SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
FIRST TENNESSEE NATIONAL CORPORATION
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies: _________
(2) Aggregate number of securities to which transaction applies: ____________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(5) Total fee paid: _________________________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid: _________________________________________________
(2) Form, Schedule or Registration Statement No.: ___________________________
(3) Filing party: ___________________________________________________________
(4) Dated filed: ____________________________________________________________
2001
2002
2001 ANNUAL FINANCIAL DISCLOSURES & 2002 PROXY STATEMENT
[LOGO](sm)
FIRST TENNESSEE
ALL THINGS FINANCIAL(R)
[outside front and back covers]
[LOGO](sm) FIRST TENNESSEE
All Things Financial(R)
".......a testament to our
employees' ingenuity,
tenacity, flexibility
and willingness to
work together."
[Logo](sm) FIRST TENNESSEE
All Things Financial(R)
March 15, 2002
Dear Shareholders:
You are cordially invited to attend First Tennessee National
Corporation's 2002 annual meeting of shareholders. We will hold the meeting on
April 16, 2002, in the Auditorium, First Tennessee Building, 165 Madison Avenue,
Memphis, Tennessee, at 10:00 a.m. We have attached the formal notice of the
annual meeting, our 2002 proxy statement, and a form of proxy.
At the meeting, we will ask you to elect three Class III directors and
one Class II director, approve the 2002 Management Incentive Plan, and ratify
the appointment of Arthur Andersen LLP as our independent auditors for 2002. The
attached proxy statement contains information about these matters.
An appendix to this proxy statement contains detailed financial
information relating to our activities and operating performance during 2001. We
have also enclosed a 2001 Summary Report for those of you that did not receive
this document previously.
Our registered shareholders that have access to the Internet have the
opportunity to receive proxy statements electronically. If you have not already
done so for this year, we encourage you to elect this method of receiving the
proxy statement next year. Not only will you have access to the document as soon
as it is available, but you will be helping our company to save expense dollars.
If you vote electronically, you will have the opportunity to give your consent
at the conclusion of the voting process.
Your vote is important. You may vote by telephone or over the Internet
or by mail, or if you attend the meeting and want to vote your shares, then
prior to the balloting you should request that your form of proxy be withheld
from voting. We request that you vote by telephone or over the Internet or
return your proxy card in the postage-paid envelope as soon as possible.
Sincerely yours,
/s/ Ralph Horn
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Ralph Horn
Chairman of the Board
and Chief Executive Officer
FIRST TENNESSEE NATIONAL CORPORATION
165 Madison Avenue
Memphis, Tennessee 38103
NOTICE OF ANNUAL SHAREHOLDERS' MEETING
April 16, 2002
The annual meeting of shareholders of First Tennessee National
Corporation will be held on April 16, 2002, at 10:00 a.m., CDT, in the
Auditorium, First Tennessee Building, 165 Madison Avenue, Memphis, Tennessee.
The items of business are:
1. Election of three Class III directors to serve until the 2005
annual meeting of shareholders and one Class II director to
serve until the 2004 annual meeting of shareholders, or until
their successors are duly elected and qualified.
2. Approval of the 2002 Management Incentive Plan.
3. Ratification of the appointment of auditors.
These items are described more fully in the following pages, which are
made a part of this notice. The close of business February 22, 2002, is the
record date for the meeting. All shareholders of record at that time are
entitled to vote at the meeting.
Management requests that you vote by telephone or over the Internet
(following the instructions on the enclosed form of proxy) or that you sign and
return the form of proxy promptly, so that if you are unable to attend the
meeting your shares can nevertheless be voted. You may revoke a proxy at any
time before it is exercised at the annual meeting in the manner described on
page 1 of the proxy statement.
/s/ Lenore S. Creson
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Lenore S. Creson
Corporate Secretary
Memphis, Tennessee
March 15, 2002
IMPORTANT NOTICE
PLEASE (1) VOTE BY TELEPHONE OR (2) VOTE OVER THE INTERNET OR (3)
MARK, DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED FORM OF PROXY IN
THE ENCLOSED ENVELOPE SO THAT YOUR SHARES WILL BE REPRESENTED AT
THE MEETING.
PROXY STATEMENT
FIRST TENNESSEE NATIONAL CORPORATION
TABLE OF CONTENTS
Page
GENERAL MATTERS................................................................................................ 1
STOCK OWNERSHIP INFORMATION AND TABLE.......................................................................... 1
VOTE ITEM NO. 1 - ELECTION OF DIRECTORS........................................................................ 3
Nominees 3
Continuing Directors 4
The Board of Directors and its Committees 4
Audit Committee Report 5
VOTE ITEM NO. 2 - APPROVAL OF 2002 MANAGEMENT INCENTIVE PLAN................................................... 6
VOTE ITEM NO. 3 - RATIFICATION OF APPOINTMENT OF AUDITORS...................................................... 8
Audit Fees 8
Financial Information Systems Design and Implementation Fees 8
All Other Fees 8
OTHER MATTERS.................................................................................................. 9
SHAREHOLDER PROPOSAL DEADLINES................................................................................. 9
EXECUTIVE COMPENSATION......................................................................................... 9
Summary Compensation Table 10
Option/SAR Grants in Last Fiscal Year Table 12
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/SAR Values Table 13
Pension Plan Table 14
Employment Contracts and Termination of Employment and
Change-in-Control Arrangements 15
Compensation Committee Interlocks and Insider Participation 16
Certain Relationships and Related Transactions 16
Board Compensation Committee Report on Executive Compensation 16
Total Shareholder Return Performance Graph 21
Compensation of Directors 22
Section 16(a) Beneficial Ownership Reporting Compliance 22
AVAILABILITY OF ANNUAL REPORT OF FORM 10-K..................................................................... 23
APPENDIX A - Audit Committee Charter........................................................................... A-1
APPENDIX B - 2002 Management Incentive Plan.................................................................... B-1
APPENDIX F - Financial Information and Discussion.............................................................. F-1
PROXY STATEMENT
FIRST TENNESSEE NATIONAL CORPORATION
165 Madison Avenue
Memphis, Tennessee 38103
GENERAL MATTERS
The following proxy statement is being mailed to shareholders beginning
on or about March 15, 2002. The Board of Directors is soliciting proxies to be
used at our annual meeting of the shareholders to be held on April 16, 2002, at
10:00 a.m., CDT, in the Auditorium, First Tennessee Building, 165 Madison
Avenue, Memphis, Tennessee, and at any adjournment or adjournments thereof.
The accompanying form of proxy is for use at the meeting if you will be
unable to attend in person. You may revoke your proxy at any time before it is
exercised by writing to the Corporate Secretary, by timely delivering a properly
executed, later-dated proxy (including a telephone or Internet vote) or by
voting by ballot at the meeting. All shares represented by valid proxies
received pursuant to this solicitation, and not revoked before they are
exercised, will be voted in the manner specified therein. If no specification is
made, the proxies will be voted IN FAVOR OF ALL ITEMS below:
1. Election of three Class III directors to serve until the 2005
annual meeting of shareholders and one Class II director to
serve until the 2004 annual meeting of shareholders, or until
their successors are duly elected and qualified.
2. Approval of the 2002 Management Incentive Plan.
3. Ratification of the appointment of auditors.
We will bear the entire cost of soliciting the proxies. In following up
the original solicitation of the proxies by mail, we may request brokers and
others to send proxies and proxy material to the beneficial owners of the shares
and may reimburse them for their expenses in so doing. If necessary, we may also
use several of our regular employees to solicit proxies from the shareholders,
either personally or by telephone or by special letter, for which they will
receive no compensation in addition to their normal compensation.
Our common stock is the only class of voting securities. There were
125,853,984 shares of common stock outstanding and entitled to vote as of
February 22, 2002, the record date for the annual shareholders' meeting. Each
share is entitled to one vote. A quorum of the shares must be represented at the
meeting to take action on any matter at the meeting. A majority of the votes
entitled to be cast constitutes a quorum for purposes of the annual meeting. A
plurality of the votes cast is required to elect the nominees as directors. A
majority of the votes cast is required to approve the Management Incentive Plan
and ratify the appointment of auditors. Both "abstentions" and broker
"non-votes" will be considered present for quorum purposes, but will not
otherwise have any effect on any of the vote items.
STOCK OWNERSHIP INFORMATION AND TABLE
We know of no person who owned beneficially, as that term is defined by
Rule 13d-3 of the Securities Exchange Act of 1934, more than five percent (5%)
of our common stock on December 31, 2001.
1
The following table sets forth certain information as of December 31,
2001, concerning beneficial ownership of our common stock by each director and
nominee, each executive officer named in the Summary Compensation Table, and
directors and executive officers as a group:
Name of Shares Beneficially Stock Units in Total and Percent
Beneficial Owner Owned(1) Deferral Accounts(2) of Class (3)
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Robert C. Blattberg 29,978(4) -- 29,978
Charles G. Burkett 59,054(5) -- 59,054
Carlos H. Cantu 43,082(4) -- 43,082
George E. Cates 59,712(4) -- 59,712
J. Kenneth Glass 485,765(5) 69,577 555,342
James A. Haslam, III 52,438(4) -- 52,438
Ralph Horn 1,159,423(5) 268,276 1,427,699(1.1%)
John C. Kelley, Jr 378,117(5) 77,501 455,618
R. Brad Martin 71,294(4) -- 71,294
Joseph Orgill, III 255,769(4) -- 255,769
Vicki R. Palmer 66,815(4) -- 66,815
Michael D. Rose 85,203(4) -- 85,203
William B. Sansom 90,229(4) -- 90,229
Elbert L. Thomas, Jr 304,241(5) 29,886 334,127
Luke Yancy, Iii 7,559(4) -- 7,559
Directors and Executive
Officers as a Group (21 3,973,168(5) 521,807 4,494,975(3.5%)
Persons)
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(1) The respective directors and officers have sole voting and investment powers
with respect to all of such shares except as specified in notes (4) and (5).
Amounts in the second column do not include stock units in the third column.
(2) Our stock option program permits participants to defer receipt of shares
upon the exercise of options and our restricted stock incentive plan permits
participants to defer receipt of shares prior to the lapsing of restrictions
imposed on restricted stock awards. Amounts in the third column reflect the
number of shares deferred that a participant has the right to receive on a
future date. These shares are not currently issued and are not considered to
be beneficially owned for purposes of Rule 13d-3, but are reflected in a
deferral account on our books as phantom stock units or restricted stock
units.
(3) No individual director or executive officer, except for Mr. Horn,
beneficially owns more than one (1%) percent of our common stock that is
outstanding. Mr. Horn beneficially owns 1.1% including stock units (or 0.9%
excluding stock units). The percentage of common stock outstanding owned by
the director and executive officer group (3.5%) includes stock units. The
percentage would be 3.1% with stock units excluded.
(4) Includes the following shares of restricted stock with respect to which the
nonemployee director possesses sole voting power, but no investment power:
Dr. Blattberg - 600; Mr. Cantu - 3,000; Mr. Cates - 3,000; Mr. Haslam -
3,000; Mr. Martin - 1,800; Mr. Orgill - 600; Mrs. Palmer - 1,200; Mr. Rose -
600; Mr. Sansom - 600; and Mr. Yancy - 6,000. Includes the following shares
as to which the named nonemployee directors have the right to acquire
beneficial ownership through the exercise of stock options granted under our
director plans, all of which are 100% vested: Dr. Blattberg - 23,618; Mr.
Cantu - 37,020; Mr. Cates - 45,650; Mr. Haslam - 36,376; Mr. Martin -
32,177; Mr. Orgill - 65,839; Mrs. Palmer - 60,707; Mr. Rose - 56,043; Mr.
Sansom - 75,905; and Mr. Yancy - 0.
(5) Includes the following shares of restricted stock with respect to which the
named person or group has sole voting power but no investment power: Mr.
Burkett - 10,000; Mr. Glass - 19,290; Mr. Horn - 29,901; Mr. Kelley -
29,479; Mr. Thomas - 10,611; and the director and executive officer group -
165,667. Includes the following shares as to which the named person or group
has the right to acquire beneficial ownership within 60 days through the
exercise of stock options granted under our stock option plans: Mr. Burkett
- 11,828; Mr. Glass - 284,599; Mr. Horn - 627,161; Mr. Kelley - 229,467; Mr.
Thomas - 248,718; and the director and executive officer group - 2,243,028.
Also includes shares held at December 31, 2001 for 401(k) Savings Plan
accounts.
2
VOTE ITEM NO. 1 - ELECTION OF DIRECTORS
The Board of Directors is divided into three Classes. The term of
office of each Class expires in successive years. The term of Class III
directors expires at this annual meeting. The terms of Class I and Class II
directors expire at the 2003 and 2004 annual meetings, respectively. The Board
of Directors proposes the election of three Class III directors and one Class II
director. The Class II director was elected by the Board of Directors in October
2001, and pursuant to the requirements of state law, he has been nominated for
election by the shareholders at the annual meeting. Each director elected at the
meeting will hold office until the specified annual meeting of shareholders and
until his or her successor is elected and qualified.
If any nominee proposed by the Board of Directors is unable to accept
election, which the Board of Directors has no reason to anticipate, the persons
named in the enclosed form of proxy will vote for the election of such other
persons as management may recommend, unless the Board decides to reduce the
number of directors pursuant to the Bylaws.
We have provided below certain information about the nominees and
directors (including age, current principal occupation which has continued for
at least five years unless otherwise indicated, name and principal business of
the organization in which his or her occupation is carried on, directorships in
other reporting companies, and year first elected to our Board). All of our
directors are also directors of First Tennessee Bank National Association (the
"Bank" or "FTB"). The Bank is our principal operating subsidiary.
NOMINEES FOR DIRECTOR
Class III
For a Three-Year Term Expiring at 2005 Annual Meeting
GEORGE E. CATES (64) is Chairman of the Board of Mid-America Apartment
Communities, Inc., ("Mid-America") Memphis, Tennessee, a real estate investment
trust. Prior to October 2001, he was also Chief Executive Officer of
Mid-America. Mr. Cates is a director of two other public companies, Mid-America
and SCB Computer Technology, Inc. Mr. Cates has been a director of the
Corporation since 1996.
JAMES A. HASLAM, III (47) is President of Pilot Travel Centers, LLC, Knoxville,
Tennessee, a national retail operator of convenience stores and travel centers,
and he remains CEO of Pilot Corporation. Mr. Haslam is a director of one other
public company, Ruby Tuesday, Inc. Mr. Haslam has been a director since 1996 and
is a member of the Human Resources Committee.
RALPH HORN (60) is Chairman of the Board and Chief Executive Officer of First
Tennessee and the Bank. Mr. Horn has served as Chief Executive Officer since
1994 and Chairman of the Board since 1996. From 1991 through July 2001, he also
served as President of First Tennessee. Mr. Horn is a director of three other
public companies, Harrah's Entertainment, Inc., Mid-America Apartment
Communities, Inc. and Gaylord Entertainment Company. Mr. Horn has been a
director since 1991.
Class II
For a Two-Year Term Expiring at 2004 Annual Meeting
LUKE YANCY, III (52) is President and Chief Executive Officer of Mid-South
Minority Business Council, Memphis, Tennessee, a nonprofit organization that
promotes minority and women business enterprises. Prior to June 2000, Mr. Yancy
was President, West Region, of AmSouth Bank and, prior to its acquisition by
AmSouth in 1999, First American Bank. Mr. Yancy has been a director since
October 2001 and is a member of the Audit Committee.
3
CONTINUING DIRECTORS
Class I
Term Expiring at 2003 Annual Meeting
R. BRAD MARTIN (50) is Chairman of the Board and Chief Executive Officer of Saks
Incorporated, Birmingham, Alabama, a retail merchandising company. Mr. Martin is
a director of two other public companies, Saks Incorporated and Harrah's
Entertainment, Inc. He has been a director since 1994 and is Chairman of the
Human Resources Committee.
JOSEPH ORGILL, III (64) is Chairman of the Board of Orgill, Inc., Memphis,
Tennessee, wholesale hardware distributors. Prior to January 1996, Orgill, Inc.,
was a subsidiary of Rock Island Corporation, Memphis, Tennessee, of which Mr.
Orgill remains Chairman of the Board. Mr. Orgill has been a director since 1969
and is a member of the Audit Committee.
VICKI R. PALMER (48) is Corporate Senior Vice President, Treasurer, and Special
Assistant to the CEO of Coca-Cola Enterprises Inc., Atlanta, Georgia, a bottler
of soft drink products. Prior to December 1999, Mrs. Palmer was Corporate Vice
President and Treasurer of Coca-Cola Enterprises, Inc. Mrs. Palmer has been a
director since 1993 and is a member of the Human Resources Committee.
WILLIAM B. SANSOM (60) is Chairman of the Board and Chief Executive Officer of
The H. T. Hackney Co., Knoxville, Tennessee, a diversified wholesale
distribution firm serving the food, gas, oil and industrial markets in the
Southeast. He is a director of two other public companies, Martin Marietta
Materials, Inc. and Astec Industries, Inc. Mr. Sansom has been a director since
1984 and is Chairman of the Audit Committee.
Class II
Term Expiring at 2004 Annual Meeting
ROBERT C. BLATTBERG (59) is the Polk Brothers Distinguished Professor of
Retailing, J. L. Kellogg Graduate School of Management, Northwestern University,
Evanston, Illinois. Dr. Blattberg has been a director since 1984.
J. KENNETH GLASS (55) is President and Chief Operating Officer of First
Tennessee and the Bank. From April 1999 through July 2001, he was
President-Retail Financial Services of the Bank and from April 2000 through July
2001, President - Retail Financial Services of First Tennessee. Prior to April
1999, he was President-Tennessee Banking Group of the Bank and prior to April
2000, he was Executive Vice President of First Tennessee. Mr. Glass has been a
director since 1996.
MICHAEL D. ROSE (60) is Chairman of Gaylord Entertainment Company, Nashville,
Tennessee, a diversified hospitality and entertainment company. From December
1997 through April 2001, Mr. Rose was a private investor. Prior to December
1997, he was Chairman of the Board of Promus Hotel Corporation. Mr. Rose is
director of four other public companies, Gaylord Entertainment Company, Darden
Restaurants, Inc., FelCor Lodging Trust, Inc., and Stein Mart, Inc. Mr. Rose has
been a director since 1984.
The Board of Directors and its Committees
During 2001, the Board of Directors held four meetings. The average
attendance at Board and committee meetings exceeded 97 percent. No director
attended fewer than 75 percent of the meetings of the Board and the committees
of the Board on which he or she served.
The Board has several standing committees, including the Audit
Committee and the Human Resources Committee. The Human Resources Committee
serves as both a nominating committee and a compensation committee. The Audit
Committee and the Human Resources Committee are each composed of directors who
are not First Tennessee employees. Currently, Messrs. Cantu (who is scheduled to
retire in April 2002), Orgill, Sansom, and Yancy serve on the Audit Committee
and Messrs. Martin and Haslam and Mrs. Palmer serve on the Human Resources
Committee.
4
The Audit Committee was established by our Board of Directors and
operates pursuant to a written charter that was last amended and restated on
July 17, 2001. A copy of the Committee charter is attached to this proxy
statement as Appendix A. Subject to the limitations and provisions of its
charter, the Committee assists our Board in its oversight of our accounting and
financial reporting principles and policies, internal audit controls and
procedures, and financial statements and the independent audit of the financial
statements. The Committee provides advice to the Board concerning the selection
and replacement of the independent auditor and evaluates the independent auditor
and its independence. The members of the Committee are themselves "independent,"
as that term is defined in the listing standards of the New York Stock Exchange,
on which our common stock is listed. During 2001 the Audit Committee held five
meetings. The Audit Committee's Report is included below.
As a nominating committee, the Human Resources Committee primarily
considers recommendations for nominees to the Board of Directors, reviews the
performance of incumbent directors and senior officers in determining whether to
recommend them to the Board of Directors for reappointment, reviews succession
plans, and between annual meetings of the Board has authority to appoint persons
to offices except the offices of Chairman, CEO, President, Auditor and any
office in which the incumbent has been designated by the Board as an Executive
Officer. As a compensation committee, the Human Resources Committee's primary
functions include recommending to the Board major policies concerning
compensation, periodically reviewing corporate compensation and management of
human resources, fixing the compensation of executive officers, reviewing
remuneration structures for non-executive officers, and making recommendations
to the Board concerning compensation arrangements for directors and adoption or
amendment of employee benefit and management compensation plans. During 2001 the
Human Resources Committee held five meetings.
It is our practice to encourage communication between management and
shareholders. Management in turn communicates appropriate information to the
Board. The Human Resources Committee, as a committee of the Board, follows this
procedure in considering nominations for directorships and does not receive
nominations directly from shareholders.
Notwithstanding anything to the contrary set forth in any of our
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings by
reference, including this proxy statement, in whole or in part, the following
Audit Committee Report, the Audit Committee Charter attached as Appendix A and
the statements regarding the independence of the members of the Committee shall
not be incorporated by reference into any such filings.
Audit Committee Report
The role of the Audit Committee (Committee) is to assist our Board of
Directors in its oversight of our financial reporting process. The Committee
operates pursuant to a charter that was last amended and restated by the Board
on July 17, 2001, a copy of which is attached hereto as Appendix A. As set forth
in the Committee's charter, management of First Tennessee is responsible for the
preparation, presentation and integrity of our financial statements, and
maintaining appropriate accounting and financial reporting principles and
policies and internal controls and procedures designed to assure compliance with
accounting standards and applicable laws and regulations. The independent
auditors are responsible for auditing our financial statements and expressing an
opinion as to their conformity with generally accepted accounting principles.
In the performance of its oversight function, the Committee has
considered and discussed the audited financial statements with management and
the independent auditors. The Committee has also discussed with the independent
auditors the matters required to be discussed by Statement on Auditing Standards
No. 61, Communication with Audit Committees, as currently in effect. Finally,
the Committee has received the written disclosures and the letter from the
independent auditors required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees, as currently in effect, has
considered whether the provision of non-audit services by the independent
auditors to First Tennessee is compatible with maintaining the auditors'
independence and has discussed with the auditors the auditors' independence.
The members of the Committee are not professionally engaged in the practice of
auditing or accounting and are not experts in the fields of accounting or
auditing, including in respect of auditor independence. Members of the
5
Committee rely without independent verification on the information provided to
them and on the representations made by management and the independent auditors.
Accordingly, the Committee's oversight does not provide an independent basis to
determine that management has maintained appropriate accounting and financial
reporting principles or appropriate internal controls and procedures designed to
assure compliance with the accounting standards and applicable laws and
regulations. Furthermore, the Committee's considerations and discussions
referred to above do not assure that the audit of our financial statements has
been carried out in accordance with generally accepted auditing standards, that
the financial statements are presented in accordance with generally accepted
accounting principles or that our auditors are in fact "independent."
Based upon the reports and discussions described in this report, and
subject to the limitations on the role and responsibilities of the Committee
referred to above and in the Committee's charter, the Committee recommended to
the Board of Directors that the audited financial statements be included in our
Annual Report on Form 10-K for the year ended December 31, 2001, to be filed
with the Securities and Exchange Commission.
Submitted by the Audit Committee of our Board of Directors.
Audit Committee
William B. Sansom, Chairman
Carlos H. Cantu
Joseph Orgill, III
Luke Yancy, III
VOTE ITEM NO. 2 - APPROVAL OF 2002 MANAGEMENT INCENTIVE PLAN
Our shareholders approved the original Management Incentive Plan (the
"old MIP") approximately thirty years ago to promote the interest of the
shareholders by providing an incentive to key officers and employees of First
Tennessee who contribute the most to our growth and profitability. Last year, we
retained a nationally recognized benefits and compensation consulting firm to
conduct a review of our existing compensation programs for executive officers
and to make appropriate recommendations. As a result of this review and the
recommendations received, the Human Resources Committee and the Board have
adopted the 2002 Management Incentive Plan (the "Plan"), subject to approval by
the shareholders at the annual meeting. The purpose of the Plan is to provide a
financial incentive for key executives to encourage and reward performance that
furthers our growth, development and financial success and to enhance our
ability to attract and retain key personnel. In addition, because the Board
intends that incentive awards under the Plan qualify as tax-deductible
"performance-based compensation" for purposes of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Tax Code"), the Plan is being submitted
for shareholder approval. Section 162(m) of the Tax Code is explained below in
the Board Compensation Committee Report. The following description of the Plan
is qualified in its entirety by reference to the full text of the Plan, which is
attached as Appendix B hereto.
Subject to the approval by the shareholders at the annual meeting, the
Plan will become effective as of January 1, 2002, and will replace the old MIP.
No new awards may be made under the Plan after December 31, 2012. The Plan will
be administered by the Human Resources Committee of the Board, which is composed
entirely of "non-employee directors" as defined for securities law purposes, who
are also "outside directors" as defined for purposes of the Tax Code. The
Committee will have full authority to interpret the Plan, adopt rules and
regulations for administration of the Plan, subject to certain exceptions,
select participants eligible to receive awards under the Plan and the
Performance Measures to be used for purposes of setting Performance Goals under
the Plan, establish Performance Goals and Target Awards (as those terms are
defined below), and determine the extent to which First Tennessee and the
participants have achieved the goals applicable to them.
6
Senior officers of First Tennessee or any of its subsidiaries are
eligible to be selected for participation in the Plan. Under the old MIP, 12
individuals were selected for participation in the old MIP for calendar year
2001, and 10 individuals have been selected for participation in the Plan for
calendar year 2002, including 9 of our 10 executive officers and all of the
individuals (except Mr. Kelley) named in the Summary Compensation Table.
Awards will be paid to the participants in cash and/or shares of our
common stock in such proportions as the Committee establishes. The maximum
number of shares of our common stock that may be awarded under the Plan is
200,000 shares, subject to adjustment to prevent dilution in the event of
certain changes in capitalization. Common stock, if awarded, will be provided
from shares purchased in the open market or privately or by the issuance of
authorized but unissued shares and will be issued at 100% of fair market value
as of the date of issuance of the award. In addition, if any participant is, or
the Committee reasonably expects such a person to be, a "Covered Employee" for
purposes of Section 162(m) of the Tax Code, then the maximum number of our
shares that may be paid to the participant for any calendar year is 100,000
shares, and the maximum amount of any cash award that may be paid to the
participant for any calendar year is $4,000,000.
For each calendar year the Committee will designate Performance
Measures for use in determining awards. The term "Performance Measures" means
one or more, or any combination, of the following First Tennessee, subsidiary,
operating unit, division, line of business, department, team or business unit
financial performance measures: stock price, dividends, total shareholder
return, earnings per share, market capitalization, book value, revenues,
expenses, loans, deposits, noninterest income, net interest income, fee income,
operating income before or after taxes, net income before or after taxes, net
income before securities transactions, net or operating income excluding
non-recurring charges, return on assets, return on equity, return on capital,
cash flow, credit quality, service quality, market share, customer retention,
efficiency ratio, strategic business objectives, consisting of one or more
objectives based on meeting specified cost targets, business expansion goals,
and goals relating to acquisitions or divestitures; and except in the case of a
Covered Employee, any other performance criteria established by the Committee.
Then, for each of the Performance Measures selected for the calendar year, the
Committee will establish specific performance goals or targets (the "Performance
Goals") against which actual performance is to be measured. Also, the Committee
will designate for each participant the Target Award for the calendar year. The
term "Target Award" means the award that the participant would receive for
achievement of 100% of the Performance Goal for the calendar year, expressed as
a percentage of a participant's compensation. If a minimum threshold level of
performance is not achieved, no award will be paid. The maximum award that may
be paid for superior performance shall not exceed the lesser of 2 1/2 times the
Target Award or $4,000,000 for any calendar year. The Committee retains the
power to reduce or eliminate awards under the Plan and to determine whether an
award will be paid under one or more of the Performance Measures, but the
Committee has no power to increase an award that has been calculated pursuant to
the provisions of the Plan.
In the event of a Change-in-Control, as the term is defined in the
"Employment Contracts and Termination of Employment and Change-in-Control
Arrangements" section below, during a calendar year, the participant will be
paid the Target Award (or a different amount provided for by an agreement under
the Plan) for the calendar year unless a separate agreement between us and the
participant already provides for the payment of a bonus. If the Change in
Control occurs after the end of the calendar year, the participant will be paid
the full amount of any award earned under the Plan for the calendar year.
The Board of Directors retains the power to terminate, suspend, amend
or modify the Plan at any time, in whole or in part, subject to any shareholder
approval required under Section 162(m) of the Tax Code. No such amendment,
modification, suspension or termination will adversely affect the rights of any
participant under any award previously earned but not yet paid without the
consent of the participant. In addition, the Committee retains the discretion to
pay out awards in the event of a termination of the Plan, in whole or in part;
provided, however, payments to a participant who is a Covered Employee must be
discounted to reflect the present value of the payment using the discount rate
in effect at the time under our pension plan.
Under the old MIP (the current plan for executives), a different method
for computing bonus amounts was provided. The old MIP's performance measures
were designated as Corporate Financial Criteria and consisted of the following
financial measures: book value, earnings per share, market capitalization, net
income, price-earnings ratio, return on assets, return on equity, and return on
revenue. Under the old MIP, the Chief Executive Officer and the Chief Operating
Officer/President awards were calculated by multiplying (i) the participant's
salary for the
7
calendar year times (ii) a percentage specified by the Committee times (iii) the
percentage achievement by First Tennessee of the Performance Goals. For all
other participants, if the Committee so specified, the calculation of the award
involved multiplying the amount described in the prior sentence by the
percentage achievement by the participant of the participant's personal plan
goals. The old MIP provided for a maximum of 150,000 shares of our common stock
for awards under that plan, and the maximum award that could be paid to a
Covered Employee for any calendar year could not exceed $1,500,000.
It is not possible to determine the awards that will be received under
the Plan for 2002. The awards that were received under the old MIP (the
predecessor plan) for 2001 for the persons named in the Summary Compensation
Table are disclosed in that table in this proxy statement under column (d) and
the footnotes to that column. The amount that was received for 2001 by all
executive officers of First Tennessee as a group and by all employees as a group
(excluding executive officers) was $3,550,114 and $115,384, respectively.
Nonemployee directors can not participate in the Plan or the old MIP.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
ITEM NO. 2. A vote for Item No. 2 will be deemed to include for purposes of
Section 162(m) of the Tax Code approval by the shareholders of the material
terms of the performance goals under which compensation is to be paid under the
Plan, including the employees eligible for participation, the Performance
Measures, the Performance Goals, the formula used to calculate the amount of the
awards and the maximum award that can be paid to a participant under the Plan
for a calendar year.
VOTE ITEM NO. 3 - RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has appointed, based on the recommendation of
the Audit Committee, the firm of Arthur Andersen LLP, independent accountants,
to be our auditors for the year 2002. The Board is submitting to the
shareholders as Vote Item No. 3 the ratification of Arthur Andersen's
appointment as our auditors for the year 2002, and THE BOARD UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR ITEM NO. 3. Fees billed by Arthur
Andersen LLP for the year 2001 are described below. The Audit Committee of our
Board of Directors has considered whether the provision of services other than
professional services rendered for the audit of our financial statements and the
quarterly review of the financial statements included in our Form 10-Q's is
compatible with maintaining Arthur Andersen LLP's independence. Representatives
of Arthur Andersen LLP are expected to be present at the annual meeting of
shareholders with the opportunity to make a statement and to respond to
appropriate questions.
Audit Fees
The aggregate fees billed to us by Arthur Andersen LLP for professional
services rendered for the audit of our financial statements for the year 2001
and for the reviews of the financial statements in our Form 10-Q's for the year
2001 were $1,050,000.
Financial Information Systems Design and
Implementation Fees
No fees were billed to us by Arthur Andersen LLP for professional
services for the year 2001 for designing or implementing hardware or software
systems that aggregate source data underlying our financial statements or
generate information that is significant to our financial statements taken as a
whole.
All Other Fees
The aggregate fees billed to us by Arthur Andersen LLP for services
rendered for the year 2001 and not included in the fees disclosed in either of
the two preceding subsections were $439,750. Substantially all of this amount
($425,750) was provided in connection with audit-related services, primarily
ERISA audits, audits for subsidiaries, compliance attestation, and acquisitions
due diligence.
8
OTHER MATTERS
The Board of Directors, at the time of the preparation and printing of
this proxy statement, knew of no other business to be brought before the meeting
other than the matters described in this proxy statement. If any other business
properly comes before the meeting, the persons named in the enclosed proxy will
have discretionary authority to vote all proxies in accordance with their best
judgment.
SHAREHOLDER PROPOSAL DEADLINES
If you intend to present a shareholder proposal at the 2003 annual
meeting, it must be received by the Corporate Secretary, First Tennessee
National Corporation, P. O. Box 84, Memphis, Tennessee, 38101, not later than
November 15, 2002, for inclusion in the proxy statement and form of proxy
relating to that meeting.
In addition, Sections 2.8 and 3.6 of our Bylaws provide that a
shareholder who wishes to nominate a person for election to the Board or submit
a proposal at a shareholder meeting must comply with certain procedures whether
or not the matter is included in our proxy statement. These procedures require
written notification to us, generally not less than 90 nor more than 120 days
prior to the date of the shareholder meeting. If, however, we give fewer than
100 days' notice or public disclosure of the shareholder meeting date to
shareholders, then we must receive the shareholder notification not later than
10 days after the earlier of the date notice of the shareholder meeting was
mailed or publicly disclosed. The shareholder must disclose certain information
about the nominee or item proposed, the shareholder and any other shareholders
known to support the nominee or proposal. Section 2.4 of our Bylaws provides
that the date and time of the annual meeting will be the third Tuesday in April
(or, if that day is a legal holiday, on the next succeeding business day that is
not a legal holiday) at 10:00 a.m. Memphis time or such other date and/or such
other time as our Board may fix by resolution. The meeting date for 2003,
determined according to the Bylaws, is April 15, 2003. Thus, shareholder
proposals submitted outside the process that permits them to be included in our
proxy statement must be submitted to the Corporate Secretary between December
16, 2002, and January 15, 2003, or the proposals will be considered untimely.
Untimely proposals may be excluded by the Chairman or our proxies may exercise
their discretion and vote on these matters in a manner they determine to be
appropriate.
EXECUTIVE COMPENSATION
The Summary Compensation Table provides information for the last three
years about the Chief Executive Officer ("CEO") and our other four most highly
compensated executive officers at year-end 2001. All of the named officers are
officers of both First Tennessee and the Bank. The amounts include all
compensation earned during each year, including amounts deferred (which are
disclosed only in the notes to the table), by the named officers for all
services rendered in all capacities to us and our subsidiaries. Information is
provided for each entire year in which an individual served during any portion
of the year as an executive officer. Additional information is provided in
tabular form below about option grants and exercises in 2001, year-end option
values, and pension benefits, along with a report of the Board's Human Resources
Committee on executive compensation and certain other information concerning
compensation of executive officers and directors.
9
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
----------------------------------------- -------------------------------------------------
Awards (3) Payouts
--------------------- -------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Name Other Restricted Underlying
And Annual Stock Options/ LTIP All Other
Principal Salary Bonus Compensation Award(s) SARs Payouts Compensation
Position Year ($) ($) ($)(7) ($)(1) (#)(2) $ ($)(9)
-----------------------------------------------------------------------------------------------------------------------------------
Ralph Horn 2001 $861,122 $1,076,403 $11,544 -- 76,416 -- $383,335
Chairman & CEO 2000 814,346 -- 11,554 -- 205,547 -- 355,997
1999 771,154 467,461(5) 11,554 1,162,551 137,331(5) -- 347,211
J. Kenneth Glass 2001 556,235(4) 454,676(4) 9,505 -- 65,569(4) -- 189,136
President & COO 2000 475,385(4) -- 7,068 -- 110,921(4) -- 183,282
1999 455,212(4) 232,947(4) 7,068 749,995 74,471(4) -- 184,392
John C. Kelley, Jr 2001 501,945 501,945 -- -- 33,279 -- 210,391
Senior Exec. Vice 2000 472,846 -- 7,068 -- 89,512 -- 209,065
President (3) 1999 446,923 234,351 7,068 674,996 44,841 -- 204,435
Elbert L. Thomas, Jr 2001 317,098 267,098(6) -- -- 22,275(6) -- 35,247
Exec. Vice Pres. & 2000 288,962 -- -- -- 19,086 -- 27,620
CFO 1999 206,787(6) --(6) -- 412,556 114,839(6) -- 27,620
Charles G. Burkett 2001 246,923(8) 136,277(8) 6,376 -- 21,994(8) -- 33,812
President - Retail
Financial Svs./
Memphis Fin.Svs.(3)
-----------------------------------------------------------------------------------------------------------------------------------
(1) Restricted stock awards are valued on the basis of the fair market value of
a share of stock on the date of the award: $38.88 (2-23-99). On 12-31-01,
the named officers held the following shares of restricted stock (including
RSU's described in the following sentence) with market values as indicated:
Mr. Horn - 119,901 shares ($4,333,822); Mr. Glass - 55,646 shares
($2,011,325); Mr. Kelley - 41,598 shares ($1,503,560); Mr.Thomas - 32,287
shares ($1,167,014); and Mr. Burkett - 10,000 shares ($361,450). The number
of shares disclosed in the preceding sentence includes restricted stock
units ("RSU's"), described in note (2) to the Stock Ownership Table, with
respect to which restrictions had not lapsed at 12-31-01, as follows: Mr.
Horn - 90,000 RSU's; Mr. Glass - 36,356 RSU's; Mr. Kelley - 12,119 RSU's;
Mr. Thomas - 21,676 RSU's; and Mr. Burkett - 0 RSU's. Dividends are paid on
restricted stock (and dividend equivalents are paid on RSU's) at the same
rate as all other shares of our common stock. Dividend equivalents on RSU's
accrue interest at a 10-year Treasury rate and are settled only in cash. Mr.
Kelley was awarded 17,361 shares of restricted stock on 2-23-99, with 100%
vesting on 2-23-09 and with accelerated vesting if performance criteria
established by the Human Resources Committee are met. The Committee approved
the vesting of these shares in January 2002 in connection with Mr. Kelley's
retirement. See "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements" subsection below.
(2) All amounts represent shares subject to option. No stock appreciation rights
(SAR's) were awarded.
(3) Mr. Kelley retired January 25, 2002. Mr. Burkett was designated by the Board
as an Executive Officer on July 17, 2001. Thus, no compensation information
is required to be provided for the 1999 and 2000 fiscal years.
10
(4) In 2000, 1999 and 1998 Mr. Glass elected to receive a deferred compensation
stock option in lieu of $50,000, $50,000 and $40,000 of his salary earned
for the following year. The amounts in column (c) do not include these
amounts, in lieu of which options for 3,482 shares, 3,546 shares, 4,441
shares, 7,022 shares, 5,140 shares and 3,172 shares (included in the amounts
in column (g)) were granted on 1-2-02, 7-2-01, 1-02-01, 7-03-00, 1-3-00 and
7-1-99, respectively. In 2000 and 1998 Mr. Glass elected to receive a
deferred compensation stock option in lieu of $151,559 & $50,000 of his
annual bonus for the following year. The amount in column (d) for 1999 and
2001 does not include this amount, in lieu of which options for 21,565
shares and 18,519 shares (included in the amount in column (g)) were granted
on 2-26-02 and 3-1-00, respectively.
(5) In 1998 Mr. Horn elected to receive a deferred compensation stock option in
lieu of $100,000 of his annual bonus for the following year. The amount in
column (d) for 1999 does not include this amount, in lieu of which an option
for 37,037 shares (included in the amount in column (g)) was granted on
3-1-00.
(6) In 1998 Mr. Thomas elected to receive a deferred compensation stock option
in lieu of $60,000 of his salary earned for the following year. The amount
in column (c) does include this amount in lieu of which options for 7,711
shares and 4,758 shares (included in the amount in column (g)) were granted
on 1-3-00 and 7-1-99, respectively. In 2000 and 1998 Mr. Thomas elected to
receive a deferred compensation stock option in lieu of a portion of his
annual bonus for the following year. The amount in column (d) for 2001 and
1999 does not include a bonus of $50,000 and $248,645, in lieu of which
options for 7,112 shares and 92,091 shares (included in the amounts in
column (g)) were granted on 2-26-02 and 3-1-00, respectively.
(7) The amounts in column (e) for all years represent automobile allowance tax
gross-up payments.
(8) In 2000 Mr. Burkett elected to receive a deferred compensation stock option
in lieu of $3,000 of his salary earned for the following year. The amount in
column (c) does not include this amount, in lieu of which options for 209
shares and 213 shares (included in the amount in column (g)) were granted on
1-2-02 and 7-2-01, respectively. In 2000 Mr. Burkett elected to receive a
deferred compensation stock option in lieu of $105,993 of his annual bonus
for the following year. The amount in column (d) for 2001 does not include
this amount, in lieu of which an option for 15,080 shares was granted on
2-26-02.
(9) Elements of "All Other Compensation" for 2001 consist of the following:
Mr. Horn Mr. Glass Mr. Kelley Mr. Thomas Mr. Burkett
-------------------------------------------------------------------------------------------
Above Mkt Rate $100,055 $ 75,093 $ 91,332 $ -- $ --
SurBen/SERP 256,660 89,423 108,089 24,277 12,192
Flex $ 5,720 5,720 5,720 5,720 5,720
401(k) Match 5,250 5,250 5,250 5,250 5,250
Auto Allowance 15,650 13,650 -- -- 10,650
-------------------------------------------------------------------------------------------
Total $383,335 $189,136 $210,391 $35,247 $33,812
===========================================================================================
"Above Mkt Rate" represents above-market interest accrued on deferred
compensation.
"Sur Ben/SERP" represents insurance premiums with respect to our
supplemental life insurance and excess pension plans. Under our
Survivor Benefits Plan a benefit of 2 1/2 times final annual base
salary is paid upon the participant's death prior to retirement (or 2
times final salary upon death after retirement).
"Flex $" represents First Tennessee's contribution to the Flexible
Benefits Plan, based on salary, service and corporate performance.
"401(k) Match" represents First Tennessee's 50% matching contribution
to the 401(k) Savings Plan, which is based on the amount contributed by
the participant to the FTNC stock fund, up to 6% of compensation.
11
The following table provides information about stock options granted
during 2001 to the officers named in the Summary Compensation Table. No stock
appreciation rights (SAR's) were granted during 2001.
Option/SAR Grants in Last Fiscal Year Table
---------------------------------------------------------------------------------------------------------------------
Individual Grants
-------------------------------------
(b) Number (c) % of Total (h) Alternatives to
of Securities Options/SARs (f) and (g):
Underlying Granted to (d) Exercise or (e) Grant Date Value.
Options/SAR's Employees in Base Price (2) Expiration Grant Date Present
(a) Name Granted(#)(1) Fiscal Year ($ per share)(1) Date Value($)(4)
---------------------------------------------------------------------------------------------------------------------
Mr. Horn 56,977 1.08% $30.48 2-23-11 $482,595
19,439 .37 30.48 2-23-11 164,648
Mr. Glass 4,441(2) .08 22.53(2) 1-2-21 50,983
27,569 .52 30.48 2-23-11 233,509
9,407 .18 30.48 2-23-11 79,677
3,546(2) .07 28.19(2) 7-2-21 55,211
Mr. Kelley 24,812 .47 30.48 2-23-11 210,158
8,467 .16 30.48 2-23-11 71,715
Mr. Thomas 15,163 .29 30.48 2-23-11 128,431
1,690(3) .03 36.61 4-21-04 14,128
5,191(3) .10 36.61 4-18-06 55,803
6,692(3) .13 36.61 7-1-16 90,677
Mr. Burkett 6,492 .12 30.48 2-23-11 54,987
1,839(2) .03 24.38(2) 2-23-21 21,112
1,840 .03 30.48 2-23-11 15,585
213(2) .00 28.19(2) 7-2-21 3,316
--------
---------------------------------------------------------------------------------------------------------------------
(1) All options except those marked with footnote (2) or (3) were granted
2-23-01 and vest 50% after four years from the date of grant and 100% after
five years, with accelerated vesting if certain performance criteria (our
stock price equals or exceeds $41.69 on 2-23-04 or on 5 consecutive days
before 2-23-04) are met. No SAR's were granted. The exercise price per share
equals the fair market value of one share of our common stock on the date of
grant. Under the terms of all options, including those marked with footnote
(2) and (3), participants are permitted to pay the exercise price of the
options with our stock; participants are permitted to defer receipt of
shares upon an exercise and thereby defer gain; options (except those marked
with footnote (3)) exercised more than one year prior to the end of their
term are eligible for a reload option grant when the exercise price is paid
with our stock, with the reload option grant for the number of shares
surrendered and having an exercise price equal to fair market value at the
time of the first exercise and a term equal to the remainder of the first
option's term; the option plan provides for tax withholding rights upon
approval of the plan committee; and upon a Change-in-Control (as defined in
the subsection entitled Employment Contracts and Termination of Employment
and Change-in-Control Arrangements"), all options vest.
(2) Options indicated by footnote (2) that were granted during 2001 were granted
in lieu of compensation earned during 2000 and 2001. Mr. Glass was granted
options for 4,441 shares on 1-2-01 in lieu of $25,000 of his 2000 salary and
3,546 shares on 7-2-01 in lieu of $25,000 of his 2001 salary. Mr. Burkett
was granted an option for 213 shares on 7-2-01 in lieu of $1,500 of his 2001
salary and 1,839 shares on 2-23-01 in lieu of $11,219 of his bonus for 2000.
The exercise price per share equals 80% of the fair market value ("FMV") of
one share of our common stock on the grant date. The options vest 100% six
months after the grant date. No SAR's were granted. FMV on grant dates were
$28.16, $30.48, and $35.24 on 1-2-01, 2-23-01 and 7-2-01, respectively.
12
(3) Options indicated by footnote (3) were reload options, as described in
footnote (1). Mr. Thomas was granted options for 1,690 shares, 5,191 shares
and 6,692 shares on 12-19-01. FMV on the grant date was $36.61.
(4) A variation of the Black-Scholes option-pricing model has been used. The
following assumptions were made for purposes of calculating the Grant Date
Value of the options granted 1-2-01 (options in lieu of compensation),
2-23-01, 7-2-01 (options in lieu of compensation), and three reloads dated
12-19-01, respectively: an exercise price of $22.53, $30.48, $28.19, $36.61,
$36.61, and $36.61; an option term of 20 years, 10 years, 20 years, 2 1/3
years, 4 1/3 years, and 14 1/2 years; an interest rate of 5.16%, 5.10%,
5.24%, 3.28%, 4.13%, and 5.09%; volatility of 42.79%, 43.19%, 43.21%,
40.95%, 40.95%, and 40.95%; a dividend yield of 3.13%, 2.89%, 2.50%, 2.73%,
2.73%, and 2.73%; a reduction of 2%, 24.18%, 2%, 0%, 0%, and 0% to reflect
the probability of forfeiture due to termination prior to vesting; and
reduction of 6.47%, 9.65%, 8.81%, 2.17%, 5.58%, and 13.89% to reflect the
probability of a shortened option term due to termination prior to the
option expiration date. The actual value, if any, realized by a participant
upon the exercise of an option may differ and will depend on the future
market value of our common stock.
The following table provides information about stock options and SAR's
held at December 31, 2001, and exercises during 2001 by the officers named in
the Summary Compensation Table. The values in column (c) represent the
difference between the fair market value of the shares on the exercise date and
the exercise price of the option. The values in column (e) reflect the spread
between the market value at December 31, 2001, of the shares underlying the
option and the exercise price of the option.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES TABLE
-------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at In-the-Money Options/SARs
Fiscal Year-End (1) at Fiscal Year-End (1)
---------------------------- ------------------------------
Shares Acquired Value
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
($) (#) (#) ($) ($)
-------------------------------------------------------------------------------------------------------------------------------
Mr. Horn 180,000(2) $5,220,000(2) 627,161 163,423 $11,591,850 $494,101
Mr. Glass -- -- 281,053 75,380 4,907,966 258,131
Mr. Kelley -- -- 229,467 66,268 4,242,682 208,979
Mr. Thomas 37,164 863,598 248,718 45,441 3,934,429 94,027
Mr. Burkett 10,433 193,853 11,615 16,493 126,813 44,975
-------------------------------------------------------------------------------------------------------------------------------
(1) No SAR's are attached to any of the options in the table. Option values are
based on $36.15 per share, the average of the high and low sales price on
12-31-01.
(2) Mr. Horn did not realize this value in cash at the time of exercise. He
exercised an option that was about to expire, deferred receipt of the
shares, and will receive 150,779 shares of our common stock at the
termination of the deferral period. The actual value ultimately realized by
Mr. Horn will depend on the future market value of our shares at the
termination of the deferral period.
13
The following table provides information about estimated combined benefits under
both our Pension Plan and our Pension Restoration Plan.
PENSION PLAN TABLE
========================================================================================================================
Covered
Compensation Years of Service*
------------------------------------------------------------------------------------------------------------------------
15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs. 40 Yrs.
------------------------------------------------------------------------------------------------------------------------
$ 150,000 $ 59,995 $ 73,617 $ 87,239 $ 93,461 $ 99,682 $105,903
200,000 74,797 93,353 111,909 120,598 129,286 137,974
250,000 89,599 113,089 136,579 147,735 158,890 170,045
300,000 104,401 132,825 161,249 174,872 188,494 202,116
350,000 119,203 152,561 185,919 202,009 218,098 234,187
400,000 134,005 172,297 210,589 229,146 247,702 266,258
450,000 148,807 192,033 235,259 256,283 277,306 298,329
500,000 163,609 211,769 259,929 283,420 306,910 330,400
550,000 178,411 231,505 284,599 310,557 336,514 362,471
600,000 193,213 251,241 309,269 337,694 366,118 394,542
650,000 208,015 270,977 333,939 364,831 395,722 426,613
700,000 222,817 290,713 358,609 391,968 425,326 458,684
750,000 237,619 310,449 383,279 419,105 454,930 490,755
800,000 252,421 330,185 407,949 446,242 484,534 522,826
850,000 267,223 349,921 432,619 473,379 514,138 554,897
------------------------------------------------------------------------------------------------------------------------
*Benefit shown is subject to limitations fixed by the Secretary of the
Treasury pursuant to Section 415 of the Internal Revenue Code of 1986,
as amended. The limitation is $140,000 for 2001 or 100% of the
employee's average income in his three highest paid years, whichever is
less.
Our Pension Plan is integrated with social security under an "offset"
formula, applicable to all participants. Retirement benefits are based upon a
participant's average base salary for the highest 60 consecutive months of the
last 120 months of service ("Covered Compensation"), service, and social
security benefits. Benefits are normally payable in monthly installments after
age 65. The normal form of benefit payment for a married participant is a
qualified joint and survivor annuity with the surviving spouse receiving for
life 50 percent of the monthly amount the participant received. The normal form
of benefit payment for an unmarried participant is an annuity payable for life
and 10 years certain. For purposes of the plan, "compensation" is defined as the
total cash remuneration reportable on the employee's IRS form W-2, plus pre-tax
contributions under the Savings Plan and employee contributions under the
Flexible Benefits Plan, excluding bonuses, commissions, and incentive and
contingent compensation. Our Pension Restoration Plan is an unfunded plan
covering employees in the highest salary grades, including all executive
officers, whose benefits under the Pension Plan have been limited under Tax Code
Section 415, as described in the note to the Pension Table, and Tax Code Section
401(a)(17), which limits compensation to $170,000 for purposes of certain
benefit calculations. "Compensation" is defined in the same manner as it is for
purposes of the Pension Plan. Under the Pension Restoration Plan participants
receive the difference between the monthly pension payable, if tax code
limitations did not apply, and the actual pension payable. The amounts shown in
the table are annual benefits payable (including any social security payments)
in the event of retirement on December 31, 2001, at age 65 of a participant with
a spouse who is age 65, assuming receipt of a qualified joint and 50% survivor
annuity. The estimated credited years of service and the compensation covered by
the plans for each of the individuals named in the Summary Compensation Table
are as follows: Mr. Horn, 38 ($690,000); Mr. Glass, 28 ($424,992); Mr. Kelley,
32 ($428,342); Mr. Thomas, 12 ($175,768); and Mr. Burkett, 32 ($183,373).
14
Employment Contracts and Termination of Employment
and Change-in-Control Arrangements
We have contracts with approximately 70 officers, including each of the
named executive officers, which may be terminated upon three years' prior
notice. These contracts provide generally for a payment (which, for the named
executive officers, is equal to three times annual base salary plus annual
target bonus) in the event of a termination of the officer's employment by us
other than "for cause" or by the employee for "good reason" (as such terms are
defined in the contracts) within 36 months after a "Change-in-Control" or the
officer's termination of employment for any reason (other than "cause") during
the 30-day period commencing one year after a Change-in-Control. The contracts
provide generally for an excise tax gross-up with respect to any taxes incurred
under Internal Revenue Code Section 4999 following a Change-in-Control and for 3
years continued welfare benefits. The term "Change-in-Control" is defined to
include:
- a merger or other business combination, unless (i) more than
50 percent of the voting power of the corporation resulting
from the business combination is represented by our voting
securities outstanding immediately prior thereto, (ii) no
person or other entity beneficially owns 20 percent or more of
the resulting corporation, and (iii) at least a majority of
the members of the board of directors of the resulting
corporation were our directors at the time of board approval
of the business combination (solely for purposes of the
severance contracts, but not for purposes of their 30-day
termination period, the "50 percent" test in clause (i) is
changed to "60 percent" and the "majority of the board" test
in clause (iii) is changed to "two-thirds of the board"),
- the acquisition by a person or other entity of 20 percent or
more of our outstanding voting stock,
- a change in a majority of the Board of Directors, or
- shareholder approval of a plan of complete liquidation or a
sale of substantially all of our assets.
A Change-in-Control has the following effect on certain benefit plans
in which the named executive officers participate:
- Target annual bonuses are prorated through the date of the
Change-in-Control and paid.
- Restricted stock, restricted stock units, phantom stock units
and unvested stock options vest.
- Under our Pension Restoration Plan, a lump sum payout is made
to participants of the present value, using a discount rate of
4.2 percent, of the participant's scheduled projected
benefits, assuming periodic distributions of the participant's
accrued benefit in the normal form under the plan, actuarially
adjusted according to a formula for the participant's age at
the time of the Change-in-Control.
- Excess funding in the Pension Plan is allocated, according to
a formula, to participants and retirees.
- Deferred compensation under individual deferral agreements
which accrue interest based on the 10-year Treasury rate and
certain other benefits are paid over to previously established
rabbi trusts. Funds in such trusts will remain available for
the benefit of our general creditors prior to distribution.
- Our Survivor Benefits Plan generally cannot be amended to
reduce benefits.
- Under the Directors and Executives Deferred Compensation Plan,
a lump sum payout is made to participating employees and
certain terminated employees of the present value, using a
discount rate of 4.2 percent, of the participant's scheduled
projected distributions, assuming employment through normal
retirement date and continued interest accruals at
above-market rates, described in the "Compensation of
Directors" section below.
The Human Resources Committee approved the following for Mr. Kelley, an
executive officer and director who retired in January 2002 after 32 years of
service: a supplemental pension of approximately $251,000 annually and as
permitted by our plans for early retirees, continued accrual of interest at
above-market rates under the Directors
15
and Executives Deferred Compensation Plan, early vesting of restricted stock,
and a survivor income benefit of two times salary under the Survivor Benefits
Plan. Mr. Kelley entered into a covenant not to compete in connection with these
benefits.
Compensation Committee Interlocks
and Insider Participation
Messrs. Cantu, Haslam, Martin and Rose and Mrs. Palmer, all of whom are
non-employee directors, served as members of the Board of Director's Human
Resources Committee ("Committee"), which is our compensation committee, during
all or a portion of 2001. No interlocking relationships existed with respect to
any of the members of the Committee. Mr. Horn, Chairman and CEO of First
Tennessee, was, however, during 2001 Chairman of the compensation committee of
Mid-America Apartment Communities, Inc., of which Mr. Cates, a director of First
Tennessee, is Chairman.
Certain Relationships and Related Transactions
Our banking subsidiaries have had banking transactions in the ordinary
course of business with our executive officers, directors, nominees, and their
associates which are reported in a note to our financial statements, and they
expect to have such transactions in the future. Such transactions, which at
December 31, 2001, amounted to 3.58 percent of our shareholders' equity, have
been on substantially the same terms, including interest rates and collateral on
loans, as those prevailing at the same time for comparable transactions with
others and have not involved more than normal risk of collectibility or
presented other unfavorable features.
We repurchased from Dr. Blattberg, one of our nonemployee directors,
38,199 shares of our common stock in September 2001, for an aggregate purchase
price of $1,407,251. The purchase was made pursuant to our publicly announced,
board approved stock repurchase programs in a transaction in the ordinary course
of business at current market prices (the volume-weighted average price for the
day) and represented less than one-half of 1% of the shares we repurchased in
2001 under our repurchase programs. Under our programs repurchases are not
permitted at any time we are aware of material nonpublic information about First
Tennessee. The transaction was reported by Dr. Blattberg on a SEC Form 4 for the
month in which the transaction occurred, not after year-end.
During 2001, we paid Cook Systems International ("CSI") $135,845 for
contract employees (computer programmers), and we currently expect to pay CSI
$89,940 for contract employees through March 31,2002. Corey Glass, who is the
son of Mr. Glass, our president and COO and a director, is employed by CSI and
received from CSI, as a part of his compensation, commissions related to those
transactions totaling $3,328 in 2001, and he expects to receive commissions of
$5,666 for transactions through March 31, 2002.
Notwithstanding anything to the contrary set forth in any of our
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings by
reference, including this proxy statement, in whole or in part, the following
Board Compensation Committee Report on Executive Compensation and the Total
Shareholder Return Performance Graph shall not be incorporated by reference into
any such filings.
Board Compensation Committee Report on Executive Compensation
Our Bylaws require the Board of Directors or a Board committee to
determine the compensation of executive officers. The Board has designated the
Human Resources Committee (Committee) to perform this function. The Committee is
composed entirely of independent, nonemployee directors who have no interlocking
relationships with us. The Committee has set forth below its report on the
compensation policies applicable to executive officers and the bases for the
compensation of the Chief Executive Officer (CEO) during 2001.
Our executive compensation programs are designed to align the interests
of the executive officers with our performance and the interests of our
shareholders. Approximately 65 to 70 percent of the executive officers'
16
annual compensation potential is at risk based on corporate performance and
total shareholder return (defined below). Compensation programs have been
designed to reward executive officers in both cash and our stock based on
performance that also rewards shareholders. When corporate performance does not
meet criteria established by the Committee, incentive compensation is reduced
accordingly. In addition, the executive compensation program has been designed
to attract and retain qualified executive officers. Executive compensation
consists generally of the following components:
- base salary
- annual incentive bonus
- long-term incentive awards
- deferral of compensation through stock option grants or at market
interest rates (or for compensation deferred before 1996 at above-
market rates)
- customary employee and other benefits typically offered to
similarly situated executives
Base salary and annual bonus are based on an evaluation of the
individual's position and responsibilities based on independent criteria and
external market data and personal and corporate performance. The Committee does
not assign a specific weight to any of the factors but places greater emphasis
on corporate and personal performance in the overall mix.
Long-term incentive awards consist of restricted stock awards
containing provisions for acceleration of vesting upon achievement of corporate
performance criteria and stock options. It is not our practice to "reprice"
stock options or to price them at less than fair market value on the date of
grant. Although deferred compensation options have an exercise price of 50
percent (80 percent for options granted for 2001 and 2000 and 85% for options
granted for years prior to the year 2000) of fair market value on the grant
date, to receive the option the participant must forego the right to receive
cash compensation. Under our option plans the amount of the foregone cash
compensation plus the option exercise price must equal or exceed 100% of fair
market value. In the past, we have offered deferred compensation at above-market
rates and deferrals through the use of stock options. Deferrals since 1995 have
been limited to stock options or a 10-year Treasury rate of interest. Executive
officers may also defer the receipt of shares upon the exercise of stock options
and defer the receipt of restricted stock prior to the lapse of restrictions.
Except for our stock fund within our 401(k) plan, other benefits provided to the
executive officers are not tied to corporate performance.
The Committee reviewed external market data provided by an independent
consulting firm from 21 of the highest-performing companies in the American
Banker Top 50, a peer group of banking organizations against which we measure
our strategic performance. We selected the highest-performing companies based
generally on the following one and five-year return measures: return on assets,
return on equity, earnings per share growth, and total shareholder return.
The purpose of the review was to determine compensation practices of
these companies. The compensation peer group used by the independent consulting
firm did not include all of the banking organizations listed in the Total
Shareholder Return Performance Graph ("TSR graph") for the 2001 peer group
because compensation data on every organization included in the TSR graph was
not available. The median asset size of the compensation highest-performing peer
group was $33.4 billion. In actual practice the compensation of executive
officers approximates the median of the compensation highest-performing peer
group when performance goals are met. We do not, however, have a specific policy
that mandates how our compensation practices will compare to the peer group.
All compensation paid to executive officers during 2001 is fully
deductible on our corporate federal income tax return. Section 162(m) of the Tax
Code generally disallows a tax deduction to public companies, including us, for
compensation exceeding $1 million paid during the year to the CEO and the four
other highest paid executive officers at year end. Certain performance-based
compensation is not, however, subject to the deduction limit. Under Tax Code
regulations the salary and TARSAP (defined below) portions of compensation do
not meet the performance-based compensation criteria of Section 162(m). The
restricted stock plan permits deferral by participants of the receipt of
restricted stock prior to the lapse of restrictions. Any such deferral does not
represent compensation paid during the year, and thus, is not currently subject
to the Section 162(m) limitation. The
17
Committee's practice is to continue to consider ways to maximize the
deductibility of executive compensation while retaining the discretion deemed
necessary to compensate executive officers in a manner commensurate with
performance and the competitive market of executive talent.
(i) The CEO's Compensation
Base Salary: The Committee establishes the CEO's base salary annually
based on corporate performance, achievement of objectives in his individualized
written personal plan, and competitive practices within the industry.
The CEO develops his personal plan and submits it to the Committee for
review and recommendation. The Board of Directors approves the plan, which
generally contains strategic, quality and financial goals. A salary increase of
5.7 percent for Mr. Horn was approved in February of 2001 based on substantial
achievement of personal plan objectives and competitive practices. Although no
specific weight is assigned to these factors, the Committee places greater
emphasis on personal performance than on competitive practices within the
industry. Base salary is intended to represent approximately 20 percent to 30
percent of the CEO's total compensation potential.
Annual Bonus: The CEO's annual bonus is based entirely on our corporate
performance against financial objectives established by the Committee at the
beginning of each year. The financial objectives for 2001 were based on ROE and
EPS. The CEO may be awarded an annual bonus of a maximum of 125 percent of his
salary dollars earned during the year. The degree of our success in reaching the
corporate targets determines a payout of zero percent to 100 percent of the
CEO's annual bonus potential. During 2001, our corporate performance resulted in
a payout of 100% of targeted bonus. The annual bonus plan in which executive
officers, including the CEO, participate was amended in October of 1999 to
reduce the amount paid in cash by approximately 25 percent for the 1999, 2000
and 2001 plan years and to grant stock options to the executive officers in an
amount that was based on a multiple of the bonus reduction. In 2001, the
Committee recommended to the Board and the Board approved the repeal of the
mandatory 25% reduction in the cash portion of annual bonus.
Long-term Awards: The CEO's long-term incentive compensation consists
of restricted stock and stock options.
Our restricted stock program includes performance criteria as a
condition to early vesting of awards to executive officers. The objective of
this time accelerated restricted stock award plan (TARSAP) feature is to
associate more closely the long-term compensation of executive officers with
shareholder interests. Under the TARSAP feature restricted stock is granted with
accelerated vesting if performance criteria established by the Committee are met
with respect to specified performance periods. Performance periods are for three
years and overlap: e.g., 1999-2001, 2000-2002, 2001-2003. Performance criteria
have always been based, for all participants, including the CEO, on total
shareholder return (appreciation in the market value of our stock with dividends
reinvested-TSR) targets established at the beginning of each performance period.
Targets are based on our percentile ranking in a peer group (the "100-bank peer
group") of approximately the 100 largest banking organizations by asset size
traded on U.S. exchanges, including the NASDAQ Stock Market's National Market
System, with the condition that TSR must be a positive number. The 100-bank peer
group is different from the peer group used to compare shareholder returns. The
100-bank peer group was originally selected in 1990, prior to the adoption of
SEC rules requiring disclosure of a shareholder return performance graph,
because the Committee believed that it was an appropriate index with which to
associate more closely long-term compensation of executives with shareholder
interests. The restricted stock program which contains the 100-bank peer group
has produced the desired results, and thus, the Committee has continued to use
it for the restricted stock program. In addition to the TSR targets, the
Committee adopted alternative criteria for the accelerated vesting of TARSAP
awards made in 1996 and future years based upon our percentile ranking within
the 100-bank peer group with respect to operating EPS growth rate (or exceeding
a minimum operating EPS growth rate) and average operating ROE, with the
condition that TSR must be a positive number. In January 2002, the Committee
approved the accelerated vesting of the TARSAP shares for the 1999-2001
performance period because the alternative criteria, as described above, were
met.
18
In addition to performance-based restricted stock awards, the Committee
generally awards stock options to executive officers, including the CEO, as a
part of a broad-based stock option program under which awards are made to all of
our employees, both full-time and part-time. The CEO's option award (which is
disclosed in the "Option/SAR Grants in Last Fiscal Year Table") was based on an
estimated value of the option which in combination with the restricted stock
award provides the basis for a competitive long-term incentive package. Because
the value of the option to the CEO is a function of the price growth of our
stock, the amount realized by the CEO is tied directly to increases in
shareholder value. In addition, the option grant contained a performance-based,
accelerated vesting feature, which is described in part (ii) of this report.
Other Benefits: The CEO's compensation reported in the Summary
Compensation Table also includes accrual of above-market rates of interest on
compensation deferred prior to 1996 and the cost of insurance to fund a
supplemental retirement plan and life insurance benefit, which are not directly
based on corporate performance. Above-market rates are accrued for deferred
compensation of the CEO and other named executive officers to retain key
officers. Generally, the plan under which this benefit is offered requires that
the amount deferred be automatically recalculated at market rates if termination
occurs prior to retirement.
(ii) Other Executive Officer Compensation
Base Salary: The CEO recommends and the Committee approves the base
salary for executive officers other than the CEO. Recommendations are generally
based on corporate performance (as measured by financial, quality and strategic
objectives), individual overall performance during the prior year, and
competitiveness in the market place. It is our policy to maintain a competitive
salary commensurate with the duties and responsibilities of the executive
officers. Salary is intended to represent approximately 30 percent to 45 percent
of an executive officer's potential annual compensation.
Annual Bonus: Executive officers' annual bonus is based on achievement
of corporate financial objectives and performance against personal objectives
for the year, which are recorded in individualized written personal plans.
Individual objectives must include financial, quality and strategic goals. The
degree of completion of goals determines the award. Financial objectives for
2001 were based on ROE and EPS. Although the CEO has an individualized personal
plan, his annual bonus and the COO/President's annual bonus are based entirely
on corporate financial performance, and the Chief Credit Officer's and
Controller's annual bonuses are based solely on individualized personal plans.
The maximum annual bonus of executive officers other than the CEO is between 45
percent and 100 percent of salary dollars during the year, based on salary
grade. During 2001, our corporate performance resulted in a payment of 100% for
any executive officer whose bonus was based on corporate performance.
Long-term Awards: The executive officers named in the Summary
Compensation Table and all but one of the other executive officers participate
in the TARSAP program described above with respect to the CEO. The performance
criteria are identical. The number of shares awarded for a three-year
performance period is generally 50 percent of the participant's salary grade
mid-point, based on market value of the shares at the time of the award. We do
not provide a federal income tax gross-up to executive officers at the vesting
of restricted stock.
In addition to performance-based restricted stock awards, the Committee
generally awards stock options annually on our stock to executive officers,
including the CEO, as a part of the option program discussed in part (i) of this
report. The number of shares awarded to executive officers is equal to a
percentage of salary (ranging from 100 percent to 200 percent depending on
salary grade, with 200 percent used for the CEO) divided by the market value (or
for the CEO and the COO/President, the Black-Scholes value) of one share of our
stock at the time of grant. Executive officers may also be awarded shares in
addition to those calculated as a percent of salary if in the opinion of the
Committee additional shares are required to ensure a competitive compensation
opportunity. The exercise price is the market value at the time of grant.
Options are awarded based on personal performance and to encourage future
performance as well as for retention purposes (with a ten-year term and vesting
at 50 percent after four years and 100 percent after five years). The February
2001 grant's exercise price is $30.48. This grant contains a provision for
accelerated vesting if the closing market price per share equals at least $41.69
for five consecutive days in the three years following the grant or at the end
of the three year period. Options are not granted based on prior corporate
performance; except for the March 2000 and February 2001 grants made to the
19
CEO, the COO/President, and the Senior Executive Vice President, which were
based in part on prior corporate performance.
As described above for executive officers and the CEO, bonus plans for
all employees above a specified salary grade were amended to reduce amounts paid
in cash by approximately 25 percent for plan years 1999, 2000 and 2001, and the
Committee awarded options to the portion of this population who received bonuses
at its February 2001 meeting in an amount based on a multiple of the 2000 bonus
reduction. The mandatory requirement of this provision was repealed for the 2001
bonus payment.
Other Benefits: We have adopted certain broad-based employee benefit
plans in which executive officers participate and certain other retirement, life
and health insurance plans and we provide customary personal benefits. Except
for our stock fund within our 401(k) plan, the benefits under these plans are
not tied to corporate performance. The executive officers named in the Summary
Compensation Table participate in the other benefits described above with
respect to the CEO.
Human Resources Committee
R. Brad Martin, Chairperson
James A. Haslam
Vicki R. Palmer
20
The following graph compares the yearly percentage change in our
cumulative total shareholder return with returns based on the Standard and
Poor's 500 index and a peer group index, which is described below and in a
footnote to the graph. It should be noted that the "total shareholder return"
reflected in the graph is not comparable to the "total shareholder return"
described in the Compensation Committee Report because the former has a
different measurement period and it has been adjusted and weighted for the
market capitalization of the companies in the peer group, as required by SEC
regulations. Our peer group consists of the American Banker Top 50 banking
organizations (excluding First Tennessee) as measured by market capitalization
as of the end of the most recent fiscal year.
TOTAL SHAREHOLDER RETURN PERFORMANCE GRAPH
[GRAPH]
---------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001
---------------------------------------------------------------------------------------------
First Tennessee $100 $182 $212 $163 $173 $222
S&P 500 100 133 171 207 188 166
American Banker 100 159 179 195 248 234
Top 50
The graph assumes $100 is invested on December 31, 1998, and dividends are reinvested.
Returns are market-capitalization weighted.
---------------------------------------------------------------------------------------------
The American Banker Top 50 consists of the following: AmSouth
Bancorporation, Associated Banc Corp, Banknorth Group, Inc., Banc One
Corporation, BankAmerica Corporation, Bank of New York Co., Inc., Branch Banking
and Trust Company, Charter One Financial, Inc., Citigroup Inc., City National
Corp., Comerica Incorporated, Commerce Bancorp, Commerce Bancshares, Inc.,
Compass Bancshares, Inc., Fifth Third Bancorp, First Virginia Banks, Inc., First
Merit Corp, Fleet Boston Financial Corp., Fulton Financial Corp., Hibernia
Corporation, Huntington Bancshares Incorporated, J.P. Morgan Chase & Co.,
KeyCorp, M & T Bank Corporation,
21
Marshall & Ilsley Corporation, Mellon Financial Corporation, Mercantile
Bankshares Corporation, National City Corporation, National Commerce Bancorp,
North Fork Bancorporation, Northern Trust Corporation, Pacific Century Financial
Corp., PNC Financial Services, Popular Inc., Regions Financial Corp, Sky
Financial Group, Inc., SouthTrust Corporation, State Street Corporation,
SunTrust Banks, Inc., Synovus Financial Corporation, TCF Financial Corp,
UnionBanCal Corporation, Union Planters Corporation, U.S. Bancorp, Valley
National Bancorp, Wachovia Corporation, Wells Fargo & Company, Wilmington Trust,
and Zions Bancorporation.
Compensation of Directors
During 2001, each nonemployee director was paid a retainer quarterly at
an annual rate of $25,000 ($22,000 prior to April 2001) plus a fee of $1,000 for
each day of each Board and each committee meeting attended. The chairpersons of
the Audit and Human Resources Committees were paid quarterly an additional
retainer at an annual rate of $3,000 each. We also reimburse our directors for
their expenses incurred in attending meetings. Our practice is to hold Board and
committee meetings jointly with the Bank's Board and committees. All of our
directors are also directors of the Bank. Directors are not separately
compensated for Bank Board or committee meetings except for those infrequent
meetings that do not occur jointly. Directors who are officers are not
separately compensated for their services as directors. Under the terms of our
1992 Restricted Stock Incentive Plan, which was approved by the shareholders and
which terminates in April 2002, all nonemployee directors received an automatic,
nondiscretionary award of 6,000 shares (adjusted for stock splits) of restricted
stock on May 1, 1992, and all new nonemployee directors received such award upon
election to the Board. Restrictions lapse at the rate of 10 percent annually.
Such shares are forfeited if the director terminates for any reason other than
death, disability, retirement, or the acquisition by a person of 20 percent of
the voting power of our stock. Upon termination for any of the four listed
reasons, all shares vest. Directors may elect to defer their retainers and fees.
Under the 2000 Non-Employee Directors' Deferred Compensation Stock Option Plan,
all nonemployee directors elected to receive stock options in lieu of fees
through 2004. The exercise price per share is 80 percent (85% under a prior plan
for options granted prior to the year 2000) of fair market value of one share of
our common stock on the date of grant, and the number of shares subject to
option granted equals the amount of fees deferred divided by 20 percent (15
percent under a prior plan with respect to options granted prior to the year
2000) of the fair market value of one share on the date of grant. Under the
Directors and Executives Deferred Compensation Plan, not offered with respect to
compensation earned since 1995, under which up to six annual deferrals may be
elected, amounts deferred accrue interest at rates ranging from 17-22 percent
annually, based on age at the time of deferral, with a reduction to a guaranteed
rate based on 10-year Treasury obligations if a participant terminates prior to
a change-in-control for a reason other than death, disability or retirement.
Interim distributions in an amount between 85 percent and 100 percent of the
amount originally deferred are made in the eighth through the eleventh years
following the year of deferral, with the amount remaining in a participant's
account and accrued interest generally paid monthly over the 15 years following
retirement at age 65. Certain restrictions and limitations apply on payments and
distributions. Under other deferral agreements, nonemployee directors have
deferred and may defer amounts which generally accrue interest at a rate tied to
10-year Treasury obligations.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act") requires our directors and officers to file with the SEC
initial reports of ownership and reports of changes in ownership of our common
stock and to furnish us with copies of all forms filed.
To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other reports were
required, during the past fiscal year all Section 16(a) filing requirements
applicable to our officers and directors were complied with.
22
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
A COPY OF OUR ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL
STATEMENTS AND SCHEDULES THERETO, WHICH IS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, IS AVAILABLE FREE OF CHARGE TO EACH SHAREHOLDER OF RECORD
UPON WRITTEN REQUEST TO THE TREASURER, FIRST TENNESSEE NATIONAL CORPORATION, P.
O. BOX 84, MEMPHIS, TENNESSEE, 38101. Each such written request must set forth a
good faith representation that as of the record date specified in the notice of
annual shareholders' meeting the person making the request was a beneficial
owner of a security entitled to vote at the annual meeting of shareholders.
The exhibits to the Annual Report on Form 10-K will also be supplied
upon written request to the Treasurer and payment to us of the cost of
furnishing the requested exhibit or exhibits. A document containing a list of
each exhibit to Form 10-K, as well as a brief description and the cost of
furnishing each such exhibit, will accompany the Annual Report on Form 10-K.
BY ORDER OF THE
BOARD OF DIRECTORS
/s/ Lenore S. Creson
Corporate Secretary
March 15, 2002
23
Appendix A
AUDIT COMMITTEE CHARTER
FIRST TENNESSEE NATIONAL CORPORATION
(AS AMENDED AND RESTATED JULY 17, 2001)
ESTABLISHMENT AND PURPOSES OF THE COMMITTEE
Acting pursuant to Tennessee Code Annotated Section 48-18-206, Article 11(b)(8)
of the Corporation's restated charter, as amended, and Section 3.5 of the
Corporation's bylaws, as amended, the Board of Directors of First Tennessee
National Corporation hereby creates the Audit Committee (the "Committee") of
the Board of Directors, which shall assist the Board of Directors in (1) its
oversight of the Corporation's accounting and financial reporting principles
and policies and internal audit controls and procedures, (2) its oversight of
the Corporation's financial statements and the independent audit thereof, (3)
recommending to the Board the nomination of the independent auditor to be
proposed for shareholder approval, evaluating the independent auditor and, when
deemed appropriate, recommending the replacement of the independent auditor,
and (4) evaluating the independence of the independent auditor.
The function of the Committee is oversight. Management of the Corporation is
responsible for preparation, presentation and integrity of the Corporation's
financial statements. Management and the internal auditor are responsible for
maintaining appropriate accounting and financial reporting principles and
policies and internal controls and procedures to provide for compliance with
accounting standards and applicable laws and regulations. The independent
auditor is responsible for planning and carrying out a proper audit of the
Corporation's annual financial statements, reviews, including reviews of the
Corporation's quarterly financial statements prior to the filing of each
quarterly report on Form 10-Q, and other procedures. It is recognized that, in
fulfilling their responsibilities hereunder, members of the Committee are not
full-time employees of the Corporation and are not, and do not represent
themselves to be, accountants or auditors by profession or experts in the field
of accounting or auditing including in respect of auditor independence. As
such, it is not the duty or responsibility of the Committee or its members to
conduct "field work" or other types of auditing or accounting reviews or
procedures or to set auditor independence standards, and each member of the
Committee shall be entitled to rely on (1) the integrity of those persons and
organizations within and outside the Corporation from which it receives
information, (2) the accuracy of the financial and other information provided
to the Committee by such persons or organizations absent actual knowledge to
the contrary (which shall be promptly reported to the Board) and (3) the
representations made by management as to any information technology, internal
audit and other non-audit services provided by the independent auditor to the
Corporation. Further, in fulfilling their responsibilities hereunder, the
members of the Committee will incorporate the use of reasonable materiality
standards, including the size of the Corporation and the nature, scope and
risks of the activities conducted.
The independent auditor for the Corporation is ultimately accountable to the
Board of Directors (as assisted by the Committee). The Board, with the
assistance of the Committee, has the ultimate authority and responsibility to
select, evaluate, and when appropriate replace the independent auditor (or to
nominate the independent auditor to be proposed for shareholder approval).
The independent auditor shall submit to the Corporation annually a formal
written statement delineating all relationships between the independent auditor
and the Corporation ("Statement as to Independence"), addressing each non-audit
service provided to the Corporation and at least the matters set forth in
Independence Standards Board No. 1.
The independent auditor shall submit to the Corporation annually a formal
written statement of the fees billed for each of the following categories of
services rendered by the independent auditor: (1) the audit of the
Corporation's annual financial statements for the most recent fiscal year and
the reviews of the financial statements included in the Corporation's Quarterly
Reports on Form 10-Q for that fiscal year; (2) information technology
consulting services for the most recent fiscal year, in the aggregate and by
each service (and separately identifying fees for such services relating to
financial information systems design and implementation); and (3) all other
services rendered by the independent auditor for the most recent fiscal year,
in the aggregate and by each service.
A-1
QUALIFICATIONS OF COMMITTEE MEMBERS
The Committee shall consist of at least three members appointed annually by a
majority of the entire Board on the recommendation of the Human Resources
Committee of the Board of Directors, acting in its capacity as the nominating
committee. Members shall be directors who meet the independence and experience
requirements of the New York Stock Exchange ("NYSE"), as such requirements are
interpreted by the Board of Directors in the exercise of its business judgment.
OPERATION OF THE COMMITTEE
Meetings shall be held at least four times yearly and may be called at any time
by the Committee Chairperson or by any two members of the Committee upon
written or oral notice to a majority of the members of the Committee prior to
the meeting. A quorum shall consist of a majority of the members and the vote
of a majority of the members present at a meeting at which a quorum is present
shall be the act of the Committee. Proceedings of the Committee over the
signature of a member in attendance shall be recorded in a minute book and
reflect the names of those in attendance. The Chairperson of the Committee, or
acting Chairperson of the meeting, will present a report of Committee
activities to the full Board of Directors at its next regularly scheduled
meeting. The Secretary of the Board will permanently maintain the minutes of
Committee meetings. Meetings may be held jointly with a similar committee of
First Tennessee Bank National Association ("Bank") if either the members of the
Bank's committee and the members of this Committee are identical or all of the
members of the Bank's committee would meet the independence and experience
requirements of the NYSE, including any exceptions permitted thereby. The
Committee shall have unrestricted access to Corporation personnel and documents
and will be given the resources necessary to discharge its responsibilities.
The Committee shall have the resources and authority to retain special legal,
accounting, auditing or other experts or consultants to advise the Committee.
The Committee may request any officer or employee of the Corporation or of the
Corporation's outside counsel or independent auditor to attend a meeting of the
Committee or to meet with any members of, or consultants to, the Committee. It
will be the responsibility of the Committee to maintain free and open means of
communication between the directors and management of the Corporation. The
Committee shall meet separately at least annually with management, the internal
auditor, and the independent auditor in separate executive sessions to discuss
any matters that the Committee or any of these persons or firms believes should
be discussed privately.
DUTIES OF THE COMMITTEE
The Committee is hereby delegated full authority with respect to the following
matters and such additional matters as may be provided in the bylaws of the
Corporation or as the Board of Directors may from time to time by resolution
adopt by a majority of the entire Board specify:
1. with respect to the independent auditor,
a. provide advice to the Board in selecting, evaluating and
replacing the independent auditor.
b. review the fees charged by the independent auditor for audit
and non-audit services.
c. ensure that the independent auditor prepares and delivers
annually a Statement as to Independence (it being understood
that the independent auditor is responsible for the accuracy
and completeness of this Statement), discuss with the
independent auditor any relationships or services disclosed
in this Statement that may have an impact on the objectivity
or independence of the Corporation's independent auditor and
recommend that the Board take appropriate action in response
to this Statement to satisfy itself of the independent
auditor's independence.
d. if applicable, to consider whether the independent auditor's
provision of (i) information technology consulting services
relating to financial information systems design and
implementation and (ii) other non-audit services to the
Corporation is compatible with maintaining the independence
of the independent auditor; and
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e. instruct the independent auditor that the independent auditor
is ultimately accountable to the Board and the Committee.
2. with respect to the internal auditing department,
a. make recommendations to the Board concerning the appointment
and removal of the Corporation's internal auditor.
b. advise the internal auditor that he or she is expected to
provide the Committee summaries of and, as appropriate,
significant reports to management prepared by the internal
auditing department and management's responses thereto.
3. with respect to financial reporting principles and policies and
internal audit controls and procedures,
a. advise management, the internal auditor and the independent
auditor that each is expected to provide to the Committee a
timely analysis of significant financial reporting issues and
practices.
b. consider any reports or communications (and management's
and/or the internal auditor's responses thereto) submitted to
the Committee by the independent auditor required by or
referred to in SAS 61 (as codified by AU Section 380), as may
be modified or supplemented.
c. meet with management, the internal auditor, and/or the
independent auditor to discuss the scope of the annual audit,
the audited financial statements and the form of opinion
thereon proposed by the independent auditor, any significant
matters arising from any audit or report or communication
with respect to significant reports to management prepared by
the internal auditor or required by or referred to in SAS 61
relating to the Corporation's financial statements, and
significant changes to the Corporation's auditing and
accounting principles, policies, controls, procedures and
practices proposed or contemplated by the independent
auditor, the internal auditor or management, and inquire
about significant risks and exposures if any, and the steps
taken to monitor and minimize such risks.
d. obtain from the independent auditor assurance that the audit
was conducted in a manner consistent with Section 10A of the
Securities Exchange Act of 1934, as amended, which set forth
certain procedures to be followed in any audit of financial
statements required under that act.
e. review the Corporation's compliance policies and any material
reports or inquiries received from regulators or government
agencies and management's responses and, with the
Corporation's General Counsel, pending and threatened claims
that may have a material impact on the financial statements.
4. with respect to reporting and recommendations,
a. prepare any report or other disclosures, including any
recommendation of the Committee, required by the rules of the
Securities Exchange Commission to be included in the
Corporation's annual proxy statement.
b. to review and reassess the adequacy of this Charter at least
annually and recommend any changes to the Board.
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Appendix B
FIRST TENNESSEE NATIONAL CORPORATION
2002 MANAGEMENT INCENTIVE PLAN
ARTICLE I-PURPOSE
Section 1.1 The purpose of the Plan is to provide a financial incentive
for key executives to encourage and reward desired performance on key financial
measures that will further the growth, development and financial success of the
Company and to enhance the Company's ability to maintain a competitive position
in attracting and retaining qualified key personnel who contribute, and are
expected to contribute, materially to the success of the Company. The Plan is
designed to replace the existing First Tennessee National Corporation
Management Incentive Plan, as amended and restated, and to ensure that awards
paid pursuant to this Plan to eligible employees of the Company are tax
deductible under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"). This Plan shall be submitted to the Company's
shareholders for approval pursuant to 26 C.F.R. ss. 1.162.27(e)(4)(vi) at the
annual meeting to be held on April 16, 2002, and shall be effective for the
2002 fiscal year commencing on January 1, 2002. If the shareholders do not
approve the Plan, the Plan shall not become effective.
ARTICLE II-DEFINITIONS
Section 2.1 Whenever the following terms are used in this Plan, they
shall have the meaning specified below unless the context clearly indicates to
the contrary. The masculine pronoun shall include the feminine and neuter and
the singular shall include the plural, where the context so indicates.
(a) "AWARD" shall mean an incentive compensation award made to a
Participant pursuant to this Plan that is subject to and dependent upon the
attainment of one or more Performance Goals.
(b) "BOARD" shall mean the Board of Directors of the Company.
(c) "CHANGE IN CONTROL" shall mean the occurrence of any one of (and shall
be deemed to have occurred on the date of the earliest to occur of) the
following events:
(i) individuals who, on January 21, 1997, constitute the Board
(the "Incumbent Directors") cease for any reason to
constitute at least a majority of the Board, provided that
any person becoming a director subsequent to January 21,
1997, whose election or nomination for election was approved
by a vote of at least three-fourths (3/4) of the Incumbent
Directors then on the Board (either by a specific vote or by
approval of the proxy statement of the Company in which such
person is named as a nominee for director, without written
objection to such nomination) shall be an Incumbent Director;
provided, however, that no individual elected or nominated as
a director of the Company initially as a result of an actual
or threatened election contest with respect to directors or
as a result of any other actual or threatened solicitation of
proxies or consents by or on behalf of any person other than
the Board shall be deemed to be an Incumbent Director;
(ii) any "Person" (as defined under Section 3(a)(9) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act") as used in Section 13(d) or Section 14(d) of the
Exchange Act) is or becomes a "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20% or
more of the combined voting power of the Company's then
outstanding securities eligible to vote for the election of
the Board (the "Company Voting Securities"); provided,
however, that the event described in this paragraph (ii)
shall not be deemed to be a Change in Control by virtue of
any of the following acquisitions: (A) by the Company or any
entity in which the Company directly or indirectly
beneficially owns more than 50% of the voting securities or
interests (a "Subsidiary"), (B) by an employee stock
ownership or employee benefit plan or trust sponsored or
maintained by the Company or any Subsidiary, (C) by
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any underwriter temporarily holding securities pursuant to an
offering of such securities, or (D) pursuant to a
Non-Qualifying Transaction (as defined in paragraph (iii)
hereof);
(iii) the shareholders of the Company approve a merger,
consolidation, share exchange or similar form of corporate
transaction involving the Company or any of its Subsidiaries
that requires the approval of the Company's shareholders,
whether for such transaction or the issuance of securities in
the transaction (a "Business Combination"), unless
immediately following such Business Combination: (A) more
than 50% of the total voting power of (x) the corporation
resulting from such Business Combination (the "Surviving
Corporation"), or (y) if applicable, the ultimate parent
corporation that directly or indirectly has beneficial
ownership of 100% of the voting securities eligible to elect
directors of the Surviving Corporation (the "Parent
Corporation"), is represented by Company Voting Securities
that were outstanding immediately prior to the consummation
of such Business Combination (or, if applicable, is
represented by shares into which such Company Voting
Securities were converted pursuant to such Business
Combination), and such voting power among the holders thereof
is in substantially the same proportion as the voting power
of such Company Voting Securities among the holders thereof
immediately prior to the Business Combination, (B) no person
(other than any employee benefit plan sponsored or maintained
by the Surviving Corporation or the Parent Corporation), is
or becomes the beneficial owner, directly or indirectly, of
20% or more of the total voting power of the outstanding
voting securities eligible to elect directors of the Parent
Corporation (or, if there is no Parent Corporation, the
Surviving Corporation) and (C) at least a majority of the
members of the board of directors of the Parent Corporation
(or, if there is no Parent Corporation, the Surviving
Corporation) were Incumbent Directors at the time of the
Board's approval of the execution of the initial agreement
providing for such Business Combination (any Business
Combination which satisfies all of the criteria specified in
(A), (B) and (C) above shall be deemed to be a
"Non-Qualifying Transaction"); or
(iv) the shareholders of the Company approve a plan of complete
liquidation or dissolution of the Company or a sale of all or
substantially all of the Company's assets.
Computations required by paragraph (iii) 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. Notwithstanding the foregoing, a
change in control of the Company shall not be deemed to have occurred solely
because any person acquires beneficial ownership of more than twenty percent
(20%) of the Company Voting Securities as a result of the acquisition of
Company Voting Securities by the Company which reduces the number of Company
Voting Securities outstanding: provided, that if after such acquisition by the
Company such person becomes the beneficial owner of additional Company Voting
Securities that increases the percentage of outstanding Company Voting
Securities beneficially owned by such person, a Change in Control of the
company shall then occur.
(d) "CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(e) "COMMITTEE" shall mean the Committee designated pursuant to Section
3.1 of this Plan and shall consist solely of two or more members of the Board,
appointed by and holding office at the pleasure of the Board, each of whom is
both a "non-employee director" as defined by Rule 16b-3 of the Securities
Exchange Act of 1934, as amended, and an "outside director" for purposes of
Section 162(m) of the Code.
(f) "COMMON STOCK" shall mean the common stock of the Company, par value
$0.625 per share, as adjusted from time to time for stock splits.
(g) "COMPANY" shall mean First Tennessee National Corporation, and its
successors and assigns.
(h) "COMPENSATION" shall mean the base salary earned by a Participant
during any Performance Period.
(i) "COVERED OFFICER" shall mean at any date (i) any individual who, with
respect to the previous tax year of the Company, was a "covered employee" of
the Company within the meaning of Code Section 162(m), excluding any such
individual whom the Committee, in its discretion, reasonably expects not to be
a "covered employee" with respect to the current tax year of the Company and
(ii) any individual who was not a "covered employee" under
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Code Section 162(m) for the previous tax year of the Company, but whom the
Committee, in its discretion, reasonably expects to be a "covered employee"
with respect to the current tax year of the Company or with respect to the tax
year of the Company in which any applicable Award will be paid.
(j) "DISABILITY" shall mean a disability that would qualify as a total and
permanent disability under the long-term disability plan then in effect at the
Company or Subsidiary employing the Participant at the onset of such total and
permanent disability.
(k) "EARLY RETIREMENT" shall mean the Termination of Employment of a
Participant from the employ or service of the Company, or any of its
Subsidiaries participating in the First Tennessee National Corporation Pension
Plan, as amended from time to time, on or after the Participant has attained
the age of 55 and 15 years of employment or service with the Company or any of
its participating Subsidiaries.
(l) "EMPLOYEE" shall mean any employee of the Company or a Subsidiary,
whether such employee is so employed at the time this Plan is adopted or
becomes so employed subsequent to the adoption of this Plan.
(m) "EMPLOYER" shall mean the Company or a Subsidiary, whichever at the
time employs the Employee.
(n) "FAIR MARKET VALUE" with respect to the Common Stock, shall mean, as
of any date, (i) the mean between the high and low sales prices at which shares
of Common Stock were sold on the New York Stock Exchange, or any other such
exchange on which the Common Stock is traded, on such date, or, in the absence
of reported sales on such date, the mean between the high and low sales prices
on the immediately preceding date on which sales were reported, or (ii) in the
event there is no public market for the Common Stock on such date, the fair
market value as determined in good faith by the Committee in its sole
discretion.
(o) "MAXIMUM AWARD" shall mean the maximum Award payable under the Plan
for the attainment of Performance Goals in any Performance Period, which Award
(i) shall be payable for Superior Performance and (ii) shall not exceed the
lesser of two and one-half (2 1/2) times the Target Award or $4,000,000 for any
Performance Period.
(p) "PARTICIPANT" shall mean an Employee who is selected to participate in
the Plan.
(q) "PERFORMANCE GOALS" shall mean the performance goals or targets for
the Performance Measures established by the Committee for each Performance
Period, the attainment of which is necessary for the payment of an Award to a
Participant at the completion of the Performance Period. The level of the
attainment of the Performance Goals shall determine the amount of the Award
payable hereunder. Performance Goals may be expressed as an absolute amount or
percent, as a ratio, or per share or per Employee.
(r) "PERFORMANCE MEASURES" shall mean one or more, or any combination, of
the following Company, Subsidiary, operating unit, division, line of business,
department, team or business unit financial performance measures: stock price,
dividends, total shareholder return, earnings per share, market capitalization,
book value, revenues, expenses, loans, deposits, noninterest income, net
interest income, fee income, operating income before or after taxes, net income
before or after taxes, net income before securities transactions, net or
operating income excluding non-recurring charges, return on assets, return on
equity, return on capital, cash flow, credit quality, service quality, market
share, customer retention, efficiency ratio, strategic business objectives,
consisting of one or more objectives based on meeting specified cost targets,
business expansion goals, and goals relating to acquisitions or divestitures;
and except in the case of a Covered Officer, any other performance criteria
established by the Committee, including Personal Plan Goals.
(s) "PERFORMANCE PERIOD" shall mean the fiscal-year period to be used in
measuring the degree to which the Performance Goals relating to Awards have
been met; provided, however, that for purposes of the initial Performance
Period of the Plan, Performance Period shall mean the period commencing on
January 1, 2002 and ending December 31, 2002.
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(t) "PERSONAL PLAN GOALS" shall mean the individual performance goals to
be achieved by a Participant in a Performance Period which are not based upon
corporate performance, as recommended by the Chief Executive Officer of the
Company and approved by the Committee.
(u) "PLAN" shall mean the First Tennessee National Corporation 2002
Management Incentive Plan, as amended from time to time.
(v) "RETIREMENT" shall mean the Termination of Employment of a Participant
after the Participant (i) 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, or (ii) has achieved a certain number of years of
service with the Company or any Subsidiary participating in the First Tennessee
National Corporation Pension Plan, as amended from time to time, and attained a
certain age, that the sum of the Participant's years of service and age equals
or exceeds the number 75.
(w) "SUBSIDIARY" shall mean any corporation or other person of which a
majority of its voting power or its equity securities or equity interest is
owned directly or indirectly by the Company.
(x) "SUPERIOR PERFORMANCE" shall mean the Performance Goals established
for any Performance Period, the attainment of which is necessary for the
payment of the Maximum Award for that Performance Period.
(y) "TARGET AWARD" shall mean the Award payable to a Participant under the
terms of the Plan for the achievement of 100% of the Performance Goal in any
Performance Period, expressed as a percentage of a Participant's Compensation
in accordance with Section 5.1 of the Plan.
(z) "TERMINATION OF EMPLOYMENT" shall mean the time when the
employee-employer relationship between a Participant and the Employer is
terminated for any reason, with or without Cause, including, but not by way of
limitation, a termination by resignation, discharge, death, Disability, Early
Retirement or Retirement, but excluding (i) terminations where there is a
simultaneous reemployment or continuing employment of a Participant by the
Employer; (ii) at the discretion of the Committee, terminations which result in
a temporary severance of the employee-employer relationship; and (iii) at the
discretion of the Committee, terminations which are followed by the
simultaneous establishment of a consulting relationship by the Employer with
the former Employee. The Committee, in its absolute discretion, shall determine
the effect of all matters and questions relating to Termination of Employment,
including, but not by way of limitation, the question of whether a Termination
of Employment resulted from a discharge for cause, and all questions of whether
particular leaves of absence constitute Terminations of Employment. However,
notwithstanding any provision of this Plan, the Employer has an absolute and
unrestricted right to terminate an Employee's employment at any time for any
reason whatsoever, with or without cause, except to the extent expressly
provided otherwise in writing.
(aa) "THRESHOLD PERFORMANCE" shall mean the level of attainment of the
Performance Goal necessary for the payment of any Award upon the completion of
any Performance Period.
ARTICLE III-PLAN ADMINISTRATION
Section 3.1 Subject to the authority and powers of the Board in relation
to the Plan as hereinafter provided, the Plan shall be administered by a
Committee designated by the Board. The Committee shall have full authority to
interpret the Plan and from time to time to adopt such rules and regulations
not inconsistent with the terms of the Plan for carrying out the Plan as it may
deem best in its sole and absolute discretion; provided, however, that the
Committee may not exercise any authority otherwise granted to it hereunder if
such action would have the effect of increasing the amount of any Award payable
hereunder to any Covered Officer. All determinations by the Committee shall be
made by the affirmative vote of a majority of those members present at a
meeting duly called and held at which a quorum exists, but any determination
reduced to writing and signed by all of the members of the Committee shall be
fully as effective as if it had been made by a majority vote at a meeting duly
called and held. All designations, determinations, interpretations and other
decisions of the Committee under or with respect to the provisions of the Plan
or any Award and all orders or resolutions of the Board pursuant thereto shall
be final, conclusive and binding on all persons, including but not limited to
the Participants, the Company and its Subsidiaries and their respective equity
holders, heirs, successors and personal representatives.
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Section 3.2 The Committee, on behalf of the Participants, shall enforce
this Plan in accordance with its terms and shall have all powers necessary for
the accomplishment of that purpose, including, but not by way of limitation,
the following powers:
(a) To select the Participants;
(b) To select the Performance Measures to be used for purposes of
setting the Performance Goals for a Performance Period;
(c) To establish the Performance Goals for each Performance
Period and the Target Awards to be payable to Participants
for the achievement thereof;
(d) To interpret, construe, approve and adjust all terms,
provisions, conditions and limitations of this Plan;
(e) To decide any questions arising as to the interpretation or
application of any provision of the Plan;
(f) To prescribe forms to be used and procedures to be followed
by Participants for the administration of the Plan; and
(g) To establish the terms and conditions of any agreement or
instrument under which an Award may be earned and paid.
ARTICLE IV-PARTICIPATION
Section 4.1 Subject to the provisions of the Plan, the Committee may from
time to time select any Employee who is a senior officer of the Company or of
any Subsidiary to be granted Awards under the Plan. Eligible Employees hired by
the Company after the commencement of a Performance Period may receive an Award
for the Performance Period which commenced in the fiscal year in which the
Employee became employed by the Company, if any is payable under the terms of
the Plan, and the Employee is selected by the Committee to participate in the
Plan at the time the Employee is employed by the Company. Such Award may be
paid in full or may be prorated based on the number of full months in the
Performance Period the Participant was employed by the Company, at the sole and
absolute discretion of the Committee. No Employee shall at any time have the
right (a) to be selected as a Participant in the Plan for any Performance
Period, (b) if selected as a Participant in the Plan, to be entitled to an
Award, or (c) if selected as a Participant in one Performance Period, to be
selected as a Participant in any subsequent Performance Period.
ARTICLE V-AWARDS
Section 5.1 The Committee may make Awards to Participants with respect to
each Performance Period, subject to the terms and conditions set forth in the
Plan. Unless specified otherwise by the Committee, the amount payable pursuant
to an Award shall be based on a percentage of the Participant's Compensation,
with the Target Award set for attaining 100% of the Performance Goal for any
Performance Period.
Section 5.2 The Committee shall establish in writing the Performance
Goals for the selected Performance Measures applicable to a Performance Period,
including the Threshold Performance and Superior Performance, within 90 days of
the commencement of the Performance Period and an Award for that Performance
Period shall be earned, paid, vested or otherwise deliverable upon the
completion of the Performance Period solely on account of the attainment of
such Performance Goals.
Section 5.3 Performance Goals may be described in terms of Company-wide
objectives or objectives that are related to the performance of the individual
Participant or the Subsidiary, operating unit, division, line of business,
department, team, business unit or function within the Company or Subsidiary in
which the Participant is employed, and may be expressed on an absolute and/or
relative basis, based on or otherwise employ comparisons based on Company
internal targets, the past performance of the Company and/or the past or
current performance of other companies, the performance of other companies over
one or more years, or an index of the performance of other companies, markets
or economic metrics over one or more years, and in the case of earnings-based
measures, may use or employ comparisons relating to capital, shareholders'
equity and/or Common Stock outstanding, or to assets or net assets.
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Section 5.4 The degree to which the Company achieves the Performance
Goals established by the Committee for a Performance Period shall serve as the
basis for the Committee's determination of the Award payable to a Participant
upon the completion of the Performance Period. Awards will be prorated for
Company performance results occurring between stated performance levels.
Company performance below the Threshold Performance will result in no Award
payments for that Performance Period. The Award payable for the attainment of
Superior Performance shall not exceed two and one-half times the Target Award
for any Performance Period.
Section 5.5 With respect to any Covered Officer during any Performance
Period, the maximum number of shares of Common Stock in respect of which an
Award may be paid under the Plan is 100,000 and the maximum amount of any Award
settled in cash is $4,000,000.
Section 5.6 Except in the case of Performance Goals related to an Award
intended to qualify under Section 162(m) of the Code, if the Committee
determines that a change in the business, operations, corporate structure or
capital structure of the Company, or the manner in which it conducts its
business, or other events or circumstances render the Performance Goals and/or
Performance Measures established for any Performance Period unsuitable, the
Committee, after the commencement of a Performance Period, may modify such
Performance Measures and/or Performance Goals, in whole or in part, as the
Committee deems appropriate and equitable.
ARTICLE VI - PAYMENT OF AWARDS
Section 6.1 Upon completion of each Performance Period, the Committee
shall review Company performance results as compared to the established
Performance Goals for that Performance Period, and shall certify (either by
written consent or as evidenced by the minutes of a meeting) the specified
Performance Goals achieved for the Performance Period (if any) and direct which
Award payments, if any, are payable under the Plan. No payment shall be made if
the Threshold Performance for the Performance Period is not met. The Committee
may, in its sole and absolute discretion, reduce or eliminate a Participant's
Award that would have been otherwise paid, including without limitation by
reference to a Participant's failure to achieve his or her Personal Plan Goals.
Section 6.2 The Committee shall have sole and absolute authority and
discretion to determine the time and manner in which Awards, if any, shall be
paid under this Plan. Generally, however, the following provisions may apply:
(a) Form of Payment: Payment of Awards may be made in a
single-sum in cash, or at the option of the Committee in its sole and
absolute discretion, in whole or in part in Company Common Stock.
(b) Date of Payment: Payment of Awards shall be made as
soon as practicable (as determined by the Committee) following the
close of the Performance Period (the "Payment Date"), except as
otherwise provided in Section 6.2(c) below.
(c) Employment Required: Except as provided below,
Participants must be Employees on the Payment Date in order to receive
payment of an Award.
(i) Early Retirement, Retirement, death or Disability
during a Performance Period: If, during a Performance Period,
a Participant's Termination of Employment by the Company or
its Subsidiaries is due to the Early Retirement, Retirement,
death or Disability of the Participant, the Participant (or
his beneficiary, as the case may be) shall nonetheless
receive payment of an Award, if any, after the close of the
Performance Period based upon the Performance Goals actually
attained by the Company for the Performance Period. The
Award, if any, may be paid in full or may be prorated based
on the number of full months which have elapsed in the
Performance Period as of the date of such Termination of
Employment, at the sole and absolute discretion of the
Committee. Payments under this Section 6.2(c)(i) shall be
made on the Payment Date.
(ii) Early Retirement, Retirement, death or Disability
after Last Day of the Performance Period: If a Participant is
an Employee on the last day of a Performance Period, but is
not an Employee on the Payment Date due to Early Retirement,
Retirement, death or Disability, then the Participant (or his
beneficiary, as the case may be) may receive on the Payment
Date the full Award earned under
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the terms of the Plan for the Performance Period, if any. The
Award, if any, shall be made on the Payment Date. If a
Participant's employment with the Company is terminated for
any other reason other than Early Retirement, Retirement,
death or Disability after the last day of a Performance
Period, but before the Payment Date, the Participant (or his
beneficiary, as the case may be) will forfeit all rights to
any earned but unpaid Awards for that Performance Period
under the Plan; provided, however, that the Committee may, at
any time and in its sole and absolute discretion, authorize a
full or partial payment of any earned but unpaid Awards under
the Plan.
(iii) Change in Control: In the event the terms of any
agreement entered into by and between the Company and a
Participant governs the payment of any Award granted
hereunder following a Change in Control, then the payment of
such Award shall be governed by the terms and conditions of
such agreement and not of this Plan. If the payment of any
Award granted hereunder following a Change in Control is not
otherwise provided for by the terms of an agreement by and
between the Company and a Participant, then the payment of
such Award following a Change in Control shall be governed by
this Section 6.2(c)(iii). Unless otherwise provided under the
terms of an agreement between the Participant and the
Company, a Participant shall receive an Award equal to the
Target Award the Participant would have received for the
Performance Period if the Participant's employment with the
Company is terminated during a Performance Period in which
there has been a Change in Control, and the Target Award in
such event shall be prorated based upon the number of full
months which have elapsed in the Performance Period as of the
date of such Termination of Employment. If a Participant's
employment is terminated following a Performance Period in
which there was a Change in Control, but before the Payment
Date for that Performance Period, the Participant shall
receive the full amount of any Award earned but not yet paid
for that Performance Period.
Section 6.3 The Committee in its sole and absolute discretion may
decrease the amount payable pursuant to an Award, but in no event shall the
Committee have discretion to increase the amount payable to any Covered Officer
pursuant to an Award in a manner inconsistent with the requirements for
qualified performance-based compensation under Code Section 162(m). In
interpreting Plan provisions applicable to Performance Goals and Awards, it is
the intent of the Plan to conform with the standards of Code Section 162(m)
applicable to qualified performance-based compensation, and the Committee in
establishing such Performance Goals and interpreting the Plan shall be guided
by such provisions.
ARTICLE VII - SHARES AVAILABLE FOR AWARDS
7.1 Subject to the provisions of Section 7.2 hereof, the stock to be
subject to Awards under the Plan shall be the Common Stock of the Company, and
the maximum number of shares of Common Stock with respect to which Awards may
be granted under the Plan shall be 200,000 shares. Any shares of Common Stock
delivered pursuant to an Award may consist, in whole or in part, of authorized
and unissued shares of Common Stock or of issued shares of Common Stock which
have been required by the Company and shall be issued at 100% of the Fair
Market Value of the Common Stock as of the date of issuance.
7.2 Any increase in the number of outstanding shares of Common Stock
occurring through stock splits or stock dividends after the adoption of this
Plan shall be reflected proportionately in an increase in the aggregate number
of shares of Common Stock then available for Awards under the Plan and in the
number of shares of Common Stock available for an Award to any one person under
the Plan. Any fractional shares of Common Stock resulting from such adjustments
shall be eliminated. If changes in capitalization other than a stock split or
stock dividend shall occur, including without limitation, a recapitalization,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, or exchange of shares of Common Stock or other
securities of the Company, issuance of warrants or other rights to purchase
shares of Common Stock or other securities of the Company, or other similar
corporate transaction or event which affects the shares of Common Stock such
that an adjustment is determined by the Board, in its sole discretion, to be
appropriate, then the Board shall, in such manner as it may deem equitable,
adjust any or all of (a) the aggregate number of shares of Common Stock with
respect to which Awards may be granted under the Plan; (b) the number of shares
of Common Stock of the Company subject to outstanding Awards under the Plan;
and (c) the appropriate Fair Market Value and other price determinations for
such Awards; provided that the number of shares subject to any Award shall
always be a whole number.
B-7
ARTICLE VIII - AMENDMENT, MODIFICATION, SUSPENSION OR TERMINATION OF THE PLAN
Section 8.1 The Board may at any time terminate or suspend the Plan, in
whole or in part, and from time to time, subject to the shareholder approval
requirements of Section 162(m), amend or modify the Plan, provided that, except
as otherwise provided in the Plan, no such amendment, modification, suspension
or termination shall adversely affect the rights of any Participant under any
Award previously earned but not yet paid to such Participant without the
consent of such Participant. In the event of such termination, in whole or in
part, of the Plan, the Committee may in its sole discretion direct the payment
to Participants of any amounts specified in Article VI and theretofore not paid
out, prior to the Payment Date, and in a lump sum or installments as the
Committee shall prescribe with respect to each such Participant.
Notwithstanding the foregoing, any such payment to a Covered Officer must be
discounted to reflect the present value of such payment using a rate equal to
the discount rate in effect under the First Tennessee National Corporation
Pension Plan, as amended from time to time, on the date of such payment. The
Board may at any time and from time to time delegate to the Committee any or
all of its authority under this Article VIII to the extent permitted by law.
ARTICLE IX - GENERAL PROVISIONS
Section 9.1 Unless otherwise determined by the Committee and provided in
the Agreement, no Award or any other benefit under this Plan shall be
assignable or otherwise transferable, except by will or the laws of descent and
distribution. Any attempted assignment of an Award or any other benefit under
this Plan in violation of this Section 9.1 shall be null and void. A
Participant may designate in writing a beneficiary (including the trustee or
trustees of a trust) who shall upon the death of such Participant be entitled
to receive all amounts payable under the provisions of Section 6.2(c) to such
Participant. A Participant may rescind or change any such designation at any
time.
Section 9.2 The Company shall have the right to withhold applicable taxes
from any Award payment and to take such other action as may be necessary in the
opinion of the Company to satisfy all obligations for withholding of such
taxes.
Section 9.3 No Employee or other person shall have any claim or right to
be granted an Award under this Plan. Neither the Plan nor any action taken
thereunder shall be construed as giving an Employee any right to be retained in
the employ of the Company or an Employer and the right of the Company or
Employer to dismiss or discharge any such Participant is specifically reserved.
The benefits provided for Participants under the Plan shall be in addition to,
and shall in no way preclude, other forms of compensation to or in respect of
such Participants. No Participant shall have any lien on any assets of the
Company or any Employer by reason of any Award made under this Plan.
Section 9.4 The payment of all or any portion of the Awards payable to a
Participant under this Plan may be deferred by the Participant, subject to such
terms and conditions as may be established by the Committee in its sole and
absolute discretion.
Section 9.5 This Plan and all determinations made and actions taken
pursuant thereto, shall be governed by and construed in accordance with, the
laws of the State of Tennessee, without giving effect to the conflicts of law
principles thereof.
Section 9.6 The terms of the Plan shall be binding upon the Company and
its successors and assigns and the Participants and their legal
representatives, and shall bind any successor of the Company, as well as its
assets or its businesses (whether direct or indirect, by purchase, merger,
consolidation or otherwise), in the same manner and to the same extent that the
Company would be obligated under this Plan if no succession had taken place. In
the case of any transaction in which a successor would not by the foregoing
provision or by operation of law be bound by this Plan, the Company shall
require such successor expressly and unconditionally to assume and agree to
perform the Company's obligations hereunder, in the same manner and to the same
extent that the Company would be required to perform if no such succession had
taken place.
Section 9.7 This Plan shall expire on December 31, 2012, and no new
Awards shall be granted under the Plan after that date.
B-8
FINANCIAL INFORMATION AND DISCUSSION
TABLE OF CONTENTS
Selected Financial and Operating Data F-2
Management's Discussion and Analysis F-3
General Information F-3
Forward Looking Statements F-3
Critical Accounting Policies F-4
Income Statement Analysis (2001 compared to 2000) F-5
Debt Restructurings F-16
Cumulative Effect of Changes in Accounting Principles F-16
Unusual Revenue and Expense Items F-16
Business Line Review F-17
Income Statement Analysis (2000 compared to 1999) F-19
Balance Sheet Review F-21
Risk Management F-27
Other F-38
Glossary F-41
Consolidated Statements of Condition F-44
Consolidated Statements of Income F-45
Consolidated Statements of Shareholders' Equity F-46
Consolidated Statements of Cash Flows F-47
Notes to Consolidated Financial Statements F-48
Report of Independent Public Accountants F-86
Consolidated Historical Performance Statements of Income F-87
Consolidated Average Balance Sheets and Related Yields and Rates F-88
First Tennessee National Corporation F-1
SELECTED FINANCIAL AND OPERATING DATA
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions except per share data) 2001 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE DEBT RESTRUCTURINGS AND
CUMULATIVE ADJUSTMENT* $ 329.6 $ 232.6 $ 247.5 $ 226.4 $ 197.5 $ 179.9
NET INCOME 318.2 232.6 247.5 226.4 197.5 179.9
------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA
Earnings per share before debt
restructurings and
cumulative adjustment* $ 2.58 $ 1.79 $ 1.90 $ 1.77 $ 1.54 $ 1.34
Earnings per share 2.49 1.79 1.90 1.77 1.54 1.34
Diluted earnings per share
before debt restructurings
and cumulative adjustment* 2.51 1.77 1.85 1.72 1.50 1.32
Diluted earnings per share 2.42 1.77 1.85 1.72 1.50 1.32
Cash dividends declared per share .91 .88 .79 .685 .615 .5475
Year-end book value per share 11.66 10.70 9.52 8.50 7.44 7.14
Closing price of common stock per share:
High 37.25 29.06 45.19 38.06 33.75 19.31
Low 27.38 16.06 27.56 23.81 18.38 14.44
Year-end 36.26 28.94 28.50 38.06 33.38 18.75
Dividends per share/year-end closing price 2.5% 3.0% 2.8% 1.8% 1.8% 2.9%
Dividends per share/earnings per
share (payout ratio) 36.5 49.2 41.6 38.7 39.9 40.9
Price/earnings ratio 15.0x 16.3x 15.4x 22.1x 22.3x 14.2x
Market capitalization $ 4,597.0 $ 3,744.7 $ 3,715.1 $ 4,920.8 $ 4,279.0 $ 2,507.2
Average shares outstanding (thousands) 127,777 129,865 130,573 128,235 128,365 134,393
Period-end shares outstanding (thousands) 125,865 128,745 129,878 128,974 128,209 133,715
Volume of shares traded (thousands) 110,154 99,469 96,207 107,837 135,205 109,038
------------------------------------------------------------------------------------------------------------------------------------
SELECTED AVERAGE BALANCES
Total assets $19,222.7 $19,320.8 $18,620.8 $16,720.7 $13,280.6 $12,588.3
Total loans** 10,104.3 9,932.0 8,818.8 8,242.1 7,945.1 7,472.1
Investment securities 2,595.3 2,862.7 2,702.7 2,425.8 2,139.4 2,203.2
Earning assets 16,125.4 16,095.5 15,583.7 14,320.5 11,512.1 11,062.0
Deposits 12,421.7 12,860.8 12,302.1 10,996.4 9,207.1 8,945.5
Term borrowings 521.5 384.3 371.1 252.7 185.5 253.7
Shareholders' equity 1,401.3 1,276.6 1,186.8 996.0 878.8 897.5
------------------------------------------------------------------------------------------------------------------------------------
SELECTED PERIOD-END BALANCES
Total assets $20,616.8 $18,555.1 $18,373.4 $18,734.0 $14,387.9 $13,058.9
Total loans** 10,283.1 10,239.5 9,363.2 8,557.1 8,311.4 7,728.2
Investment securities 2,525.9 2,839.0 3,101.3 2,426.3 2,186.5 2,239.5
Earning assets 17,085.7 15,193.3 14,944.2 15,694.6 12,220.2 11,045.8
Deposits 13,606.3 12,188.7 11,358.7 11,723.0 9,671.8 9,033.1
Term borrowings 550.4 409.7 358.7 414.5 168.9 234.6
Shareholders' equity 1,477.8 1,384.2 1,241.5 1,099.5 954.1 954.5
------------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average shareholders'
equity before debt restructurings
and cumulative adjustment 23.52% 18.22% 20.86% 22.73% 22.47% 20.05%
Return on average shareholders' equity 22.71 18.22 20.86 22.73 22.47 20.05
Return on average assets before
debt restructurings
and cumulative adjustment 1.71 1.20 1.33 1.35 1.49 1.43
Return on average assets 1.66 1.20 1.33 1.35 1.49 1.43
Net interest margin 4.27 3.73 3.80 3.80 4.23 4.13
Allowance for loan losses to loans** 1.51 1.40 1.49 1.59 1.51 1.52
Net charge-offs to average loans** .80 .62 .59 .46 .54 .41
Average shareholders' equity to average assets 7.29 6.61 6.37 5.96 6.62 7.13
Average tangible equity to average tangible assets 6.66 5.99 5.70 5.23 5.81 6.20
Average shareholders' equity to average net loans 14.08 13.04 13.68 12.28 11.24 12.20
------------------------------------------------------------------------------------------------------------------------------------
RETURN TO SHAREHOLDERS
Stock appreciation 25.3% 1.5% (25.1)% 14.0% 78.0% 24.0%
Dividend yield 3.1 3.1 2.1 2.1 3.3 3.6
Total return 28.4 4.6 (23.0) 16.1 81.3 27.6
------------------------------------------------------------------------------------------------------------------------------------
*Cumulative adjustment reflects the effect of changes in accounting principles
related to derivatives.
**Net of unearned income.
See accompanying notes to consolidated financial statements. Common stock data
reflects the 1998 and 1996 two-for-one stock splits.
F-2 First Tennessee National Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
GENERAL INFORMATION
-------------------
First Tennessee National Corporation (First Tennessee) is headquartered in
Memphis, Tennessee, and is a diversified financial services institution that
provides banking and other financial services to its customers through various
regional and national business lines. The REGIONAL BANKING GROUP includes the
retail/commercial bank, the credit card division, and the trust division. The
NATIONAL LINES OF BUSINESS include First Horizon Home Loan Corporation (also
referred to as First Horizon Home Loans or mortgage banking), First Tennessee
Capital Markets (also referred to as capital markets), and transaction
processing (credit card merchant processing, automated teller machine network,
payment processing operation, and check clearing).
Based on management's best estimates certain revenue and expenses are allocated
and reflect the inherent risk in each business line equity is assigned to the
various business lines. These allocations and assignments are periodically
reviewed and may be revised from time to time to more accurately reflect current
business conditions and risks; the previous history is restated to ensure
comparability.
For the purpose of this management discussion and analysis (MD&A), noninterest
income (also called fee income) and total revenue exclude securities gains and
losses. Net interest income has been adjusted to a fully taxable equivalent
(FTE) basis for certain tax-exempt loans and investments included in earning
assets. Earning assets, including loans, have been expressed as averages, net of
unearned income. First Tennessee Bank National Association, the primary bank
subsidiary, is also referred to as FTBNA in this discussion.
The following financial discussion should be read with the accompanying
consolidated financial statements and notes. A glossary is included at the end
of the MD&A to assist with terminology.
FORWARD-LOOKING STATEMENTS
--------------------------
Management's discussion and analysis may contain forward-looking statements with
respect to First Tennessee's beliefs, plans, goals, expectations, and estimates.
These statements are contained in certain sections such as Critical Accounting
Policies, Noninterest Income, Net Interest Income, Interest Rate Risk
Management, Credit Risk Management/Asset Quality, and Other. Forward-looking
statements are statements that are not based on historical information but
rather are related to future operations, strategies, financial results or other
developments. The words "believe", "expect", "anticipate", "intend", "estimate",
"should", "is likely", "going forward", and other expressions that indicate
future events and trends identify forward-looking statements. Forward-looking
statements are necessarily based upon estimates and assumptions that are
inherently subject to significant business, economic and competitive
uncertainties and contingencies many of which are beyond a company's control,
and many of which, with respect to future business decisions and actions (such
as acquisitions and divestitures), are subject to change (including possibly
significant changes). Examples of uncertainties and contingencies include, among
other important factors, general and local economic and business conditions;
expectations of and actual timing and amount of interest rate movements (which
can have a significant impact on a financial services institution); market and
monetary fluctuations; inflation; competition within and outside the financial
services industry; possible terrorist activity; technology; and new products and
services in the industries in which First Tennessee operates. Other
uncertainties and contingencies are those inherent in originating and servicing
loans, including prepayment risks and fluctuating collateral values and changes
in customer financial condition. Additionally, the policies of the Office of the
Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve
System, the Financial Accounting Standards Board (FASB) and the Securities and
Exchange Commission; unanticipated regulatory and judicial proceedings; and
changes in laws and regulations applicable to First Tennessee and First
Tennessee's success in executing its business plans and strategies and managing
the risks involved in the foregoing, could cause actual results to differ from
those currently anticipated. First Tennessee assumes no obligation to update any
forward-looking statements that are made from time to time.
First Tennessee National Corporation F-3
CRITICAL ACCOUNTING POLICIES
----------------------------
The consolidated financial statements of First Tennessee are prepared in
conformity with generally accepted accounting principles and follow general
practices within the industries in which it operates. This preparation requires
management to make estimates, assumptions and judgments that affect the amounts
reported in the financial statements and accompanying notes. These estimates,
assumptions and judgments are based on information available as of the date of
the financial statements; accordingly, as this information changes, the
financial statements could reflect different estimates, assumptions and
judgments. Certain policies inherently have a greater reliance on the use of
estimates, assumptions and judgments and as such have a greater possibility of
producing results that could be materially different than originally reported.
Management believes the following policies are both important to the portrayal
of the company's financial condition and results and require subjective or
complex judgments.
Subject to the use of estimates, assumptions and judgments is management's
evaluation process used to determine the adequacy of the allowance for loan
losses which combines three factors: historical loss experience derived from
analytical models, current trends and economic conditions, and reasonably
foreseeable events. Because current economic conditions can change and future
events are inherently difficult to predict, the anticipated amount of estimated
loan losses, and therefore the adequacy of the allowance, could change. First
Tennessee believes the allowance for loan losses is adequate and properly
recorded in the financial statements. See Credit Risk Management/Asset Quality.
The fair value of First Tennessee's investment in mortgage servicing rights
(MSR) is important to the presentation of the consolidated financial statements
in that MSR are subject to a fair value based impairment standard and are
actively hedged in fair value hedging relationships. MSR do not trade in an
active open market with readily observable prices. Rather, sales of MSR tend to
occur in principal to principal transactions, and although precise terms and
conditions of sale are typically not readily available, information regarding
the value of transactions is generally obtainable. As such, like other
participants in the mortgage banking business, First Tennessee relies on an
internal discounted cash flow model to estimate the fair value of its MSR. First
Tennessee uses assumptions in the model that it believes are comparable to those
used by other participants in the mortgage banking business and reviews its
values and assumptions with outside advisors on a quarterly basis. While First
Tennessee believes that the values produced by its internal model are indicative
of the fair value of its MSR portfolio, these values can change significantly
depending upon the then current interest rate environment and other economic
conditions, and the proceeds that might be received should First Tennessee
actually consider a sale of the MSR portfolio could differ from the amounts
reported at any point in time. First Tennessee believes MSR are properly
recorded in the financial statements. See Interest Rate Risk Management and Note
6 - Mortgage Servicing Rights.
In various segments of its business, particularly in mortgage banking, First
Tennessee uses derivative financial instruments to reduce exposure to changes in
interest rates and market prices for financial instruments. Substantially all of
these derivative financial instruments are designated as hedges for financial
reporting purposes. The application of the hedge accounting policy requires
judgment in the assessment of hedge effectiveness, identification of similar
hedged item groupings and measurement of changes in the fair value of hedged
items. First Tennessee believes that its techniques for addressing these
judgmental areas are in line with industry practices in assessing hedge
effectiveness. However, if in the future the derivative financial instruments
used by First Tennessee no longer qualify for hedge accounting treatment and,
consequently, the change in fair value of hedged items could not be recognized
in earnings, the impact on the consolidated results of operations and reported
earnings could be significant. First Tennessee believes hedge effectiveness is
evaluated properly in preparation of the financial statements. See Interest Rate
Risk Management, Accounting for Derivative Instruments & Hedging Activities,
Further Interpretations of SFAS No. 133, and Note 23 - Fair Value of Financial
Instruments.
Most of the derivative financial instruments used by First Tennessee have active
markets and indications of fair value can be readily obtained. Under the
existing accounting rules, the commitments to extend mortgage loans at fixed
interest rates entered into between mortgage banking and its customers qualify
as derivative financial instruments. In the absence of a ready and observable
market for loan commitments, First Tennessee uses an internal model and one of
several industry valuation techniques to value its fixed-rate loan commitments.
While First Tennessee believes the value produced by its internal model is
reasonable, the proceeds that might be received should First Tennessee actually
consider a sale of the loan commitments could differ from the amounts
F-4 First Tennessee National Corporation
reported at any point in time. First Tennessee believes loan commitments are
properly recorded in the financial statements. See Note 23 - Fair Value of
Financial Instruments.
First Tennessee's activities as a servicer of mortgage loans subjects it to
similar credit related risks as are present in the loan portfolio. The
estimation of an adequate foreclosure loss reserve involves the same judgments
regarding the predictive power of past foreclosure results and the impact of
current trends and operating conditions. While First Tennessee believes that the
current analytical model and related assumptions used to determine the
foreclosure loss reserve are proper and in line with industry practice and
reflective of current trends and conditions, actual foreclosure losses could
differ from the estimated amount as properties and collateral are actually
disposed. First Tennessee believes the foreclose loss reserve is adequate and
properly recorded in the financial statements. See Note 23 - Fair Value of
Financial Instruments.
The assessment of contingent liabilities, including legal contingencies and tax
liabilities, involves the use of estimates, assumptions and judgments, and there
can be no assurance that future events, such as court decisions or I.R.S.
positions, will not differ from management's current assessment. First Tennessee
believes reserves for contingent liabilities are adequate and properly recorded
in the financial statements.
Under SFAS No. 142, "Goodwill and Other Intangible Assets", which became
effective on January 1, 2002, goodwill will no longer be amortized, but is
subject to an impairment test. First Tennessee does not believe that any of the
goodwill currently on its books has been impaired, but subsequent developments
or information could result in an impairment charge (see Other - Accounting
Changes).
Note 1 - Summary of Significant Accounting Policies provides more detail on the
accounting policies applied in the preparation of First Tennessee's financial
statements.
INCOME STATEMENTS ANALYSIS - 2001 COMPARED TO 2000
--------------------------------------------------
Earnings in 2001 were $318.2 million, an increase of 37 percent from $232.6
million earned in 2000. Diluted earnings per common share were $2.42 in 2001, an
increase of 37 percent from the $1.77 earned in 2000. Earnings per common share
were $2.49 in 2001, up 39 percent from the $1.79 earned in 2000. Return on
average assets (ROA) was 1.66 percent in 2001 compared with 1.20 percent in
2000. Return on average shareholders' equity (ROE) was 22.7 percent in 2001
compared with 18.2 percent in 2000. The growth in earnings was influenced by
unusual revenue, primarily gain from divestitures, and certain unusual expenses
and losses, such as costs related to efficiency and revenue enhancement programs
and divestitures, in both 2001 and 2000. These income and expense items are
discussed in greater detail throughout this MD&A (see Unusual Revenue and
Expense Items).
On December 31, 2001, First Tennessee was ranked among the top 50 bank holding
companies nationally in market capitalization ($4.6 billion) and assets ($20.6
billion). On December 31, 2000, market capitalization was $3.7 billion and total
assets were $18.6 billion.
Total revenue for 2001 increased 29 percent, or $435.0 million, with net
interest income increasing 15 percent, or $87.9 million, and fee income
increasing 38 percent, or $347.1 million.
NONINTEREST INCOME
Fee income provides the majority of First Tennessee's revenue. During 2001 fee
income increased 38 percent, to $1,264.0 million from $916.9 million, and
contributed 65 percent to total revenue in 2001 compared with 61 percent in
2000. Table 1 provides six years of detailed information concerning First
Tennessee's noninterest income. The following discussion provides additional
information on various line items reported in the table.
First Tennessee National Corporation F-5
TABLE 1 - ANALYSIS OF NONINTEREST INCOME
Compound Annual
Growth Rates(%)
-----------------
(Dollars in thousands) 2001 2000 1999 1998 1997 1996 01/00 01/96
---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking $ 449,647 $238,031 $479,886 $449,514 $287,812 $249,365 88.9 + 12.5 +
Capital markets 343,647 117,870 126,835 147,353 98,310 85,871 191.5 + 32.0 +
Deposit transactions and
cash management 133,631 116,080 106,240 90,444 86,047 78,228 15.1 + 11.3 +
Divestitures 80,357 157,635 4,246 567 -- -- 49.0 - N/A
Trust services and
investment management 56,705 65,817 59,807 51,198 40,941 34,704 13.8 - 10.3 +
Merchant processing 45,426 48,232 49,711 37,462 32,111 24,185 5.8 - 13.4 +
Equity securities
gains/(losses) (3,290) 754 2,313 3,940 (854) (2,495) NM 5.7 -
Debt securities
gains/(losses) (1,041) (4,961) (56) 36 141 (186) 79.0 + 41.1 -
All other income and
commissions:
Other service charges 24,932 23,199 17,430 14,863 10,474 9,891 7.5 + 20.3 +
Cardholder fees 20,137 29,666 25,579 21,046 19,833 17,155 32.1 - 3.3 +
Insurance premiums and
commissions 16,844 12,203 10,912 8,725 6,457 5,644 38.0 + 24.4 +
Check clearing fees 11,615 11,129 11,143 9,199 13,043 16,873 4.4 + 7.2 -
Other 81,026 97,019 76,173 42,304 31,496 25,873 16.5 - 25.6 +
-------------------------------------------------------------------------------------------------------
Total other income 154,554 173,216 141,237 96,137 81,303 75,436 10.8 - 15.4 +
-------------------------------------------------------------------------------------------------------
Total noninterest income $1,259,636 $912,674 $970,219 $876,651 $625,811 $545,108 38.0 + 18.2 +
=======================================================================================================
Certain previously reported amounts have been reclassified to agree with current
presentation.
NM - not meaningful
MORTGAGE BANKING
First Horizon Home Loans, a subsidiary of FTBNA, originates and services
residential mortgage loans. Following origination, the mortgage loans, primarily
first-lien, are currently sold to investors in the secondary market, and during
2001 a significant portion of the rights to service such loans was sold under a
flow servicing sale agreement. Various hedging strategies are used to mitigate
changes in the market value of the loan during the time period beginning with a
price commitment to the customer and ending when the loan is delivered to the
investor. Closed loans held during this time period are referred to as the
mortgage warehouse. Origination fees and gains or losses from the sale of loans
are recognized at the time a mortgage loan is sold into the secondary market.
Subsequent to the 2001 adoption of new accounting standards related to
derivatives (Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS No. 133) and EITF
99-20), a portion of the gain or loss formerly recognized with the sale of a
mortgage loan is now recognized at the time an interest rate lock commitment is
made to the customer. Secondary marketing activities include gains or losses
from mortgage pipeline and warehouse hedging activities, product pricing
decisions, and gains or losses from the sale of loans into the secondary market
including the capitalized net present value of the MSR. Servicing rights permit
the collection of fees for gathering and processing monthly mortgage payments
for the owner of the mortgage loans. First Horizon Home Loans employs hedging
strategies intended to counter a change in the value of its MSR through changing
interest rate environments. MSR hedge gains/(losses) reflect effects of hedging
including servicing rights net value changes (see Other - Accounting for
Derivative Instruments and Hedging Activities). Other income includes income
from the foreclosure repurchase program, bulk sales of MSR, and other
miscellaneous items. Mortgage trading securities gains/(losses) relate to market
value adjustments primarily on interest-only strips that were classified as
trading securities in 2001 and related hedges. In order to be comparable with
other mortgage companies' disclosures, mortgage banking fee income is now
reported net of amortization,
F-6 First Tennessee National Corporation
impairment and other expenses related to MSR and related hedges. As shown in
Table 2, total mortgage banking fee income increased 89 percent in 2001.
TABLE 2 - MORTGAGE BANKING
Compound Annual
Growth Rates(%)
---------------
(Dollars and volume in millions) 2001 2000 1999 01/00 01/99
------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Loan origination fees $ 190.9 $ 127.2 $ 172.7 50.1 + 5.1 +
Secondary marketing activities 279.0 115.3 242.7 142.1 + 7.2 +
Mortgage servicing fees 157.1 161.5 167.8 2.7 - 3.2 -
Mortgage servicing rights net hedge gains/(losses)* 48.0 (47.7) 17.9 N/A 63.8 +
Other income 22.6 32.6 31.7 30.5 - 15.6 -
Mortgage trading securities net losses (9.1) -- -- N/A N/A
Amortization of mortgage servicing rights (109.3) (81.6) (103.5) 34.1 - 2.8 -
Mortgage servicing rights impairment loss (115.4) (31.2) -- 270.5 - N/A
Amortization and time decay
of mortgage servicing rights hedges (14.2) (38.0) (49.4) 62.7 + 46.4 +
----------------------------------------------------------------------------------------------
Total mortgage noninterest income $ 449.6 $ 238.1 $ 479.9 88.9 + 3.2 -
==============================================================================================
Refinance originations $16,071 $ 2,835 $ 7,155 466.9 + 49.9 +
New loan originations 10,192 11,986 12,708 15.0 - 10.4 -
----------------------------------------------------------------------------------------------
Mortgage loan originations $26,263 $14,821 $19,863 77.2 + 15.0 +
==============================================================================================
Servicing portfolio $45,460 $47,394 $44,628 4.1 - .9 +
----------------------------------------------------------------------------------------------
*For 2001, subsequent to the adoption of SFAS No. 133, net hedge gains
represent net gains on servicing hedges in excess of losses on hedged MSR
(see Note 1 - Summary of Significant Accounting Policies).
N/A = not applicable
Total origination volume, consisting of home purchase-related mortgages and
refinanced mortgages, increased 77 percent to $26.3 billion compared to $14.8
billion in 2000. The increase in volume was primarily due to the impact that
declining mortgage interest rates had on refinance mortgage activity which
increased 467 percent to $16.1 billion from $2.8 billion in 2000. Home
purchase-related mortgage originations fell 15 percent to $10.2 billion from
$12.0 billion, primarily due to the closing or other disposition of less
profitable production offices in 2000. Fees derived from the mortgage
origination process (loan origination fees, profits from the sale of loans, flow
sales of MSR, and other secondary marketing activities) increased 94 percent in
2001, to $469.9 million from $242.5 million. This increase was primarily due to
increased origination volume, improved pricing margin management, and an
improvement in the results in pipeline and warehouse hedging and other loan sale
activities. While the growth in refinance activity produced increased
origination fee income, it also substantially increased actual and projected MSR
prepayment speeds. The increase in prepayment speeds in 2001 was the primary
reason for the 34 percent increase, to $109.3 million, in MSR amortization
expense and a $115.4 million impairment loss in 2001 (see MSR net hedge gains
discussed below which reduced the effect of this loss) compared to a $21.2
million loss in 2000. In 2000, there was also a $10.0 million impairment loss
from the write-down of the book value of MSR related to a change in methodology
for recognizing the decrease in value of servicing for delinquent mortgage loans
(see Unusual Revenue and Expense Items).
The mortgage-servicing portfolio (which includes servicing for ourselves and
others) totaled $45.5 billion on December 31, 2001, compared to $47.4 billion on
December 31, 2000. The reduction was a result of higher than expected loan
prepayments and was consistent with management's strategy to reduce the size of
the servicing portfolio. First Horizon Home Loans also managed the size of the
servicing portfolio through servicing released originations which totaled $9.4
billion in 2001 (see Note 6 - Mortgage Servicing Rights for information
summarizing changes in MSR). Mortgage servicing fee income was $157.1 million in
2001, compared with $161.5 million in 2000.
First Tennessee National Corporation F-7
MSR net hedge gains, which after the adoption of SFAS No. 133 in 2001 represent
net hedge gains on servicing hedges in excess of losses on hedged MSR, were
$48.0 million ($117 million of hedge gains offset by a $69 million decline in
the value of hedged MSR) and included $5.0 million in SFAS No. 133 gain (See
Accounting for Derivative Instruments and Hedging Activities and Unusual Revenue
and Expense Items). In 2000 there were MSR net hedge losses of $47.7 million,
which included a $49.9 million loss related to the repositioning of the mortgage
servicing hedge portfolio in preparation for the adoption of SFAS No. 133 (see
Unusual Revenue and Expense Items). Amortization and time decay of MSR hedges,
now reported in fee income, improved 63 percent to $14.2 million primarily due
to the decreased use of option-based hedges in 2001.
Other mortgage income decreased 30 percent to $22.6 million for 2001 compared
with $32.6 million in 2000. The decrease was primarily due to $3.1 billion in
bulk sales of servicing during 2000, which resulted in gains of $14.8 million,
compared to no bulk sales in 2001. Income from the agency insured foreclosure
repurchase program, under which First Horizon Home Loans buys delinquent loans
to reduce future foreclosure costs, increased 1 percent in 2001 to $17.2 million
from $17.0 million in 2000.
In 2001 a net loss of $9.1 million related to market value adjustments on
interest-only and principal-only strips that were classified as trading
securities in first quarter 2001 and related hedges was recognized in mortgage
banking income. Gross losses included in these earnings resulting from the
reclassification of the securities from available for sale to trading securities
were $3.6 million.
Going forward, if mortgage interest rates remain at current levels, the
origination volume from refinanced mortgages, and therefore revenue from
origination fees, profits from the sale of loans and MSR and gains from pipeline
and warehouse hedging and other loan sale activities, is expected to decline
along with the current expense levels associated with amortization and write-off
of existing MSR. Home purchase-related mortgage originations should reflect the
relative strength or weakness of the economy. Actual results could differ
because of several factors, including those presented in the Forward-Looking
Statements section of the MD&A.
DIVESTITURES
Gains from divestitures totaled $80.4 million in 2001 and $157.6 million in 2000
(certain incremental operating expenses related to these divestitures were also
incurred - see the Noninterest Expense section for additional information). The
gains in 2001 reflect First Tennessee's divestitures of its interests in Check
Solutions Company ($42.7 million); the sale of Peoples and Union Bank ($13.1
million); the sale of a portfolio of student loans ($11.8 million); the final
phase of the sale of certain single relationship credit card accounts ($8.2
million); and an earn-out related to the 2000 divestiture of First Tennessee's
corporate and municipal trust business ($4.6 million) (see Unusual Revenue and
Expense Items). The gains in 2000 reflect First Tennessee's divestitures of
single relationship credit card accounts ($50.2 million); the sale of the
corporate and municipal trust business ($33.4 million); the sale of the MONEY
BELT(R) ATM network ($33.1 million); and the sale of the HomeBanc mortgage
division ($40.9 million) (see Note 2 - Acquisitions/Divestitures and Unusual
Revenue and Expense Items).
CAPITAL MARKETS
First Tennessee Capital Markets generates fee income primarily from the purchase
and sale of securities as both principal and agent and from investment banking,
portfolio advisory and equity research services. Inventory positions are limited
to the procurement of securities solely for distribution to customers by the
sales staff. Inventory is hedged to protect against movements in interest rates.
During 2001 capital markets noninterest income increased 192 percent to $343.7
million from $117.9 million. This increased activity reflects continued growth
and penetration into our targeted institutional customer base and changes in
product mix. Additionally, fee income was favorably impacted in 2001 by revenues
from new products and services that capital markets began offering in the second
half of 2000. These sources of revenue include portfolio advisory, various
investment banking services, and the acquisition in first quarter 2001 of
MidWest Research Group. 2001's results include $95.1 million in revenues related
to these new products and services, compared to $9.0 million in 2000.
Additionally, capital markets 2001 fee income has benefited from an improvement
from last year's distressed market conditions. Excluding the impact of these new
products, capital markets fee income increased 128 percent to $248.6 million in
2001 from $108.9 million in 2000. This growth was
F-8 First Tennessee National Corporation
more consistent with the increase experienced in the volume of securities
transactions along with a rebound in profitability from a more normal product
mix. Total securities bought and sold by the capital markets division were
$1,408.5 billion, an increase of 85 percent from $760.0 billion in 2000.
Furthermore, capital markets has experienced 19 percent average annual growth in
revenue from traditional sources since the last record year in 1998 resulting
from customer penetration benefited by the void created by significant
consolidation in the brokerage industry. Going forward, while market conditions
are likely to eventually stabilize, the extension of new products and services
to capital markets' customer base will continue to increase revenue sources from
nontraditional businesses. Actual results could differ because of several
factors, including those presented in the Forward-Looking Statements section of
the MD&A.
DEPOSIT TRANSACTIONS AND CASH MANAGEMENT
Deposit transactions include services related to retail deposit products (such
as service charges on checking accounts), cash management products and services
such as electronic transaction processing (automated clearing house and
Electronic Data Interchange), account reconciliation services, cash vault
services, lockbox processing, and information reporting (Prime Connection).
Noninterest income from deposit transactions and cash management increased 15
percent in 2001, to $133.6 million from $116.1 million primarily due to growth
in return check charges and cash management fees in 2001.
TRUST SERVICES AND INVESTMENT MANAGEMENT
Trust services and investment management fees come from the product lines of
investment management, personal trust, employee benefits, and custodial trust
services. During 2001 total noninterest income from trust services and
investment management decreased 14 percent, to $56.7 million from $65.8 million.
This decrease was primarily due to the divestiture of corporate and municipal
trust in fourth quarter 2000 and a decline in market values of managed
portfolios, which fell 11 percent to $8.7 billion on December 31, 2001 from $9.8
billion on December 31, 2000. The net decrease in fee income was as follows: the
asset management business lines decreased 6 percent; personal trust was up 2
percent; and employee benefits decreased 29 percent primarily due to exiting
less profitable product lines.
MERCHANT PROCESSING
Credit card merchant processing involves converting transactions from plastic
media such as check cards, debit cards, credit cards, purchase cards, and
private label credit cards into cash for merchants that sell goods and services
to consumers and businesses. Fee income from merchant processing decreased 6
percent in 2001, to $45.4 million from $48.2 million in 2000, which reflects the
slowdown in the hospitality industry.
ALL OTHER NONINTEREST INCOME
All other noninterest income decreased 11 percent in 2001, to $154.5 million
from $173.2 million due to divestitures. Cardholder fees result from issuing and
servicing credit cards, and include the collection of annual fees and late
charges, as well as interchange fees received for accepting credit card
transactions. Cardholder noninterest income decreased 32 percent in 2001, to
$20.1 million from $29.7 million, due to the sales of certain single
relationship credit card accounts in fourth quarter 2000 and first quarter 2001
(see Note 2 - Acquisitions /Divestitures). Other noninterest income decreased 16
percent, or $16.0 million in 2001 due to the divestitures of the MONEY BELT(R)
ATM network in fourth quarter 2000 and Check Solutions in second quarter 2001
(see Note 2 - Acquisitions/Divestitures).
SECURITIES GAINS/(LOSSES)
In 2001 there were $4.3 million of net securities losses compared to $4.2
million of net securities losses for 2000 (see Unusual Revenue and Expense Items
for $3.3 million of the loss for 2001 and $6.2 million of the loss for 2000). In
2001, the majority of the security losses were related to equity investments at
First Tennessee's venture capital subsidiaries. In 2000 First Tennessee
recognized $4.6 million of security losses as a result of the sale of
lower-yielding securities in the investment portfolio.
First Tennessee National Corporation F-9
NET INTEREST INCOME
During 2001 net interest income increased 15 percent to $688.4 million from
$600.9 million primarily due to lower funding costs. The consolidated net
interest spread for 2001 was 3.61 percent compared with 3.14 percent for 2000.
The consolidated net interest margin (margin) increased to 4.27 percent for 2001
compared with 3.73 percent for 2000. The margin was positively impacted by the
lower funding costs; growth in core deposits while earning assets remained
relatively flat, reducing funding of the balance sheet with purchased funds; and
improvement in the negative impact from mortgage banking due to the lower
funding costs. The regional banking group's margin increased in 2001 to 5.04
percent from 4.84 percent in 2000 primarily due to the lower funding costs and
mortgage banking's net interest spread on mortgage loans held for sale, which
was also positively impacted by the lower funding costs, increased to 3.19
percent in 2001 from 1.62 percent in 2000. Going forward, if, as expected over
the near term, short-term rates remain at current low levels and the slope of
the yield curve does not flatten, the regional banking group's margin and the
margin on mortgage loans held for sale are likely to remain stable. Over the
long term margins should begin to decrease toward a more normal level as the
yield curve flattens. Actual results could differ because of several factors,
including those presented in the Forward-Looking Statements section of the MD&A.
The margin is affected by the activity levels and related funding for First
Tennessee's national lines of business as these nonbank business lines typically
produce different margins than traditional banking activities. Mortgage banking
can affect the overall margin based on a number of factors, including the size
of the mortgage warehouse, the time it takes to deliver loans into the secondary
market, the amount of custodial balances, and the level of MSR. Capital markets
tends to compress the margin because of its strategy to reduce market risk by
hedging its inventory in the cash markets which effectively eliminates net
interest income on these positions. As a result, First Tennessee's consolidated
margin cannot be readily compared to that of other bank holding companies. Going
forward, the consolidated margin will continue to be influenced by the activity
levels in the nonbanking lines of business, especially mortgage banking. Actual
results could differ because of several factors, including those presented in
the Forward-Looking Statements section of the MD&A discussion.
Table 3 details the computation of the net interest margin for the regional
banking group and the impact that the other business lines had on the
consolidated margin for the years 1999 through 2001.
TABLE 3 - NET INTEREST MARGIN COMPOSITION
2001 2000 1999
-------------------------------------------------------------------------------
REGIONAL BANKING GROUP:
Yields on earning assets 7.42 % 8.50 % 7.91 %
Rates paid on interest-bearing liabilities 3.45 4.72 3.88
-------------------------------------------------------------------------------
Net interest spread 3.97 3.78 4.03
-------------------------------------------------------------------------------
Effect of interest-free sources .91 .91 .78
Loan fees .16 .15 .14
FRB interest and penalties -- -- .01
-------------------------------------------------------------------------------
Regional Banking Group - net interest margin 5.04 % 4.84 % 4.96 %
-------------------------------------------------------------------------------
MORTGAGE BANKING (.56) (.97) (1.02)
CAPITAL MARKETS (.22) (.17) (.16)
TRANSACTION PROCESSING .01 .03 .02
-------------------------------------------------------------------------------
Consolidated net interest margin 4.27 % 3.73 % 3.80 %
===============================================================================
Interest rate sensitivity is primarily a function of the repricing structure of
First Tennessee's balance sheet (Statement of Condition). Table 4 shows the
assets and liabilities as of year-end, subject to repricing in specified time
intervals with each maturity interval referring to the earliest repricing
opportunity (i.e., the earlier of scheduled contractual maturity or repricing
date) for each asset and liability category. The resulting gap is one tool,
though not a predominant management tool, used to measure the sensitivity of net
interest income to changes in interest rates. It should be noted that the
required gap analysis does not take into account future management actions that
F-10 First Tennessee National Corporation
could be undertaken to alter the simulated results, the effect of interest-free
sources, or a change in the slope of the yield curve. (For additional
information see the Risk Management - Interest Rate Risk Management section.)
In order to reflect more appropriately the repricing structure of First
Tennessee's balance sheet, management has made certain adjustments to the
balances shown in the table from their actual contractual terms. Based on
historical and industry data, an estimate of the expected prepayments on
consumer loans and investment securities is reflected in the balances in Table
4. Changes in the economic and interest rate environments may also affect these
expected prepayments.
Similarly, an adjustment to deposits is made to reflect the behavioral
characteristics of certain core deposits that do not have specified contractual
maturities (i.e., interest checking, savings and money market deposit accounts).
Historically, balances on these deposit accounts have remained relatively stable
despite changes in market interest rates. Management has classified certain of
these accounts as non-interest sensitive based on management's historical
pricing practices and runoff experience. Table 4 does not take into account the
effect of interest-free sources, which can be significant to First Tennessee.
Simulation analysis is the primary tool used by First Tennessee to manage the
exposure of net interest income and margin to volatile interest rates, changing
market spreads, forecasted changes in balance sheet mix, and rate sensitivity.
This type of analysis computes the amount of net interest income at risk from
dynamic changes in the market place and related rate, pricing and balance sheet
movements. The simulation models create various at-risk scenarios looking at
increases and/or decreases in interest rates from an instantaneous movement, or
a staggered movement over a certain time period. Management reviews these
different scenarios to determine probable actions. The models are then updated
to incorporate management action. A level of acceptable net interest income at
risk based on a staggered increase or decrease in interest rates of 300 basis
points is a component of internal guidelines. Due to the current abnormally low
level of rates, a rate decrease of 150 basis points was used starting in the
second half of 2001. Based on First Tennessee's rate sensitivity position during
2001, net interest income at risk in 2001 when modeling a staggered change in
rates was estimated to be less than 1 percent. Based on the rate sensitivity
position on December 31, 2001, net interest income exposure over the next 12
months to a 300 basis point staggered increase in interest rates is estimated to
be approximately 2 percent of projected 2002 net interest income. Net interest
income exposure to a 150 basis point staggered decrease in interest rates is
projected to be approximately a 2 percent decrease of projected 2002 net
interest income. A 300 basis point gradual increase or 150 basis point gradual
decrease in interest rates is a hypothetical rate scenario. These scenarios are
used as one estimate of risk, and do not necessarily represent management's
current view of future interest rates or market developments and may well vary
from actual results for a number of reasons, including those presented in the
Forward-Looking Statements section of the MD&A. Table 5 provides rate and volume
changes in interest income and interest expense for earning assets and
interest-bearing liabilities for the past three years.
First Tennessee National Corporation F-11
TABLE 4 - RATE SENSITIVITY ANALYSIS ON DECEMBER 31, 2001
Within 3 After 3 Months After 6 Months After 1 Year After
(Dollars in millions) Months Within 6 Months Within 12 Months Within 5 Years 5 Years Total
-------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS:
Loans $ 5,905 $ 404 $ 572 $ 2,799 $ 603 $10,283
Investment securities 361 185 263 1,494 223 2,526
Loans held for sale 3,399 -- -- -- -- 3,399
Federal funds sold and
securities purchased under
agreements to resell 230 -- -- -- -- 230
Other earning assets 564 3 6 50 25 648
-------------------------------------------------------------------------------------------------------------------------------
Total earning assets $10,459 $ 592 $ 841 $ 4,343 $ 851 $17,086
===============================================================================================================================
EARNING ASSET FUNDING:
Savings $ 10 $ 10 $ 21 $ 190 $ 65 $ 296
Checking interest 65 65 131 305 811 1,377
Money market 2,071 -- -- -- 260 2,331
CD's under $100,000
and other time 523 440 388 490 43 1,884
CD's $100,000 and more 3,314 167 75 136 16 3,708
Short-term borrowed funds 3,271 -- 100 -- -- 3,371
Term borrowings 180 -- -- 134 236 550
-------------------------------------------------------------------------------------------------------------------------------
Total earning asset funding $ 9,434 $ 682 $ 715 $ 1,255 $ 1,431 $13,517
===============================================================================================================================
RATE SENSITIVITY GAP:
Period $ 1,025 $ (90) $ 126 $ 3,088 $ (580)
Cumulative 1,025 935 1,061 4,149 3,569
-------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY GAP ADJUSTED
FOR INTEREST RATE SWAPS
Period $ 1,025 $ 9 $ 126 $ 2,989 $ (580)
Cumulative 1,025 1,034 1,160 4,149 3,569
-------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY GAP ADJUSTED
FOR INTEREST RATE SWAPS
AND MORTGAGE CUSTODIALS*
Period $ 271 $ 9 $ 126 $ 2,989 $(1,060)
Cumulative 271 280 406 3,395 2,335
-------------------------------------------------------------------------------------------------------------------------------
ADJUSTED GAP AS A PERCENTAGE
OF TOTAL EARNING ASSETS:
Period 1.6% .1% .7% 17.5% (6.2)%
Cumulative 1.6 1.7 2.4 19.9 13.7
-------------------------------------------------------------------------------------------------------------------------------
*As a result of the refinance market at year-end, mortgage custodial balances
included a significant amount of loan payoffs not yet remitted to investors.
Interest-sensitive categories represent ranges in which assets and liabilities
can be repriced, not necessarily their actual maturities. The 'After 5 Years'
column includes assets and liabilities with interest sensitivity of more than
five years or with indefinite repricing schedules. Noninterest earning/bearing
balances have been excluded from this analysis but are included in management's
internal analysis of interest income.
F-12 First Tennessee National Corporation
TABLE 5 - ANALYSIS OF CHANGES IN NET INTEREST INCOME
2001 Compared to 2000 2000 Compared to 1999
Increase / (Decrease) Due to* Increase / (Decrease) Due to*
(Fully taxable equivalent) ------------------------------------ -----------------------------------
(Dollars in thousands) Rate** Volume** Total Rate** Volume** Total
-------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME - FTE:
Loans $(118,634) $ 15,259 $(103,375) $ 59,770 $101,010 $160,780
Investment securities:
U.S. Treasury and other
U.S. government agencies (4,560) 2,847 (1,713) 5,456 3,863 9,319
States and municipalities 25 150 175 (39) (145) (184)
Other (7,990) (21,267) (29,257) 2,792 7,791 10,583
---------------------------------------------- ---------- ---------
Total investment securities (12,530) (18,265) (30,795) 8,448 11,270 19,718
---------------------------------------------- ---------- ---------
Other earning assets:
Loans held for sale (26,393) (5,021) (31,414) 25,214 (59,184) (33,970)
Investment in bank time deposits 30 (11) 19 28 (385) (357)
Federal funds sold and securities
purchased under agreements to resell (8,028) (5,041) (13,069) 4,275 1,862 6,137
Mortgage banking trading securities -- 12,088 12,088 -- -- ---
Capital markets securities inventory (7,566) 9,472 1,906 4,504 (1,347) 3,157
---------------------------------------------- ---------- ---------
Total other earning assets (39,561) 9,091 (30,470) 30,340 (55,373) (25,033)
---------------------------------------------- --------- ---------
Total earning assets (167,103) 2,463 (164,640) 113,760 41,705 155,465
---------------------------------------------------------------------------------------- -----------------------------------
Total interest income - FTE $(164,640) $155,465
---------------------------------------------------------------------------------------- -----------------------------------
INTEREST EXPENSE:
Interest-bearing deposits:
Savings $ (1,191) $ (506) $ (1,697) $ (44) $ (195) $ (239)
Checking interest and money market (31,426) 5,489 (25,937) 11,929 (5,390) 6,539
Certificates of deposit under $100,000
and other time (6,099) (12,010) (18,109) 9,995 (4,565) 5,430
Certificates of deposit $100,000 and more (71,651) (46,134) (117,785) 41,924 47,043 88,967
---------------------------------------------- ---------- ---------
Total interest-bearing deposits (121,566) (41,962) (163,528) 77,701 22,996 100,697
---------------------------------------------- ---------- ---------
Federal funds purchased and securities
sold under agreements to repurchase (67,896) 14,128 (53,768) 33,025 31,661 64,686
Commercial paper and other
short-term borrowings (12,692) (27,952) (40,644) 18,051 (35,918) (17,867)
Term borrowings (2,192) 8,033 5,841 (1,373) 898 (475)
---------------------------------------------- ---------- ---------
Total interest-bearing liabilities (202,546) (49,553) (252,099) 120,962 26,079 147,041
---------------------------------------------------------------------------------------- -----------------------------------
Total interest expense $(252,099) $147,041
---------------------------------------------------------------------------------------- -----------------------------------
Net interest income - FTE $ 87,459 $ 8,424
===============================================================================================================================
*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.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the charge to operating earnings that
management determines to be necessary to maintain the allowance for loan losses
at an adequate level reflecting management's estimate of the risk of loss
inherent in the loan portfolio. An analytical model based on historical loss
experience, current trends and economic conditions, and reasonably foreseeable
events is used to determine the amount of provision to be recognized and to test
the adequacy of the loan loss allowance. The provision for loan losses increased
39 percent, to $93.5
First Tennessee National Corporation F-13
million in 2001 compared with $67.3 million in 2000, reflecting economic
conditions including the impact of increased nonperforming loans and higher
charge-offs. The ratio of allowance for loan losses to total loans, net of
unearned income, was 1.51 percent in 2001, compared to 1.40 percent in 2000. In
2001 the provision increased $9.1 million due to the classification as
nonperforming of two large commercial credits totaling approximately $20 million
and increased approximately $4 million due to further deterioration of an
existing commercial credit classified as nonperforming in 2000. The remaining
$13 million increase was primarily due to deterioration in economic conditions
and increased charge-offs of consumer loans with higher risk and reward
profiles. A more detailed discussion follows in the Risk Management - Credit
Risk Management/Asset Quality section.
NONINTEREST EXPENSE
Noninterest expense increased 23 percent in 2001 to $1,358.7 million from
$1,106.7 million. The type and level of activity in mortgage banking and capital
markets effect changes in personnel and total noninterest expense. Excluding
mortgage banking and capital markets, total noninterest expense increased 7
percent. The increase was also affected by various unusual expenses (i.e.,
marketing, litigation, occupancy, professional fees, severance and other
expenses) related to announced initiatives which include the effects of
divestitures and investments in efficiency and revenue enhancement programs.
Excluding mortgage banking, capital markets and the effect of these unusual
expenses in both years ($43.4 million in 2001 and $23.9 million in 2000 - see
Unusual Revenue and Expense Items), noninterest expense would have increased 3
percent. Going forward, capital markets, mortgage banking and investments in and
the results of efficiency and revenue enhancement programs will influence the
level of noninterest expense. Table 6 provides detail by category for the past
six years with growth rates.
TABLE 6 - ANALYSIS OF NONINTEREST EXPENSE
Compound Annual
Growth Rates(%)
----------------
(Dollars in thousands) 2001 2000 1999 1998 1997 1996 01/00 01/96
---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation,
incentives and benefits $ 797,841 $ 598,017 $ 633,640 $ 563,576 $409,783 $385,380 33.4 + 15.7 +
Equipment rentals, depreciation
and maintenance 74,106 68,230 57,807 45,771 40,093 34,121 8.6 + 16.8 +
Occupancy 69,069 80,453 73,052 51,421 42,848 39,815 14.1 - 11.6 +
Operations services 59,635 70,875 64,545 58,505 49,879 44,109 15.9 - 6.2 +
Communications and courier 48,771 47,337 51,937 41,468 34,899 32,981 3.0 + 8.1 +
Amortization of intangible assets 10,805 11,738 10,492 11,114 9,631 9,491 7.9 - 2.6 +
All other expense:
Advertising and public relations 35,508 26,693 30,187 25,184 18,722 17,629 33.0 + 15.0 +
Contract employment 32,115 28,868 43,685 35,937 17,420 11,288 11.2 + 23.3 +
Legal and professional fees 32,087 26,794 22,492 24,551 13,999 12,050 19.8 + 21.6 +
Foreclosed real estate 25,452 16,080 6,585 31,019 10,827 7,533 58.3 + 27.6 +
Computer software 25,107 19,205 15,410 11,629 6,731 4,076 30.7 + 43.9 +
Travel and entertainment 17,489 13,891 18,698 19,485 13,802 10,394 25.9 + 11.0 +
Supplies 16,200 18,170 22,006 20,195 15,267 14,383 10.8 - 2.4 +
Distributions on guaranteed
preferred securities 8,070 8,070 8,070 8,070 8,070 -- -- N/A
Fed service fees 7,761 7,112 6,471 5,307 5,799 7,814 9.1 + .1 -
Distributions on preferred stock 4,535 1,178 -- -- -- -- 285.0 + N/A
Deposit insurance premium 2,463 2,589 1,790 1,578 1,485 5,129 4.9 - 13.6 -
Other 91,734 61,370 55,500 58,107 43,470 42,252 49.5 + 16.8 +
--------------------------------------------------------------------------------------------------------
Total other expense 298,521 230,020 230,894 241,062 155,592 132,548 29.8 + 17.6 +
--------------------------------------------------------------------------------------------------------
Total noninterest expense $1,358,748 $1,106,670 $1,122,367 $1,012,917 $742,725 $678,445 22.8 + 14.9 +
========================================================================================================
Certain previously reported amounts have been reclassified to agree with current
presentation.
F-14 First Tennessee National Corporation
Employee compensation, incentives, and benefits (personnel expense), the largest
component of noninterest expense, increased 33 percent in 2001, to $797.8
million from $598.0 million, primarily due to the commissions and incentives
associated with the higher fee income in 2001 in capital markets and mortgage
banking. As the revenue increases or decreases and/or as the product mix changes
in these business lines, the amount of commissions also changes. In addition,
other personnel expenses in mortgage banking and capital markets fluctuate based
on the type and level of activity. Excluding these two business lines, total
personnel expense increased 1 percent.
Occupancy expense decreased 14 percent, or $11.4 million, due to the closure by
mortgage banking of less profitable production offices during 2000. Included in
2001 occupancy expense was $.5 million of unusual items compared to $3.4 million
(related to divestitures) in 2000 (see Unusual Revenue and Expense Items).
Operations services decreased 16 percent, or $11.3 million, due principally to
First Tennessee internalizing certain of its operations which resulted in
increased expenses in various other expense line items. Included in 2001
operations services expense was $.4 million of unusual items compared to $1.7
million in 2000 (see Unusual Revenue and Expense Items). All other expense
increased 30 percent, or $68.4 million, due in part to $29.7 million of unusual
expense items in 2001, primarily marketing, litigation and professional fees,
compared to $7.6 million in 2000, primarily professional fees and divestiture
costs (see Unusual Revenue and Expense Items). Also impacting this growth were
increased expenses in contract employment, foreclosed real estate, software and
dividends on preferred stock. Additional business line information related to
expenses is provided in Table 7 and the discussion that follows.
TABLE 7 - NONINTEREST EXPENSE COMPOSITION
(Dollars in millions) 2001 2000 1999
------------------------------------------------------------------
Regional banking group $ 538.8 $ 492.4 $ 452.8
Mortgage banking 469.3 414.5 483.1
Capital markets 245.0 92.5 96.7
Transaction processing 97.1 98.8 81.1
Corporate 8.5 8.5 8.7
------------------------------------------------------------------
Total noninterest expense $1,358.7 $1,106.7 $1,122.4
==================================================================
Mortgage banking expenses increased 13 percent, to $469.3 million from $414.5
million in 2000. Expense growth for this business line varies with the volume
and type of activity. Personnel expense increased 25 percent to $279.4 million
for 2001 from $223.3 million in 2000 due to higher activity levels in 2001.
Foreclosed property expense for mortgage banking increased 56 percent or $8.8
million in 2001. Occupancy expense decreased 35 percent or $12.0 million in
mortgage banking due to the closure of less profitable production offices
primarily in 2000.
Capital markets experienced a 165 percent increase in expenses to $245.0 million
from $92.5 million primarily due to higher commissions and incentives recognized
in 2001, which caused total personnel expense for this segment to increase 182
percent, or $140.3 million from 2000.
Expenses for the regional banking group increased 9 percent to $538.8 million
from $492.4 million in 2000 due largely to unusual expenses ($39.4 million in
2001 compared to $13.0 million in 2000 - see Unusual Revenue and Expense Items)
associated with announced initiatives which include the effects of divestitures
and investments in efficiency and revenue enhancement programs (marketing,
litigation, occupancy, professional fees, severance, and other expenses).
Transaction processing experienced a decline in operating expense of 2 percent,
to $97.1 million from $98.8 million.
INCOME TAXES
The effective tax rate for 2001 increased to 33.2 percent from 31.0 percent in
2000. This variance was primarily the result of a tax benefit related to the
sale of mandatory redeemable cumulative preferred stock issued by an affiliate
of FTBNA during 2000.
First Tennessee National Corporation F-15
DEBT RESTRUCTURINGS
-------------------
In second quarter 2001, there was a $5.1 million pre-tax ($3.2 million
after-tax) loss related to debt restructurings. For financial statement
presentation purposes this loss is treated as an extraordinary item and
therefore, net income and earnings per share are indicated before and after the
after-tax loss (see Unusual Revenue and Expense Items and Note 17 - Earnings Per
Share).
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
-----------------------------------------------------
SFAS No. 133 and EITF 99-20 were adopted on January 1, 2001. At that date all
freestanding derivative instruments were measured at fair value with differences
between the previous book value and fair value reported as a one-time accounting
adjustment. Likewise, offsetting gains and losses on hedged assets, liabilities
and firm commitments were recognized as adjustments of their respective book
values at the adoption date as part of this accounting adjustment, except to the
extent that they related to hedges of the variable cash flow exposure of a
forecasted transaction. To the extent the adoption adjustment related to hedges
of the variable cash flow exposure of a forecasted transaction, the accounting
adjustment, a $1.4 million after-tax gain, was reported as a cumulative effect
adjustment of comprehensive income (see Note 17 - Earnings Per Share).
Additionally, the new rules regarding the recognition of impairment and income
of interest-only strips were adopted. The net one-time accounting adjustments
reported on the income statement as the cumulative effect of changes in
accounting principles were a $13.0 million pre-tax ($8.2 million after-tax) loss
(see Unusual Revenue and Expense Items).
UNUSUAL REVENUE AND EXPENSE ITEMS
---------------------------------
First Tennessee's third quarter earnings press release dated October 18, 2000,
announced an ongoing initiative to enhance growth and business mix, in which
several slower growth businesses were being considered for divestiture. Several
strategic divestitures occurred in 2000 and 2001 - the corporate and municipal
trust business and the MONEY BELT(R) ATM network in fourth quarter 2000; the
single relationship credit card portfolio in fourth quarter 2000 and first
quarter 2001; and the student loan portfolio, Peoples and Union Bank, and a
partnership interest in Check Solution Company in second quarter 2001. In
connection with this announced initiative, First Tennessee also announced plans
to incur costs and expenses associated with various revenue and expense
enhancement programs. First Tennessee considers the strategic divestiture gains
and associated revenue and expense enhancement plan costs and expenses occurring
after this announcement (fourth quarter 2000 through fourth quarter 2001) to be
unusual revenue and expense items which should be identified. Also included in
unusual revenue and expense items by First Tennessee are the SFAS No. 133 gains
and losses (see Accounting for Derivative Instruments and Hedging Activities);
debt restructuring; and the cumulative effect of changes in accounting
principles. In internal evaluations of performance for 2001 and 2000, First
Tennessee excludes these identified unusual revenue and expense items.
Beginning in second quarter 2001, in First Tennessee's earnings release and the
MD&A section of Forms 10-Q, these identified unusual revenue and expense items
were referred to as non-operating income and expense. Gains such as the sale of
HomeBanc (a division of First Horizon Home Loans) in second quarter 2000 and
similar expenses, such as the loss from repositioning certain mortgage banking
hedges, also in second quarter 2000, which occurred prior to the strategic
divestiture announcement, were not described as non-operating items.
F-16 First Tennessee National Corporation
The following is a summary of these pre-tax unusual revenue and expense items:
(Dollars in thousands) 2001 2000
-----------------------------------------------------------------------------------------------------------
Revenue:
Divestiture gains $ 80,357 $116,714
SFAS No. 133 net gains 5,040 --
MSR hedge restructuring loss -- (49,889)
MSR delinquent loan valuation loss -- (9,955)
Securities losses (3,250) (6,209)
Other -- (3,782)
-----------------------------------------------------------------------------------------------------------
Total revenue 82,147 46,879
-----------------------------------------------------------------------------------------------------------
Expense:
Noninterest expense (marketing, litigation, severance, asset write-offs,
professional fees, process workflow, divestiture costs and other expenses) (43,381) (23,905)
-----------------------------------------------------------------------------------------------------------
Total expense (43,381) (23,905)
-----------------------------------------------------------------------------------------------------------
Revenue in excess of expense 38,766 22,974
Debt restructuring loss (5,107)* --
Cumulative effect of changes in accounting principles loss (12,994)* --
-----------------------------------------------------------------------------------------------------------
Total net revenue in excess of expense and other unusual items $ 20,665 $ 22,974
===========================================================================================================
*Pre-tax equivalent of amounts shown in financial statements on an after-tax
basis.
The before sale pre-tax contribution of the businesses included in the fourth
quarter 2000, first quarter 2001, and second quarter 2001 strategic divestitures
totaled $2.1 million for 2001 and $56.1 million for 2000.
BUSINESS LINE REVIEW
--------------------
First Tennessee provides traditional retail/commercial banking and other
financial services to its customers. The regional banking group provides a
comprehensive package of financial services including banking, trust services,
investments, asset management, insurance, and credit card services to its
customers. The national lines of business include mortgage banking, capital
markets and transaction processing. Mortgage banking offers first and second
mortgages through origination offices in 31 states and also services a
multi-billion dollar portfolio. Capital markets offers investment securities and
advisory services such as portfolio analysis, tax planning and loan
securitization to institutional clients nationwide through offices in Chicago,
Cleveland, Dallas, Kansas City, Los Angeles, Memphis, Mobile, Nashville and New
York City. Transaction processing includes credit card merchant processing,
nationwide check clearing and remittance processing. The Other segment is used
to isolate corporate items such as expense related to guaranteed preferred
beneficial interests in First Tennessee's junior subordinated debenture and
securities gains or losses which include any venture capital gains or losses and
related incentive costs.
REGIONAL BANKING GROUP
Net pre-tax income for the regional banking group was $288.5 million for 2001,
compared to $386.2 million for 2000. 2001 included $2.1 million in before sale
pre-tax income from strategic divestiture businesses as compared to $56.1
million in 2000. 2001 included unusual revenue in excess of expense of $40.9
million compared to unusual revenue in excess of expense of $102.4 million in
2000 (see Unusual Revenue and Expense Items).
Net interest income increased 3 percent to $559.0 million in 2001 due primarily
to lower funding costs. Net interest margin, which was positively impacted by
the lower funding costs, increased to 5.04 percent in 2001 from 4.84 percent in
2000. Earning assets remained relatively flat in 2001 and averaged $11.8 billion
compared to $11.7 billion in 2000.
First Tennessee National Corporation F-17
Fee income from deposit transactions and cash management fees grew 20 percent to
$121.5 million in 2001. Cardholder fees decreased 32 percent to $19.6 million.
Excluding the impact of divestitures, cardholder fees grew 24 percent. Trust
services and investment management fees decreased 14 percent to $56.7 million
primarily due to the decrease in market values of managed portfolios and
divestitures. Excluding the impact of divestitures trust services and investment
management fees declined 7 percent. Other income and commissions decreased 15
percent to $78.5 million. Excluding the impact of divestitures and non-operating
revenues other income and commissions grew 3 percent.
An analytical model based on historical loss experience, current trends and
economic conditions, and reasonably foreseeable events is used to test the
adequacy of the loan loss reserve and to determine the amount of provision to be
recognized. The provision for loan losses increased 31 percent to $88.3 million
for 2001 reflecting economic conditions. Nonperforming assets increased to $49.9
million on December 31, 2001, from $45.0 million on December 31, 2000, but
decreased from $54.9 million on September 30, 2001. Net charge-offs increased to
$76.7 million or .82 percent of total loans in 2001 compared to $55.8 million or
..60 percent of total loans in 2000.
Total noninterest expense increased 9 percent to $538.8 million in 2001 due
largely to expenses associated with the announced initiatives which include the
effects of divestitures and investments in efficiency and revenue enhancement
programs (marketing, litigation, occupancy, professional fees, severance, and
other expenses). Employee compensation, incentives and benefits, the largest
component of noninterest expense, increased 2 percent to $250.9 million in 2001.
Excluding the impact of divestitures and non-operating items, total noninterest
expense increased 6 percent to $478.4 million in 2001, and employee
compensation, incentives and benefits increased 6 percent to $241.5 million.
CAPITAL MARKETS
Net pre-tax income for capital markets was $110.0 million for 2001, compared to
$29.6 million for 2000.
Fee income increased 194 percent to $348.9 million in 2001. Securities bought
and sold increased 85 percent to $1,408.5 billion in 2001. This increased
activity reflects continued growth and penetration into our targeted
institutional customer base and change in product mix. New product initiatives,
including portfolio advisory services, investment banking services, and the
acquisition of MidWest Research Group, added $95.1 million to revenues in 2001,
compared to $9.0 million in 2000. Additionally, capital markets 2001 fee income
has benefited from an improvement from last year's distressed market conditions.
Total noninterest expense increased 165 percent to $245.0 million in 2001
primarily due to the increase in personnel expense, the largest component of
noninterest expense, resulting from commissions and incentives associated with
the higher fee income in 2001.
MORTGAGE BANKING
Net pre-tax income for mortgage banking was $98.4 million for 2001, compared to
a pre-tax loss of $78.1 million for 2000. 2001 included unusual revenue in
excess of expense of $3.4 million compared to unusual expense in excess of
revenue of $69.8 million in 2000 (see Unusual Revenue and Expense Items).
Net interest income increased 154 percent to $107.9 million in 2001 primarily
due to lower funding costs. Net interest spread on mortgage loans held for sale,
which was positively impacted by the lower funding costs, increased to 3.19
percent in 2001 from 1.62 percent in 2000.
Total fee income increased 58 percent to $465.0 million in 2001. Fee income
consists primarily of fees from the origination process, fees from the mortgage
servicing portfolio and MSR net hedge gains or losses and is net of
amortization, impairment and other expenses related to MSR and related hedges.
Fees from the mortgage origination process increased 94 percent to $469.9
million in 2001 due to increased origination volume (see further discussion
below), improved margin management, and improvement in the results in pipeline
hedging and other loan sale activities and the recognition in 2001 of the value
of interest rate lock commitments.
F-18 First Tennessee National Corporation
Fees associated with the mortgage servicing portfolio were $157.1 million in
2001 compared to $161.5 million in 2000.
Total origination volume increased 77 percent to $26.3 billion in 2001 primarily
due to the impact that declining mortgage interest rates had on refinance
mortgage activity. While this growth in refinance activity produced increased
origination fee income, it also substantially increased actual and projected MSR
prepayment speeds. The increase in prepayment speeds was the primary reason for
the 34 percent increase, to $109.3 million, in MSR amortization; and the
increase to $115.4 million in MSR impairment loss compared to a $21.2 million
impairment loss in 2000. In 2000, there was also a $10.0 million impairment loss
from the write-down of the book value of MSR related to a change in methodology
for recognizing the decrease in value of servicing for delinquent mortgage
loans. The effect of increased impairment was reduced by MSR net hedge gains of
$48.0 million in 2001 compared to net hedge losses of $47.7 million last year.
Amortization and time decay expenses of MSR option-based hedges decreased 63
percent to $14.2 million primarily due to the decreased use of option-based
hedges in 2001.
Total noninterest expense increased 13 percent to $469.3 million in 2001.
Personnel expense, the largest component of noninterest expense, increased 25
percent to $279.4 million in 2001 primarily due to the commissions and
incentives associated with the higher origination volume. Foreclosed property
expense increased 56 percent or $8.8 million in 2001. Occupancy expense
decreased 35 percent, or $12.0 million, due to the closure of less profitable
production offices.
TRANSACTION PROCESSING
Pre-tax income for transaction processing was $11.6 million in 2001, compared to
$14.7 million in 2000. 2001 included unusual expense in excess of revenue of
$2.3 million compared to unusual expense in excess of revenue of $3.4 million in
2000 (see Unusual Revenue and Expense Items). This decrease in pre-tax income
was primarily due to a 5 percent decrease, to $45.2 million, in merchant
processing fee income, contributed to by the slowdown in the hospitality
industry. Total noninterest expense decreased 2 percent to $97.1 million in 2001
from $98.8 million in 2000.
OTHER
For 2001 the other segment recognized a loss of $12.8 million compared to a loss
of $12.7 million in 2000. These losses represent net securities losses and
expenses primarily associated with the guaranteed preferred beneficial interests
in First Tennessee's junior subordinated debentures.
INCOME STATEMENT ANALYSIS - 2000 COMPARED TO 1999
Earnings in 2000 were $232.6 million, a decline of 6 percent from $247.5 million
earned in 1999. Earnings per common share decreased 6 percent to $1.79 in 2000
from $1.90 in 1999. Diluted earnings per common share decreased 4 percent to
$1.77 in 2000 from $1.85 in 1999. Return on average shareholders' equity was
18.2 percent in 2000 compared with 20.9 percent in 1999. Strong internal equity
generation and retention contributed to the decline in this ratio. Return on
average assets was 1.20 percent in 2000 and 1.33 percent in 1999.
Noninterest income decreased 5 percent during 2000, to $916.9 million from
$967.9 million and contributed 61 percent to total revenue. During 2000 mortgage
banking fees decreased 50 percent, to $238.1 million from $479.9 million due to
less production; lower margins related to competitive pricing pressures and a
shift in product mix; a decrease in the results of hedging and other loan sale
activities compared with 1999; a net loss of $47.7 million principally related
to the repositioning of the MSR hedge portfolio (compared to hedge gains of
$17.9 million in 1999); and MSR impairment losses of $31.2 million in 2000.
Positively impacting mortgage banking noninterest income in 2000 were declines
of $21.9 million and $11.4 million, respectively, related to amortization of MSR
and related hedges. MSR amortization declined primarily due to the 1999
classification of excess MSR to interest-only strips and slower mortgage
prepayment speeds experienced in 2000. Amortization expense from hedge
instruments decreased primarily due to the sale or de-designation of hedge
instruments associated with the MSR in
First Tennessee National Corporation F-19
2000. During 2000 mortgage banking originations were $14.8 billion compared with
$19.9 billion in 1999 due to higher interest rates throughout most of 2000,
pricing competition within the industry, and the closing of less profitable
production offices. The servicing portfolio grew to $47.4 billion on December
31, 2000, compared with $44.6 billion on December 31, 1999. See Table 2 for a
breakout of mortgage banking fee income. Gains from divestitures totaled $157.6
million in 2000 which reflect First Tennessee's divestitures of certain slower
growing businesses including a gain of $50.2 million from the sale of certain
single relationship credit card accounts; a gain of $33.4 million from the sale
of the corporate and municipal trust business; a gain of $33.1 million from the
sale of the MONEY BELT(R) ATM network; and a gain of $40.9 million from the sale
of the HomeBanc mortgage division. In 1999, a gain of $4.2 million was realized
from the sale of a bank branch in Mississippi (see Note 2 - Acquisitions/
Divestitures). Capital markets' fee income decreased 7 percent in 2000, to
$117.9 million from $126.8 million, while securities bought and sold increased
42 percent, to $760.0 billion from $534.3 billion. The decrease in fee income
resulted from the negative impact resulting from the expectation of rising
interest rates and lack of liquidity in the financial services industry during
the first half of 2000. During 2000 deposit transactions and cash management
fees increased 9 percent, to $116.1 million from $106.2 million, due to growth
in cash management fees along with higher returned check charges and debit card
charges. Trust services and investment management fees increased 10 percent, to
$65.8 million from $59.8 million. This increase was driven by growth in
investment management fees, repricing of certain products and successful
cross-sell efforts, particularly to our targeted market. Merchant processing
fees decreased 3 percent, to $48.2 million from $49.7 million, due primarily to
special assessments received from customers in 1999. All other noninterest
income grew 23 percent in 2000, to $173.2 million from $141.3 million. Factors
contributing to the increase in 2000 were other service charges, cardholder
fees, revenues generated by remittance processing and company owned life
insurance. Also see Unusual Revenue and Expense Items.
In 2000 there were $4.2 million of net securities losses compared with $2.3
million of net securities gains for 1999. In 2000 First Tennessee recognized
$4.6 million of security losses as a result of the sale of lower-yielding
securities in the investment portfolio. The majority of the net security gains
in 1999 were attributable to First Tennessee's venture capital subsidiaries.
Also see Unusual Revenue and Expense Items.
During 2000 net interest income increased 1 percent, to $600.9 million from
$592.5 million, principally from strong loan growth. The regional banking
group's margin fell to 4.84 percent in 2000 from 4.96 percent in 1999. The
consolidated margin declined to 3.73 percent in 2000 from 3.80 percent in 1999
due to growth in earning assets outpacing core deposit growth, which required
funding the growth of the balance sheet with purchased funds at higher interest
rates thereby reducing the margin. See Table 3 for detailed computation on the
net interest margin for the regional banking group and the impact that the other
business lines had on the consolidated margin.
The provision for loan losses increased 16 percent, to $67.3 million in 2000
compared with $57.9 million in 1999, due to continued loan growth, a change in
the loan mix related to growth in loans with higher risk/reward profiles, and an
increase in nonperforming loans.
During 2000 noninterest expense decreased 1 percent, to $1,106.7 million from
$1,122.4. Table 7 gives a breakdown of total expenses by business line. Mortgage
banking expenses decreased 14 percent to $414.5 million in 2000 from $483.1
million in 1999. Personnel expense fell 20 percent to $223.3 million in 2000
from $278.5 million in 1999 due to lower commissions as a result of lower
activity levels. Foreclosed property expense for mortgage banking increased 147
percent or $9.3 million in 2000. Also see Unusual Revenue and Expense Items.
Expenses for the regional banking group increased 9 percent, to $492.4 million
from $452.8 million in 2000. This growth rate was affected by increases in
personnel expense and various expenses related to the implementation of
initiatives to enhance efficiency and profitability. Capital markets experienced
a 4 percent decrease in expenses, to $92.5 million from $96.7 million primarily
due to lower commissions and incentives compared to 1999. Transaction processing
experienced growth in noninterest expense of 22 percent, to $98.8 million from
$81.1 million. This growth was mainly related to the operation of the NPC
locations acquired in June 1999. Also see Unusual Revenue and Expense Items.
F-20 First Tennessee National Corporation
BALANCE SHEET REVIEW
--------------------
On December 31, 2001, First Tennessee reported total assets of $20.6 billion
compared with $18.6 billion at the end of 2000 and $18.4 billion at the end of
1999. Average assets were $19.2 billion in 2001 compared with $19.3 billion in
2000 and $18.6 billion in 1999. In 2000 an increase in earning assets accounted
for 73 percent of the growth in average assets.
EARNING ASSETS
Earning assets primarily consist of loans, investment securities and loans held
for sale. During 2001 average earning assets remained level at $16.1 billion
after increasing from $15.6 billion in 1999. Average earning assets were 84
percent of total average assets in 2001, 83 percent in 2000 and 84 percent in
1999.
LOANS
Since third quarter 2000, First Tennessee has sold approximately $300 million of
its single-relationship credit card receivables, approximately $340 million of
student loans, and Peoples and Union Bank with total loans of approximately $110
million. Excluding the impact of these divestitures, average loans grew
approximately 9 percent, with growth in commercial loans of 8 percent and
approximately 11 percent growth in retail loans. Including the impact of these
divestitures, average loans increased 2 percent to $10.1 billion during 2001 and
grew 13 percent to $9.9 billion during 2000. Average loans represented 63
percent of average earning assets in 2001; 62 percent in 2000; and 57 percent in
1999. During years prior to 2001 certain retail loans have been securitized. The
securities resulting from the securitization of residential real estate loans
from the loan portfolio are owned by subsidiaries of First Tennessee, including
FTBNA, and are classified as investment securities (see Note 24 -
Securitizations). Additional loan information is provided in Table 8 and Note 4
- Loans.
TABLE 8 - AVERAGE LOANS
2001 2000
PERCENT GROWTH Percent Growth Percent
(Dollars in millions) 2001 OF TOTAL RATE 2000 of Total Rate 1999 of Total
------------------------------------------------------------------------------------------------------------------------------------
Commercial:
Commercial, financial and industrial $ 4,075.2 40% 7.5% $3,792.0 38% 6.6% $3,557.9 40%
Real estate commercial 941.2 9 7.1 878.5 9 21.1 725.4 8
Real estate construction 436.2 4 8.9 400.5 4 30.5 307.0 4
Retail:
Real estate residential 3,613.6 36 12.0 3,227.3 32 26.0 2,560.8 29
Real estate construction 186.5 2 22.1 152.7 2 61.9 94.3 1
Other consumer 575.9 6 (37.8) 926.4 9 (7.4) 1,000.0 11
Credit card receivables 275.7 3 (50.3) 554.6 6 (3.3) 573.4 7
-----------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned $10,104.3 100% 1.7% $9,932.0 100% 12.6% $8,818.8 100%
===================================================================================================================================
Commercial loans, consisting of commercial, financial and industrial; commercial
real estate; and commercial construction loans, averaged $5.5 billion and grew 8
percent, or $381.6 million during 2001, and averaged $5.1 billion and grew 10
percent, or $480.7 million in 2000. Commercial, financial and industrial loans
continued as the single largest loan category in 2001 and represented 75 percent
of the commercial loan portfolio in both 2001 and 2000. Commercial real estate
loans grew 7 percent, or $62.7 million in 2001 and grew 21 percent, or $153.1
million in 2000 due to new projects and the funding of projects committed to in
1999. Commercial construction loans grew 9 percent in 2001, or $35.7 million
after increasing 30 percent, or $93.5 million in 2000 primarily due to expansion
of a program at First Horizon Home Loans for developers of single-family
residential properties. Additional commercial loan information is provided in
Table 9.
First Tennessee National Corporation F-21
TABLE 9 - CONTRACTUAL MATURITIES OF COMMERCIAL LOANS ON DECEMBER 31, 2001
After 1 Year
(Dollars in thousands) Within 1 Year Within 5 Years After 5 Years Total
--------------------------------------------------------------------------------------------------------------------
Commercial, financial and industrial $2,394,669 $1,551,774 $230,295 $4,176,738
Real estate commercial 324,803 535,335 68,898 929,036
Real estate construction 389,187 95,927 7,417 492,531
--------------------------------------------------------------------------------------------------------------------
Total commercial loans, net of unearned income $3,108,659 $2,183,036 $306,610 $5,598,305
====================================================================================================================
For maturities over one year:
Interest rates - floating $ 936,174 $ 98,352 $1,034,526
Interest rates - fixed 1,246,862 208,258 1,455,120
--------------------------------------------------------------------------------------------------------------------
Total $2,183,036 $306,610 $2,489,646
====================================================================================================================
The retail loan portfolio consists of residential real estate (principally
secured by first and/or second liens on residential property), other consumer
(student, automobile and other consumer installment loans requiring periodic
payments of principal and interest), credit card, and retail construction loans.
In 2001 retail loans averaged $4.6 billion and decreased 4 percent, or $209.3
million, and in 2000 averaged $4.8 billion and grew 15 percent, or $632.5
million.
Residential real estate loans accounted for 78 percent of the retail loan
portfolio in 2001 and 66 percent in 2000. The residential real estate loan
portfolio grew 12 percent, or 386.3 million in 2001 primarily due to growth in
home equity lines of credit and second mortgages and grew 26 percent, or $666.5
million in 2000 due to growth in second mortgages originated by First Horizon
Equity Lending, a division of FTBNA. The retail real estate construction
portfolio increased 22 percent, or $33.8 million in 2001 after growing 62
percent, or $58.4 million in 2000 due to expansion of a program at First Horizon
Home Loans to provide residential construction loans to individuals for whom we
have committed a permanent mortgage. Due to the sale of the student loan
portfolio in second quarter 2001 (See Note 2 - Acquisitions/Divestitures), other
consumer loans decreased 38 percent, or $350.5 million in 2001 and decreased 7
percent, or $73.6 million in 2000.
Total credit card receivables (Visa, MasterCard and private label accounts)
averaged $275.7 million, a decrease of 50 percent in 2001, due to First
Tennessee's decision to focus on core multi-relationship customers and sell
almost $300 million of affinity, co-branded and certain single relationship
credit card receivables which did not fit this strategic focus (see Note 2 -
Acquisitions/Divestitures for additional information). Credit card receivables
averaged $554.6 million in 2000 with a decrease of 3 percent from 1999.
Going forward, First Tennessee expects loan growth to reflect the relative
strength of the economy. First Tennessee will continue to evaluate alternative
sources of funding which may include loan sales, securitizations, syndications,
and debt offerings.
INVESTMENT SECURITIES
The investment portfolio of First Tennessee consists principally of debt
securities used as a source of income, liquidity and collateral for repurchase
agreements or public fund deposits. Additionally, the investment portfolio is
used as a tool to manage risk from movements in interest rates. On December 31,
2001, the investment portfolio totaled $2.5 billion. The investment portfolio is
classified into two categories: securities available for sale (AFS) and
securities held to maturity (HTM). Table 10 shows information pertaining to the
composition, yields and maturities of the investment securities portfolio.
F-22 First Tennessee National Corporation
TABLE 10 - CONTRACTUAL MATURITIES OF INVESTMENT SECURITIES ON DECEMBER 31, 2001
(AMORTIZED COST)
After 1 Year After 5 Years
Within 1 Year Within 5 Years Within 10 Years After 10 Years
------------------ -------------------- ------------------- --------------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
----------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
States and municipalities* $ 922 7.74% $ 7,095 6.93% $ 3,803 6.85% $ 2,216 7.36%
Privately issued CMO -- -- -- -- 213,724 6.87 233,499 7.65
----------------------------------------------------------------------------------------------------------------------------------
Total $ 922 7.74% $ 7,095 6.93% $217,527 6.87% $ 235,715 7.65%
==================================================================================================================================
SECURITIES AVAILABLE FOR SALE:
Mortgage-backed securities
and collateralized
mortgage obligations** $ 131 4.55% $ 5,797 7.59% $ 8,341 7.07% $1,658,238 6.53%
U.S. Treasury and other U.S.
government agencies 51,153 2.66 49,991 5.98 32,342 7.17 118 4.44
States and municipalities* 1,307 7.04 7,039 7.91 738 8.24 21,250 7.93
Other 2,323 8.54 10,489 6.30 4,930 6.70 170,484 *** 4.55
----------------------------------------------------------------------------------------------------------------------------------
Total $54,914 3.01% $73,316 6.34% $ 46,351 7.12% $1,850,090 6.36%
==================================================================================================================================
*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 government agency issued mortgage-backed securities and
collateralized mortgage obligations which, when adjusted for early paydowns,
have an estimated average life of 2.7 years.
***Represents equity securities with no stated maturity.
Average investment securities decreased 9 percent, or $267.4 million, in 2001 to
$2.6 billion primarily due to the transfer of mortgage banking's interest-only
strips to trading securities and the declining balances of retained
securitization interests, which are paying down without being replenished.
During 2000 average investment securities increased 6 percent, or $160.0
million. The growth in 2000 came from the 1999 reclassification of excess MSR to
interest-only strips held in the investment portfolio. Investment securities
represented 16 percent of earning assets in 2001, 18 percent of earning assets
in 2000 and 17 percent in 1999.
On December 31, 2001, the AFS securities totaled $2.1 billion and had an average
life of 2.6 years. AFS securities consisted primarily of mortgage-backed
securities, collateralized mortgage obligations (CMO), U.S. Treasuries, U.S.
government agencies, and equities. On December 31, 2001, these securities had
approximately $39.9 million of net unrealized gains that resulted in an increase
in book equity of approximately $24.5 million, net of $15.4 million of deferred
income taxes. On December 31, 2000, the AFS securities portfolio totaled $2.2
billion and had approximately $23.9 million of net unrealized gains that
resulted in an increase in book equity of approximately $14.6 million, net of
$9.3 million of deferred income taxes. On December 31, 1999, the AFS securities
portfolio totaled $2.3 billion and had approximately $35.7 million of net
unrealized losses that resulted in a decrease in book equity of approximately
$21.8 million, net of $13.9 million of deferred income tax benefit.
On December 31, 2001, the HTM securities totaled $461.3 million and had an
average life of 3.3 years. HTM securities include privately issued CMO and
municipal securities. The privately issued CMO represent consumer real estate
loans that have been securitized and retained through the use of a Real Estate
Mortgage Investment Conduit (REMIC). The HTM securities portfolio had a net
unrealized loss on December 31, 2001, of $2.2 million. On December 31, 2000, the
HTM securities totaled $638.3 million and had a net unrealized loss of $18.6
million, and on December 31, 1999, the HTM securities portfolio totaled $768.9
million and had a net unrealized loss of $34.1 million.
LOANS HELD FOR SALE
Loans held for sale consist of the mortgage warehouse and student loans. The
warehouse accounts for the majority of loans held for sale. Loans held for sale
represented 15 percent of total earning assets in 2001 and 2000 compared with 21
percent in 1999. During 2001 loans held for sale averaged $2.4 billion and
decreased 3 percent
First Tennessee National Corporation F-23
or $62.8 million from 2000. During 2000 loans held for sale averaged $2.5
billion and decreased 24 percent or $766.9 million from 1999. Since the mortgage
warehouse loans are generally held in inventory for a short period of time,
there may be significant differences between average and period-end balances. At
year-end 2001, loans held for sale totaled $3.4 billion compared with $1.7
billion and $2.0 billion at year-end 2000 and 1999, respectively.
DEPOSITS, OTHER SOURCES OF FUNDS AND LIQUIDITY MANAGEMENT
DEPOSITS
During 2001 core deposits increased 4 percent, or $377.9 million, and averaged
$9.3 billion. This compares to a decrease of 3 percent, or $237.1 million, and
an average balance of $8.9 billion in 2000. In 1999, these deposits averaged
$9.1 billion. Interest-bearing core deposits remained relatively flat and
averaged $6.0 billion in 2001 and 2000 and averaged $6.3 billion in 1999.
Noninterest-bearing core deposits grew 16 percent, or $452.1 million, during
2001, due to expanded usage of a cash management investment product and growth
in mortgage escrow accounts, and averaged $3.3 billion. In 2000,
noninterest-bearing deposits grew 2 percent, or $43.3 million, primarily from
growth in a cash management investment product, and averaged $2.9 billion.
Noninterest-bearing deposits averaged $2.8 billion in 1999.
OTHER SOURCES OF FUNDS
Short-term purchased funds averaged $6.9 billion for 2001, down 13 percent, or
$1,038.8 million, from the previous year as an increase in core deposits
provided additional funding. Short-term purchased funds increased 12 percent, or
$821.4 million in 2000, and averaged $7.9 billion and $7.1 billion during 2000
and 1999, respectively. The growth in 2000 was primarily used to fund the growth
in earning assets. Short-term purchased funds accounted for 41 percent of First
Tennessee's funding (core deposits plus purchased funds and term borrowings) in
2001, 46 percent in 2000, and 43 percent in 1999 (see Note 9 - Short-Term
Borrowings for additional information).
Term borrowings include senior and subordinated borrowings and advances with
maturities greater than one year. On average, term borrowings increased 36
percent, or $137.2 million, during 2001 and averaged $521.5 million, compared to
an increase of 4 percent, or $13.2 million, and an average balance of $384.3
million in 2000. Term borrowings averaged $371.1 million in 1999. Term
borrowings on December 31, 2001, were $550.4 million, an increase of 34 percent,
or $140.7 million, from 2000 year-end (see Note 10 - Term Borrowings for
additional information).
LIQUIDITY MANAGEMENT
The objective of liquidity management is to ensure the continuous availability
of funds to meet the demands of depositors, other creditors and borrowers. The
Asset/Liability Committee, a committee consisting of senior management that
meets regularly, is responsible for managing these needs by taking into account
the marketability of assets; the sources, stability and availability of funding;
and the level of unfunded commitments (see Note 18 - Restrictions,
Contingencies, Commitments, and Other Disclosures). Core deposits are First
Tennessee's primary source of funding and have been a stable source of liquidity
for banks. These deposits are insured by the Federal Deposit Insurance
Corporation to the maximum extent authorized by law. In 2001, the average total
loan to core deposit ratio was 109 percent compared with 112 percent and 97
percent in 2000 and 1999, respectively. FTBNA has a bank note program available
for additional liquidity, under which the bank may borrow funds from time to
time, at maturities of 30 days to 30 years. On December 31, 2001, approximately
$2.5 billion was available under the bank note program as a long-term (greater
than one year) funding source. First Tennessee also evaluates alternative
sources of funding, including loan sales, securitizations, syndications, and
debt offerings in its management of liquidity.
First Tennessee has a loan funding arrangement with a commercial paper conduit
facility. Loans made under this facility would qualify for First Tennessee's
highest grades of low risk commercial loans if these loans had been made by
First Tennessee. First Tennessee provides a liquidity facility and a credit
enhancement to the conduit that totaled $214.7 million on December 31, 2001. The
loans in the conduit are not reflected on First Tennessee's Statement of
Condition. Given the relatively small volume of loans currently referred to the
conduit, this facility does not represent a critical element of First
Tennessee's liquidity.
F-24 First Tennessee National Corporation
First Horizon Home Loans originates conventional conforming and federally
insured single-family residential mortgage loans. Likewise, First Tennessee
Capital Assets Corporation frequently purchases the same types of loans from our
customers. Substantially all of these mortgage loans are exchanged for
securities, which are issued through GNMA for federally insured loans and FNMA
and FHLMC for conventional loans, and then sold in the secondary markets. In
many cases First Horizon Home Loans retains the right to service and receive
servicing fees on these loans. After sale, these loans are not reflected on the
Consolidated Statement of Condition. Each of these government-sponsored entities
has specific guidelines and criteria for sellers and servicers of loans backing
their respective securities. During 2001, approximately $16.1 billion of
conventional and federally insured mortgage loans were securitized and sold by
First Horizon Home Loans through these government-sponsored entities. First
Tennessee's use of these government-sponsored entities as an efficient outlet
for our mortgage loan production is an essential source of liquidity for First
Tennessee and other participants in the housing industry.
Certain of First Horizon Home Loans' originated loans do not conform to the
requirements for sale or securitization by FNMA and FHLMC due to exceeding the
maximum loan size of approximately $235 thousand. First Horizon Home Loans pools
and securitizes these "jumbo" loans in proprietary transactions. After
securitization and sale, these loans are not reflected on the Consolidated
Statement of Condition except as described hereafter. These transactions, which
are conducted through single-purpose business trusts, are the most efficient way
for First Horizon Home Loans and other participants in the housing industry to
monetize these assets. In most cases First Horizon Home Loans retains the right
to service and receive servicing fees on these loans and, on occasion, has
retained senior principal-only certificates or interest-only strips that are
classified on the Consolidated Statement of Condition as trading securities. On
December 31, 2001, the outstanding principal amount of loans in these
off-balance sheet business trusts was $2.8 billion. Given the significance of
First Horizon Home Loans' origination of non-conforming loans, the use of
single-purpose business trusts to securitize these loans is an important source
of liquidity to First Tennessee (see Note 24 - Securitizations).
Other securitization activity includes an automobile loan securitization in
2000. There was $62.6 million in unpaid principal balance of loans in the
securitization trust on December 31, 2001. This securitization is not an
essential element of First Tennessee's liquidity (see Note 24 -
Securitizations).
In addition to these transactions, liquidity has been obtained in prior years
through issuance of guaranteed preferred beneficial interests in First
Tennessee's junior subordinated debentures through a Delaware business trust
wholly owned by First Tennessee ($100.0 million) (see Note 11) and through
preferred stock issued by an indirect wholly owned subsidiary of First Tennessee
($44.2 million) (see Note 12).
First Tennessee has a lease arrangement with a single-purpose entity for First
Horizon Home Loan's main office headquarters in Dallas. Under this arrangement,
First Tennessee has guaranteed a significant portion of the residual value of
the Dallas property through the end of the lease term in 2011. Approximately $41
million of the construction cost of the property is not reflected on First
Tennessee's Statement of Condition but is rather owned by the single-purpose
entity. If the value of the property were to decline below its original
construction cost, First Tennessee would be obligated to reimburse the
single-purpose entity for a significant portion of the deficiency, if any, at
the end of the lease term. The use of this leasing arrangement is not an
essential element of First Tennessee's liquidity.
Parent company liquidity is maintained by cash flows stemming from dividends and
interest payments collected from subsidiaries, which represent the primary
source of funds to pay dividends to shareholders and interest to debtholders.
The amount of dividends from bank subsidiaries is subject to certain regulatory
restrictions that are described in Note 18 - Restrictions, Contingencies,
Commitments, and Other Disclosures. The parent company statements are presented
in Note 25 - Parent Company Financial Information. The parent company also has
the ability to enhance its liquidity position by raising equity or incurring
debt. Under an effective shelf registration statement on file with the
Securities and Exchange Commission (SEC), First Tennessee, as of December 31,
2001, may offer from time to time at its discretion, debt securities, and common
and preferred stock aggregating up to $225 million. In addition, First Tennessee
also has an effective capital securities shelf registration statement on file
with the SEC under which up to $200 million of capital securities is available
for issuance.
Maintaining adequate credit ratings on debt issues is critical to liquidity
because it affects the ability of First Tennessee to attract funds from various
sources, such as brokered deposits or wholesale borrowings of which First
First Tennessee National Corporation F-25
Tennessee had $2.9 billion on December 31, 2001, on a cost-competitive basis.
The various credit ratings are detailed in Table 11. The availability of funds
other than core deposits is dependent upon marketplace perceptions of the
financial soundness of First Tennessee, which include such issues as capital,
asset quality and reputation. The availability of core deposit funding is
dependent upon federal deposit insurance, which can be removed only in
extraordinary circumstances.
TABLE 11 - CREDIT RATINGS
Standard & Poor's Moody's Fitch
-----------------------------------------------------------------------------------------------------
FIRST TENNESSEE NATIONAL CORPORATION
Overall credit rating* A-/Stable A2/Stable A/Stable/F1
Subordinated debt BBB+ A3 A-
Capital securities** BBB a2 A-
-----------------------------------------------------------------------------------------------------
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
Overall credit rating* A/Stable/A-1 A1/Stable A/Stable/F1
Long-term/short-term deposits A/A-1 A1/P-1 A+/F1
Other long-term/short-term funding*** A A1/P-1
Subordinated debt A- A2 A-
-----------------------------------------------------------------------------------------------------
FT REAL ESTATE SECURITIES COMPANY, INC
Preferred stock BBB+ a1
-----------------------------------------------------------------------------------------------------
*As of February 2002.
**Guaranteed preferred beneficial interests in First Tennessee's subordinated
debentures.
***Other funding includes senior bank notes.
A rating is not a recommendation to buy, sell or hold securities and is subject
to revision or withdrawal at any time and should be evaluated independently of
any other rating.
CAPITAL
Shareholders' equity was $1.5 billion at year-end 2001, up 7 percent from 2000,
which increased 11 percent from year-end 1999. The increase in shareholders'
equity during 2001 and 2000 came from retention of net income after dividends
and stock option exercises reduced by shares repurchased. The Consolidated
Statements of Shareholders' Equity highlights the changes in equity since
December 31, 1998.
Capital adequacy is an important indicator of financial stability and
performance. Management's objectives are to maintain a level of capitalization
that is sufficient to sustain asset growth, take advantage of profitable growth
opportunities and promote depositor and investor confidence. Overall, First
Tennessee's capital position remained strong as shown in Table 12. Unrealized
market valuations had no material effect on the ratios.
TABLE 12 - CAPITAL RATIOS
2001 2000 1999
-------------------------------------------------------------------------------------------
Average shareholders' equity to average assets 7.29% 6.61% 6.37%
Period-end shareholders' equity to assets 7.17 7.46 6.76
Period-end double leverage 105.9 107.2 108.9
-------------------------------------------------------------------------------------------
Banking regulators define minimum capital ratios for bank holding companies and
their subsidiaries. Based on the capital rules and definitions prescribed by the
banking regulators, should any depository institution's capital ratios decline
below predetermined levels, it would become subject to a series of increasingly
restrictive regulatory actions. The system categorizes a depository
institution's capital position into one of five categories ranging from
well-capitalized to critically under-capitalized. For an institution to qualify
as well-capitalized, Tier 1 Capital, Total Capital and Leverage capital ratios
must be at least 6 percent, 10 percent and 5 percent, respectively. As of
December 31, 2001, First Tennessee and all of its banking affiliates had
sufficient capital to qualify as well-capitalized institutions as shown in Note
13 - Regulatory Capital. As discussed in Deposits, Other Sources of
F-26 First Tennessee National Corporation
Funds and Liquidity Management, First Horizon Home Loans uses single-purpose
business trusts to securitize and sell non-conforming (due to exceeding the FNMA
and FHLMC allowable size of loans) loans, which, therefore, are not reflected on
First Tennessee's Statement of Condition. Even if these loans had not been
securitized and sold, and were included on the Statement of Condition, First
Tennessee and all of its banking affiliates would have been adequately
capitalized.
On December 31, 2001, book value per common share was $11.66 compared with
$10.70 for 2000 and $9.52 for 1999. Average shares outstanding for the
three-year period were: 127.8 million in 2001, 129.9 million in 2000 and 130.6
million in 1999. Period-end shares outstanding for this same three-year period
were: 125.9 million, 128.7 million and 129.9 million, respectively. The lower
number of shares outstanding in 2001 was due to more shares repurchased than
shares issued for stock option exercises. First Tennessee's shares are traded on
The New York Stock Exchange under the symbol FTN. The sales price ranges, net
income per share and dividends declared by quarter, for each of the last two
years, are presented in Table 20.
On December 31, 2001, the closing sales price of First Tennessee's common stock
was $36.26 per share. The annual dividend yield for 2001 was 3.1 percent based
on dividends declared in 2001 and the closing market price of $28.9375 on
December 31, 2000. Management has authority to repurchase common stock from time
to time for various benefit programs. During 2001, First Tennessee repurchased
7.2 million shares while 4.4 million were issued for benefit plans. During 2000,
2.5 million shares were repurchased while 1.3 million were issued for benefit
plans. During 1999, 1.3 million shares were repurchased while 1.9 million were
issued for benefit plans and .3 million were issued for acquisitions. Pursuant
to board authority, First Tennessee plans to continue to repurchase shares from
time to time for its stock option plans and will evaluate the level of capital
and take action designed to generate or use capital as appropriate for the
interests of the shareholders. On October 16, 2001, the board of directors
extended from June 30, 2002, until December 31, 2004, the non-stock option
plan-related repurchases of up to 9.5 million shares, previously approved in
October 2000. Repurchases will be made in the open market or through privately
negotiated transactions and will be subject to market conditions, accumulation
of excess equity and prudent capital management. During 2001, 2.3 million shares
of the shares repurchased were repurchased pursuant to this authority. There
were no shares repurchased pursuant to this authority in 2000.
RISK MANAGEMENT
---------------
INTEREST RATE RISK MANAGEMENT
The primary purpose of managing interest rate risk is to minimize the volatility
to earnings from changes in interest rates and preserve the value of First
Tennessee's capital. The Asset/Liability Committee is responsible for
coordinating the financial management of net interest income, liquidity,
mortgage banking interest rate risk, investment portfolio, hedging and other
such activities. Interest rate risk is managed by structuring the balance sheet
to attempt to maximize overall profitability, increase revenue, and achieve the
desired level of net interest income while managing interest sensitivity risk
and liquidity. Derivative financial instruments are used to aid in managing the
exposure of the balance sheet, net interest income, fee income, and expenses to
changes in interest rates. Interest rate sensitivity risk is defined as the risk
that future changes in interest rates will impact income.
First Tennessee's net interest income and its financial condition are affected
by changes in the level of market interest rates as the repricing
characteristics of its loans and other assets do not necessarily match those of
its deposits, other borrowings and capital. For example, some fixed-rate assets
that reprice within one year are funded with floating-rate debt. This position
will benefit net interest income in a declining interest rate environment and
will negatively impact net interest income in a rising interest rate
environment. In the case of floating-rate assets and liabilities, First
Tennessee may also be exposed to basis risk, which results from changing spreads
between loans and deposit rates.
The interest rate sensitivity analysis cannot be used in isolation to determine
the level of interest rate exposure because it does not fully capture the impact
of changes in the balance sheet mix, administered rates (such as the prime
lending rate), embedded options, lagged interest rate changes, and certain other
factors. Accordingly, First Tennessee uses simulation analysis as its primary
tool to manage interest rate risk exposure. This type of analysis
First Tennessee National Corporation F-27
computes net interest income at risk under a variety of market interest rate
scenarios to more dynamically identify interest rate risk exposures. This
simulation, which considers forecasted balance sheet changes, prepayment speeds,
deposit mix, pricing impacts, and other changes in the net interest spread,
provides an estimate of the annual net interest income at risk for given changes
in interest rates. This estimate includes assumptions that are inherently
uncertain and, as a result, the model cannot precisely estimate net interest
income or precisely predict the impact of higher or lower interest rates on net
interest income. Actual results will differ from simulated results due to
timing, magnitude and frequency of interest rate changes and changes in market
conditions, and management's strategies, among other factors.
Rate shock analysis using multiple interest rate movements up and down is used
by mortgage banking to determine the amount of interest rate risk and market
value exposure of loan commitments in the pipeline, loans in the mortgage
warehouse and MSR. Various factors are used in this analysis including the
magnitude and direction of interest changes, prepayment speeds, and other
factors that could affect mortgage banking. Derivative financial instruments are
used by mortgage banking for two purposes. Forward contracts and option
contracts are used to protect the value of the pipeline and mortgage warehouse
against rises in interest rates between the time an interest rate is committed
to the customer and the mortgage is sold into the secondary market. Interest
rate contracts are utilized to protect against the prepayment risk of the MSR
that generally accompanies declines in interest rates. As interest rates fall,
the value of the MSR should decrease and the value of the servicing hedge should
increase. Conversely, as interest rates rise, the value of MSR should increase
and the value of the servicing hedge should decrease. Under SFAS No. 133 hedge
accounting, ineffectiveness in these hedging strategies is reflected immediately
in noninterest income.
Capital markets buys and sells various types of securities for its customers.
When these securities settle on a delayed basis, they are considered forward
contracts. Inventory positions are limited to the procurement of securities
solely for distribution to customers by the sales staff, and ALCO policies and
guidelines have been established to limit the risk in managing this inventory.
The derivative financial instruments listed in Table 13 are shown at both
notional and fair values. Table 13 also details First Tennessee's interest rate
sensitivity profile on December 31, 2001, based on projected cash flows using
contractual maturity for loans and expected repayment dates for securities. See
Net Interest Income discussion for additional assumptions and information. The
information provided in this section including the discussion regarding
simulation analysis and rate shock analysis is forward-looking. Actual results
could differ because of interest rate movements, the ability of management to
execute its business plans and other factors, including those presented in the
Forward-Looking Statements section of this MD&A.
F-28 First Tennessee National Corporation
TABLE 13 - RISK SENSITIVITY ANALYSIS
CAPITAL MARKETS
Fair
(Dollars in millions) 2002 2003 2004 2005 2006 2007+ Total Value
-----------------------------------------------------------------------------------------------------------------------------
ASSETS:
Capital markets securities inventory:
Floating $ 515 -- -- -- -- -- $ 515 $ 515
Average interest rate 5.48% -- -- -- -- -- 5.48%
-----------------------------------------------------------------------------------------------------------------------------
INTEREST RATE DERIVATIVES (NOTIONAL VALUE):
Forward contracts:
Commitments to buy $(3,811) -- -- -- -- -- $(3,811) $ (8)
Weighted average settlement price 87.61% -- -- -- -- -- 87.61%
Commitments to sell $ 4,193 -- -- -- -- -- $ 4,193 $ 5
Weighted average settlement price 87.67% -- -- -- -- -- 87.67%
Caps purchased $ 165 $ 315 $ 70 -- -- -- $ 550 $ (1)
Weighted average strike price 7.00% 5.84% 6.23% -- -- -- 6.24%
Caps written $ (165) $ (315) $ (70) -- -- -- $ (550) $ 1
Weighted average strike price 7.00% 5.84% 6.23% -- -- -- 6.24%
Floors purchased $ 35 $ 120 $ 55 $ 20 -- -- $ 230 $ 6
Weighted average strike price 4.82% 6.99% 2.39% 6.25% -- -- 5.49%
Floors written $ (35) $ (120) $ (55) $ (20) -- $ (230) $ (6)
Weighted average strike price 4.82% 6.99% 2.39% 6.25% -- -- 5.49%
Option contracts purchased $ 30 -- -- -- -- -- $ 30 *
Weighted average strike price 100.94% -- -- -- -- -- 100.94%
Option contracts written $ (30) -- -- -- -- -- $ (30) *
Weighted average strike price 100.94% -- -- -- -- -- 100.94%
Swap contracts -- $ 25 $ 50 -- $ 13 $ 100 $ 188 $ (3)
Average pay rate (floating) -- 4.75% 4.75% -- 5.60% 2.39% 3.56%
Average receive rate (fixed) -- 6.34% 7.34% -- 8.42% 6.39% 6.78%
Swap contracts -- $ (25) $ (50) -- $ (13) $ (100) $ (188) $ 3
Average pay rate (fixed) -- 6.34% 7.35% -- 8.42% 6.39% 6.78%
Average receive rate (floating) -- 4.75% 4.75% -- 5.60% 2.39% 3.56%
-----------------------------------------------------------------------------------------------------------------------------
*Amount is less than $500,000
First Tennessee National Corporation F-29
TABLE 13 - RISK SENSITIVITY ANALYSIS (CONTINUED)
HELD FOR PURPOSES OTHER THAN TRADING
Fair
(Dollars in millions) 2002 2003 2004 2005 2006 2007+ Total Value
-----------------------------------------------------------------------------------------------------------------------------
ASSETS:
Loans, net of unearned income*:
Floating $ 4,207 $ 383 $ 216 $ 127 $ 184 $ 213 $ 5,330 $5,330
Average interest rate 5.53% 4.22% 4.29% 4.64% 4.36% 5.95% 5.34%
Fixed $ 1,021 $ 565 $ 621 $ 414 $ 715 $ 1,554 $ 4,890 $5,043
Average interest rate 7.92% 8.44% 8.01% 8.29% 7.33% 8.53% 8.13%
Mortgage loans held for sale - floating $ 3,399 -- -- -- -- -- $ 3,399 $3,411
Average interest rate 6.66% -- -- -- -- -- 6.66%
Investment securities - fixed $ 809 $ 469 $ 318 $ 276 $ 431 $ 223 $ 2,526 $2,524
Average interest rate 6.22% 6.46% 6.65% 6.79% 6.61% 6.66% 6.49%
Liquid assets - floating** $ 288 $ 12 $ 12 $ 12 $ 12 $ 25 $ 361 $ 361
Average interest rate 2.77% 10.07% 10.07% 10.07% 10.07% 10.07% 4.25%
-----------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Interest-bearing deposits:
Floating $ 2,175 -- -- -- -- $ 260 $ 2,435 $2,435
Average interest rate 1.63% -- -- -- -- 1.62% 1.63%
Fixed $ 5,059 $ 528 $ 236 $ 220 $ 184 $ 934 $ 7,161 $7,214
Average interest rate 2.57% 4.18% 2.87% 3.14% 2.18% .89% 2.49%
Short-term borrowings:
Floating $ 3,349 -- -- -- -- -- $ 3,349 $3,349
Average interest rate 1.57% -- -- -- -- -- 1.57%
Fixed $ 22 -- -- -- -- -- $ 22 $ 22
Average interest rate 1.44% -- -- -- -- -- 1.44%
Term borrowings - fixed $ 131 $ 55 $ 2 $ 126 $ 1 $ 235 $ 550 $ 551
Average interest rate 2.83% 5.00% 5.51% 5.85% 5.74% 6.02% 5.12%
Guaranteed preferred beneficial interests
in First Tennessee's junior
subordinated debentures - fixed -- -- -- -- -- $ 100 $ 100 $ 96
Average interest rate -- -- -- -- -- 8.07% 8.07%
Preferred stock of subsidiary - fixed -- -- -- -- -- $ 44 $ 44 $ 46
Average interest rate -- -- -- -- -- 9.50% 9.50%
-----------------------------------------------------------------------------------------------------------------------------
*Excludes nonaccrual loans.
**Consists of federal funds sold, securities purchased under agreements to
resell, investments in time deposits, and mortgage banking trading
securities.
F-30 First Tennessee National Corporation
TABLE 13 - RISK SENSITIVITY ANALYSIS (CONTINUED)
HELD FOR PURPOSES OTHER THAN TRADING (CONTINUED)
Fair
(Dollars in millions) 2002 2003 2004 2005 2006 2007+ Total Value
-----------------------------------------------------------------------------------------------------------------------------
DERIVATIVES (NOTIONAL VALUE):
MORTGAGE BANKING:
Pipeline and warehouse hedging
Forward contracts-
Commitments to sell $ 4,467 -- -- -- -- -- $ 4,467 $ 25
Weighted average settlement price 99.74% -- -- -- -- -- 99.74%
Commitments to purchase $ 155 -- -- -- -- -- $ 155 *
Weighted average settlement price 99.56% -- -- -- -- -- 99.56%
Servicing portfolio hedging
Swaps -- -- -- -- -- $ 2,805 $ 2,805 $ 80
Average pay rate (floating) -- -- -- -- -- 2.09% 2.09%
Average receive rate (fixed) -- -- -- -- -- 6.02% 6.02%
Other
Floors purchased -- $ 5,350 -- -- -- -- $ 5,350 $ 10
Weighted average strike price -- 4.48% -- -- -- -- 4.48%
Floors written -- $(5,350) -- -- -- -- $(5,350) $(10)
Weighted average strike price -- 4.48% -- -- -- -- 4.48%
Interest rate lock commitments $ 1,530 -- -- -- -- -- $ 1,530 $ (2)
Average locked rate 6.81% -- -- -- -- -- 6.81%
INTEREST RATE RISK MANAGEMENT:
Swaps $ 100 -- -- $5 $42 -- $ 147 $ 1
Average pay rate (floating) 2.20% -- -- 2.32% 4.76% -- 2.56%
Average receive rate (fixed) 4.26% -- -- 4.85% 5.50% -- 4.63%
Swaps -- $ 100 -- $5 $42 -- $ 147 $ (3)
Average pay rate (fixed) -- 5.10% -- 4.29% 5.34% -- 5.14%
Average receive rate (floating) -- 2.14% -- 2.32% 2.43% -- 2.19%
Swaps $ 155 -- -- -- -- -- $ 155 *
Average pay rate (floating) 1.99% -- -- -- -- -- 1.99%
Average receive rate (floating) 2.16% -- -- -- -- -- 2.16%
Caps:
Purchased $ 20 -- -- -- -- -- $ 20 --
Weighted average strike price 8.00% -- -- -- -- -- 8.00%
Written $ (20) -- -- -- -- -- $ (20) --
Weighted average strike price 8.00% -- -- -- -- -- 8.00%
Equity options purchased -- $ 2 -- -- -- -- $ 2 *
Weighted average strike price -- $ 1,117 -- -- -- -- $ 1,117
----------------------------------------------------------------------------------------------------------------------------
*Amount is less than $500,000
CREDIT RISK MANAGEMENT / ASSET QUALITY
First Tennessee manages credit risk and asset quality through diversification in
the loan portfolio and adherence to its credit policy process. First Tennessee's
goal is not to avoid risk but to manage it and include it in the pricing
decision. Management strives to identify loans experiencing difficulty early
enough to correct the deficiencies. In addition, management attempts to
recognize problem loans and nonperforming loans in a timely manner. Both
charge-offs and asset writedowns are recorded promptly, based on management's
assessments of current collateral values and the borrower's ability to repay.
On December 31, 2001, First Tennessee did not have any concentrations of 10
percent or more of total loans in any single industry.
First Tennessee National Corporation F-31
ALLOWANCE FOR LOAN LOSSES AND CHARGE-OFFS
Management's policy is to maintain the allowance for loan losses at a level
sufficient to absorb the estimated losses inherent in the loan portfolio. The
allowance for loan losses is increased by the provision for loan losses and
recoveries and is decreased by charged-off loans and the portion of the
allowance attributable to loans sold. The adequacy of reserves is analyzed
quarterly for the purpose of maintaining coverage of estimated losses inherent
in the loan portfolio. An analytical model based on historical loss experience,
current trends and economic conditions, and reasonably foreseeable events is
used to test the adequacy of the reserves. This methodology determines an
estimated loss percentage (reserve rate), which is applied against the balance
of loans in each segment of the loan portfolio at the evaluation date.
COMMERCIAL AND COMMERCIAL REAL ESTATE LOANS
To assess the quality of individual commercial loans, all commercial loans are
internally assigned a credit rating, ranging from grades 1 to 10 (in 2000 grades
were assigned using A to F). Analyzing the migration of loan grades assists in
the credit risk management of the portfolio. A reserve rate is established for
each loan grade based on a historical three-year moving average of actual
charge-offs. The reserve rate is then adjusted for current trends, both internal
and external, that may affect the asset quality of the loan portfolio. Some of
the factors considered in making these adjustments include: levels of and trends
in delinquencies; classified loans and nonaccrual loans; trends in outstandings
and maturities; effects of changes in lending policies and underwriting
guidelines; introduction of new loan products with different risk
characteristics; experience, ability and depth of lending management and staff;
migration trends of loan grades; and charge-off trends that may skew the
historical three-year moving average. Finally, the reserve rates for each loan
grade are reviewed quarterly to reflect local, regional and national economic
trends; concentrations of cyclical industries; and the economic prospects for
industry concentrations. To supplement management's process in setting these
additional adjustments, an economic model is used that evaluates the correlation
between historical charge-offs and a number of state and national economic
indicators. Also, all classified loans $1 million and greater are evaluated
separately, and a specific reserve is set based on the exposure (the difference
between the outstanding loan amount and the estimated net realizable value of
the collateral) and the probability of loss.
Table 14 shows the reserve rates (percentage of allowance for loan losses to
outstanding balances) by loan category. The reserve rate for all commercial
loans increased to .95 percent in 2001 from .89 percent in 2000 and .92 percent
in 1999. The increase in the reserve rate primarily is due to a higher level of
loans migrating to the watch and classified grades, which require higher
reserves. This deteriorating trend can be attributed to the slowdown in the
economy. The reserve rate for impaired loans increased to 44.74 percent in 2001
from 36.59 percent in 2000 and 42.86 percent in 1999. This increase reflects a
higher level of impaired loans, primarily two commercial credits that were
classified as nonperforming in 2001. The charge-off ratio (see Table 17)
increased to .47 percent in 2001 from .08 percent in 2000, which was down from
..17 percent in 1999.
TABLE 14 - RESERVE RATES
2001 2000 1999 1998 1997
---------------------------------------------------------------------------------------------
Commercial, commercial real estate
and commercial construction* .95% .89% .92% .96% .95%
Impaired 44.74 36.59 42.86 50.00 33.33
Retail (excluding credit card) 1.00 .85 1.06 1.13 .98
Credit card receivables 4.63 5.02 4.12 4.21 4.99
---------------------------------------------------------------------------------------------
*Excludes impaired loans.
Certain previously reported amounts have been restated to agree with current
presentation.
F-32 First Tennessee National Corporation
RETAIL LOANS
Reserve rates are also established for each segment of the retail loan portfolio
based on historical loss trends and are adjusted to reflect current trends. Some
of the factors for making these adjustments include: changes in underwriting
guidelines or credit scoring models; trends in consumer payment patterns,
delinquencies and personal bankruptcies; staffing levels in the collection area;
changes in the mix of loan products outstanding; experience, ability and depth
of lending management and staff; value of underlying collateral; and charge-off
trends. The reserve rates are also adjusted for changing economic conditions and
the adequacy of the reserves to cover inherent loss.
The reserve rate for retail loans was 1.00 percent in 2001 as compared to .85
percent in 2000 and 1.06 percent in 1999. The increase in the retail loan
reserve rate for 2001 was impacted by an increase in the reserve rate for
consumer loans, mainly real estate residential, of the regional banking group to
reflect higher net charge-off trends. The consumer real estate charge-off ratio
increased to .73 percent in 2001 from .49 percent in 2000 and .35 percent in
1999. The other consumer charge-off ratio increased to 2.72 percent in 2001 from
1.83 percent in 2000 and 1.37 percent in 1999.
The reserve rate for the credit card portfolio decreased in 2001 to 4.63 percent
after increasing in 2000 to 5.02 percent from 4.12 percent in 1999. In 2001,
subsequent to the divestiture of certain single-relationship credit card
receivables, the remaining credit card portfolio contained accounts that
historically had shown lower amounts of delinquencies and charge-offs, thereby
requiring less reserves. The credit card receivables net charge-off ratio
decreased to 4.22 percent in 2001 from 4.25 percent in 2000 compared to 3.64
percent in 1999.
TOTAL LOANS
The total allowance for loan losses increased 8 percent, or $11.7 million, from
year-end 2000, at which time it had increased 3 percent, or $4.1 million, since
year-end 1999. Period-end loans remained relatively flat in 2001 due to
divestitures after increasing 9 percent in 2000. Excluding the impact of
divestitures total loans would have increased 7 percent in 2001. The ratio of
allowance for loan losses to loans, net of unearned income, increased to 1.51
percent on December 31, 2001, from 1.40 percent on December 31, 2000. Excluding
the sale of credit cards in 2000 the ratio would have been 1.47 percent. The
ratio of allowance for loan losses to loans was 1.49 percent on December 31,
1999.
Table 15 gives a breakdown of the allowance allocation by major loan types and
commercial loan grades at December 31, 2001, compared with the same period in
2000. This table also shows the amount of the general reserve. A general reserve
is maintained on the commercial loan portfolio based on management's judgment
regarding the risk of error in grading the loans and in the specific allowances
for individual loans or pools of loans. The general reserve has well defined
criteria that must be met before any of this reserve is used. Table 16
summarizes by category, loans charged off and recoveries of loans previously
charged off. This table also shows the additions to the reserve (provision),
which have been charged against operating earnings.
Net charge-offs increased to $80.5 million for the year ended December 31, 2001.
Net charge-offs were $61.1 million for 2000 and $51.7 million for 1999. The
increase in the level of net charge-offs was due to higher retail loan net
charge-offs excluding credit card, which included products with higher
risk/return profiles, and higher commercial loan net charge-offs. Total
commercial and commercial real estate related loan net charge-offs increased to
$25.5 million in 2001 from $4.1 million in 2000. The increase in commercial loan
net charge-offs from the unsustainable low levels in 2000 was primarily
attributable to loans to three commercial credits that were classified as
nonperforming loans in 2000 and 2001. The commercial loan net charge-offs were
not concentrated in any one industry or region. Residential real estate loan net
charge-offs increased to $27.7 million in 2001 from $16.5 million in 2000. Other
consumer loan net charge-offs decreased to $15.7 million in 2001 from $16.9 in
2000. The increase in retail loan net charge-offs was due to deterioration in
economic conditions and increased charge-offs of loans with a higher risk and
reward profile. Credit card receivables net charge-offs decreased to $11.6
million for 2001 from $23.6 million for 2000. The level of credit card net
charge-offs decreased in 2001 due to the sale of certain credit card loans. The
ratio of net charge-offs to average loans increased to .80 percent for 2001 from
..62 percent for 2000 and .59 percent for 1999. In 2001, both the commercial net
charge-off ratio and the retail net charge-off ratio (excluding credit card)
increased due to the reasons mentioned above.
First Tennessee National Corporation F-33
TABLE 15 - LOANS AND FORECLOSED REAL ESTATE ON DECEMBER 31
2001
---------------------------------------------------------------------------
Construction % Allowance
and Commercial of for Loan
(Dollars in millions) Commercial Development Real Estate TOTAL Total Losses
-----------------------------------------------------------------------------------------------------------------
Internal grades:
1 $ 256 $ -- $ 1 $ 257 2% $ --
2 375 -- 77 452 4 1
3 319 1 19 339 3 1
4 2,320 397 650 3,367 33 21
5 651 73 155 879 9 9
6 115 10 12 137 1 7
7 60 2 7 69 1 6
8, 9, 10 (Classifieds) 45 9 6 60 1 8
-----------------------------------------------------------------------------------------------------------------
4,141 492 927 5,560 54 53
Impaired loans:
Contractually past due 13 1 2 16 -- 4
Contractually current 22 -- -- 22 -- 13
-----------------------------------------------------------------------------------------------------------------
Total commercial and commer-
cial real estate loans 4,176 493 929 5,598 54% $ 70
-----------------------------------------------------------------------------------------------------------------
Retail:
Real estate residential 3,733 36 35
Real estate construction 211 2 1
Consumer 460 5 8
Credit card receivables 281 3 13
-----------------------------------------------------------------------------------------------------------------
Total retail loans 4,685 46 57
-----------------------------------------------------------------------------------------------------------------
Unfunded commitments -- 4
General reserve -- 24
-----------------------------------------------------------------------------------------------------------------
Total loans $10,283 100% $155
=================================================================================================================
Foreclosed real estate:
Commercial $ -- $ 1 $ 2 $ 3
Consumer 6
Mortgage banking 13
-----------------------------------------------------------------------------------------------------------------
Total foreclosed real estate $ 22
=================================================================================================================
2000
----------------------------
% Allowance
of for Loan
(Dollars in millions) Total Total Losses
---------------------------------------------------------------------
Internal grades:
1 $ 226 2% $ --
2 630 6 1
3 -- -- --
4 3,373 33 20
5 848 8 9
6 124 1 7
7 47 1 5
8, 9, 10 (Classifieds) 38 1 5
---------------------------------------------------------------------
5,286 52 47
Impaired loans:
Contractually past due 19 -- 4
Contractually current 22 -- 11
---------------------------------------------------------------------
Total commercial and commer-
cial real estate loans 5,327 52% $ 62
---------------------------------------------------------------------
Retail:
Real estate residential 3,573 35 23
Real estate construction 180 2 2
Consumer 840 8 14
Credit card receivables 319 3 16
---------------------------------------------------------------------
Total retail loans 4,912 48 55
---------------------------------------------------------------------
Unfunded commitments -- 3
General reserve -- 24
---------------------------------------------------------------------
Total loans $10,239 100% $144
=====================================================================
Foreclosed real estate:
Commercial $ 1
Consumer 3
Mortgage banking 12
---------------------------------------------------------------------
Total foreclosed real estate $ 16
=====================================================================
Loans are expressed net of unearned income. All amounts in the Allowance for
Loan Losses columns have been rounded to the nearest million dollars. Grade 1
loans have reserve amounts of less than $500,000. Certain previously reported
amounts have been restated to agree with current presentation. All data is based
on internal loan classifications. Definitions of each credit grade are provided
below:
Grade 1: 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 2: Well established, stable companies with good to very good earnings,
liquidity, and capital. Possess many of the same characteristics as
S&P A rated companies.
Grade 3: (New grade, effective in 2001) Reasonably well established, stable
companies with above average to good earnings, liquidity, and capital
and with consistent, positive trends relative to industry norms.
Grade 4: Reasonably well established, stable companies with average earnings,
liquidity, and capital.
Grade 5: New and established companies with some potential weakness. Capital
considered less than average and history of average to below average
earnings without consistent positive trends. Overall acceptable
credits with minor weaknesses which warrant additional servicing.
Grade 6: 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 7: Significant developing weaknesses or adverse trends in earnings,
liquidity, capital, or operating environment. Limited alternate
financing is available.
Grade 8: Significantly higher than normal probability that: (1) legal action
will be required; (2) liquidation of collateral will be required; (3)
there will be a loss; or all three will occur. This grade is believed
to be substantially equivalent to the regulators' classification of
substandard.
Grade 9: Excessive degree of risk. Financial and management deficiencies are
well defined and make the obligor's ability to repay from anticipated
sources under existing terms and conditions uncertain. Collateral
shortfall and/or undeterminable collateral values exist. Timing and
amount of loss are uncertain. This grade is believed to be
substantially equivalent to the regulators' classification of
doubtful.
Grade 10: Borrowers are deemed incapable of repayment and debt is deemed
uncollectible. Loans should no longer be carried as an active bank
asset. This grade is believed to be substantially equivalent to the
regulators' classification of loss.
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 and the
loan is placed on non-accrual status. Reserves for impaired loans are
based on the value of the collateral or the cash flow of the entity
compared to the outstanding balance.
F-34 First Tennessee National Corporation
TABLE 16 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) 2001 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES:
Beginning balance $ 143,696 $ 139,603 $ 136,013 $ 125,859 $ 117,748 $ 112,567
Provision for loan losses* 93,493 67,353 57,923 51,351 51,115 35,677
Allowance from acquisitions -- -- -- 140 -- --
Securitizations/divestitures (1,337) (2,173) (2,683) (3,575) -- --
Charge-offs:
Commercial:
Commercial, financial
and industrial 22,596 6,583 9,714 5,379 6,238 3,299
Real estate commercial 4,156 857 510 -- 150 47
Real estate construction 968 47 -- 442 136 10
Retail:
Real estate residential** 30,532 17,348 9,742 8,725 6,541 2,774
Real estate construction -- -- -- -- 109 --
Consumer 20,603 20,868 17,392 9,734 13,681 13,288
Credit card receivables 13,369 25,485 22,867 24,242 27,420 22,964
-------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 92,224 71,188 60,225 48,522 54,275 42,382
-------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial:
Commercial, financial
and industrial 1,991 2,903 2,082 2,751 1,717 3,251
Real estate commercial 280 480 228 641 2,623 461
Real estate construction -- -- 8 148 171 171
Retail:
Real estate residential 2,788 857 510 788 654 847
Consumer 4,953 3,937 3,725 4,253 4,417 5,044
Credit card receivables 1,733 1,924 2,022 2,179 1,689 2,112
-------------------------------------------------------------------------------------------------------------------------------
Total recoveries 11,745 10,101 8,575 10,760 11,271 11,886
-------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 80,479 61,087 51,650 37,762 43,004 30,496
-------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 155,373 $ 143,696 $ 139,603 $ 136,013 $ 125,859 $ 117,748
===============================================================================================================================
LOANS, OUTSTANDING ON
DECEMBER 31*** $10,283,143 $10,239,450 $ 9,363,158 $ 8,557,064 $ 8,311,350 $ 7,728,203
-------------------------------------------------------------------------------------------------------------------------------
Average loans, outstanding
during the year*** $10,104,277 $ 9,931,955 $ 8,818,766 $ 8,242,135 $ 7,945,143 $ 7,472,095
-------------------------------------------------------------------------------------------------------------------------------
RATIOS***:
Allowance to loans 1.51% 1.40% 1.49% 1.59% 1.51% 1.52%
Net charge-offs to
average loans .80 .62 .59 .46 .54 .41
Net charge-offs to allowance 51.8 42.5 37.0 27.8 34.2 25.9
-------------------------------------------------------------------------------------------------------------------------------
*Provision was reduced by $1.3 million in 2001 and by $10.7 million in 2000
related to credit card loans sold.
**Real estate residential charge-offs include $3.2 million, $5.2 million, $2.1
million, $3.4 million and $3.2 million of charge-offs for 2001, 2000, 1999,
1998, and 1997, respectively, related to loans classified as nonperforming
from the warehouse and the repurchase of loans originated and previously
sold by First Horizon Home Loans.
***Net of unearned income.
First Tennessee National Corporation F-35
Within the course of normal mortgage banking activities, a small percentage of
nonperforming assets is created when FHA/VA borrowers are delinquent in their
monthly payments prior to the completion of the insuring process. Additionally,
loans that have been sold may be required to be repurchased if they are found
not to meet an investor's origination criteria. From this pool, there were net
charge-offs of $3.2 million in 2001, down from $5.2 million in 2000 which was up
from $2.1 million in 1999. These net charge-offs had the effect of adding .03
percentage point to the total net charge-off ratio in 2001.
Going forward, asset quality indicators should reflect the relative strength of
the economy and the resolution of existing asset quality issues. In addition,
asset quality ratios could be affected by balance sheet strategies and shifts in
loan mix to and from products with different risk/return profiles. Actual
results could differ because of several factors, including those presented in
the Forward-Looking Statements section of this MD&A discussion.
TABLE 17 - NET CHARGE-OFF RATIOS
2001 2000 1999
--------------------------------------------------------------------------------
BREAKDOWN BY LOAN CATEGORY:
Commercial .47% .08% .17%
Consumer real estate .73 .49 .35
Other consumer 2.72 1.83 1.37
Credit card receivables 4.22 4.25 3.64
Total net charge-offs .80 .62 .59
--------------------------------------------------------------------------------
Loans are averages expressed net of unearned income.
NONPERFORMING ASSETS
Nonperforming loans consist of impaired, other nonaccrual and restructured
loans. These, along with foreclosed real estate and other assets, represent
nonperforming assets. Impaired loans are those loans for which it is probable
that all amounts due, according to the contractual terms of the loan agreement,
will not be collected and for which recognition of interest income has been
discontinued. Other nonaccrual loans are residential and consumer loans on which
recognition of interest income has been discontinued. Restructured loans
generally take the form of an extension of the original repayment period and/or
a reduction or deferral of interest or principal because of deterioration in the
financial position of the borrower. First Tennessee has not sold any
nonperforming loans during 2001 but continues to internally resolve asset
quality issues. Acts of terrorism have had a negative impact on the passenger
airline and property and casualty insurance industries. First Tennessee does not
have a material credit exposure in these industries.
Nonperforming assets increased 10 percent, or $7.4 million, in 2001 with an
increase of 3 percent, or $1.7 million in nonperforming loans due to increased
nonperforming loans in the mortgage banking group. On December 31, 2001,
foreclosed properties amounted to $22.0 million, an increase of 35 percent due
primarily to increased foreclosed real estate from the retail real estate
portfolio in the regional banking group.
Information regarding nonperforming assets and loans is presented in Table 19.
As shown in the table, the ratio of nonperforming assets to total loans in the
regional banking group was .53 percent on December 31, 2001. Table 18 gives
additional information related to changes in nonperforming assets for 1999
through 2001.
TABLE 18 - CHANGES IN NONPERFORMING ASSETS
(Dollars in millions) 2001 2000 1999
-------------------------------------------------------------------
Beginning balance $ 77.7 $ 47.1 $ 44.2
Additional nonperforming assets 134.2 115.0 88.1
Payments (97.2) (73.3) (74.1)
Charge-offs (29.6) (11.1) (11.1)
-------------------------------------------------------------------
Ending balance $ 85.1 $ 77.7 $ 47.1
===================================================================
F-36 First Tennessee National Corporation
TABLE 19 - NONPERFORMING ASSETS ON DECEMBER 31
(Dollars in thousands) 2001 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
REGIONAL BANKING GROUP:
Nonperforming loans* $ 40,868 $ 40,921 $ 7,054 $ 11,428 $ 9,405 $ 9,978
Foreclosed real estate 8,852 3,997 5,777 5,091 4,499 5,137
Other assets 130 97 91 199 235 196
------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets - Regional Banking Group 49,850 45,015 12,922 16,718 14,139 15,311
------------------------------------------------------------------------------------------------------------------------------
MORTGAGE BANKING:
Nonperforming loans* 22,088 20,381 22,064 16,379 29,010 8,948
Foreclosed real estate 13,137 12,293 12,093 11,151 7,703 2,686
------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets - Mortgage Banking 35,225 32,674 34,157 27,530 36,713 11,634
------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 85,075 $ 77,689 $ 47,079 $ 44,248 $ 50,852 $ 26,945
==============================================================================================================================
Loans and leases 30 to 89 days past due $117,298 $105,705 $ 88,389 $ 87,832 $104,946 $ 87,177
Loans and leases 90 days past due 37,665 42,292 29,849 31,603 32,074 30,747
Potential problem assets** 123,535 107,605 75,001 63,307 70,282 78,446
------------------------------------------------------------------------------------------------------------------------------
RATIOS:
Allowance to nonperforming loans 247% 234% 479% 489% 328% 622%
Nonperforming assets to total loans plus
foreclosed real estate and other assets
(Regional Banking Group only) .53 .48 .15 .20 .17 .20
Nonperforming assets to unpaid principal balance
of servicing portfolio (Mortgage Banking only) .08 .07 .08 .07 .14 .05
------------------------------------------------------------------------------------------------------------------------------
*Total impaired loans included in nonperforming loans were $37.8 million,
$41.2 million, $7.5 million, $12.1 million, $8.7 million, and $10.3 million
for the years 2001 through 1996, respectively.
**Includes loans and leases 90 days past due.
Certain previously reported amounts have been adjusted to agree with current
presentation.
PAST DUE LOANS AND POTENTIAL PROBLEM ASSETS
Past due loans are loans contractually past due 90 days or more as to interest
or principal payments, but which have not yet been put on nonaccrual status. The
ratio of past due loans to total loans was .37 percent at year-end 2001, down
from .41 percent on December 31, 2000. Additional historical past due loan
information can be found in Table 19. Loans 30 to 89 days past due increased to
$117.3 million, or 1.14 percent of total loans, on December 31, 2001, from
$105.7 million, or 1.03 percent of total loans, on December 31, 2000.
Potential problem assets, which are not included in nonperforming assets,
increased to $123.5 million, or 1.20 percent of total loans, on December 31,
2001, from $107.6 million, or 1.05 percent of total loans, on December 31, 2000.
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.
First Tennessee National Corporation F-37
QUARTERLY FINANCIAL INFORMATION
---------------------------------
TABLE 20 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION
2001 2000
------------------------------------------ ------------------------------------------
(Dollars in millions except FOURTH THIRD SECOND FIRST Fourth Third Second First
per share data) QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------------------------------------------------------
SUMMARY INCOME INFORMATION:
Interest income $282.5 $288.1 $307.2 $321.1 $347.0 $352.6 $344.1 $319.3
Interest expense 87.3 115.2 140.3 169.8 196.2 202.5 192.2 173.8
Provision for loan losses 34.3 22.8 17.4 19.0 18.2 16.5 17.1 15.5
Noninterest income before
securities transactions 351.5 302.3 337.0 273.1 275.5 230.4 221.4 189.6
Securities gains /(losses) (.8) -- (3.4) (.1) (5.6) (.3) .1 1.6
Noninterest expense 381.6 321.1 345.5 310.5 293.5 279.1 272.4 261.7
Income before debt restructuring
and cumulative adjustment* 89.2 89.0 89.0 62.4 71.7 66.0 55.4 39.5
Debt restructurings and
cumulative adjustment, net of tax -- -- (3.2) (8.2) -- -- -- --
Net income 89.2 89.0 85.8 54.2 71.7 66.0 55.4 39.5
------------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
BEFORE DEBT RESTRUCTURINGS
AND CUMULATIVE ADJUSTMENT* $ .70 $ .70 $ .70 $ .48 $ .56 $ .51 $ .42 $ .30
EARNINGS PER COMMON SHARE .70 .70 .67 .42 .56 .51 .42 .30
DILUTED EARNINGS PER COMMON
SHARE BEFORE DEBT RESTRUCTURINGS
AND CUMULATIVE ADJUSTMENT* .68 .68 .68 .47 .55 .50 .42 .30
DILUTED EARNINGS PER COMMON
SHARE .68 .68 .65 .41 .55 .50 .42 .30
------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK INFORMATION:
Closing price per share:
High $37.25 $37.04 $36.80 $33.00 $29.06 $22.19 $22.19 $27.56
Low 31.80 31.29 30.14 27.38 19.31 17.81 16.58 16.06
Period-end 36.26 37.00 34.71 30.90 28.94 20.38 16.58 20.31
Dividends declared per share .25 .22 .22 .22 .22 .22 .22 .22
------------------------------------------------------------------------------------------------------------------------------------
*Debt restructurings occurred in second quarter 2001 and cumulative
adjustment (reflecting effects of changes in accounting principles related
to derivatives) occurred in first quarter 2001.
OTHER
-----
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
SFAS No. 133, which was adopted on January 1, 2001, establishes accounting
standards requiring that every derivative instrument be recorded on the balance
sheet as either an asset or liability measured at its fair value. It requires
that changes in the instrument's fair value be recognized currently in earnings
(or other comprehensive income). If certain criteria are met, changes in the
fair value of the asset or liability being hedged are also recognized currently
in earnings. The initial impact of adopting SFAS No. 133 resulted in a net
transition adjustment that was recognized as the cumulative effect of a change
in accounting principle.
F-38 First Tennessee National Corporation
Fair value is determined on the last business day of a reporting period. This
point in time measurement of derivative fair values and the related hedged item
fair values may be well suited to the measurement of hedge effectiveness, as
well as reported earnings, when hedge time horizons are short. The same
measurement however may not consistently reflect the effectiveness of
longer-term hedges and, in First Tennessee's view, can distort short-term
measures of reported earnings. First Tennessee uses a combination of derivative
financial instruments to hedge certain components of the interest-rate risk
associated with its portfolio of MSR, which currently have an average life of
approximately seven years. Over this long-term time horizon this combination of
derivatives can be effective in significantly mitigating the effects of interest
rate changes on the value of the servicing portfolio. However, these derivative
financial instruments can and do demonstrate significant price volatility
depending upon prevailing conditions in the financial markets. If a reporting
period ends during a period of volatile financial market conditions, the effect
of such point-in-time conditions on reported earnings does not reflect the
underlying economics of the transactions or the true value of the hedges to
First Tennessee over their estimated lives. The fact that the fair value of a
particular derivative is unusually low or high on the last day of the reporting
period is meaningful in evaluating performance during the period only if First
Tennessee sells the derivative within the period of time before fair value
changes and does not replace the hedge coverage with another derivative. First
Tennessee believes the effect of such volatility on short-term measures of
earnings is not indicative of the expected long-term performance of this hedging
practice.
First Tennessee believes that difficulties in interpreting the effects of SFAS
No. 133 are sufficiently great that it may be worthwhile to be able to identify
and isolate these effects and to determine what net income would be excluding
certain SFAS No. 133 adjustments related to mortgage banking capitalized
servicing rights. Therefore, this analysis has been added as a recurring part of
management's discussion of operating results. This new item, servicing rights
net value changes under SFAS No. 133 (SFAS No. 133 gain or loss), represents the
change in the fair value of hedged interest-rate risk of MSR, net of changes in
the fair value of derivative financial instruments designated to hedge such
risks excluding the impact of cash settlements and interest accruals on
derivatives with periodic cash flows and changes in fair value due to the
passage of time including time decay of options, and beginning in the third
quarter, the time price convergence of forward instruments. For 2001 a pre-tax
SFAS No. 133 gain of $5.0 million ($3.3 million after tax) was recognized. The
impact on earnings from hedging of the MSR portfolio is included on the
Statement of Income in mortgage banking noninterest income.
First Tennessee believes a review of the trend, if any, of the servicing rights
net value changes under SFAS No. 133 over a long period of time, preferably over
an interest-rate business cycle, is a more meaningful measure to determine the
effectiveness of hedging strategies.
For its internal evaluation of performance for each applicable period, First
Tennessee subtracts SFAS No. 133 gains from reported net income and adds SFAS
No. 133 losses to reported net income. The internal evaluation of long-term
performance will include the long-term trend, if any, in SFAS No. 133 gains or
losses.
FURTHER INTERPRETATIONS OF SFAS NO. 133
Certain provisions of SFAS No. 133 continue to undergo significant discussion
and debate by the Financial Accounting Standards Board (FASB). One such
potential issue involves the assessment of hedge effectiveness (and its impact
on qualifying for hedge accounting) when hedging fair value changes of
prepayable assets due to changes in the benchmark interest rate. As the FASB
continues to deliberate interpretation of the new rules, the potential exists
for a difference between First Tennessee's interpretation and that of the FASB,
the effects of which cannot presently be anticipated but failure to obtain hedge
accounting treatment could be significant to results of operations.
ACCOUNTING CHANGES
On June 30, 2001, the FASB finalized SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 141 all
business combinations initiated after June 30, 2001, must be accounted for using
the purchase method. With the adoption of SFAS No. 142, goodwill is no longer
subject to amortization over its estimated useful life. Rather, goodwill will be
subject to an assessment for impairment using a fair-value-based test at least
annually. Goodwill associated with equity-method investments is also no longer
amortized, but impairment analysis is governed by existing impairment guidance
for equity-method investments and
First Tennessee National Corporation F-39
not the new impairment rules. Also under the new rules, acquired intangible
assets should be separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the intangible asset
can be sold or otherwise transferred, regardless of the acquirer's intent to do
so. These new rules are expected to result in more intangible assets being
separated from goodwill than generally occurs today. The resulting assets will
be amortized over their useful lives. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001, which for First Tennessee will mean January
1, 2002. First Tennessee estimates the impact of adopting these new standards
will be to reduce noninterest expense annually by approximately $7 million
pre-tax without regard to any new acquisitions or future impairment that may
occur, the effect of which cannot be predicted at this time. In August 2001, the
FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS No. 144 addresses accounting and reporting issues
related to the impairment of long-lived assets and for long-lived assets to be
disposed of. This standard is effective for fiscal years beginning after
December 15, 2001, which for First Tennessee will be January 1, 2002. First
Tennessee anticipates the impact of adopting this standard will be immaterial.
F-40 First Tennessee National Corporation
GLOSSARY
ALLOWANCE FOR LOAN LOSSES - Valuation reserve representing the amount
considered by management to be adequate to cover estimated losses inherent in
the loan portfolio.
BASIS POINT - The equivalent of one-hundredth of one percent (0.01). One
hundred basis points equals one percent. This unit is generally used to measure
movements in interest yields and rates.
BASIS RISK - Refers to changes in the relationship between various interest
rate segments (e.g. the difference between the Prime and the Fed Funds Rates).
BOOK VALUE PER COMMON SHARE - A ratio determined by dividing shareholders'
equity at the end of a period by the number of common shares outstanding at the
end of that period.
BULK SALES - Sales of mortgage servicing rights that are transacted separately
from the sale of the related loans.
CHARGE-OFFS - The amount charged against the allowance for loan losses to
reduce specific loans to their collectible amount.
CLASSIFIED LOAN - A loan that has caused management to have serious doubts
about the borrower's ability to comply with present repayment terms. Included
in this category are grade F performing and nonperforming loans. In compliance
with the standards established by the Office of the Comptroller of the Currency
(OCC) these loans are classified as substandard, doubtful, and loss depending
on the severity of the loan's deterioration.
COMMERCIAL PAPER - A short-term unsecured debt obligation of the parent company
with maturities typically of 30 days to 270 days.
COMMERCIAL AND STANDBY LETTERS OF CREDIT - Commercial letters of credit are
issued or confirmed by an entity to ensure the payment of its customers'
payables and receivables. Standby letters of credit are issued by an entity to
ensure its customers' performance in dealing with others.
COMMITMENT TO EXTEND CREDIT - Agreements to make or acquire a loan or lease as
long as agreed-upon terms (e.g., expiration date, covenants, or notice) are
met. Generally these commitments have fixed expiration dates or other
termination clauses and may require payment of a fee.
CORE DEPOSITS - Core deposits consist of all interest-bearing and
noninterest-bearing deposits, except certificates of deposit over $100,000.
They include checking interest deposits, money market deposit accounts, time
and other savings, plus demand deposits.
DERIVATIVE FINANCIAL INSTRUMENT - Forwards, swaps, option contracts, or other
financial instruments with similar characteristics, such as interest rate caps
or floors, or fixed-rate loan commitments.
DILUTED EARNINGS PER COMMON SHARE - Net income, divided by average shares
outstanding plus the number of shares that would be outstanding if all dilutive
common shares had been issued. Dilutive common shares, for example, would
represent outstanding options where the average stock price exceeds the price
at which the option was granted.
DOUBLE LEVERAGE RATIO - A ratio that measures the degree to which parent
company debt supports investments in subsidiaries. It is calculated by dividing
the parent company's investment in subsidiaries by total consolidated equity.
EARNING ASSETS - Assets that generate interest or dividend income or
yield-related fee income, such as loans and investment securities.
EARNINGS PER COMMON SHARE - Net income, divided by the average number of common
shares outstanding in the period. (See also diluted earnings per share)
First Tennessee National Corporation F-41
FEDERAL FUNDS SOLD/PURCHASED - Excess balances of depository institutions which
are loaned to each other, generally on an overnight basis.
FLOW SALES - Refers to sales of loans where the servicing right is released at
the time the related loan is sold.
FULLY TAXABLE EQUIVALENT INCOME (FTE) - Income which has been adjusted by
increasing tax-exempt income to a level that would yield the same after-tax
income had that income been subject to taxation.
HEDGE - An instrument used to reduce risk by entering into a transaction which
offsets existing or anticipated exposures to changes in interest rates.
INTEREST FREE SOURCES - Noninterest-bearing liabilities (such as demand
deposits, other liabilities, and shareholders' equity) net of nonearning assets
(such as cash, fixed assets, and other assets).
INTEREST RATE CAPS AND FLOORS - Contracts with notional principal amounts that
require the seller, in exchange for a fee, to make payments to the purchaser if
a specified market interest rate exceeds a fixed upper "capped" level or falls
below a fixed lower "floor" level on specified future dates.
INTEREST RATE FORWARD CONTRACTS - Contracts representing commitments either to
purchase or sell at a specified future date a specified security or financial
instrument at a specified price, and may be settled in cash or through
delivery. These obligations are generally short term in nature.
INTEREST RATE OPTIONS - A contract that grants the holder (purchaser), for a
fee, the right to either purchase or sell a financial instrument at a specified
price within a specified period of time or on a specified date from the writer
(seller) of the option.
INTEREST RATE SENSITIVITY - The relationship of changes in interest income and
interest expense to fluctuations in interest rates over a defined period of
time.
INTEREST RATE SWAP - An agreement in which two entities agree to exchange, at
specified intervals, interest payment streams calculated on an agreed upon
notional principal amount with at least one stream based on a floating rate
index.
INTEREST SENSITIVITY GAP - The difference between interest-rate sensitive
assets and interest-rate sensitive liabilities over a designated time period. A
net asset exists when interest-rate sensitive assets exceed interest-rate
sensitive liabilities. A net liability position exists when liabilities exceed
assets.
LEVERAGE RATIO - Tier 1 capital divided by quarterly average assets excluding
any adjustments for available for sale securities unrealized gains/(losses),
goodwill, and certain other intangible assets.
LIQUIDITY - The ability of a corporation to generate adequate funds to meet its
cash flow requirements. It is measured by the ability to quickly convert assets
into cash with minimal exposure to interest rate risk, by the size and
stability of the core deposit base, and by additional borrowing capacity within
the money markets.
MARKET CAPITALIZATION - Market value of a firm computed by multiplying the
number of shares outstanding by the current stock price.
MORTGAGE PIPELINE - Interest-rate commitments made to customers on mortgage
loans that have not yet been closed and funded.
MORTGAGE WAREHOUSE - A mortgage loan that has been closed and funded and is
awaiting sale and delivery into the secondary market.
MORTGAGE SERVICING RIGHTS - The right to service mortgage loans, generally
owned by someone else, for a fee. Loan servicing includes collecting payments;
remitting funds to investors, insurance companies, and taxing authorities;
collecting delinquent payments; and foreclosing on properties when necessary.
F-42 First Tennessee National Corporation
NET INTEREST INCOME (NII) - Interest income less interest expense.
NET INTEREST MARGIN - A measurement of how effectively the bank utilizes its
earning assets in relationship to the interest cost of funding them. It is
computed by dividing fully taxable-equivalent net interest income by average
earning assets.
NET INTEREST SPREAD - The difference between the average yield earned on
earning assets on a fully taxable equivalent basis and the average rate paid
for interest-bearing liabilities.
NONACCRUAL LOANS - Loans on which interest accruals have been discontinued due
to the borrower's financial difficulties. Interest income on these loans is
reported on a cash basis as it is collected after recovery of principal.
NONPERFORMING ASSETS - Interest earning assets on which interest income is not
being accrued, restructured loans on which interest rates or terms of repayment
have been materially revised, real estate properties acquired through
foreclosure, and repossessed assets.
NOTIONAL PRINCIPAL AMOUNT - An amount on which payments for interest rate swaps
and interest rate options, caps and floors are based. The "notional amount" is
not paid or received.
PROVISION FOR LOAN LOSSES - The periodic charge to earnings for potential
losses in the loan portfolio.
PURCHASED FUNDS - The combination of certificates of deposit greater than
$100,000, federal funds purchased, securities sold under agreement to
repurchase, bank notes, commercial paper, and other short-term borrowings.
RECOVERIES - The amount added to the allowance for loan losses when funds are
received on a loan which was previously charged off.
REPURCHASE AGREEMENT - A method of short-term financing where one party agrees
to buy back, at a future date (generally overnight) and an agreed-upon price, a
security it sells to another party.
RESTRUCTURED LOANS - Loans where the institution, for economic or legal reasons
related to the debtor's financial difficulties, grants a concession to the
debtor that it would not otherwise consider.
RETURN ON AVERAGE ASSETS (ROA) - A measure of profitability that indicates how
effectively an institution utilized its assets. It is calculated by dividing
annualized net income by total average assets.
RETURN ON AVERAGE EQUITY (ROE) - A measure of profitability that indicates what
an institution earned on its shareholders' investment. ROE is calculated by
dividing net income by total average shareholders' equity.
REVENUE - The sum of net interest income and noninterest income. For some
comparisons, securities gains/losses are excluded.
RISK-ADJUSTED ASSETS - A regulatory risk-based calculation that takes into
account the broad differences in risks among a banking organization's assets
and off-balance sheet instruments.
SECURITIZED ASSETS OR SECURITIZATION - The process by which financial assets
are packaged, underwritten and sold as securities.
TIER 1 CAPITAL RATIO - Ratio consisting of shareholders' equity before any
adjustments for available for sale securities unrealized gains/(losses),
reduced by goodwill, certain other intangible assets and the disallowable
portion of mortgage servicing rights divided by risk-adjusted assets.
TOTAL CAPITAL RATIO - Tier 1 capital plus the allowable portion of the
allowance for loan losses and qualifying subordinated debt divided by
risk-adjusted assets.
First Tennessee National Corporation F-43
CONSOLIDATED STATEMENTS OF CONDITION
December 31
---------------------------
(Dollars in thousands) 2001 2000
----------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks (Note 18) $ 885,183 $ 838,148
Federal funds sold and securities purchased under
agreements to resell 229,440 122,251
----------------------------------------------------------------------------------------
Total cash and cash equivalents 1,114,623 960,399
----------------------------------------------------------------------------------------
Investment in bank time deposits 1,740 3,629
Trading securities 646,179 253,796
Loans held for sale 3,399,309 1,735,070
Securities available for sale (Note 3) 2,064,611 2,200,741
Securities held to maturity (fair value of $459,109 on
December 31, 2001, and $619,728 on December 31, 2000)
(Note 3) 461,259 638,315
Loans, net of unearned income (Note 4) 10,283,143 10,239,450
Less: Allowance for loan losses 155,373 143,696
----------------------------------------------------------------------------------------
Total net loans 10,127,770 10,095,754
----------------------------------------------------------------------------------------
Premises and equipment, net (Note 5) 251,504 286,107
Real estate acquired by foreclosure 21,989 16,290
Mortgage servicing rights, net (Note 6) 665,005 743,714
Intangible assets, net (Note 7) 185,004 121,624
Capital markets receivables and other assets 1,677,798 1,499,647
----------------------------------------------------------------------------------------
TOTAL ASSETS $20,616,791 $18,555,086
========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing (Note 8) $ 9,596,230 $ 9,341,603
Noninterest-bearing 4,010,104 2,847,088
----------------------------------------------------------------------------------------
Total deposits 13,606,334 12,188,691
----------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements
to repurchase (Note 9) 2,921,543 2,981,026
Commercial paper and other short-term borrowings (Note 9) 449,151 456,535
Capital markets payables and other liabilities 1,467,453 996,574
Term borrowings (Note 10) 550,361 409,676
----------------------------------------------------------------------------------------
Total liabilities 18,994,842 17,032,502
----------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in First
Tennessee's junior subordinated debentures (Note 11) 100,000 100,000
Preferred stock of subsidiary (Note 12) 44,187 38,428
----------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock -- no par value (5,000,000 shares
authorized, but unissued) -- --
Common stock -- $.625 par value (shares
authorized -- 400,000,000; shares issued -- 125,865,188 on
December 31, 2001 and 128,744,573 on December 31, 2000) 78,666 80,465
Capital surplus 106,682 115,775
Undivided profits 1,263,649 1,172,548
Accumulated other comprehensive income (Note 15) 23,278 14,598
Deferred compensation on restricted stock incentive plans (2,126) (4,183)
Deferred compensation obligation 7,613 4,953
----------------------------------------------------------------------------------------
Total shareholders' equity 1,477,762 1,384,156
----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $20,616,791 $18,555,086
========================================================================================
See accompanying notes to consolidated financial statements.
F-44 First Tennessee National Corporation
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
--------------------------------------------------
(Dollars in thousands except per share data) 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 809,105 $ 912,372 $ 751,555
Interest on investment securities:
Taxable 166,774 196,864 175,933
Tax-exempt 1,451 1,946 2,661
Interest on loans held for sale 165,900 197,314 231,284
Interest on trading securities 48,551 34,410 31,371
Interest on other earning assets 7,090 20,140 14,360
------------------------------------------------------------------------------------------------------------------------------------
Total interest income 1,198,871 1,363,046 1,207,164
------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Savings 3,840 5,537 5,776
Checking interest and money market 84,865 110,802 104,263
Certificates of deposit under $100,000 and other time 111,102 129,211 123,781
Certificates of deposit $100,000 and more 137,095 254,880 165,913
Interest on short-term borrowings 145,535 239,947 193,128
Interest on term borrowings 30,159 24,318 24,793
------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 512,596 764,695 617,654
------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 686,275 598,351 589,510
Provision for loan losses 93,493 67,353 57,923
------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 592,782 530,998 531,587
------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 449,647 238,031 479,886
Capital markets 343,647 117,870 126,835
Deposit transactions and cash management 133,631 116,080 106,240
Divestitures 80,357 157,635 4,246
Trust services and investment management 56,705 65,817 59,807
Merchant processing 45,426 48,232 49,711
Equity securities gains/(losses), net (3,290) 754 2,313
Debt securities losses, net (1,041) (4,961) (56)
All other income and commissions (Note 14) 154,554 173,216 141,237
------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,259,636 912,674 970,219
------------------------------------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 1,852,418 1,443,672 1,501,806
------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives and benefits 797,841 598,017 633,640
Equipment rentals, depreciation and maintenance 74,106 68,230 57,807
Occupancy 69,069 80,453 73,052
Operations services 59,635 70,875 64,545
Communications and courier 48,771 47,337 51,937
Amortization of intangible assets 10,805 11,738 10,492
All other expense (Note 14) 298,521 230,020 230,894
------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 1,358,748 1,106,670 1,122,367
------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 493,670 337,002 379,439
Applicable income taxes (Note 16) 164,068 104,421 131,906
------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE DEBT RESTRUCTURINGS AND CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING PRINCIPLES 329,602 232,581 247,533
Debt restructurings, net of tax (3,225) -- --
Cumulative effect of changes in accounting principles, net of tax (8,168) -- --
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 318,209 $ 232,581 $ 247,533
====================================================================================================================================
EARNINGS PER COMMON SHARE BEFORE DEBT RESTRUCTURINGS
AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (Note 17) $ 2.58 $ 1.79 $ 1.90
------------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE (Note 17) $ 2.49 $ 1.79 $ 1.90
------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE BEFORE DEBT RESTRUCTURINGS
AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (Note 17) $ 2.51 $ 1.77 $ 1.85
------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE (Note 17) $ 2.42 $ 1.77 $ 1.85
------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 127,777,356 129,865,065 130,572,763
------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
First Tennessee National Corporation F-45
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Common Capital Undivided
(Amounts in thousands) Shares Total Stock Surplus Profits
------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 128,974 $1,099,534 $80,609 $ 96,778 $ 908,977
Net income -- 247,533 -- -- 247,533
Other comprehensive income:
Unrealized market adjustments, net of
tax and reclassification adjustment -- (34,624) -- -- --
-----------------------------------------------------------------
Comprehensive income -- 212,909 -- -- 247,533
-----------------------------------------------------------------
Cash dividends declared ($.79/share) -- (102,788) -- -- (102,788)
Common stock issued:
Acquisitions:
Cambridge Mortgage Company 22 704 14 690 --
Elliot Ames, Inc. 242 6,800 151 6,649 --
For exercise of stock options 1,904 32,306 1,190 30,942 --
Tax benefit from non-qualified
stock options -- 11,616 -- 11,616 --
Common stock repurchased (1,286) (41,213) (804) (40,409) --
Amortization on restricted stock
incentive plans -- 2,149 -- -- --
Other 22 19,450 14 24,370 --
------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 129,878 1,241,467 81,174 130,636 1,053,722
Net income -- 232,581 -- -- 232,581
Other comprehensive income:
Unrealized market adjustments,
net of tax and reclassification
adjustment -- 36,350 -- -- --
-----------------------------------------------------------------
Comprehensive income -- 268,931 -- -- 232,581
-----------------------------------------------------------------
Cash dividends declared ($.88/share) -- (113,755) -- -- (113,755)
Common stock issued for exercise
of stock options 1,309 17,310 818 15,557 --
Common stock repurchased (2,461) (48,476) (1,539) (46,937) --
Amortization on restricted stock
incentive plans -- 2,019 -- -- --
Other 19 16,660 12 16,519 --
------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 128,745 1,384,156 80,465 115,775 1,172,548
Net income -- 318,209 -- -- 318,209
Other comprehensive income:
Cumulative effect of change in
accounting principle, net of tax -- 1,449 -- -- --
Unrealized market adjustments,
net of tax and reclassification
adjustment -- 7,231 -- -- --
-----------------------------------------------------------------
Comprehensive income -- 326,889 -- -- 318,209
-----------------------------------------------------------------
Cash dividends declared ($.91/share) -- (115,260) -- -- (115,260)
Common stock issued for exercise of
stock options 4,346 77,114 2,716 71,738 --
Tax benefit from non-qualified
stock options -- 28,293 -- 28,293 --
Common stock repurchased (7,217) (238,701) (4,510) (122,343) (111,848)
Amortization on restricted stock
incentive plans -- 2,168 -- -- --
Other (9) 13,103 (5) 13,219 --
------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 125,865 $1,477,762 $78,666 $106,682 $1,263,649
============================================================================================================
Accumulated Deferred Deferred
Other Compen- Compen-
Comprehensive sation sation
(Amounts in thousands) Income Asset Liability
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 12,872 $ (1,209) $1,507
Net income -- -- --
Other comprehensive income:
Unrealized market adjustments, net of
tax and reclassification adjustment (34,624) -- --
----------------------------------------
Comprehensive income (34,624) -- --
----------------------------------------
Cash dividends declared ($.79/share) -- -- --
Common stock issued:
Acquisitions:
Cambridge Mortgage Company -- -- --
Elliot Ames, Inc. -- -- --
For exercise of stock options -- -- 174
Tax benefit from non-qualified
stock options -- -- --
Common stock repurchased -- -- --
Amortization on restricted stock
incentive plans -- 2,149 --
Other -- (6,614) 1,680
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 (21,752) (5,674) 3,361
Net income -- -- --
Other comprehensive income:
Unrealized market adjustments,
net of tax and reclassification
adjustment 36,350 -- --
-----------------------------------------
Comprehensive income 36,350 -- --
-----------------------------------------
Cash dividends declared ($.88/share) -- -- --
Common stock issued for exercise
of stock options -- -- 935
Common stock repurchased -- -- --
Amortization on restricted stock
incentive plans -- 2,019 --
Other -- (528) 657
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 14,598 (4,183) 4,953
Net income -- -- --
Other comprehensive income:
Cumulative effect of change in
accounting principle, net of tax 1,449 -- --
Unrealized market adjustments,
net of tax and reclassification
adjustment 7,231 -- --
-----------------------------------------
Comprehensive income 8,680 -- --
-----------------------------------------
Cash dividends declared ($.91/share) -- -- --
Common stock issued for exercise of
stock options -- -- 2,660
Tax benefit from non-qualified
stock options -- -- --
Common stock repurchased -- -- --
Amortization on restricted stock
incentive plans -- 2,168 --
Other -- (111) --
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $23,278 $ (2,126) $7,613
====================================================================================
See accompanying notes to consolidated financial statements.
F-46 First Tennessee National Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
-------------------------------------------------
(Dollars in thousands) 2001 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
OPERATING Net income $ 318,209 $ 232,581 $ 247,533
ACTIVITIES Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Provision for loan losses 93,493 67,353 57,923
Provision/(benefit) for deferred income tax (157,870) 40,082 81,633
Depreciation and amortization of premises and equipment 56,906 58,854 53,719
Amortization and impairment of mortgage servicing rights 224,775 112,726 103,471
Amortization of intangible assets 10,805 11,738 10,492
Net other amortization and accretion 14,480 39,370 51,524
Net (increase)/decrease in net derivative product assets 87,970 (24,860) 23,014
Market value adjustment on foreclosed property 14,442 9,911 5,633
Loss on sale of securitized auto loans -- 1,315 --
Loss/(gain) on early retirement of debt 5,107 -- (1,420)
Gain on equity interest from demutualization -- -- (6,143)
Equity securities (gains)/losses 3,290 (754) (2,313)
Debt securities losses 1,041 4,961 56
Net losses/(gains) on disposals of fixed assets 5,528 5,367 (1,405)
Gains on divestitures (80,357) (157,635) (4,246)
Net (increase)/decrease in:
Trading securities (237,659) (106,755) 220,779
Loans held for sale (1,664,239) 410,999 1,858,685
Capital markets receivables (272,601) (28,428) 149,690
Interest receivable 26,430 (9,994) 1,859
Other assets (134,061) (198,732) (637,938)
Net increase/(decrease) in:
Capital markets payables 293,452 37,920 (127,795)
Interest payable (32,497) (7,194) (2,356)
Other liabilities 299,358 (10,730) (84,865)
----------------------------------------------------------------------------------------------------------------------------------
Total adjustments (1,442,207) 255,514 1,749,997
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided/(used) by operating activities (1,123,998) 488,095 1,997,530
----------------------------------------------------------------------------------------------------------------------------------
INVESTING Held to maturity securities:
ACTIVITIES Maturities 175,856 131,720 216,146
Purchases -- (500) --
Available for sale securities:
Sales 124,632 887,188 71,053
Maturities 810,913 515,589 683,613
Purchases (945,823) (1,241,976) (880,343)
Premises and equipment:
Sales 6,514 1,549 11,927
Purchases (27,694) (44,883) (106,420)
Net increase in loans (647,132) (1,407,939) (1,270,333)
Proceeds from auto loan securitizations -- 184,379 --
Net (increase)/decrease in investment in bank time deposits 1,889 (366) (2,052)
Proceeds from divestitures, net of cash and cash equivalents 453,279 455,832 (4,778)
Acquisitions, net of cash and cash equivalents acquired (11,495) -- (6,973)
----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (59,061) (519,407) (1,288,160)
----------------------------------------------------------------------------------------------------------------------------------
FINANCING Common stock:
ACTIVITIES Exercise of stock options 78,183 16,639 34,457
Cash dividends paid (112,093) (113,958) (98,704)
Repurchase of shares (238,701) (48,542) (41,262)
Term borrowings:
Issuance 324,151 101,200 52,421
Payments (245,595) (50,392) (107,200)
Net increase/(decrease) in:
Deposits 1,565,300 820,100 (316,797)
Short-term borrowings (33,962) (968,950) 67,209
----------------------------------------------------------------------------------------------------------------------------------
Net cash (used)/provided by financing activities 1,337,283 (243,903) (409,876)
----------------------------------------------------------------------------------------------------------------------------------
Net (decrease)/increase in cash and cash equivalents 154,224 (275,215) 299,494
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 960,399 1,235,614 936,120
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,114,623 $ 960,399 $ 1,235,614
==================================================================================================================================
Total interest paid $ 544,336 $ 771,189 $ 619,740
Total income taxes paid 250,607 96,693 48,802
----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
First Tennessee National Corporation F-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 [ ] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING. The consolidated financial statements of First Tennessee
National Corporation (First Tennessee), including its subsidiaries, are prepared
in conformity with generally accepted accounting principles and follow general
practices within the industries in which it operates. This preparation requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. These estimates and assumptions
are based on information available as of the date of the financial statements
and could differ from actual results.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION. The consolidated
financial statements include the accounts of First Tennessee and its
majority-owned subsidiaries. Affiliates that are not majority owned are
accounted for by the equity method. All significant intercompany transactions
and balances have been eliminated. For purposes of comparability, certain prior
period amounts have been reclassified to conform to current year presentation.
None of these reclassifications had any effect on net income or earnings per
share for any of the periods presented.
Business combinations accounted for as purchases are included in the financial
statements from the respective dates of acquisition.
STATEMENTS OF CASH FLOWS. For purposes of these statements, cash and due from
banks, federal funds sold, and securities purchased under agreements to resell
are considered cash and cash equivalents. Federal funds are usually sold for
one-day periods, and securities purchased under agreements to resell are
short-term, highly liquid investments.
The following significant non-cash stock transactions occurred in 1999: First
Tennessee issued approximately 22,000 shares related to the acquisition of
Cambridge Mortgage Company and issued approximately 242,000 shares related to
the acquisition of Elliot Ames, Inc.
TRADING SECURITIES. Inventories purchased in connection with underwriting or
dealer activities are carried at market value. Gains and losses, both realized
and unrealized, on these inventories are reflected in noninterest income as
capital markets income. In addition, retained interests, in the form of
interest-only and principal-only strips, from mortgage banking securitizations
are recognized at fair value with gains and losses, both realized and
unrealized, recognized in mortgage banking income.
INVESTMENT SECURITIES. Securities that First Tennessee has the ability and
positive intent to hold to maturity are classified as securities held to
maturity and are carried at amortized cost. Securities that may be sold prior to
maturity for asset/liability management purposes and equity securities are
classified as securities available for sale and are carried at fair value. The
unrealized gains and losses on securities available for sale are excluded from
earnings and are reported, net of tax, as a component of other comprehensive
income within shareholders' equity.
The amortized cost of all securities is adjusted for amortization of premium and
accretion of discount to maturity, or earlier call date if appropriate, using
the level yield method. Such amortization and accretion is included in interest
income from securities. Realized gains and losses and declines in value judged
to be other than temporary are determined by the specific identification method
and reported in noninterest income.
SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS. First Tennessee Capital Markets enters into short-term
purchases of securities under agreements to resell which are accounted for as
collateralized financings except where First Tennessee does not have an
agreement to sell the same or substantially the same securities before maturity
at a fixed or determinable price. Securities delivered under these transactions
are delivered to either the dealer custody account at the Federal Reserve Bank
or to the applicable counterparty. Collateral is valued daily and First
Tennessee may require counterparties to deposit additional collateral or return
collateral pledged when appropriate.
Securities sold under agreements to repurchase (securities sold) are offered to
cash management customers as an automated, collateralized investment account.
Securities sold are also used by the regional banking group to obtain favorable
borrowing rates on its purchased funds. Under these transactions, securities are
delivered to the counterparty's custody account. In the normal course of
business, First Tennessee does not use this as a primary funding source.
MORTGAGE BANKING. First Tennessee's mortgage lenders originate first-lien
mortgage loans primarily for the purpose of selling them in the secondary
market. In 2001 mortgage loans held for sale (the warehouse) are recorded at the
lower of aggregate cost or market value adjusted for offsetting gains or losses
resulting from hedging activities. The carrying value of mortgage loans held for
sale is net of deferred origination fees and costs. Prior to the adoption of
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," the warehouse loans were carried
at the lower of aggregate cost or market value. Also included in the lower of
cost or market analysis are the estimated costs
F-48 First Tennessee National Corporation
NOTE 1 [ ] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and market values of the mortgage loan commitments. Gains and losses realized
from the sale of these assets and adjustments to market value are included in
noninterest income. Some of these loans are sold with provisions of recourse.
As of December 31, 2001 and 2000, respectively, the outstanding principal amount
of these single-family residential loans that were sold on a recourse basis was
$211.1 million and $169.2 million. In the event of borrower nonperformance,
First Tennessee would assume losses to the extent they exceed the value of the
collateral and private mortgage insurance, FHA insurance or VA guarantees. A
reserve has been established to cover any inherent losses. These loans are
reviewed on a regular basis to ensure that reserves are adequate to provide for
foreclosure losses. In addition, First Tennessee originates, sells and services
loans guaranteed by the Veterans Administration (VA). In the event of
foreclosure, First Tennessee, as a servicer of VA loans, has credit risk to the
extent that the outstanding loan balance exceeds the VA guarantee and the value
of the underlying real estate. As of December 31, 2001 and 2000, the outstanding
principal balance of VA loans serviced was $5.1 billion and $5.3 billion,
respectively. These loans are reviewed on a regular basis, and a reserve has
been established to cover any inherent losses.
In certain cases, mortgage banking continues to service securitized mortgage
loans and has also retained interest-only strips or principal-only strips. The
retained interests are initially valued by allocating the total cost basis of
the securitized assets between the assets sold and the retained interests based
on their relative fair values at the time of securitization. The interest-only
and principal-only strips are financial assets that represent rights to receive
earnings from serviced assets that exceed contractually specified servicing fees
and currently are recognized on the balance sheet at fair value in trading
securities. In 2000 the interest-only and principal-only strips were recognized
in securities available for sale. The fair value of the interest-only and
principal-only strips is determined using market prices from closely comparable
assets such as MSR that are tested against prices determined using a valuation
model that calculates the present value of estimated future cash flows.
First Horizon Home Loan Corporation (FHHLC), an indirect wholly owned subsidiary
of First Tennessee, has also completed proprietary securitizations of loans from
the warehouse with prime quality jumbo fixed rate loans through its subsidiary
First Horizon Asset Securities, Inc. The resulting securities are sold as senior
and subordinate bonds, while servicing rights and in certain cases a principal
cashflow tranche (principal-only strip) have been retained. Gain or loss on sale
of the securities is recognized in noninterest income. The fair value of the
principal-only strips is determined using key market indicators to establish a
benchmark that is adjusted to reflect the difference between readily marketable
securities and privately issued securities.
Servicing rights related to the mortgages sold have historically been mostly
retained. A significant portion of the MSR was sold in 2001 under a flow
servicing sale agreement. MSR are initially valued by allocating the total cost
between the loan and the servicing right based on their relative fair values.
First Tennessee uses a cash flow valuation model to determine the fair value of
the servicing rights created. These valuations are tested for reasonableness
against prices obtained from flow and bulk sales of servicing. Additionally, for
agency conforming product, an independent market valuation is obtained. Model
assumptions are periodically reviewed and may be revised from time to time to
more accurately reflect current assumptions such as prepayment speeds.
For purposes of impairment evaluation and measurement, the MSR are stratified
based on the predominant risk characteristics of the underlying loans. These
strata currently include adjustable and fixed-rate loans. The fixed-rate loans
are further stratified by 150 basis-point interest rate bands. Previously the
strata included adjustable rate conventional and government and fixed rate
conventional and government by interest rate band. The MSR are amortized over
the period of and in proportion to the estimated net servicing revenues. A
quarterly value impairment analysis is performed using a discounted cash flow
methodology that is disaggregated by predominant risk characteristics.
Impairment, if any, is recognized through a valuation allowance for individual
strata. However, if the impairment is determined to be other than temporary, a
direct writeoff of the asset is made. See further detail about mortgage banking
policies in the derivative financial instruments disclosure below.
LOANS. Loans are stated at principal amounts outstanding, net of unearned
income. Interest on loans is recognized at the applicable interest rate on the
principal amount outstanding. Impaired loans are generally carried on a
nonaccrual status. Loans are ordinarily placed on nonaccrual status when, in
management's opinion, the collection of principal or interest is unlikely, or
when the collection of principal or interest is 90 days or more past due. Retail
real estate loans and other retail loans are not placed on nonaccrual status,
but are charged off when past due 180 days and 120 days, respectively. However,
if the debtor has filed for bankruptcy, the loans are charged off within 60 days
of notification or at 120 days past due for close ended loans and 180 days for
open ended loans (i.e. credit card), whichever is shorter.
Accrued but uncollected interest is reversed and charged against interest income
when the loan is placed on nonaccrual status. On retail loans, accrued but
uncollected interest is reversed when the loan is charged off. Management may
elect to continue the accrual of interest when the estimated net realizable
value of collateral is sufficient to recover the principal balance and accrued
interest. Interest payments received on nonaccrual and impaired loans are
normally applied to principal. Once all principal has been received, additional
interest payments are recognized on a cash basis as interest income.
First Tennessee National Corporation F-49
NOTE 1 [ ] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
First Tennessee has securitized automobile loans and retained interest-only
strips and servicing rights, both of which are retained interests in the
securitized receivables. Gain or loss on sale of the loans was recognized in
noninterest income based on the carrying amount of the financial assets involved
in the transfer, allocated between the assets sold and the retained interests
based on their relative fair value at the date of transfer. Subsequent to the
sale, the servicing rights are recognized on the balance sheet in "Intangible
assets."
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is maintained at a
level that management determines is adequate to absorb estimated losses inherent
in the loan portfolio. Management's evaluation process used to determine the
adequacy of the allowance combines three factors: historical loss experience
derived from analytical models, current trends and reasonably foreseeable
events. The actual amounts realized could differ in the near term from the
amounts assumed in arriving at the allowance for possible loan losses reported
in the financial statements.
All losses of principal are charged to the account when the loss actually occurs
or when a determination is made that a loss is probable. Additions are made to
the allowance through periodic provisions charged to current operations and
recovery of principal on loans previously charged off.
PREMISES AND EQUIPMENT. Premises and equipment are carried at cost less
accumulated depreciation and amortization and include additions that materially
extend the useful lives of existing premises and equipment. All other
maintenance and repair expenditures are expensed as incurred. Gains and losses
on dispositions are reflected in noninterest income and expense.
Depreciation and amortization are computed principally on the straight-line
method over the estimated useful lives of the assets and are expensed to
noninterest expense. Leasehold improvements are amortized over the lesser of the
lease periods or the estimated useful lives using the straight-line method.
REAL ESTATE ACQUIRED BY FORECLOSURE. Real estate acquired by foreclosure
consists of properties that have been acquired in satisfaction of debt. These
properties are carried at the lower of the outstanding loan amount or the
estimated fair market value minus the estimated cost to sell the real estate.
Losses arising at foreclosure are charged to the allowance for loan losses.
Required developmental costs associated with foreclosed property under
construction are capitalized and included in determining the estimated net
realizable value of the property, which is reviewed periodically, and any
write-downs are charged against current earnings as market adjustments.
INTANGIBLE ASSETS. Intangible assets consist of "Other intangibles" and
"Goodwill." The "Other intangibles" represents identified intangible assets,
including premium on purchased deposits, which are amortized over their
estimated useful lives, except for those assets related to deposit bases that
are primarily amortized over 10 years. "Goodwill" represents the excess of cost
over net assets of acquired subsidiaries less identifiable intangible assets and
is amortized to noninterest expense using the straight-line method over periods
ranging from 15 to 40 years. Management evaluates whether events or
circumstances have occurred that indicate the remaining useful life or carrying
value of intangibles should be revised.
DERIVATIVE FINANCIAL INSTRUMENTS. First Tennessee utilizes various derivative
financial instruments, which include interest rate forward contracts, interest
rate floors and caps, options and interest rate swap agreements, as part of its
risk management strategy and as a means to meet customers' needs. These
instruments are subject to credit and market risks. Mortgage banking, capital
markets and risk management operations currently employ the use of derivative
financial instruments. Controls and monitoring procedures for these instruments
have been established and are routinely reevaluated. The Asset/Liability
Committee (ALCO) monitors the usage and effectiveness of these derivative
financial instruments. ALCO, in conjunction with senior credit officers, also
periodically reviews counterparty credit limits.
Credit risk represents the maximum potential loss due to possible
non-performance by obligors and counterparties under the terms of contracts.
First Tennessee manages credit risk by entering into financial instrument
transactions through national exchanges, primary dealers or approved
counterparties, and using mutual margining agreements whenever possible to limit
potential exposure. With exchange-traded contracts, the credit risk is limited
to the clearinghouse used. For non-exchange traded instruments, credit risk may
occur when there is a gain in the fair value of the financial instrument and the
counterparty fails to perform according to the terms of the contract and/or when
the collateral proves to be of insufficient value.
Market risk represents the potential loss due to the decrease in the value of a
financial instrument caused primarily by changes in interest rates, prepayment
speeds or the prices of debt instruments.
Interest rate forward contracts are over-the-counter contracts where two parties
agree to purchase and sell a specific quantity of a financial instrument at a
specified price, with delivery or settlement at a specified date. Interest rate
option contracts give the purchaser the right, but not the obligation, to buy or
sell a specified quantity of a financial instrument, at a specified price,
during a specified period of time. Caps and floors are options that are linked
to a notional principal amount and an underlying
F-50 First Tennessee National Corporation
NOTE 1 [ ] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
indexed interest rate. Interest rate swaps involve the exchange of interest
payments at specified intervals between two parties without the exchange of any
underlying principal. Notional amounts are used in such contracts to calculate
interest payments and do not represent credit exposure. Exposure to interest
rate contracts will increase or decrease as interest rates fluctuate.
SFAS No. 133, which was adopted on January 1, 2001, establishes accounting
standards requiring that every derivative instrument be recorded on the balance
sheet as either an asset or liability measured at its fair value. Fair value is
defined as the amount First Tennessee would receive or pay in the market to
replace the derivatives as of the valuation date. Fair value is determined using
available market information and appropriate valuation methodologies. SFAS No.
133 requires that changes in the instrument's fair value be recognized currently
in earnings or other comprehensive income. If certain criteria are met, changes
in the fair value of the asset or liability being hedged are also recognized
currently in earnings. The initial impact of adopting SFAS No. 133 resulted in a
net transition adjustment that was recognized as the cumulative effect of a
change in accounting principle.
Adoption of SFAS No. 133 was not retroactive, therefore, the manner in which
derivatives historically have been accounted for was not affected, but
significant changes have been made in accounting policies related to derivatives
and hedges in 2001. The following accounting policies reflect the adoption of
SFAS No. 133.
Mortgage Banking
----------------
Mortgage banking interest rate lock commitments, which have been determined to
be derivative instruments, are recorded at fair value with changes in fair value
recorded currently in earnings and are not a hedgable asset. Mortgage banking
enters into forward sales commitments to protect the value of mortgage banking's
short-term commitments to fund mortgage loan applications in process (the
pipeline) and mortgage loans held for sale (the warehouse) from changes in fair
value due to fluctuations in interest rates. These forward contracts are
derivatives that are recorded at fair value under SFAS No. 133. The forward
contracts related to loans in the warehouse are fair value hedges used to hedge
the risk of change in the total fair value of the warehouse. Forward contracts
used by mortgage banking operations to hedge against interest rate risk in the
warehouse are reviewed periodically for correlation with expected changes in
value. For 2001, gains of $12.1 million that represent the amount of hedge
ineffectiveness for these fair value hedges were recognized in mortgage banking
noninterest income.
Mortgage banking also enters into interest rate contracts (including swaps,
swaptions, principal-only swaps, floors, and mortgage forward sales (TBA's)) to
hedge against the effects of changes in fair value of its MSR due solely to
changes in the benchmark rate (10-year LIBOR). For purposes of measuring
effectiveness of the hedge, volatility and time decay are excluded from the
effectiveness measurement of option-based derivatives. Interest rate derivative
contracts used to hedge against interest rate risk in the servicing portfolio
are designated to specific risk tranches of servicing. First Tennessee enters
into hedges of the MSR to minimize the effects of loss in value of MSR
associated with increased prepayment activity that generally results from
declining interest rates. In a rising interest rate environment, the value of
the MSR generally will increase while the value of the hedge instruments will
decline. For purposes of measuring hedge effectiveness under SFAS No. 133,
increases in values of hedge instruments exceeded the decrease in value of MSR
by $47.7 million in 2001. This amount, after a reduction of $14.2 million
representing the component of the derivative instruments' losses excluded from
the assessment of hedge effectiveness, was recognized in mortgage banking
noninterest income. FHHLC utilizes financial instruments that change in value
inversely to the movement of interest rates to protect the value of its
interest-only securities. Interest-only securities do not qualify for hedge
accounting under SFAS No. 133, and therefore, gains and losses are recognized
currently in earnings.
Fair value is determined on the last business day of a reporting period. This
point in time measurement of derivative fair values and the related hedged item
fair values may be well suited to the measurement of hedge effectiveness, as
well as reported earnings, when hedge time horizons are short. The same
measurement however may not consistently reflect the effectiveness of
longer-term hedges and, in First Tennessee's view, can distort short-term
measures of reported earnings. First Tennessee uses a combination of derivative
financial instruments to hedge certain components of the interest rate risk
associated with its portfolio of MSR, which currently have an average life of
approximately seven years. Over this long-term time horizon this combination of
derivatives can be effective in significantly mitigating the effects of interest
rate changes on the value of the servicing portfolio. However, these derivative
financial instruments can and do demonstrate significant price volatility
depending upon prevailing conditions in the financial markets. If a reporting
period ends during a period of volatile financial market conditions, the effect
of such point in time conditions on reported earnings does not reflect the
underlying economics of the transactions or the true value of the hedges to
First Tennessee over their estimated lives. The fact that the fair value of a
particular derivative is unusually low or high on the last day of the reporting
period is meaningful in evaluating performance during the period only if First
Tennessee sells the derivative within the period of time before fair value
changes and does not replace the hedge coverage with another derivative. First
Tennessee believes the effect of such volatility on short-term measures of
earnings is not indicative of the expected long-term performance of this hedging
practice. The servicing rights net value change for 2001, a pre-tax gain of 5.0
million, represents the change in fair value of hedged interest rate risk of
MSR, net
First Tennessee National Corporation F-51
NOTE 1 [ ] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mortgage Banking (continued)
----------------------------
of changes in the fair value of derivative financial instruments designated to
hedge such risks. This excludes the impact of cash settlements and interest
accruals on derivatives with periodic cash flows and changes in fair value due
to time decay of options. Additionally, during the later half of 2001, the time
price convergence of forward instruments was excluded.
Capital Markets
---------------
Capital markets buys and sells mortgage securities, municipal bonds and other
securities for resale to customers. When these securities settle on a delayed
basis, they are considered forward contracts. Capital markets also enters into
interest rate contracts, including options, caps, swaps and floors for its
customers. These transactions are measured at fair value, with changes in fair
value recognized currently in capital markets noninterest income. Related assets
are recorded on the balance sheet as capital markets securities inventory or
receivables and any liabilities are recognized as capital markets payables.
Capital markets utilizes futures contracts, from time to time, to manage
exposure arising from the inventory position. Credit risk related to these
transactions is controlled through credit approvals, risk control limits and
on-going monitoring procedures through ALCO.
Interest Rate Risk Management
-----------------------------
First Tennessee's ALCO focuses on managing market risk by controlling and
limiting earnings volatility attributable to changes in interest rates. Interest
rate risk exists to the extent that interest-earning assets and liabilities have
different maturity or repricing characteristics. First Tennessee uses
derivatives, including swaps, caps, options, and collars, that are designed to
moderate the impact on earnings as interest rates change. First Tennessee's
interest rate risk management policy is to use derivatives not to speculate but
to hedge interest rate risk or market value of assets or liabilities.
Interest rate risk management uses interest rate swaps to hedge the interest
rate risk of certain liabilities that qualify as fair value hedges. Interest
paid or received for swaps is recognized as an adjustment of the interest
expense of the liabilities whose risk is being managed. For 2001, there was no
hedge ineffectiveness for qualifying fair value hedges. Interest rate swaps and
caps not designated as hedging instruments are also used to moderate the impact
on earnings as interest rates change. Any contracts that fail to qualify for
hedge accounting are measured at fair value with any gains or losses included in
current earnings in noninterest income.
In addition to these derivative instruments, First Tennessee also entered into
an equity collar in 2000 to protect the value of stock that was to be received
from an equity investment. This transaction qualified as a cash flow hedge under
SFAS No. 133 and matured during first quarter 2001.
Cash flows from derivative contracts are reported as operating activities on the
Consolidated Statements of Cash Flows.
In 2000 and 1999, prior to the adoption of SFAS No. 133, the following
accounting policies were in effect for derivatives.
To qualify as a hedge used to manage interest rate risk, the following criteria
had to be met: (1) the asset or liability to be hedged exposed First Tennessee
to interest rate risk; (2) the instrument altered or reduced sensitivity to
interest rate changes; and (3) the instrument was designated and effective as a
hedge.
For interest rate contracts used to hedge interest rate risk, income and expense
were deferred and amortized over the lives of the hedged assets or liabilities.
The amortization of this income and expense was an adjustment to interest income
or expense of the hedged item. Fees were deferred and amortized over the lives
of the contracts. Any related assets or liabilities were recorded on the balance
sheet in other assets or other liabilities.
For those derivatives used to manage interest rate risk that terminated prior to
maturity, realized gains and losses were deferred and amortized straight-line
over the remaining original life of the agreement as an adjustment to the hedged
asset or liability. If the underlying hedged asset or liability was sold or
prepaid, the related portion of any unrecognized gain or loss on the derivative
was recognized in earnings as part of the gain or loss on the sale or
prepayment.
Forward and option contracts used by mortgage banking operations to hedge
against interest rate risk in the warehouse and the pipeline were reviewed
periodically for correlation with expected changes in value. Option contracts
used to hedge against interest rate risk in the servicing portfolio were
designated to specific risk tranches of servicing.
Forward and option contracts used to hedge the pipeline and the warehouse were
considered in the lower of cost or market valuation of the pipeline and the
warehouse with any related gains or losses being recognized in mortgage banking
noninterest
F-52 First Tennessee National Corporation
NOTE 1 [ ] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income. Premiums paid for purchased options were deferred and reported in other
assets and were amortized over the lives of the contracts to mortgage banking
noninterest income.
Options used to hedge the servicing portfolio were adjusted for changes in
intrinsic value with gains and losses recognized as a basis adjustment of the
related MSR risk tranche. Premiums were deferred and amortized on a
straight-line basis over the contract life to other noninterest expense. Any
unamortized premiums related to the options were reported in other assets.
For derivatives hedging the warehouse and pipeline that terminated prior to
maturity, gains and losses were recognized in current earnings as mortgage
banking noninterest income unless such gains and losses related to future loan
deliveries, in which case they were deferred and recognized at the time the
related loans were sold. For derivatives hedging the servicing portfolio that
terminated prior to maturity, gains and losses were split between the return of
time value premium and the intrinsic value. Gains or losses from the change in
the intrinsic value were deferred as a basis adjustment to the related MSR risk
tranche, and the gains or losses resulting from the return of time value premium
were recognized in mortgage banking noninterest income.
INCOME TAXES. The provision for income taxes is based on income reported for
consolidated financial statement purposes and includes deferred taxes resulting
from the recognition of certain revenues and expenses in different periods for
tax reporting purposes. First Tennessee files a consolidated federal income tax
return except for a credit life insurance company and a real estate investment
trust which both file separate returns.
EARNINGS PER SHARE. Earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for each period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding adjusted to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares resulting from options granted under First Tennessee's stock option plans
had been issued. First Tennessee utilizes the treasury stock method in this
calculation.
ACCOUNTING CHANGES. On April 1, 2001, First Tennessee adopted the final
provisions of SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." This Statement replaces SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires substantial disclosures, but carries over most of SFAS
No. 125's provisions without reconsideration. This Statement provided accounting
and reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement provided consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The disclosure provisions of the
Statement were adopted by First Tennessee in 2000. The adoption of SFAS No. 140
did not have a material impact on First Tennessee's consolidated financial
position or results of operations.
On January 1, 2001, First Tennessee adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and EITF Issue 99-20: Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interests
in Securitized Financial Assets. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative instrument's fair value be
recognized currently in earnings or other comprehensive income. Special
accounting for qualifying hedges allows a derivative instrument's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
In anticipation of adopting this standard, First Tennessee repositioned the
portfolio of mortgage banking derivatives during 2000, which involved
terminating certain derivative contracts or taking offsetting positions to
nullify existing contracts and allocating others to trading securities. In
accordance with the provisions of SFAS No. 133, First Tennessee designated anew
all hedging relationships on January 1, 2001. Also, in connection with the
adoption of SFAS No. 133, $155 million of securities available for sale were
moved to trading at which point in time gross losses of $3.6 million were
recognized. On January 1, 2001, First Tennessee measured all derivative
instruments at fair value and differences between the previous book value and
fair value were reported as part of a cumulative effect adjustment on the income
statement, except to the extent that they related to hedges of the variable cash
flow exposure of forecasted transactions. Offsetting gains and losses on hedged
assets and liabilities were recognized as adjustments of their respective book
values at the adoption date as part of this cumulative effect adjustment.
Additionally, EITF Issue 99-20, which provides impairment and interest income
recognition and measurement guidance for interests retained in a securitization
transaction accounted for as a sale, was adopted. The initial impact of adopting
SFAS No. 133 and EITF Issue 99-20 was an $8.2 million loss (after-tax) net
transition adjustment that was recognized as the cumulative effect of a change
in accounting principle in first quarter 2001. The adoption adjustment related
First Tennessee National Corporation F-53
NOTE 1 [ ] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to hedges of the variable cash flow exposure of a forecasted transaction, a $1.4
million gain (after-tax), was reported as a cumulative effect adjustment of
comprehensive income in first quarter 2001.
Certain provisions of SFAS No. 133 continue to undergo significant discussion
and debate by the FASB. One such potential issue involves the assessment of
hedge effectiveness (and its impact on qualifying for hedge accounting) when
hedging fair value changes of prepayable assets due to changes in the benchmark
interest rate. As the FASB continues to deliberate interpretation of the new
rules, the potential exists for a difference between First Tennessee's
interpretation and that of the FASB, the effects of which cannot presently be
anticipated.
On January 1, 1999, First Tennessee adopted SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after Securitization of Mortgage Loans Held
for Sale by a Mortgage Banking Enterprise." This Statement amends SFAS No. 65,
which required that retained securities be classified as trading securities.
SFAS No. 134 allows these securities to be classified as trading, held to
maturity or available for sale based on the intent and ability of the
enterprise.
On January 1, 1999, First Tennessee adopted Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities." This Statement requires that
the costs of start-up activities, including organization costs, be expensed as
incurred.
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 addresses accounting and reporting issues related to the impairment of
long-lived assets and for long-lived assets to be disposed of. This standard is
effective for fiscal years beginning after December 15, 2001, which for First
Tennessee will be January 1, 2002. First Tennessee anticipates the impact of
adopting this standard will be immaterial.
On June 30, 2001, the FASB finalized SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and other Intangible Assets." Under SFAS No. 141 all
business combinations initiated after June 30, 2001, must be accounted for using
the purchase method. With the adoption of SFAS No. 142, goodwill is no longer
subject to amortization over its estimated useful life. Rather goodwill will be
subject to an assessment for impairment using a fair-value-based test at least
annually. Goodwill associated with equity-method investments is also no longer
amortized, but impairment analysis is governed by existing impairment guidance
for equity-method investments and not the new impairment rules. Also under the
new rules, acquired intangible assets should be separately recognized if the
benefit of the intangible asset is obtained through contractual or other legal
rights, or if the intangible asset can be sold or otherwise transferred,
regardless of the acquirer's intent to do so. These new rules are expected to
result in more intangible assets being separated from goodwill than generally
occurs today. The resulting assets will be amortized over their useful lives.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001,
which for First Tennessee will mean January 1, 2002. First Tennessee estimates
the impact of adopting these new standards will be to reduce noninterest expense
annually by approximately $7 million pre-tax without regard to any new
acquisitions or future impairment that may occur, the effect of which cannot be
predicted at this time.
NOTE 2 [ ] ACQUISITIONS/DIVESTITURES
On December 31, 2001, First Tennessee Bank National Association (FTBNA), the
primary banking subsidiary of First Tennessee, acquired Synaxis Group, Inc., a
Nashville-based insurance broker operating through a network of major regional
and community-based insurance agencies in Georgia, Kentucky and Tennessee. This
transaction was completed for approximately $29.0 million and was immaterial to
First Tennessee.
On June 6, 2001, FTBNA, along with its partner, International Business Machines
(IBM) completed the sale of its interests in Check Solutions Company to Carreker
Corporation of Dallas, Texas. First Tennessee recognized a divestiture gain of
$42.7 million.
On April 27, 2001, First Tennessee completed the sale of its wholly owned
subsidiary, Peoples and Union Bank, of Lewisburg, Tennessee to First Farmers &
Merchants National Bank, of Columbia, Tennessee. First Tennessee recognized a
divestiture gain of $13.1 million.
On April 2, 2001, FTBNA sold its existing portfolio of education loans totaling
$342.1 million to Educational Funding of the South, Inc. The transaction
resulted in a divestiture gain of $11.8 million.
On January 17, 2001, FTBNA completed the sale of $31.4 million of its affinity,
co-branded, and certain single relationship credit card accounts and assets to
MBNA Corporation. On December 27, 2000, FTBNA sold $265.8 million of its single
relationship credit card accounts and assets to MBNA Corporation. These
transactions resulted in divestiture gain of $8.2 million in 2001 and $50.2
million in 2000.
F-54 First Tennessee National Corporation
NOTE 2 [ ] ACQUISITIONS/DIVESTITURES (CONTINUED)
On January 2, 2001, First Tennessee Securities Corporation (FTSC), a wholly
owned subsidiary of FTBNA, acquired certain assets of Midwest Research-Maxus
Group Limited, a Cleveland-based institutional equity research firm. This
transaction was completed for approximately $13.7 million and was immaterial to
First Tennessee.
On December 18, 2000, FTBNA sold its MONEY BELT(R) ATM network to Genpass Inc.
This transaction was completed for $34.6 million and resulted in a divestiture
gain of $33.1 million.
On October 18, 2000, FTBNA sold its corporate and municipal trust business to
The Chase Manhattan Bank. This transaction was completed for $35.1 million and
resulted in a divestiture gain of $33.4 million in fourth quarter 2000. An
additional divestiture gain of $4.6 million due to an earn-out was recognized in
first quarter 2001.
On April 28, 2000, FHHLC, a wholly owned subsidiary of FTBNA, sold its HomeBanc
mortgage division. The sales price for the division was $57.6 million and
resulted in a divestiture gain of $40.9 million.
On October 1, 1999, First Tennessee acquired Elliot Ames, Inc. of Los Altos,
California, for approximately 292,000 shares of its common stock. Elliot Ames
was merged into FHHLC. This acquisition was accounted for as a purchase and was
immaterial to First Tennessee.
On July 20, 1999, First Tennessee completed the sale of substantially all of the
assets and liabilities of Planters Bank of Tunica, Mississippi, a wholly owned
subsidiary, to First Security Bank of Batesville, Mississippi. This transaction
was completed for $10.5 million and was immaterial to First Tennessee.
On June 1, 1999, FTBNA acquired from National Processing Co. their remittance
processing business locations in Atlanta, Dallas, Louisville and Phoenix for
approximately $6.0 million. The acquisition of these units was accounted for as
a purchase and was immaterial to First Tennessee.
On March 31, 1999, First Tennessee acquired Cambridge Mortgage Company of
Seattle, Washington, for approximately 22,000 shares of its common stock.
Cambridge was merged into FHHLC. This acquisition was accounted for as a
purchase and was immaterial to First Tennessee.
The following table provides information concerning acquisitions completed
during the three years ended December 31, 2001. Acquisitions accounted for as
purchases are included in the financial statements from the date of the
acquisition.
Common Shares
Date of Issued Method of
Acquisition Location Acquisition (thousands) Accounting
--------------------------------------------------------------------------------------------------------------------------------
Synaxis Nashville, Tennessee 12/31/01 $29.0 million cash* Purchase
Elliot Ames, Inc. Los Altos, California 10/1/99 292 Purchase
Cambridge Mortgage Co. Seattle, Washington 3/31/99 22 Purchase
--------------------------------------------------------------------------------------------------------------------------------
* The purchase price was allocated based upon preliminary estimates of fair
value and could change.
First Tennessee National Corporation F-55
NOTE 3 [ ] INVESTMENT SECURITIES
The following tables summarize First Tennessee's securities held to maturity and
available for sale on December 31, 2001 and 2000:
ON DECEMBER 31, 2001*
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
States and municipalities $ 14,036 $ 249 $ (8) $ 14,277
Private issue CMOs** 447,223 5,197 (7,588) 444,832
------------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 461,259 $ 5,446 $ (7,596) $ 459,109
====================================================================================================================================
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury and other U.S. government agencies $ 133,604 $ 3,267 $ (44) $ 136,827
Government agency issued MBSs 151,576 3,791 (117) 155,250
Government agency issued CMOs 1,520,931 30,741 (1,133) 1,550,539
States and municipalities 30,334 1,046 -- 31,380
Private issue CMOs -- -- -- --
Other 17,742 521 (349) 17,914
Equity*** 170,484 11,899 (9,682) 172,701
------------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 2,024,671 $ 51,265 $ (11,325) $ 2,064,611
====================================================================================================================================
*Includes $1.7 billion of securities pledged to secure public deposits,
securities sold under agreements to repurchase and for other purposes.
**Represents First Tennessee's Real Estate Mortgage Investment Conduit.
***Equity securities include venture capital investment securities.
ON DECEMBER 31, 2000*
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
States and municipalities $ 21,815 $ 348 $ (109) $ 22,054
Private issue CMOs** 616,500 1,074 (19,900) 597,674
------------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 638,315 $ 1,422 $(20,009) $ 619,728
====================================================================================================================================
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury and other U.S. government agencies $ 141,984 $ 1,658 $ (490) $ 143,152
Government agency issued MBSs 149,350 480 (973) 148,857
Government agency issued CMOs 1,521,288 13,511 (1,813) 1,532,986
States and municipalities 33,823 338 -- 34,161
Private issue CMOs 4,046 699 (9) 4,736
Other 170,862 -- (4,533) 166,329
Equity*** 155,477 16,939 (1,896) 170,520
------------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $2,176,830 $33,625 $ (9,714) $2,200,741
====================================================================================================================================
*Includes $1.8 billion of securities pledged to secure public deposits,
securities sold under agreements to repurchase and for other purposes.
**Represents First Tennessee's Real Estate Mortgage Investment Conduit.
***Equity securities include venture capital investment securities.
F-56 First Tennessee National Corporation
NOTE 3 [ ] INVESTMENT SECURITIES (CONTINUED)
Provided below are the amortized cost and estimated fair value by contractual
maturity for the securities portfolios on December 31, 2001:
Held to Maturity Available for Sale
---------------------------- --------------------------------
Estimated Estimated
By Contractual Maturity Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value
----------------------------------------------------------------------------------------------------------------------
Within 1 year $ 922 $ 933 $ 54,783 $ 54,579
After 1 year; within 5 years 7,095 7,227 67,519 69,376
After 5 years; within 10 years 3,803 3,848 38,010 39,919
After 10 years 2,216 2,269 21,368 22,247
----------------------------------------------------------------------------------------------------------------------
Subtotal 14,036 14,277 181,680 186,121
----------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities and CMOs 447,223 444,832 1,672,507 1,705,789
Equity securities -- -- 170,484 172,701
----------------------------------------------------------------------------------------------------------------------
Total $ 461,259 $ 459,109 $2,024,671 $2,064,611
======================================================================================================================
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.
The table below provides information on realized gross gains and realized gross
losses on sales from the available for sale portfolio for the years ended
December 31:
(Dollars in thousands) AFS Debt* AFS Equity* Total
------------------------------------------------------------------------------------
2001
Gross gains on sales $ 311 $ 991 $ 1,302
Gross losses on sales (208) (26) (234)
------------------------------------------------------------------------------------
2000
Gross gains on sales $ 1,518 $ 1,586 $ 3,104
Gross losses on sales (4,926) (269) (5,195)
------------------------------------------------------------------------------------
1999
Gross gains on sales $ 10 $ 3,122 $ 3,132
Gross losses on sales (84) (24) (108)
------------------------------------------------------------------------------------
*AFS - Available for sale
Losses totaling $5.5 million, $2.2 million and $.8 million for the years 2001,
2000 and 1999, respectively, were recognized for securities that, in the opinion
of management, have been permanently impaired.
First Tennessee National Corporation F-57
NOTE 4 [ ] LOANS
A summary of the major categories of loans outstanding on December 31 is shown
below:
(Dollars in thousands) 2001 2000
---------------------------------------------------------------------------------------------
Commercial:
Commercial, financial and industrial $ 4,176,738 $ 3,964,396
Real estate commercial 929,036 946,903
Real estate construction 492,531 415,713
Retail:
Real estate residential 3,732,767 3,573,260
Real estate construction 211,429 179,515
Consumer 459,510 840,228
Credit card receivables 281,132 319,435
---------------------------------------------------------------------------------------------
Loans, net of unearned income* 10,283,143 10,239,450
Allowance for loan losses 155,373 143,696
---------------------------------------------------------------------------------------------
Total net loans $ 10,127,770 $ 10,095,754
=============================================================================================
*Loans are presented net of $.8 million and $1.1 million of unearned
income on December 31, 2001 and 2000, respectively.
Nonperforming loans consist of loans which management has identified as
impaired, other nonaccrual loans and loans which have been restructured. On
December 31, 2001 and 2000, there were no outstanding commitments to advance
additional funds to customers whose loans had been restructured. The following
table presents nonperforming loans on December 31:
(Dollars in thousands) 2001 2000
------------------------------------------ ---------------------------
Impaired loans $ 37,785 $ 41,207
Other nonaccrual loans 25,171 20,095
----------------------------------------------------------------------
Total nonperforming loans $ 62,956 $ 61,302
======================================================================
Interest income received during 2001 for impaired loans was $.5 million and for
other nonaccrual loans was $.4 million. Under their original terms, interest
income would have been approximately $2.5 million for the impaired loans and
$1.8 million for the other nonaccrual loans outstanding on December 31, 2001.
Interest income received during 2000 for impaired loans was $2.8 million and for
other nonaccrual loans was $1.3 million. Under their original terms, interest
income would have been approximately $4.0 million for the impaired loans and
$1.7 million for the other nonaccrual loans outstanding on December 31, 2000.
Interest income received during 1999 for impaired loans was $.5 million and for
other nonaccrual loans was $.9 million. Under their original terms, interest
income would have been approximately $1.2 million for the impaired loans and
$1.8 million for the other nonaccrual loans outstanding on December 31, 2001.
The average balance of impaired loans was approximately $49.8 million for 2001,
$14.7 million for 2000 and $12.5 million for 1999.
F-58 First Tennessee National Corporation
NOTE 4 [ ] LOANS (CONTINUED)
Activity in the allowance for loan losses related to non-impaired and impaired
loans for years ended December 31 is summarized as follows:
(Dollars in thousands) Non-impaired Impaired Total
-------------------------------------------------------------------------------------------------------------
Balance on December 31, 1998 $ 133,572 $ 2,441 $ 136,013
Transfer of allowance due to securitizations (1,790) -- (1,790)
Adjustment due to divestiture (893) -- (893)
Provision for loan losses 49,962 7,961 57,923
Charge-offs (50,156) (10,069) (60,225)
Loan recoveries 6,283 2,292 8,575
-------------------------------------------------------------------------------------------------------------
Net charge-offs (43,873) (7,777) (51,650)
-------------------------------------------------------------------------------------------------------------
Balance on December 31, 1999 136,978 2,625 139,603
-------------------------------------------------------------------------------------------------------------
Transfer of allowance due to securitizations (2,173) -- (2,173)
Provision for loan losses* 51,456 15,897 67,353
Charge-offs (64,662) (6,526) (71,188)
Loan recoveries 6,740 3,361 10,101
-------------------------------------------------------------------------------------------------------------
Net charge-offs (57,922) (3,165) (61,087)
-------------------------------------------------------------------------------------------------------------
Balance on December 31, 2000 128,339 15,357 143,696
-------------------------------------------------------------------------------------------------------------
Adjustment due to divestiture (1,337) -- (1,337)
Provision for loan losses* 67,885 25,608 93,493
Charge-offs (66,100) (26,124) (92,224)
Loan recoveries 9,640 2,105 11,745
-------------------------------------------------------------------------------------------------------------
Net charge-offs (56,460) (24,019) (80,479)
-------------------------------------------------------------------------------------------------------------
BALANCE ON DECEMBER 31, 2001 $ 138,427 $ 16,946 $ 155,373
=============================================================================================================
*Provision was reduced by $1.3 million in 2001 and by $10.7 million in
2000 related to credit card loans sold.
Certain executive officers and directors (and their associates) of First
Tennessee were loan customers during 2001 and 2000. Such loans are at normal
credit terms, including interest rates and collateral, and do not represent more
than a normal risk of collection. The following is a summary of related party
loans outstanding and the activity for the years ended December 31:
(Dollars in thousands) 2001 2000
-----------------------------------------------------------------------------------------------
Balance at beginning of year $ 62,240 $ 68,198
Additions 238,083 345,151
Deletions:
Repayments (247,423) (348,724)
No longer related (2) (2,385)
-----------------------------------------------------------------------------------------------
Total deletions (247,425) (351,109)
-----------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 52,898 $ 62,240
===============================================================================================
Included in other assets and in other liabilities on the Consolidated Statements
of Condition are amounts due from customers on acceptances and bank acceptances
outstanding of $4.8 million and $7.0 million on December 31, 2001 and 2000,
respectively.
First Tennessee National Corporation F-59
NOTE 5 [ ] PREMISES, EQUIPMENT AND LEASES
Premises and equipment on December 31 are summarized below:
(Dollars in thousands) 2001 2000
-------------------------------------------------------------------------------------------
Land $ 35,447 $ 35,987
Buildings 177,104 173,690
Leasehold improvements 51,475 57,150
Furniture, fixtures and equipment 270,113 272,199
-------------------------------------------------------------------------------------------
Premises and equipment, at cost 534,139 539,026
Less accumulated depreciation and amortization 282,635 252,919
-------------------------------------------------------------------------------------------
Premises and equipment, net $ 251,504 $ 286,107
===========================================================================================
First Tennessee is obligated under a number of noncancelable operating leases
for premises and equipment with terms up to 17 years, which may include the
payment of taxes, insurance and maintenance costs.
Minimum future lease payments for noncancelable operating leases on premises and
equipment on December 31, 2001, are shown below:
(Dollars in thousands)
-------------------------------------------------------------------------------------
2002 $ 51,425
2003 36,077
2004 25,140
2005 18,863
2006 14,096
2007 and after 37,434
-------------------------------------------------------------------------------------
Total minimum lease payments $ 183,035
=====================================================================================
Payments required under capital leases are not material.
Aggregate minimum income under sublease agreements for these periods is $15.4
million.
Rent expense incurred under all operating lease obligations was as follows for
the years ended December 31:
(Dollars in thousands) 2001 2000 1999
---------------------------------------------------------------------------------------
Rent expense, gross $ 58,166 $ 61,835 $ 56,656
Rent income (7,994) (4,158) (2,810)
---------------------------------------------------------------------------------------
Rent expense, net $ 50,172 $ 57,677 $ 53,846
=======================================================================================
F-60 First Tennessee National Corporation
NOTE 6 [ ] MORTGAGE SERVICING RIGHTS
Following is a summary of changes in capitalized mortgage servicing rights, net
of accumulated amortization, included in the Consolidated Statements of
Condition:
(Dollars in thousands)
--------------------------------------------------------------------------------
December 31, 1998 $ 664,438
Addition of mortgage servicing rights 420,046
Amortization (103,471)
Net hedge losses applied 70,529
Sales of mortgage servicing rights (133,066)
Purchase of mortgage servicing rights 28,388
Conversion to interest only strip* (120,654)
--------------------------------------------------------------------------------
December 31, 1999 826,210
Addition of mortgage servicing rights 230,168
Amortization (81,568)
Net hedge gains applied (125,058)
Sales of mortgage servicing rights (60,307)
Impairment (31,158)
Conversion to interest only strip* (14,573)
--------------------------------------------------------------------------------
December 31, 2000 743,714
Addition of mortgage servicing rights 378,810
Amortization (109,343)
Market value adjustments (68,966)
Sales of mortgage servicing rights (146,501)
Impairment (115,432)
Cumulative adjustment due to adoption of SFAS No. 133 (17,277)
--------------------------------------------------------------------------------
DECEMBER 31, 2001 $ 665,005
================================================================================
*Excess of servicing fair value over the contractually specified servicing.
The mortgage servicing rights on December 31, 2001 and 2000, had estimated
market values of approximately $685.0 million and $765.1 million, respectively.
These balances represent the rights to service approximately $40.7 billion and
$43.9 billion of mortgage loans on December 31, 2001 and 2000. In addition,
First Tennessee had approximately $1.4 billion and $1.8 billion in unpaid
principal balance of mortgage loans for which the servicing rights were not
capitalized on December 31, 2001 and 2000. These mortgage servicing rights had
estimated market values of $5.6 million and $9.3 million, respectively. On
December 31, 2001 and 2000, a valuation allowance due to impairment of $15.3
million and $21.2 million, respectively, was required.
First Tennessee National Corporation F-61
NOTE 7 [ ] INTANGIBLE ASSETS
Following is a summary of intangible assets, net of accumulated amortization,
included in the Consolidated Statements of Condition:
Other
(Dollars in thousands) Goodwill Intangibles*
----------------------------------------------------------------------------------
December 31, 1998 $107,470 $25,375
Amortization expense (5,665) (4,827)
Acquisitions 10,491 724
----------------------------------------------------------------------------------
December 31, 1999 112,296 21,272
Amortization expense (5,802) (5,125)
Impairment (811) --
Divestitures (3,297) --
Acquisitions 1,379 1,712
----------------------------------------------------------------------------------
December 31, 2000 103,765 17,859
Amortization expense (6,340) (4,465)
Acquisitions 45,722 28,463
----------------------------------------------------------------------------------
DECEMBER 31, 2001 $143,147 $41,857
==================================================================================
*Represents premium on purchased deposits, covenants not to compete and
non-mortgage servicing rights.
NOTE 8 [ ] TIME DEPOSIT MATURITIES
Following is a table of maturities for time deposits outstanding on December 31,
2001, which include "Certificates of deposit under $100,000 and other time" and
"Certificates of deposit $100,000 and more". "Certificates of deposit $100,000
and more" totaled $3.7 billion on December 31, 2001. Time deposits are included
in "Interest-bearing" deposits on the Consolidated Statements of Condition.
(Dollars in thousands)
---------------------------------------------------------------------------------
2002 $4,904,853
2003 355,445
2004 112,787
2005 97,158
2006 61,774
2007 and after 59,419
---------------------------------------------------------------------------------
Total $5,591,436
=================================================================================
F-62 First Tennessee National Corporation
NOTE 9 [ ] SHORT-TERM BORROWINGS
Short-term borrowings include federal funds purchased and securities sold under
agreements to repurchase, commercial paper, and other borrowed funds which
include term federal funds purchased, short-term bank notes, and advances from
the Federal Home Loan Bank.
Federal funds purchased and securities sold under agreements to repurchase and
commercial paper generally have maturities of less than 90 days. Other
short-term borrowings have original maturities of one year or less.
The detail of these borrowings for the years 2001, 2000 and 1999 is presented in
the following table:
Federal Funds
Purchased and
Securities Sold Other
Under Agreements Commercial Short-term
(Dollars in thousands) to Repurchase Paper Borrowings
----------------------------------------------------------------------------------------------------
2001
Average balance $3,162,728 $19,704 $ 545,602
Year-end balance 2,921,543 22,273 426,878
Maximum month-end outstanding 4,065,909 22,391 733,202
Average rate for the year 3.66% 3.62% 5.36%
Average rate at year-end 1.31 1.44 3.37
----------------------------------------------------------------------------------------------------
2000
Average balance $2,899,428 $17,050 $1,033,406
Year-end balance 2,981,026 19,169 437,366
Maximum month-end outstanding 3,844,312 19,169 1,684,125
Average rate for the year 5.84% 5.31% 6.74%
Average rate at year-end 5.92 5.64 6.62
----------------------------------------------------------------------------------------------------
1999
Average balance $2,292,857 $18,268 $1,613,124
Year-end balance 2,856,282 16,272 1,533,957
Maximum month-end outstanding 2,856,282 21,221 1,801,230
Average rate for the year 4.57% 4.18% 5.44%
Average rate at year-end 4.61 4.63 6.00
----------------------------------------------------------------------------------------------------
On December 31, 2001, $50 million of borrowings under unsecured lines of credit
from non-affiliated banks were available to the parent company to provide for
general liquidity needs at an annual facility fee of .10 percent.
First Tennessee National Corporation F-63
NOTE 10 [ ] TERM BORROWINGS
The following table presents information pertaining to term borrowings (debt
with original maturities greater than one year) for First Tennessee and its
subsidiaries on December 31:
(Dollars in thousands) 2001 2000
---------------------------------------------------------------------------------------------------------------------------
FIRST TENNESSEE NATIONAL CORPORATION:
Subordinated capital notes (qualifies for total capital under the Risk-Based
Capital guidelines):
Matures on November 15, 2005 -- 6.75% $ 74,683 $ 74,601
FIRST TENNESSEE BANK NATIONAL ASSOCIATION:
Subordinated notes (qualifies for total capital under the Risk-Based Capital guidelines):
Matures on April 1, 2008 -- 6.40% 89,560 89,490
Matures on December 1, 2008 -- 5.75% 140,577 140,426
Bank notes:*
Matures on May 23, 2003 -- 2.26% 69,971 -
Matures on July 6, 2004 -- 2.68125% 59,928 -
Matures on July 9, 2004 -- 2.68125% 50,000 -
Federal Home Loan Bank borrowings** 52,692 101,904
Other*** 6,692 -
FIRST NATIONAL BANK OF SPRINGDALE:
Federal Home Loan Bank borrowings** 6,258 3,255
---------------------------------------------------------------------------------------------------------------------------
Total $550,361 $409,676
===========================================================================================================================
*FTBNA has an ongoing bank note program under which the bank may offer an
aggregate principal amount of up to $3.0 billion. Bank notes with
original maturities of one year or less are included in other short-term
borrowings. Bank notes with original maturities greater than one year are
classified as term borrowings. On December 31, 2001, unused capacity
under this program was $2.5 billion.
**The Federal Home Loan Bank (FHLB) borrowings were issued with fixed
interest rates and terms of 2 to 28 years. These borrowings had weighted
average interest rates of 4.24 percent and 6.42 percent for FTBNA and
5.77 percent and 6.37 percent for Springdale on December 31, 2001 and
December 31, 2000, respectively. Borrowings from the FHLB were
collateralized with $1,107.8 million first-lien permanent mortgage loans
on December 31, 2001. In June 2001, FTBNA retired $100,000,000 in FHLB
borrowings, resulting in an early payment penalty of $5.1 million which
is presented as an extraordinary item, net of tax, in the Consolidated
Statements of Income.
***Other long-term debt is comprised of unsecured obligations issued with
fixed interest rates and terms of 2 to 3 years. These borrowings had a
weighted average interest rate of 4.60 percent on December 31, 2001.
Annual principal repayment requirements as of December 31, 2001, are as follows:
(Dollars in thousands)
--------------------------------------------------------------------------------
2002 $ 684
2003 75,038
2004 112,147
2005 126,633
2006 1,384
2007 and after 236,381
--------------------------------------------------------------------------------
All subordinated notes are unsecured and are subordinate to other present and
future senior indebtedness. These notes qualify as Tier II risk-based capital
under the Federal Reserve Board and Office of the Comptroller of the Currency
guidelines for assessing capital adequacy. The subordinated capital and bank
notes may not be redeemed or prepaid prior to maturity.
F-64 First Tennessee National Corporation
NOTE 11 [ ] GUARANTEED PREFERRED BENEFICIAL INTERESTS IN FIRST TENNESSEE'S
JUNIOR SUBORDINATED DEBENTURES
On December 30, 1996, First Tennessee, through its underwriters, sold to
institutional investors $100 million of capital securities. First Tennessee
Capital I (Capital I), a Delaware business trust wholly owned by First
Tennessee, issued $100 million of Capital Securities, Series A at 8.07%. The
proceeds were upstreamed to First Tennessee as junior subordinated debt under
the same terms and conditions. First Tennessee has, through various contractual
arrangements, fully and unconditionally guaranteed all of Capital I's
obligations with respect to the capital securities. These capital securities
qualify as Tier I capital and are presented in the Consolidated Statements of
Condition as "Guaranteed Preferred Beneficial Interests in First Tennessee's
Junior Subordinated Debentures." The sole asset of Capital I is $103 million of
junior subordinated debentures issued by First Tennessee. These junior
subordinated debentures also carry an interest rate of 8.07 percent. Both the
capital securities of Capital I and the junior subordinated debentures of First
Tennessee will mature on January 6, 2027; however, under certain circumstances,
the maturity of both may be shortened to a date not earlier than January 6,
2017.
NOTE 12 [ ] PREFERRED STOCK OF SUBSIDIARY
On September 14, 2000, FT Real Estate Securities Company, Inc. (FTRESC), an
indirect wholly owned subsidiary of First Tennessee, issued 50 shares of 9.50%
Cumulative Preferred Stock, Series B (Series B Preferred Shares), with a
liquidation preference of $1.0 million per share to other wholly owned
subsidiaries of First Tennessee. These securities qualify as Tier II capital and
are presented in the Consolidated Statements of Condition as "Preferred Stock of
Subsidiary." FTRESC is a real estate investment trust (REIT) established for the
purpose of acquiring, holding and managing real estate mortgage assets. An
aggregate total of 47 of the Series B Preferred Shares have been sold privately
to nonaffiliates. These shares were sold for essentially no gain or loss.
Dividends on the Series B Preferred Shares are cumulative and are payable
semi-annually. The dividends are recorded in noninterest expense.
The Series B Preferred Shares are mandatorily redeemable on March 31, 2031, and
redeemable at the discretion of FTRESC in the event that the Series B Preferred
Shares cannot be accounted for as Tier II regulatory capital or there is more
than an insubstantial risk that dividends paid with respect to the Series B
Preferred Shares will not be fully deductible. They are not subject to any
sinking fund and are not convertible into any other securities of FTRESC, First
Tennessee or any of its subsidiaries. The shares are, however, automatically
exchanged at the direction of the Office of the Comptroller of the Currency for
preferred stock of FTBNA, having substantially the same terms as the Series B
Preferred Shares in the event FTBNA becomes undercapitalized, insolvent or in
danger of becoming undercapitalized. The total amount of "Preferred stock of
subsidiary" publicly issued and outstanding on December 31, 2001 and 2000, as
reported on the Consolidated Statements of Condition, was $44.2 million and
$38.4 million, respectively.
NOTE 13 [ ] REGULATORY CAPITAL
First Tennessee is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on First Tennessee's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
specific capital guidelines that involve quantitative measures of assets,
liabilities and certain derivatives as calculated under regulatory accounting
practices must be met. Capital amounts and classification are also subject to
qualitative judgment by the regulators about components, risk weightings and
other factors. Quantitative measures established by regulation to ensure capital
adequacy require First Tennessee to maintain minimum amounts and ratios of total
and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average
assets (leverage). Management believes, as of December 31, 2001, that First
Tennessee met all capital adequacy requirements to which it was subject.
First Tennessee National Corporation F-65
NOTE 13 [ ] REGULATORY CAPITAL (CONTINUED)
The actual capital amounts and ratios of First Tennessee and FTBNA (the primary
banking subsidiary of First Tennessee) are presented in the table below. In
addition, FTBNA must also calculate its capital ratios after excluding financial
subsidiaries as defined by the Gramm-Leach-Bliley Act of 1999. Based on this
calculation FTBNA's Total Capital, Tier 1 Capital and Leverage Ratios were 10.76
percent, 8.09 percent and 6.59 percent, respectively.
First Tennessee National First Tennessee Bank
Corporation National Association
------------------------ -------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------------------------
ON DECEMBER 31, 2001:
Actual:
Total Capital $1,822,617 11.41% $1,699,906 10.83%
Tier 1 Capital 1,347,112 8.43 1,272,117 8.11
Leverage 1,347,112 6.86 1,272,117 6.61
For Capital Adequacy Purposes:
Total Capital 1,277,687 => 8.00 1,255,586 => 8.00
Tier 1 Capital 638,843 => 4.00 627,793 => 4.00
Leverage 785,861 => 4.00 769,942 => 4.00
To Be Well Capitalized Under Prompt
Corrective Action Provisions:
Total Capital 1,597,108 => 10.00 1,569,482 => 10.00
Tier 1 Capital 958,265 => 6.00 941,689 => 6.00
Leverage 982,326 => 5.00 962,428 => 5.00
-------------------------------------------------------------------------------------------------------------------
On December 31, 2000:
Actual:
Total Capital $1,805,986 12.11% $1,634,920 11.48%
Tier 1 Capital 1,327,496 8.90 1,223,667 8.59
Leverage 1,327,496 6.98 1,223,667 6.76
For Capital Adequacy Purposes:
Total Capital 1,192,764 => 8.00 1,139,406 => 8.00
Tier 1 Capital 596,382 => 4.00 569,703 => 4.00
Leverage 761,136 => 4.00 724,532 => 4.00
To Be Well Capitalized Under Prompt
Corrective Action Provisions:
Total Capital 1,490,955 => 10.00 1,424,258 => 10.00
Tier 1 Capital 894,573 => 6.00 854,555 => 6.00
Leverage 951,420 => 5.00 905,665 => 5.00
-------------------------------------------------------------------------------------------------------------------
The following table details the actual regulatory capital ratios for First
National Bank of Springdale on December 31, 2001:
--------------------------------------------------------------------------------------------------------
ON DECEMBER 31, 2001:
Total Capital 16.31%
Tier 1 Capital 15.06
Leverage 9.84
--------------------------------------------------------------------------------------------------------
F-66 First Tennessee National Corporation
NOTE 14 [ ] OTHER INCOME AND OTHER EXPENSE
Following is detail concerning "All other income and commissions" and "All other
expense" as presented in the Consolidated Statements of Income:
(Dollars in thousands) 2001 2000 1999
----------------------------------------------------------------------------------------------------------------------------
ALL OTHER INCOME AND COMMISSIONS:
Other service charges $ 24,932 $ 23,199 $ 17,430
Cardholder fees 20,137 29,666 25,579
Insurance premiums and commissions 16,844 12,203 10,912
Check clearing fees 11,615 11,129 11,143
Other 81,026 97,019 76,173
----------------------------------------------------------------------------------------------------------------------------
Total $154,554 $173,216 $141,237
============================================================================================================================
ALL OTHER EXPENSE:
Advertising and public relations $ 35,508 $ 26,693 $ 30,187
Contract employment 32,115 28,868 43,685
Legal and professional fees 32,087 26,794 22,492
Foreclosed real estate 25,452 16,080 6,585
Computer software 25,107 19,205 15,410
Travel and entertainment 17,489 13,891 18,698
Supplies 16,200 18,170 22,006
Distributions on guaranteed preferred securities 8,070 8,070 8,070
Fed service fees 7,761 7,112 6,471
Distributions on preferred stock of subsidiary 4,535 1,178 --
Deposit insurance premium 2,463 2,589 1,790
Other 91,734 61,370 55,500
----------------------------------------------------------------------------------------------------------------------------
Total $298,521 $230,020 $230,894
============================================================================================================================
NOTE 15 [ ] COMPONENTS OF OTHER COMPREHENSIVE INCOME
Following is detail of "Accumulated other comprehensive income" as presented in
the Consolidated Statements of Condition:
Accumulated
Gain/(Loss) Tax Other
Before-Tax (Expense)/ Comprehensive
(Dollars in thousands) Amount Benefit Income
-----------------------------------------------------------------------------------------------------------------------------
December 31, 1998 $ 12,872
Other comprehensive income:
Unrealized market adjustments for the period $(54,472) $ 21,227 (33,245)
Less: adjustment for net gains included in net income 2,257 (878) 1,379
----------------------------------------------------------------------------------------------------------- -------------
December 31, 1999 $(56,729) $ 22,105 (21,752)
===========================================================================================================
Other comprehensive income:
Unrealized market adjustments for the period $ 55,400 $(21,621) 33,779
Less: adjustment for net losses included in net income (4,207) 1,636 (2,571)
----------------------------------------------------------------------------------------------------------- -------------
December 31, 2000 $ 59,607 $(23,257) 14,598
===========================================================================================================
Other comprehensive income:
Cumulative effect of change in accounting principle $ 2,307 $ (858) 1,449
Realized gain on cash flow hedge (2,307) 858 (1,449)
Unrealized market adjustments for the period 6,212 (2,459) 3,753
Less: adjustment for net losses included in net income (7,970) 3,043 (4,927)
----------------------------------------------------------------------------------------------------------- -------------
DECEMBER 31, 2001 $ 14,182 $ (5,502) $ 23,278
=========================================================================================================== =============
First Tennessee National Corporation F-67
NOTE 16 [ ] INCOME TAXES
The components of income tax expense/(benefit) are as follows:
(Dollars in thousands) 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------
Current:
Federal $ 299,100 $ 38,781 $ 64,615
State 22,838 25,558 (14,342)
Deferred:
Federal (143,273) 59,155 60,276
State (14,597) (19,073) 21,357
-----------------------------------------------------------------------------------------------------------------
Total $ 164,068 $104,421 $131,906
=================================================================================================================
The effective tax rates for 2001, 2000 and 1999 were 33.23 percent, 30.99
percent and 34.76 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) 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------
Federal income tax rate 35% 35% 35%
-------------------------------------------------------------------------------------------------------------------
Tax computed at statutory rate $172,785 $117,951 $ 132,803
Increase/(decrease) resulting from:
Tax-exempt interest (1,330) (1,219) (1,454)
State income taxes 5,472 4,223 4,760
Sale of preferred stock by subsidiary (1,082) (10,739) --
Other (11,777) (5,795) (4,203)
-------------------------------------------------------------------------------------------------------------------
Total $164,068 $104,421 $ 131,906
===================================================================================================================
A deferred tax asset or liability is recognized for the tax consequences of
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. The tax consequence is calculated
by applying enacted statutory tax rates, applicable to future years, to these
temporary differences. Temporary differences which gave rise to deferred tax
(assets)/liabilities on December 31, 2001 and 2000, were as follows:
(Dollars in thousands) 2001 2000
---------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Loss reserves $ (71,609) $(63,741)
Net operating loss carryforwards (9,944) (13,143)
Interest rate derivatives (12,730) --
Employee benefits (8,312) (7,915)
Other (15,018) (11,349)
---------------------------------------------------------------------------------------------------------------
Gross deferred tax assets (117,613) (96,148)
---------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Capitalized mortgage servicing rights 185,821 329,806
Depreciation and amortization 20,861 17,508
Investments in securities 30,844 14,931
Deferred loan fees 4,329 4,304
Federal Home Loan Bank stock 8,409 9,483
Capitalized computer software 3,810 8,218
Other 22,498 23,114
---------------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities 276,572 407,364
---------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities $ 158,959 $ 311,216
===============================================================================================================
F-68 First Tennessee National Corporation
NOTE 17 [ ] EARNINGS PER SHARE
The following table shows a reconciliation of earnings per common share to
diluted earnings per common share.
(Dollars in thousands, except per share data) 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
Income before debt restructurings and cumulative
effect of changes in accounting principles $ 329,602 $ 232,581 $ 247,533
Debt restructurings, net of tax (3,225) -- --
Cumulative effect of changes in accounting principles, net of tax (8,168) -- --
------------------------------------------------------------------------------------------------------------------------------------
Net income $ 318,209 $ 232,581 $ 247,533
====================================================================================================================================
Weighted average common shares outstanding 126,982,073 129,296,245 130,161,432
Shares attributable to deferred compensation 795,283 568,820 411,331
------------------------------------------------------------------------------------------------------------------------------------
Total weighted average shares 127,777,356 129,865,065 130,572,763
====================================================================================================================================
EARNINGS PER COMMON SHARE:
Income before debt restructurings and cumulative
effect of changes in accounting principles $ 2.58 $ 1.79 $ 1.90
Debt restructurings, net of tax (0.03) -- --
Cumulative effect of changes in accounting principles, net of tax (0.06) -- --
------------------------------------------------------------------------------------------------------------------------------------
Net income $ 2.49 $ 1.79 $ 1.90
====================================================================================================================================
Weighted average shares outstanding 127,777,356 129,865,065 130,572,763
Dilutive effect due to stock options 3,760,267 1,798,166 3,406,177
------------------------------------------------------------------------------------------------------------------------------------
Total weighted average shares, as adjusted 131,537,623 131,663,231 133,978,940
====================================================================================================================================
DILUTED EARNINGS PER COMMON SHARE:
Income before debt restructurings and cumulative
effect of changes in accounting principles $ 2.51 $ 1.77 $ 1.85
Debt restructurings, net of tax (0.03) -- --
Cumulative effect of changes in accounting principles, net of tax (0.06) -- --
------------------------------------------------------------------------------------------------------------------------------------
Net income $ 2.42 $ 1.77 $ 1.85
====================================================================================================================================
NOTE 18 [ ] RESTRICTIONS, CONTINGENCIES, COMMITMENTS AND OTHER DISCLOSURES
RESTRICTIONS ON CASH AND DUE FROM BANKS. The commercial banking subsidiaries of
First Tennessee are required to maintain average reserve and clearing balances
with the Federal Reserve Bank under the Federal Reserve Act and Regulation D.
The balances required on December 31, 2001 and 2000, were $192.3 million and
$162.2 million, respectively. These reserves are included in "Cash and due from
banks" on the Consolidated Statements of Condition.
RESTRICTIONS ON DIVIDENDS. Dividends are paid by First Tennessee from its
assets, which are mainly provided by dividends from its subsidiaries. Certain
regulatory restrictions exist regarding the ability of the banking subsidiaries
to transfer funds to First Tennessee in the form of cash, dividends, loans or
advances. As of December 31, 2001, the banking subsidiaries had undivided
profits of $1,123.7 million of which $275.6 million was available for
distribution to First Tennessee as dividends without prior regulatory approval.
First Tennessee National Corporation F-69
NOTE 18 [ ] RESTRICTIONS, CONTINGENCIES, COMMITMENTS AND OTHER DISCLOSURES
(CONTINUED)
RESTRICTIONS ON INTERCOMPANY TRANSACTIONS. Under Federal banking law, banking
subsidiaries may not extend credit to the parent company in excess of 10 percent
of the banks' capital stock and surplus, as defined, or $173.7 million on
December 31, 2001. The parent company had borrowings of $43.2 million from FTBNA
on December 31, 2001. Certain loan agreements also define other restricted
transactions related to additional borrowings.
CONTINGENCIES. In 2001, the Tennessee Supreme Court affirmed a $209,156 award of
compensatory damages against FTBNA (as successor by merger to Community Bank of
Germantown) as well as a $60,000 award in FTBNA's favor against the plaintiff.
The Supreme Court also vacated a $9 million punitive damage award against FTBNA
and remanded the case to the trial court to reassess punitive damages in
accordance with the factors outlined in an earlier Tennessee Supreme Court
opinion. No date has been set for the punitive damages hearing. In addition to
this case, but excluding those mentioned in the following paragraphs, various
other claims and lawsuits are pending against First Tennessee and its
subsidiaries. Although First Tennessee cannot predict the outcome of these
lawsuits, after consulting with counsel, it is management's opinion that when
resolved, these lawsuits will not have a material adverse effect on the
consolidated financial statements of First Tennessee.
In May 1996, an action was filed against FTBNA and another defendant in an
Alabama federal court alleging that defendants engaged in unfair and deceptive
practices in connection with financing satellite dish television systems
("satellite systems"). The case was later certified as a nationwide class action
limited to a Truth In Lending Act statutory damages claim which has a cap of
$500,000 plus attorneys' fees. In September 1997, another action was filed in
Tennessee state court asserting similar claims relating to the same satellite
systems financing program. This case was later certified as a nationwide class
on some of the alleged claims. In February 2002, these two cases, with
approximately 8,000 plaintiff class members, were combined and preliminarily
approved as an opt-out class settlement. The settlement is still subject to
final court approval and other contingencies. Four additional suits on similar
allegations were filed on behalf of multiple individual plaintiffs in
Mississippi state court in 2001 and 2002. These cases have also been tentatively
settled. Although the final terms and conditions of these settlements have not
yet been determined, if the tentative settlements described in this paragraph
are consummated, management does not believe they will have a material adverse
effect on the consolidated financial statements of First Tennessee. Another
case, filed by nine plaintiffs and involving similar allegations, is now pending
in federal court in Mississippi. In addition, two similar satellite systems
actions, each filed by one plaintiff, are now pending in the Choctaw Tribal
Court. Because the cases or claims that do not settle are, or could be, in
forums that have sometimes awarded higher damages than similar actions in other
jurisdictions, First Tennessee cannot at this time evaluate either the
likelihood of an unfavorable outcome or the dollar amount of any potential loss
exposure. First Tennessee believes that it has valid defenses, which it intends
to vigorously assert.
Many mortgage lenders, including a First Tennessee subsidiary, have been sued in
putative class actions on the theory that yield spread premiums paid to mortgage
brokers are referral fees banned by the Real Estate Settlement Practices Act.
Under that act, liability for an impermissible referral fee is three times the
amount of the fee. Accordingly, the potential damages are substantial. In June
2001, the Eleventh Circuit Court of Appeals upheld certification of a class in a
yield spread premium case against a lender unaffiliated with First Tennessee.
Although the decision was procedural, certain statements in the decision could
be interpreted to suggest a liability standard favorable to plaintiff borrowers.
In October 2001, the U.S. Department of Housing and Urban Development (HUD)
published a policy statement disagreeing with the Eleventh Circuit's decision.
In other pending cases involving lenders unaffiliated with First Tennessee, the
Eleventh Circuit has ordered briefing on the effect of HUD's new policy
statement. Because the suits against First Tennessee's subsidiary are in an
early stage of litigation and the law in this area is not clearly established,
First Tennessee cannot at this time evaluate either the likelihood of an
unfavorable outcome or the dollar amount of any potential loss exposure. First
Tennessee believes its subsidiary's yield spread premium payments, which are
consistent with industry practices, are lawful, and intends to defend vigorously
the lawsuits against it.
LOAN COMMITMENTS. First Tennessee enters into fixed and variable loan
commitments with customers. When these commitments have contract rate
adjustments that lag changes in market rates, the financial instruments have
characteristics similar to option contracts. First Tennessee follows the same
credit policies and underwriting practices in making commitments as it does for
on-balance sheet instruments. Each counterparty's creditworthiness is evaluated
on a case-by-case basis. The amount of collateral obtained, if any, is based on
management's credit evaluation of the counterparty.
Commitments to extend credit are contractual obligations to lend to a customer
as long as all established contractual conditions are met. These commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The majority of First Tennessee's loan commitments has
maturities less than one year and reflects the prevailing market rates at the
time of the commitment. Since commitments may expire without being fully drawn
upon, the total contract amount does not necessarily represent future cash
requirements.
Other commitments include standby and commercial letters of credit and other
credit enhancements. Standby and commercial letters of credit and other credit
enhancements are conditional commitments issued by First Tennessee to guarantee
the
F-70 First Tennessee National Corporation
NOTE 18 [ ] RESTRICTIONS, CONTINGENCIES, COMMITMENTS AND OTHER DISCLOSURES
(CONTINUED)
performance and/or payment of a customer to a third party in connection with
specified transactions. The credit risk involved in issuing these commitments is
essentially the same as that involved in extending loan facilities to customers.
The following is a summary of the maximum credit exposure of each class of
lending related off-balance sheet financial instruments outstanding on December
31:
(Dollars in millions) 2001 2000
--------------------------------------------------------------------------------
Commitments to extend credit:
Consumer credit card lines $ 1,188.0 $ 1,532.7
Consumer home equity 1,196.4 733.0
Commercial real estate and construction
and land development 1,055.2 1,003.4
Commercial and other 1,358.2 1,515.1
--------------------------------------------------------------------------------
Total loan commitments* 4,797.8 4,784.2
Other commitments:
Standby letters of credit 389.2 323.7
Other 223.9 235.3
--------------------------------------------------------------------------------
Total loan and other commitments $ 5,410.9 $ 5,343.2
================================================================================
*Total loan commitments do not include mortgage banking interest rate
lock commitments which, subsequent to adoption of SFAS No. 133, are
included on the balance sheet at fair value in other assets. The
contractual amounts for 2001 and 2000 are $1.5 billion and $.7 billion,
respectively.
OTHER DISCLOSURES - COMPANY OWNED LIFE INSURANCE. First Tennessee has purchased
life insurance on certain of its employees and is the beneficiary on these
policies. On December 31, 2001, the cash surrender value of these policies,
which is included in "Capital markets receivables and other assets" on the
Consolidated Statements of Condition, was $203.7 million. There are no
restrictions on the proceeds from these benefits, and First Tennessee has not
borrowed against the cash surrender value of these policies.
OTHER DISCLOSURES - LEASE ARRANGEMENT. First Tennessee has a lease arrangement
with a single-purpose entity for FHHLC's main office headquarters in Dallas.
Under this arrangement, First Tennessee has guaranteed a significant portion of
the residual value of the Dallas property through the end of the lease term in
2011. Approximately $41 million of the construction cost of the property is not
reflected on First Tennessee's Statement of Condition but is rather owned by the
single-purpose entity. If the value of the property were to decline below its
original construction cost, First Tennessee would be obligated to reimburse the
single-purpose entity for a significant portion of the deficiency, if any, at
the end of the lease term.
NOTE 19 [ ] SHAREHOLDER PROTECTION RIGHTS AGREEMENT
On October 20, 1998, First Tennessee adopted a Shareholder Protection Rights
Agreement (the "Agreement") and declared a dividend of one right on each
outstanding share of common stock held on November 2, 1998, or issued thereafter
and prior to the time the rights separate and thereafter pursuant to options and
convertible securities outstanding at the time the rights separate.
The Agreement provides that until the earlier of the tenth business day (subject
to certain adjustments by the board of directors) after a person or group
commences a tender or exchange offer that will, subject to certain exceptions,
result in such person or group owning 10 percent or more of First Tennessee's
common stock, or the tenth business day (subject to certain adjustments by the
board) after the public announcement by First Tennessee that a person or group
owns 10 percent or more of First Tennessee's common stock, the rights will be
evidenced by the common stock certificates, will automatically trade with the
common stock, and will not be exercisable. Thereafter, separate rights
certificates will be distributed, and each right will entitle its holder to
purchase one one-hundredth of a share of participating preferred stock having
economic and voting terms similar to those of one share of common stock for an
exercise price of $150.
If any person or group acquires 10 percent or more of First Tennessee's common
stock, then each right (other than rights beneficially owned by holders of 10
percent or more of the common stock or affiliates, associates or transferees
thereof, which rights become void) will entitle its holder to purchase, for the
exercise price, a number of shares of First Tennessee common stock or
participating preferred stock having a market value of twice the exercise price.
Also, if there is a 10 percent shareholder and First Tennessee is involved in
certain significant transactions, each right will entitle its holder to
purchase, for the exercise price, a number of shares of common stock of the
other party having a market value of twice the exercise price. If any person or
group acquires 10 percent or more (but not more than 50 percent) of First
Tennessee's common stock, First
First Tennessee National Corporation F-71
NOTE 19 [ ] SHAREHOLDER PROTECTION RIGHTS AGREEMENT (CONTINUED)
Tennessee's board of directors may, at its option, exchange one share of First
Tennessee common stock or one one-hundredth of a share of participating
preferred stock for each right (other than rights which have become void). The
board of directors may amend the Agreement in any respect prior to the tenth
business day after announcement by First Tennessee that a person or group has
acquired 10 percent or more of First Tennessee's common stock. The rights will
expire on the earliest of the following times: the time of the exchange
described in the second preceding sentence; December 31, 2009; or the date the
rights are redeemed as described in the following sentence. The rights may be
redeemed by the board of directors for $0.001 per right until 10 business days
after First Tennessee announces that any person or group owns 10 percent or more
of First Tennessee's common stock.
NOTE 20 [ ] SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS
SAVINGS PLAN. Substantially all employees of First Tennessee are covered by a
contributory savings plan in conjunction with a flexible benefits plan. During
the year, First Tennessee makes contributions to each employee's flexible
benefits plan account. These contributions are based on length of service and a
percentage of the employee's salary. The employees have the option to direct a
portion or all of the contribution into their savings plan accounts. Employees
may also make pre-tax and after-tax personal contributions to the savings plan.
First Tennessee matches the majority of employee pre-tax contributions invested
in First Tennessee's common stock (or for employees of FHHLC, contributions made
to any savings plan fund) at a rate of $.50 for each $1.00 invested up to 6
percent of the employee's qualifying salary. Contributions made by First
Tennessee to the flexible benefits plan were $18.3 million for 2001, $19.5
million for 2000 and $18.8 million for 1999. A feature of the savings plan
allows employees to choose to invest their savings in one or more of six various
component funds, including a company stock fund. During December 2001, First
Tennessee converted the company stock fund component of its savings plan to a
nonleveraged employee stock ownership plan (ESOP). This component fund remains
part of the savings plan. Compensation cost related to the ESOP is measured as
the amount allocated from matching contributions and discretionary contributions
contributed to the ESOP and is included in the contributions amount above.
Dividends on shares held by the ESOP are charged to retained earnings and shares
held by the ESOP are treated as outstanding in computing earnings per share. The
number of allocated shares held by the ESOP totaled 9,172,293 at December 31,
2001.
PENSION PLAN. Substantially all employees of First Tennessee are covered by a
noncontributory, defined benefit pension plan. Pension benefits are based on
years of service, average compensation near retirement and estimated social
security benefits at age 65. The annual funding is based on an actuarially
determined amount using the entry age cost method.
OTHER EMPLOYEE BENEFITS. First Tennessee provides postretirement medical
insurance to full-time employees retiring under the provisions of the First
Tennessee Pension Plan. The postretirement medical plan is contributory with
retiree contributions adjusted annually. The plan is based on criteria that are
a combination of the employee's age and years of service and utilizes a two-step
approach. For any employee retiring on or after January 1, 1995, First Tennessee
will contribute a fixed amount based on years of service and age at time of
retirement.
ACTUARIAL ASSUMPTIONS. The actuarial assumptions used in the defined benefit
pension plan and the other employee benefit plans were as follows:
Pension Benefits Postretirement Benefits
---------------------------------- -----------------------------------
2001 2000 1999 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
SEPTEMBER 30 MEASUREMENT DATE
Discount rate 7.25% 7.75% 7.50% 7.25% 7.75% 7.50%
Expected return on plan assets 10.00 10.00 10.00 10.00 10.00 10.00
Expected return on plan assets dedicated to
employees who retired prior to January 1, 1993 N/A N/A N/A 6.50 6.50 6.50
Rate of compensation increase 4.00 4.00 4.00 N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------------
F-72 First Tennessee National Corporation
NOTE 20 [ ] SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
The components of net periodic benefit cost for the plan years 2001, 2000 and
1999 were as follows:
Pension Benefits Postretirement Benefits
------------------------------------------ -------------------------------------
(Dollars in thousands) 2001 2000 1999 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 8,943 $ 9,024 $ 8,341 $ 860 $ 900 $ 832
Interest cost 13,893 12,868 11,468 1,773 1,824 1,711
Expected return on plan assets (26,661) (23,853) (20,950) (1,954) (1,696) (1,480)
Amortization of prior service cost 338 338 322 (176) 6 3
Recognized gains/(losses) -- -- 311 (299) (154) --
Amortization of transition obligation or asset (460) (460) (460) 989 989 989
-----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost/(benefit) $ (3,947) $ (2,083) $ (968) $ 1,193 $ 1,869 $ 2,055
===================================================================================================================================
The following table sets forth the plans' funded status reconciled to the
amounts shown in the Consolidated Statements of Condition:
Pension Benefits Postretirement Benefits
-------------------------------- -------------------------------
(Dollars in thousands) 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of plan year $ 182,298 $ 174,039 $ 23,732 $ 25,059
Service cost 8,943 9,024 860 900
Interest cost 13,893 12,868 1,773 1,824
Amendments 4,796 -- -- (2,369)
Actuarial (gain)/loss 17,545 (7,572) 3,896 (65)
Benefits paid (6,808) (6,061) (2,284) (1,617)
-----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of plan year $ 220,667 $ 182,298 $ 27,977 $ 23,732
===================================================================================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of plan year $ 294,238 $ 258,552 $ 21,706 $ 19,129
Actual return on plan assets (14,304) 41,747 (779) 3,222
Employer contribution -- -- 1,040 972
Benefits paid (6,808) (6,061) (2,284) (1,617)
-----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of plan year $ 273,126 $ 294,238 $ 19,683 $ 21,706
===================================================================================================================================
NET FUNDED STATUS AT SEPTEMBER 30 $ 52,459 $ 111,940 $ (8,294) $ (2,026)
Unrecognized net actuarial (gain)/loss 17,118 (41,392) 68 (6,860)
Unrecognized net transitional (asset)/obligation (480) (940) 10,873 11,862
Unrecognized prior service cost 6,708 2,250 (2,124) (2,300)
-----------------------------------------------------------------------------------------------------------------------------------
Prepaid benefit cost at September 30 75,805 71,858 523 676
Contributions paid from October 1 to December 31 -- -- -- 1,040
-----------------------------------------------------------------------------------------------------------------------------------
Prepaid benefit cost at December 31 $ 75,805 $ 71,858 $ 523 $ 1,716
===================================================================================================================================
The following table sets forth the amounts and types of mutual funds managed by
FTBNA that are included in plan assets.
Pension Benefits Postretirement Benefits
----------------------------------- ---------------------------------
(Dollars in thousands) 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
First Funds Capital Appreciation Portfolio Class I $ 26,202 $ 43,970 $ 1,540 $ 2,461
First Funds Growth & Income Portfolio Class I 113,538 138,749 6,576 7,693
First Funds Bond Portfolio Class I 106,878 96,611 5,755 4,876
-----------------------------------------------------------------------------------------------------------------------------------
First Tennessee National Corporation F-73
NOTE 20 [ ] SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
In 2001 and 2000 the cost of health care benefits was projected to increase at
an annual per capita rate of 5.75 percent and to remain at an even level
thereafter. In 1999, the annual rate of increase was assumed to be 6.75 percent
decreasing evenly to a rate of 5.75 percent by the year 2000 and remaining at
that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
(Dollars in thousands) 1% Increase 1% Decrease
-----------------------------------------------------------------------------------------------------------------------------------
Adjusted total service and interest cost components $ 2,704 $ 2,570
Adjusted postretirement benefit obligation at end of plan year 29,048 27,026
-----------------------------------------------------------------------------------------------------------------------------------
First Tennessee provides benefits to former and inactive employees after
employment but before retirement. The obligation recognized in accordance with
accounting standards was $2.4 million in 2001, $4.8 million in 2000 and $.2
million in 1999.
Medical and group life insurance expenses incurred for active employees are
shown in the following table:
(Dollars in thousands) 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
Medical plan expense based on claims incurred $ 18,759 $ 17,679 $ 14,558
Participants 6,668 6,522 7,567
-----------------------------------------------------------------------------------------------------------------------------------
Group life insurance expense based on benefits incurred $ 1,210 $ 1,271 $ 1,392
Participants 9,872 9,811 10,860
-----------------------------------------------------------------------------------------------------------------------------------
NOTE 21 [ ] STOCK OPTION, RESTRICTED STOCK INCENTIVE, AND DIVIDEND REINVESTMENT
PLANS
STOCK OPTION PLANS. First Tennessee issues non-qualified stock options under
various plans to employees, non-employee directors, and bank advisory board
members. The plans provide for the issuance of First Tennessee common stock at a
price equal to its fair market value at the date of grant; however, the exercise
price may be less than the fair market value if the grantee has agreed to
receive the options in lieu of compensation. The foregone compensation plus the
exercise price must equal the fair market value of the stock on the date of
grant. All options expire 10 years from the date of grant, except for those
options that were part of compensation deferral, which expire 20 years from the
date of grant. There were 11,696,344 shares available for option plan grants on
December 31, 2001.
F-74 First Tennessee National Corporation
NOTE 21 [ ] STOCK OPTION, RESTRICTED STOCK INCENTIVE, AND DIVIDEND REINVESTMENT
PLANS (CONTINUED)
As a result of plan amendments adopted by the board of directors during 1997,
employees may defer the receipt of shares upon the exercise of stock options.
The summary of stock option activity is shown below:
Weighted
Options Average
Outstanding Exercise Price
-----------------------------------------------------------------------------------------------------------------------------------
January 1, 1999 13,254,602 $ 18.96
Options granted 6,151,908 34.28
Options exercised* (1,982,652) 17.10
Options canceled (524,348) 32.27
-------------
December 31, 1999 16,899,510 24.33
=============
Options exercisable 12,316,124 21.06
-----------------------------------------------------------------------------------------------------------------------------------
January 1, 2000 16,899,510 $ 24.33
Options granted 7,423,312 17.56
Options exercised* (1,491,040) 12.32
Options canceled (1,575,966) 27.39
-------------
December 31, 2000 21,255,816 22.58
=============
Options exercisable 17,246,539 21.18
-----------------------------------------------------------------------------------------------------------------------------------
January 1, 2001 21,255,816 $ 22.58
Options granted 5,334,043 28.83
Options exercised* (4,953,435) 18.10
Options canceled (525,334) 30.96
-------------
December 31, 2001 21,111,090 25.00
=============
Options exercisable 15,620,729 22.45
-----------------------------------------------------------------------------------------------------------------------------------
*Stock options exercised for 2001, 2000 and 1999 respectively, included
386,026; 112,306 and 106,392 options converted to stock equivalents as
part of the deferred compensation program.
The following table summarizes information about stock options outstanding on
December 31, 2001:
Weighted Weighted
Weighted Average Average
Average Exercise Exercise
Remaining Price - Price -
Options Contractual Options Options Options
Exercise Price Range Outstanding Life Outstanding Exercisable Exercisable
-----------------------------------------------------------------------------------------------------------------------------------
$ 4.00 - $14.00 1,780,348 6.25 years $ 10.20 1,780,348 $ 10.20
$14.01 - $24.00 7,627,792 12.21 years 18.45 7,359,492 18.46
$24.01 - $34.00 9,163,992 14.30 years 29.86 6,051,138 29.97
$34.01 - $44.00 2,538,958 7.72 years 37.53 429,751 35.67
-----------------------------------------------------------------------------------------------------------------------------------
First Tennessee accounts for these plans under APB Opinion No. 25 pursuant to
which recognized compensation costs are negligible. Had compensation cost for
these plans been determined consistent with SFAS No. 123, First Tennessee's net
income and earnings per share would have been reduced to the following pro forma
amounts:
December 31
------------------------------------------------------------
(Dollars in thousands except per share data) 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 318,209 $ 232,581 $ 247,533
Pro forma net income 306,764 216,444 237,948
Earnings per share, as reported 2.49 1.79 1.90
Pro forma earnings per share 2.40 1.67 1.82
-----------------------------------------------------------------------------------------------------------------------------------
First Tennessee National Corporation F-75
NOTE 21 [ ] STOCK OPTION, RESTRICTED STOCK INCENTIVE, AND DIVIDEND REINVESTMENT
PLANS (CONTINUED)
Total compensation costs that would have been recognized in income under SFAS
No. 123 for all stock-based compensation awards was $18.7 million for 2001,
$26.4 million for 2000 and $15.7 million for 1999.
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. First Tennessee
used the Black-Scholes Option Pricing Model to estimate the fair value of stock
options granted in 2001, 2000 and 1999, with the following assumptions:
2001 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
Expected dividend yield 2.74% 2.84% 3.03%
Expected option lives of options issued at market 6.19 years 6.56 years 4.83 years
Expected option lives of options issued below market 2.19 years 2.08 years 2.15 years
Expected volatility 24.56% 24.25% 20.04%
Risk-free interest rates 4.75% 6.50% 5.30%
---------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Fair
Number Value per Option
Issued at Grant Date
-----------------------------------------------------------------------------------------------------------------------------------
2001:
Options issued at market on the date of grant 3,246,384 $ 8.18
Options issued below market on the date of grant 2,087,659 8.58
-----------------------------------------------------------------------------------------------------------------------------------
2000:
Options issued at market on the date of grant 3,142,929 $ 5.34
Options issued below market on the date of grant 4,280,383 5.20
-----------------------------------------------------------------------------------------------------------------------------------
1999:
Options issued at market on the date of grant 2,720,585 $ 7.71
Options issued below market on the date of grant 3,431,323 8.01
-----------------------------------------------------------------------------------------------------------------------------------
RESTRICTED STOCK INCENTIVE PLANS. First Tennessee has authorized the issuance of
its common stock for awards to executive employees who have a significant impact
on the profitability of First Tennessee under restricted stock incentive plans.
Additionally, one of the plans provides for 6,000 shares of restricted stock to
be granted to each new non-employee director upon election to the board of
directors with restrictions lapsing as defined in the plans. In 2001 First
Tennessee granted 9,796 restricted shares under the plans. In 2000, 10,000
restricted shares were granted and 170,112 shares were granted in 1999.
Compensation expense related to these plans was $2.2 million, $2.0 million and
$2.1 million for the years 2001, 2000 and 1999, respectively. There were 669,645
shares available for restricted stock incentive grants on December 31, 2001.
The board of directors approved amendments to the restricted stock plan during
1998 permitting deferral by participants of the receipt of restricted stock
prior to the lapse of restrictions.
DIVIDEND REINVESTMENT PLAN. The Dividend Reinvestment and Stock Purchase Plan,
as amended in 1995, authorizes the sale of First Tennessee's common stock from
authorized, but unissued common stock or from shares acquired on the open market
to shareholders who choose to invest all or a portion of their cash dividends
and make optional cash payments of $25 to $10,000 per quarter without paying
commissions. Shares for this plan are purchased on the open market. The price of
the shares purchased directly from First Tennessee is the mean between the high
and low sales price on the investment date. The price of shares purchased on the
open market is the average price paid.
F-76 First Tennessee National Corporation
NOTE 22 [ ] BUSINESS SEGMENT INFORMATION
First Tennessee provides traditional retail/commercial banking and other
financial services to its customers. These products and services are categorized
into two broad groups: a regional banking group and national lines of business.
The regional banking group provides a comprehensive package of financial
services including traditional banking, trust services, investments, asset
management, insurance and credit card services to its customers. Banking
subsidiaries offer general banking products through financial centers in 21
Tennessee counties, in northern Mississippi, northwest Arkansas and northern
Georgia as well as through consumer finance offices in 12 states nationwide. The
national lines of business include mortgage banking, capital markets and
transaction processing. Mortgage banking offers first and second mortgages
through origination offices in 31 states and also services a multi-billion
dollar portfolio. Capital markets offers investment securities and advisory
services such as portfolio analysis, tax planning, equity research and loan
securitization to institutional clients nationwide through offices in Chicago,
Cleveland, Dallas, Kansas City, Los Angeles, Memphis, Mobile, Nashville and New
York City. Transaction processing includes credit card merchant processing,
nationwide check clearing and remittance processing. The Other segment is used
to isolate corporate items such as expense related to guaranteed preferred
beneficial interests in First Tennessee's junior subordinated debentures and
securities gains or losses which include any venture capital gains or losses and
related incentive costs.
First Tennessee's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. The
measurements used in reporting these segments are the same as those reviewed
monthly by the chief operating decision-maker. Total revenue, expense and asset
levels reflect those which are specifically identifiable or which are allocated
based on an internal allocation method. Net interest income is allocated to the
segments using a combination of matched funding and multiple pool transfer
pricing methods. In addition to expenses paid directly by the segments,
allocated expenses may be charged to the lines of business based on the
utilization of resources. Equity is allocated to the segments through risk
analysis that incorporates the appropriate level of credit, operating, market
and franchise risk factors. Because the allocations are based on internally
developed assignments and allocations, they are to an extent subjective. This
assignment and allocation has been consistently applied for all periods
presented. The following table reflects the approximate amounts of consolidated
revenue, expense, tax, and assets for the three years ended December 31, for
each segment:
Regional
Banking Mortgage Capital Transaction
(Dollars in thousands) Group Banking Markets Processing Other CONSOLIDATED
-----------------------------------------------------------------------------------------------------------------------------------
2001
Interest income $ 897,009 $ 244,126 $ 40,603 $ 17,133 $ -- $ 1,198,871
Interest expense 340,017 136,236 34,626 1,717 -- 512,596
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income 556,992 107,890 5,977 15,416 -- 686,275
Other revenues 356,716 592,380 348,936 93,271 (4,331) 1,386,972
Depreciation and
amortization* 32,722 149,899 2,387 6,525 -- 191,533
Other expenses** 594,398 451,933 242,671 90,551 8,491 1,388,044
-----------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 286,588 98,438 109,855 11,611 (12,822) 493,670
Income taxes 97,756 36,525 41,640 4,412 (16,265) 164,068
-----------------------------------------------------------------------------------------------------------------------------------
Income before debt restructurings
and cumulative effect of changes
in accounting principles 188,832 61,913 68,215 7,199 3,443 329,602
Debt restructurings, net of tax -- -- -- -- (3,225) (3,225)
Cumulative effect of changes in
accounting principles, net of tax -- -- -- -- (8,168) (8,168)
-----------------------------------------------------------------------------------------------------------------------------------
Net income $ 188,832 $ 61,913 $ 68,215 $ 7,199 $ (7,950) $ 318,209
===================================================================================================================================
Average assets $12,984,396 $4,603,780 $1,067,445 $567,091 $ -- $19,222,712
-----------------------------------------------------------------------------------------------------------------------------------
Expenditures for
long-lived assets $ 9,476 $ 5,881 $ 3,700 $ 8,637 $ -- $ 27,694
-----------------------------------------------------------------------------------------------------------------------------------
*Includes amortization expense on mortgage servicing rights and hedges
that is reported in mortgage banking income on the Consolidated
Statements of Income.
**Includes loan loss provision.
First Tennessee National Corporation F-77
NOTE 22 [ ] BUSINESS SEGMENT INFORMATION (CONTINUED)
Regional
Banking Mortgage Capital Transaction
(Dollars in thousands) Group Banking Markets Processing Other Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
2000
Interest income $ 1,020,276 $ 281,698 $ 44,029 $ 17,043 $ -- $ 1,363,046
Interest expense 481,912 239,251 40,990 2,542 -- 764,695
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income 538,364 42,447 3,039 14,501 -- 598,351
Other revenues 405,328 413,441 118,709 98,991 (4,207) 1,032,262
Depreciation and
amortization* 55,406 127,833 1,248 7,043 -- 191,530
Other expenses** 504,411 406,200 91,248 91,730 8,492 1,102,081
-----------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 383,875 (78,145) 29,252 14,719 (12,699) 337,002
Income taxes 133,542 (40,808) 10,920 5,593 (4,826) 104,421
-----------------------------------------------------------------------------------------------------------------------------------
Net income $ 250,333 $ (37,337) $ 18,332 $ 9,126 $ (7,873) $ 232,581
===================================================================================================================================
Average assets $12,962,611 $ 5,042,760 $761,919 $553,536 $ -- $19,320,826
-----------------------------------------------------------------------------------------------------------------------------------
Expenditures for
long-lived assets $ 27,255 $ 7,235 $ 991 $ 9,402 $ -- $ 44,883
-----------------------------------------------------------------------------------------------------------------------------------
1999
Interest income $ 877,619 $ 273,158 $ 38,659 $ 17,728 $ -- $ 1,207,164
Interest expense 367,523 214,263 33,760 2,108 -- 617,654
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income 510,096 58,895 4,899 15,620 -- 589,510
Other revenues 264,947 640,323 126,905 88,672 2,257 1,123,104
Depreciation and
amortization(*) 41,249 172,673 1,363 3,921 -- 219,206
Other expenses(**) 461,386 471,354 95,386 77,218 8,625 1,113,969
-----------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 272,408 55,191 35,055 23,153 (6,368) 379,439
Income taxes 91,183 21,145 13,199 8,798 (2,419) 131,906
-----------------------------------------------------------------------------------------------------------------------------------
Net income $ 181,225 $ 34,046 $ 21,856 $ 14,355 $ (3,949) $ 247,533
===================================================================================================================================
Average assets $12,040,121 $ 5,300,788 $779,893 $499,953 $ -- $18,620,755
-----------------------------------------------------------------------------------------------------------------------------------
Expenditures for
long-lived assets $ 61,037 $ 35,625 $ 1,259 $ 8,499 $ -- $ 106,420
-----------------------------------------------------------------------------------------------------------------------------------
*Includes amortization expense on mortgage servicing rights and hedges
that is reported in mortgage banking income on the Consolidated
Statements of Income.
**Includes loan loss provision.
F-78 First Tennessee National Corporation
NOTE 23 [ ] FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting standards require the disclosure of estimated fair values of all
asset, liability and off-balance sheet financial instruments. The following fair
value estimates are determined as of a specific point in time utilizing various
assumptions and estimates. The use of assumptions and various valuation
techniques, as well as the absence of secondary markets for certain financial
instruments, will likely reduce the comparability of fair value disclosures
between financial institutions. In some cases, book value is a reasonable
estimate of fair value due to the relatively short period of time between
origination of the instrument and its expected realization. The following table
summarizes the book value and estimated fair value of financial instruments
recorded in the Consolidated Statements of Condition as well as off-balance
sheet commitments as of December 31, 2001 and 2000:
ON DECEMBER 31, 2001 On December 31, 2000
--------------------------------- ----------------------------------
Book Fair Book Fair
(Dollars in thousands) Value Value Value Value
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Loans, net of unearned income:
Floating $ 5,329,684 $ 5,330,389 $ 5,228,815 $ 5,228,890
Fixed 4,890,503 5,042,640 4,949,333 5,028,614
Nonaccrual 62,956 62,956 61,302 61,302
Allowance for loan losses (155,373) (155,373) (143,696) (143,696)
-----------------------------------------------------------------------------------------------------------------------------------
Total net loans 10,127,770 10,280,612 10,095,754 10,175,110
Liquid assets 877,359 877,359 379,676 379,676
Loans held for sale* 3,399,309 3,411,284 1,735,070 1,768,464
Securities available for sale 2,064,611 2,064,611 2,200,741 2,200,741
Securities held to maturity 461,259 459,109 638,315 619,728
Derivative assets 172,801 172,801 197,182 214,740
Nonearning assets 1,367,719 1,367,719 1,081,800 1,081,800
-----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Defined maturity $ 5,591,436 $ 5,644,505 $ 5,596,013 $ 5,627,825
Undefined maturity 8,014,898 8,014,898 6,592,678 6,592,678
-----------------------------------------------------------------------------------------------------------------------------------
Total deposits 13,606,334 13,659,403 12,188,691 12,220,503
Short-term borrowings 3,370,694 3,370,681 3,437,561 3,437,454
Term borrowings 550,361 550,860 409,676 402,941
Derivative liabilities 75,232 75,232 21,210 24,203
Other noninterest-bearing liabilities 477,186 477,186 216,172 216,172
Guaranteed preferred beneficial interests in First
Tennessee's junior subordinated debentures 100,000 95,651 100,000 87,578
Preferred stock of subsidiary 44,187 45,909 38,428 36,603
-----------------------------------------------------------------------------------------------------------------------------------
Contractual Fair Contractual Fair
Amount Value Amount Value
-----------------------------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET COMMITMENTS:
Loan commitments** $ 4,797,750 $ 4,419 $ 4,784,295 $ 3,439
Other commitments 613,100 5,838 558,936 5,663
-----------------------------------------------------------------------------------------------------------------------------------
*Mortgage loans held for sale include fair value related to MSR of
approximately $33.1 million and $20.6 million on December 31, 2001 and
2000, respectively.
**Loan commitments do not include mortgage banking interest rate lock
commitments which subsequent to the adoption of SFAS No. 133, are
included on the balance sheet in derivative assets. The amounts for
2000 which are not included on the balance sheet are loan commitments
of $716.3 million with a fair value of $1.1 million.
First Tennessee National Corporation F-79
NOTE 23 [ ] FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following describes the assumptions and methodologies used to estimate the
fair value for financial instruments:
FLOATING RATE LOANS. With the exception of floating rate 1-4 family residential
mortgage loans, the fair value is approximated by the book value. Floating rate
1-4 family residential mortgage loans reprice annually and will lag movements in
market rates; whereas, commercial and consumer loans typically reprice monthly.
The fair value for floating rate 1-4 family mortgage loans is calculated by
discounting future cash flows to their present value. Future cash flows are
discounted to their present value by using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
time period. Prepayment assumptions based on historical prepayment speeds have
been applied to the floating rate 1-4 family residential mortgage portfolio.
FIXED RATE LOANS. The fair value is estimated by discounting future cash flows
to their present value. Future cash flows are discounted to their present value
by using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same time period. Prepayment assumptions
based on historical prepayment speeds have been applied to the fixed rate
mortgage and installment loan portfolios.
NONACCRUAL LOANS. The fair value is approximated by the book value.
ALLOWANCE FOR LOAN LOSSES. The fair value is approximated by the book value.
Additionally, the credit exposure known to exist in the loan portfolio is
embodied in the allowance for loan losses.
LIQUID ASSETS. The fair value is approximated by the book value. For the purpose
of this disclosure, liquid assets consist of federal funds sold, securities
purchased under agreements to resell, capital markets securities inventory,
mortgage banking trading securities, and investment in bank time deposits.
MORTGAGE LOANS HELD FOR SALE. Fair values are based primarily on quoted market
prices.
SECURITIES AVAILABLE FOR SALE. Fair values are based primarily on quoted market
prices.
SECURITIES HELD TO MATURITY. Fair values for marketable securities are based
primarily on quoted market prices. Fair values for securitized loans are based
upon cash flows discounted at a market yield. Market yields are computed by
adding Treasury yields at year-end plus an appropriate spread estimated by
observing quotes on similarly structured marketable securities and changes in
swap spreads.
DERIVATIVE ASSETS. Fair values are based primarily on quoted market prices.
NONEARNING ASSETS. The fair value is approximated by the book value. For the
purpose of this disclosure, nonearning assets include cash and due from banks,
accrued interest receivable and capital markets receivables.
DEFINED MATURITY DEPOSITS. The fair value is estimated by discounting future
cash flows to their present value. Future cash flows are discounted by using the
current market rates of similar instruments applicable to the remaining
maturity. For the purpose of this disclosure, defined maturity deposits include
all certificates of deposit and other time deposits.
UNDEFINED MATURITY DEPOSITS. The fair value is approximated by the book value.
For the purpose of this disclosure, undefined maturity deposits include demand
deposits, checking interest accounts, savings accounts, and money market
accounts.
SHORT-TERM BORROWINGS. The fair value of federal funds purchased, securities
sold under agreements to repurchase, commercial paper, bank notes and other
short-term borrowings is approximated by the book value. The fair value for
Federal Home Loan Bank borrowings is determined using discounted future cash
flows.
DERIVATIVE LIABILITIES. Fair values are based primarily on quoted market prices.
TERM BORROWINGS. The fair value is approximated by the present value of the
contractual cash flows discounted by the investor's yield which considers First
Tennessee's and FTBNA's debt ratings.
OTHER NONINTEREST-BEARING LIABILITIES. For the purpose of this disclosure, other
noninterest-bearing liabilities include accrued interest payable and capital
markets payables. The fair value is approximated by the book value.
GUARANTEED PREFERRED BENEFICIAL INTERESTS. The fair value is approximated by the
present value of the contractual cash flows discounted by the investor's yield
which considers First Tennessee's debt rating.
F-80 First Tennessee National Corporation
NOTE 23 [ ] FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
PREFERRED STOCK OF SUBSIDIARY. The fair value is approximated by the current
trade amount of similar instruments.
LOAN COMMITMENTS. Fair values are based on fees charged to enter into similar
agreements taking into account the remaining terms of the agreements and the
counterparties' credit standing.
OTHER COMMITMENTS. Fair values are based on fees charged to enter into similar
agreements.
NOTE 24 [ ] SECURITIZATIONS
During 2001 and 2000, FHHLC securitized $20.2 billion and $11.6 billion,
respectively, of single-family residential mortgage loans in primarily
proprietary and agency securitization transactions, and the resulting securities
were sold as senior and subordinate certificates. FHHLC recognized net pretax
gains of $260.7 million in 2001 and $104.9 million in 2000 on these sales, which
were recorded in mortgage banking noninterest income and securities gains. In
certain cases, FHHLC continues to service and receive servicing fees related to
the securitized mortgage loans, and has also retained interest only strips or
senior certificates structured as principal only strips. FHHLC received annual
servicing fees approximating .37 percent in 2001 and .35 percent in 2000 of the
outstanding balance of the underlying loans. In 2001 and 2000, FHHLC recognized
approximately $378.8 million and $230.2 million, respectively, in mortgage
servicing rights through these securitizations. These mortgage servicing rights,
as well as other mortgage servicing rights held by FHHLC, are discussed further
in Note 6 - Mortgage Servicing Rights. The investors and the securitization
trusts have no recourse to assets of FHHLC or First Tennessee for failure of
debtors to pay when due.
FHHLC uses assumptions and estimates in determining the fair value allocated to
retained interests at the time of initial securitization. The key economic
assumptions used to measure the fair value of the mortgage servicing rights
(MSR), interest only strips (IO) and principal only strips (PO) at the date of
securitization were as follows:
MSR IO PO
---------------------------------------------------------------------------------------------------------------
2001
Weighted average life (in years) 4.5-7.0 4.4-6.9 N/A
Annual prepayment rate 11.8% - 20.5% 11.8% - 20.5% N/A
Annual discount rate 10.3% - 10.5% 10.3% - 10.5% N/A
Annual cost to service $ 43-$44 per loan N/A N/A
Annual earnings on escrow 4.1% - 5.7% N/A N/A
---------------------------------------------------------------------------------------------------------------
2000
Weighted average life (in years) 6.0 - 8.7 6.0 - 8.7 8.9 - 9.7
Annual prepayment rate 8.1% - 13.0% 8.1% - 13.0% 7.5% - 9.0%
Annual discount rate 10.3% - 10.5% 10.3% - 10.5% 5.0% - 6.2%
Annual cost to service $ 43 per loan N/A N/A
Annual earnings on escrow 5.5% - 6.9% N/A N/A
---------------------------------------------------------------------------------------------------------------
The expected static pool credit losses as of December 31, 2001, were
approximately .10 percent of the original principal balance of loans securitized
during 2001. Static pool losses are calculated by summing the actual and
projected future credit losses and dividing them by the original balance of the
securitized loans. The percentages above represent weighted average credit
losses for all securitizations during the year.
First Tennessee National Corporation F-81
NOTE 24 [ ] SECURITIZATIONS (CONTINUED)
The sensitivity of the current fair value of retained interests to immediate 10
percent and 20 percent adverse changes in assumptions on December 30, 2001 are
as follows:
(Dollars in thousands, except for annual cost to service) MSR IO PO
-----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001
Fair value of retained interests $ 685,005 $ 125,831 $ 4,886
Weighted average life (in years) 6.5 6.4 7.5
Annual prepayment rate 13.0% 13.0% 9.6%
Impact on fair value of 10% adverse change $ (31,676) $ (6,123) $ (69)
Impact on fair value of 20% adverse change (60,810) (11,778) (145)
Annual discount rate on residual cash flows 10.5% 9.5% 4.7%
Impact on fair value of 10% adverse change $ (27,618) $ (4,664) $ (88)
Impact on fair value of 20% adverse change (53,110) (9,003) (171)
Annual cost to service $ 44 per loan N/A N/A
Impact on fair value of 10% adverse change $ (7,139) N/A N/A
Impact on fair value of 20% adverse change (14,277) N/A N/A
Annual earnings on escrow 4.9% N/A N/A
Impact on fair value of 10% adverse change $ (14,961) N/A N/A
Impact on fair value of 20% adverse change (30,228) N/A N/A
-----------------------------------------------------------------------------------------------------------------------------------
These sensitivities are hypothetical and should not be considered to be
predictive of future performance. As the figures indicate, changes in fair value
based on a 10 percent variation in assumptions generally cannot necessarily be
extrapolated because the relationship of the change in assumption to the change
in fair value may not be linear. Also, in this table, the effect of a variation
in a particular assumption on the fair value of the retained interest is
calculated independently from any change in another assumption. In reality,
changes in one factor may result in changes in another, which might magnify or
counteract the sensitivities. Furthermore, the estimated fair values as
disclosed should not be considered indicative of future earnings on these
assets.
First Tennessee Capital Assets Corporation (FTCAC), an indirect wholly-owned
subsidiary of First Tennessee, enters into transactions where mortgage loans are
purchased, pooled, securitized and sold. During 2001, $515.1 million and during
2000 $1.0 billion of mortgage loans were sold for pre-tax gains of $5.9 million
and $7.1 million, respectively, that were recognized in capital markets
noninterest income. FTCAC does not retain servicing rights or any other form of
residual on these securitizations.
During 2000, First Tennessee securitized and sold $190 million of indirect
automobile loan receivables and recognized a pretax loss of $1.3 million, which
was recorded in other noninterest expense. In the securitization, First
Tennessee retained an interest only strip and servicing rights, both of which
are retained interests in the securitized receivables. First Tennessee receives
servicing fees on the outstanding balance of securitized receivables and retains
the rights to future cash flows arising after the investors in the
securitization trust have received the return for which they contracted. The
investors and the securitization trust have no recourse to First Tennessee's
assets for failure of debtors to pay when due except to the extent of First
Tennessee's rights to future cash flows and any subordinated interests retained.
First Tennessee's retained interests are subordinate to investor's interests and
are subject to credit, prepayment, and interest rate risks on the transferred
financial assets.
First Tennessee uses assumptions and estimates in determining the fair value
allocated to the retained interest at the time of initial sale. These
assumptions and estimates include projections concerning the annual percentage
rates charged to customers, charge-off experience, loan repayment rates, the
cost of funds, and discount rates commensurate with the risks involved. For the
automobile loan securitization completed during 2000, the fair value assigned to
the retained interest at the date of securitization was $8.6 million. Key
economic assumptions used in measuring the retained interests at the time of the
securitization were as follows: an annual prepayment rate of 13 percent, a
weighted average life of 41 months, expected annual credit losses of .97
percent, a discount rate of 9 percent on the servicing asset and 11.5 percent on
the interest-only strip, and a yield of 10.07 percent. On December 31, 2001 and
2000, the sensitivity of the current fair value of the retained interests to 10
percent and 20 percent adverse changes in assumptions was not material.
F-82 First Tennessee National Corporation
NOTE 24 [ ] SECURITIZATIONS (CONTINUED)
First Tennessee has also securitized certain real estate loans through a real
estate mortgage investment conduit (REMIC) in prior years and retained all of
the interests in the securitized assets. Fair value for these securities are
based upon cash flows discounted at a market yield. Market yields are computed
by adding Treasury yields at year-end plus an appropriate spread estimated by
observing quotes on similarly structured marketable securities and changes in
swap spreads. The retained interest is classified on the balance sheet in
"Securities held to maturity".
On December 31, 2001, the sensitivity of the current fair value of the REMIC
securities to immediate 10 percent and 20 percent adverse changes in assumptions
are as follows:
(Dollars in thousands) 2001
-----------------------------------------------------------------------------------------------------------------------------------
Fair value of retained interests $ 444,832
Weighted average life (in years) 1.9 - 2.0
Annual prepayment rate 49.4% - 52.0%
Impact on fair value of 10% adverse change $ (369)
Impact on fair value of 20% adverse change (676)
Annual discount rate on residual cash flows 6.3%
Impact on fair value of 10% adverse change $ (10,778)
Impact on fair value of 20% adverse change (22,029)
-----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2001 and 2000, cash flows received and paid
related to the automobile and real estate loan securitizations were as follows:
(Dollars in thousands) 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
Proceeds from initial securitizations $ 21,044,776 $ 12,932,272
Servicing fees received 157,076 161,514
Purchases of delinquent or foreclosed assets 27,595 24,246
Other cash flows received on retained interests* 119,523 159,365
-----------------------------------------------------------------------------------------------------------------------------------
*Other cash flows include all cash flows from interest-only strips,
principal-only strips and REMIC securities.
As of December 31, 2001, the principal amount of loans securitized and other
loans managed with them, and the principal amount of delinquent loans, in
addition to net credit losses during 2001 are as follows:
Total Principal Principal Amount Net Credit
(Dollars in thousands) Amount of Loans of Delinquent Loans* Losses
-----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED
ON DECEMBER 31, 2001 DECEMBER 31, 2001
-----------------------------------------------------------------------------------------------------------------------------------
Type of loan:
Automobile loans $ 272,430 $ 1,913 $ 6,201
Real estate residential 30,979,772 146,983 27,967
-------------------------------------------------------------------------------- ---------- ---------
Total loans managed or securitized** 31,252,202 $ 148,896 $ 34,168
========== =========
Loans securitized and sold (23,522,394)
Loans held for sale or securitization (3,368,622)
Loans securitized and transferred to
investment securities (418,616)
--------------------------------------------------------------------------------
Loans held in portfolio $ 3,942,570
================================================================================
*Includes nonaccrual loans and loans 90 days or more past due.
**Securitized loans are automobile and real estate residential loans in
which First Tennessee has a retained interest other than servicing
rights.
First Tennessee National Corporation F-83
NOTE 25 [ ] PARENT COMPANY FINANCIAL INFORMATION
Following are condensed statements of the parent company:
STATEMENTS OF CONDITION December 31
-----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash $ 13 $ 14
Securities purchased from subsidiary bank under agreements to resell 20,848 70,484
-----------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 20,861 70,498
Investment in bank time deposits 111,967 44,325
Securities available for sale 49,779 59,651
Investments in subsidiaries at equity:
Bank 1,528,676 1,448,359
Non-bank 36,185 35,091
Other assets 53,162 48,105
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,800,630 $ 1,706,029
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Commercial paper and other short-term borrowings $ 24,273 $ 19,169
Accrued employee benefits and other liabilities 77,619 71,810
Term borrowings 220,976 230,894
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 322,868 321,873
Shareholders' equity 1,477,762 1,384,156
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,800,630 $ 1,706,029
===================================================================================================================================
STATEMENTS OF INCOME Year Ended December 31
-----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
Dividend income:
Bank $ 265,905 $ 152,994 $ 116,070
Non-bank 8,913 9,021 7,957
-----------------------------------------------------------------------------------------------------------------------------------
Total dividend income 274,818 162,015 124,027
Interest income 6,062 6,517 10,147
Other income 13,318 292 250
-----------------------------------------------------------------------------------------------------------------------------------
Total income 294,198 168,824 134,424
-----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Short-term debt 843 989 840
Term borrowings 16,617 17,110 20,355
-----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 17,460 18,099 21,195
Compensation, employee benefits and other expense 17,739 16,209 14,672
-----------------------------------------------------------------------------------------------------------------------------------
Total expense 35,199 34,308 35,867
-----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed net income
of subsidiaries 258,999 134,516 98,557
Applicable income taxes (7,616) (11,176) (12,061)
-----------------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net income of subsidiaries 266,615 145,692 110,618
Equity in undistributed net income of subsidiaries:
Bank 50,746 86,236 136,012
Non-bank 848 653 903
-----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 318,209 $ 232,581 ($ 247,533)
===================================================================================================================================
F-84 First Tennessee National Corporation
NOTE 25 [ ] PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS Year Ended December 31
-----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 318,209 $ 232,581 $ 247,533
Less undistributed net income of subsidiaries 51,594 86,889 136,915
-----------------------------------------------------------------------------------------------------------------------------------
Income before undistributed net income of subsidiaries 266,615 145,692 110,618
Adjustments to reconcile income to net cash provided by operating activities:
Provision/(benefit) for deferred income taxes (4,129) 1,914 (807)
Depreciation and amortization 2,702 3,414 3,048
Loss/(gain) on sale of securities 27 (40) --
Gain on divestiture (13,132) -- --
Net change in interest receivable and other assets (832) (4,289) (2,112)
Net change in interest payable and other liabilities 16,092 13,275 17,192
-----------------------------------------------------------------------------------------------------------------------------------
Total adjustments 728 14,274 17,321
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 267,343 159,966 127,939
-----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Securities:
Sales and prepayments 10,145 97 9,452
Purchases (300) (5,000) (5,000)
Decrease/(increase) in investment in bank time deposits (67,642) 32,000 (23,154)
Advances to subsidiaries (20,000) -- --
Principal collected on advances to subsidiaries 20,000 -- 75,500
Proceeds from sale of a subsidiary 23,271 -- 6,652
Cash investments in subsidiaries (4,947) (8,329) (1,758)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided/(used) by investing activities (39,473) 18,768 61,692
-----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Common stock:
Exercise of stock options 78,183 16,639 34,457
Cash dividends (112,093) (113,958) (98,696)
Repurchase of shares (238,701) (48,542) (41,262)
Term borrowings:
Issuance -- -- 5,000
Payment (10,000) -- (83,750)
Increase/(decrease) in short-term borrowings 5,104 2,897 (6,932)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (277,507) (142,964) (191,183)
-----------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents (49,637) 35,770 (1,552)
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 70,498 34,728 36,820
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 20,861 $ 70,498 $ 34,728
===================================================================================================================================
Total interest paid $ 17,763 $ 17,353 $ 22,225
Total income taxes paid 247,760 93,325 46,750
-----------------------------------------------------------------------------------------------------------------------------------
First Tennessee National Corporation F-85
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, 2001 and 2000, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Tennessee National
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2001, the Company adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, and EITF Issue 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial Assets."
/s/ Arthur Andersen LLP
Memphis, Tennessee,
January 15, 2002
F-86 First Tennessee National Corporation
CONSOLIDATED HISTORICAL STATEMENTS OF INCOME (UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------------------
Growth Rates (%)
-----------------
(Dollars in millions except per share data) 2001 2000 1999 1998 1997 1996 01/00 01/96*
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 809.1 $ 912.4 $ 751.5 $ 725.9 $ 699.6 $ 653.5 11.3 - 4.4 +
Investment securities 168.2 198.8 178.6 159.6 139.8 141.1 15.4 - 3.6 +
Loans held for sale 165.9 197.3 231.3 205.7 76.9 82.1 15.9 - 15.1 +
Trading securities inventory 48.6 34.4 31.4 30.5 13.4 14.1 41.3 + 28.1 +
Other earning assets 7.1 20.1 14.4 12.1 11.6 5.7 64.7 - 4.5 +
-----------------------------------------------------------------------------------------------------------------
Total interest income 1,198.9 1,363.0 1,207.2 1,133.8 941.3 896.5 12.0 - 6.0 +
-----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
Savings 3.8 5.5 5.8 7.1 8.2 9.4 30.9 - 16.6 -
Checking interest and money market 84.9 110.8 104.3 113.2 95.1 92.7 23.4 - 1.7 -
Certificates of deposit under $100,000 and
other time 111.1 129.2 123.8 144.9 160.5 166.5 14.0 - 7.8 -
Certificates of deposit $100,000 and more 137.1 254.9 165.9 111.5 47.7 46.3 46.2 - 24.2 +
Short-term borrowings 145.5 240.0 193.1 196.7 130.8 109.6 39.4 - 5.8 +
Term borrowings 30.2 24.3 24.8 19.9 15.9 20.8 24.3 + 7.7 +
----------------------------------------------------------------------------------------------------------------
Total interest expense 512.6 764.7 617.7 593.3 458.2 445.3 33.0 - 2.9 +
----------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 686.3 598.3 589.5 540.5 483.1 451.2 14.7 + 8.7 +
Provision for loan losses 93.5 67.3 57.9 51.3 51.1 35.7 38.8 + 21.2 +
----------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION 592.8 531.0 531.6 489.2 432.0 415.5 11.6 + 7.4 +
----------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 449.6 238.1 479.9 449.5 287.8 249.3 88.9 + 12.5 +
Divestitures 80.4 157.6 4.2 .6 - - 49.0 - N/A
Capital markets 343.7 117.9 126.8 147.4 98.3 85.9 191.5 + 32.0 +
Deposit transactions and cash management 133.6 116.1 106.2 90.4 86.1 78.2 15.1 + 11.3 +
Trust services and investment management 56.7 65.8 59.8 51.2 40.9 34.7 13.8 - 10.3 +
Merchant processing 45.4 48.2 49.7 37.5 32.1 24.2 5.8 - 13.4 +
Equity securities gains/(losses) (3.3) .8 2.3 3.9 (.8) (2.5) NM 5.7 -
Debt securities gains/(losses) (1.0) (5.0) -- -- .1 (.2) 79.0 + 41.1 -
All other income and commissions 154.5 173.2 141.3 96.1 81.3 75.5 10.8 - 15.4 +
----------------------------------------------------------------------------------------------------------------
Total noninterest income 1,259.6 912.7 970.2 876.6 625.8 545.1 38.0 + 18.2 +
----------------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION 1,852.4 1,443.7 1,501.8 1,365.8 1,057.8 960.6 28.3 + 14.0 +
----------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives and benefits 797.8 598.0 633.6 563.6 409.8 385.4 33.4 + 15.7 +
Occupancy 69.1 80.5 73.1 51.4 42.8 39.8 14.1 - 11.6 +
Operations services 59.6 70.9 64.6 58.5 49.9 44.1 15.9 - 6.2 +
Equipment rentals, depreciation and maintenance 74.1 68.2 57.8 45.8 40.1 34.1 8.6 + 16.8 +
Communications and courier 48.8 47.3 51.9 41.5 34.9 33.0 3.0 + 8.1 +
Amortization of intangible assets 10.8 11.7 10.5 11.1 9.6 9.5 7.9 - 2.6 +
All other expense 298.5 230.1 230.9 241.0 155.6 132.5 29.8 + 17.6 +
----------------------------------------------------------------------------------------------------------------
Total noninterest expense 1,358.7 1,106.7 1,122.4 1,012.9 742.7 678.4 22.8 + 14.9 +
----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 493.7 337.0 379.4 352.9 315.1 282.2 46.5 + 11.8 +
Applicable income taxes 164.1 104.4 131.9 126.5 117.6 102.3 57.1 + 9.9 +
----------------------------------------------------------------------------------------------------------------
INCOME BEFORE DEBT RESTRUCTURINGS AND
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 329.6 232.6 247.5 226.4 197.5 179.9 41.7 + 12.9 +
Debt restructurings, net of tax (3.2) -- -- -- -- -- N/A N/A
Cumulative effect of changes in
accounting principles, net of tax (8.2) -- -- -- -- -- N/A N/A
----------------------------------------------------------------------------------------------------------------
NET INCOME $ 318.2 $ 232.6 $ 247.5 $ 226.4 $ 197.5 $ 179.9 36.8 + 12.1 +
================================================================================================================
FULLY TAXABLE EQUIVALENT ADJUSTMENT $ 2.1 $ 2.6 $ 3.0 $ 3.8 $ 4.3 $ 5.4 19.2 - 17.2 -
----------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE BEFORE
DEBT RESTRUCTURINGS AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES $ 2.58 $ 1.79 $ 1.90 $ 1.77 $ 1.54 $ 1.34 44.1 + 14.0 +
----------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE $ 2.49 $ 1.79 $ 1.90 $ 1.77 $ 1.54 $ 1.34 39.1 + 13.2 +
----------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE BEFORE
DEBT RESTRUCTURINGS AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES $ 2.51 $ 1.77 $ 1.85 $ 1.72 $ 1.50 $ 1.32 41.8 + 13.7 +
----------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ 2.42 $ 1.77 $ 1.85 $ 1.72 $ 1.50 $ 1.32 36.7 + 12.9 +
----------------------------------------------------------------------------------------------------------------
*Compound annual growth rate. NM - not meaningful
Certain previously reported amounts have been reclassified to agree with current
presentation. Per share data reflect the 1998 and 1996 two-for-one stock splits.
First Tennessee National Corporation F-87
CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES (UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------------------- ----------------------------- Average
Interest Average Interest Average Balance
(Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/ Growth(%)
(Dollars in millions) Balance Expense Rates Balance Expense Rates 01/00
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Earning assets:
Loans, net of unearned income $ 10,104.3 $ 809.9 8.02% $ 9,932.0 $ 913.3 9.20% 1.7 +
Investment securities:
U.S. Treasury and other U.S. government
agencies 1,812.5 118.1 6.51 1,767.7 119.8 6.78 2.5 +
States and municipalities 50.8 3.8 7.53 48.7 3.6 7.49 4.3 +
Other 732.0 47.5 6.49 1,046.3 76.8 7.34 30.0 -
--------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,595.3 169.4 6.53 2,862.7 200.2 6.99 9.3 -
--------------------------------------------------------------------------------------------------------------------------
Other earning assets:
Mortgage loans held for sale 2,388.0 165.9 6.95 2,450.8 197.3 8.05 2.6 -
Investment in bank time deposits 1.9 .1 6.56 2.1 .1 5.07 9.5 -
Federal funds sold and securities purchased
under agreements to resell 226.5 7.0 3.07 328.4 20.0 6.10 31.0 -
Mortgage banking trading securities 127.5 12.1 9.48 -- -- -- N/A
Capital markets securities inventory 681.9 36.6 5.37 519.5 34.7 6.68 31.3 +
--------------------------------------------------------------------------------------------------------------------------
Total other earning assets 3,425.8 221.7 6.47 3,300.8 252.1 7.64 3.8 +
--------------------------------------------------------------------------------------------------------------------------
Total earning assets 16,125.4 1,201.0 7.45 16,095.5 1,365.6 8.48 .2 +
Allowance for loan losses (149.7) (144.5) 3.6 +
Cash and due from banks 756.5 815.8 7.3 -
Premises and equipment, net 268.7 294.6 8.8 -
Capital markets receivables and other assets 2,221.8 2,259.4 1.7 -
--------------------------------------------------------------------------------------------------------------------------
Total assets/Interest income $ 19,222.7 $ 1,201.0 $ 19,320.8 $1,365.6 .5 -
==========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing deposits:
Savings $ 304.4 $ 3.8 1.26% $ 337.4 $ 5.5 1.64% 9.8 -
Checking interest and money market 3,548.2 84.9 2.39 3,371.5 110.8 3.29 5.2 +
Certificates of deposit under $100,000 and
other time 2,092.3 111.1 5.31 2,310.3 129.2 5.59 9.4 -
--------------------------------------------------------------------------------------------------------------------------
Total interest-bearing core deposits 5,944.9 199.8 3.36 6,019.2 245.5 4.08 1.2 -
Certificates of deposit $100,000 and more 3,142.7 137.1 4.36 3,959.7 254.9 6.44 20.6 -
Federal funds purchased and securities sold
under agreements to repurchase 3,162.7 115.6 3.66 2,899.4 169.4 5.84 9.1 +
Commercial paper and other short-term borrowings 565.3 29.9 5.30 1,050.4 70.6 6.72 46.2 -
Term borrowings 521.5 30.2 5.79 384.3 24.3 6.34 35.7 +
--------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 13,337.1 512.6 3.84 14,313.0 764.7 5.34 6.8 -
Demand deposits 1,541.7 1,688.0 8.7 -
Other noninterest-bearing deposits 1,792.3 1,193.9 50.1 +
Capital markets payables and other liabilities 1,006.3 741.8 35.7 +
Guaranteed preferred beneficial interests in
First Tennessee's junior subordinated
debentures 100.0 100.0 --
Preferred stock of subsidiary 44.0 7.5 483.2 +
Shareholders' equity 1,401.3 1,276.6 9.8 +
--------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity/Interest expense $ 19,222.7 $ 512.6 $ 19,320.8 $ 764.7 .5 -
==========================================================================================================================
Net interest income-tax equivalent basis/Yield $ 688.4 4.27% $ 600.9 3.73%
Fully taxable equivalent adjustment (2.1) (2.6)
--------------------------------------------------------------------------------------------------------------------------
Net interest income $ 686.3 $ 598.3
==========================================================================================================================
Net interest spread 3.61% 3.14%
Effect of interest-free sources used to fund
earning assets .66 .59
--------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.27% 3.73%
==========================================================================================================================
Certain previously reported amounts have been reclassified to agree with current
presentation. Yields and corresponding income amounts are adjusted to a fully
taxable equivalent. Earning assets yields are expressed net of unearned income.
Rates are expressed net of unamortized debenture cost for long-term debt. Net
interest margin is computed using total net interest income.
F-88 First Tennessee National Corporation
------------------------------------------------------------------------------------------------------------------------------------
1999 1998
-------------------------------------- -------------------------------------
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 $ 8,818.8 $ 752.4 8.53% $ 8,242.1 $ 727.4 8.83%
Investment securities:
U.S. Treasury and other U.S. government
agencies 1,711.1 110.5 6.46 1,795.2 117.8 6.56
States and municipalities 50.7 3.8 7.56 69.8 5.4 7.80
Other 940.9 66.2 7.04 560.8 38.4 6.84
------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,702.7 180.5 6.68 2,425.8 161.6 6.66
------------------------------------------------------------------------------------------------------------------------------------
Other earning assets:
Mortgage loans held for sale 3,217.7 231.3 7.19 2,911.2 205.7 7.06
Investment in bank time deposits 9.8 .5 4.76 40.8 2.0 4.81
Federal funds sold and securities purchased
under agreements to resell 292.6 13.9 4.75 193.4 10.1 5.22
Mortgage banking trading securities - - - - - -
Capital markets securities inventory 542.1 31.6 5.82 507.2 30.8 6.07
------------------------------------------------------------------------------------------------------------------------------------
Total other earning assets 4,062.2 277.3 6.82 3,652.6 248.6 6.80
------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 15,583.7 1,210.2 7.77 14,320.5 1,137.6 7.94
Allowance for loan losses (141.2) (133.1)
Cash and due from banks 779.3 697.6
Premises and equipment, net 288.5 222.4
Capital markets receivables and other assets 2,110.5 1,613.3
------------------------------------------------------------------------------------------------------------------------------------
Total assets/Interest income $ 18,620.8 $1,210.2 $16,720.7 $1,137.6
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing deposits:
Savings $ 350.0 $ 5.8 1.65% $ 347.5 $ 7.1 2.05%
Checking interest and money market 3,551.2 104.3 2.94 3,403.7 113.2 3.32
Certificates of deposit under $100,000 and
other time 2,398.4 123.8 5.16 2,588.7 144.9 5.60
------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing core deposits 6,299.6 233.9 3.71 6,339.9 265.2 4.18
Certificates of deposit $100,000 and more 3,163.9 165.9 5.24 1,992.5 111.5 5.59
Federal funds purchased and securities sold
under agreements to repurchase 2,292.9 104.7 4.57 2,456.4 122.6 4.99
Commercial paper and other short-term borrowings 1,631.4 88.4 5.42 1,285.5 74.1 5.76
Term borrowings 371.1 24.8 6.69 252.7 19.9 7.91
------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 13,758.9 617.7 4.49 12,327.0 593.3 4.81
Demand deposits 1,866.6 1,749.0
Other noninterest-bearing deposits 972.0 915.0
Capital markets payables and other liabilities 736.5 633.7
Guaranteed preferred beneficial interests in
First Tennessee's junior subordinated
debentures 100.0 100.0
Preferred stock of subsidiary - -
Shareholders' equity 1,186.8 996.0
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity/Interest expense $ 18,620.8 $ 617.7 $16,720.7 $ 593.3
====================================================================================================================================
Net interest income-tax equivalent basis/Yield $ 592.5 3.80% $ 544.3 3.80%
Fully taxable equivalent adjustment (3.0) (3.8)
------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 589.5 $ 540.5
====================================================================================================================================
Net interest spread 3.28% 3.13%
Effect of interest-free sources used to fund
earning assets .52 .67
------------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.80% 3.80%
====================================================================================================================================
------------------------------------------------------------------------------------------------------------------------------------
1997 1996
------------------------------- -------------------------------- Average
Interest Average Interest Average Balance
(Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/ Growth(%)
(Dollars in millions) Balance Expense Rates Balance Expense Rates 01/96*
------------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Earning assets:
Loans, net of unearned income $ 7,945.1 $ 701.3 8.83% $ 7,472.1 $ 655.9 8.78% 6.2 +
Investment securities:
U.S. Treasury and other U.S. government
agencies 1,963.3 129.3 6.59 2,031.2 131.0 6.45 2.3 -
States and municipalities 83.7 6.8 8.06 98.1 7.9 8.02 12.3 -
Other 92.4 6.1 6.65 73.9 4.8 6.51 58.2 +
---------------------------------------------------------------------------------------------------------------------
Total investment securities 2,139.4 142.2 6.65 2,203.2 143.7 6.52 3.3 +
---------------------------------------------------------------------------------------------------------------------
Other earning assets:
Mortgage loans held for sale 1,005.9 76.9 7.64 1,059.4 82.1 7.74 17.7 +
Investment in bank time deposits 9.8 .5 5.05 14.6 .7 5.05 33.5 -
Federal funds sold and securities purchased
under agreements to resell 207.1 11.1 5.37 94.2 5.0 5.30 19.2 +
Mortgage banking trading securities - - - - - - N/A
Capital markets securities inventory 204.8 13.6 6.65 218.5 14.5 6.66 25.6 +
---------------------------------------------------------------------------------------------------------------------
Total other earning assets 1,427.6 102.1 7.15 1,386.7 102.3 7.38 19.8 +
---------------------------------------------------------------------------------------------------------------------
Total earning assets 11,512.1 945.6 8.21 11,062.0 901.9 8.15 7.8 +
Allowance for loan losses (123.6) (117.1) 5.0 +
Cash and due from banks 658.6 662.8 2.7 +
Premises and equipment, net 195.1 181.4 8.2 +
Capital markets receivables and other assets 1,038.4 799.2 22.7 +
---------------------------------------------------------------------------------------------------------------------
Total assets/Interest income $13,280.6 $ 945.6 $12,588.3 $ 901.9 8.8 +
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing deposits:
Savings $ 376.5 $ 8.2 2.17% $ 424.3 $ 9.4 2.23% 6.4 -
Checking interest and money market 2,963.7 95.1 3.21 2,715.9 92.7 3.41 5.5 +
Certificates of deposit under $100,000 and
other time 2,798.0 160.5 5.74 2,885.2 166.5 5.77 6.2 -
---------------------------------------------------------------------------------------------------------------------
Total interest-bearing core deposits 6,138.2 263.8 4.30 6,025.4 268.6 4.46 .3 -
Certificates of deposit $100,000 and more 843.0 47.7 5.66 835.8 46.3 5.54 30.3 +
Federal funds purchased and securities sold
under agreements to repurchase 1,790.1 89.8 5.01 1,588.1 78.0 4.91 14.8 +
Commercial paper and other short-term borrowings 663.0 41.0 6.18 520.1 31.6 6.07 1.7 +
Term borrowings 185.5 15.9 8.60 253.7 20.8 8.24 15.5 +
---------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 9,619.8 458.2 4.76 9,223.1 445.3 4.83 7.7 +
Demand deposits 1,695.8 1,816.1 3.2 -
Other noninterest-bearing deposits 530.1 268.2 46.2 +
Capital markets payables and other liabilities 457.5 383.4 21.3 +
Guaranteed preferred beneficial interests in
First Tennessee's junior subordinated
debentures 98.6 - N/A
Preferred stock of subsidiary - - N/A
Shareholders' equity 878.8 897.5 9.3 +
---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity/Interest expense $13,280.6 $ 458.2 $12,588.3 $ 445.3 8.8 +
=====================================================================================================================
Net interest income-tax equivalent basis/Yield $ 487.4 4.23% $ 456.6 4.13%
Fully taxable equivalent adjustment (4.3) (5.4)
---------------------------------------------------------------------------------------------------------------------
Net interest income $ 483.1 $ 451.2
=====================================================================================================================
Net interest spread 3.45% 3.32%
Effect of interest-free sources used to fund
earning assets .78 .81
---------------------------------------------------------------------------------------------------------------------
Net interest margin 4.23% 4.13%
=====================================================================================================================
* Compound annual growth rate
First Tennessee National Corporation F-89
CORPORATE OFFICERS
Ralph Horn
Chairman of the Board
and Chief Executive Officer
J. Kenneth Glass
President and Chief Operating Officer
Charles G. Burkett
President
Memphis Financial Services
Retail Financial Services
Larry B. Martin
President
Tennessee Financial Services
Business Financial Services
Herbert H. Hilliard
Executive Vice President
Risk Management
Harry A. Johnson, III
Executive Vice President
General Counsel
Sarah L. Meyerrose
Executive Vice President
Wealth Management
Employee Services
John P. O'Connor, Jr.
Executive Vice President
Chief Credit Officer
Elbert L. Thomas, Jr.
Executive Vice President
Chief Financial Officer
James F. Keen
Senior Vice President
Corporate Controller
Milton A. Gutelius, Jr.
Senior Vice President
Treasurer
Lenore S. Creson
Corporate Secretary
FIRST TENNESSEE NATIONAL CORPORATION
BOARD OF DIRECTORS
Robert C. Blattberg
Polk Brothers Distinguished Professor of Retailing
J.L. Kellogg Graduate School of Management
Northwestern University
Carlos H. Cantu
Senior Chairman
The ServiceMaster Company
George E. Cates
Chairman of the Board
Mid-America Apartment Communities, Inc.
J. Kenneth Glass
President and Chief Operating Officer
First Tennessee National Corporation
First Tennessee Bank National Association
James A. Haslam, III
Chief Executive Officer
Pilot Travel Services, LLC
Ralph Horn
Chairman of the Board and Chief Executive Officer
First Tennessee National Corporation
First Tennessee Bank National Association
John C. Kelley, Jr.
Senior Executive Vice President
First Tennessee National Corporation
First Tennessee Bank National Association
Retired January, 2002 after 32 years of loyal service
R. Brad Martin
Chairman of the Board and Chief Executive Officer
Saks Incorporated
Joseph Orgill, III
Chairman of the Board
Orgill, Inc.
Vicki R. Palmer
Corporate Senior Vice President, Treasurer
and Special Assistant to CEO
Coca-Cola Enterprises, Inc.
Michael D. Rose
Chairman
Gaylord Entertainment Company
William B. Sansom
Chairman of the Board and Chief Executive Officer
The H.T. Hackney Co.
Luke Yancy, III
President and Chief Executive Officer
Mid-South Minority Business Council
SHAREHOLDER
INFORMATION
STOCK LISTING
First Tennessee's common stock is traded on the New York Stock Exchange under
the symbol FTN.
FIRST TENNESSEE AFFILIATES
Federal Flood Certification Corp.
First Express Remittance Processing, Inc.
First Horizon Asset Securities, Inc.
First Horizon Home Loan Corp.
First Horizon Insurance Services, Inc.
First Horizon Merchant Services, Inc.
First Horizon Mortgage Loan Corp.
First Horizon Strategic Alliances, Inc.
First National Bank of Springdale
First Tennessee Bank National Association
First Tennessee Brokerage, Inc.
First Tennessee Capital Assets Corp.
First Tennessee Housing Corp.
First Tennessee Securities Corp.
FT Insurance Corp.
FT Real Estate Securities Company, Inc.
FT Reinsurance Company
Hickory Capital Corp.
Hickory Venture Capital Corp.
Highland Capital Management Corp.
Martin & Company, Inc.
Norten Life Insurance Company
Synaxis Group, Inc.
SHAREHOLDER ASSISTANCE
If you need help, call us at 1-800-410-4577.
- For answers to questions about stock transfers, changes of address,
dividend payments or lost certificates
- To receive general information or an enrollment card for direct deposit
of dividend checks
- To eliminate duplicate mailings of financial information
- To receive a prospectus and enrollment card for our dividend
reinvestment and stock purchase plan
If you would rather contact our transfer agent directly, call Wells Fargo
Shareholder Services at 1-800-468-9716.
INTERNET
Visit www.FirstTennessee.com, www.FirstHorizonOnline.com, www.fhmsi.com or
www.FTNFinancial.com to find out about our products and services as well as the
latest investor relations information including stock quotes, news releases and
other financial data.
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 10:00 a.m. Tuesday, April 16,
2002, at the First Tennessee Building, 165 Madison Avenue, M-Level Auditorium,
Memphis, Tennessee.
GENERAL INFORMATION
First Tennessee National Corporation
Corporate Headquarters
165 Madison Avenue
Memphis, TN 38103
(901) 523-4444
[LOGO] FIRST TENNESSEE
First Tennessee National Corporation
Annual Meeting
April 16, 2002
10:00 a.m. Central Daylight Time
First Tennessee Building
M-Level Auditorium
165 Madison Avenue
Memphis, Tennessee 38103
If you consented to access your proxy information electronically, you
may view it by going to the following website on the internet:
http://www.firsttennessee.com
If you would like to access the proxy material electronically next
year, you may do so by giving your consent at the following website:
http://www.econsent.com/ftn/
[LOGO] FIRST TENNESSEE
FIRST TENNESSEE NATIONAL CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints James L. Boren, Jr., Lewis Donelson, and
George P. Lewis, or any one or more of them with full power of substitution, as
Proxy or Proxies, to represent and vote all shares of stock standing in my name
on the books of the Corporation at the close of business on February 22, 2002,
which I would be entitled to vote if personally present at the Annual Meeting of
Shareholders of First Tennessee National Corporation to be held in the
Auditorium, First Tennessee Building, 165 Madison Avenue, Memphis, Tennessee,
April 16, 2002, at 10 a.m. CDT or any adjournments thereof, upon the matters set
forth in the notice of said meeting as stated on the reverse side. The Proxies
are further authorized to vote in their discretion as to any other matters which
may come before the meeting. The Board of Directors, at the time of preparation
of the Proxy Statement, knows of no business to come before the meeting other
than that referred to in the Proxy Statement.
THE SHARES COVERED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
AUTOMATED TELEPHONE VOTING INSTRUCTIONS, THE INTERNET VOTING INSTRUCTIONS, OR
THE INSTRUCTIONS GIVEN ON THE REVERSE SIDE AND WHEN NO INSTRUCTIONS ARE GIVEN
WILL BE VOTED FOR PROPOSALS 1, 2, AND 3 WHICH ARE DESCRIBED IN THE ACCOMPANYING
NOTICE OF ANNUAL MEETING AND PROXY STATEMENT AND ON THE REVERSE SIDE OF THIS
PROXY.
YOU CAN VOTE YOUR PROXY BY TELEPHONE, OVER THE INTERNET, OR BY SIGNING AND
RETURNING THIS CARD ON THE REVERSE SIDE.
(Continued and see voting instructions on reverse side.)
COMPANY # _________________
CONTROL # _________________
THERE ARE THREE WAYS TO VOTE YOUR PROXY.
YOUR TELEPHONE OR INTERNET VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES
IN THE SAME MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD.
VOTE BY PHONE- TOLL FREE - 1-800-240-6326 - QUICK *** EASY *** IMMEDIATE
- Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a
week until 12:00 p.m. (noon) on April 15, 2002.
- You will be prompted to enter your 3-digit Company Number and your 7-digit
Control Number which are located above.
- Follow the simple voice mail instructions.
VOTE BY INTERNET - HTTP://WWW.EPROXY.COM/FTN/ - QUICK *** EASY *** IMMEDIATE
- Use the Internet to vote your proxy 24 hours a day, 7 days a week until
12:00 p.m. (noon) on April 15, 2002.
- You will be prompted to enter your 3-digit Company number and your 7-digit
Control Number which are located above to obtain your records and create an
electronic ballot.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to First Tennessee National Corporation, c/o
Shareowner Services(SM), P. O. Box 64873, St. Paul, MN 55164-0873.
IF YOU VOTE BY PHONE OR INTERNET, PLEASE DO NOT MAIL YOUR PROXY CARD.
--Please detach here--
[X] Please mark votes as in this example.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ITEMS 1, 2, AND 3.
1. Election of three Class III directors to serve until the 2005 Annual
Meeting of Shareholders and one Class II director to serve until 2004
Annual Meeting.
Nominees: Class III: (01) George E. Cates (02) James A. Haslam, III (03)
Ralph Horn and Class II: (04) Luke Yancy, III
[ ] VOTE FOR [ ] VOTE WITHHELD
all nominees from all nominees
Instructions: To withhold authority to vote for any nominee(s),
write the number(s) of the nominee(s) in the box to the right. [ ]
FOR AGAINST ABSTAIN
2. Approval of 2002 Management Incentive Plan. [ ] [ ] [ ]
3. Ratification of appointment of Arthur Andersen LLP as [ ] [ ] [ ]
auditors.
Address change? Mark Box. Indicate changes below:
[ ]
The undersigned hereby acknowledges receipt of notice of said meeting and
the related proxy statement.
Date____________________________, 2002
[ ]
Signatures in Box
Shareholders sign here exactly as shown on the imprint on this card. When
signing as Attorney, Executor, Administrator, Trustee or Guardian, please give
full name. If more than one Trustee, all should sign. All Joint Owners should
sign.