent, and 50 percent in 1995, 1994, and 1993, respectively. Total noninterest income (excluding securities gains in all periods) increased 13 percent in both 1995 and 1994, compared with a 52 percent increase in 1993. Table 2 - Analysis of Noninterest Income gives detail by category for the past six years with growth rates for the one-year and the five-year periods. MORTGAGE BANKING Mortgage banking noninterest income consists of loan origination fees, servicing fee income, net gains from the sale of mortgage loans, and gains from the sale of mortgage servicing rights. During 1995, mortgage banking fee income increased 13 percent, and during 1994 and 1993 increased 35 percent and 314 percent, respectively. The increase in 1995 was a result of $200 million more originations, increased income from servicing fees as a result of a larger servicing portfolio, and the benefit of a new accounting rule (SFAS No. 122, "Accounting for Mortgage Servicing Rights an amendment of FASB Statement No. 65" [SFAS No. 122]) related to originated servicing rights. The adoption of this rule in the second quarter, effective to the beginning of the year, enabled First Tennessee to retroactively increase first quarter revenues $5.0 million. This rule benefits First Tennessee by treating originated and purchased mortgage servicing rights equally, thus allowing First Tennessee the opportunity to retain more servicing. The acquisition of the mortgage companies had a significant impact on the comparability of mortgage banking income for the periods presented. MNC, as a purchase transaction, is only included in the statements of operations for the fourth quarter of 1993 and forward. SNMC, as a pooling of interests acquisition, is reflected in all periods presented. However, SNMC began operations in November 1992; therefore, only the results of two months of operations are included in that year. Excluding the effects of the items just mentioned, the growth during 1994 would have been 17 percent, and during 1993 would have been 133 percent. This growth in 1993 was primarily due to First Tennessee's participation in the refinancing activity experienced in the overall mortgage industry as interest rates declined during the year. Originations in 1995 were $7.2 billion compared with $7.0 billion in 1994. The mortgage servicing portfolio, which includes servicing for ourselves and others, totaled $16.7 billion at December 31, 1995, as compared with $14.2 billion at December 31, 1994. The change in the portfolio during 1995 was created primarily from additions due to originations of $7.2 billion, reductions from sales of servicing of $2.7 billion and principal reductions of $2.0 billion as a result of payments being received in the normal course of business. The change in the portfolio during 1994 was primarily from additions due to originations of $7.0 billion and acquired servicing of $.4 billion, and reductions from sales of servicing of $6.7 billion and principal reductions of $2.5 billion as a result of payments being received in the normal course of business. Gains recognized from the sale of servicing during 1995 totaled $35.4 million as compared with $83.5 million during 1994, and $23.5 million during 1993. Less servicing was sold in 1995 due to the adoption of SFAS No. 122. BOND DIVISION Bond division revenues increased 7 percent in 1995, following a 15 percent decrease in 1994 and a 14 percent increase in 1993. Additional volume, through expansion in the nonbank customer base, contributed to the growth in revenues during 1995. The decrease in 1994 primarily resulted from strong loan growth 4 in community banks, one of the principal customer segments of the bond division, and a change in customer activities and product preferences because of the regulatory environment and market conditions. The increase in 1993, a record year, was a result of increased market penetration, additional products, and a favorable interest rate environment which created a higher demand for securities. Bond division revenues are obtained primarily from the sale of securities as both principal and agent. Inventory positions are limited to the procurement of securities solely for distribution to customers by the sales staff. Inventory is hedged to protect against movements in interest rates. DEPOSIT TRANSACTIONS AND CASH MANAGEMENT Noninterest income for deposit transactions and cash management results from fees charged for retail deposit products and cash management services. For 1995, fee income in this category increased 11 percent, with 3 percent growth resulting from an accounting methodology change for business accounts from cash basis to accrual basis. The remaining fee income increase was due to new product sales, an expanded customer base, and improvement in the collection process. The growth in fees collected from retail and business customers in 1995 was partially offset by the reduction in the Federal Deposit Insurance Corporation (FDIC) premium. In 1991, when the FDIC increased deposit insurance to $.23 per $100 of deposits, First Tennessee assessed only a portion of this cost to its customers. In August 1995, the FDIC voted to lower deposit insurance premiums paid by well-capitalized banks to $.04 per $100 of deposits. These fees received from customers, that have partially offset the overall cost of the deposit insurance premium, will no longer be assessed, thus reducing revenues approximately $1.0 million per quarter going forward. Deposit transactions and cash management fee income increased 10 percent and 8 percent in 1994 and 1993, respectively. The growth in 1994 reflected increased sales and the introduction of new retail deposit products and pricing changes. The 1993 increase was related to services sold to businesses and a lower earnings credit rate on corporate demand deposit accounts. CARDHOLDER AND MERCHANT PROCESSING Noninterest income for cardholder and merchant processing, two separate divisions related to the credit card business, increased 18 percent in 1995, 10 percent in 1994, and 7 percent in 1993. The increases experienced over the last three years primarily reflect growth in the volume of merchant transactions processed as well as the expansion of merchant services in restaurant and hotel businesses. TRUST SERVICES During 1995, noninterest income from this specialty line of business grew 23 percent, from $28.9 million in 1994 to $35.6 million in 1995. Growth of $4.2 million or 15 percent was a result of an accounting change from cash basis to accrual basis. The managed asset segment of the business grew appreciably in 1995. Fees from these products, including Personal Trust, Employee Benefits, and Investment Management accounts, grew 13 percent over comparable 1994 levels. Fees from Corporate Trust Services, an indenture trustee business that acts as trustee on public bond issues, declined due to significant reductions in debt issuance by municipalities. Fee growth in the managed asset segment during 1994 was 5 percent. Total trust assets, including custodial accounts, were approximately $14.9 billion at the end of 1995, compared with $12.5 billion at the end of 1994. Managed assets grew 18 percent during 1995 and reached $5.2 billion on December 31, 1995, compared with $4.4 billion at December 31, 1994. NET SECURITIES GAINS/LOSSES The net securities gains of $2.4 million in 1995 included $.9 million in recoveries from investments previously written down; $4.6 million realized as venture capital gains; and the write-down of $3.6 million of securities that, in the opinion of management, have been permanently impaired. In 1994, net securities gains included $7.5 million of equity securities gains related to the formation of a charitable foundation; $5.0 million of losses resulting from securities being sold in the normal course of business; $.8 million in recoveries from investments previously written down; and $16.7 million realized as venture capital gains. The net securities gains in 1993 included $1.1 million of gains resulting from securities being sold in the normal course of business, $.3 million in recoveries of held for sale securities marked to market value, and $.5 million loss realized on venture capital. ALL OTHER NONINTEREST INCOME All other noninterest income grew 12 percent, 10 percent, and 18 percent for the years 1995, 1994, and 1993, respectively. The largest sources of all other noninterest income were check clearing fees and other service charges. Income 5 from check clearing fees increased 9 percent, 11 percent, and 12 percent for 1995 through 1993, respectively. This growth was primarily due to the increase in the volume of checks processed by First Express, First Tennessee's national check clearing operation. Other service charges are fees generated from banking services performed, but are not directly related to deposit transactions, such as fees for money orders, travelers checks, savings bonds, safety deposit rental, mutual funds, and safekeeping. During 1995, these fees grew 5 percent following a decrease of 21 percent in 1994 and growth of 34 percent in 1993. The increase in 1993 revenues primarily related to additional sales of mutual fund products by First Tennessee employees in response to a change in customer's investment preferences. In 1994, this sales effort continued, but with a third party vendor which received a portion of the fees related to these products, thus reducing the amount of fees collected. As previously discussed, the method of accounting for acquisitions impacts the comparability of financial statements. The growth in total noninterest income during 1995 would have been 11 percent, excluding securities gains, the purchases of Peoples and FIC, and the changes in accounting methodology from cash basis to accrual basis previously explained. The growth in 1994 would have been 6 percent, excluding MNC from 1994 and 1993 results. The growth in 1993 would have been 25 percent, excluding MNC and SNMC from the 1993 and 1992 results. NET INTEREST INCOME For purposes of this discussion, net interest income has been adjusted to a fully taxable equivalent basis for certain tax-exempt loans and investments included in earning assets. Earning assets, including loans, have been expressed as averages, net of unearned income. Earning assets increased 7 percent in 1995, 5 percent in 1994, and 10 percent in 1993 as a result of commercial and consumer loan growth during the three-year period. Total interest-bearing liabilities grew 9 percent in 1995, 4 percent in 1994, and 11 percent in 1993. Table 4 - Analysis of Changes in Net Interest Income gives volume and rate detail by category comparing 1995 to 1994 and 1994 to 1993.
===================================================================================================== NET INTEREST INCOME AND EARNING ASSETS (TABLE 3) Years Ended December 31 ----------------------- (Dollars in thousands) 1995 1994 1993 - - ---------------------------------------------------------------------------------------------------- Investment securities $ 2,161.0 $2,248.7 $3,015.3 Loans 7,593.3 6,752.3 5,611.7 Other earning assets 340.4 405.2 326.6 - - ---------------------------------------------------------------------------------------------------- Total earning assets $10,094.7 $9,406.2 $8,953.6 - - ---------------------------------------------------------------------------------------------------- Net interest income - FTE $ 395.7 $ 399.3 $ 382.4 Yields on earning assets excluding swaps 8.26% 7.51% 7.34% Impact from interest rate swaps (.06) (.01) .01 - - ---------------------------------------------------------------------------------------------------- Yields adjusted for swaps 8.20 7.50 7.35 - - ---------------------------------------------------------------------------------------------------- Rates paid on interest-bearing liabilities excluding swaps 4.87 3.84 3.66 Impact from interest rate swaps .22 .09 .02 - - ---------------------------------------------------------------------------------------------------- Rates paid adjusted for swaps 5.09 3.93 3.68 - - ---------------------------------------------------------------------------------------------------- Net interest spread 3.11 3.57 3.67 Effect of interest-free sources .81 .68 .60 - - ---------------------------------------------------------------------------------------------------- Net interest margin 3.92 4.25 4.27 - - ---------------------------------------------------------------------------------------------------- Net interest margin excluding swaps 4.16% 4.32% 4.28% - - ----------------------------------------------------------------------------------------------------
The extreme interest rate movements in 1994 and the flattening of the yield curve in 1995 contributed to the decline in the net interest margin in 1995 as First Tennessee's balance sheet and off-balance sheet positions were impacted from repricing mismatches. A $1 billion basis swap, executed in May 1993 and terminated at the beginning of 1995, negatively impacted the net interest margin approximately 18 basis points in 1995 and 7 basis points in 1994, and will continue to affect the margin through May 1996 when the amortization period for the swap ends. 6 The net interest margin is affected by the activity levels and related funding for First Tennessee's specialty lines of business, as these nonbank business lines typically produce different margins than traditional retail/commercial banking activities. Consequently, First Tennessee's consolidated margin cannot be readily compared to that of other bank holding companies. During 1995, mortgage banking negatively impacted the margin approximately 9 basis points because the spread between the rates on mortgage loans temporarily in the warehouse and the related short-term funding rates were significantly less than the comparable spread earned in the retail/commercial bank. The bond division also negatively impacted the margin approximately 11 basis points in 1995. First Tennessee's strategy is to hedge inventory in the cash markets, effectively eliminating net interest income on these positions. In 1994 and 1993, the margin was negatively impacted 8 basis points and 10 basis points, respectively, by mortgage banking, and 14 basis points and 13 basis points, respectively, by the bond division. The balance sheet was rate sensitive $518 million more assets than liabilities scheduled to reprice within one year, as shown in Table 5 - Rate Sensitivity Analysis, which is 5.0 percent of earning assets and within First Tennessee guideline limits. This point-in-time measurement indicates that over the course of a year a downward movement in rates may negatively impact the net interest margin since assets will reprice faster than liabilities. Net interest income increased during the year due to a higher volume of average earning assets, as shown in the graph below. The results of maturities and actions taken in 1995 have led to the improvement in the net interest margin over the past quarter as also shown in the graph. [Graph] With First Tennessee's existing balance sheet mix and the current interest rate environment, the retail/commercial bank's margin is expected to continue to improve throughout 1996, especially once the costs associated with the basis swap end. Going forward, the consolidated margin will continue to be influenced by the activity levels in the specialty lines of business. PROVISION FOR LOAN LOSSES The provision for loan losses is the charge to operating earnings that management determines to be necessary to maintain the allowance for loan losses at an adequate level, and reflects management's estimate of the risk of loss inherent in the loan portfolio. The provision for loan losses was $20.6 million, $17.2 million, and $36.5 million for the years 1995, 1994, and 1993, respectively. The provision for 1994, the lowest level since 1990, shows the significant improvement in asset quality from 1993. While asset quality trends remained favorable, the provision increased in 1995 to cover the growth in the loan portfolio. NONINTEREST EXPENSE Noninterest expense, also called operating expense, decreased 2 percent in 1995 following increases of 13 percent in 1994 and 37 percent in 1993. Table 6 - Analysis of Noninterest Expense provides details by category for the past six years. A number of transactions during the periods reviewed affected the comparability of noninterest expense. One-time acquisition expenses of $5.8 million, $4.8 million, and $9.4 million were recognized in 1995, 1994, and 1992, respectively. There were no one-time acquisition expenses in 1993. During 1995, $1.4 million in expenses was recognized related to the change in accounting methodology from cash basis to accrual basis for trust services fees and deposit transactions and cash management fees. Peoples and FIC were included in the results of operations only from the dates of their acquisitions which added $4.8 million to 1995 expenses. During 1994, nonrecurring expenses included the adoption of a new accounting standard (SFAS No. 112, "Employers' Accounting for Postemployment Benefits") which increased benefits expense $2.3 million related to prior services rendered and rights vested for postemployment benefits. Also in 1994, a charitable foundation was established which increased contribution expenses $9.4 million. Total expenses increased $20.4 million in 1993 from the impact of the acquisitions of MNC and New South Bancorp. Included in the 1992 results were one-time costs of $1.6 million related to the restructuring of remote data processing centers and benefit awards. Finally, the acquisition of SNMC in 1994 added only two months of expenses in 1992 due to a November start-up date. For comparative purposes, excluding the one-time expenses and other items just discussed, the 1995 noninterest expenses still decreased 2 percent, following increases of 4 percent and 17 percent for 1994 and 1993, respectively. Employee compensation, incentives, and benefits (staff expense), the largest component of noninterest expense, decreased 3 percent in 1995, following increases of 13 percent and 44 percent for 1994 and 1993, respectively. Staff expense includes commissions paid in several lines of 7 business, such as the bond division, mortgage banking, and the venture capital companies. As the revenues increase or decrease in these business lines, the commissions change accordingly. For comparative purposes, excluding the previously mentioned one-time items, the 1995 decrease in staff expense would still have been 3 percent compared with increases of 6 percent and 24 percent in 1994 and 1993, respectively. The 1995 decrease is primarily due to the benefit of operating efficiences especially in mortgage banking from consolidation synergies. The increase in 1994 was partially offset by a reduction in the mutual fund sales force in 1994. The increases in 1994 and 1993 reflect the specialty lines of business which use commission-based compensation. Deposit insurance premium expense decreased $7.0 million or 41 percent in 1995 following several years of stable premium expense. The premium, which had been set at $.23 per $100 of deposits since 1991 was lowered to $.04 per $100 of deposits in August 1995; and, as a result of the Bank Insurance Fund (BIF) becoming fully capitalized, the FDIC voted in November of 1995 to reduce insurance on BIF deposits to zero as of January 1, 1996, with only adminstrative costs being assessed to the banks. Congress is currently discussing various proposals to fully capitalize the Savings Association Insurance Fund (SAIF). An assessment could potentially be charged to all institutions that have SAIF-insured deposits. The timing of the assessment could be as early as the first quarter of 1996. In management's opinion, under current proposals, the maximum pre-tax, one-time cost to First Tennessee is estimated to be approximately $6.1 million. All Other expense consists of many smaller expense categories such as supplies, Fed service fees, travel and entertainment, foreclosed real estate expenses, contributions, and others. During 1995, the decrease in All Other expense was 15 percent, following increases of 17 percent and 27 percent for 1994 and 1993, respectively. For comparative purposes, excluding the nonrecurring expenses previously discussed, these expenses decreased 4 percent and 2 percent for 1995 and 1994, respectively, after increasing 11 percent in 1993. INCOME TAXES The effective tax rate in 1995 was 34.8 percent compared with 29.2 percent in 1994 and 37.4 percent in 1993. The lower tax rate in 1994 resulted from the elimination of $7.7 million of deferred tax valuation allowance related to the acquisition of SNMC, and $2.9 million related to the establishment of a charitable foundation. Without these items, the 1994 effective tax rate would have been 34.3 percent. For further information see Note 16 - Income Taxes. BALANCE SHEET REVIEW At December 31, 1995, First Tennessee reported total assets of $12.1 billion compared with $10.9 billion and $10.8 billion at the end of 1994 and 1993, respectively. Average assets were $11.4 billion in 1995 compared with $10.6 billion in 1994 and $10.0 billion in 1993. EARNING ASSETS Investment securities and loans are the primary types of earning assets. For 1995, earning assets averaged $10.1 billion compared with $9.4 billion for 1994 and $9.0 billion for 1993. Average earning assets were 89 percent of total average assets in 1995 and 1994, and 90 percent of total average assets in 1993. INVESTMENT SECURITIES The investment portfolio consists principally of debt securities that First Tennessee uses as a source of income and liquidity, to balance interest rate risk with other categories of the balance sheet, and to supply securities to pledge as required collateral for certain deposits. Table 7 - Maturities of Investment Securities shows information pertaining to the composition, yields, and maturities of the securities portfolio. Average investment securities peaked in 1993 at more than $3 billion, and decreased 25 percent in 1994 and 4 percent in 1995, as mortgage warehouse loans increased in 1994. Excluding the impact of purchase acquisitions in 1995, the decrease would have been 7 percent in 1995. Investment securities represented 21 percent and 24 percent of earning assets for 1995 and 1994, respectively. The investment portfolio is classified into two categories: securities held to maturity and securities available for sale. Securities that management has the positive intent and ability to hold to maturity are included in the securities held to maturity (HTM) category and are carried at amortized cost. The designation of securities as available for sale (AFS) applies to all other securities that may be held for indefinite periods, including securities that may be sold in response to changes in interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs, and other similar factors. These securities are carried at their fair values with unrealized gains and losses excluded from operating results and reported, net of 8 deferred taxes, as a component of shareholders' equity. During the fourth quarter of 1995, the Financial Accounting Standards Board (FASB) released a report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." As a result of this report, banks were allowed to reclassify their AFS and HTM securities before January 1, 1996, without any adverse ramifications. First Tennessee did reclassify a portion of the investment portfolio on December 1, 1995. Prior to the reclassification, the AFS portfolio was approximately 52 percent of the total investment securities portfolio; after reclassification, the AFS portfolio was approximately 96 percent of the total. At December 31, 1995, the securities portfolio totaled $2.1 billion of which $2.0 billion of securities were classified as AFS with an average life of 2.1 years. These securities consisted primarily of mortgage-backed securities, collateralized mortgage obligations (CMOs), U.S. Treasuries, and U.S. government agencies. At December 31, 1995, these securities had approximately $18.2 million of net unrealized gains that resulted in an increase in book equity of approximately $10.6 million, net of $7.6 million of deferred income taxes. At December 31, 1994, the $1.2 billion of AFS securities had approximately $39.6 million of net unrealized losses that resulted in a decrease in equity of approximately $24.3 million, net of $15.3 million of deferred income taxes. The increase in the market value of this portfolio during 1995 came primarily from an improved interest rate environment. HTM securities totaled $74.7 million and were primarily municipal bonds at December 31, 1995, with an average life of 6.9 years. The HTM securities portfolio had a net unrealized gain at December 31, 1995 of $1.0 million. At December 31, 1994, the securities classified as HTM totaled $1.0 billion and had a net unrealized loss of $52.7 million. Corporate guidelines call for all securities purchased for the investment portfolio to be rated investment grade by Moody's or Standard & Poor's. Securities backed by the U.S. government and its agencies, both on a direct and indirect basis, represented approximately 92 percent of the investment portfolio at December 31, 1995. LOANS Loans grew 12 percent during 1995 and 20 percent during 1994. For purposes of this discussion, loans are expressed as averages, net of unearned income, unless otherwise noted. Loans represented 75 percent of earning assets in 1995 and 72 percent in 1994. Additional loan information is provided in Table 8 - Maturities of Loans and Note 4 - Loans. The purchase acquisitions of Peoples and FIC were responsible for approximately 1 percent of the total loan growth in 1995. The impact by individual loan category was similar. Commercial loans continued as the single largest loan category, representing 41 percent of total loans in both 1995 and 1994. During 1995, commercial loans grew 13 percent compared with 14 percent in 1994. The increase in commercial loans generally reflects the economic growth experienced in Tennessee during this period, as well as new customers and the result of cross-selling efforts to existing deposit and cash management customers. The consumer loan portfolio consists of real estate, automobile, student and other consumer installment loans that require periodic payments of principal and interest. The consumer loan portfolio represented 31 percent of total loans in both 1995 and 1994. During 1995, consumer loans grew 14 percent compared with 37 percent in 1994. Growth in consumer loans has primarily been due to successes with direct marketing efforts and increases in automobile loans and second mortgages. First Tennessee is active in selling second mortgages not only in Tennessee through First Tennessee Bank National Association (FTBNA) but also outside of this market through Gulf Pacific Mortgage, a division of FTBNA. Growth in real estate loans, principally secured by first and second liens on residential property, contributed significantly to the increase in the consumer loan portfolio in 1994. Mortgage warehouse loans held for sale are loans awaiting securitization. These loans represented approximately 9 percent of total loans in 1995 and 11 percent of total loans in 1994. The mortgage warehouse declined 8 percent during 1995 with a 53 percent increase in period-end balances between December 31, 1994, and 1995, as the majority of loan originations did not occur until the latter half of 1995. The mortgage warehouse grew 25 percent in 1994, primarily due to the purchase acquisition of MNC. The permanent mortgage portfolio includes certain mortgage loans, principally adjustable rate mortgages, that First Tennessee periodically decides to retain. During 1995, the permanent mortgage portfolio represented 9 percent of total loans compared with 8 percent in 1994. This portfolio of loans grew 18 percent in 1995 and 6 percent in 1994. Credit card receivables represent outstanding balances on credit card accounts. During both 1995 and 1994, credit card receivables represented 9 6 percent of total loans. During 1995, credit card receivables increased 11 percent compared with an increase of 9 percent in 1994. The growth was a result of increased use by consumers of debt, cross-selling opportunities, and targeted promotional campaigns. The real estate construction loan portfolio represented 3 percent of total loans in 1995 and 2 percent in 1994. During 1995, this loan portfolio increased $99 million or 84 percent compared with a $35 million increase or 43 percent in 1994. Growth during this period was a result of economic growth and favorable market conditions. DEPOSITS, OTHER SOURCES OF FUNDS, AND LIQUIDITY MANAGEMENT Core deposits are First Tennessee's primary source of funding and one of the most stable sources of liquidity for a bank. During 1995, these deposits averaged $7.6 billion and represented 75 percent of First Tennessee's earning asset funding compared with $7.3 billion and 77 percent, respectively, in 1994 and $6.8 billion and 76 percent, respectively, in 1993. Approximately two-thirds of the growth in 1995 came from growth in the depositor base as the number of households increased approximately 6 percent. The other third of the growth came from the purchases of Peoples and FIC. Interest-bearing core deposits grew 6 percent during 1995 compared with 5 percent in 1994, while noninterest-bearing demand deposits were relatively flat during 1995 and grew 13 percent in 1994. Excluding the purchase acquisitions, interest-bearing core deposits grew 5 percent and noninterest-bearing demand deposits decreased 1 percent in 1995. Purchased funds averaged $2.4 billion for 1995, up 11 percent, or $238 million from the previous year. Purchased funds represented 24 percent of the corporation's funding in 1995 and 23 percent in 1994. The purchase acquisitions represented $27 million or 1 percent of the growth in purchased funds in 1995. Term borrowings include senior and subordinated long-term debt and borrowings from the Federal Home Loan Bank with maturities greater than one year. Term borrowings increased $107 million during 1995. In November 1995, First Tennessee (the parent company) completed a $75 million subordinated debt issuance in the form of 10-year noncallable notes. The notes have a coupon of 6.75 percent. The objective of liquidity management is to ensure the continuous availability of funds to meet the demands of depositors, investors, and borrowers. ALCO (Asset/Liability Committee) is responsible for managing these needs which take into account the marketability of assets, the sources and stability of funding, and the level of unfunded commitments. Parent company liquidity is maintained by cash flows stemming from dividends and interest payments collected from subsidiaries, which represent the primary source of funds to pay dividends to shareholders and interest payments to bondholders. The amount of dividends from bank subsidiaries is subject to certain regulatory restrictions, which is presented in Note 19 - Restrictions on Dividends and Intercompany Transactions. The parent company statements are presented in Note 22 - Condensed Financial Information. The parent company also has the ability to enhance its liquidity position by raising equity or incurring debt. Under an effective shelf registration statement on file with the Securities and Exchange Commission, First Tennessee, as of December 31, 1995, may offer from time to time, at its discretion, debt securities and common and preferred stock up to $225 million. Maintaining adequate credit ratings on debt issues is critical to liquidity because it affects the ability of First Tennessee to attract funds from various sources on a cost competitive basis. The various credit ratings are detailed in Table 9 - Credit Ratings.
================================================================================================= CREDIT RATINGS AT DECEMBER 31, 1995 (TABLE 9) Standard Thomson & Poor's Moody's BankWatch IBCA Fitch - - -------------------------------------------------------------------------------------------------- FIRST TENNESSEE Overall credit rating B Subordinated capital notes due 1999 BBB+ Baa1 A- Subordinated capital notes due 2005 BBB+ Baa1 A- A Commercial paper TBW-1 - - -------------------------------------------------------------------------------------------------- FIRST TENNESSEE BANK NATIONAL ASSOCIATION Short-term/Long-term deposits A-1/A P-1/A1 TBW-1 A1/A Counterparty credit rating A A1 - - --------------------------------------------------------------------------------------------------
10 CAPITAL Total shareholders' equity at December 31, 1995, was $873.2 million, up $98.3 million, or 13 percent from the balance at the end of 1994. This followed an increase of $53.8 million, or 7 percent from year-end 1993. In both years, the increase was principally due to the retention of net income after dividends. The Consolidated Statements of Shareholders' Equity highlight the detailed changes in equity since December 31, 1993. Capital adequacy is an important indicator of financial stability and performance. Management's objectives are to maintain a level of capitalization that is sufficient to sustain asset growth, take advantage of profitable growth opportunities, and promote depositor and investor confidence. Overall, First Tennessee's capital position remained strong with a ratio of average equity to assets of 7.24 percent and 7.18 percent for 1995 and 1994, respectively. The period-end equity to assets ratio improved 14 basis points from 7.09 percent at December 31, 1994, to 7.23 percent at December 31, 1995. Double leverage increased to 107.2 percent at December 31, 1995, from 99.7 percent at December 31, 1994. Banking industry regulators define minimum capital ratios for bank holding companies and their subsidiaries. Based on the risk-based capital rules and definitions prescribed by the banking regulators, should an institution's capital ratios decline below predetermined levels, it would become subject to a series of increasingly restrictive regulatory actions. The system categorizes a financial institution's capital position into one of five categories ranging from well-capitalized to critically under-capitalized. For an institution to qualify as well-capitalized, Tier 1, Total Capital and Leverage capital ratios must be at least 6 percent, 10 percent, and 5 percent, respectively. First Tennessee and its affiliates, on December 31, 1995, had sufficient capital to qualify as well-capitalized institutions as shown in Table 10 - Regulatory Capital. At December 31, 1995, book value per common share was $13.00 based on shares outstanding of approximately 67.2 million compared with $11.37 based on shares outstanding of 68.1 million at December 31, 1994. First Tennessee's shares are traded on The Nasdaq Stock Market under the symbol FTEN. The sales price ranges, earnings per share, and dividends by quarter for each of the last two years are presented in Table 16 - Summary of Quarterly Financial Information. At December 31, 1995, the closing sales price was $30.25 per share. This price was 233 percent of year-end book value per share, and the dividend yield is 3.5 percent for 1996 based on current dividends per share. The quarterly dividend was last increased at the October 24, 1995, board meeting to $.265 per share, up from $.235 per share. The two-for-one stock split, effective February 16, 1996, changed the par value of First Tennessee's common stock from $2.50 to $1.25 per share and the shares of common stock authorized doubled from 100 million to 200 million. At the October 1995 board of directors meeting, authority was given to management to purchase up to $60 million of First Tennessee stock to manage the capital balance between debt and equity and reduce excess equity levels. The purchase of these shares was completed prior to year-end 1995 and is expected to have a positive impact on future earnings. In total during 1995, First Tennessee purchased approximately 4.8 million shares of its common stock. Approximately 3.4 million shares were issued for acquisitions closed during the year, and approximately 438,000 shares were issued for benefit programs. The company plans to continue to purchase shares pursuant to board authority for various stock option plans, and from time to time, will evaluate the level of capital and take action designed to generate or use the capital to maximize the benefit to shareholders. During 1994, approximately 1.1 million shares were repurchased, with 304,000 shares being issued for acquisitions and 322,000 shares being issued for benefit plans. This share information has been restated for the two-for-one stock split that occurred in the first quarter of 1996. ASSET QUALITY First Tennessee manages asset quality through diversification in the loan portfolio and adherence to its credit policy. Management strives to identify loans experiencing difficulty early enough to correct the problems, to recognize nonperforming loans in a timely manner, to record charge-offs promptly based on realistic assessments of current collateral values and the borrower's ability to repay, and to maintain adequate reserves to cover inherent losses in the loan portfolio. First Tennessee's goal is not to avoid risk, but to manage it, and to include credit risk as part of the pricing decision of each product. At December 31, 1995, First Tennessee had no concentrations of 10 percent or more of total loans in any single industry. ALLOWANCE FOR LOAN LOSSES Management's policy is to maintain the allowance for loan losses at a level sufficient to absorb all estimated losses inherent in the loan portfolio. The allowance for loan losses is increased by the provision for loan losses and 11 recoveries and is decreased by charged-off loans. The evaluation process to determine potential losses includes consideration of the industry, specific conditions of the individual borrower, and the general economic environment. While management uses available information to recognize potential losses on loans, future additions to the reserve may be necessary based on changes in economic conditions. Table 11 - Analysis of Allowance for Loan Losses summarizes loans charged off and recoveries of loans previously charged off by loan category, and additions to the reserve which have been charged to operating expense. The allowance for loan losses is allocated according to the amount systematically estimated as necessary to provide for the inherent losses within the various categories of loans. This allocation is based primarily on previous charge-off experience adjusted for changes in the risk characteristics of each category. In addition, classified loans over $1 million are evaluated separately and a specific reserve is set based on the expected loss of the individual loan. The anticipated effect of economic conditions on loan categories is another factor used in determining the quantifying amounts. A general reserve is also maintained to supplement specific allocations. Table 12 - Loans and Foreclosed Real Estate gives a breakdown of the allowance allocation by major loan types and commercial loan grades at December 31, 1995, compared with the same period in 1994. The total allowance for loan losses for 1995 increased 2 percent from the 1994 and 1993 levels. The ratio of allowance for loan losses to loans, net of unearned income, was reduced to 1.39 percent at December 31, 1995, from 1.57 percent at December 31, 1994, as a result of the loan growth experienced in 1995. Excluding mortgage warehouse loans, this ratio was 1.54 percent and 1.69 percent in 1995 and 1994, respectively. NET CHARGE-OFFS Each lending product has, as a normal course of business, an expected level of net charge-offs based on the profit margin of that product. The level of charge-offs can vary from period to period due to the size, type, and number of individual credits; all of which may be cyclical, depending on economic conditions. In 1995, net charge-offs increased $2.5 million to $20.5 million at December 31. Net charge-offs were $18.0 million and $29.9 million for 1994 and 1993, respectively. The ratio of net charge-offs to total loans remained at .27 percent for 1995 and 1994. This ratio for 1993 was .53 percent of total loans. Commercial and real estate loan recoveries exceeded charge-offs by $1.0 million in 1995. This compares with net charge-offs of $2.5 million in 1994, a more normal level of charge-offs. Consumer loan net charge-offs in 1995 were $6.6 million, an increase of $1.8 million from 1994; and credit card receivables net charge-offs were $14.9 million, an increase of $4.1 million in 1995; both reflecting growth in these consumer loan portfolios and a return toward a more historical level of charge-offs. Asset quality levels were at their best in 1994. Going forward, in light of current expected economic conditions and trends, the absolute level of net charge-offs will continue to increase from the low levels experienced in 1994 and 1995. Despite a possible increase, management believes that during 1996 there will be no significant deterioration in the asset quality ratios. NONPERFORMING ASSETS Nonaccrual and restructured loans constitute nonperforming loans, and these, along with foreclosed real estate and other assets, represent nonperforming assets. Nonaccrual loans consist of those loans on which recognition of interest income was discontinued. Restructured loans generally take the form of an extension of the original repayment period and/or a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower. Nonperforming assets decreased 17 percent in 1995 and 41 percent in 1994. Nonperforming loans increased $2.0 million, or 12 percent in 1995, compared with a decrease of $12 million or 41 percent in 1994. At December 31, 1995, foreclosed properties amounted to $11.8 million, a decrease of 39 percent from the $19.2 million of foreclosed properties reported in 1994. Nonperforming assets along with past due loans are presented in Table 14 - Nonperforming Assets. Table 15 - Changes in Nonperforming Assets, gives additional information for 1993 to 1995. PAST DUE LOANS AND POTENTIAL PROBLEM ASSETS Past due loans are loans contractually past due 90 days or more as to interest or principal payments, but have not yet been put on nonaccrual status. Past due loans were $33.3 million or .4 percent of loans at December 31, 1995, a $10.0 million increase from the $23.3 million or .3 percent of loans at December 31, 1994, reflecting the overall trends in both permanent mortgage and 12 consumer loan delinquencies, the change in the loan mix, and the return to more historical past due levels. Potential problem assets, which are not included in nonperforming assets, decreased to $66.6 million at December 31, 1995, from the previous year's level, and were less than 1 percent of total loans in 1995. Potential problem assets represent those assets where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower's ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Office of the Comptroller of the Currency for loans classified substandard and doubtful. 13 ANALYSIS OF NONINTEREST INCOME (TABLE 2)
(Dollars in thousands) 1995 1994 1993 1992 - - --------------------------------------------------------------------------------------- NONINTEREST INCOME: Mortgage banking $212,579 $187,340 $138,960 $ 33,539 Bond division 82,814 77,478 91,525 80,275 Deposit transactions and cash management 70,957 64,169 58,377 53,914 Cardholder and merchant processing 36,984 31,402 28,467 26,556 Trust services 35,632 28,933 26,532 23,819 Equity securities gains/(losses) 3,195 24,251 (479) 342 Debt securities gains/(losses) (751) (4,298) 1,371 (1,535) All other: Check clearing fees 17,585 16,124 14,569 12,956 Other service charges 7,709 7,334 9,296 6,942 Other 29,859 26,006 21,303 18,532 - - --------------------------------------------------------------------------------------- Total other income 55,153 49,464 45,168 38,430 - - --------------------------------------------------------------------------------------- Total noninterest income $496,563 $458,739 $389,921 $255,340 =======================================================================================
ANALYSIS OF NONINTEREST INCOME Growth rates (%) --------------------- (Dollars in thousands) 1991 1990 95/94 95/90 - - --------------------------------------------------------------------------------------- NONINTEREST INCOME: Mortgage banking $ 17,593 $ 19,483 13.5 + 61.3 + Bond division 68,628 41,704 6.9 + 14.7 + Deposit transactions and cash management 46,300 40,246 10.6 + 12.0 + Cardholder and merchant processing 25,834 22,299 17.8 + 10.6 + Trust services 20,996 17,994 23.2 + 14.6 + Equity securities gains/(losses) (713) (1,039) 86.8 - 38.4 + Debt securities gains/(losses) (47) (932) 82.5 + 3.6 + All other: Check clearing fees 8,879 8,610 9.1 + 15.4 + Other service charges 5,539 4,936 5.1 + 9.3 + Other 13,652 19,798 14.8 + 8.6 + - - -------------------------------------------------------------- Total other income 28,070 33,344 11.5 + 10.6 + - - -------------------------------------------------------------- Total noninterest income $206,661 $173,099 8.2 + 23.5 + ===============================================================
Certain previously reported amounts have been reclassified to agree with current presentation. 14 ANALYSIS OF CHANGES IN NET INTEREST INCOME (Table 4)
1995 Compared to 1994 1994 Compared to 1993 Increase/(Decrease) Due to* Increase/(Decrease) Due to* (Fully taxable equivalent) -------------------------------- -------------------------------- (Dollars in thousands) Rate** Volume** Total Rate** Volume** Total - - ------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME - FTE: Loans: Commercial $22,727 $ 30,160 $ 52,887 $ 7,161 $ 25,836 $ 32,997 Consumer 15,284 23,987 39,271 (6,269) 44,906 38,637 Mortgage warehouse loans held for sale 3,400 (4,664) (1,264) (40) 11,117 11,077 Permanent mortgage 43 7,978 8,021 (4,344) 2,530 (1,814) Credit card receivables 2,463 6,431 8,894 735 4,722 5,457 Real estate construction 1,191 10,462 11,653 697 3,379 4,076 Nonaccrual 213 (162) 51 357 (786) (429) - - ------------------------------------------------ ------- -------- Total loans 47,800 71,713 119,513 (2,663) 92,664 90,001 - - ------------------------------------------------ ------- -------- Investment securities: U.S. Treasury and other U.S.government agencies 6,728 (3,583) 3,145 (1,288) (36,689) (37,977) States and municipalities (521) (271) (792) (679) (2,347) (3,026) Other 582 (1,627) (1,045) (1,410) (7,539) (8,949) - - ------------------------------------------------- -------- -------- Total investment securities 6,751 (5,443) 1,308 (3,340) (46,612) (49,952) - - ------------------------------------------------- -------- -------- Other earning assets: Investment in bank time deposits 79 (104) (25) 1 43 44 Federal funds sold and securities purchased under agreements to resell 2,447 (1,532) 915 2,297 1,589 3,886 Broker/dealer securities inventory 1,811 (1,896) (85) 1,836 1,595 3,431 - - ------------------------------------------------- -------- -------- Total other earning assets 4,466 (3,661) 805 3,706 3,655 7,361 - - ------------------------------------------------- -------- -------- Total earning assets 67,849 53,777 121,626 13,635 33,775 47,410 - - ------------------------------------------------------------------------------------------------------------------------------ Total interest income - FTE $121,626 $ 47,410 ============================================================================================================================== INTEREST EXPENSE: Interest-bearing deposits: Checking/Interest $ (552) $ (888) $ (1,440) $(1,055) $ (557) $ (1,612) Savings (1,096) (1,568) (2,664) (4,832) 2,840 (1,992) Money market account 27,022 4,588 31,610 10,147 2,807 12,954 Certificates of deposit under $100,000 and other time 27,890 17,923 45,813 424 4,343 4,767 Certificates of deposit $100,000 and more 8,674 3,239 11,913 616 1,856 2,472 - - ------------------------------------------------- -------- -------- Total interest-bearing deposits 69,142 16,090 85,232 4,571 12,018 16,589 Federal funds purchased and securities sold under agreements to repurchase 19,623 20,820 40,443 10,818 478 11,296 Commercial paper and other short-term borrowings 8,658 (17,502) (8,844) 4,661 (2,023) 2,638 Term borrowings (862) 9,309 8,447 21 (87) (66) - - ------------------------------------------------- -------- -------- Total interest-bearing liabilities 96,428 28,850 125,278 19,025 11,432 30,457 - - ----------------------------------------------------------------------------------------------------------------------------- Total interest expense $125,278 $ 30,457 ============================================================================================================================= Net interest income - FTE $ (3,652) $ 16,953 =============================================================================================================================
* The changes in interest due to both rate and volume have been allocated to change due to rate and change due to volume in proportion to the absolute amounts of the changes in each. ** Variances are computed on a line-by-line basis and are non-additive. 15 RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1995 (TABLE 5)
Interest Sensitivity Period --------------------------------------------------------------- Within 3 After 3 Months After 6 Months (Dollars in millions) Months Within 6 Months Within 12 Months Other Total - - -------------------------------------------------------------------------------------------------------------- EARNING ASSETS: Loans $4,114 $421 $ 857 $2,731 $ 8,123 Investment securities 154 133 334 1,490 2,111 Other earning assets 250 -- -- -- 250 - - -------------------------------------------------------------------------------------------------------------- Total earning assets $4,518 $554 $1,191 $4,221 $10,484 ============================================================================================================== EARNING ASSET FUNDING: Interest-bearing deposits $2,389 $673 $ 577 $2,959 $ 6,598 Short-term purchased funds 1,761 -- -- -- 1,761 Term borrowings 21 1 3 235 260 Noninterest-bearing funds 309 (66) (11) 1,633 1,865 - - -------------------------------------------------------------------------------------------------------------- Total earning asset funding $4,480 $608 $ 569 $4,827 $10,484 ============================================================================================================== RATE SENSITIVITY GAP: Period $ 38 $(54) $ 622 $ (606) Cumulative 38 (16) 606 -- - - --------------------------------------------------------------------------------------------------- RATE SENSITIVITY GAP ADJUSTED FOR INTEREST RATE FUTURES AND INTEREST RATE SWAPS: Period $ (307) $ (1) $ 826 $ (518) Cumulative (307) (308) 518 -- - - --------------------------------------------------------------------------------------------------- ADJUSTED GAP AS A PERCENT OF EARNING ASSETS: Period (2.9)% -- % 7.9 % (5.0)% Cumulative (2.9) (2.9) 5.0 -- - - ---------------------------------------------------------------------------------------------------
Interest-sensitive categories represent ranges in which assets and liabilities can be repriced, not necessarily their actual maturities. The 'Other' column amounts include assets and liabilities with interest sensitivity of more than 12 months or with indefinite repricing schedules. 16 ANALYSIS OF NONINTEREST EXPENSE (TABLE 6)
(Dollars in thousands) 1995 1994 1993 1992 - - --------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Employee compensation, incentives, and benefits $340,508 $349,769 $308,601 $214,303 Operations services 38,798 33,679 28,705 24,252 Occupancy 37,867 34,102 27,673 24,738 Equipment rentals, depreciation, and maintenance 31,845 29,202 22,246 17,516 Communications and courier 29,880 30,653 24,775 18,049 Amortization of mortgage servicing rights 14,980 14,936 25,478 4,482 Legal and professional fees 13,403 13,747 11,274 11,391 Advertising and public relations 12,972 10,678 7,987 6,165 Deposit insurance premium 9,957 16,923 16,585 16,177 Amortization of intangible assets 8,100 6,406 5,871 9,866 All other: Supplies 11,866 11,472 10,312 6,520 Fed service fees 9,489 8,544 7,778 7,228 Travel and entertainment 8,211 10,144 8,868 5,774 Foreclosed real estate 4,962 3,862 1,542 4,935 Contribution to charitable foundation -- 9,379 -- -- Other 40,829 44,760 46,683 34,734 - - --------------------------------------------------------------------------------------- Total other expense 75,357 88,161 75,183 59,191 - - --------------------------------------------------------------------------------------- Total noninterest expense $613,667 $628,256 $554,378 $406,130 =======================================================================================
ANALYSIS OF NONINTEREST EXPENSE
Growth rates (%) --------------------- (Dollars in thousands) 1991 1990 95/94 95/90 - - --------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Employee compensation, incentives, and benefits $177,648 $154,918 2.6 - 17.1 + Operations services 21,860 18,517 15.2 + 15.9 + Occupancy 22,036 20,542 11.0 + 13.0 + Equipment rentals, depreciation, and maintenance 13,944 12,918 9.1 + 19.8 + Communications and courier 16,515 14,617 2.5 - 15.4 + Amortization of mortgage servicing rights 1,361 917 .3 + 74.8 + Legal and professional fees 8,348 6,621 2.5 - 15.1 + Advertising and public relations 4,941 4,499 21.5 + 23.6 + Deposit insurance premium 13,373 7,597 41.2 - 5.6 + Amortization of intangible assets 7,711 7,075 26.4 + 2.7 + All other: Supplies 5,752 5,808 3.4 + 15.4 + Fed service fees 5,311 4,960 11.1 + 13.9 + Travel and entertainment 4,898 5,161 19.1 - 9.7 + Foreclosed real estate 7,449 3,048 28.5 + 10.2 + Contribution to charitable foundation -- -- -- -- Other 32,563 28,553 8.8 - 7.4 + - - --------------------------------------------------------------- Total other expense 55,973 47,530 14.5 - 9.7 + - - --------------------------------------------------------------- Total noninterest expense $343,710 $295,751 2.3 - 15.7 + ===============================================================
Certain previously reported amounts have been reclassified to agree with current presentation. 17 MATURITIES OF INVESTMENT SECURITIES AT DECEMBER 31, 1995 (AMORTIZED COST) (TABLE 7)
After 1 Year After 5 Years Within 1 Year Within 5 Years Within 10 Years After 10 Years --------------- ------------------ ---------------- ----------------- Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield - - ----------------------------------------------------------------------------------------------------------------------------------- SECURITIES HELD TO MATURITY: States and municipalities** $ 9,493 8.97% $ 18,944 8.22 % $ 20,274 8.37 % $ 26,020 9.19 % - - ----------------------------------------------------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE: Mortgage-backed securities and collateralized mortgage obligations* $ 2,516 6.08% $101,427 6.36 % $310,075 6.18 % $1,233,896 6.45 % U.S. Treasury and other U.S. government agencies 112,533 5.37 145,233 6.34 12,270 6.65 1,224 7.52 States and municipalities** 1,889 7.19 9,271 9.05 16,285 8.92 602 8.94 Other 498 9.01 15,474 7.10 1,394 9.39 53,927*** 6.14 - - ---------------------------------------------------------------------------------------------------------------------------------- Total $117,436 5.43% $271,405 6.48 % $340,024 6.34 % $1,289,649 6.44 % ==================================================================================================================================
* Includes $1,646.1 million of government agency issued mortgage-backed securities and collateralized mortgage obligations which, when adjusted for early paydowns, have an estimated average life of 2.2 years. ** Weighted average yields on tax-exempt obligations have been computed by adjusting allowable tax-exempt income to a fully taxable equivalent basis using a tax rate of 35 percent. *** Represents equity securities with no stated maturity. 18 MATURITIES OF LOANS AT DECEMBER 31, 1995 (TABLE 8)
After 1 Year (Dollars in thousands) Within 1 Year Within 5 Years After 5 Years Total - - ---------------------------------------------------------------------------------------------------------- Commercial $2,217,072 $ 960,715 $ 153,142 $3,330,929 Consumer 96,233 1,270,674 1,158,982 2,525,889 Credit card receivables 529,104 -- -- 529,104 Real estate construction 172,950 56,223 9,690 238,863 Permanent mortgage 80,753 75,634 533,071 689,458 Nonaccrual 8,547 7,286 3,207 19,040 - - ---------------------------------------------------------------------------------------------------------- Total loans, net of unearned income* $3,104,659 $2,370,532 $1,858,092 $7,333,283 ========================================================================================================== For maturities over one year: Interest rates - floating $ 762,474 $ 469,911 $1,232,385 Interest rates - fixed 1,608,058 1,388,181 2,996,239 - - ---------------------------------------------------------------------------------------------------------- Total $2,370,532 $1,858,092 $4,228,624 ==========================================================================================================
* Excludes $789.2 million of mortgage warehouse loans held for sale with maturities greater than 5 years. These loans are sold within one year of origination. 19 REGULATORY CAPITAL AT DECEMBER 31, 1995 (Table 10)
Peoples (Dollars in thousands) First Tennessee (1) FTBNA (2) CBT (3) and Union (4) - - ------------------------------------------------------------------------------------------------------------------ CAPITAL: Tier 1 capital: Shareholders' common equity $ 873,224 $ 790,003 $ 25,224 $ 15,221 Disallowed intangibles (98,933) (69,669) -- -- Adjust for unrealized (gains)/losses on available for sale securities (10,582) (8,303) (968) (119) - - ------------------------------------------------------------------------------------------------------------------ Total Tier 1 capital 763,709 712,031 24,256 15,102 - - ------------------------------------------------------------------------------------------------------------------ Tier 2 capital: Qualifying debt 148,969 75,000 -- -- Qualifying allowance for loan losses 111,325 104,279 1,881 864 - - ------------------------------------------------------------------------------------------------------------------ Total Tier 2 capital 260,294 179,279 1,881 864 - - ------------------------------------------------------------------------------------------------------------------ Total capital $ 1,024,003 $ 891,310 $ 26,137 $ 15,966 ================================================================================================================== Risk-adjusted assets $ 8,904,769 $ 8,341,667 $149,266 $ 69,027 Quarterly average assets* 11,984,206 11,042,163 240,657 122,127 - - ------------------------------------------------------------------------------------------------------------------ RATIOS: Tier 1 capital to risk-adjusted assets 8.58 % 8.54 % 16.25 % 21.88 % Tier 2 capital to risk-adjusted assets 2.92 2.15 1.26 1.25 - - ------------------------------------------------------------------------------------------------------------------ Total capital to risk-adjusted assets 11.50 % 10.69 % 17.51 % 23.13 % ================================================================================================================== Leverage - Tier 1 capital to adjusted quarterly average assets less disallowed intangibles 6.43 % 6.49 % 10.08 % 12.37 % - - ------------------------------------------------------------------------------------------------------------------ Peoples FNB (Dollars in thousands) Planters (5) FTBNA-MS (6) Bank (7) Springdale (8) - - ------------------------------------------------------------------------------------------------------------------ CAPITAL: Tier 1 capital: Shareholders' common equity $ 6,639 $ 6,878 $ 17,996 $ 50,006 Disallowed intangibles -- (665) (8,885) (23,099) Adjust for unrealized (gains)/losses on available for sale securities 23 (88) (416) (494) - - ------------------------------------------------------------------------------------------------------------------ Total Tier 1 capital 6,662 6,125 8,695 26,413 - - ------------------------------------------------------------------------------------------------------------------ Tier 2 capital: Qualifying debt -- -- -- -- Qualifying allowance for loan losses 394 345 625 1,520 - - ------------------------------------------------------------------------------------------------------------------ Total Tier 2 capital 394 345 625 1,520 - - ------------------------------------------------------------------------------------------------------------------ Total capital $ 7,056 $ 6,470 $ 9,320 $ 27,933 ================================================================================================================== Risk-adjusted assets $ 30,968 $ 39,331 $ 49,750 $184,161 Quarterly average assets* 58,886 61,895 103,576 356,629 - - ------------------------------------------------------------------------------------------------------------------ RATIOS: Tier 1 capital to risk-adjusted assets 21.51 % 15.57 % 17.48 % 14.34 % Tier 2 capital to risk-adjusted assets 1.27 .88 1.25 .83 - - ------------------------------------------------------------------------------------------------------------------ Total capital to risk-adjusted assets 22.78 % 16.45 % 18.73 % 15.17 % ================================================================================================================== Leverage - Tier 1 capital to adjusted quarterly average assets less disallowed intangibles 11.31 % 10.00 % 9.18 % 7.92 % - - ------------------------------------------------------------------------------------------------------------------
* Adjusted for unrealized (gains)/losses on available for sale securities. (1) First Tennessee National Corporation (2) First Tennessee Bank National Association (3) Cleveland Bank and Trust Company (4) Peoples and Union Bank (5) Planters Bank (6) First Tennessee Bank National Association Mississippi (7) Peoples Bank of Senatobia (8) First National Bank of Springdale Based on regulatory guidelines. 20 ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (TABLE 11)
(Dollars in thousands) 1995 1994 1993 1992 1991 1990 - - -------------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES: Beginning balance $ 109,859 $ 110,720 $ 103,223 $ 97,550 $ 93,187 $ 70,374 Provision for loan losses 20,592 17,182 36,461 45,248 60,694 71,156 Allowance from acquisitions 2,632 -- 971 -- 9,327 -- Charge-offs: Commercial 5,614 6,458 16,905 20,597 34,589 28,278 Consumer 12,373 9,180 8,909 10,524 14,614 12,905 Credit card receivables 16,874 12,674 13,357 17,013 16,913 11,510 Real estate construction 44 -- 2,320 173 6,888 6,214 Permanent mortgage 326 884 1,170 2,339 2,546 1,756 - - -------------------------------------------------------------------------------------------------------------------------- Total charge-offs 35,231 29,196 42,661 50,646 75,550 60,663 - - -------------------------------------------------------------------------------------------------------------------------- Recoveries: Commercial 6,728 4,001 6,266 5,833 5,481 8,321 Consumer 5,732 4,415 3,590 2,759 2,921 2,552 Credit card receivables 2,022 1,890 2,262 1,985 1,278 1,141 Real estate construction 59 373 159 215 150 286 Permanent mortgage 174 474 449 279 62 20 - - -------------------------------------------------------------------------------------------------------------------------- Total recoveries 14,715 11,153 12,726 11,071 9,892 12,320 - - -------------------------------------------------------------------------------------------------------------------------- Net charge-offs 20,516 18,043 29,935 39,575 65,658 48,343 - - -------------------------------------------------------------------------------------------------------------------------- Ending balance $ 112,567 $ 109,859 $ 110,720 $ 103,223 $ 97,550 $ 93,187 ========================================================================================================================== LOANS, OUTSTANDING AT DECEMBER 31* $8,122,466 $ 7,013,449 $6,823,566 $ 5,105,048 $ 4,870,568 $ 4,677,996 - - -------------------------------------------------------------------------------------------------------------------------- AVERAGE LOANS, OUTSTANDING DURING THE YEAR* $7,593,272 $ 6,752,290 $5,611,668 $ 4,887,215 $ 4,666,672 $ 4,542,714 - - -------------------------------------------------------------------------------------------------------------------------- RATIOS* : Allowance to loans 1.39 % 1.57 % 1.62 % 2.02 % 2.00 % 1.99 % Net charge-offs to average loans .27 .27 .53 .81 1.41 1.06 Net charge-offs to allowance 18.2 16.4 27.0 38.3 67.3 51.9 - - --------------------------------------------------------------------------------------------------------------------------
* Net of unearned income. 21 LOANS AND FORECLOSED REAL ESTATE AT DECEMBER 31 (TABLE 12)
1995 1994 ---------------------------------------------------------------------- -------------------- Construction Allowance Allowance and Commercial For Loan For Loan (Dollars in millions) Commercial Development Real Estate TOTAL Losses Total Losses - - ---------------------------------------------------------------------------------------------------------------------------------- Internal grades: A $ 256 $ -- $ 3 $ 259 $ -- $ 210 $ -- B 415 18 60 493 1 402 1 C 2,009 172 477 2,658 27 2,361 27 D 60 1 13 74 5 75 7 E 24 -- 9 33 3 27 4 F 27 1 2 30 7 41 9 - - ---------------------------------------------------------------------------------------------------------------------------------- 2,791 192 564 3,547 43 3,116 48 Impaired loans: Contractually past due 5 2 1 8 2 -- -- Contractually current 1 -- 3 4 1 -- -- Nonaccrual loans: Contractually past due 1 -- -- 1 -- 6 2 Contractually current -- -- -- -- -- 4 2 - - ---------------------------------------------------------------------------------------------------------------------------------- Total commercial and commercial real estate loans $2,798 $194 $568 $3,560 $ 46 $3,126 $ 52 - - ---------------------------------------------------------------------------------------------------------------------------------- Retail: Consumer 2,526 21 2,263 20 Credit card 529 21 475 19 Permanent mortgages 689 4 591 2 Mortgage warehouse loans held for sale 789 -- 515 -- Mortgage banking nonaccrual loans 6 1 6 1 - - ---------------------------------------------------------------------------------------------------------------------------------- Total retail loans 4,539 47 3,850 42 - - ---------------------------------------------------------------------------------------------------------------------------------- Other/Unfunded commitments 23 3 37 3 General reserve -- 17 -- 13 - - ---------------------------------------------------------------------------------------------------------------------------------- Total loans, net of unearned income $8,122 $113 $7,013 $110 ================================================================================================================================== Foreclosed real estate: Foreclosed property $ 1 $ 8 $ 2 $ 11 $ 14 Foreclosed property - mortgage banking 1 5 - - ---------------------------------------------------------------------------------------------------------------------------------- Total foreclosed real estate $ 12 $ 19 ==================================================================================================================================
All amounts in the Allowance for Loan Losses columns have been rounded to the nearest million dollars. Grade A Loans have reserve amounts of less than $500,000. Definitions of each credit grade are provided below: *GRADE A -- Established, stable companies with excellent earnings, liquidity, and capital. Possess many of the same characteristics as Standard & Poor's (S&P) AA rated companies. *GRADE B -- Established, stable companies with good earnings, liquidity, and capital. Possess many of the same characteristics as S&P A rated companies. *GRADE C -- Established, stable companies with satisfactory earnings, liquidity, and capital and with consistent, positive trends relative to industry norms. *GRADE D -- Financial condition adversely affected by temporary lack of earnings or liquidity or changes in the operating environment. An action plan is required to rehabilitate the credit or have it refinanced elsewhere. *GRADE E -- Significant developing weaknesses or adverse trends in earnings, liquidity, capital, or operating environment. No discernable market for refinancing is available. *GRADE F -- Significantly higher than normal probability that: (1) legal action or liquidation of collateral is required; (2) there will be a loss; or (3) both will occur. This grade is believed to be substantially equivalent to the regulators' classifications of substandard and doubtful. *IMPAIRED - A loan for which it is probable that all amounts due, according to the contractual terms of the loan agreement, will not be collected. *NONACCRUAL -- A loan that is placed on nonaccrual status is not included in any of these six grades, but is placed in a separate nonaccrual category. Commercial and real estate loans are placed on nonaccrual status automatically once they become 90 days or more past due. Based on internal loan classifications. 22 NET CHARGE-OFFS AS A PERCENT OF AVERAGE LOANS (TABLE 13) Net of unearned income 1995 1994 - - -------------------------------------------------------- Commercial and commercial real estate (.03) % .07% Consumer .28 .23 Credit card receivables 3.09 2.49 Permanent mortgage .02 .07 - - -------------------------------------------------------- 23 NONPERFORMING ASSETS AT DECEMBER 31 (TABLE 14)
(Dollars in thousands) 1995 1994 1993 - - -------------------------------------------------------------------------------------------------------------------- AMOUNTS: Impaired loans* $ 11,865 Other nonaccrual loans 7,175 - - --------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 19,040 $ 16,853 $ 27,599 Restructured loans -- 158 1,195 - - --------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 19,040 17,011 28,794 Foreclosed real estate 11,794 19,215 35,048 Other assets 1,022 2,055 1,292 - - --------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 31,856 $ 38,281 $ 65,134 ===================================================================================================================== Non-government guaranteed past due loans** $ 21,942 $ 13,297 $ 13,634 Government guaranteed past due loans** 11,331 10,030 11,560 Past due loans** - - --------------------------------------------------------------------------------------------------------------------- RATIOS***: Nonperforming loans to total loans .23 % .24 % .42 % Nonperforming assets to total loans plus foreclosed real estate and other assets .39 .54 .95 Nonperforming assets and non-government guaranteed past due loans to total loans plus foreclosed real estate and other assets**** .66 .73 1.15 - - --------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1992 1991 1990 - - --------------------------------------------------------------------------------------------------------------------- AMOUNTS: Impaired loans* Other nonaccrual loans - - --------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans $ 32,761 $ 50,729 $ 73,701 Restructured loans 2,493 4,526 1,128 - - --------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 35,254 55,255 74,829 Foreclosed real estate 29,690 45,816 34,101 Other assets 1,292 723 109 - - --------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 66,236 $ 101,794 $ 109,039 ===================================================================================================================== Non-government guaranteed past due loans** $ 15,000 Government guaranteed past due loans** 8,906 Past due loans** $ 23,758 $ 19,732 - - --------------------------------------------------------------------------------------------------------------------- RATIOS***: Nonperforming loans to total loans .69 % 1.13 % 1.60 % Nonperforming assets to total loans plus foreclosed real estate and other assets 1.29 2.07 2.31 Nonperforming assets and non-government guaranteed past due loans to total loans plus foreclosed real estate and other assets**** 1.58 - - --------------------------------------------------------------------------------------------------------------------
* Includes $303,000 of restructured loans. ** Loans that are 90 days or more past due as to principal and/or interest and not yet impaired or on nonaccrual status. Detail on government guaranteed and non-government guaranteed past due loans is unavailable for years prior to 1992. *** Total loans are expressed net of unearned income. **** Not available for years prior to 1992. 24 CHANGES IN NONPERFORMING ASSETS (TABLE 15)
(Dollars in millions) 1995 1994 1993 - - ----------------------------------------------------------- Beginning balance $ 38.3 $ 65.1 $ 67.6 New nonperformers 23.5 18.0 22.4 Acquisitions 1.1 -- 22.8 Return to accrual (.2) (2.0) (3.4) Payments (26.0) (37.5) (31.0) Charge-offs (4.8) (5.3) (13.2) Market writedowns -- -- (.1) - - ------------------------------------------------------------ Ending balance $ 31.9 $ 38.3 $ 65.1 ============================================================
25 SUMMARY OF QUARTERLY FINANCIAL INFORMATION (TABLE 16)
1995 1994 --------------------------------------- ----------------------------------------- FOURTH THIRD SECOND FIRST Fourth Third Second First (Dollars in millions except per share data) QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter - - --------------------------------------------------------------------------------------------------------------------------------- SUMMARY INCOME INFORMATION: Interest income $216.8 $211.5 $202.8 $191.4 $185.6 $179.0 $170.2 $166.3 Interest expense 112.4 112.9 107.4 99.1 90.0 79.7 70.7 66.2 Provision for loan losses 7.3 5.9 3.2 4.2 4.3 4.2 2.9 5.8 Noninterest income before securities transactions 139.2 126.4 114.8 113.7 102.0 105.5 110.4 120.9 Securities gains/(losses) 1.9 -- -- .5 (2.7) .2 7.7 14.7 Noninterest expense 169.1 151.1 145.5 147.9 147.8 145.5 165.4 169.5 Net income 45.7 43.8 40.8 34.6 32.9 37.6 36.8 39.8 - - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE $ .67 $ .65 $ .60 $ .50 $ .48 $ .56 $ .53 $ .58 - - --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK INFORMATION: Closing price per share: High $ 30 7/8 $ 27 13/16 $ 23 1/8 $ 21 1/2 $ 23 3/4 $ 23 7/8 $ 22 5/8 $ 19 7/8 Low 26 3/4 23 1/8 20 5/8 19 5/8 19 7/8 21 3/4 18 7/8 18 11/16 Period-end 30 1/4 27 3/4 23 1/8 20 7/8 20 3/8 22 1/2 21 7/8 19 1/8 Dividends declared per share .265 .235 .235 .235 .235 .21 .21 .21 - - ---------------------------------------------------------------------------------------------------------------------------------
Per share data reflects the 1996 two-for-one stock split. 26 GRAPH TITLE: 1995 Net Interest Income and Net Interest Margin NARRATIVE DESCRIPTION: This is a combination line and bar graph with the x-axis representing 1995 quarterly periods and the left y-axis representing ranges from $0 to $105.8 million and the right y-axis ranges from 0 percent to 4.00 percent. The bars represent the fully taxable equivalent of the net interest income in dollars and the line represents the net interest margin percent. The bars begin in the first quarter of 1995 at $93.5 million and increase to $105.8 million in the fourth quarter of 1995. The net interest margin line begins in the first quarter of 1995 at 3.92 percent, decreases to 3.91 percent in the second quarter, decreases to 3.85 percent in the third quarter and finally increases to 4.00 percent in the fourth quarter of 1995. DATA POINTS: 1995 NET NET QUARTERLY INTEREST INTEREST PERIOD INCOME MARGIN (in millions) ---------- ------------- --------- FIRST $ 93.5 3.92 SECOND 96.6 3.91 THIRD 99.8 3.85 FOURTH 105.8 4.00 27 GLOSSARY ALLOWANCE FOR LOAN LOSSES--Valuation reserve representing the amount considered by management to be adequate to cover estimated losses inherent in the loan portfolio. BASIS POINT--The equivalent of one-hundredth of one percent (0.01). One hundred basis points equals one percent. This unit is generally used to measure movements in interest yields and rates. BASIS RISK--Refers to changes in the relationship between various interest rate segments (e.g. the difference between the Prime and Fed Funds Rates). BOOK VALUE PER SHARE--A ratio determined by dividing assets, net of liabilities, at the end of a period by the number of common shares outstanding at the end of that period. CHARGE-OFFS--The amount charged against the allowance for loan losses to reduce specific loans to their collectible amount. CLASSIFIED LOAN--A loan that has caused management to have serious doubts about the borrower's ability to comply with present repayment terms. Included in this category are grade F performing and nonperforming loans. In compliance with the standards established by the Office of the Comptroller of the Currency (OCC) these loans are classified as substandard, doubtful, and loss depending on the severity of the loan's deterioration. COMMERCIAL AND STANDBY LETTERS OF CREDIT--Commercial letters of credit are issued or confirmed by an entity to ensure the payment of its customers' payables and receivables. Standby letters of credit are issued by an entity to ensure its customers' performance in dealing with others. COMMITMENT TO EXTEND CREDIT--Agreements to make or acquire a loan or lease as long as agreed-upon terms (e.g., expiry, covenants, or notice) are met. Generally these commitments have fixed expiration dates or other termination clauses and may require payment of a fee. CORE DEPOSITS--Core deposits consist of all interest-bearing and noninterest-bearing deposits, except certificates of deposit over $100,000. They include checking interest deposits, money market deposit accounts, time and other savings, plus demand deposits. DERIVATIVE FINANCIAL INSTRUMENT--Futures, forwards, swaps, option contracts, or other financial instruments with similar characteristics, such as interest rate caps or floors, or fixed-rate loan commitments. DIVIDEND PAYOUT RATIO--Cash dividends per share paid as a percent of net income per share. DOUBLE LEVERAGE RATIO--A ratio that measures the degree to which parent company debt supports investments in subsidiaries. It is calculated by dividing the parent company's investment in subsidiaries by total consolidated equity. EARNING ASSETS--Assets that generate interest or dividend income or yield-related fee income, such as loans and investment securities. EARNINGS PER SHARE--Net income, divided by the average number of common shares outstanding in the period. FEDERAL FUNDS SOLD/PURCHASED--Excess balances of depository institutions which are loaned to each other, generally on an overnight basis. FULLY TAXABLE-EQUIVALENT INCOME (FTE)--Income which has been adjusted by increasing tax-exempt income to a level that would yield the same after-tax income had that income been subject to taxation. HEDGE--An instrument used to reduce risk by entering into a transaction which offsets existing or anticipating exposures to changes in interest rates. INTEREST FREE SOURCES--Noninterest bearing liabilities (such as demand deposits, other liabilities, and shareholders' equity) net of nonearning assets (such as cash, fixed assets, and other assets). INTEREST RATE CAPS AND FLOORS--Contracts with notional principal amounts that require the seller, in exchange for a fee, to make payments to the purchaser if a specified market interest rate exceeds a fixed upper "capped" level or falls below a fixed lower "floor" level on specified future dates. INTEREST RATE FORWARD AND FUTURES CONTRACTS--Contracts representing commitments either to purchase or sell at a specified future date a specified security or financial instrument at a specified price, and may be settled in cash or through delivery. These obligations are generally short term in nature. INTEREST RATE OPTION (OPTIONS)--A contract that grants the holder (purchaser), for a fee, the right to either purchase or sell a financial instrument at a specified price within a specified period of time or on a specified date from the writer (seller) of the option. INTEREST RATE SENSITIVITY--The relationship of changes in interest income and interest expense to fluctuations in interest rates over a defined period of time. INTEREST RATE SWAP (SWAP)--An agreement in which two entities agree to exchange, at specified intervals, interest payment streams calculated on an agreed upon notional principal amount with at least one stream based on a floating rate index. 28 INTEREST SENSITIVITY GAP--The difference between interest-rate sensitive assets and interest-rate sensitive liabilities over a designated time period. A net asset position is the amount by which interest-rate sensitive assets exceed interest-rate sensitive liabilities. An excess of liabilities would represent LEVERAGE RATIO -- Tier 1 capital divided by quarterly average assets excluding the adjustment for available for sale securities unrealized gains or losses, goodwill, and certain other intangible assets. LIQUIDITY -- The ability of a corporation to generate adequate funds to meet its cash flow requirements. It is measured by the ability to quickly convert assets into cash with minimal exposure to interest rate risk, by the size and stability of the core deposit base, and by additional borrowing capacity within the money markets. MORTGAGE LOANS SOLD WITH RECOURSE -- Mortgages sold with an agreement to repurchase any loans upon default. MORTGAGE SERVICING RIGHTS -- The right to service mortgage loans, generally owned by someone else, for a fee. Loan servicing includes collecting payments; remitting funds to investors, insurance companies, and taxing authorities; collecting delinquent payments; and foreclosing on properties when necessary. NET INTEREST INCOME (NII) -- Interest income less interest expense. NET INTEREST MARGIN -- A measurement of how effectively the bank utilizes its earning assets in relationship to the interest cost of funding them. It is computed by dividing fully taxable-equivalent net interest income by average interest earning assets. NET INTEREST SPREAD -- The difference between the average yield earned on earning assets on a fully taxable equivalent basis and the average rate paid for interest-bearing liabilities. NONACCRUAL LOANS -- Loans on which interest accruals have been discontinued due to the borrower's financial difficulties. Interest income on these loans is reported on a cash basis as it is collected after recovery of principal. NONPERFORMING ASSETS -- Interest earning assets on which interest income is not being accrued, restructured loans on which interest rates or terms of repayment have been materially revised, real estate properties acquired through foreclosure, and repossessed assets. NOTIONAL PRINCIPAL AMOUNT -- An amount on which interest rate swaps and interest rate options, caps and floors payments are based. The "notional amount" is not paid or received. OPERATING MARGIN (ALSO CALLED RETURN ON REVENUE - ROR) -- A measure of profitability that indicates operational efficiency and productivity. It is calculated by dividing the fully taxable equivalent pre-tax profit before loan loss provision by the fully taxable equivalent net interest income plus noninterest income. PRICE/EARNINGS RATIO -- The relationship of the market price of a share of common stock to the earnings per share of the stock, expressed as a multiple. PROVISION FOR LOAN LOSSES -- The periodic charge to earnings for potential losses in the loan portfolio. PURCHASED FUNDS -- The combination of certificates of deposit greater than $100,000, federal funds purchased, securities sold under agreement to repurchase, commercial paper, and other short-term borrowings. RECOVERIES -- The amount added to the allowance for loan losses when funds are received on a loan which was previously charged off. RESTRUCTURED LOANS -- The institution, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. RETURN ON AVERAGE ASSETS (ROA) -- A measure of profitability that indicates how effectively an institution utilized its assets. It is calculated by dividing annualized net income by total average assets. RETURN ON AVERAGE EQUITY (ROE) -- A measure of profitability that indicates what an institution earned on its shareholders' investment. ROE is calculated by dividing net income by total average shareholders' equity. REVENUE -- The sum of net interest income and noninterest income. For some comparisons, securities gains/losses are excluded. RISK-ADJUSTED ASSETS -- A regulatory risk-based capital measure for assessing capital adequacy that takes into account the broad differences in risks among a banking organization's assets and off-balance sheet instruments. RISK-BASED CAPITAL RATIOS -- Regulatory ratios of capital to assets, including assets not reflected on the balance sheet, which have been adjusted to reflect the risk profile of such assets. TIER 1 CAPITAL ratio consists of shareholders' equity before any adjustments for available for sale securities unrealized gains (losses) reduced by goodwill and certain other intangible assets divided by risk-adjusted assets, while TOTAL CAPITAL ratio is Tier 1 capital plus the allowable portion of the allowance for loan losses and qualifying subordinated debt divided by risk-adjusted assets. 29 SECURITIES AVAILABLE FOR SALE -- Investment Securities that will be held for indefinite periods of time and which may be sold as part of the bank's asset/liability strategy. SECURITIES HELD TO MATURITY -- Investment securities that the bank has the ability and the intent to hold until maturity. WATCH LIST LOANS -- Identified loans graded D and E requiring a closer level of monitoring due to some of the following circumstances: impact of negative economic conditions; changes in company ownership; underwriting exceptions; and reduction in the value of collateral. 30
CONSOLIDATED STATEMENTS OF CONDITION First Tennessee National Corporation - - ----------------------------------------------------------------------------------------------------- December 31 --------------------------- (Dollars in thousands) 1995 1994 - - ----------------------------------------------------------------------------------------------------- ASSETS: Cash and due from banks $ 710,870 $ 724,828 Federal funds sold and securities purchased under agreements to resell 64,978 253,124 - - ----------------------------------------------------------------------------------------------------- Total cash and cash equivalents 775,848 977,952 - - ----------------------------------------------------------------------------------------------------- Investment in bank time deposits 2,119 2,534 Broker/dealer securities inventory 182,655 170,031 Securities available for sale 2,036,668 1,166,738 Securities held to maturity (market value of $75,750 at December 31, 1995, and $951,444 at December 31,1994) 74,731 1,004,177 Loans, net of unearned income 8,122,466 7,013,449 Less: Allowance for loan losses 112,567 109,859 - - ----------------------------------------------------------------------------------------------------- Total net loans 8,009,899 6,903,590 - - ----------------------------------------------------------------------------------------------------- Premises and equipment, net 177,400 159,036 Real estate acquired by foreclosure 11,794 19,215 Intangible assets 128,985 91,725 Mortgage servicing rights 149,220 72,722 Bond division receivables and other assets 527,563 365,229 - - ----------------------------------------------------------------------------------------------------- TOTAL ASSETS $12,076,882 $10,932,949 ===================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Demand $ 1,983,994 $ 1,733,336 Checking/Interest 103,860 508,741 Savings 592,320 605,388 Money market account 2,499,817 1,819,825 Certificates of deposit under $100,000 and other time 2,882,094 2,771,012 Certificates of deposit $100,000 and more 520,112 442,004 - - ----------------------------------------------------------------------------------------------------- Total deposits 8,582,197 7,880,306 - - ----------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 1,674,225 1,457,517 Commercial paper and other short-term borrowings 86,520 352,522 Bond division payables and other liabilities 600,699 353,928 Term borrowings 260,017 113,771 - - ----------------------------------------------------------------------------------------------------- Total liabilities 11,203,658 10,158,044 - - ----------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY: Preferred stock - no par value (5,000,000 shares authorized, but unissued) -- -- Common stock - $1.25 par value (shares authorized - 200,000,000; shares issued - 67,178,236 at December 31, 1995, and 68,147,916 at December 31, 1994) 83,973 85,185 Capital surplus 63,610 91,558 Undivided profits 716,861 625,231 Unrealized market adjustment on available for sale securities 10,582 (24,273) Deferred compensation on restricted stock incentive plan (1,802) (2,796) - - ----------------------------------------------------------------------------------------------------- Total shareholders' equity 873,224 774,905 - - ----------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,076,882 $10,932,949 =====================================================================================================
See accompanying notes to consolidated financial statements. 31
CONSOLIDATED STATEMENTS OF INCOME First Tennessee National Corporation - - -------------------------------------------------------------------------------------------------- Year Ended December 31 --------------------------------------------- (Dollars in thousands except per share data) 1995 1994 1993 - - -------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $ 665,727 $ 546,385 $ 455,988 Interest on investment securities: Taxable 130,830 128,895 175,828 Tax-exempt 4,621 5,139 7,204 Interest on broker/dealer securities inventory 12,630 12,810 9,304 Interest on other earning assets 8,720 7,829 3,899 - - -------------------------------------------------------------------------------------------------- Total interest income 822,528 701,058 652,223 - - -------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on deposits: Checking/Interest 7,734 9,174 10,786 Savings 10,789 13,453 15,445 Money market account 88,090 56,480 43,526 Certificates of deposit under $100,000 and other time 167,850 122,037 117,270 Certificates of deposit $100,000 and more 30,579 18,666 16,194 Interest on short-term borrowings 108,815 77,216 63,282 Interest on term borrowings 18,018 9,571 9,637 - - -------------------------------------------------------------------------------------------------- Total interest expense 431,875 306,597 276,140 - - -------------------------------------------------------------------------------------------------- NET INTEREST INCOME 390,653 394,461 376,083 Provision for loan losses 20,592 17,182 36,461 - - -------------------------------------------------------------------------------------------------- NET INEREST INCOME AFTER PROVISION FOR LOAN LOSSES 370,061 377,279 339,622 - - -------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Mortgage banking 212,579 187,340 138,960 Bond division 82,814 77,478 91,525 Deposit transactions and cash management 70,957 64,169 58,377 Cardholder and merchant processing 36,984 31,402 28,467 Trust services 35,632 28,933 26,532 Equity securities gains/(losses) 3,195 24,251 (479) Debt securities gains/(losses) (751) (4,298) 1,371 All other 55,153 49,464 45,168 - - -------------------------------------------------------------------------------------------------- Total noninterest income 496,563 458,739 389,921 - - -------------------------------------------------------------------------------------------------- ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 866,624 836,018 729,543 - - -------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Employee compensation, incentives, and benefits 340,508 349,769 308,601 Operations services 38,798 33,679 28,705 Occupancy 37,867 34,102 27,673 Equipment rentals, depreciation, and maintenance 31,845 29,202 22,246 Communications and courier 29,880 30,653 24,775 Amortization of mortgage servicing rights 14,980 14,936 25,478 Legal and professional fees 13,403 13,747 11,274 Advertising and public relations 12,972 10,678 7,987 Deposit insurance premium 9,957 16,923 16,585 Amortization of intangible assets 8,100 6,406 5,871 All other 75,357 88,161 75,183 - - -------------------------------------------------------------------------------------------------- Total noninterest expense 613,667 628,256 554,378 - - -------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 252,957 207,762 175,165 Applicable income taxes 88,069 60,694 65,449 - - -------------------------------------------------------------------------------------------------- NET INCOME $ 164,888 $ 147,068 $ 109,716 ================================================================================================== NET INCOME PER COMMON SHARE $ 2.42 $ 2.15 $ 1.61 - - -------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING 68,024,794 68,441,382 68,145,768 - - --------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 32 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY First Tennessee National Corporation - - --------------------------------------------------------------------------------------------------------------
Common Common Capital Undivided (Dollars in thousands) Shares Total Stock Surplus Profits - - -------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1992 63,955,238 $ 630,244 $79,944 $ 88,294 $463,442 Adjustments for poolings of interests 3,914,448 19,998 4,893 10,417 4,688 - - -------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1992, RESTATED 67,869,686 650,242 84,837 98,711 468,130 Net income -- 109,716 -- -- 109,716 Cash dividends declared -- (43,582) -- -- (43,582) Common stock issued: For exercise of stock options 231,508 2,093 289 1,804 -- Restricted: employee benefit plan 119,282 -- 149 2,132 -- incentive to non-employee directors 3,000 -- 4 51 -- Converted subordinated debt 576,898 3,860 721 3,139 -- Common stock repurchased (241,100) (4,797) (301) (4,496) -- Amortization of deferred compensation on restricted stock incentive plan -- 1,397 -- -- -- Other -- 2,179 -- 2,439 (260) - - -------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1993, RESTATED 68,559,274 721,108 85,699 103,780 534,004 Net income -- 147,068 -- -- 147,068 Cash dividends declared -- (55,871) -- -- (55,871) Common stock issued: Emerald Mortgage Company acquisition 303,852 7,105 380 6,725 -- For exercise of stock options 321,914 2,808 402 2,406 -- Restricted: employee benefit plan 90,000 -- 113 1,603 -- incentive to non-employee directors 3,300 -- 4 75 -- Common stock repurchased (1,137,816) (26,583) (1,422) (25,161) -- Change in unrealized market adjustment on available for sale securities -- (24,273) -- -- -- Amortization of deferred compensation on restricted stock incentive plan -- 1,374 -- -- -- Other 7,392 2,169 9 2,130 30 - - -------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1994 68,147,916 774,905 85,185 91,558 625,231 Adjustment related to change in reporting date for acquisition accounted for as a pooling of interests -- (7,757) -- -- (7,757) - - -------------------------------------------------------------------------------------------------------------- ADJUSTED BALANCE, JANUARY 1, 1995 68,147,916 767,148 85,185 91,558 617,474 Net income -- 164,888 -- -- 164,888 Cash dividends declared -- (65,576) -- -- (65,576) Common stock issued: Peoples Commercial Services Corporation acquisition 841,810 17,865 1,052 16,813 -- Financial Investment Corp. acquisition 2,565,482 69,997 3,207 66,790 -- For exercise of stock options 437,778 4,834 547 4,287 -- Restricted employee benefit plan 8,200 -- 11 160 -- Common stock repurchased (4,827,108) (122,796) (6,034) (116,762) -- Change in unrealized market adjustment on available for sale securities -- 34,855 -- -- -- Amortization of deferred compensation on restricted stock incentive plan -- 1,165 -- -- -- Other 4,158 844 5 764 75 - - -------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 67,178,236 $ 873,224 $83,973 $ 63,610 $716,861 ==============================================================================================================
33 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - - ----------------------------------------------------------------
Unrealized Deferred Market Compen- (Dollars in thousands) Adjustment sation - - ---------------------------------------------------------------- BALANCE, DECEMBER 31, 1992 $ -- $ (1,436) Adjustments for poolings of interests -- -- - - ---------------------------------------------------------------- BALANCE, DECEMBER 31, 1992, RESTATED -- (1,436) Net income -- -- Cash dividends declared -- -- Common stock issued: For exercise of stock options -- -- Restricted: employee benefit plan -- (2,281) incentive to non-employee directors -- (55) Converted subordinated debt -- -- Common stock repurchased -- -- Amortization of deferred compensation on restricted stock incentive plan -- 1,397 Other -- -- - - ---------------------------------------------------------------- BALANCE, DECEMBER 31, 1993, RESTATED -- (2,375) Net income -- -- Cash dividends declared -- -- Common stock issued: Emerald Mortgage Company acquisition -- -- For exercise of stock options -- Restricted: employee benefit plan -- (1,716) incentive to non-employee directors -- (79) Common stock repurchased -- -- Change in unrealized market adjustment on available for sale securities (24,273) -- Amortization of deferred compensation on restricted stock incentive plan -- 1,374 Other -- -- - - ---------------------------------------------------------------- BALANCE, DECEMBER 31, 1994 (24,273) (2,796) Adjustment related to change in reporting date for acquisition accounted for as a -- -- pooling of interests - - ---------------------------------------------------------------- ADJUSTED BALANCE, JANUARY 1, 1995 (24,273) (2,796) Net income -- -- Cash dividends declared -- -- Common stock issued: Peoples Commercial Services Corporation acquisition -- -- Financial Investment Corp. acquisition -- -- For exercise of stock options -- -- Restricted employee benefit plan -- (171) Common stock repurchased -- -- Change in unrealized market adjustment on available for sale securities 34,855 -- Amortization of deferred compensation on restricted stock incentive plan -- 1,165 Other -- -- - - ---------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 $ 10,582 $ (1,802) ================================================================
See accompanying notes to consolidated financial statements. 34
CONSOLIDATED STATEMENTS OF CASH FLOWS First Tennessee National Corporation - - -------------------------------------------------------------------------------------------------- Year Ended December 31 ---------------------------------- (Dollars in thousands) 1995 1994 1993 - - -------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $164,888 $147,068 $ 109,716 Adjustments to reconcile net income to net cash provided/(used) by operating activities: Provision for loan losses 20,592 17,182 36,461 Provision/(benefit) for deferred income tax 33,508 (3,036) (2,228) Depreciation and amortization of premises and equipment 25,289 21,081 17,311 Amortization of mortgage servicing rights 14,980 14,936 25,478 Amortization of intangibles 8,100 6,406 5,871 Net amortization of premiums and accretion of discounts 20,575 13,695 25,542 Market value adjustment on foreclosed property 4,266 1,808 927 Market value adjustment on securities held for sale -- -- (248) Securities contributed to charitable trust -- 9,379 -- Equity securities/(gains) losses (3,195) (24,251) 479 Debt securities/(gains) losses 751 4,298 (1,123) Net gain on disposal of branch -- -- (672) Net (gain)/loss on disposal of fixed assets 1,421 108 (709) Net (increase)/decrease in: Broker/dealer securities inventory (12,624) 8,632 9,944 Mortgage warehouse loans held for sale (273,217) 748,002 (488,893) Bond division receivables (34,024) 39,667 (30,178) Interest receivable (5,145) (6,237) 9,245 Other assets (266,296) (7,784) (93,541) Net increase/(decrease) in: Bond division payables 39,104 (50,511) 30,760 Interest payable 18,046 14,492 713 Other liabilities 152,854 (54,526) 48,638 - - -------------------------------------------------------------------------------------------------- Total adjustments (255,015) 753,341 (406,223) - - -------------------------------------------------------------------------------------------------- Net cash (used)/provided by operating activities (90,127) 900,409 (296,507) - - -------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Proceeds from maturities of: Held to maturity securities 89,457 352,299 -- Available for sale securities 189,229 299,928 -- Investment securities -- -- 1,618,957 Proceeds from sale of: Available for sale securities 443,135 423,817 -- Debt securities -- -- 481,173 Equity securities -- -- 6,248 Premises and equipment 2,756 1,320 1,284 Payments for purchase of: Held to maturity securities (38,709) (488,710) -- Available for sale securities (375,926) (416,288) -- Debt securities -- -- (1,290,599) Equity securities -- -- (17,597) Premises and equipment (38,545) (40,045) (35,216) Net increase in loans (658,230) (940,878) (754,120) Decrease/(increase) in investment in bank time deposits 415 5,103 (2,484) Branch sale, including cash and cash equivalents sold -- -- (18,339) Acquisitions, net of cash and cash equivalents acquired 58,527 130 (102,577) - - -------------------------------------------------------------------------------------------------- Net cash used by investing activities (327,891) (803,324) (113,270) - - -------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from: Exercise of stock options 4,977 2,777 2,052 Issuance of long-term debt 164,182 2,984 -- Payments for: Capital lease obligations (234) (233) (232) Long-term debt (18,035) (1,346) (37,971) Stock repurchase (122,796) (26,583) (4,797) Cash dividends (62,694) (41,022) (51,970) Equity distributions related to acquisitions (23) (47) -- Net increase/(decrease) in: Deposits 306,737 277,653 226,056 Short-term borrowings (56,200) (127,949) 240,697 - - -------------------------------------------------------------------------------------------------- Net cash provided by financing activities 215,914 86,234 373,835 - - -------------------------------------------------------------------------------------------------- Net increase/(decrease) in cash and cash equivalents (202,104) 183,319 (35,942) - - -------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 977,952 794,633 830,575 - - -------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $775,848 $977,952 $ 794,633 ================================================================================================== Total interest paid $396,063 $291,985 $ 273,704 Total income taxes paid 53,065 69,036 72,590 - - -------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 35 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of First Tennessee National Corporation (First Tennessee) and its subsidiaries conform to generally accepted accounting principles and, as to its banking subsidiaries, with general practice within the banking industry. First Tennessee offers a full range of banking and bank-related services. First Tennessee's banking subsidiaries offer general banking products in 21 Tennessee counties including the five major metropolitan areas and in northern Mississippi and northwest Arkansas. Mortgage banking provides services in 28 states. First Tennessee offers related financial services including bond broker, agency, capital markets services, merchant credit card processing, nationwide check clearing, integrated check processing solutions, trust services, brokerage, venture capital, and credit life insurance. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of First Tennessee and its banking and non-banking subsidiaries more than 50 percent owned. Subsidiaries not more than 50 percent owned are recorded using the equity method. All significant intercompany accounts and transactions have been eliminated. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet dates and revenues and expenses for the periods shown. Actual results could differ from the estimates and assumptions used in the consolidated financial statements. BASIS OF PRESENTATION. Prior period financial statements are restated to include the accounts of companies that are acquired and accounted for as poolings of interests. Business combinations accounted for as purchases are included in the consolidated financial statements from the respective dates of acquisition. The consolidated financial statements for prior periods also reflect certain reclassifications to conform to current presentation. None of these reclassifications had any effect on net income or earnings per share. STATEMENTS OF CASH FLOWS. Cash and cash equivalents as presented in the statements include cash and due from banks, federal funds sold, and securities purchased under agreements to resell. Generally, federal funds are sold for one-day periods and securities purchased under agreements to resell are short-term, highly liquid investments. The following significant stock transactions have been adjusted for a two-for-one stock split that First Tennessee effected in February 1996. In 1995, First Tennessee issued approximately 7,980,000 shares of its common stock related to the acquisitions of Carl I. Brown and Company, Community Bancshares, Inc., Peoples Commercial Services Corporation, and Financial Investment Corp. In 1994, First Tennessee issued approximately 7,716,000 shares of its common stock related to the acquisitions of SNMC Management Corporation, Highland Capital Management Corp., Cleveland Bank and Trust Company, Planters Bank, and Emerald Mortgage Company. In 1993, approximately 298,000 shares of First Tennessee common stock were issued in exchange for all of the common stock of New South Bancorp (see Note 2 - Business Combinations). BROKER/DEALER SECURITIES INVENTORY. Securities purchased in connection with underwriting or dealer activities are carried at market value. Realized and unrealized gains and losses on these securities are reflected in noninterest income as bond division income. SECURITIES HELD TO MATURITY. Securities which First Tennessee has the ability and positive intent to hold to maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income. Realized gains and losses and unrealized permanent impairments in value are reported in noninterest income. SECURITIES AVAILABLE FOR SALE. Securities available for sale include both debt and equity securities and are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity. Gains and losses from sales are computed by the specific identification method and are reported in noninterest income. MORTGAGE WAREHOUSE LOANS HELD FOR SALE. Mortgage loans that are originated and held for sale to investors are classified as held for sale. These assets are recorded at the lower of cost or market value as determined using aggregated methodology. Gains and losses realized from the sale of these assets and adjustments to market value are included in noninterest income. 36 LOANS. Loans are stated at principal amounts outstanding net of unearned income. Interest on certain consumer installment loans is recognized by the sum-of-the-months-digits method which does not differ materially from the effective interest method. Interest on other loans is recognized at the applicable interest rate on the principal amount outstanding. Included in nonperforming loans are impaired loans, as defined in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," and other nonaccrual loans. Also included are loans which have been restructured in accordance with criteria in SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructuring." Impaired loans are generally carried on a nonaccrual status. Loans generally are placed on nonaccrual status when the collection of principal or interest is 90 days or more past due or when, in management's judgment, such principal or interest will not be collectible in the ordinary course of business. Consumer installment loans and credit card receivables are not placed on nonaccrual status, but are charged off when past due 120 days and 180 days, respectively. When interest accrual is stopped, outstanding accrued interest receivable is reversed and charged to current operations. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to recover the principal balance and accrued interest. Generally, interest payments received on nonaccrual loans are applied to principal. Once all principal has been received, additional interest payments are recognized as interest income on a cash basis. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is a valuation reserve available for losses incurred on loans. All losses of principal are charged to the account when the loss actually occurs or when a determination is made that a loss is probable. Additions are made to the reserve through periodic provisions charged to current operations or recovery of principal on loans previously charged off. The determination of the balance of the allowance for loan losses is based upon a review and analysis of the loan portfolio. Management's objective in determining the level of the allowance is to maintain a reserve which is adequate to absorb losses inherent in the portfolio. Their assessment includes the systematic evaluation of several factors: current and anticipated economic conditions and their impact on specific borrowers and industry groups; the level of classified and nonperforming loans; the historical loss experience by loan type; the results of regulatory examinations of the portfolio; and, in specific cases, the estimated value of underlying collateral. PREMISES AND EQUIPMENT. Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation expense is computed principally on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line method over the lease periods or the estimated useful lives, whichever is shorter. Estimated useful lives are 10 to 45 years for premises and three to eight years for equipment. Depreciation and amortization expense is included in noninterest expense. Maintenance agreements are primarily amortized to expense over the period of time covered. The cost of major renovations is capitalized. All other maintenance and repair expenditures are expensed as incurred. Gains and losses on dispositions are reflected in noninterest income and expense. REAL ESTATE ACQUIRED BY FORECLOSURE. Real estate acquired by foreclosure represents assets that have been acquired in satisfaction of debt. Property is carried at the lower of the outstanding loan amount or the estimated fair market value minus estimated cost to sell the real estate. Any excess of loan amount over the estimated net realizable fair value at the time of acquisition is charged to the allowance for loan losses. Required developmental costs associated with foreclosed property under construction are capitalized and considered in determining the estimated net realizable fair value of the property. The estimated net realizable fair value is reviewed periodically and any write-downs are charged against current earnings as market adjustments. INTANGIBLE ASSETS. Intangible assets represent the premium on purchased deposits and assets and the excess of cost over net assets of acquired subsidiaries (goodwill). The "Premium on purchased deposits and assets" represents identified intangible assets, which are amortized over their estimated useful lives, with the exception of those assets related to deposit bases which are primarily amortized over a 10-year period. Goodwill is being 37 amortized using the straight-line method over periods ranging from 15 to 40 years. Management evaluates whether events or circumstances have occurred that would result in impairment in the value or life of goodwill. If such events or circumstances should occur, First Tennessee would use internally generated management reports to determine the related business contribution to the overall profitability of the corporation in revising the value and remaining life to the related goodwill. CAPITALIZED MORTGAGE SERVICING RIGHTS. In May 1995, the Financial Accounting Standards Board issued SFAS No. 122, "Accounting for Mortgage Servicing Rights an amendment of FASB Statement No. 65." SFAS No. 122, among other provisions, requires the recognition of originated mortgage servicing rights (OMSRs), as well as purchased mortgage servicing rights (PMSRs), as assets by allocating the total cost incurred between the loan and the servicing right based on their relative fair value. Under SFAS No. 65, the cost of the OMSRs was included with the cost of the related loans and written off against proceeds when the loans were sold. PMSRs were previously recorded as assets under SFAS No. 65. First Tennessee elected to adopt this statement as of January 1, 1995. SFAS No. 122 prohibits retroactive application; therefore, First Tennessee's financial reporting for prior periods was accounted for under the original SFAS No. 65. The value of pre-SFAS No. 122 PMSRs was established using the lesser of: a discounted cash flow analysis; current market value; or the amount of consideration specifically paid by First Tennessee. The PMSRs were being amortized using an accelerated method over the estimated life of the servicing income. A quarterly value impairment analysis was performed using a discounted methodology that was disaggregated by purchase transaction. This was the basis of presentation for years prior to 1995. During 1995, the value of OMSRs was established by allocating the total costs incurred between the loan and the servicing rights based on their relative fair values. To determine the fair value of the servicing rights created, First Tennessee uses the market prices under current sales contracts which are tested against prices obtained from flow and bulk purchasers of servicing and prices determined using a valuation model that calculates the present value of future cash flows. For purposes of impairment evaluation and measurement, the mortgage servicing rights are stratified based on the predominant risk characteristics of the underlying loans. For First Tennessee these risk characteristics include adjustable rate conventional and government; fixed rate conventional and government by interest rate band; and multifamily. In addition the pre-SFAS No. 122 PMSRs have been restratified using the same risk characteristics with the reallocated basis being determined by current discount cash flow analysis. The combined PMSRs and OMSRs are being amortized as noninterest expense over the period of and in proportion to the estimated net servicing revenues. A quarterly value impairment analysis is performed using a discounted cash flow methodology that is disaggregated by predominant risk characteristics. Impairment shall be recognized through a valuation allowance for individual stratum. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. First Tennessee utilizes a variety of off-balance sheet financial instruments to manage various financial risks. These instruments include interest rate swaps, futures, forwards, and option contracts. To qualify as a hedge used to manage interest rate risk, the following criteria must be met: (1) the asset or liability to be hedged exposes the institution to interest rate risk; (2) the instrument alters or reduces sensitivity to interest rate changes; and (3) the instrument is designated and effective as a hedge. For interest rate swaps used to hedge interest rate risk, income and expense is accrued and recognized as an adjustment to the interest income or expense of the related on-balance sheet asset or liability. Fees on interest rate swaps are deferred and amortized over the lives of the contracts. Realized gains and losses on all off-balance sheet transactions used to manage interest rate risk that are terminated prior to maturity are deferred and amortized as an adjustment to the hedged asset or liability, over the remaining original life of the agreement. For interest rate forwards, futures, and options used to hedge interest rate risk, gains and losses on contracts applicable to certain interest sensitive assets and liabilities are deferred and amortized over the lives of the hedged assets and liabilities as an adjustment to interest income and expense. Any contracts that fail to qualify for hedge accounting are included in current earnings in noninterest income. Customer related swaps are recorded at market value with changes in market value recognized in noninterest income. Off-balance sheet financial instruments held or issued by the bond division are valued at prevailing market rates on a present value basis. Realized and unrealized gains and losses are included in noninterest income as bond division income. 38 Realized and unrealized gains and losses related to foreign currency exchange agreements with customers are included in noninterest income as foreign exchange income. TRUST SERVICES INCOME. Prior to January 1, 1995, trust services income was reported on a cash basis, which was not materially different from the accrual basis. INCOME TAXES. The provision for income taxes is based on income reported for consolidated financial statement purposes and includes deferred taxes resulting from the recognition of certain revenues and expenses in different periods for tax reporting purposes. First Tennessee files consolidated federal and state income tax returns with the exception of two credit life insurance companies that file separate returns. INCOME PER SHARE. Per share amounts for all periods presented have been computed based on the weighted average number of common shares outstanding for each period. Options granted under the stock option plans are not included in the computation since their dilutive effect is not material. Previously reported per share amounts have been restated for the effect of acquisitions accounted for as poolings of interests. All references to per share amounts for all years presented have been adjusted for the two-for-one stock split on February 16, 1996. 39 NOTE 2 -- BUSINESS COMBINATIONS All of the share information provided in this footnote has been adjusted to reflect the two-for-one stock split effected by First Tennessee in February 1996. Additional information including asset size and origination volume can be found in Table 1 - Acquisitions in the Management Discussion and Analysis. The following acquisitions occurred during 1995 and were accounted for as poolings of interests; therefore, the financial statements for all periods presented reflect the combined companies. On January 3, 1995, First Tennessee acquired for approximately 1,731,000 shares of its common stock all of the outstanding capital stock of Carl I. Brown and Company (Carl I. Brown), a mortgage company in Kansas City, Missouri. Carl I. Brown became a wholly owned subsidiary of First Tennessee Bank National Association (FTBNA), the principal subsidiary of First Tennessee. On February 24, 1995, First Tennessee acquired for approximately 2,842,000 shares of its common stock all of the outstanding capital stock of Community Bancshares, Inc. (CBI), of Germantown, Tennessee. CBI, the parent company of Community First Bank, merged into First Tennessee, and Community First Bank merged into FTBNA. The following presents certain financial data pertaining to the combination of First Tennessee with Carl I. Brown and CBI for the years ended 1994 and 1993:
(Dollars in thousands, except per share data) 1994 1993 - - ------------------------------------------------------------------------------------ TOTAL REVENUE:* First Tennessee, as originally reported $769,735 $698,265 Carl I. Brown** 71,138 55,975 CBI 12,420 11,764 Eliminations (93) -- - - ------------------------------------------------------------------------------------ First Tennessee $853,200 $766,004 ==================================================================================== NET INCOME: First Tennessee, as originally reported $146,349 $106,082 Carl I. Brown** (1,882) 1,328 CBI 2,601 2,306 - - ------------------------------------------------------------------------------------ First Tennessee $147,068 $109,716 ==================================================================================== NET INCOME PER SHARE: First Tennessee, as originally reported $ 2.28 $ 1.66 Carl I. Brown** (10.89) 7.68 CBI .81 .81 First Tennessee 2.15 1.61 - - ------------------------------------------------------------------------------------
* Total revenue is net interest income and noninterest income. ** Twelve months ended for Carl I. Brown is October 31. Carl I. Brown had a fiscal reporting period ending October 31, and the results of its operations for the two-month period ended December 31, 1994, are not included in the Consolidated Statements of Income. These results were recognized directly through an adjustment to beginning retained earnings for 1995 on the Consolidated Statements of Shareholders' Equity. The following presents certain financial data for Carl I. Brown's two-month period ended December 31, 1994:
For the Two Months Ended (Dollars in thousands) December 31, 1994 - - --------------------------------------------------------------------------- Total revenue* $ 6,425 Total expense** 14,182 - - --------------------------------------------------------------------------- Net income $(7,757) ===========================================================================
* Total revenue is net interest income and noninterest income. ** Total expense includes income tax expense. The following acquisitions occurred in 1995 and were accounted for as purchases. Accordingly, the purchase price has been allocated to the acquired assets and liabilities at their respective estimated fair values at the date of acquisition. This allocation has been based on preliminary estimates which may be revised at a later date. The operating results of these acquisitions are included in First Tennessee's consolidated results of operations from the date of acquisition. On April 1, 1995, First Tennessee acquired for approximately 842,000 shares 40 of its common stock all of the outstanding shares of Peoples Commercial Services Corporation (Peoples), parent company of Peoples Bank, headquartered in Senatobia, Mississippi. As approved by the First Tennessee Board of Directors, the shares issued in this transaction had been repurchased in the open market. Peoples was merged with and into First Tennessee while Peoples Bank became a wholly owned subsidiary of First Tennessee. The cost of the acquisition, totaling approximately $17.9 million of First Tennessee's common stock, exceeded the estimated net fair value of tangible assets and liabilities acquired by approximately $9.5 million. Intangible assets totaling approximately $2.7 million have been identified and are being amortized over the expected useful lives of the individual components. The excess of consideration paid over the estimated net fair value of the tangible and intangible assets acquired, totaling approximately $6.8 million, has been recorded as goodwill and is being amortized using the straight-line method over 25 years. On October 1, 1995, First Tennessee acquired for approximately 2,565,000 shares of its common stock all of the outstanding shares of Financial Investment Corp. (FIC), parent company of First National Bank of Springdale (FNB), headquartered in Springdale, Arkansas. As approved by the First Tennessee Board of Directors, the shares issued in this transaction had been repurchased in the open market. FIC was merged with and into First Tennessee while FNB became a wholly owned subsidiary of First Tennessee. The cost of the acquisition, totaling approximately $70.0 million of First Tennessee's common stock, exceeded the estimated net fair value of tangible assets and liabilities acquired by approximately $27.2 million. Intangible assets totaling approximately $9.2 million have been identified and are being amortized over the expected useful lives of the individual components. The excess of consideration paid over the estimated net fair value of the tangible and intangible assets acquired, totaling approximately $18.0 million, has been recorded as goodwill and is being amortized using the straight-line method over 25 years. The following presents on a proforma basis certain financial data pertaining to the Peoples and FIC transactions as if they had been acquired at the beginning of the periods. The proforma results presented are not necessarily indicative of the future results of operations of the combined company or the results of operations that would have actually occurred had the merger been in effect for the periods presented.
(Dollars in thousands, except per share data) 1995 1994 - - ------------------------------------------------------------------------------------- TOTAL REVENUE:* First Tennessee, as originally reported $887,216 $769,735 Peoples 1,232 3,679 FIC 10,312 14,801 Purchase accounting adjustments (1,674) (3,503) - - ------------------------------------------------------------------------------------- First Tennessee proforma $897,086 $784,712 ===================================================================================== NET INCOME: First Tennessee, as originally reported $164,888 $146,349 Peoples 430 919 FIC 2,158 4,695 Purchase accounting adjustments (1,896) (3,728) - - ------------------------------------------------------------------------------------- First Tennessee proforma $165,580 $148,235 ===================================================================================== NET INCOME PER SHARE: First Tennessee, as originally reported $ 2.42 $ 2.28 Peoples 3.23 6.91 FIC 1.21 2.63 First Tennessee proforma 2.36 2.32 - - -------------------------------------------------------------------------------------
*Total revenue is net interest income and noninterest income. On July 1, 1995, First Tennessee acquired certain assets and certain liabilities of HomeBanc Mortgage Corporation (HomeBanc) of Atlanta, Georgia, for approximately $6.7 million. HomeBanc was merged into Sunbelt National Mortgage Corporation. This acquisition was accounted for as a purchase and was immaterial to First Tennessee. The following four acquisitions occurred in 1994 and were accounted for as poolings of interests; therefore, the financial statements for all periods presented reflect the combined companies. On January 4, 1994, First Tennessee acquired for approximately 3,502,000 shares of its common stock all of the outstanding capital stock of SNMC Management Corporation (SNMC). SNMC, the parent of Sunbelt National Mortgage Corporation headquartered in Dallas, Texas, became a wholly owned subsidiary of FTBNA. 41 On March 1, 1994, First Tennessee acquired for approximately 936,000 shares of its common stock all of the outstanding shares of Highland Capital Management Corp. (HCMC). HCMC merged with First Tennessee Investment Management, Inc., a wholly owned subsidiary of First Tennessee. The combined organization became a wholly owned subsidiary of First Tennessee with the name Highland Capital Management Corp. First Tennessee acquired Cleveland Bank and Trust Company (CBT) of Cleveland, Tennessee, on March 16, 1994, for approximately 2,306,000 shares of its common stock and acquired Planters Bank (Planters) of Tunica, Mississippi, on August 9, 1994, for approximately 668,000 shares of its common stock. Both of these banks became wholly owned subsidiaries of First Tennessee. On October 1, 1994, First Tennessee acquired Emerald Mortgage Company (Emerald) of Lynnwood, Washington, for approximately 304,000 shares of its common stock. Emerald was merged into SNMC. This acquisition was accounted for as a purchase and was immaterial to First Tennessee. On December 31, 1993, First Tennessee acquired for approximately 298,000 shares of its common stock all of the outstanding shares of New South Bancorp (NSB), a Mississippi bank holding company. NSB was merged with and into First Tennessee. At the same time NSB's principal subsidiary, New South Bank, was merged with and into First Tennessee Bank National Association Mississippi, a wholly owned subsidiary of First Tennessee. The consolidated financial statements of First Tennessee give effect to the merger which was accounted for as a pooling of interests. Due to immateriality, the transaction has been recorded by a restatement of beginning shareholders' equity without restating income statements for years prior to 1993. On October 1, 1993, FTBNA acquired for cash Maryland National Mortgage Corporation (MNMC) headquartered in Baltimore, Maryland. In 1994, MNMC changed its name to MNC Mortgage Corp. The acquisition has been accounted for as a purchase and accordingly, the purchase price has been allocated to the acquired assets and liabilities at their respective estimated fair values at the date of acquisition. The operating results of this acquisition are included in First Tennessee's consolidated results of operations from the date of acquisition. The cost of the acquisition, totaling approximately $114.8 million, exceeded the estimated net fair value of tangible assets and liabilities acquired by approximately $75.0 million. Intangible assets totaling approximately $31.9 million have been identified and are being amortized over the expected useful lives of the individual components. The excess of the consideration paid over the estimated net fair value of the tangible and intangible assets acquired, totaling approximately $43.1 million, has been recorded as goodwill and is being amortized using the straight-line method over 25 years. 42 NOTE 3 -- INVESTMENT SECURITIES Reconciliations of the amortized cost to the estimated market values of investments in securities at December 31, 1995, are provided below. Also provided are the amortized cost and estimated market value by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. SECURITIES HELD TO MATURITY
Gross Gross Estimated Amortized Unrealized Unrealized Market (Dollars in thousands) Cost Gains Losses Value - - ------------------------------------------------------------------------------------ AT DECEMBER 31, 1995: States and municipalities $ 74,731 $ 1,289 $ (270) $ 75,750 - - ------------------------------------------------------------------------------------ Estimated BY CONTRACTUAL MATURITY Amortized Market (Dollars in thousands) Cost Value - - ------------------------------------------------------------------------------------ AT DECEMBER, 1995: Within 1 year $ 9,493 $ 9,556 After 1 year; within 5 years 18,944 19,224 After 5 years; within 10 years 20,274 20,658 After 10 years 26,020 26,312 - - ------------------------------------------------------------------------------------ Total $ 74,731 $ 75,750 ====================================================================================
SECURITIES AVAILABLE FOR SALE
Gross Gross Estimated Amortized Unrealized Unrealized Market (Dollars in thousands) Cost Gains Losses Value - - ------------------------------------------------------------------------------------ AT DECEMBER 31, 1995: U.S. Treasury and other U.S. government agencies $ 271,260 $ 3,289 $ (708) $ 273,841 Government agency issued MBS 294,731 6,239 (1,266) 299,704 Government agency issued CMOs 1,351,342 11,154 (2,586) 1,359,910 States and municipalities 28,047 1,388 (26) 29,409 Private issued CMOs 1,841 22 -- 1,863 Other 17,366 591 (500) 17,457 Equity 53,927 2,163 (1,606) 54,484 - - ------------------------------------------------------------------------------------ Total $2,018,514 $24,846 $ (6,692) $2,036,668 ====================================================================================
Estimated BY CONTRACTUAL MATURITY Amortized Market (Dollars in thousands) Cost Value - - ------------------------------------------------------------------------------------ AT DECEMBER 31, 1995: Within 1 year $ 114,920 $ 114,975 After 1 year; within 5 years 169,978 172,880 After 5 years; within 10 years 29,949 30,933 After 10 years 1,826 1,919 - - ------------------------------------------------------------------------------------ Subtotal 316,673 320,707 - - ------------------------------------------------------------------------------------ Mortgage-backed securities and CMOs 1,647,914 1,661,477 Equity securities 53,927 54,484 - - ------------------------------------------------------------------------------------ Total $2,018,514 $2,036,668 ====================================================================================
Proceeds from the sales of available for sale debt securities were $428,590,000 and $404,972,000 in 1995 and 1994, respectively. Gross gains of $514,000 and $264,000 and gross losses of $742,000 and $5,384,000 were realized on 1995 and 1994 debt sales, respectively. Proceeds from the sales of equity securities during 1995 and 1994 were $14,545,000 and $18,845,000, respectively. 43 Gross gains of $5,466,000 and $15,788,000 and gross losses of $114,000 and $153,000 were realized on the 1995 and 1994 equity sales, respectively. In 1995, losses totaling $1,400,000 on debt securities and $2,157,000 on equity securities were recognized for securities, that in the opinion of management, have been permanently impaired. During 1994, First Tennessee contributed $9,379,000 of equity securities to establish a charitable foundation. Gross gains of $8,616,000 were realized on the contribution. During 1995 and 1994, $877,000 and $822,000 of recoveries were realized as gains on debt securities that had previously been written down. There was no change in net unrealized holding gain or loss on broker/dealer securities inventory for 1995. The change in net unrealized losses on broker/dealer securities inventory recognized in bond division income was $426,000 for 1994. Securities included in the Consolidated Statements of Condition of $1,590,984,000 and $1,424,466,000 at December 31, 1995 and 1994, respectively, were pledged to secure public deposits, securities sold under agreement to repurchase, and for other purposes. Equity securities include venture capital investment securities. As a result of the report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," issued by the Financial Accounting Standards Board, First Tennessee reclassified certain of its securities from the Held to Maturity category to the Available for Sale category on December 1, 1995. The following table provides certain information related to the reclassification:
Estimated Net Amortized Market Unrealized (Dollars in thousands) Cost Value Gain/(Loss) - - ---------------------------------------------------------------------- AT DECEMBER 1, 1995: U.S. Treasury and other U.S. government agencies $ 38,578 $ 38,843 $ 265 Government agency issued MBS 120,820 119,208 (1,612) Government agency issued CMOs 742,032 745,949 3,917 States and municipalities 13,968 14,631 663 Private issued CMOs 12,718 12,920 202 - - ---------------------------------------------------------------------- Total $928,116 $931,551 $3,435 ======================================================================
Reconciliations of the amortized cost to the estimated market values of investments in securities at December 31, 1994, are provided below. Also provided are the amortized cost and estimated market value by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligation with or without call or prepayment penalties. SECURITIES HELD TO MATURITY
Gross Gross Estimated Amortized Unrealized Unrealized Market (Dollars in thousands) Cost Gains Losses Value - - ------------------------------------------------------------------------------------ AT DECEMBER 31, 1994: U.S. Treasury and other U.S. government agencies $ 63,550 $ 55 $ (1,791) $ 61,814 Government agency issued MBS 139,954 15 (11,265) 128,704 Government agency issued CMOs 724,682 -- (38,487) 686,195 States and municipalities 61,723 757 (1,517) 60,963 Private issued CMOs 2,493 -- (55) 2,438 Other 11,775 52 (497) 11,330 - - ------------------------------------------------------------------------------------ Total $1,004,177 $879 $(53,612) $951,444 ====================================================================================
44
Estimated BY CONTRACTUAL MATURITY Amortized Market (Dollars in thousands) Cost Value - - ----------------------------------------------------------------------------------- AT DECEMBER 31, 1994: Within 1 year $ 38,725 $38,825 After 1 year; within 5 years 66,853 65,434 After 5 years; within 10 years 16,458 15,712 After 10 years 15,012 14,136 - - ----------------------------------------------------------------------------------- Subtotal 137,048 134,107 - - ----------------------------------------------------------------------------------- Mortgage-backed securities and CMOs 867,129 817,337 - - ----------------------------------------------------------------------------------- Total $1,004,177 $951,444 ===================================================================================
SECURITIES AVAILABLE FOR SALE
Gross Gross Estimated Amortized Unrealized Unrealized Market (Dollars in thousands) Cost Gains Losses Value - - ------------------------------------------------------------------------------------ AT DECEMBER 31, 1994: U.S. Treasury and other U.S. government agencies $ 333,469 $ 295 $(10,810) $ 322,954 Government agency issued MBS 179,058 2,903 (4,668) 177,293 Government agency issued CMOs 614,551 64 (28,804) 585,811 States and municipalities 14,780 1,103 (224) 15,659 Private issued CMOs 409 -- -- 409 Private issued asset-backed 2,020 -- (42) 1,978 Other 6,272 18 (1,220) 5,070 Equity 55,834 3,941 (2,211) 57,564 - - ------------------------------------------------------------------------------------ Total $1,206,393 $8,324 $(47,979) $1,166,738 ====================================================================================
Estimated BY CONTRACTUAL MATURITY Amortized Market (Dollars in thousands) Cost Value - - --------------------------------------------------------------------------------- AT DECEMBER 31, 1994: Within 1 year $ 25,293 $ 25,918 After 1 year; within 5 years 313,104 302,007 After 5 years; within 10 years 14,899 14,583 After 10 years 3,245 3,153 - - --------------------------------------------------------------------------------- Subtotal 356,541 345,661 - - --------------------------------------------------------------------------------- Mortgage-backed securities and CMOs 794,018 763,513 Equity securities 55,834 57,564 - - --------------------------------------------------------------------------------- Total $ 1,206,393 $1,166,738 =================================================================================
45 NOTE 4 -- LOANS Although First Tennessee has a loan portfolio diversified by type of risk, the ability of its customers to honor their contracts is to some extent dependent upon their regional economic condition. In order to mitigate the impact of credit risk, First Tennessee manages the concentration of this risk across various geographical regions. First Tennessee grants commercial and consumer loans primarily to customers throughout Tennessee and its contiguous states. Mortgage loans are originated through offices in 28 states, with the majority of these being securitized and sold. The composition of the loan portfolio at December 31 is summarized below:
(Dollars in thousands) 1995 1994 - - ---------------------------------------------------------------------------- Commercial $3,330,929 $2,991,231 Consumer 2,525,889 2,263,007 Mortgage warehouse loans held for sale 789,183 515,407 Permanent mortgage 689,458 591,094 Credit card receivables 529,104 475,489 Real estate construction 238,863 160,368 Nonaccrual 19,040 16,853 - - ---------------------------------------------------------------------------- Loans, net of unearned income 8,122,466 7,013,449 Allowance for loan losses 112,567 109,859 - - ---------------------------------------------------------------------------- Total net loans $8,009,899 $6,903,590 ============================================================================
Additional detail on consumer loans by product is provided in the following table as of December 31:
(Dollars in thousands) 1995 1994 - - ----------------------------------------------------------------------------- Real estate $1,576,215 $1,416,275 Auto 606,199 499,304 Student 231,732 216,404 Other 111,743 131,024 - - ----------------------------------------------------------------------------- Total consumer loans, net of unearned income $2,525,889 $2,263,007 =============================================================================
At December 31, 1995 and 1994, real estate consumer loans included $1,537,064,000 and $1,384,656,000 of first and second liens and home equity loans, respectively. On January 1, 1995, First Tennessee adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." On that date, impaired loans totaling $9,742,000 were identified. These impaired loans had a related allowance that totaled $2,542,000. The following table presents information concerning nonperforming loans at December 31, 1995:
(Dollars in thousands) 1995 - - --------------------------------------------------------------- Impaired loans $11,865 Other nonaccrual loans 7,175 - - --------------------------------------------------------------- Total $19,040 ===============================================================
Total interest income recognized on impaired loans was $1,405,000 for the year ended December 31, 1995. Interest income which would have been earned under the original terms of these loans was approximately $1,374,000 in 1995. The average balance of impaired loans was approximately $10,441,000 for the year ended December 31, 1995. Total restructured impaired loans at December 31, 1995 were $303,000. At December 31, 1995, there were no outstanding commitments to advance additional funds to customers whose loans had been restructured. An allowance for loan losses is maintained for all impaired loans. Activity in the allowance for loan losses related to non-impaired loans, impaired loans, and for the total allowance for the year ended December 31, 1995, is summarized as follows: 46
1995 (Dollars in thousands) Non-impaired Impaired Total - - --------------------------------------------------------------------------- Balance at beginning of year $109,859 $ -- $109,859 Transfer of allowance (2,542) 2,542 -- Allowance from acquisitions 2,632 -- 2,632 Provision for loan losses 14,388 6,204 20,592 Charge-offs 29,766 5,465 35,231 Less loan recoveries 14,480 235 14,715 - - --------------------------------------------------------------------------- Net charge-offs 15,286 5,230 20,516 - - --------------------------------------------------------------------------- Balance at end of year $109,051 $3,516 $112,567 ===========================================================================
The following table presents information concerning nonperforming loans at December 31, 1994:
(Dollars in thousands) 1994 - - --------------------------------------------------------------- Nonaccrual loans $16,853 Restructured loans 158 - - --------------------------------------------------------------- Total $17,011 ===============================================================
Total interest recorded on nonaccrual and restructured loans was $1,368,000 in 1994. Interest income which would have been earned under the original terms of these loans was approximately $1,591,000 in 1994. At December 31, 1994,there were no outstanding commitments to advance additional funds to customers whose loans had been restructured. The allowance for loan losses includes management's estimate of the amounts expected to be lost on specific loans and for losses on other as yet unidentified loans included in loans outstanding. In estimating the potential losses on specific loans, management relies on a combination of in-house prepared discounted cash flow analyses and valuations by independent appraisers. In estimating the reserve component for unidentified losses within the portfolio, management relies on historical experience by loan type adjusted for any known trends in the portfolio. The amounts that will ultimately be realized could differ materially in the near term from the amounts assumed in arriving at the allowance for possible loan losses reported in the financial statements. Activity in the allowance for loan losses for the years ended December 31, 1994 and 1993, is summarized as follows:
(Dollars in thousands) 1994 1993 - - --------------------------------------------------------------- Balance at beginning of year $110,720 $103,223 Allowance from acquisitions -- 971 Provision for loan losses 17,182 36,461 Charge-offs 29,196 42,661 Less loan recoveries 11,153 12,726 - - --------------------------------------------------------------- Net charge-offs 18,043 29,935 - - --------------------------------------------------------------- Balance at end of year $109,859 $110,720 ===============================================================
In the ordinary course of business, First Tennessee makes loans to its executive officers and directors as well as to other related persons and expects to continue to do so in the future. These loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility or other unfavorable features. Loans to directors and executive officers of First Tennessee and their associates were $128,911,000 and $94,470,000 at December 31, 1995 and 1994, respectively. The following table summarizes the changes to these amounts:
(Dollars in thousands) 1995 1994 - - --------------------------------------------------------------- Balance at beginning of year $ 94,470 $ 81,278 Additions 202,652 149,108 Deletions: Repayments 167,720 128,263 No longer related 491 7,653 - - --------------------------------------------------------------- Total deletions 168,211 135,916 - - --------------------------------------------------------------- Balance at end of year $128,911 $ 94,470 ===============================================================
Included on the Consolidated Statements of Condition in "Bond division receivables and other assets" are amounts due from customers on acceptances and in "Bond division payables and other liabilities" are bank acceptances outstanding of $4,663,000 and $4,530,000 at December 31, 1995 and 1994, respectively. 47 NOTE 5 -- PREMISES AND EQUIPMENT Premises and equipment at December 31 are summarized below:
(Dollars in thousands) 1995 1994 - - ------------------------------------------------------------- Land $ 27,564 $ 25,515 Buildings 121,932 106,770 Leasehold improvements 18,260 16,037 Furniture, fixtures, and equipment 160,535 147,096 - - ------------------------------------------------------------- Premises and equipment, at cost 328,291 295,418 Less accumulated depreciation and amortization 150,891 136,382 - - ------------------------------------------------------------- Premises and equipment, net $177,400 $159,036 =============================================================
48 NOTE 6 -- INTANGIBLE ASSETS Following is a summary of intangible assets, net of accumulated amortization, included in the Consolidated Statements of Condition:
Premium on Purchased Deposits (Dollars in thousands) Goodwill and Assets - - -------------------------------------------------------- December 31, 1992 $20,747 $32,761 Amortization expense 1,674 4,197 Acquisitions/Divestitures 43,492 408 - - -------------------------------------------------------- December 31, 1993 62,565 28,972 Amortization expense 3,073 3,333 Acquisitions/Divestitures 6,594 - - - -------------------------------------------------------- December 31, 1994 66,086 25,639 Amortization expense 3,676 4,424 Acquisitions/Divestitures 29,382 15,978 - - -------------------------------------------------------- DECEMBER 31, 1995 $91,792 $37,193 ========================================================
49 NOTE 7 -- CONTINGENCIES Various claims and lawsuits are pending against First Tennessee and its subsidiaries. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, after consulting with counsel, these matters, when resolved, will not have a material adverse effect on the consolidated financial statements of First Tennessee and its subsidiaries. 50 NOTE 8:-- CAPITALIZED MORTGAGE SERVICING RIGHTS Following is a summary of capitalized mortgage servicing rights, net of accumulated amortization, included in the Consolidated Statements of Condition:
Capitalized Mortgage Servicing (Dollars in thousands) Rights - - ------------------------------------------------------- December 31, 1992 $ 62,537 Amortization expense (25,478) Acquisitions/Divestitures 48,924 - - ------------------------------------------------------- December 31, 1993 $ 85,983 Amortization expense (14,936) Acquisitions/Divestitures 1,675 - - ------------------------------------------------------- December 31, 1994 $ 72,722 Amortization expense (14,980) Acquisitions/Divestitures 91,478 - - ------------------------------------------------------- DECEMBER 31, 1995* $ 149,220 - - ------------------------------------------------------- Fair value at December 31, 1995 $ 166,247 - - -------------------------------------------------------
* Includes $11.3 million of originated loan servicing rights which are related to loans held for sale to investors. The mortgage servicing rights capitalized at December 31, 1995, represents the rights to service approximately $12 billion of mortgage loans. In addition, First Tennessee has approximately $5.3 billion of loans for which the mortgage servicing rights were not capitalized. The estimated fair value of the servicing for these loans was $43.6 million. No valuation allowance was required as of December 31, 1995. 51 NOTE 9 -- SHORT-TERM BORROWINGS Short-term borrowings include federal funds purchased and securities sold under agreements to repurchase, commercial paper, and other borrowed funds, including term federal funds purchased and cash management advances from the Federal Home Loan Bank. Federal funds purchased arise principally from First Tennessee's market activity for its regional correspondent banks and generally mature in one business day. To the extent that the proceeds of these transactions exceed First Tennessee's funding requirements, the excess funds are sold in the money markets. Securities sold under agreements to repurchase are secured by U.S. government and agency securities and certain investments in bank time deposits and had original maturities ranging from two to 30 days at December 31, 1995. Commercial paper is an obligation of First Tennessee and had original maturities ranging from two to 90 days at December 31, 1995. Other short-term borrowings generally represent secured and unsecured obligations to financial institutions, including the Federal Reserve Bank, at various rates and terms and generally do not exceed one year to maturity. Bank overdraft obligations are reclassified into other short-term borrowings. The following table reflects the average daily outstandings, year-end outstandings, maximum month-end outstandings, average rates paid during the year, and the average rates paid at year-end for the three categories of short-term borrowings:
(Dollars in thousands) 1995 1994 1993 - - -------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase: Balance: Average $1,491,033 $1,045,571 $1,028,981 Year-end 1,674,225 1,457,517 1,025,124 Maximum month-end outstanding 1,953,448 1,457,517 1,239,396 Rate: Average for the year 5.43 % 3.87 % 2.84 % Average at year-end 4.96 5.15 2.73 Commercial paper: Balance: Average $ 35,579 $ 34,351 $ 30,269 Year-end 29,402 67,820 32,283 Maximum month-end outstanding 44,755 67,820 54,809 Rate: Average for the year 5.14 % 3.77 % 3.06 % Average at year-end 4.59 4.57 3.06 Other short-term borrowings: Balance: Average $ 368,630 $ 645,447 $ 694,236 Year-end 57,118 284,702 900,390 Maximum month-end outstanding 547,131 894,840 1,114,552 Rate: Average for the year 7.07 % 5.46 % 4.78 % Average at year-end 6.52 8.05 5.30 - - --------------------------------------------------------------------------------
52 NOTE 10 -- CASH AND DUE FROM BANKS Commercial banking subsidiaries of First Tennessee are required to maintain average reserve balances with the Federal Reserve Bank. These reserve balances vary, depending on the types and amounts of deposits received. Included in "Cash and due from banks" on the Consolidated Statements of Condition are amounts so restricted of $24,297,000 at December 31, 1995, and $82,440,000 at December 31, 1994. 53 NOTE 11 -- LEASE COMMITMENTS Leased capital assets included in "Bond division receivables and other assets" on the Consolidated Statements of Condition at December 31 are summarized below:
(Dollars in thousands) 1995 1994 - - ----------------------------------------------------------------- Premises $2,243 $2,243 Less accumulated amortization 1,706 1,599 - - ----------------------------------------------------------------- Leased capital assets, net $ 537 $ 644 =================================================================
Future minimum lease payments for capitalized leases together with the present value of net minimum lease payments at December 31, 1995, are as follows:
(Dollars in thousands) Premises - - ----------------------------------------------------------------- 1996 $ 234 1997 234 1998 237 1999 193 2000 124 2001 and after 137 - - ----------------------------------------------------------------- Total 1,159 Less amount representing interest 242 - - ----------------------------------------------------------------- Present value of net minimum lease payments $ 917 =================================================================
Rent expense under all operating lease obligations aggregated $27,779,000 for 1995, $27,865,000 for 1994, and $18,875,000 for 1993. Rent expense was reduced in 1994 and 1993 by amortization of a deferred gain resulting from the sale of an office building in 1985. This amortization totaled $585,000 in 1994, and $1,062,000 in 1993. Rent income received aggregated $1,776,000, $2,498,000, and $2,117,000 for the years 1995, 1994, and 1993, respectively. With respect to many leased locations, First Tennessee pays taxes, insurance, and maintenance costs. Most of the leases are for terms ranging from one to 15 years and include renewal options for additional periods of one to 25 years. At December 31, 1995, First Tennessee's long-term leases required minimum annual rentals as follows:
(Dollars in thousands) Premises Equipment Total - - ------------------------------------------------------------------- 1996 $18,403 $ 2,594 $20,997 1997 16,327 1,982 18,309 1998 14,271 902 15,173 1999 9,797 728 10,525 2000 7,641 365 8,006 2001 and after 13,924 -- 13,924 - - ------------------------------------------------------------------- Total $80,363 $ 6,571 $86,934 ===================================================================
Aggregate minimum income under sublease agreements for these periods is $2,739,000. 54 NOTE 12 -- TERM BORROWINGS Term borrowings on the financial statements consist of borrowings with maturities greater than one year. The following table presents information pertaining to term borrowings for First Tennessee and its subsidiaries at December 31:
(Dollars in thousands) 1995 1994 - - ---------------------------------------------------------------------------- FIRST TENNESSEE NATIONAL CORPORATION: Subordinated capital notes: Matures on June 1, 1999 -- 10 3/8% $ 74,692 $ 74,602 Matures on November 15, 2005 -- 6 3/4% 74,193 -- Sinking fund debentures -- 7 3/8% -- 13,950 FIRST TENNESSEE BANK NATIONAL ASSOCIATION: Notes payable to Federal Home Loan Bank: Matures on January 3, 1997 -- 7.95% 25,000 -- Matures on April 3, 1997 -- 7.95% 25,000 -- Matures on October 3, 1997 -- 8.05% 10,000 -- Principal payments of approximately $4,898,000, $5,279,000, and $1,382,000 due 1996, 1997, and 1998, respectively -- 7.50% 11,559 -- Matures on January 29, 1999 -- 7.95% 15,000 -- Matures on June 30, 1999 -- One month LIBOR + .05% (5.7375% and 6.175% at December 31, 1995 and 1994, respectively) 20,000 20,000 Monthly payments of approximately $17,000 due through November 1, 2009 -- 8.10% 2,783 2,984 Industrial development bond payable to City of Alcoa, Tennessee -- 6.50%; payment of $400,000 due 1999 400 500 CLEVELAND BANK AND TRUST COMPANY: Industrial development bond payable to City of Cleveland, Tennessee -- 65% of prime (5.525% and 5.520% at December 31, 1995 and 1994, respectively); monthly payments of approximately $29,000 due through 1999 1,390 1,735 - - ---------------------------------------------------------------------------- Total $260,017 $113,771 ============================================================================
Annual principal repayment requirements for the years 1996 through 2000 approximate $5,446,000, $65,827,000, $1,930,000, $110,946,000, and $200,000, respectively. Total repayment requirements for 2001 through 2009 are approximately $76,783,000. Subordinated capital notes were issued on June 10, 1987, at 10.375 percent with interest payable on June 1 and December 1 of each year. At maturity, the notes will be exchanged for capital securities having a market value equal to the principal amount of the notes. First Tennessee may elect to pay the principal amount in cash, in whole or in part, from designated proceeds. Subordinated capital notes were also issued on November 9, 1995, at 6.75 percent with interest payable on May 15 and November 15 of each year beginning on May 15, 1996. Proceeds from this issuance were used to purchase First Tennessee common stock and redeem the outstanding sinking fund debentures. A portion of the long-term debt issued by the parent company was downstreamed to FTBNA to support asset growth and improve bank capital ratios. The bank previously issued $75,000,000 in notes to the parent company corresponding to the subordinated capital notes issued in 1987. Interest rate and maturity terms are identical to the corporate debt. The subordinated capital notes meet bank regulatory capital guidelines. 55 NOTE 13 -- SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS SAVINGS PLAN. Substantially all employees of First Tennessee and its subsidiaries participate in a contributory savings plan in conjunction with a flexible benefits plan. First Tennessee contributes during the year into each eligible employee's flexible benefits plan account an amount based on length of service and an amount based on a percentage of the employee's salary, as determined by a committee of the board of directors. The employees may then direct that all or a portion of the contribution be allocated to their savings plan accounts. Employees may also make pre-tax and after-tax personal contributions to the savings plan. Pre-tax contributions invested in First Tennessee's common stock are matched at a rate of $.50 for each $1.00 invested up to 6 percent of the employee's salary. Employer contributions to the flexible benefits plan were as follows:
(Dollars in thousands) 1995 1994 1993 - - ----------------------------------------------------------------------------------------- Flexible benefits contributions: Performance dollars $ 4,675 $ 4,144 $ 3,937 Service dollars 1,866 1,758 1,716 - - ----------------------------------------------------------------------------------------- Total 6,541 5,902 5,653 Company matching contribution 3,455 2,374 1,976 - - ----------------------------------------------------------------------------------------- Total employer contribution $ 9,996 $ 8,276 $ 7,629 =========================================================================================
The figures in the table above include 1995 flexible benefit contributions and company matching contributions for employees of CBI, Peoples, and FIC, companies acquired by First Tennessee during 1995. Also during 1995, First Tennessee acquired Carl I. Brown. The 1994 totals include HCMC and CBT, companies acquired by First Tennessee during 1994. Also during 1994, First Tennessee acquired Planters, SNMC, and Emerald. Emerald was merged into SNMC. Each of these companies sponsored a savings, thrift, or ESOP plan. Community First Bank Profit Sharing Trust is a 401(k) savings plan. This plan was frozen effective as of the acquisition. Expense for this plan was $3,000 for the period preceding the acquisition date of February 24, 1995. For the years ended December 31, 1994 and 1993, the expense was $258,000 and $122,000 respectively. In 1995, the Community First Bank Profit Sharing Trust was merged into the First Tennessee Savings Plan. The Peoples Bank of Senatobia Profit Sharing Plan is a 401(k) savings plan. This plan was frozen effective as of the acquisition. No further employee or employer contributions are being made into this plan. Expense for this plan was $13,000 for the period preceding the acquisition date of April 1, 1995. The First National Bank of Springdale 401(k) Profit Sharing Plan was frozen as of the acquisition. No further employee or employer contributions are being made into this plan. Expense for this plan was $14,000 for the period preceding the acquisition date of October 1, 1995. The Carl I. Brown and Company Employee Savings Trust is a 401(k) savings plan. This plan was frozen as of December 31, 1995. No further employee or employer contributions are being made into this plan. Expense under this plan was $134,000, $ 145,000, and $91,000 for the years ended December 31, 1995, 1994, and 1993, respectively. The HCMC Profit Sharing Trust is a 401(k) savings plan. This plan was frozen effective as of the acquisition. No further employee or employer contributions are being made into this plan. In 1994, expense for this plan was $28,000 for the two months preceding the acquisition date of March 1, 1994. For the year ended December 31, 1993, the expense for this plan was $165,000. The CBT Retirement Plan was a thrift plan for all eligible employees. Expense for this plan in 1994 was $75,000 for the period preceding the acquisition date of March 16, 1994. For the year ended December 31, 1993, the expense for this plan was $298,000. Effective as of the merger, CBT's retirement plan was terminated. In accordance with the plan and with ERISA, all amounts credited to the plan became fully vested and nonforfeitable. Planters' Retirement Plan is an Employee Stock Ownership Plan. The benefits provided under the plan are funded by employer contributions to eligible employees. Expense for this plan was $29,000 and $45,000 for the years ended December 31, 1994 and 1993, respectively. This plan was terminated in 1994. SNMC began sponsoring on April 1, 1993, the SNMC Savings Plan, a defined contribution plan which covered substantially all its employees. The SNMC Savings Plan was frozen as of December 31, 1995. No further employee or employer contributions are being made into this plan. Expense under this plan was $621,000, $650,000, and $600,000 for years ended December 31, 1995, 1994, and 1993, respectively. Emerald's 401(k) Savings Plan was frozen effective as of the acquisition. Also, Emerald's Profit Sharing Plan was terminated effective as of the acquisition. In accordance with the Profit Sharing Plan and with ERISA, all amounts credited to the plan became fully vested and nonforfeitable. 56 PENSION PLAN. Substantially all employees of First Tennessee and its subsidiaries participate in a noncontributory, defined benefit pension plan. Effective January 1, 1992, the annual funding is based on an actuarially determined amount using the entry age cost method. Prior to 1992, the funding was determined actuarially using the unit credit cost method. As of January 1, 1986, First Tennessee adopted SFAS No. 87, "Employers'Accounting for Pensions." At the date of adoption, the projected benefit obligation of the First Tennessee National Corporation Pension Plan was $40,093,000 and plan assets at fair value were $51,139,000, resulting in an unrecognized net asset of $11,046,000. The unrecognized net asset is being amortized over 17 years, the remaining average service life of the eligible employees at implementation date. The annual pension expense was $278,000 in 1995, $2,993,000 in 1994, and $882,000 in 1993. The components of net periodic pension cost were as follows:
(Dollars in thousands) 1995 1994 1993 - - ------------------------------------------------------------------------------------------ Service cost-benefits earned during the year $ 5,210 $ 6,792 $ 4,522 Interest cost on projected benefit obligation 6,907 6,459 5,683 Return on plan assets (27,516) (676) (8,847) Net amortization and deferral 15,677 (9,582) (476) - - ------------------------------------------------------------------------------------------ Net periodic pension cost $ 278 $ 2,993 $ 882 ==========================================================================================
The following table sets forth the plan's funded status at December 31:
(Dollars in thousands) 1995 1994 - - ------------------------------------------------------------------------------------------ Plan assets at fair value $ 150,685 $ 110,574 Actuarial present value of projected benefit obligation* 108,215 83,648 - - ------------------------------------------------------------------------------------------ Plan assets in excess of projected benefit obligation 42,470 26,926 Unrecognized net (gain)/loss from past experience different from that assumed and effects of changes in assumptions 72 4,752 Prior service cost not yet recognized in net periodic pension cost 3,138 1,194 Unrecognized net transitional asset (3,240) (3,700) - - ------------------------------------------------------------------------------------------ Prepaid pension cost recognized in the Consolidated Statements of Condition $ 42,440 $ 29,172 ==========================================================================================
*At December 31, 1995 and 1994, respectively, the actuarial present values of the accumulated benefit obligation were $86,495,000 and $60,026,000, of which vested benefits were $84,302,000 and $57,769,000. The accumulated benefit obligation excludes projected future increases in compensation. The discount rate and weighted-average rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.25 percent and 4.7 percent, respectively, in 1995 and 8.5 percent and 4.8 percent, respectively, in 1994. The expected long-term rate of return on assets was 10 percent for 1995 and 9.5 percent for 1994. FIC sponsored the First National Bank of Springdale Pension Plan and Trust, which is a defined benefit pension plan. This plan was frozen as of the acquisition. No further employer contributions are being made into this plan. This plan will be merged into the First Tennessee plan. Participants employed at the time of the acquisition will receive vesting and benefit service credit in the First Tennessee plan from their original date of hire by FIC. OTHER EMPLOYEE BENEFITS. In November 1992, FASB issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits." It requires the recognition of the obligation for benefits to former and inactive employees after employment but before retirement. Those benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits, workers' compensation, job training and counseling, and continuation of benefits such as health care and life insurance coverage. On January 1, 1994, First Tennessee adopted SFAS No. 112 with the recognition of $2.3 million of pre-tax postemployment benefits related to prior service rendered and rights vested. Total expense recognized in 1995 and 1994 was $1.9 million and $2.5 million, respectively. First Tennessee adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective January 1, 1993. This statement requires that the expected cost of providing postretirement benefits be recognized in the financial statements during the employee's active service period. 57 First Tennessee provides postretirement medical insurance to full-time employees retiring under the provisions of the First Tennessee Pension Plan. The postretirement medical plan is contributory with retiree contributions adjusted annually. In 1992, First Tennessee made significant changes to the postretirement medical plan for future retirees. The revised plan is based on criteria that are a combination of the employee's age and years of service and utilizes a two-step approach. For any employee retiring on or after January 1, 1995, First Tennessee will contribute a fixed amount based on years of service and age at time of retirement. The following table sets forth the plans' funded status reconciled to the amount shown in the Consolidated Statements of Condition at December 31:
(Dollars in thousands) 1995 1994 - - ------------------------------------------------------------------------------------------ Accumulated postretirement benefit obligation (APBO): Retirees $ (14,236) $ (15,039) Actives (8,948) (5,886) - - ------------------------------------------------------------------------------------------ Total APBO (23,184) (20,925) Plan assets at fair value 11,055 10,637 - - ------------------------------------------------------------------------------------------ APBO in excess of plan assets (12,129) (10,288) Unrecognized: Net transition obligation 16,807 17,796 Prior service cost 44 47 Prepaid benefit cost (394) (868) - - ------------------------------------------------------------------------------------------ Prepaid postretirement benefit cost $ 4,328 $ 6,687 ==========================================================================================
Net periodic postretirement benefit cost for the periods ending December 31 included the following components:
(Dollars in thousands) 1995 1994 1993 - - ------------------------------------------------------------------------------------------ Service cost $ 427 $ 556 $ 434 Interest cost on APBO 1,762 1,578 1,582 Actual return on assets (1,867) (864) (388) Amortization of transition obligation over 20 years 989 989 989 Total of other components 1,048 172 (292) - - ------------------------------------------------------------------------------------------ Net periodic postretirement benefit cost $ 2,359 $ 2,431 $ 2,325 ==========================================================================================
For measurement purposes, in 1995 the annual rate of increase in the per capita cost of covered health care benefits was assumed to be 10.75 percent decreasing evenly to a rate of 5.75 percent by the year 2000 and remaining at that level thereafter. In 1994, the annual rate of increase was assumed to be 13 percent decreasing evenly to a rate of 7 percent by the year 2000 and remaining at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. The following table illustrates the effect of increasing the assumed health care cost trend rate by 1 percent.
Current Increased Percent (Dollars in thousands) Trend Trend Change - - ---------------------------------------------------------------------------------------- APBO at December 31, 1995 $23,184 $24,688 6.5+ Service and interest cost 2,189 2,320 6.0+ - - ----------------------------------------------------------------------------------------
The discount rate used in determining the accumulated postretirement benefit obligation was 7.25 percent in 1995 and 8.5 percent in 1994. The funding policy for the plan is to fund the maximum amount allowable under the current tax regulations. Plan assets consist primarily of equity and fixed income securities. The trust holding the plan assets for employees that had retired prior to January 1, 1993, is subject to federal income taxes at a 35 percent rate. The expected long-term rate of return on plan assets before income taxes was 6.5 percent for 1995 and 1994. The trust holding the plan assets for all other First Tennessee employees, actives and those retired since 1992, is not subject to federal income taxes. The expected long-term rate of return on plan assets before income taxes was 10 percent for 1995 and 9.5 percent for 1994. In 1995, medical plan expense based on claims incurred was $8,673,000 for 5,304 active participants. Medical plan expense in 1994 was $9,841,000 for 5,400 active participants. The 1993 medical plan expense was $8,195,000 for 5,187 active participants. First Tennessee does not currently provide group life insurance upon retirement; however, seven employees, most of whom retired prior to August 1, 1963, are currently provided coverage totaling $125,000. Group life insurance expense based on benefits incurred was $783,000 for 7,744 participants in 1995; $1,088,000 for 6,413 participants in 1994; and $1,132,000 for 6,408 participants in 1993. 58 NOTE 14 -- SHAREHOLDER PROTECTION RIGHTS AGREEMENT In September 1989, First Tennessee adopted a Shareholder Protection Rights Agreement and distributed a dividend of one right on each outstanding share of common stock held on September 18, 1989, or issued thereafter and prior to the time the rights separate. Until a person or group acquires 10 percent or more of First Tennessee's common stock or commences a tender offer that will result in such person or group owning 10 percent or more of First Tennessee's common stock, the rights will be evidenced by the common stock certificates, will automatically trade with the common stock, and will not be exercisable. Thereafter, separate rights certificates will be distributed and each right will entitle its holder to purchase one one-hundredth of a share of participating preferred stock having economic and voting terms similar to those of one share of common stock for an exercise price of $38.34 which has been adjusted for the two-for-one stock split on February 16, 1996. If any person or group acquires 10 percent or more of First Tennessee's common stock, then each right (other than rights beneficially owned by holders of 10 percent or more of the common stock or transferees thereof, which rights become void) will entitle its holder to purchase, for the exercise price, a number of shares of First Tennessee common stock or participating preferred stock having a market value of twice the exercise price. Also, if First Tennessee is involved in a merger or sells more than 50 percent of its assets or earning power, each right will entitle its holder to purchase, for the exercise price, a number of shares of common stock of the acquiring company having a market value of twice the exercise price. If any person or group acquires between 10 percent and 50 percent of First Tennessee's common stock, First Tennessee's Board of Directors may, at its option, exchange one share of First Tennessee common stock or one one-hundredth of a share of participating preferred stock for each right. The rights will expire on the earliest of one of the following three times: the time of the exchange described in the preceding sentence; September 18, 1999; or the date the rights are redeemed as described in the following sentence. The rights may be redeemed by the board of directors for $0.0033 per right prior to the day when any person or group acquires 10 percent or more of First Tennessee's common stock. 59 NOTE 15 -- STOCK OPTION, RESTRICTIVE STOCK INCENTIVE, AND DIVIDEND REINVESTMENT PLANS At its January meeting, the board of directors authorized a two-for-one split of First Tennessee's common stock. The shares were distributed February 16, 1996, to shareholders of record on February 2, 1996. Share and per share amounts in the accompanying text and table have been adjusted for the split. STOCK OPTION PLANS. In 1995, First Tennessee's shareholders approved a new stock option plan that provides for the granting of non-qualified and incentive stock options to all employees of First Tennessee. The Plan authorizes the issuance of 3,000,000 shares. The Plan is designed to give employees a proprietary interest in First Tennessee. The options granted under this Plan allow for the purchase of First Tennessee's common stock at a price equal to its fair market value at the date of grant; however, the exercise price may be less than fair market value if the grantee has agreed to receive the options in lieu of compensation. The foregone compensation plus the exercise price must equal the fair market value on the date of grant. Options for 1,062,800 shares were granted in 1995. These options are exercisable three years from the date of grant and expire ten years from the date of grant. The plan also provides for the grant of Stock Appreciation Rights (SARs) exercisable for the economic appreciation of the stock in the form of cash and/or stock. No SARs have been granted under this plan. Also approved in 1995 was the Non-Employee Directors' Deferred Compensation Stock Option Plan. Under this plan options of 450,000 shares may be granted to non-employee members of the Board of Directors electing to receive them in lieu of retainer/fees. Options for 69,036 shares were granted during 1995. First Tennessee also has a stock option plan, approved in 1990, which provides for the granting of both non-qualified and incentive stock options to key executives and employees. The options granted under this plan allow for the purchase of First Tennessee's common stock at a price equal to its fair market value at the date of grant; however, the exercise price may be less than fair market value if the grantee has agreed to receive the options in lieu of compensation. The foregone compensation plus the exercise price must equal the fair market value on the date of grant. In 1995, options for 54,612 shares were granted in lieu of compensation and options for 9,000 shares were granted where the exercise price was equal to the market value on the date of grant under this Plan. In 1994, options for 27,648 shares were granted in lieu of compensation and options for 1,057,846 shares were granted where the exercise price was equal to the market value on the date of grant under the Plan. The plan also provides for the grant of SARs exercisable for the economic appreciation of the stock in the form of cash and/or stock. No SARs have been granted under this plan. Under a stock option plan established in 1984, similar to the aforementioned 1990 Plan, stock options and SARs may no longer be granted; however, options for 785,196 shares remained outstanding at the end of 1995. In addition, there were 46,292 SARs outstanding under this Plan at the end of 1995. Total stock appreciation rights expense associated with fluctuations in the market value of First Tennessee stock was $26,000, $6,000, and $67,000 for the years 1995, 1994, and 1993, respectively. In November 1991, the First Tennessee Board of Directors approved the Bank Advisory Director Deferral Plan for FTBNA's regional advisory board members. Options are awarded to those electing to receive them in lieu of attendance fees. Options for 15,720 and 14,348 shares were granted during 1995 and 1994, respectively. On February 24, 1995, First Tennessee acquired CBI which had a stock option plan that provided for the granting of stock options to certain key employees. All outstanding options were exercised prior to the acquisition. Options for 127,804 shares were outstanding at December 31, 1994. RESTRICTED STOCK INCENTIVE PLANS. First Tennessee has authorized a total of 855,000 shares of its common stock for awards under its 1983 and 1989 restricted stock incentive plans for executive employees who have a significant impact on the profitability of First Tennessee. Shares awarded under the plans are subject to risk of forfeiture during a restriction period determined by a committee of the board of directors. All shares have been awarded under the 1983 Plan, subject to restrictions which lapsed in 1995. Each award under the 1983 Plan provides for supplemental cash payments when the restrictions lapse. No shares were granted under the 1989 Plan in 1995 or 1994. At December 31, 1995, the 1989 Plan had 3,252 shares available to be awarded. In 1992, First Tennessee's shareholders approved the 1992 Restricted Stock Incentive Plan for awards to executive employees who have a significant impact on the profitability of First Tennessee. The Plan authorized the issuance of 660,000 shares. In addition, the Plan provides for 3,000 shares of restricted stock to be granted to each new non-employee director upon election to the Board with restrictions lapsing at 300 shares per year over the 10 years following the grant. One officer was granted 8,200 restricted shares in 1995. In 1994, 96,000 restricted shares were granted. At December 31, 1995, the 1992 Plan had 484,912 shares available to be awarded. Compensation expense related to these plans was $1,165,000, $1,374,000, and $1,586,000 for the years 1995, 1994, and 1993, respectively. 60 The summary of stock option and restricted stock activity is shown below:
Weighted Exercise Average Available Options Price Exercise for Grant Outstanding Per Share Price - - ------------------------------------------------------------------------------------- JANUARY 1, 1994, AS ORIGINALLY REPORTED 1,357,972 1,139,910 $10.40-34.29 $23.29 Adjustments for two-for-one stock split 1,357,972 1,139,910 Adjustments for pooling of interests 158,008 ---------- --------- JANUARY 1, 1994, RESTATED 2,715,944 2,437,828 $ 5.20-17.15 $11.35 Options granted (1,099,842) 1,116,844 $ 9.50-22.32 $19.66 Restricted stock incentive awards (96,000) Stock options exercised (324,232) $ 5.20-17.15 $ 8.70 SARs exercised (200) $11.09 $11.09 Unissued options lapsed (59,818) Restricted stock canceled 2,700 Stock options canceled 55,114 (57,436) $ 6.94-20.13 $13.80 --------- --------- DECEMBER 31, 1994 1,518,098 3,172,804 $ 6.94-22.32 $14.50 ========= ========= Options exercisable 1,399,302 $ 6.94-17.15 $10.47 - - ------------------------------------------------------------------------------------ JANUARY 1, 1995 1,518,098 3,172,804 $ 6.94-22.32 $14.50 Options granted (1,211,168) 1,211,168 $10.19-27.82 $20.64 Restricted stock incentive awards (8,200) Shares authorized 3,450,000 Stock options exercised (439,372) $ 6.94-20.13 $11.05 Unissued options lapsed (9,914) Stock options canceled 260,366 (260,366) $ 8.34-21.13 $20.49 ---------- --------- DECEMBER 31, 1995 3,999,182 3,684,234 $ 8.19-27.82 $16.50 ========== ========= Options exercisable 1,653,598 $ 8.19-25.63 $12.40 - - ------------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN. The Dividend Reinvestment and Stock Purchase Plan, originally adopted in 1979, was amended in 1995 to authorize the sale of 600,000 additional shares of First Tennessee's common stock from authorized but unissued common stock or from shares acquired on the open market to shareholders who choose to invest all or a portion of their cash dividends and optional cash payments of $25 to $10,000 per quarter. The number of shares of common stock now authorized totals 1,000,000. In 1988, First Tennessee began purchasing these shares on the open market. The price of the shares purchased directly from First Tennessee is the mean between the high and low sales price on the investment date. The price of shares purchased on the open market is the average price paid. 61 NOTE 16 -- INCOME TAXES The components of income tax expense/(benefit) are as follows:
(Dollars in thousands) 1995 1994 1993 - - --------------------------------------------------------------------------- Current: Federal $46,502 $55,435 $ 58,573 State 8,059 9,325 9,275 Deferred: Federal 29,734 (3,272) (2,276) State 3,774 (794) 282 Tax law rate change -- -- (405) - - --------------------------------------------------------------------------- Total $88,069 $60,694 $ 65,449 ===========================================================================
The effective tax rates for 1995, 1994, and 1993, were 34.82 percent, 29.21 percent and 37.36 percent, respectively. Income tax expense was different than the amounts computed by applying the statutory federal income tax rate to income before income taxes because of the following:
(Dollars in thousands) 1995 1994 1993 - - ---------------------------------------------------------------------------- Federal income tax rate 35% 35% 35% - - ---------------------------------------------------------------------------- Tax computed at statutory rate $88,535 $72,712 $61,263 Increase/(decrease) resulting from: Tax-exempt interest (2,922) (2,989) (3,808) State income taxes 7,691 6,059 5,363 Adjustment of prior years' estimated liabilities (5,675) (5,883) -- Valuation allowance -- (8,038) 6,128 Charitable foundation -- (2,921) -- Tax law rate changes -- -- (405) Other 440 1,754 (3,092) - - ---------------------------------------------------------------------------- Total $88,069 $60,694 $65,449 ============================================================================
A deferred tax asset or liability is recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The temporary differences which gave rise to these deferred tax (assets)/liabilities at December 31, 1995, were as follows:
Deferred Deferred (Dollars in thousands) Assets Liabilities Total - - ------------------------------------------------------------------------------ Depreciation $ -- $ 4,628 $ 4,628 Loss reserves (36,264) -- (36,264) Originated mortgage servicing rights -- 22,299 22,299 Investments in debt and equity securities -- 6,736 6,736 Employee benefits -- 6,119 6,119 Purchase accounting adjustments -- 4,510 4,510 Intangible assets -- 5,600 5,600 Lease operations -- 3,728 3,728 Hedging transactions -- 4,453 4,453 Net operating loss carryforwards (7,499) -- (7,499) Other (2,822) 5,601 2,779 - - ------------------------------------------------------------------------------- Net deferred tax (asset)/liability at end of year $(46,585) $63,674 $ 17,089 ===============================================================================
62 NOTE 17 -- BUSINESS SEGMENT INFORMATION The following information is presented to comply with the business segment requirements of SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." First Tennessee has several specialty lines of business which include mortgage banking and the bond division. The mortgage banking operations consist of units which originate loans, primarily to securitize and sell, and service mortgages. The bond division distributes certain securities and loans to its customer base. For purposes of this disclosure, all of the other specialty lines of business are included in the banking group. Total revenue, expense, and asset levels reflect those which are specifically identifiable or which are allocated based on an internal allocation method. Because the allocations are based on internally developed assignments and allocations, they are to an extent subjective. This assignment and allocation has been consistently applied for all periods presented. The following table reflects the approximate amounts of consolidated revenue, expense, and assets for the three years ended December 31, for each segment:
Banking Mortgage Bond (Dollars in thousands) Group Banking Division Consolidated - - --------------------------------------------------------------------------- 1995 Interest income $ 735,377 $ 59,718 $ 27,433 $ 822,528 Interest expense 371,238 33,093 27,544 431,875 - - -------------------------------------------------------------------------- Net interest income 364,139 26,625 (111) 390,653 Other revenues 200,380 213,369 82,814 496,563 Other expenses 380,007 195,419 58,833 634,259 - - -------------------------------------------------------------------------- Pre-tax income $ 184,512 $ 44,575 $ 23,870 $ 252,957 ========================================================================== Identifiable assets $10,559,010 $1,168,010 $349,862 $ 12,076,882 - - -------------------------------------------------------------------------- 1994 Interest income $ 615,048 $ 61,026 $ 24,984 $ 701,058 Interest expense 253,757 28,642 24,198 306,597 - - -------------------------------------------------------------------------- Net interest income 361,291 32,384 786 394,461 Other revenues 193,677 187,584 77,478 458,739 Other expenses 376,770 210,185 58,483 645,438 - - -------------------------------------------------------------------------- Pre-tax income $ 178,198 $ 9,783 $ 19,781 $ 207,762 ========================================================================== Identifiable assets $ 9,838,270 $ 772,410 $322,269 $ 10,932,949 - - -------------------------------------------------------------------------- 1993 Interest income $ 583,853 $ 50,600 $ 17,770 $ 652,223 Interest expense 229,330 29,957 16,853 276,140 - - -------------------------------------------------------------------------- Net interest income 354,523 20,643 917 376,083 Other revenues 158,558 139,838 91,525 389,921 Other expenses 358,670 168,865 63,304 590,839 - - -------------------------------------------------------------------------- Pre-tax income $ 154,411 $ (8,384) $ 29,138 $ 175,165 ========================================================================== Identifiable assets $ 8,832,189 $1,533,675 $434,880 $ 10,800,744 - - --------------------------------------------------------------------------
Capital expenditures and depreciation and amortization occurred primarily in the banking group. Capital expenditures were $38,545,000, $40,045,000, and $35,216,000 for the years ended December 31, 1995, 1994, and 1993, respectively. Depreciation and amortization was $68,944,000, $56,118,000, and $74,202,000 for 1995, 1994, and 1993, respectively. 63 NOTE 18 -- OFF-BALANCE SHEET FINANCIAL INSTRUMENTS In the normal course of business, First Tennessee enters into transactions involving financial instruments that are subject to credit and market risks but are not required to be reflected on the balance sheet. First Tennessee utilizes these financial instruments, which include credit commitments and other off-balance sheet financial instruments, in order to meet the financial needs of its customers and to manage its own exposure to fluctuations in interest rates. RISKS Credit risk is the possibility that a loss might occur from the failure of a counterparty to perform according to the terms of a transaction. Currently, First Tennessee enters into financial instrument transactions through national exchanges, primary dealers, or approved counterparties. Whenever possible mutual margining agreements are used to limit potential exposure. The credit risk associated with exchange-traded futures contracts is limited to the relevant clearing house. For non-exchange traded instruments, credit risk may occur when there is a gain in the fair value of the financial instrument and the counterparty fails to perform according to the terms of the contract and/or when the collateral proves to be of insufficient value. The credit exposure is limited to the amount of the fair value of the instrument rather than the notional amount. Options written do not expose First Tennessee to credit risk, except to the extent of the underlying risk associated with any financial instrument that First Tennessee may be obligated to acquire under certain written put options. Settlement Risk is an underlying risk when the financial instrument obligates First Tennessee to acquire and/or deliver under a contract but the counterparty fails to meet its obligations. First Tennessee believes its credit and settlement procedures reduce these risks. Market risk is the possibility that future changes in market rates or prices might decrease the value of First Tennessee's position. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance sheet hedges are aggregated, and the resulting net positions are identified. CONTROLS First Tennessee follows the same credit policies and underwriting practices in making commitments as it does for on-balance sheet instruments. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if any, is based on management's credit evaluation of the counterparty. The use of financial instruments is monitored by management's Asset/Liability Committee (ALCO). The primary objective of ALCO is to manage market and interest rate risk by controlling and limiting the degree of earnings volatility attributable to changes in interest rates. Counterparty credit limits are reviewed and revised periodically by ALCO, in conjunction with senior credit officers, for each operating unit. In addition, controls and monitoring procedures for these instruments have been established and are routinely revised. First Tennessee has no financial instruments with leverage features. OFF-BALANCE SHEET CREDIT COMMITMENTS Commitments to Extend Credit are agreements to lend to a customer at a future date that generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commercial and Standby Letters of Credit are conditional commitments issued by First Tennessee to guarantee the performance of a customer to a third party. The credit risk involved in issuing commercial and standby letters of credit is essentially the same as that involved in extending loan facilities to customers. At December 31, 1995 and 1994, First Tennessee's outstanding off-balance sheet credit commitments included the following, which represented the maximum credit exposure associated with these instruments:
(Dollars in millions) 1995 1994 - - ---------------------------------------------------------------------- Commitments to extend credit: Consumer credit card lines $1,596 $1,735 Consumer home equity 249 199 Commercial real estate and construction and land development 330 257 Mortgage banking 569 753 Other 1,381 1,237 Commercial and standby letters of credit 255 216 - - ----------------------------------------------------------------------
Mortgage Loans Sold with Recourse First Tennessee has sold certain mortgage loans with an agreement to repurchase the loans upon default. As of December 31, 1995 and 1994, the outstanding principal amount of these loans was $682.1 million and $607.7 million, respectively. Credit risk, to the extent of recourse, totaled approximately $421.0 million and $312.3 million at December 31, 1995 and 1994, respectively. A reserve has been established in 64 order to cover any future defaults. These loans are reviewed on a regular basis to ensure that reserves are adequate to provide for foreclosure losses. The reserve was $14.1 million and $11.3 million at December 31, 1995 and 1994, respectively. OTHER OFF-BALANCE SHEET FINANCIAL INSTRUMENTS First Tennessee enters into a variety of off-balance sheet financial instruments as part of its boker/dealer operations and for purposes other than broker/dealer operations. These other activities include interest rate risk management and meeting customer needs. HELD OR ISSUED FOR PURPOSES OTHER THAN BROKER/DEALER OPERATIONS Interest Rate Risk Management Activities First Tennessee uses off-balance sheet financial instruments primarily to hedge potential fluctuations in income or market values as part of its overall asset/liability management and mortgage banking hedging strategies. As a result of interest rate fluctuations, these financial instruments will develop unrealized gains or losses that mitigate changes in the underlying hedged portion of the balance sheet. These off-balance sheet financial instruments when utilized effectively are designed to moderate the impact on earnings as interest rates move up or down. ALCO policy prohibits positions to generate speculative earnings. Other Activities First Tennessee enters into fixed and variable rate loan commitments with customers. Fixed rate loan commitments and variable rate loan commitments with contract rate adjustments that lag changes in market rates are financial instruments with characteristics similar to option contracts. The following tables set forth the notional or contractual amounts and related fair values for First Tennessee's off-balance sheet financial instruments at December 31, 1995 and 1994, for both interest rate risk management and other activities. First Tennessee's maximum exposure resulting from these off-balance sheet financial instruments at December 31, 1995 and 1994, is represented by the fair value amounts. HELD OR ISSUED FOR PURPOSES OTHER THAN BROKER/DEALER OPERATIONS AT DECEMBER 31
1995 1994 ----------------- ----------------- Notional Fair Notional Fair (Dollars in millions) Value Value Value Value - - --------------------------------------------------------------------------------- INTEREST RATE RISK MANAGEMENT ACTIVITIES: Interest rate swap agreements: Receive fixed/pay floating - amortizing $378.2 $(1.3) $ 550.0 $(33.3) Basis swap - - 1,000.0 (35.3) Interest rate forward contracts: Mortgage banking commitments to sell 952.1 (4.5) 447.8 Mortgage banking commitments to buy - - (22.6) - - --------------------------------------------------------------------------------- Net position 952.1 (4.5) 425.2 .7* Interest rate option contracts: Mortgage banking put option purchased 32.0 (.3) 13.0 - Mortgage banking call option purchased - - 6.0 - - - ---------------------------------------------------------------------------------
*Only net position available. Mortgage banking loan commitments have an additional off-balance sheet value resulting from originated mortgage servicing rights of approximately $4.1 million at December 31, 1995. HELD OR ISSUED FOR PURPOSES OTHER THAN BROKER/DEALER OPERATIONS AT DECEMBER 31
1995 1994 ---------------- ----------------- Notional Fair Notional Fair (Dollars in millions) Value Value Value Value - - ------------------------------------------------------------------------- OTHER ACTIVITES: Loan commitments $4,123.6 $4.7 $4,180.3 $2.8 Commercial and Standby letters of credit 254.7 3.2 216.4 2.7 Foreign exchange contracts: Contracts to buy (.5) (.3) Contracts to sell .3 .2 - - ------------------------------------------------------------------------- Net position (.2) - (.1) - Interest rate option contracts: Written option contracts - - (2.8) - Purchased option contracts - - 2.8 - - - -------------------------------------------------------------------------
65 Interest Rate Swaps The rate sensitive position of a bank can be altered either by holding fixed rate debt instruments in the securities portfolio and/or by holding certain off-balance sheet financial instruments. During the fourth quarter of 1993 and beginning of 1994, First Tennessee lengthened the maturity of its prime rate loans and thus restructured the asset sensitive position created from the mortgage company acquisitions by executing index amortizing swaps. With these swaps First Tennessee receives a fixed interest rate and pays a floating rate applied to an amortizing notional principal amount. The notional total of the index amortizing swaps held by First Tennessee is $378.2 million. Approximately 74 percent of these have a final maturity in the fourth quarter of 1996 and the remainder have a final maturity in 1997. All of these have the opportunity to be called in 1996. As of December 31, 1995 and 1994, respectively, these swaps had depreciated market values of $1.3 million and $33.3 million. At December 31, 1994, First Tennessee had a $1 billion notional principal swap (basis swap). This swap was terminated in 1995 in order to restructure the rate sensitive position and limit the loss going forward in a rising rate scenario. As of December 31, 1995, deferred losses from terminated swap transactions were $6.9 million and will be amortized through May 1996. The following information illustrates the maturities, indices, and weighted average rates received on the interest rate swaps used by First Tennessee in its interest rate risk program as of December 31, 1995:
Final Maturity In ----------------- (Dollars in millions) 1996 1997 Total - - -------------------------------------------------------------------- AMORTIZING SWAPS: Notional value $280 $98 $378* Weighted average rate received 4.58% 5.59% 4.84% - - --------------------------------------------------------------------
* All have the opportunity of being called in 1996. First Tennessee pays either 3 month or 6 month LIBOR depending on the contractual arrangements. Interest Rate Forward Contracts Forward contracts are commitments for delayed delivery of securities or financial instruments in which the seller agrees to make delivery at a specified future date of a specified instrument at a specified price or yield. These obligations are generally short-term in nature. Risks arise from the possible inability of counterparties to meet the terms of the contracts and from movements in the instruments' value and interest rates. The contractual amounts significantly exceed the future cash requirements, since First Tennessee has the ability to offset open positions prior to settlement. The mortgage banking companies use forward contracts to hedge interest rates between the time the mortgage loan is committed to the customer and the time it is funded and securitized. Mortgage banking is committed to deliver mortgage loans under mandatory forward sales agreements. Such agreements may be filled with mortgage loans held for sale, mortgage loans purchased, or mortgage loans in process. Interest Rate Options First Tennessee purchases interest rate options as a tool to manage interest rate risk in the mortgage banking operations. In a rising interest rate environment, purchased put option contracts give First Tennessee the right to sell mortgage loans to the seller of the option and are used to cover the uncertainty of more loan applications closing than expected. HELD OR ISSUED FOR BROKER/DEALER OPERATIONS The bond division buys and sells mortgage securities, municipal bonds, and other securities that settle on a delayed basis as part of its broker/dealer operations. These are considered forward contracts. These transactions are measured at fair value, and gains or losses are recognized in earnings as they occur. Futures contracts are utilized by the bond division, from time to time, to manage exposure arising from the inventory position. First Tennessee's ALCO policy allows the bond division the ability to execute off-balance sheet derivative financial instruments. As shown in the table below, the bond division's 1994 swap position was offset with a combination of option and futures contracts. 66 HELD OR ISSUED FOR BROKER/DEALER OPERATIONS 1995
At For The Period Ended December 31 December 31 --------------- -------------------- Net Average Notional Fair Gain/ Fair (Dollars in millions) Value Value (Loss) Value - - ----------------------------------------------------------------------------- BROKER/DEALER ACTIVITIES: Forward contracts: Commitments to buy: Gain position $(268.9) $ 1.8 Loss position (704.0) (3.6) Commitments to sell: Gain position 744.3 3.5 Loss position 278.8 (2.2) - - ----------------------------------------------------------------------------- Net position 50.2 (.5) $58.6 $(1.6) Futures contracts: Contracts to buy - - .9 * Contracts to sell - - (.3) * - - ----------------------------------------------------------------------------- Net position - - .6 * Option contracts: Option contract written - - .6 * Option contract purchased - - .1 * - - ----------------------------------------------------------------------------- Net position - - .7 * Interest rate swap - floating - - (1.6) * - - ----------------------------------------------------------------------------- *Amount is less than $100,000.
HELD OR ISSUED FOR BROKER/DEALER OPERATIONS 1994
At For The Period Ended December 31 December 31 ---------------- -------------------- Net Average Notional Fair Gain/ Fair (Dollars in millions) Value Value (Loss) Value - - ---------------------------------------------------------------------------- BROKER/DEALER ACTIVITIES: Forward contracts: Commitments to buy $(424.9) $ .9 Commitments to sell 502.3 (1.7) - - ---------------------------------------------------------------------------- Net position 77.4 (.8) $22.5 $ (.8) Futures contracts: Contracts to buy (269.0) (.6) (.7) (.2) Contracts to sell - - .7 .1 - - ---------------------------------------------------------------------------- Net position (269.0) (.6) - (.1) Option contracts: Option contract written (235.0) (.7) (.9) (.5) Option contract purchased 5.0 - .5 - - - ---------------------------------------------------------------------------- Net position (230.0) (.7) (.4) (.5) Interest rate swap: Receive fixed/pay floating 75.0 1.3 1.3 .7 - - ----------------------------------------------------------------------------
67 NOTE 19 -- RESTRICTIONS ON DIVIDENDS AND INTERCOMPANY TRANSACTIONS Dividends are paid by First Tennessee from its assets which are mainly provided by dividends from the subsidiaries. However, certain regulatory restrictions exist regarding the ability of the banking subsidiaries to transfer funds to First Tennessee in the form of cash dividends, loans, or advances. As of December 31, 1995, the banking subsidiaries had undivided profits of $610,313,000 of which $236,281,000 was available for distribution to First Tennessee as dividends without prior regulatory approval. Under Federal Banking law, banking subsidiaries may not extend credit to the parent company in excess of 10 percent of the banks' capital stock and surplus, or $99,349,000 at December 31, 1995. There were no extensions of credit to the parent from its banking subsidiaries at December 31, 1995. Certain loan agreements and indentures also define other restricted trans- actions related to additional borrowings and public offerings of capital stock. 68 NOTE 20 -- OTHER INCOME AND OTHER EXPENSE Following is detail concerning "All other income" and "All other expense" as presented in the Consolidated Statements of Income:
(Dollars in thousands) 1995 1994 1993 - - ------------------------------------------------------------ ALL OTHER INCOME: Check clearing fees $ 17,585 $16,124 $14,569 Other service charges 7,709 7,334 9,296 Other 29,859 26,006 21,303 - - ------------------------------------------------------------ Total $ 55,153 $49,464 $45,168 ============================================================ ALL OTHER EXPENSE: Supplies $ 11,866 $11,472 $10,312 Fed service fees 9,489 8,544 7,778 Travel and entertainment 8,211 10,144 8,868 Foreclosed real estate 4,962 3,862 1,542 Contribution to charitable foundation -- 9,379 -- Other 40,829 44,760 46,683 - - ------------------------------------------------------------ Total $ 75,357 $88,161 $75,183 ============================================================
69 NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments is disclosed to comply with SFAS No. 107, "Disclosure about Fair Value of Financial Instruments." The following table presents estimates of fair value for First Tennessee's financial instruments recorded in the Consolidated Statements of Condition at December 31, 1995 and 1994:
Impact Book Fair Favorable/ Percent (Dollars in thousands) Value Value (Unfavorable) Change - - ------------------------------------------------------------------------------------------------ AT DECEMBER 31, 1995: ASSETS: Loans, net of unearned income: Floating $3,162,016 $3,162,016 $ - - Fixed 4,152,227 4,115,773 (36,454) .88 - Nonaccrual 19,040 19,040 - - Allowance for loan losses (112,567) (112,567) - - - - -------------------------------------------------------------------------------------- Total net loans 7,220,716 7,184,262 (36,454) .50 - Liquid assets 249,752 249,752 - - Mortgage warehouse loans held for sale 789,183 791,349 2,166 .27 + Securities available for sale 2,036,668 2,036,668 - - Securities held to maturity 74,731 75,750 1,019 1.36 + Nonearning assets 909,289 909,289 - - - - -------------------------------------------------------------------------------------- LIABILITIES: Deposits: Defined maturity $3,402,206 $3,366,434 $ 35,772 1.05 + Undefined maturity 5,179,991 5,179,991 - - - - -------------------------------------------------------------------------------------- Total deposits 8,582,197 8,546,425 35,772 .42 + Short-term borrowings 1,760,745 1,760,745 - - Term borrowings 260,017 274,799 (14,782) 5.69 - Other noninterest- bearing liabilities 216,544 214,553 1,991 .92 + - - -------------------------------------------------------------------------------------- AT DECEMBER 31, 1994: ASSETS: Loans, net of unearned income: Floating $2,859,796 $2,856,298 $ (3,498) .12 - Fixed 3,621,393 3,479,671 (141,722) 3.91 - Nonaccrual 16,853 16,853 - - Allowance for loan losses (109,859) (109,859) - - - - -------------------------------------------------------------------------------------- Total net loans 6,388,183 6,242,963 (145,220) 2.27 - Liquid assets 425,689 425,689 - - Mortgage warehouse loans held for sale 515,407 516,520 1,113 .22 + Securities available for sale 1,166,738 1,166,738 - - Securities held to maturity 1,004,177 951,444 (52,733) 5.25 - Nonearning assets 870,615 870,615 - - - - -------------------------------------------------------------------------------------- LIABILITIES: Deposits: Defined maturity $3,213,016 $3,186,387 $ 26,629 .83 + Undefined maturity 4,667,290 4,667,290 - - - - -------------------------------------------------------------------------------------- Total deposits 7,880,306 7,853,677 26,629 .34 + Short-term borrowings 1,810,039 1,810,038 1 - Term borrowings 113,771 119,946 (6,175) 5.43 - Other noninterest- bearing liabilities 157,646 155,024 2,622 1.66 + - - -------------------------------------------------------------------------------------------------
See Note 18 - Off-Balance Sheet Financial Instruments for information on the fair value of off-balance sheet financial instruments. 70 The following describes the assumptions and methodologies used to calculate the fair value for financial instruments. FLOATING RATE LOANS. With the exception of 1-4 family residential floating rate mortgage loans, the fair value of floating rate loans is approximated by the book value. Floating rate 1-4 family residential mortgage loans reprice annually and will lag movements in market rates; whereas, commercial and consumer loans reprice monthly. The fair value for floating rate mortgage loans is calculated by discounting future cash flows to their present value. Future cash flows, consisting of principal payments, interest payments, and repricings, are discounted with current First Tennessee prices for similar instruments applicable to the remaining maturity. Prepayment assumptions based on historical prepayment speeds have been applied to the 1-4 family residential floating rate mortgage portfolio. FIXED RATE LOANS. The fair value for fixed rate loans is calculated by discounting future cash flows to their present value. Future cash flows, consisting of both principal and interest payments, are discounted with current First Tennessee prices for similar instruments applicable to the remaining maturity. Prepayment assumptions based on historical prepayment speeds have been applied to the fixed rate mortgage and installment loan portfolios. NONACCRUAL LOANS. The fair value of nonaccrual loans is approximated by the book value. ALLOWANCE FOR LOAN LOSSES. The fair value of the allowance for loan losses is approximated by the book value. Additionally, the credit exposure known to exist in the loan portfolio is embodied in the allowance for loan losses. LIQUID ASSETS. The fair value of liquid assets is approximated by the book value. For the purpose of this disclosure, liquid assets consist of federal funds sold, securities purchased under agreements to resell, trading account securities, and investment in bank time deposits. MORTGAGE WAREHOUSE LOANS HELD FOR SALE. Market quotes are used for the fair value of mortgage warehouse loans held for sale. SECURITIES AVAILABLE FOR SALE. Market quotes are used for the fair value of securities available for sale. SECURITIES HELD TO MATURITY. Market quotes are used for the fair value of securities held to maturity. NONEARNING ASSETS. The fair value of nonearning assets are approximated by the book value. For the purpose of this disclosure, nonearning assets include cash and due from banks, accrued interest receivable, bond division receivables, and excess mortgage servicing fees. DEFINED MATURITY DEPOSITS. The fair value for defined maturity deposits is calculated by discounting future cash flows to their present value. Future cash flows, consisting of both principal and interest payments, are discounted with First Tennessee prices for similar instruments applicable to the remaining maturity. For the purpose of this disclosure, defined maturity deposits include all certificates of deposit and other time deposits. UNDEFINED MATURITY DEPOSITS. The fair value of undefined maturity deposits is required by the statement to equal the book value. For the purpose of this disclosure, undefined maturity deposits include demand deposits, checking interest accounts, savings accounts, and money market accounts. SHORT-TERM BORROWINGS. The fair value of federal funds purchased, securities sold under agreements to repurchase, commercial paper, and other short-term borrowings is approximated by the book value. The fair value for Federal Home Loan Bank borrowings was determined using discounted future cash flows. TERM BORROWINGS. The fair value for term borrowings is calculated by discounting future cash flows to their present value. Future cash flows, consisting of both principal and interest payments, are discounted using the current yield to maturity for First Tennessee's outstanding term borrowings as quoted by Keefe, Bruyette and Woods, Inc. OTHER NONINTEREST-BEARING LIABILITIES. For the purpose of this disclosure, other noninterest-bearing liabilities include accrued interest payable and bond division payables. Accrued interest, which is not payable until the maturity of an instrument, has been discounted to its present value given current market rates and the maturity structure of the financial instrument. The fair value of bond division payables is approximated by the book value. 71 NOTE 22 -- CONDENSED FINANCIAL INFORMATION Following are condensed statements of the parent company:
STATEMENTS OF CONDITION December 31 --------------------------- (Dollars in thousands) 1995 1994 - - ------------------------------------------------------------------------------------ Assets: Cash $ 1,732 $ 892 Securities purchased from subsidiary bank under agreements to resell 72,868 88,814 - - ------------------------------------------------------------------------------------ Total cash and cash equivalents 74,600 89,706 Investment in bank time deposits 100 - Securities held to maturity - 5,012 Securities available for sale 1,515 1,465 Notes receivable--long-term 75,000 75,000 Investments in subsidiaries at equity: Bank 924,916 758,829 Non-bank 11,263 13,605 Other assets 29,572 26,850 - - ------------------------------------------------------------------------------------ Total assets $1,116,966 $970,467 ==================================================================================== Liabilities and shareholders' equity: Commercial paper and other short-term borrowings $ 49,401 $ 67,820 Accrued employee benefits and other liabilities 45,372 39,082 Term borrowings 148,969 88,660 - - ------------------------------------------------------------------------------------ Total liabilities 243,742 195,562 Shareholders' equity 873,224 774,905 - - ------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $1,116,966 $970,467 ====================================================================================
72
STATEMENTS OF INCOME Year Ended December 31 --------------------------------------- (Dollars in thousands) 1995 1994 1993 - - ------------------------------------------------------------------------------------- Dividend income: Bank $ 97,791 $ 65,086 $ 42,425 Non-bank 3,982 1,197 - - - ------------------------------------------------------------------------------------- Total dividend income 101,773 66,283 42,425 Interest income 9,950 9,687 9,423 Management fees - 19,166 18,611 Other income 248 103 320 - - ------------------------------------------------------------------------------------- Total income 111,971 95,239 70,779 - - ------------------------------------------------------------------------------------- Interest expense: Short-term debt 2,395 1,296 927 Term borrowings 9,569 8,898 9,157 - - ------------------------------------------------------------------------------------- Total interest expense 11,964 10,194 10,084 Compensation, employee benefits, and other expense 15,685 19,143 19,030 - - ------------------------------------------------------------------------------------- Total expense 27,649 29,337 29,114 - - ------------------------------------------------------------------------------------- Income before income taxes and equity in undistributed net income of subsidiaries 84,322 65,902 41,665 Applicable income taxes (6,825) 803 (1,284) - - ------------------------------------------------------------------------------------- Income before equity in undistributed net income of subsidiaries 91,147 65,099 42,949 Equity in undistributed net income of subsidiaries: Bank 73,073 79,912 65,120 Non-bank 668 2,057 1,647 - - ------------------------------------------------------------------------------------- Net income $164,888 $147,068 $109,716 =====================================================================================
73
STATEMENTS OF CASH FLOWS Year Ended December 31 ---------------------------------------- (Dollars in thousands) 1995 1994 1993 - - ------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $164,888 $147,068 $109,716 Less undistributed net income of subsidiaries 73,741 81,969 66,767 - - ------------------------------------------------------------------------------------- Income before undistributed net income of subsidiaries 91,147 65,099 42,949 Adjustments to reconcile income to net cash provided by operating activities: Provision for deferred income taxes (17) (45) (1,228) Depreciation and amortization 1,926 2,328 2,429 Gain on disposal of fixed assets (225) - - Net (increase)/decrease in: Interest receivable 184 (117) 291 Other assets (4,226) (245) (657) Net increase/(decrease) in: Interest payable 580 39 (329) Other liabilities 3,497 1,354 2,944 - - ------------------------------------------------------------------------------------- Total adjustments 1,719 3,314 3,450 - - ------------------------------------------------------------------------------------- Net cash provided by operating activities 92,866 68,413 46,399 - - ------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Proceeds from maturity of investment securities 5,000 20 5,000 Proceeds from sale of premises and equipment 1,608 - - Payments for purchase of: Investment securities (202) (400) (5,715) Investment in bank time deposits (100) - - Premises and equipment (426) (1,139) (539) Net decrease in loans - - 25,046 Return of investments 151 66 13 Investment in subsidiaries 2,656 (1,462) (971) Cash received from acquisitions 22,063 - - - - ------------------------------------------------------------------------------------- Net cash provided/(used) by investing activities 30,750 (2,915) 22,834 - - ------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from exercise of stock options 4,977 2,777 2,046 Proceeds from issuance of subordinated capital notes 74,183 - - Payments for: Term borrowings (13,950) (850) (37,476) Cash dividends (62,694) (40,314) (50,730) Equity distributions related to acquisitions (23) (47) - Repurchase of common stock (122,796) (24,211) (4,797) Increase/(decrease) in borrowings (18,419) 35,538 10,427 - - ------------------------------------------------------------------------------------- Net cash used by financing activities (138,722) (27,107) (80,530) - - ------------------------------------------------------------------------------------- Net increase/(decrease) in cash and cash equivalents (15,106) 38,391 (11,297) - - ------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 89,706 51,315 62,612 - - ------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 74,600 $ 89,706 $ 51,315 ===================================================================================== Total interest paid $ 11,281 $ 10,119 $ 10,377 Total income taxes paid 42,400 56,923 55,869 - - -------------------------------------------------------------------------------------
74 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of First Tennessee National Corporation: We have audited the accompanying consolidated statements of condition of First Tennessee National Corporation (a Tennessee corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First Tennessee National Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flow for each of the three years in the period ended December 31, 1995, in confromity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective January 1, 1995, the Company changed its method of accounting for mortgage servicing rights. Memphis, Tennessee, Arthur Andersen LLP January 16, 1996. 75
SELECTED FINANCIAL DATA First Tennessee National Corporation - - ------------------------------------------------------------------------------------------------------------------------------- (Dollars in millions except per share data) 1995 1994 1993 1992 1991 1990 - - ------------------------------------------------------------------------------------------------------------------------------- SUMMARY INCOME STATEMENTS Interest income $ 822.5 $ 701.1 $ 652.2 $ 644.3 $ 686.0 $ 710.7 Less interest expense 431.8 306.6 276.1 298.7 388.9 439.3 - - ------------------------------------------------------------------------------------------------------------------------------- Net interest income 390.7 394.5 376.1 345.6 297.1 271.4 Provision for loan losses 20.6 17.2 36.5 45.2 60.7 71.2 - - ------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 370.1 377.3 339.6 300.4 236.4 200.2 Noninterest income 496.5 458.7 389.9 255.3 206.7 173.1 - - ------------------------------------------------------------------------------------------------------------------------------- Adjusted gross income after provision for loan losses 866.6 836.0 729.5 555.7 443.1 373.3 Noninterest expense 613.6 628.2 554.4 406.1 343.7 295.8 - - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 253.0 207.8 175.1 149.6 99.4 77.5 Applicable income taxes 88.1 60.7 65.4 56.9 27.6 20.0 - - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 164.9 $ 147.1 $ 109.7 $ 92.7 $ 71.8 $ 57.5 =============================================================================================================================== COMMON STOCK DATA Net income per common share $ 2.42 $ 2.15 $ 1.61 $ 1.44 $ 1.14 $ .90 Cash dividends declared per common share .97 .87 .75 .63 .57 .55 Year-end book value per common share 13.00 11.37 10.52 9.58 9.16 8.54 Closing price of common stock per share: High 30 7/8 23 7/8 23 1/2 19 13 13/16 9 Low 19 5/8 18 11/16 18 1/16 13 3/16 7 3/16 6 Year-end 30 1/4 20 3/8 19 1/4 18 3/8 13 13/16 7 9/16 Dividends/price 3.1-4.9 % 3.6-4.6 % 3.2-4.2 % 3.3-4.8 % 4.1-7.9 % 6.1-9.1 % Dividends/earnings 40.1 40.5 46.6 43.8 50.0 61.1 Closing price/earnings 12.5 x 9.5 x 12.0 x 12.8 x 12.1 x 8.4 x Market capitalization $ 2,032.1 $ 1,388.5 $ 1,319.8 $ 1,241.6 $ 875.3 $ 478.8 Average shares outstanding (thousands) 68,025 68,442 68,146 64,354 63,346 64,142 Period-end shares outstanding (thousands) 67,178 68,148 68,560 67,572 63,368 63,316 Volume of shares traded (thousands) 65,648 46,692 50,972 42,788 31,428 17,240 - - ------------------------------------------------------------------------------------------------------------------------------- SELECTED AVERAGE BALANCES Total assets $11,359.5 $ 10,579.8 $ 9,982.4 $ 8,911.5 $ 8,188.6 $ 7,741.2 Total loans* 7,593.3 6,752.3 5,611.7 4,887.2 4,666.7 4,542.7 Investment securities 2,161.0 2,248.7 3,015.3 2,803.9 1,981.3 1,671.0 Earning assets 10,094.7 9,406.2 8,953.6 8,112.9 7,469.3 7,031.4 Deposits 8,132.4 7,714.4 7,186.0 7,030.2 6,579.2 6,142.6 Term borrowings 208.9 101.8 102.8 132.8 131.4 132.2 Shareholders' equity 822.8 759.5 684.1 622.5 559.4 530.3 - - ------------------------------------------------------------------------------------------------------------------------------- SELECTED PERIOD-END BALANCES Total assets $12,076.9 $ 10,932.9 $ 10,800.7 $ 9,749.4 $ 9,296.7 $ 8,024.5 Total loans* 8,122.5 7,013.4 6,823.6 5,105.1 4,870.6 4,678.0 Investment securities 2,111.4 2,170.9 2,364.3 3,214.0 2,672.9 1,761.6 Earning assets 10,483.6 9,610.1 9,511.8 8,806.4 8,162.3 7,189.4 Deposits 8,582.2 7,880.3 7,602.7 7,365.6 7,218.3 6,461.1 Term borrowings 260.0 113.8 92.0 133.8 131.2 131.6 Shareholders' equity 873.2 774.9 721.1 647.6 580.7 540.7 - - ------------------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS Return on average equity 20.04 % 19.36 % 16.04 % 14.88 % 12.84 % 10.85 % Return on average assets 1.45 1.39 1.10 1.04 .88 .74 Net interest margin 3.92 4.25 4.27 4.36 4.12 4.07 Allowance for loan losses to loans* 1.39 1.57 1.62 2.02 2.00 1.99 Net charge-offs to average loans* .27 .27 .53 .81 1.41 1.06 Average equity to average assets 7.24 7.18 6.85 6.99 6.83 6.85 Average tangible equity to average tangible assets 6.36 6.38 6.28 6.38 6.34 6.47 Average equity to average net loans 11.00 11.44 12.43 13.01 12.25 11.90 - - ------------------------------------------------------------------------------------------------------------------------------- RETURN TO SHAREHOLDERS Stock appreciation 48.5 % 5.8 % 4.8 % 33.0 % 82.6 % (9.0)% Dividend yield 4.8 4.5 4.1 4.6 7.5 6.6 Annual return 53.3 10.3 8.9 37.6 90.1 (2.4) - - -------------------------------------------------------------------------------------------------------------------------------
* Net of unearned income. The notes to consolidated financial statements should be read in conjunction with this table. Common stock data reflects the 1996 two-for-one stock split. 76
CONSOLIDATED HISTORICAL PERFORMANCE STATEMENTS OF INCOME (Unaudited) First Tennessee National Corporation - - ----------------------------------------------------------------------------------------------------------------------------- Growth Rates (%) (Dollars in millions except ------------------- per share data) 1995 1994 1993 1992 1991 1990 95/94 95/90 - - ----------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans: Commercial $264.4 $211.6 $178.7 $180.4 $214.4 $234.7 25.0 + 2.4 + Consumer 206.0 166.8 128.1 114.6 116.9 121.4 23.5 + 11.2 + Mortgage warehouse loans held for sale 54.7 56.0 44.9 15.7 8.7 8.5 2.3 - 45.1 + Permanent mortgage 52.1 44.0 45.9 59.0 64.3 60.8 18.4 + 3.0 - Credit card receivables 65.5 56.6 51.1 53.2 53.0 46.2 15.7 + 7.2 + Real estate construction 23.0 11.4 7.3 6.0 13.1 25.4 101.8 + 2.0 - Investment securities: Taxable 130.9 128.9 175.8 187.1 150.7 130.7 1.6 + - Tax-exempt 4.6 5.2 7.2 8.7 11.9 15.2 11.5 - 21.3 - Other earning assets: Investments in bank time deposits .2 .2 .2 2.5 23.3 30.4 - 63.4 - Federal funds sold and securities purchased under agreements to resell 8.5 7.6 3.7 6.8 20.2 25.4 11.8 + 19.7 - Broker/dealer securities inventory 12.6 12.8 9.3 10.3 9.5 12.0 1.6 - 1.0 + - - -------------------------------------------------------------------------------------------------------- Total interest income 822.5 701.1 652.2 644.3 686.0 710.7 17.3 + 3.0 + - - -------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits: Checking/Interest 7.7 9.2 10.8 12.7 16.1 16.8 16.3 - 14.4 - Savings 10.8 13.4 15.4 17.5 20.5 20.9 19.4 - 12.4 - Money market account 88.1 56.5 43.5 52.7 73.3 78.8 55.9 + 2.3 + Certificates of deposit under $100,000 and other time 167.8 122.0 117.3 147.3 191.0 207.9 37.5 + 4.2 - Certificates of deposit $100,000 and more 30.6 18.7 16.2 20.5 33.1 41.2 63.6 + 5.8 - Federal funds purchased and securities sold under agreements to repurchase 80.9 40.5 29.2 22.5 31.7 47.2 99.8 + 11.4 + Commercial paper and other short-term borrowings 25.7 35.6 33.6 13.7 10.3 12.6 27.8 - 15.3 + Federal Reserve Bank penalties 2.2 1.1 .5 .7 1.0 1.3 100.0 + 11.1 + Term borrowings 18.0 9.6 9.6 11.1 11.9 12.6 87.5 + 7.4 + - - -------------------------------------------------------------------------------------------------------- Total interest expense 431.8 306.6 276.1 298.7 388.9 439.3 40.8 + .3 - - - -------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 390.7 394.5 376.1 345.6 297.1 271.4 1.0 - 7.6 + Provision for loan losses 20.6 17.2 36.5 45.2 60.7 71.2 19.8 + 22.0 - - - -------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 370.1 377.3 339.6 300.4 236.4 200.2 1.9 - 13.1 + - - -------------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Mortgage banking 212.6 187.3 138.9 33.5 17.6 19.5 13.5 + 61.3 + Bond division 82.8 77.5 91.5 80.3 68.6 41.7 6.9 + 14.7 + Deposit transactions and cash management 71.0 64.2 58.4 53.9 46.3 40.2 10.6 + 12.0 + Cardholder and merchant processing 37.0 31.4 28.5 26.6 25.8 22.3 17.8 + 10.6 + Trust services 35.6 28.9 26.5 23.8 21.0 18.0 23.2 + 14.6 + Equity securities gains/(losses) 3.2 24.2 (.5) .3 (.7) (1.0) 86.8 - 38.4 + Debt securities gains/(losses) (.8) (4.3) 1.4 (1.5) - (.9) 82.5 + 3.6 + All other 55.1 49.5 45.2 38.4 28.1 33.3 11.5 + 10.6 + - - -------------------------------------------------------------------------------------------------------- Total noninterest income 496.5 458.7 389.9 255.3 206.7 173.1 8.2 + 23.5 + - - -------------------------------------------------------------------------------------------------------- ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 866.6 836.0 729.5 555.7 443.1 373.3 3.7 + 18.3 + - - -------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Employee compensation, incentives, and benefits 340.5 349.8 308.6 214.3 177.6 154.9 2.6 - 17.1 + Operations services 38.8 33.7 28.7 24.3 21.9 18.5 15.2 + 15.9 + Occupancy 37.9 34.1 27.7 24.7 22.0 20.6 11.0 + 13.0 + Equipment rentals, depreciation, and maintenance 31.8 29.2 22.2 17.5 14.0 12.9 9.1 + 19.8 + Communications and courier 29.9 30.7 24.8 18.0 16.5 14.6 2.5 - 15.4 + Amortization of mortgage servicing rights 15.0 14.9 25.5 4.5 1.4 .9 .3 + 74.8 + Legal and professional fees 13.4 13.7 11.3 11.4 8.3 6.6 2.5 - 15.1 + Advertising and public relations 13.0 10.7 8.0 6.2 4.9 4.5 21.5 + 23.6 + Deposit insurance premium 9.9 16.9 16.6 16.2 13.4 7.6 41.2 - 5.6 + Amortization of intangible assets 8.1 6.4 5.8 9.8 7.7 7.1 26.4 + 2.7 + All other 75.3 88.1 75.2 59.2 56.0 47.6 14.5 - 9.7 + - - -------------------------------------------------------------------------------------------------------- Total noninterest expense 613.6 628.2 554.4 406.1 343.7 295.8 2.3 - 15.7 + - - -------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 253.0 207.8 175.1 149.6 99.4 77.5 21.8 + 26.7 + Applicable income taxes 88.1 60.7 65.4 56.9 27.6 20.0 45.1 + 34.5 + - - -------------------------------------------------------------------------------------------------------- NET INCOME $164.9 $147.1 $109.7 $ 92.7 $ 71.8 $ 57.5 12.1 + 23.5 + ======================================================================================================== FULLY TAXABLE EQUIVALENT ADJUSTMENT $ 5.0 $ 4.8 $ 6.3 $ 8.4 $ 10.9 $ 14.5 4.2 + 19.2 - - - -------------------------------------------------------------------------------------------------------- NET INCOME PER SHARE $ 2.42 $ 2.15 $ 1.61 $ 1.44 $ 1.14 $ .90 12.6 + 21.9 + - - --------------------------------------------------------------------------------------------------------
Certain previously reported amounts have been reclassified to agree with current presentation. Per share data reflects the 1996 two-for-one stock split. 77
CONSOLIDATED AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES (Unaudited) First Tennessee National Corporation - - ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 ---------------------------------- ---------------------------------- Interest Average Interest Average (Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/ (Dollars in millions) Balance Expense Rates Balance Expense Rates - - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS: Earning assets: Loans, net of unearned income: Commercial $ 3,148.4 $265.3 8.43% $ 2,775.7 $212.4 7.65% Consumer 2,367.1 206.0 8.70 2,082.6 166.8 8.01 Mortgage warehouse loans held for sale 706.1 54.7 7.75 767.9 56.0 7.29 Permanent mortgage 658.4 52.1 7.91 557.5 44.0 7.90 Credit card receivables 480.4 65.5 13.63 432.7 56.6 13.08 Real estate construction 216.4 23.0 10.65 117.3 11.4 9.71 Nonaccrual loans 16.5 1.4 8.48 18.6 1.3 7.25 - - ------------------------------------------------------------------------------------------------------------------------------------ Total loans, net of unearned income 7,593.3 668.0 8.80 6,752.3 548.5 8.12 - - ------------------------------------------------------------------------------------------------------------------------------------ Investment securities: U.S. Treasury and other U.S. government agencies 2,004.3 125.9 6.28 2,063.4 122.8 5.95 States and municipalities 81.4 7.0 8.63 84.3 7.8 9.26 Other 75.3 4.9 6.53 101.0 5.9 5.91 - - ------------------------------------------------------------------------------------------------------------------------------------ Total investment securities 2,161.0 137.8 6.38 2,248.7 136.5 6.07 - - ------------------------------------------------------------------------------------------------------------------------------------ Other earning assets: Investment in bank time deposits 3.1 .2 5.79 5.3 .2 3.88 Federal funds sold and securities purchased under agreements to resell 157.5 8.5 5.42 191.9 7.6 3.97 Broker/dealer securities inventory 179.8 13.0 7.22 208.0 13.1 6.28 - - ------------------------------------------------------------------------------------------------------------------------------------ Total other earning assets 340.4 21.7 6.37 405.2 20.9 5.16 - - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets 10,094.7 827.5 8.20 9,406.2 705.9 7.50 Allowance for loan losses (113.0) (113.1) Cash and due from banks 659.0 659.7 Premises and equipment, net 166.0 149.1 Bond division receivables and other assets 552.8 477.9 - - ------------------------------------------------------------------------------------------------------------------------------------ Total assets / Interest income $11,359.5 $827.5 $10,579.8 $705.9 ==================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing deposits: Checking/Interest $ 466.6 $ 7.7 1.66% $ 518.8 $ 9.2 1.77% Savings 602.2 10.8 1.79 686.5 13.4 1.96 Money market account 1,912.3 88.1 4.61 1,776.8 56.5 3.18 Certificates of deposit under $100,000 and other time 2,872.6 167.8 5.84 2,529.4 122.0 4.82 Certificates of deposit $100,000 and more 531.9 30.6 5.75 460.2 18.7 4.06 - - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 6,385.6 305.0 4.78 5,971.7 219.8 3.68 Federal funds purchased and securities sold under agreements to repurchase 1,491.1 80.9 5.43 1,045.6 40.5 3.87 Commercial paper and other short-term borrowings 404.2 27.9 6.90 683.2 36.7 5.37 Term borrowings 208.9 18.0 8.63 101.8 9.6 9.41 - - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 8,489.8 431.8 5.09 7,802.3 306.6 3.93 Demand deposits 1,746.8 1,742.7 Bond division payables and other liabilities 300.1 275.3 Shareholders' equity 822.8 759.5 - - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity / Interest expense $11,359.5 $431.8 $10,579.8 $306.6 ==================================================================================================================================== Net interest income-tax equivalent basis / Yield $395.7 3.92% $399.3 4.25% Fully taxable equivalent adjustment (5.0) (4.8) - - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $390.7 $394.5 ==================================================================================================================================== Net interest spread 3.11% 3.57% Effect of interest-free sources used to fund earning assets .81 .68 - - ------------------------------------------------------------------------------------------------------------------------------------ Net interest margin 3.92% 4.25% ====================================================================================================================================
Certain previously reported amounts have been reclassified to agree with current presentation. Yields and corresponding income amounts are adjusted to a fully taxable equivalent. Earning assets yields are expressed net of unearned income. Rates are expressed net of unamortized debenture cost for long-term debt. Net interest margin is computed using total interest income. 78
CONSOLIDATED AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES (Unaudited) First Tennessee National Corporation - - ------------------------------------------------------------------------------------------------------------------------------------ 1993 1992 ---------------------------------- --------------------------------- Interest Average Interest Average (Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/ (Dollars in millions) Balance Expense Rates Balance Expense Rates - - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS: Earning assets: Loans, net of unearned income: Commercial $2,435.3 $179.4 7.37% $2,332.2 $182.9 7.84% Consumer 1,524.9 128.1 8.40 1,231.8 114.6 9.30 Mortgage warehouse loans held for sale 615.3 44.9 7.29 188.8 15.7 8.29 Permanent mortgage 527.4 45.9 8.70 643.2 59.0 9.17 Credit card receivables 396.5 51.1 12.90 388.1 53.2 13.72 Real estate construction 82.0 7.3 8.92 58.9 6.0 10.21 Nonaccrual loans 30.3 1.8 5.86 44.2 1.5 3.48 - - ----------------------------------------------------------------------------------------------------------------------------------- Total loans, net of unearned income 5,611.7 458.5 8.17 4,887.2 432.9 8.86 - - ----------------------------------------------------------------------------------------------------------------------------------- Investment securities: U.S. Treasury and other U.S. government agencies 2,679.9 160.8 6.00 2,224.4 154.3 6.94 States and municipalities 109.2 10.8 9.92 127.2 13.0 10.26 Other 226.2 14.9 6.60 452.3 32.6 7.21 - - ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities 3,015.3 186.5 6.19 2,803.9 199.9 7.13 - - ----------------------------------------------------------------------------------------------------------------------------------- Other earning assets: Investment in bank time deposits 4.2 .2 3.84 40.6 2.5 6.08 Federal funds sold and securities purchased under agreements to resell 142.0 3.7 2.63 222.8 6.8 3.05 Broker/dealer securities inventory 180.4 9.6 5.34 158.4 10.6 6.70 - - ----------------------------------------------------------------------------------------------------------------------------------- Total other earning assets 326.6 13.5 4.14 421.8 19.9 4.71 - - ----------------------------------------------------------------------------------------------------------------------------------- Total earning assets 8,953.6 658.5 7.35 8,112.9 652.7 8.05 Allowance for loan losses (109.6) (103.3) Cash and due from banks 582.5 487.7 Premises and equipment, net 126.3 117.3 Bond division receivables and other assets 429.6 296.9 - - ----------------------------------------------------------------------------------------------------------------------------------- Total assets / Interest income $9,982.4 $658.5 $8,911.5 $652.7 ==================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing deposits: Checking/Interest $ 548.1 $ 10.8 1.97% $ 491.4 $ 12.7 2.59% Savings 567.9 15.4 2.72 518.0 17.5 3.38 Money market account 1,673.8 43.5 2.60 1,598.9 52.7 3.29 Certificates of deposit under $100,000 and other time 2,439.4 117.3 4.81 2,621.5 147.3 5.62 Certificates of deposit $100,000 and more 414.0 16.2 3.91 472.7 20.5 4.34 - - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 5,643.2 203.2 3.60 5,702.5 250.7 4.40 Federal funds purchased and securities sold under agreements to repurchase 1,029.0 29.2 2.84 691.7 22.5 3.26 Commercial paper and other short-term borrowings 724.5 34.1 4.70 251.1 14.4 5.75 Term borrowings 102.8 9.6 9.39 132.8 11.1 8.33 - - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 7,499.5 276.1 3.68 6,778.1 298.7 4.41 Demand deposits 1,542.8 1,327.7 Bond division payables and other liabilities 256.0 183.2 Shareholders' equity 684.1 622.5 - - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity / Interest expense $9,982.4 $276.1 $8,911.5 $298.7 ==================================================================================================================================== Net interest income-tax equivalent basis / Yield $382.4 4.27% $354.0 4.36% Fully taxable equivalent adjustment (6.3) (8.4) - - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income $376.1 $345.6 ==================================================================================================================================== Net interest spread 3.67% 3.64% Effect of interest-free sources used to fund earning assets .60 .72 - - ----------------------------------------------------------------------------------------------------------------------------------- Net interest margin 4.27% 4.36% ====================================================================================================================================
Certain previously reported amounts have been reclassified to agree with current presentation. Yields and corresponding income amounts are adjusted to a fully taxable equivalent. Earning assets yields are expressed net of unearned income. Rates are expressed net of unamortized debenture cost for long-term debt. Net interest margin is computed using total interest income. 79
CONSOLIDATED AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES (Unaudited) First Tennessee National Corporation - - ------------------------------------------------------------------------------------------------------------------------------------ 1991 1990 ---------------------------------- --------------------------------- Interest Average Interest Average (Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/ (Dollars in millions) Balance Expense Rates Balance Expense Rates - - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS: Earning assets: Loans, net of unearned income: Commercial $2,264.8 $217.4 9.60% $2,199.2 $237.5 10.80% Consumer 1,098.8 116.9 10.64 1,065.2 121.4 11.39 Mortgage warehouse loans held for sale 58.6 8.7 14.88 86.3 8.5 9.87 Permanent mortgage 684.0 64.3 9.41 593.8 60.8 10.23 Credit card receivables 370.4 53.0 14.31 313.7 46.2 14.73 Real estate construction 123.8 13.1 10.59 224.6 25.6 11.42 Nonaccrual loans 66.3 2.3 3.43 59.9 4.5 7.48 - - ------------------------------------------------------------------------------------------------------------------------------------ Total loans, net of unearned income 4,666.7 475.7 10.19 4,542.7 504.5 11.11 - - ------------------------------------------------------------------------------------------------------------------------------------ Investment securities: U.S. Treasury and other U.S. government agencies 1,449.7 122.6 8.46 1,230.6 111.6 9.07 States and municipalities 163.0 17.2 10.57 207.9 22.1 10.61 Other 368.6 28.0 7.58 232.5 18.9 8.14 - - ------------------------------------------------------------------------------------------------------------------------------------ Total investment securities 1,981.3 167.8 8.47 1,671.0 152.6 9.13 - - ------------------------------------------------------------------------------------------------------------------------------------ Other earning assets: Investment in bank time deposits 331.3 23.3 7.03 358.8 30.4 8.49 Federal funds sold and securities purchased under agreements to resell 365.2 20.2 5.52 323.5 25.4 7.86 Broker/dealer securities inventory 124.8 9.9 7.94 135.4 12.3 9.07 - - ------------------------------------------------------------------------------------------------------------------------------------ Total other earning assets 821.3 53.4 6.50 817.7 68.1 8.34 - - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets 7,469.3 696.9 9.33 7,031.4 725.2 10.31 Allowance for loan losses (100.0) (85.6) Cash and due from banks 447.3 459.2 Premises and equipment, net 107.8 99.2 Bond division receivables and other assets 264.2 237.0 - - ------------------------------------------------------------------------------------------------------------------------------------ Total assets / Interest income $8,188.6 $696.9 $7,741.2 $725.2 ==================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing deposits: Checking/Interest $ 414.5 $ 16.1 3.87% $ 395.0 $ 16.8 4.25% Savings 420.1 20.5 4.88 399.3 20.9 5.24 Money market account 1,401.4 73.3 5.23 1,208.7 78.8 6.52 Certificates of deposit under $100,000 and other time 2,704.8 191.0 7.06 2,561.9 207.9 8.12 Certificates of deposit $100,000 and more 513.1 33.1 6.46 519.2 41.2 7.94 - - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 5,453.9 334.0 6.12 5,084.1 365.6 7.19 Federal funds purchased and securities sold under agreements to repurchase 598.1 31.7 5.30 632.0 47.2 7.47 Commercial paper and other short-term borrowings 147.7 11.3 7.68 144.0 13.9 9.66 Term borrowings 131.4 11.9 9.08 132.2 12.6 9.52 - - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 6,331.1 388.9 6.14 5,992.3 439.3 7.33 Demand deposits 1,125.3 1,058.5 Bond division payables and other liabilities 172.8 160.1 Shareholders' equity 559.4 530.3 - - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity / Interest expense $8,188.6 $388.9 $7,741.2 $439.3 ==================================================================================================================================== Net interest income-tax equivalent basis / Yield $308.0 4.12% $285.9 4.07% Fully taxable equivalent adjustment (10.9) (14.5) - - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $297.1 $271.4 ==================================================================================================================================== Net interest spread 3.19% 2.98% Effect of interest-free sources used to fund earning assets .93 1.09 - - ------------------------------------------------------------------------------------------------------------------------------------ Net interest margin 4.12% 4.07% ====================================================================================================================================
Certain previously reported amounts have been reclassified to agree with current presentation. Yields and corresponding income amounts are adjusted to a fully taxable equivalent. Earning assets yields are expressed net of unearned income. Rates are expressed net of unamortized debenture cost for long-term debt. Net interest margin is computed using total interest income. 80
CONSOLIDATED AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES (Unaudited) First Tennessee National Corporation - - -------------------------------------------------------------------------------------------------------------------------------- Average Balance (Fully taxable equivalent) Growth Rates (%) ----------------------------------------- (Dollars in millions) 95/94 95/90 - - -------------------------------------------------------------------------------------------------------------------------------- ASSETS: Earning assets: Loans, net of unearned income: Commercial 13.4 + 7.4 + Consumer 13.7 + 17.3 + Mortgage warehouse loans held for sale 8.0 - 52.3 + Permanent mortgage 18.1 + 2.1 + Credit card receivables 11.0 + 8.9 + Real estate construction 84.5 + .7 - Nonaccrual loans 11.3 - 22.7 - - - ------------------------------------------------------------------------------------------------------------------------------- Total loans, net of unearned income 12.5 + 10.8 + - - ------------------------------------------------------------------------------------------------------------------------------- Investment securities: U.S. Treasury and other U.S. government agencies 2.9 - 10.2 + States and municipalities 3.4 - 17.1 - Other 25.4 - 20.2 - - - ------------------------------------------------------------------------------------------------------------------------------- Total investment securities 3.9 - 5.3 + - - ------------------------------------------------------------------------------------------------------------------------------- Other earning assets: Investment in bank time deposits 41.5 - 61.3 - Federal funds sold and securities purchased under agreements to resell 17.9 - 13.4 - Broker/dealer securities inventory 13.6 - 5.8 + - - ------------------------------------------------------------------------------------------------------------------------------- Total other earning assets 16.0 - 16.1 - - - ------------------------------------------------------------------------------------------------------------------------------- Total earning assets 7.3 + 7.5 + Allowance for loan losses .1 - 5.7 + Cash and due from banks .1 - 7.5 + Premises and equipment, net 11.3 + 10.8 + Bond division receivables and other assets 15.7 + 18.5 + - - ------------------------------------------------------------------------------------------------------------------------------- Total assets / Interest income 7.4 + 8.0 + =============================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing deposits: Checking/Interest 10.1 - 3.4 + Savings 12.3 - 8.6 + Money market account 7.6 + 9.6 + Certificates of deposit under $100,000 and other time 13.6 + 2.3 + Certificates of deposit $100,000 and more 15.6 + .5 + - - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 6.9 + 4.7 + Federal funds purchased and securities sold under agreements to repurchase 42.6 + 18.7 + Commercial paper and other short-term borrowings 40.8 - 22.9 + Term borrowings 105.2 + 9.6 + - - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 8.8 + 7.2 + Demand deposits .2 + 10.5 + Bond division payables and other liabilities 9.0 + 13.4 + Shareholders' equity 8.3 + 9.2 + - - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity / Interest expense 7.4 + 8.0 + =============================================================================================================================== Net interest income-tax equivalent basis / Yield Fully taxable equivalent adjustment - - ------------------------------------------------------------------------------------------------------------------------------- Net interest income =============================================================================================================================== Net interest spread Effect of interest-free sources used to fund earning assets - - ------------------------------------------------------------------------------------------------------------------------------- Net interest margin ===============================================================================================================================
Certain previously reported amounts have been reclassified to agree with current presentation. Yields and corresponding income amounts are adjusted to a fully taxable equivalent. Earning assets yields are expressed net of unearned income. Rates are expressed net of unamortized debenture cost for long-term debt. Net interest margin is computed using total interest income. EX-21 12 SUBSIDIRARIES OF THE CORPORATION 1 Exhibit 21 PARENTS AND SUBSIDIARIES The following is a list of all subsidiaries of First Tennessee National Corporation at December 31, 1995. 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 ---------- ------------------ --------------- Cleveland Bank & Trust Company Direct Tennessee First National Bank of Springdale Direct United States First Tennessee Bank National Association (1) Direct United States "A" PLUS Strategic Alliances, Inc. Indirect Tennessee Check Consultants, Incorporated Indirect Tennessee Check Consultants Company of Tennessee, Inc. Indirect Tennessee Community Leasing Corporation * Indirect Tennessee Community Money Center, Inc.* Indirect Tennessee East Tennessee Service Corporation Indirect Tennessee Upper East Tennessee Insurance Agency Indirect Tennessee First Funds, Inc.* Indirect Tennessee First Tennessee Capital Assets Corporation Indirect Tennessee First Tennessee Brokerage, Inc. Indirect Tennessee First Tennessee Equipment Finance Corporation Indirect Tennessee FT Mortgage Holding Corporation Indirect Illinois FT Mortgage Companies (2) Indirect Kansas First Tennessee Mortgage Services, Inc. Indirect Tennessee Hickory Venture Capital Corporation Indirect Alabama JPO, Inc. Indirect Tennessee TSMM Corporation Indirect Tennessee First Tennessee Bank National Association Mississippi Direct United States FTB Futures Corporation* Direct Tennessee Hickory Capital Corporation Direct Tennessee Highland Capital Management Corp. Direct Tennessee Mountain Financial Company* Direct Tennessee Norlen Life Insurance Company Direct Arizona Peoples and Union Bank Direct Tennessee Peoples Bank Direct Mississippi Planters Bank Direct Mississippi *Inactive.
(1) Divisions of this subsidiary do business in certain jurisdictions under the following names: First Express, First Money Center, First Securities Company in Mobile, Garland Capital Management, Garland Trust, Gulf Pacific Mortgage. (2) Divisions of this subsidiary do business in certain jurisdictions under the following names: Atlantic Coast Mortgage, Capital Mortgage, Carl I. Brown Mortgage, CIB Funding, CIB Mortgage, Emerald Mortgage, First Tennessee Mortgage Company, Inc., Flagship Mortgage Bankers, FTB Mortgage Services, HomeBanc Mortgage Corporation, MNC Mortgage, Mortgage Resources, Premier Mortgage Resources, Priority One, Provision Mortgage Bankers, Select Mortgage Resources, SNMC National Mortgage, Sunbelt National Mortgage, Wolf and Company Mortgage Bankers. EX-23 13 CONSENT OF PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 16, 1996, included in First Tennessee National Corporation's 1995 Annual Report on Form 10-K, into the Company's previously filed registration statement file Nos. 33-8029, 33-9846, 33-40398, 33-44142, 33-52105, 33-52561, 33-57241, 33-57697, 33-58975, 33-63809, and 33-64471 and to all references to our firm included therein. Arthur Andersen LLP Memphis, Tennessee, March 22, 1996. EX-24 14 POWERS 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 ELBERT L. THOMAS, JR., JAMES F. KEEN, CLYDE A. BILLINGS, JR., and TERESA A. FEHRMAN, 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, 1995 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 ----- ---- Ralph Horn Chairman of the Board, March 25, 1996 - - ---------------------------------- President and Chief Executive Ralph Horn Officer and a Director (principal executive officer) Elbert L. Thomas, Jr. Executive Vice President and March 25, 1996 - - ---------------------------------- Chief Financial Officer Elbert L. Thomas, Jr. (principal financial officer) James F. Keen Senior Vice President and March 25, 1996 - - ---------------------------------- Controller (principal James F. Keen accounting officer) Jack A. Belz Director March 25, 1996 - - ---------------------------------- Jack A. Belz Robert C. Blattberg Director March 25, 1996 - - ---------------------------------- Robert C. Blattberg J. R. Hyde, III Director March 25, 1996 - - ---------------------------------- J. R. Hyde, III
Page 1 of 2 2 R. Brad Martin Director March 25, 1996 - - ---------------------------------- R. Brad Martin Joseph Orgill, III Director March 25, 1996 - - ---------------------------------- Joseph Orgill, III Richard E. Ray Director March 25, 1996 - - ---------------------------------- Richard E. Ray Vicki G. Roman Director March 25, 1996 - - ---------------------------------- Vicki G. Roman Michael D. Rose Director March 25, 1996 - - ---------------------------------- Michael D. Rose William B. Sansom Director March 25, 1996 - - ---------------------------------- William B. Sansom Gordon P. Street, Jr. Director March 25, 1996 - - ---------------------------------- Gordon P. Street, Jr. Ronald Terry Director March 25, 1996 - - ---------------------------------- Ronald Terry
Page 2 of 2 EX-27 15 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST TENNESSEE NATIONAL CORPORATION'S DECEMBER 31, 1995, FINANCIAL STATEMENTS FILED IN ITS 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCES TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 710,870 2,119 64,978 182,655 2,036,668 74,731 75,750 8,122,466 112,567 12,076,882 8,582,197 1,760,745 600,699 260,017 0 0 83,973 789,251 12,076,882 665,727 135,451 21,350 822,528 305,042 431,875 390,653 20,592 2,444 613,667 252,957 164,888 0 0 164,888 2.42 2.38 3.92 19,040 33,273 0 66,621 109,859 35,231 14,715 112,567 112,567 0 0
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