1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-6198
FIRST AMERICAN CORPORATION
(Exact name of Registrant as specified in its charter)
TENNESSEE 62-0799975
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
FIRST AMERICAN CENTER, NASHVILLE, TENNESSEE 37237
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 615/748-2000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common shares outstanding: 26,068,376 as of April 29, 1994.
2
PART I. FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
FOR QUARTER ENDED MARCH 31, 1994
3
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
QUARTER ENDED
MARCH 31
--------------------------
1994 1993
---------- ----------
(IN THOUSANDS)
INTEREST INCOME
Interest and fees on loans $ 78,311 $ 68,907
Interest and dividends on securities 30,773 35,148
Interest on Federal funds sold and securities
purchased under agreements to resell 1,193 772
Interest on time deposits with other banks and other interest 295 859
- - ----------------------------------------------------------------------------------------------------------------------
Total interest income 110,572 105,686
- - ----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 3,774 3,482
Money market accounts 12,501 10,842
Regular savings 2,454 2,438
Certificates of deposit under $100,000 10,042 11,794
Certificates of deposit $100,000 and over 2,761 3,410
Other time and foreign 3,807 4,699
- - ----------------------------------------------------------------------------------------------------------------------
Total interest on deposits 35,339 36,665
- - ----------------------------------------------------------------------------------------------------------------------
Interest on short-term borrowings 5,144 3,893
Interest on long-term debt 939 315
- - ----------------------------------------------------------------------------------------------------------------------
Total interest expense 41,422 40,873
- - ----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 69,150 64,813
PROVISION FOR LOAN LOSSES (NOTE 4) - 2,000
- - ----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 69,150 62,813
- - ----------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 9,421 8,972
Commissions and fees on fiduciary activities 4,234 3,804
Investment services income 2,110 946
Merchant discount fees 1,507 1,283
Trading account revenue 542 689
Net loss on sale of securities available for sale (403) (1,572)
Other income 7,107 5,307
- - ----------------------------------------------------------------------------------------------------------------------
Total non-interest income 24,518 19,429
- - ----------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 31,668 28,942
Net occupancy expense 5,413 5,144
Equipment expense 3,587 3,203
Systems and processing expense 3,419 3,362
FDIC insurance expense 3,099 3,418
Communication expense 1,986 1,801
Supplies expense 1,326 1,140
Foreclosed properties expense (income), net (776) (1,536)
Other expenses 8,106 9,127
- - ----------------------------------------------------------------------------------------------------------------------
Total non-interest expense 57,828 54,601
- - ----------------------------------------------------------------------------------------------------------------------
Income before income tax expense and cumulative effect of changes
in accounting principles 35,840 27,641
Income tax expense (note 7) 13,900 10,221
- - ----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles 21,940 17,420
Cumulative effect of changes in accounting principles, net of tax (notes 6 and 7) - 1,216
- - ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 21,940 $ 18,636
======================================================================================================================
PER COMMON SHARE:
Income before cumulative effect of changes in accounting principles $ .84 $ .67
Cumulative effect of changes in accounting principles, net of tax - .05
- - ----------------------------------------------------------------------------------------------------------------------
Net income $ .84 $ .72
======================================================================================================================
Cash dividends $ .21 $ .10
======================================================================================================================
Weighted average common shares outstanding 26,041 25,825
======================================================================================================================
See notes to consolidated financial statements.
4
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31 DECEMBER 31
--------------------------- --------------
1994 1993 1993
----------- ----------- --------------
(IN THOUSANDS)
ASSETS
Cash and due from banks $ 358,477 $ 383,515 $ 500,119
Time deposits with other banks 21,875 123,380 2,195
Securities (note 2):
Held to maturity (market value $1,061,373, $1,316,540 and
$670,764, respectively) 1,066,333 1,278,594 657,835
Available for sale (amortized cost $1,027,337, market value
$919,721, and amortized cost $1,356,896, respectively) 1,025,499 889,255 1,392,984
- - -----------------------------------------------------------------------------------------------------------------------------
Total securities 2,091,832 2,167,849 2,050,819
- - -----------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under
agreements to resell 257,338 237,095 144,785
Trading account securities 6,623 4,811 12,263
Loans:
Commercial 1,867,734 1,739,249 1,953,983
Consumer--amortizing mortgages 1,044,943 664,949 1,015,852
Consumer--other 1,015,843 897,405 969,929
Real estate--construction 96,622 108,724 106,624
Real estate--commercial mortgages and other 308,844 304,423 302,772
- - -----------------------------------------------------------------------------------------------------------------------------
Total loans 4,333,986 3,714,750 4,349,160
Unearned discount and net deferred loan fees 7,864 14,423 9,072
- - -----------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net deferred
loan fees 4,326,122 3,700,327 4,340,088
Allowance for possible loan losses (note 4) 137,151 180,671 134,124
- - -----------------------------------------------------------------------------------------------------------------------------
Total net loans 4,188,971 3,519,656 4,205,964
- - -----------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 102,925 101,567 102,596
Foreclosed properties 17,171 31,911 18,881
Other assets 275,543 175,804 150,700
- - -----------------------------------------------------------------------------------------------------------------------------
Total assets $7,320,755 $6,745,588 $7,188,322
=============================================================================================================================
LIABILITIES
Deposits:
Demand (non-interest-bearing) $1,176,669 $1,068,425 $1,232,951
NOW accounts 812,699 689,194 797,343
Money market accounts 1,466,220 1,403,677 1,442,316
Regular savings 435,144 398,527 424,492
Certificates of deposit under $100,000 1,117,603 1,169,319 1,137,965
Certificates of deposit $100,000 and over 334,119 376,200 296,285
Other time 321,337 346,312 327,231
Foreign 25,013 23,408 31,975
- - -----------------------------------------------------------------------------------------------------------------------------
Total deposits 5,688,804 5,475,062 5,690,558
- - -----------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 867,950 591,674 756,763
Long-term debt 52,366 16,902 65,945
Other liabilities 136,035 176,034 93,347
- - -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 6,745,155 6,259,672 6,606,613
- - -----------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $5 par value; authorized 50,000,000
shares; issued: 26,062,254 shares at March 31, 1994;
25,875,016 shares at March 31, 1993 and 25,988,201
shares at December 31, 1993 130,311 129,375 129,941
Capital surplus 118,439 115,639 117,015
Retained earnings 330,113 242,162 313,644
Deferred compensation on restricted stock (2,138) (1,260) (940)
- - -----------------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 576,725 485,916 559,660
Net unrealized gains (losses) on securities available
for sale, net of tax (note 2) (1,125) - 22,049
- - -----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 575,600 485,916 581,709
- - -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $7,320,755 $6,745,588 $7,188,322
=============================================================================================================================
See notes to consolidated financial statements.
5
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NET
UNREALIZED
DEFERRED GAINS
COMPENSATION (LOSSES)
ON ON SECURITIES
QUARTER ENDED MARCH 31, 1993, AND COMMON CAPITAL RETAINED RESTRICTED AVAILABLE
MARCH 31, 1994 STOCK SURPLUS EARNINGS STOCK FOR SALE TOTAL
--------- --------- -------- ------------- ------------- -------
(IN THOUSANDS)
Balance, January 1, 1993 $128,931 $114,350 $226,113 $ (1,073) $ - $468,321
Issuance of 78,211 common shares in
connection with Employee Benefit Plan, net
of discount on Dividend Reinvestment Plan 391 1,048 - - - 1,439
Issuance of 10,600 shares of restricted common
stock 53 241 - (294) - -
Amortization of deferred compensation on
restricted stock - - - 107 - 107
Net income - - 18,636 - - 18,636
Cash dividends declared ($.10 per common
share) - - (2,587) - - (2,587)
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1993 $129,375 $115,639 $242,162 $ (1,260) $ - 485,916
=================================================================================================================================
Balance, January 1, 1994 $129,941 $117,015 $313,644 $ (940) $ 22,049 $581,709
Issuance of 28,853 common shares in
connection with Employee Benefit Plan, net
of discount on Dividend Reinvestment Plan 144 277 - - - 421
Issuance of 45,200 shares of restricted common
stock 226 1,147 - (1,373) - -
Amortization of deferred compensation on
restricted stock - - - 175 - 175
Net income - - 21,940 - - 21,940
Cash dividends declared ($.21 per common
share) - - (5,471) - - (5,471)
Change in net unrealized gains and losses on
securities available for sale, net of taxes - - - - (23,174) (23,174)
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1994 $130,311 $118,439 $330,113 $ (2,138) $ (1,125) $575,600
=================================================================================================================================
See notes to consolidated financial statements.
6
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTER ENDED
MARCH 31
--------------------------
1994 1993
---------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 21,940 $ 18,636
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses - 2,000
Depreciation of premises and equipment 3,377 3,088
Cumulative effect of changes in accounting principles, net of tax - (1,216)
Amortization of intangible assets 788 584
Other amortization (accretion) (303) 1,504
Deferred income tax benefit (1,090) (1,125)
Net loss on sale of securities available for sale 403 1,572
Net gain on sale of premises and equipment (176) (3)
Change in assets and liabilities, net of effects from purchase of
bank subsidiary:
Increase in accrued interest receivable (743) (1,971)
Decrease in accrued interest payable (15) (1,045)
Decrease in trading account securities 5,640 3,070
(Increase) decrease in other assets (107,336) 29,109
Increase in other liabilities 42,875 58,900
- - -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (34,640) 113,103
- - -------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net increase in time deposits with other banks (19,680) (6,195)
Proceeds from sale of securities available for sale 787,062 531,561
Proceeds from maturities of securities available for sale 86,899 1,638
Purchases of securities available for sale (544,022) (833,860)
Proceeds from maturities of securities held to maturity 48,331 406,654
Purchases of securities held to maturity (457,126) (288,867)
Net increase in Federal funds sold and
securities purchased under agreements to resell (112,553) (141,645)
Net (increase) decrease in loans 16,993 (3,463)
Proceeds from sale of premises and equipment 748 47
Purchases of premises and equipment (4,278) (3,375)
- - -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (197,626) (337,505)
- - -------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in deposits (1,754) (46,777)
Net increase (decrease) in short-term borrowings 111,187 (16,905)
Redemption of 7 5/8% debentures at 101.22% (13,759) -
Net proceeds from issuance of common stock 421 1,439
Cash dividends paid (5,471) (2,587)
- - -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 90,624 (64,830)
- - -------------------------------------------------------------------------------------------------------------------------
Decrease in cash and due from banks (141,642) (289,232)
Cash and due from banks, January 1 500,119 672,747
- - -------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, March 31 $358,477 $383,515
=========================================================================================================================
Cash paid during the period for:
Interest expense $ 41,437 $ 40,800
Income taxes 3,486 5,968
Noncash investing activities:
Foreclosures 775 10,094
- - -------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
7
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and general practices
within the banking industry.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
presented in the Corporation's 1993 Annual Report to Shareholders. The
quarterly consolidated financial statements reflect all adjustments which are,
in the opinion of management, necessary for a fair presentation of the results
for interim periods. Certain prior year amounts have been reclassified to
conform with current year presentation. The results for interim periods are
not necessarily indicative of results to be expected for the complete fiscal
year.
(2) SECURITIES
Securities carried in the consolidated balance sheets at
approximately $1.29 billion, $1.10 billion, and $1.31 billion at March 31, 1994
and 1993 and December 31, 1993, respectively, were pledged to secure public and
trust deposits and for other purposes as required or permitted by law.
At March 31, 1994, gross unrealized gains and losses on
securities held to maturity were $5.0 million and $10.0 million, respectively,
and gross unrealized gains and losses on securities available for sale were
$14.4 million and $16.2 million, respectively.
Effective December 31, 1993, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires investments
in equity securities that have a readily determinable fair value and
investments in debt securities to be classified into three categories, as
follows: held to maturity debt securities, which are reported at amortized
cost; trading securities, which are reported at fair value with unrealized
gains and losses included in earnings; and securities available for sale, which
are reported at fair value, with unrealized gains and losses excluded from
earnings and reported, net of tax, as a separate component of shareholders'
equity. There was no impact on the Corporation's 1993 consolidated net income
as a result of adoption of SFAS No. 115.
(3) NONPERFORMING ASSETS
Nonperforming assets were as follows:
MARCH 31 December 31
- - -------------------------------------------------------------------------------------------------------
(in thousands) 1994 1993 1993
- - -------------------------------------------------------------------------------------------------------
Non-accrual loans $ 21,392 $ 48,507 $ 21,666
Foreclosed properties 17,171 31,911 18,881
- - -------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 38,563 $ 80,418 $ 40,547
=======================================================================================================
90 days or more past due
on accrual $ 3,868 $ 6,954 $ 4,764
=======================================================================================================
Nonperforming assets as a percent of
loans and foreclosed properties .89% 2.15% .93%
=======================================================================================================
8
(4) ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses were as
follows:
THREE MONTHS ENDED
MARCH 31
- - ---------------------------------------------------------------------------------------------
(in thousands) 1994 1993
- - ---------------------------------------------------------------------------------------------
Balance, January 1 $134,124 $181,108
Provision charged to operating expenses - 2,000
- - ---------------------------------------------------------------------------------------------
134,124 183,108
- - ---------------------------------------------------------------------------------------------
Loans charged off 2,468 6,244
Recoveries of loans previously charged off (5,495) (3,807)
- - ---------------------------------------------------------------------------------------------
Net charge-offs (recoveries) (3,027) 2,437
- - ---------------------------------------------------------------------------------------------
BALANCE, MARCH 31 $137,151 $180,671
=============================================================================================
Allowance ratios were as follows:
THREE MONTHS ENDED
MARCH 31
- - --------------------------------------------------------------------------------------------
1994 1993
- - --------------------------------------------------------------------------------------------
Allowance end of period to net loans outstanding 3.17% 4.88%
Net charge-offs (recoveries) to average loans (annualized) (.29) .27
Provision for loan losses to average loans (annualized) - .22
============================================================================================
Net charge-offs (recoveries) by major categories were as follows:
THREE MONTHS ENDED
MARCH 31
- - -------------------------------------------------------------------------------------------------
(in thousands) 1994 1993
- - -------------------------------------------------------------------------------------------------
Commercial $ (2,643) $ 706
Consumer--amortizing mortgages (192) 271
Consumer--other 221 769
Real estate--construction (12) 492
Real estate--commercial mortgages and other (401) 199
- - -------------------------------------------------------------------------------------------------
Total net charge-offs (recoveries) $ (3,027) $ 2,437
=================================================================================================
(5) LONG-TERM DEBT
On January 31, 1994, the Corporation redeemed the remaining balance
of approximately $13.6 million of its 7 5/8% debentures due in 2002, at a price
of 101.22%.
(6) EMPLOYEE BENEFITS
Effective January 1, 1993, the Corporation adopted SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
which requires the cost of postretirement benefits other than pensions to be
recognized on an accrual basis as employees perform services to earn such
benefits. The Corporation recognized this item during the first quarter of
1993 as a cumulative effect of a change in accounting principle, resulting in a
one-time non-cash charge of $17.5 million before taxes ($11.6 million after
taxes). This charge represents the discounted present value of expected future
retiree medical and death benefits attributable to employees' service rendered
prior to 1993.
9
Effective December 31, 1993, the Corporation adopted SFAS No.
112, "Employers' Accounting for Postemployment Benefits," which requires
employers to recognize a liability for postemployment benefits under certain
circumstances. The Corporation's short-term and long-term disability benefits,
survivor income benefits, and certain other benefits are governed by this
statement. The Corporation recognized this item during fourth quarter 1993 as
a cumulative effect of a change in accounting principle, resulting in a
one-time non-cash charge of $2.0 million before taxes ($1.3 million after
taxes).
(7) INCOME TAXES
Income tax expense (benefit) attributable to income from
continuing operations consisted of the following:
THREE MONTHS ENDED
MARCH 31
- - --------------------------------------------------------------------------------------------------------
(in thousands) 1994 1993
- - --------------------------------------------------------------------------------------------------------
Current - Federal $ 12,737 $ 9,525
State 2,253 1,821
Deferred - Federal (649) (678)
State (441) (447)
- - --------------------------------------------------------------------------------------------------------
Total $ 13,900 $ 10,221
========================================================================================================
Effective January 1, 1993, the Corporation adopted SFAS No.
109, "Accounting for Income Taxes," which requires a change from the deferred
method of accounting for income taxes applying Accounting Principles Bulletin
No. 11 to the asset and liability method of accounting for income taxes. Under
the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. The cumulative effect of this change in
accounting for income taxes, net of a $3.9 million valuation allowance, was a
$12.8 million benefit and is included in the cumulative effect of changes in
accounting principles in the 1993 consolidated income statement.
The valuation allowance for deferred tax assets as of December 31, 1993,
was $1.3 million. The net change in the total valuation allowance for the
quarter ended March 31, 1994, was a net decrease of $.3 million as a result of
continuing operations.
At March 31, 1994, deferred tax assets, net of a valuation allowance
of $1.0 million, totalled $72.5 million and deferred tax liabilities
totalled $18.4 million, resulting in net deferred tax assets of $54.1 million.
Management believes that more likely than not, the deferred tax assets, net of
a valuation allowance, will be realized. The tax effects of temporary
differences that give rise to the significant portion of deferred tax assets at
March 31, 1994, include the allowance for loan losses ($51.2 million) and
postretirement benefit obligation ($7.5). The tax effects of temporary
differences that give rise to deferred tax liabilities include plant and
equipment ($5.7 million), direct lease financing ($5.7 million), and purchase
accounting adjustments ($2.5 million).
(8) LEGAL MATTERS
The Corporation and seven other financial institutions are defendants in a class
action lawsuit brought in the Circuit Court of Shelby County, Tennessee. The
lawsuit alleges anti-trust, unconscionability, usury, and contract claims
arising out of the defendants' returned check or overdraft fees. The plaintiffs
are requesting compensatory and punitive damages of $25 million against each
defendant. The anti-trust, unconscionability, and usury claims were previously
dismissed, and in December 1993 the Circuit Court granted the defendants' motion
for summary judgment and dismissed the remaining claim. The plaintiffs have
appealed. In addition, an antitrust lawsuit alleging a price fixing conspiracy
has been filed against the Corporation and eight other financial institutions by
the plaintiffs in the U.S. District Court for the Western District of Tennessee.
The defendant banks' motion for summary judgement was recently granted
10
and the plaintiffs have appealed. Management believes these suits are
without merit and, based upon information currently known and on advice of
counsel, that they will not have a material adverse effect on the Corporation's
consolidated financial statements.
Also, there are from time to time other legal proceedings
pending against the Corporation and its subsidiaries. In the opinion of
management and counsel, liabilities, if any, arising from such proceedings
presently pending would not have a material adverse effect on the consolidated
financial statements of the Corporation.
(9) ACQUISITION
On April 1, 1994, the Corporation consummated its purchase of
all of the outstanding shares of Fidelity Crossville Corporation (FCC), the
parent company of First Fidelity Savings Bank, F.S.B. (First Fidelity) located
in Crossville, Tennessee, for $6.5 million. First Fidelity was a Federal stock
savings bank with offices in Crossville and Fairfield Glade with total assets
of $48.7 million at March 31, 1994. In conjunction with the acquisition, First
Fidelity was merged into First American National Bank and First Fidelity's two
offices became branches of First American National Bank. The transaction will
be accounted for as a purchase.
(10) ACCOUNTING MATTERS
During May 1993, the Financial Accounting Standards Board issued
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which
is effective for fiscal years beginning after December 15, 1994. SFAS No. 114
requires that impaired loans be measured at the present value of expected
future cash flows discounted at the loan's effective interest rate, or at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. At this time, the Corporation is evaluating when and
how it will adopt SFAS No. 114, as well as the possible financial impact of
this statement to the Corporation.
(11) EARNINGS PER COMMON SHARE
Earnings per common share amounts are computed by dividing net
income by the weighted average number of common shares outstanding during each
respective period.
11
PART I. FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR QUARTER ENDED MARCH 31, 1994
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with
the consolidated financial statements and supplementary data appearing within
this report. Reference should also be made to the Corporation's 1993 Annual
Report for a complete discussion of factors that impact results of operations,
liquidity, and capital.
HIGHLIGHTS
Net income for the first quarter of 1994 was $21.9 million or
$.84 per share compared with $18.6 million or $.72 per share for the first
quarter of 1993. Net income for the first quarter of 1993 included $1.2
million or $.05 per share for the cumulative effect of changes in accounting
principles. Effective January 1, 1993, the Corporation adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 109,
"Accounting for Income Taxes." Income before the cumulative effect of changes
in accounting principles for the quarter ended March 31, 1993, was $17.4
million or $.67 per share.
The primary factors contributing to improved earnings were
higher net interest income, continued growth in non-interest income and a
decrease in the provision for loan losses. Such improvements were partially
offset by an increase in non-interest expense. The rise in net interest
income to $70.0 million on a taxable equivalent basis for the current quarter
versus $65.8 million in 1993, a 6% increase, was primarily due to an 8%
increase in earning assets partially offset by a lower net interest spread.
Non-interest income of $24.5 million for the three months ended March 31,
1994, increased 26% as compared to the same period in 1993. The provision for
loan losses declined from $2.0 million for the quarter ended March 31, 1993, to
a zero provision for the current quarter. Non-interest expense of $57.8
million for the quarter rose 6% from the first quarter of 1993.
On April 1, 1994, the Corporation consummated its purchase of
all of the outstanding shares of Fidelity Crossville Corporation (FCC), the
parent company of First Fidelity Savings Bank, F.S.B.(First Fidelity) located
in Crossville, Tennessee, for $6.5 million. First Fidelity was a Federal stock
savings bank with offices in Crossville and Fairfield Glade with total assets
of $48.7 million at March 31, 1994. In conjunction with the acquisition, First
Fidelity was merged into First American National Bank and First Fidelity's two
offices became branches of First American National Bank. The transaction will
be accounted for as a purchase.
BALANCE SHEET
Total assets of the Corporation rose $575.2 million or 9% to
$7.32 billion at March 31, 1994, compared to $6.75 billion one year earlier.
The growth in total assets is primarily due to a $625.8 million (17%) increase
in loans, net of unearned discount and net deferred loan fees, to $4.33 billion
at March 31, 1994, from $3.70 billion at March 31, 1993. The consumer
amortizing mortgage loan portfolio at March 31, 1994, reflects an increase of
$380.0 million or 57% as compared to March 31, 1993, as a result of additional
residential mortgage lending. Also contributing to the increase in loans was
the October 1, 1993, acquisition of First American National Bank of Kentucky
(FANBKY), which was accounted for as a purchase and which had $167.5 million of
loans at March 31, 1994. Excluding FANBKY, loans increased $458.3 million or
12%. Partially offsetting this increase in loans were decreases in time
deposits with other banks ($101.5 million) and securities ($76.0 million).
Total deposits were $5.69 billion at March 31, 1994, an
increase of $213.7 million or 4% from $5.48 billion a year earlier primarily
due to deposits obtained from the acquisition of FANBKY, which had $183.0
million of deposits at March 31, 1994. Excluding FANBKY, deposits increased
$30.7 million or 1%. Core deposits, which are defined as total deposits
excluding certificates of deposit $100,000 and over and foreign deposits,
totalled $5.33 billion at March 31, 1994, an increase of $254.2 million or 5%
from one year earlier. Short-term borrowings, primarily Federal funds
purchased and securities sold under agreements to repurchase, increased $276.3
million or 47%.
13
Total shareholders' equity was $575.6 million or 7.86% of
total assets at March 31, 1994, as compared with $485.9 million or 7.20% of
total assets at March 31, 1993. Book value per share was $22.09, $18.78, and
$22.38 for March 31, 1994 and 1993 and December 31, 1993, respectively. The
slight decline in book value per share from December 31, 1993, to March 31,
1994, reflects a decrease of $23.2 million in the net balance of unrealized
gains and losses on securities available for sale, net of tax, recorded in
accordance with SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities," which the Corporation adopted December 31, 1993.
NET INTEREST INCOME
The Corporation's primary source of earnings is net interest
income, which is the difference between interest earned on earning assets and
interest expense incurred on interest-bearing liabilities. Net interest income
is affected by the volume and mix of earning assets and interest-bearing
liabilities and the respective yields earned and rates paid. The Corporation's
1993 Annual Report includes additional discussion of factors which impact net
interest income.
Net interest income on a taxable equivalent basis amounted to
$70.0 million for the first quarter of 1994, compared to $65.8 million for the
first quarter of 1993, an increase of $4.2 million or 6%. The increase was
primarily due to an increase in the volume of earning assets partially offset
by a lower net interest spread, which is the difference between the yield on
earning assets and the rate paid on interest-bearing liabilities. Average
earning assets increased 8% to $6.48 billion in the first quarter of 1994 from
$6.00 billion in the first quarter of 1993. For the first quarter of 1994, the
Corporation's net interest spread declined 11 basis points to 3.78% from 3.89%
for the first of quarter 1993. This decrease resulted from the rates earned on
earning assets (primarily securities) declining more than rates paid on
interest-bearing liabilities (primarily deposits). As the net interest spread
declined, the net interest margin, which is net interest income expressed as a
percentage of average earning assets, decreased to 4.38% for the first quarter
of 1994 as compared with 4.45% for the same quarter a year earlier.
PROVISION FOR LOAN LOSSES AND ALLOWANCE
The provision for loan losses represents a charge (credit) to
earnings necessary, after loan charge-offs and recoveries, to maintain the
allowance for possible loan losses at an appropriate level to absorb estimated
losses inherent in the loan portfolio. During the first quarter of 1994 there
was no provision made for loan losses, compared to a $2.0 million provision
recorded in the first quarter of 1993. Nonperforming loans totalled $21.4
million at March 31, 1994, a 56% decrease from the $48.5 million balance a year
earlier. In the first quarter of 1994 and 1993, charge-offs were $2.5 million
and $6.2 million, respectively, while recoveries amounted to $5.5 million and
$3.8 million, respectively. Net recoveries were $3.0 million in the first
quarter of 1994 as compared to $2.4 million of net charge-offs in the first
quarter of 1993.
The allowance for possible loan losses was $137.2 million at
March 31, 1994, compared with $180.7 million at March 31, 1993. The allowance
for possible loan losses represented 3.17% and 4.88% of net loans at March 31,
1994 and 1993, respectively.
Determining the appropriate level of the allowance and the
amount of the provision for loan losses involves uncertainties and matters of
judgment and therefore cannot be determined with precision. The Corporation's
1993 Annual Report includes additional discussion of factors which impact the
allowance for possible loan losses.
NON-INTEREST INCOME
Total non-interest income was $24.5 million for the first
quarter of 1994 compared with $19.4 million for the first quarter of 1993, an
increase of $5.1 million or 26%. Excluding FANBKY, non-interest income would
have increased $4.9 million or 25%. Excluding the net loss on the sale of
securities available for sale, non-interest income rose $3.9 million or 19%.
This increase from the first quarter of 1993 is primarily attributable to
growth in investment services income ($1.2 million or a 123% increase) related
to the sale of annuities, mutual funds, and other investment products; service
charges on deposit accounts ($.4 million or a 5% increase); commissions and
fees on fiduciary activities ($.4 million or an 11% increase); and "other
income" ($1.8 million or a 34% increase), which includes $1.0 million of income
from a gain from a leverage lease buy-out and vendor incentives.
14
NON-INTEREST EXPENSE
Total non-interest expense was $57.8 million for the first
quarter of 1994 compared with $54.6 million for the same period in 1993, a 6%
increase. Excluding FANBKY, non-interest expense increased $2.1 million or 4%.
Salaries and employee benefits increased $2.7 million or 9% from the same
period in 1993, which is primarily reflective of additional employees from the
acquisition of FANBKY, merit increases, incentive compensation, and higher
employee benefit costs. Non-personnel related expense increased $.5 million or
2% from the first quarter of 1993.
The Corporation's operating efficiency ratio (non-interest
expense as a percentage of the sum of net interest income, on a fully taxable
basis, and non-interest income) improved to 61.17% in the first quarter of 1994
from 64.06% in the first quarter of 1993.
In March 1994 the Corporation's agreement with an outside
vendor to provide data processing and telecommunication services was amended to
transfer certain software programming functions to the Corporation. The
Corporation expects to have increased control over programming functions. The
restructuring will result in a cost savings in systems and processing expense
and increases in other non-interest expense categories, such as salaries and
benefits.
INCOME TAXES
During the first quarters of 1994 and 1993, the Corporation's
income tax expense was $13.9 million and $10.2 million, respectively. The
major factor for the increase in 1994 was the Corporation's higher taxable
income.
ASSET QUALITY
Nonperforming assets of the Corporation were $38.6 million at
March 31, 1994, compared with $80.4 million at March 31, 1993. Nonperforming
assets at March 31, 1994, represented .89% of total loans and foreclosed
properties, compared to 2.15% at March 31, 1993. At March 31, 1994,
nonperforming assets were comprised of $21.4 million of non-accrual loans and
$17.2 million of foreclosed properties.
Other potential problem loans consist of loans that are not considered
nonperforming currently but where information about possible credit
problems has caused the Corporation to have doubts as to the ability of the
borrowers to comply fully with present repayment terms. At March 31, 1994,
loans totalling approximately $79 million, while not considered nonperforming
loans, were classified in the Corporation's internal loan grading system as
substandard or worse, compared with approximately $117 million of such loans at
March 31, 1993. Depending on the economy and other future events, these loans
and others which may not be presently identified could become future
nonperforming assets.
CAPITAL ADEQUACY AND LIQUIDITY
In the first quarter of 1994, the Corporation declared cash
dividends on its common stock of $.21 per share compared to $.10 per share in
the first quarter of 1993, a 110% increase.
The Federal Reserve Board and Office of the Comptroller of the
Currency (OCC) regulations require that bank holding companies and national
banks maintain a minimum total risk-based capital ratio (total capital to
risk-adjusted assets) of 8.0%, a Tier I risk-based capital ratio (Tier I
capital to risk-adjusted assets) of 4.0%, and a Tier I leverage capital ratio
(Tier I capital to total assets less excluded intangibles) of 4.0% to 5.0%. At
March 31, 1994, the Corporation had a total risk-based capital ratio of 12.84%,
a Tier I risk-based capital ratio of 10.62%, and a Tier I leverage capital
ratio of 7.86%. At March 31, 1994, these ratios for First American National
Bank, the Corporation's principal subsidiary, were 11.29%, 10.02%, and 7.48%.
Liquidity management consists of maintaining sufficient cash
levels to fund operations and to meet the requirements of borrowers,
depositors, and creditors. Liquid assets, which include cash and cash
equivalents, money market instruments, and securities that will mature within
one year, amounted to $.92 billion and $1.25 billion at March 31, 1994 and
1993, respectively. The average maturity of securities was 4.3 years and 3.5
years at March 31, 1994 and 1993, respectively. The overall liquidity position
of the Corporation is further enhanced by a high proportion of core deposits,
which provide a stable funding base. Core deposits comprised 94% of total
deposits at March 31, 1994, versus 93% at March 31, 1993.
15
On January 31, 1994, the Corporation redeemed the remaining
balance of approximately $13.6 million of its 7 5/8% debentures due in 2002, at
a price of 101.22%. During the first quarter of 1993, the Corporation filed a
shelf registration statement with the Securities and Exchange Commission to
issue $100 million of subordinated debt securities. During the second quarter
of 1993, the Corporation issued $50 million of subordinated notes under the
shelf registration statement and used a portion of the proceeds for the
acquisition of FANBKY, formerly known as First Federal Savings and Loan
Association of Bowling Green, Kentucky.
The Corporation entered into a three-year revolving credit
agreement effective March 31, 1994, which provides for loans of up to $35
million. This agreement replaces the $50 million one-year revolving credit
agreement which expired March 31, 1994. The Corporation had no revolving
credit borrowings outstanding at March 31, 1994, or during the quarter then
ended.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation and seven other financial institutions
are defendants in a class action lawsuit brought in the Circuit
Court of Shelby County, Tennessee. The lawsuit alleges
anti-trust, unconscionability, usury, and contract claims
arising out of the defendants' returned check charges. The
asserted plaintiff class consists of depositors who have been
charged returned check or overdraft fees. The plaintiffs are
requesting compensatory and punitive damages of $25 million
against each defendant. The anti-trust, unconscionability, and
usury claims were previously dismissed, and in December 1993 the
Circuit Court granted the defendants' motion for summary
judgment and dismissed the remaining claim. The plaintiffs have
appealed. In addition, an antitrust lawsuit alleging a price
fixing conspiracy has been filed against the Corporation and
eight other financial institutions by the plaintiffs in the U.S.
District Court for the Western District of Tennessee. The
defendant banks' motion for summary judgment was recently
granted and the plaintiffs have appealed. Management believes
these suits are without merit and, based upon information
currently known and on advice of counsel, that they will not
have a material adverse effect on the Corporation's consolidated
financial statements.
Also, there are from time to time other legal
proceedings pending against the Corporation and its
subsidiaries. In the opinion of management and counsel,
liabilities, if any, arising from such proceedings presently
pending would not have a material adverse effect on the
consolidated financial statements of the Corporation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ --------------------------------------------------------------------
11 Statement regarding computation of per share earnings is included in Note 11 to
the Consolidated Financial Statements for the Quarter Ended March 31, 1994. See
Part 1, Item 1.
15 Letter regarding unaudited interim financial information from KPMG Peat Marwick,
dated April 21, 1994.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March
31, 1994.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST AMERICAN CORPORATION
(Registrant)
/s/ Dale W. Polley
--------------------------------------
Dale W. Polley
Vice Chairman and Chief Administrative
Officer and Director (and principal
financial officer)
Date: May 11, 1994
18
FIRST AMERICAN CORPORATION
QUARTERLY STATEMENT ON FORM
10-Q
FOR QUARTER ENDED MARCH 31, 1994
EXHIBIT INDEX
Exhibit
Number Description
- - ------ --------------------------------------------------------
15 Letter regarding unaudited interim financial information
from KPMG Peat Marwick, dated April 21, 1994.