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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994. COMMISSION FILE NUMBER 0-6198.
FIRST AMERICAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-0799975
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
FIRST AMERICAN CENTER,
NASHVILLE, TENNESSEE 37237-0700
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 615/748-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $5 PER SHARE AND ASSOCIATED
SERIES A JUNIOR PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
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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 at least the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value (computed on the basis of the reported last
sale price on February 9, 1995) of shares of Common Stock, par value $5 per
share, held by non-affiliates of the Registrant was $731,010,671.60. The
market value calculation assumes (i) that all shares beneficially held by
members of the Board of Directors of the Registrant are shares owned by
"affiliates," a status which each of the directors individually disclaims, and
(ii) that shares beneficially owned by the Registrant's subsidiaries are owned
by "affiliates".
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Outstanding at
Class February 9, 1995
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Common Stock, $5 par value: 26,160,563
DOCUMENTS INCORPORATED BY REFERENCE:
Document from which portions are Part of Form 10-K
incorporated by reference to which incorporated
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1. PROXY STATEMENT DATED MARCH 16, 1995 PART III
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TABLE OF CONTENTS
Page
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PART I
Item 1-2 Business and Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Statistical Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Supervision and Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 4 Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART II
Item 5 Market for the Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 7 Management's Discussion and Analysis of Results
of Operations and Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 8 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Item 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
PART III
Item 10 Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . 55
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Item 12 Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Item 13 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
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PART I
ITEMS 1-2: BUSINESS AND PROPERTIES
GENERAL
First American Corporation (the "Corporation") is a registered bank
holding company which was incorporated under the laws of Tennessee in 1968.
The Corporation's principal subsidiary is First American National Bank
("FANB"). In addition, the Corporation owns First American National Bank of
Kentucky ("FANBKY") and First American Trust Company, N.A. ("FATC"). The
Corporation coordinates the financial resources of the consolidated enterprise
and maintains systems of financial, operational and administrative controls
that allow coordination of selected policies and activities. The Corporation
derives its income from interest, dividends and management fees received from
subsidiaries. The principal executive offices of the Corporation are located
at First American Center, Nashville, Tennessee 37237-0700, and the telephone
number is (615) 748-2000.
COMMERCIAL BANKING
FANB
FANB, headquartered in Nashville, Tennessee, was founded in 1883. At
December 31, 1994, FANB had 139 banking offices in 28 Tennessee counties
containing approximately 69% of Tennessee's population. On the basis of
deposits at June 30, 1994, FANB was the second largest bank in Tennessee, and
had the largest deposit base in the Nashville-Davidson County market, the
second largest deposit base in the Tri-Cities (Sullivan and Washington
Counties) market, the third largest deposit base in the Knoxville (Knox County)
market, the sixth largest deposit base in the Memphis (Shelby County) market,
and the seventh largest deposit base in the Chattanooga (Hamilton County)
market. On the basis of the aggregate deposits held by FANB at June 30, 1994,
the Corporation was the second largest bank holding company headquartered in
Tennessee.
On April 1, 1994, the Corporation consummated its purchase of all
outstanding shares of Fidelity Crossville Corp. ("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 that date. In conjunction with the acquisition, First Fidelity was
merged into FANB and First Fidelity's two offices became branches of FANB.
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At December 31, 1994, FANB had bank offices in the fifteen largest
counties in Tennessee (measured by aggregate bank deposits of banks in the
county at June 30, 1994) and in thirteen of the fifteen most populous Tennessee
cities.
FANB offers the services generally performed by commercial banks of
like size and character. FANB also offers 24-hour banking service through
automated teller machines located at a majority of its banking offices and at
other locations. At December 31, 1994, FANB operated a total of 166 automated
teller machines.
FANB owns First Amtenn Life Insurance Company which underwrites credit
life and accident and health insurance on extensions of credit made by FANB.
FANB also owns Ameristar Capital Markets, Inc., which provides securities
brokerage services.
FANBKY
Like FANB, FANBKY also offers the services generally performed by
commercial banks of like size and character. At December 31, 1994, FANBKY had
three banking offices in two Kentucky counties, Warren and Simpson, which
contained approximately 3% of Kentucky's population, and offered 24-hour
banking service through three automated teller machines. On the basis of
deposits at June 30, 1994, FANBKY had the second largest deposit base in the
combined Warren and Simpson County market.
TRUST AND INVESTMENT MANAGEMENT
The trust functions, both individual and corporate, of the
Corporation, are provided by FATC, which owns all of the stock of Lee,
Robinson & Steine, Inc. ("LRS"), a non-banking subsidiary which is a registered
investment advisor. At December 31, 1994 the total market value of assets
under trust of FATC and LRS was approximately $3.7 billion, including $2.2
billion of assets managed with discretionary investment authority.
RECENT DEVELOPMENTS
In January 1995, the Corporation announced plans to repurchase up to
800,000 shares of First American common stock. The shares so acquired will be
used to fund the Corporation's various employee benefit plans and potential
future acquisitions.
On February 21, 1995, the Corporation reached an agreement with
Heritage Federal Bancshares, Inc. ("HFB") to merge HFB with and into the
Corporation in a transaction valued at approximately $89 million.
Headquartered in Kingsport, HFB is a $520 million savings bank with 13 offices
located in East Tennessee. As a result of the merger, the Corporation is
expected to have the leading market share in
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Sullivan County (Kingsport, Tennessee) and will have the second highest market
share in Anderson and Roane Counties.
Under the definitive merger agreement between the Corporation and HFB,
all of the outstanding shares of HFB will be exchanged for First American
common stock at a rate of $28.00 per share, or $89 million, based upon 3.18
million shares of HFB outstanding at December 31, 1994. The Corporation
intends to increase its stock repurchase program to cover up to 80% of the
shares to be issued in the merger.
The merger is expected to be completed during the fourth quarter of
1995, subject to the approval of the regulatory authorities, including the
Federal Reserve Board, the Office of Thrift Supervision, and the Office of the
Comptroller of the Currency, and the approval of the HFB shareholders.
STATISTICAL INFORMATION
Management's Discussion and Analysis of Results of Operations and
Financial Condition and the Consolidated Year-End Balance Sheets, which discuss
the Corporation from a financial perspective, are contained in Item 7 of this
Report.
SUPERVISION AND REGULATION
General
The Corporation and its subsidiaries are subject to extensive
regulation under state and federal statutes and regulations. The discussion in
this section, which briefly summarizes certain of such statutes, does not
purport to be complete and is qualified in its entirety by reference to such
statutes. Other state and federal legislation and regulations directly and
indirectly affecting banks and other financial institutions are likely to be
enacted or implemented in the future and may have a material impact on the
business of the Corporation and one or more of its subsidiaries.
The Corporation is a bank holding company subject to the supervision
of the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") under the Bank Holding Company Act of 1956, as amended (the "Act"). As
a bank holding company, the Corporation is required to file annual reports
with, and is subject to supervision by, the Federal Reserve Board. FANB,
FANBKY and FATC are national banks and, as such, are subject to the supervision
of, and are regularly examined by, the Office of the Comptroller of the
Currency (the "OCC"). The Corporation and its subsidiary banks are also
subject to certain of the state banking laws of each state in which such banks
are located. Each of the Corporation's banking subsidiaries is also insured
by, and subject to the regulations of, the Federal Deposit Insurance
Corporation (the "FDIC"), and is also affected significantly by the actions of
the Federal Reserve Board by virtue of its role in regulating money supply and
credit availability, as well as the U.S. economy in general. Areas subject to
regulation by
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federal authorities include loan loss reserves, investments, loans, mergers,
issuance of securities, payment of dividends, establishment and closing of
branches, and other aspects of operations.
The Corporation's non-banking subsidiaries are also subject to the
supervision of the Federal Reserve Board and other regulatory agencies
including the Securities and Exchange Commission, the National Association of
Securities Dealers, Inc. and state securities regulators.
Capital
The Federal Reserve Board has adopted risk-based capital guidelines
for bank holding companies. The minimum guideline for the ratio of total
capital ("Total Capital") to risk-weighted assets (including certain
off-balance-sheet activities, such as standby letters of credit) is 8.00%. At
least half of the Total Capital must be composed of common stockholders'
equity, and to the extent applicable, minority interests in the equity accounts
of consolidated subsidiaries, non-cumulative perpetual preferred stock and a
limited amount of cumulative perpetual preferred stock, less disallowed
intangibles ("Tier 1 Capital"). The remainder, which is "Tier 2 Capital", may
consist of subordinated debt (or certain other qualifying debt issued prior to
March 12, 1988), other preferred stock and a limited amount of loan loss
reserves. The Federal Reserve Board expects bank holding companies, especially
those expanding through mergers and acquisitions, to operate well above the
minimum risk-based capital ratios. At December 31, 1994, the Corporation's Tier
1 risk-based capital and total risk-based capital ratios were 10.52% and
12.64%, respectively, both of which exceeded the minimum ratios established by
the Federal Reserve Board.
In addition, the Federal Reserve Board has established minimum
leverage capital ratio guidelines for bank holding companies. These guidelines
provide for a minimum Tier 1 leverage capital ratio (Tier 1 Capital to total
assets, less disallowed intangibles) of 4% to 5% for most bank holding
companies. The Corporation's Tier 1 leverage capital ratio at December 31,
1994 was 8.22%.
The Corporation's subsidiary national banks are also subject to
similar capital requirements adopted by the OCC. At December 31, 1994, FANB's
Tier 1 risk-based, total risk-based and Tier 1 leverage capital ratios were
9.70%, 10.96% and 7.62%, respectively and FANBKY's were 18.71%, 19.78% and
10.65%, respectively, all of which exceeded the minimum ratios established by
the OCC.
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Payment of Dividends
The Corporation is a legal entity separate and distinct from its
subsidiary banks and its nonbank subsidiaries. The Corporation's revenues (on
a parent company only basis) result, in part, from dividends paid to the
Corporation by its subsidiaries. The right of the Corporation, and consequently
the right of creditors and shareholders of the Corporation, to participate in
any distribution of the assets or earnings of any subsidiary through the
payment of such dividends or otherwise is necessarily subject to the prior
claims of creditors of the subsidiary (including depositors, in the case of
banking subsidiaries), except to the extent that claims of the Corporation in
its capacity as a creditor may be recognized.
There are statutory and regulatory requirements applicable to the
payment of dividends by subsidiary banks to the Corporation. National banks
are required to obtain the prior approval of the OCC for the payment of
dividends if the total of all dividends declared in any year exceeds the total
of (i) such bank's net profits (as defined by the OCC) for that year plus (ii)
the retained net profits (as defined by the OCC) for the preceding two years,
less any required transfers to surplus. In addition, national banks may only
pay dividends to the extent that retained net profits (including the portion
transferred to surplus) exceed statutory bad debts. In accordance with these
regulations, at December 31, 1994, FANB had approximately $167.6 million,
FANBKY had approximately $1.3 million and FATC had approximately $1.4 million
available for distribution as dividends to the Corporation without the prior
approval of the OCC.
In 1994, the Corporation was further restricted by the terms of the
Indenture for its 7.625% Debentures due 2002 and by the terms of its
$50,000,000 revolving credit facility, for which Chemical Bank serves as agent.
This facility was not drawn upon by the Corporation during 1994. On January
31, 1994, the Corporation redeemed the remaining balance of approximately $13.6
million of the 7.625% debentures due in 2002, at a purchase price of 101.22% of
par. Under the most restrictive debt covenant in effect during 1994 (contained
in the revolving credit agreement), approximately $88.6 million of the
Corporation's retained earnings were available to pay dividends on December 31,
1994.
It is the policy of the Federal Reserve Board that bank holding
companies should pay dividends only out of current operating earnings. Federal
banking regulators also have the authority to prohibit banks and bank holding
companies from paying dividends if they deem such payment to be an unsafe or
unsound banking practice. In addition, it is the position of the Federal
Reserve Board that the Corporation is expected to act as a source of financial
strength to each subsidiary bank. See "The Corporation's Support of its
Subsidiary Banks."
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Certain Transactions with Affiliates
Provisions of the Federal Reserve Act impose restrictions on the type,
quantity and quality of transactions between affiliates of an insured bank
(including the holding company and its nonbank subsidiaries) and the insured
bank. The purpose of these restrictions is to prevent the misuse of the
resources of the bank by its uninsured affiliates. An exception to most of
these restrictions is provided for transactions between two insured banks that
are within the same holding company where the holding company owns 80% or more
of each bank. An insured bank and its subsidiaries are limited in engaging in
"covered transactions" with its nonbank or nonsavings bank affiliates to the
following amounts: (i) in the case of any such affiliate, the aggregate amount
of covered transactions of the insured bank and its subsidiaries will not
exceed 10% of the capital stock and surplus of the insured bank; and (ii) in
the case of all affiliates, the aggregate amount of covered transactions of the
insured bank and its subsidiaries will not exceed 20% of the capital stock and
surplus of the bank. "Covered transactions" are defined by statute to include
a loan or extension of credit, as well as a purchase of securities issued by an
affiliate, a purchase of assets (unless otherwise exempted by the Federal
Reserve Board), the acceptance of securities issued by the affiliate as
collateral for a loan and the issuance of a guarantee, acceptance, or letter of
credit on behalf of an affiliate. Further, provisions of the Act prohibit a
bank holding company and its subsidiaries from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
The Corporation's Support of its Subsidiary Banks
Under Federal Reserve Board policy, the Corporation is expected to act
as a source of financial and managerial strength to each of its subsidiary
banks and to commit resources to support each of them. This support may be
required at times when the Corporation would not otherwise be inclined to
provide it.
Under the "cross guarantee" provisions of the Federal Deposit
Insurance Act, any FDIC-insured subsidiary of the Corporation can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC in connection with (i) the default of a commonly controlled FDIC-insured
subsidiary or (ii) any assistance provided by the FDIC to any commonly
controlled FDIC-insured subsidiary "in danger of default." "Default" is
defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur in the absence of regulatory
assistance.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any
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commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment over certain other creditors.
Acquisition and Expansion
The Act requires any bank holding company to obtain the prior approval
of the Federal Reserve Board before it may acquire substantially all the assets
of any bank, or ownership or control of any voting shares of any bank, if,
after acquiring such shares, it would own or control, directly or indirectly,
more than 5% of the voting shares of such bank. Under the Tennessee Bank
Structure Act of 1974 (the "TBSA"), a bank holding company which controls more
than 16.5% of the total individual, partnership and corporate demand and other
transaction accounts, savings accounts and time deposits (excluding all
correspondent, governmental, and international deposits and certificates of
deposit of more than $100,000) in all federally insured financial institutions
in Tennessee may not acquire another federally insured financial institution in
Tennessee. As of December 31, 1994, the Corporation estimates it held
approximately 9.5% of such deposits. Recently, Congress enacted interstate
banking legislation establishing both nationwide and statewide concentration
limits. Effective September 29, 1995, federal nationwide concentration limits
prohibit a bank holding company which controls more than 10% of the total
amount of deposits of insured depository institutions in the United States from
further acquisitions; federal statewide concentration limits prohibit an
acquisition if, upon consummation of the transaction, a bank holding company
would control 30% or more of the total amounts of deposits of insured
depository institutions in any one state. Individual state deposit caps are
not superseded by the legislation. Therefore, unless there is a change in
current Tennessee law, the recent federal legislation should have no effect in
Tennessee. Furthermore, except for the acquisition of banks in the four most
populous Tennessee counties (Shelby, Davidson, Knox and Hamilton), under the
TBSA, no bank holding company may acquire any bank in Tennessee that has been
in operation less than five years or organize a new bank in Tennessee, except
in the case of certain interim bank mergers and acquisitions of banks in
financial difficulty. Also, banks in Tennessee which have been in operation at
least five years may merge and continue branching in their respective counties.
The effect of these provisions is that the Corporation in the future may
acquire banks in Tennessee which have been in operation for over five years but
may not form a new bank in any Tennessee county other than the four most
populous counties. In addition, state banks and national banks in Tennessee
can branch anywhere in the state. With certain limited exceptions, Kentucky
banks are prohibited by law from branching outside the county in which their
principal place of business is located. Since January 1, 1991, Tennessee law
has allowed banks and bank holding companies in any state to acquire banks and
bank holding companies in Tennessee on a reciprocal basis. Kentucky also
permits reciprocal interstate banking acquisitions. As discussed more fully
under Recent Banking Legislation, effective September 29, 1995, interstate
banking acquisitions may no longer be based on
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reciprocity. In general, acquisitions of banks or bank holding companies in
Tennessee require the approval of the Tennessee Commissioner of Financial
Institutions and acquisitions of banks or bank holding companies in Kentucky
require the approval of the Kentucky Commissioner of Financial Institutions.
The Act also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company
that is not a bank and from engaging in any business other than banking or
managing or controlling banks. The Federal Reserve Board is authorized to
approve ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. Certain activities have been found to be closely related to
banking by Federal Reserve Board regulations, including operating a trust
company, mortgage company, finance company or factoring company; performing
data processing operations; providing investment advice; and engaging in
certain kinds of credit-related insurance activities.
FDICIA
In 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") which among other matters, authorized
additional borrowings by the FDIC in order to provide funds for the resolution
of failing financial institutions. FDICIA also instituted certain changes to
the supervisory process, including provisions that mandate certain regulatory
agency actions against undercapitalized institutions within specified time
limits.
Prompt Corrective Regulatory Action. FDICIA requires the federal
banking regulators to assign each insured institution to one of five capital
categories: "well capitalized", "adequately capitalized" or one of three
undercapitalized categories, and to take progressively more restrictive actions
towards an institution depending upon the assigned category. Under the "prompt
corrective action" regulations adopted pursuant to FDICIA, in order to be
considered "adequately capitalized", national banks must have a Tier 1
risk-based capital ratio of at least 4%, a total risk-based capital ratio of at
least 8% and a Tier 1 leverage ratio of at least 4%. Well capitalized
institutions are those with a Tier 1 risk-based capital ratio above 6%, a total
risk-based capital ratio above 10%, and a Tier 1 leverage capital ratio above
5% and which are not subject to a written agreement, order or capital
directive to maintain capital at a specified level. Both FANB and FANBKY
exceeded the minimum capital ratios of the "well capitalized" category as of
December 31, 1994.
All institutions, regardless of their capital levels, are restricted
from making any capital distribution or paying any management fees that would
cause the institution to fail to satisfy the minimum levels for any of its
capital requirements. Furthermore, national banks are prohibited from paying
dividends, making other distributions or
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paying any management fees to a parent corporation if, after such payment, the
bank would fail to have a Tier 1 risk-based capital ratio of 4%, a total
risk-based capital ratio of 8% and a Tier 1 leverage ratio of 4%. An
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to
submit an acceptable capital restoration plan within 45 days; (iii) subject to
asset growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company (under which
the holding company would be liable up to the lesser of 5% of the institution's
total assets or the amount necessary to bring the institution into capital
compliance as of the date it failed to comply with its capital restoration
plan) that the institution will comply with the plan until it has been
adequately capitalized on average for four consecutive quarters.
The bank regulatory agencies have discretionary authority to
reclassify well capitalized institutions as adequately capitalized or to impose
on adequately capitalized institutions requirements or actions specified for
undercapitalized institutions if the agency determines after notice and an
opportunity for hearing that the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, which can consist of
the receipt of an unsatisfactory examination rating if the deficiencies cited
are not corrected. A significantly undercapitalized institution, as well as
any undercapitalized institution that did not submit an acceptable capital
restoration plan, may be subject to regulatory demands for recapitalization,
broader application of restrictions on transactions with affiliates,
limitations on interest rates paid on deposits, asset growth and other
activities, possible replacement of directors and officers, and restrictions on
capital distributions by any bank holding company controlling the institution.
Any company controlling the institution could also be required to divest the
institution or the institution could be required to divest subsidiaries. The
senior executive officers of a significantly undercapitalized institution may
not receive bonuses or increases in compensation without prior approval and the
institution is prohibited from making payments of principal or interest on its
subordinated debt. If an institution's ratio of tangible capital to total
assets falls below a level established by the appropriate federal banking
regulator, which may not be less than 2% nor more than 65% of the minimum
tangible capital level otherwise required (the "critically undercapitalized
level"), the institution will be subject to conservatorship or receivership
within 90 days unless periodic determinations are made that forbearance from
such action would better protect the deposit insurance fund. Unless
appropriate findings and certifications are made by the appropriate federal
bank regulatory agencies, a critically undercapitalized institution must be
placed in receivership if it remains critically undercapitalized on average
during the calendar quarter beginning 270 days after the date it became
critically undercapitalized.
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FDIC Insurance. The Corporation's subsidiary banks are subject to
FDIC deposit insurance assessments. Pursuant to FDICIA, the FDIC has
promulgated risk-based deposit insurance assessment regulations which became
effective in 1993. Under these regulations, insured institutions are assigned
assessment risk classifications based upon capital levels and supervisory
evaluations. The annual assessment rates for insured institutions for
semi-annual periods in 1995 currently range from 0.23% to 0.31%, depending on
the institution's assessment risk classification. Under these regulations,
both FANB's and FANBKY's assigned assessment rate for the first semi-annual
period of 1995 is 0.23%. FANB's deposit insurance assessment rate is expected
to decrease from 0.23% to 0.04% effective for the second semi-annual period of
1995, subject to the Bank Insurance Fund reaching a reserve ratio of 1.25% of
insured deposits. With the exception of deposits attributable to the
acquisition of First Fidelity, FANB pays its premiums into the Bank Insurance
Fund, and, as a former savings and loan association, FANBKY pays its premiums
into the Savings Association Insurance Fund (the "SAIF"). The premiums paid in
respect to the deposits attributable to the acquisition of First Fidelity,
which currently represent less than 1% of FANB's deposits, continue to be paid
effectively on the SAIF rate based on a formula allocation. Approximately 17%
of the total premiums paid are passed through and absorbed directly or
indirectly by FANB customers.
Under FDICIA, the FDIC is required to pursue the least costly approach
to resolving failed banks. After 1994, the FDIC may not protect uninsured
deposits of failed banks except in extraordinary circumstances. If it does,
the FDIC must levy a special assessment against all insured banks to cover the
cost.
Standards for Safety and Soundness. Under FDICIA, federal bank
regulatory agencies have also proposed standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation, fees and benefits. The compensation
standards prohibit employment contracts, compensation or benefit arrangements,
stock option plans, fee arrangements or other compensatory arrangements that
provide excessive compensation, fees or benefits or that could lead to material
financial loss.
Brokered Deposits. FDICIA amended the Federal Deposit Insurance Act
to prohibit insured depository institutions that are adequately capitalized
(but do not meet the capital standards for well capitalized institutions) from
accepting brokered deposits unless a waiver has been obtained from the FDIC and
generally bars undercapitalized institutions from accepting any brokered
deposits. Deposit brokers are required to register with the FDIC. The
Corporation's subsidiary banks are not prohibited from accepting brokered
deposits and are not required to seek a waiver under these regulations.
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Consumer Protection Provisions. FDICIA seeks to encourage enforcement
of existing consumer protection laws and enacts new consumer oriented
provisions including a requirement of notice to regulators and customers for
any proposed branch closing and provisions intended to encourage the offering
of "lifeline" banking accounts and lending in distressed communities. FDICIA
also requires depository institutions to make additional disclosures to
depositors with respect to the rate of interest and the terms of their deposit
accounts. Extensive regulations governing "Truth in Savings" became effective
in 1993.
Miscellaneous. FDICIA also made extensive changes in the applicable
rules regarding audit, examinations and accounting. FDICIA generally requires
annual on-site full-scope examinations by each bank's primary federal
regulator. FDICIA also imposes new responsibilities on management, the
independent audit committee and outside accountants to develop, approve, or
attest to reports regarding the effectiveness of internal controls, legal
compliance and off-balance sheet liabilities and assets.
FDICIA also required the Federal Reserve Board to prescribe standards
that limit the risks posed by an insured institution's "exposure" to any other
depository institution in order to limit the risk that a failure of a large
depository institution would pose to an insured depository institution. FDICIA
broadly defines exposure to include extensions of credit to the other
institution; purchases of, or investments in, securities issued by the other
institution; securities issued by the other institution and accepted as
collateral for an extension of credit to any person; and similar transactions
defined by regulation to constitute exposure. Accordingly, the Federal Reserve
Board has established procedures and "benchmark" standards to limit an insured
depository institution's credit and settlement exposure to each of its
correspondent banks.
Under FDICIA, the federal bank regulatory agencies have also
established minimum loan to value ratios (with limited permitted exceptions)
for real estate mortgage and construction loans.
Recent Banking Legislation
Two major pieces of banking legislation were enacted by Congress in
1994: the Riegle-Neal Interstate Banking and Branching Efficiency Act and the
Riegle Community Development and Regulatory Improvement Act.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 ("IBBEA") will significantly impact future bank acquisitions, mergers, and
interstate branching. Among other matters, the IBBEA will permit commercial
bank holding companies to (1) acquire banks nationwide, regardless of whether
such acquisitions are authorized under the law of the host state, one year
after enactment of the legislation (September 29, 1995); (2) fully merge or
consolidate into a single, legal
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entity after June 1, 1997, subject to the right of individual states to "opt
in" or "opt out" of this authority before that date; (3) establish new
branches on an interstate basis provided that such action is specifically
authorized by the law of the host state; and (4) as of September 29, 1995,
engage in certain agency relationships (receive deposits, renew time deposits,
close loans, service loans and receive payments on loans and other obligations)
as agent for any bank or thrift affiliate, irrespective of whether the
affiliate is located in the same State as the agent bank. Overall, the IBBEA,
which is the exclusive means by which bank holding companies can obtain
interstate branches, should encourage an increase in consolidation and
competition and promote geographic diversification in the banking industry.
The Riegle Community Development and Regulatory Improvement Act
("RCDRIA") is an effort to alleviate certain regulatory burdens imposed on the
banking industry by amending sections of FDICIA and other statutes pertaining
to the regulation of financial institutions and financial institution holding
companies. For example, as amended by the RCDRIA, FDICIA empowers each agency
to adopt its own standards for safety and soundness relating to quality,
earnings, and stock valuation as the agency deems appropriate.
The RCDRIA also contains the following provisions: various community
development initiatives; measures to promote the securitization of small
business loans; changes to the National Flood Insurance Program and changes to
the Bank Secrecy Act in terms of money laundering; protection against bank
insolvency of the security interests of public entities in bank assets pledged
to secure the entities' deposits; restrictions on certain high-rate, high-fee
mortgages; and disclosure requirements for reverse mortgages.
Interest Rate Limitations
The maximum permissible rates of interest on most commercial and
consumer loans made by FANB are governed by Tennessee's general usury law and
the Tennessee Industrial Loan and Thrift Companies Act ("Industrial Loan Act").
Most commercial and consumer loans made by FANBKY are governed by Kentucky's
general usury law. Certain other usury laws affect limited classes of loans,
but the laws referenced above are by far the most significant. Tennessee's
general usury law authorizes a floating rate of 4% per annum over the average
prime or base commercial loan rate, as published by the Federal Reserve Board
from time to time, subject to an absolute 24% per annum limit. The Industrial
Loan Act, which also is generally applicable to most of the loans made by FANB
in Tennessee, authorizes an interest rate of 24% per annum and also allows
certain loan charges, generally on a more liberal basis than does the general
usury law. Kentucky's general usury law provides for a legal rate of interest
of 8% or less per annum; however, by written agreement, parties may agree for
the payment of interest at any rate under any written contract or other written
obligation where the original principal amount is in excess of
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$15,000. For loans where the original principal amount is $15,000 or less, any
rate allowed national banking associations under federal law is permissible.
Environmental Regulation
As real estate lenders and as owners of real property, financial
institutions such as the Corporation and its subsidiary banks may become
subject to liability under various statutes and regulations applicable to
property owners, specifically including those which impose liability with
respect to the environmental condition of real property. The Corporation's
primary exposure under these statutes and regulations stems from the lending
activities of its subsidiary commercial banks, both of which have adopted
policies and procedures to identify and monitor their exposure to avoid any
material loss or liability related to the environmental condition of mortgaged
property.
COMPETITION
The activities in which the Corporation engages are very competitive.
Generally, the lines of activity and markets served by the Corporation involve
competition with money market mutual funds, national and state banks, mutual
savings banks, savings and loan associations, finance companies, brokerage
firms, credit unions and other financial institutions located primarily in the
southeastern region of the United States. The principal methods of competition
center around such aspects as interest rates on loans and deposits, lending
limits, customer services, location of offices, and other service delivery
systems. Some of the Corporation's competitors are major corporations with
substantially more assets and personnel than the Corporation and its
subsidiaries.
FANB and FANBKY actively compete for loans and deposits with other
commercial banks, savings and loan associations and credit unions. Consumer
finance companies, department stores, factors, mortgage brokers and insurance
companies are also significant competitors for various types of loans. FATC
competes for various types of fiduciary and trust business from other banks,
trust and investment companies, investment advisory firms and others.
EMPLOYEES
As of December 31, 1994, the Corporation and its subsidiaries employed
3,273 full-time equivalent officers and employees, compared with 3,138 at
December 31, 1993.
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ITEM 3: LEGAL PROCEEDINGS
Note 16 to the Consolidated Financial Statements, included in this
Report under Item 8, is hereby incorporated in this Item 3 by reference.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1994.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Corporation's Common Stock is traded on the National Association
of Securities Dealers Automated Quotation National Market System (the "NASDAQ
National Market System") under the symbol FATN. At the close of business on
February 9, 1995, there were approximately 9,260 holders of record of the
Corporation's common stock. The following table sets out the quarterly high and
low sales prices of the Corporation's common stock. The dividends declared
during each quarter for the last two years are also shown. In the fourth
quarter of 1994, the Corporation declared a dividend of $.25 per share, an
increase of 19%.
STOCK PRICES
DIVIDENDS
HIGH LOW DECLARED
---- --- --------
1993
----
First Quarter $30.250 $25.250 $.10
Second Quarter 33.750 27.000 .15
Third Quarter 34.500 28.250 .15
Fourth Quarter 34.125 28.125 .15
====== ====== ===
1994
----
First Quarter $32.000 $29.125 $.21
Second Quarter 34.750 28.750 .21
Third Quarter 35.000 31.000 .21
Fourth Quarter 33.125 26.125 .25
====== ====== ===
See SUPERVISION AND REGULATION, PAYMENT OF DIVIDENDS. See also, notes 8 and 16
to the Corporation's Consolidated Financial Statements, included in this Report
under Item 8, which are incorporated herein by reference.
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ITEM 6: SELECTED FINANCIAL DATA
The table "Selected Financial Data" on page 45 hereof is incorporated
in this Item 6 by reference.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following is Management's discussion and analysis of First
American Corporation's results of operations and financial condition for 1994.
It should be read in conjunction with the consolidated financial statements and
accompanying notes and other data included herein. Tables referred to in this
discussion may be found on pages 45 to 54.
OVERVIEW
Net income for 1994 was $90.7 million, or $3.48 per share, compared
with $101.8 million, or $3.93 per share, in 1993. Net income for 1994 was
increased by a $6.1 million negative provision for loan losses, net of tax, or
$.24 per share, and reduced by $6.0 million of losses, net of tax, or $.23 per
share, in the fourth quarter on sales of securities available for sale. Net
income for 1993 was increased by a $28.6 million negative provision for loan
losses, net of tax, or $1.10 per share, and reduced by a $6.5 million
charitable contribution, net of tax, or $.25 per share, and the $.1 million
cumulative effect of changes in accounting principles. With these transactions
excluded in both years, net income increased 13% to $90.6 million in 1994, or
$3.47 per share, versus $79.8 million in 1993, or $3.08 per share.
Return on average assets (ROA) and return on average equity (ROE) were
1.25% and 15.23%, respectively, during 1994.
Net interest income on a taxable equivalent basis increased 4% during
1994 to $283.1 million due primarily to loan growth. Average loans increased
17% from 1993 (14% excluding acquisitions).
Asset quality improved during 1994, marking the fourth straight year
of improvement. Nonperforming assets equaled $21.1 million, or .43% of total
loans and foreclosed properties at December 31, 1994. This is down 48% from
$40.5 million, or .93% of total loans and foreclosed properties a year earlier.
First American recorded net loan recoveries of $2.7 million during 1994,
compared to net loan charge-offs of $6.3 million during 1993. In light of
these and other factors, the Company's allowance for possible loan losses
methodology produced a negative $10.0 million (pre-tax) provision for loan
losses in 1994 in order to maintain the allowance for loan losses at an
appropriate level.
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[GRAPH 1 - See Appendix]
NET INCOME (LOSS) PER SHARE
[GRAPH 2- See Appendix]
RETURN ON AVERAGE EQUITY
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[GRAPH 3 - See Appendix]
RETURN ON AVERAGE ASSETS
[GRAPH 4- See Appendix]
NET INTEREST INCOME
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Excluding the $9.7 million (pre-tax) losses on sales of securities
available for sale recorded in the fourth quarter of 1994, non-interest income
rose 10% to $94.6 million. Excluding the $10.0 million (pre-tax) charitable
contribution in 1993, non-interest expense rose only 2% to $229.6 million.
With these transactions excluded, the operating efficiency ratio improved from
63.2% in 1993 to 60.8% in 1994.
Dividends paid in 1994 increased 60% to $.88 per share compared to
$.55 per share in 1993. The Board of Directors voted to increase the quarterly
cash dividend from $.21 per share to $.25 per share during the fourth quarter
of 1994 based on First American's capital position and financial performance.
In December 1994, the Board of Directors authorized the repurchase of
up to 800,000 shares of First American common stock to fund the Company's
various employee benefit plans and potential future acquisitions.
In February 1995, First American signed a definitive merger agreement
under which all of the outstanding shares of Heritage Federal Bancshares, Inc.
(Heritage Federal) will be exchanged for approximately $89 million of First
American common stock. Heritage Federal, a savings bank with $521.5 million in
assets at December 31, 1994, is headquartered in Kingsport, Tennessee and
operates 13 offices primarily in the East Tennessee areas of Tri-Cities,
Anderson County and Roane County. The merger is expected to be completed
during the fourth quarter of 1995, subject to approval by regulatory
authorities and a vote of Heritage Federal shareholders.
TABLE 1 presents selected financial data for First American for the
past five years. A more detailed discussion and analysis of the 1994 results
of operations and financial condition follows.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is First American's largest source of income and
was $283.1 million in 1994 on a taxable equivalent basis. This is up $11.6
million, or 4%, from $271.5 million in 1993. Net interest income is the
difference between total interest income earned on loans, securities and other
earning assets and total interest expense incurred on deposits and other
interest-bearing liabilities. Throughout this discussion, tax-exempt interest
income has been adjusted to a fully taxable equivalent basis in order to be
comparable to interest income which is subject to Federal income tax. This
adjustment has been calculated using a Federal income tax rate of 35%, adjusted
for applicable non-deductible interest expense (for tax purposes) to purchase
or carry tax-exempt obligations.
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Interest income, interest expense and net interest income are all
impacted by fluctuations in the volume and mix of earning assets and
interest-bearing liabilities and the corresponding interest yields and costs.
TABLE 2 highlights the effect that changes in volume, mix and rates had on net
interest income from 1993 to 1994 and 1992 to 1993. TABLE 3 presents detailed
average balance sheets, taxable equivalent interest income, interest expense,
and corresponding yields and rates for the past five years.
Interest income was $475.5 million in 1994, an increase of $36.2
million, or 8%, from 1993. Of the $36.2 million increase, $31.2 million was
due to a higher volume of earning assets (primarily loans) and $5.0 million
resulted from an increase in average yields.
First American's two primary types of earning assets are securities
and loans. During 1994, average earning assets rose $439.4 million, or 7%, to
$6.62 billion. Average loans increased $672.3 million, or 17%, to $4.54
billion and average total securities declined $143.2 million, or 7%, to $1.98
billion. Changes in average balances and other pertinent items are discussed
in more detail under the captions "Securities" and "Loans."
The average yield on earning assets rose seven basis points to 7.18%.
The average yield on loans increased ten basis points to 7.74%, which reflects
a higher interest rate environment in 1994 compared to 1993. The average yield
on total securities dropped 41 basis points in 1994 to 6.07% from 6.48% during
1993. This drop in yield during the rising interest rate environment in 1994
reflects the fact that a portion of the Company's securities portfolio contains
fixed rate securities which do not reprice upon a change in external interest
rates. Thus, an increase in external interest rates does not affect fixed rate
securities until those securities mature or are sold. Downward pressure on the
Company's average securities yield during 1994 resulted from the fact that many
of the fixed rate securities maturing throughout 1994 and in the latter part of
1993 were purchased during 1990 and 1991 when average rates were higher than
average rates in effect during 1994 and the latter part of 1993.
Interest expense increased $24.6 million, or 15%, to $192.4 million in
1994. Of the $24.6 million increase, $13.7 million was due to higher average
rates paid on interest-bearing funds and $10.9 million resulted from increased
volumes of interest-bearing liabilities.
During 1994, average interest-bearing liabilities grew $330.3 million,
or 7%, to $5.40 billion. Average interest-bearing deposits grew $182.4
million, or 4%, to $4.57 billion, average short-term borrowings increased
$103.5 million, or 16%, to $740.4 million and average long-term debt increased
$44.4 million, or 86%, to $95.9 million. Changes in average balances and other
relevant information are discussed in more detail under the captions "Deposits"
and "Other Borrowed Funds."
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The average cost of interest-bearing funds in 1994 rose 25 basis
points to 3.56%. As a reflection of the higher interest rate environment
during 1994, the average rate on interest-bearing deposits increased ten basis
points to 3.45% and the average rate on short-term borrowings rose 116 basis
points to 3.85%. The 87 basis point decline in the average rate on long-term
debt to 6.61% reflects the January 1994 repayment of $13.6 million of
debentures with a rate of 7 5/8% and the 1994 addition of long-term debt at
rates lower than those in effect when long-term debt agreements were entered
into in previous years.
National and international interest rates significantly impact the
market rates First American charges on loans, earns on investment securities,
and pays on interest-bearing liabilities. The average national prime lending
rate and certain longer-term market indices directly impact market rates
charged on new or adjustable rate loans. Yields on many of the Company's newly
purchased debt securities are affected by treasury security yields. Rates paid
on interest-bearing liabilities are primarily impacted by changes in the
Federal funds rate, LIBOR (London Interbank Offering Rate) and certain
longer-term indices.
During periods of increasing rates like 1994, First American's yields
on earning assets and rates paid on interest-bearing liabilities will generally
rise. The increase will not be precisely the same size nor will it occur at
the same time as increases in external indices. This is because some of First
American's earning assets and interest-bearing liabilities do not reprice
immediately or at the same time upon a change in external rates. Competitive
factors also impact yields on earning assets and rates paid on interest-bearing
liabilities. The following chart compares selected average interest rates for
1994 and 1993 and rates in effect on December 31, 1994 and 1993.
======================================================================================================================
Selected External Interest Rates Average Rates During Rates at December 31
------------------------- -------------------------
1994 1993 Increase 1994 1993 Increase
------------------------- ---------- ------------------------- --------
Prime - daily 7.15% 6.00% 1.15 8.50 % 6.00% 2.50
Federal funds - daily 4.21 3.02 1.19 5.45 2.99 2.46
LIBOR (London Interbank Offering 4.87 3.32 1.55 6.50 3.38 3.12
Rate) - 3 month
Treasury security yields:
3 month 4.40 3.05 1.35 5.69 3.06 2.63
6 month 4.88 3.23 1.65 6.49 3.30 3.19
1 year 5.32 3.43 1.89 7.21 3.61 3.60
3 year 6.27 4.44 1.83 7.79 4.53 3.26
5 year 6.69 5.14 1.55 7.81 5.14 2.67
Conventional fixed-rate first mortgages 8.35 7.35 1.00 9.18 7.20 1.98
=====================================================================================================================
Net interest income increased primarily as a result of the increase in
the volume of earning assets partially offset by a lower net interest spread.
Net interest spread is the difference between the average yield on earning
assets and the average rate paid on interest-bearing liabilities. First
American's net interest spread decreased from 3.80% in 1993 to 3.62% in 1994.
This 18 basis point decline reflects the 25 basis
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point increase in the rates paid on interest-bearing liabilities which exceeded
the seven basis point increase in yields on earning assets.
As the Company's net interest spread declined, the net interest
margin, which is net interest income expressed as a percentage of average
earning assets, decreased 12 basis points to 4.27% in 1994 from 4.39% in 1993.
The net interest margin declined less than the net interest spread due to the
increase in net non-interest funding. Net non-interest funding represents the
excess of non-interest-bearing liabilities (such as demand deposits and
shareholders' equity) over non-earning assets (such as cash and other assets).
Management anticipates net interest income will increase in 1995 due
to expected growth in earning assets (primarily loans). However, we also
anticipate that the net interest margin may decline in 1995 as external
interest rates are expected to increase. This may cause the average rates on
interest-bearing liabilities to increase initially at a faster pace than the
Company's ability to increase average yields on interest-earning assets since,
in aggregate, the former tends to reprice more rapidly than the latter. This
topic is also addressed under the caption "Interest Rate Sensitivity."
Management continues to concentrate on improving the mix of earning
assets, increasing the ratio of earning assets to total assets, and managing
interest rate sensitivity. Various techniques are used to assist in managing
the Company's interest rate sensitivity and are discussed under the caption
"Asset/Liability Management."
PROVISION FOR LOAN LOSSES
This topic is addressed under the caption "Allowance and Provision for
Possible Loan Losses."
NON-INTEREST INCOME
Non-interest income of $84.9 million in 1994 declined $.9 million, or
1%, from 1993. This decline is due in large part to losses on securities
available for sale of $10.0 million during 1994 compared to losses of $2.0
million in 1993. Virtually all of the 1994 losses occurred during the fourth
quarter when $85 million of securities available for sale were sold at a $9.7
million loss. The securities sold had the longest maturities and were the most
depreciated in value in the available for sale category. The proceeds were
invested in higher yielding securities with shorter maturities, which improved
First American's overall interest rate sensitivity. The sale did not impact
total shareholders' equity since the unrealized net losses on those securities
had been previously recorded as a reduction in total shareholders' equity under
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
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Non-interest income, excluding net securities losses totalled $94.9
million for 1994, an increase of $7.0 million (8%) from $87.9 million in 1993.
This increase is primarily attributable to increases in service charges on
deposit accounts ($3.0 million, an 8% increase); "other income" ($3.9 million,
an 18% increase); and commissions and fees on fiduciary activities ($.8
million, a 5% increase). The increase in service charges on deposit accounts
is primarily due to 8% growth in the number of retail deposit accounts. The
increase in "other income" consists primarily of $2.6 million of increases from
vendor incentives and insurance commissions. These increases in non-interest
income were partially offset by a decline in investment services income ($.9
million, a 12% decrease) attributable to a decrease in the sale of investment
products.
Management currently expects non-interest income to increase in 1995,
as generating more fee income from existing products and developing new sources
of fee income are two of our primary objectives over the next several years.
NON-INTEREST EXPENSE
Non-interest expense decreased $6.3 million, or 3%, during 1994 to
$229.6 million. The decline was primarily due to a $10.0 million charitable
contribution in 1993 to First American Foundation, a not-for-profit private
foundation formed to facilitate the Company's charitable contributions. There
was no similar contribution in 1994. Also contributing to the decrease in
non-interest expense was a $3.3 million decrease in net foreclosed properties
expense. Exclusive of the 1993 charitable contribution, 1994 non-interest
expenses increased $3.7 million, or 2%.
First American's two recent acquisitions, which were recorded under
the purchase method of accounting, resulted in a $4.2 million increase in
non-interest expense. First American National Bank of Kentucky (FANBKY),
acquired October 1, 1993, produced $1.2 million of non-interest expense in the
three months it was owned during 1993 and $4.5 million in 1994, an increase of
$3.3 million. First Fidelity Savings Bank, F.S.B. (First Fidelity), acquired
April 1, 1994, generated $.9 million of non-interest expense for the nine
months in 1994 it was part of First American. Exclusive of the non-interest
expense of the two acquisitions and the 1993 charitable contribution,
non-interest expense was $224.2 million in 1994 compared to $224.5 million in
1993. The acquisitions are described in NOTE 10 to the consolidated financial
statements.
Salaries and employee benefits increased $12.7 million, or 11%, for
the year ended December 31, 1994. Salaries expense increased $12.6 million, or
13%, in 1994, reflecting merit increases, higher incentive compensation, and
additional employees. The number of full-time equivalent employees increased
4% from 3,138 at December 31, 1993, to 3,273 at December 31, 1994, primarily
due to the transfer of certain software programming functions to First American
that were previously
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outsourced and the acquisition of First Fidelity. Though the October 1, 1993,
acquisition of FANBKY did not cause the number of employees to increase from
year-end 1993 to year-end 1994, it did result in a $1.2 million increase in
salaries and employee benefits since it was part of First American for only
three months during 1993 compared to a full year in 1994. Included within
salaries expense, incentive compensation increased $1.6 million as a result of
higher corporate and individual performances and an increase in the number of
employees covered by incentive programs.
Systems and processing expense declined $5.1 million following the
amendment in March 1994 to First American's agreement with an outside vendor
that provides data processing and telecommunications services. The agreement
was amended to transfer certain software programming functions to the Company.
This amendment resulted in cost reductions in systems and processing expense
and increases in other non-interest expense categories, such as salaries and
benefits, which increased due to hiring approximately 50 additional computer
systems personnel.
Net foreclosed properties expense decreased $3.3 million in 1994 ($5.7
million of net foreclosed properties income in 1994 versus income of $2.4
million in 1993). First American recorded net gains on disposals of foreclosed
properties and in-substance foreclosures amounting to $6.4 million in 1994, as
compared to $3.8 million in 1993. Operating costs associated with foreclosed
properties declined from $1.4 million during 1993 to $.7 million in 1994, as
the level of foreclosed properties decreased.
First American's operating efficiency ratio, which represents the
ratio of operating expenses to taxable equivalent net interest income plus
non-interest income, improved to 60.8% in 1994 (exclusive of the impact on non-
interest income of the $9.7 million of losses on securities available for sale
realized in the fourth quarter of 1994). The 1993 operating efficiency ratio
was 63.2% (exclusive of the impact on non-interest expense of the $10 million
Foundation contribution). Management continues to emphasize expense control as
a means to improve efficiency and profitability. Our near-term objective is to
improve the operating efficiency ratio to less than 59% for 1996.
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[GRAPH 5 - See Appendix]
OPERATING EFFICIENCY RATIO
24
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INCOME TAXES
Income tax expense was $54.1 million in 1994, which resulted in an
effective tax rate of 37.4% of pre-tax income. Income tax expense for 1993 was
$57.4 million which produced an effective tax rate of 36.0%. The lower
effective tax rate in 1993 was primarily attributable to a $1.8 million benefit
resulting from the Omnibus Budget Reconciliation Act of 1993 which became
effective January 1, 1993. For additional information on income taxes of the
Company and the status of Internal Revenue Service examinations, see NOTE 12 to
the consolidated financial statements.
ASSET/LIABILITY MANAGEMENT
INTEREST RATE SENSITIVITY
The purpose of managing First American's interest rate sensitivity is
to maintain growth in net interest income while limiting exposure to the
potentially adverse effects of changes in interest rates. Through this
process, Management seeks to maximize net interest income within liquidity,
capital, and interest rate risk constraints. Asset/liability management is the
responsibility of the Asset/Liability Committee, which is comprised of senior
executives of First American. The Committee regularly reviews First American's
balance sheet, net interest income performance, and forecasts of net interest
income under numerous alternative simulated interest rate environments. The
objective of the review is to identify risks and opportunities relative to
balance sheet and margin strategies. Additionally, the Committee formulates
and monitors compliance with policies and guidelines.
An important tool used in this process is the earnings simulation
model. The model captures earning assets, interest-bearing liabilities and
off-balance-sheet financial instruments and combines the various factors
affecting interest rate sensitivity into an earnings projection that
incorporates the Asset/Liability Committee's forecast of the most likely
interest rate environment for the next 12 months. Interest rate sensitivity is
determined by assessing the impact on net interest income of multiple rising
and falling interest rate scenarios. The model is updated at least monthly and
more often as considered necessary.
Management's asset/liability objective is to manage the interest
sensitivity position so that net income will not be impacted more than 5% for
changes in interest rates within 150 basis points of the Committee's most
likely interest rate forecast over the next 12 months. A 5% impact on net
income corresponds approximately to a 2.5% impact on net interest income.
Throughout 1994, First American operated within this guideline. At December
31, 1994, the Asset/Liability Committee's assessment of the most likely
interest rate scenario included a 100 basis point increase in the prime rate
during the next 12 months from 8.5% at December 31, 1994, to 9.5% at December
31, 1995. This scenario also assumes that interest-
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bearing deposit costs in aggregate will rise by a like amount in 1995.
Management's objective is expected to be met even if the prime rate is 150
basis points higher or lower than forecast.
Another measure of interest rate sensitivity is the "static gap"
approach, which compares the volume of assets to the volume of liabilities
subject to repricing over a series of future time periods. TABLE 4 presents
First American's interest rate sensitivity at December 31, 1994 and 1993, and
reflects that First American is positioned more favorably for a lower interest
rate environment than for a higher interest rate environment. At December 31,
1994, the net of interest-earning assets and interest-bearing liabilities
repricing in a one-year period as a percent of earning assets was a cumulative
net liability sensitivity of 10.9%. In other words, based on the December 31,
1994, balance sheet, the amount of liabilities repricing in 1995 in excess of
the amount of assets repricing in 1995, together with the effect of related
off-balance-sheet activities, was $767.4 million, or 10.9% of all earning
assets. This compares with a cumulative one-year repricing net liability
sensitivity of $1,020.8 million, or 15.6%, at year-end 1993.
For interest rate sensitivity purposes, First American classifies
savings, NOW, and money market deposits, which in aggregate amount to $2.77
billion, as immediately rate-sensitive since none of these deposits carry
contractual rate guarantees or early withdrawal penalties. The classification
of savings and NOW accounts as immediately rate-sensitive is a conservative
approach in measuring maximum interest rate sensitivity since, based on past
experience, rates paid on NOW and regular savings balances ($1.18 billion at
December 31, 1994) have generally not been immediately interest rate sensitive.
If NOW and regular savings accounts are not considered interest-sensitive, the
cumulative one-year repricing gap at December 31, 1994, would be net asset
sensitive by $413.8 million, or 5.9% of earning assets.
DERIVATIVES
Generally, a derivatives transaction is a bilateral contract or
payments exchange agreement whose value derives from the value of an underlying
asset or underlying reference rate or index. First American has utilized
off-balance-sheet derivative products for a number of years in managing its
interest rate sensitivity. The use of non-complex, non-leveraged derivative
products has reduced the Company's exposure to changes in the interest rate
environment. By using derivatives, such as interest rate swaps and futures
contracts, to alter the nature of (hedge) specific assets or liabilities on the
balance sheet (for example, to change a variable to a fixed rate obligation),
the derivative products offset fluctuations in net interest income from the
otherwise unhedged position. In other words, if net interest income from the
otherwise unhedged position changes (increases or decreases) by a given amount,
the derivative product should produce close to the opposite result, making the
combined amount (otherwise unhedged position impact plus the derivative product
position
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impact) essentially unchanged. Derivative products have enabled First American
to improve its balance between interest-sensitive assets and
interest-sensitive liabilities by managing interest rate sensitivity, while
continuing to meet the credit and deposit needs of customers.
First American uses derivatives to reduce the negative effect of
certain interest rate changes. In aggregate, many of First American's
securities and loans with fixed rates may be funded with variable rate money
market deposits. Consequently, net interest income can be negatively affected
if short-term interest rates rise quickly. To reduce this exposure, the
Company has entered into interest rate swaps on which the Company pays a fixed
rate and receives a variable rate tied to three-month LIBOR. Thus, these swaps
act to "fix" the rates paid on a portion of the money market account balances
for the period of time covered by the swaps, which in turn reduces the
potential negative impact on net interest income of rising interest rates.
NOTE 15 to the consolidated financial statements presents the derivative
financial instruments outstanding at December 31, 1994 and 1993.
At December 31, 1994, First American had interest rate and basis swaps
with notional values totalling $1.7 billion with net positive fair values
(unrealized net pre-tax gains) of $17.9 million. Notional amounts are key
elements of derivative financial instrument agreements. However, notional
amounts do not represent the amounts exchanged by the parties to derivatives
and do not measure First American's exposure to credit or market risks. The
amounts exchanged are based on the notional amounts and the other terms of the
underlying derivative agreements. At December 31, 1993, the Company had
interest rate and basis swaps with notional values totalling $1.1 billion and
futures contracts with notional values of $.3 billion. These derivatives had a
total of $3.0 million of net negative fair values (unrealized net pre-tax
losses) at December 31, 1993.
As First American's individual derivative contracts approach maturity,
they may be terminated and replaced with derivatives with longer maturities
which offer more interest rate risk protection. NOTE 15 to the consolidated
financial statements presents the deferred gains related to terminated
derivative contracts. These deferred gains totalled $6.1 million at December
31, 1994, and $.1 million at December 31, 1993. Deferred gains and losses on
off-balance-sheet derivative activities are recognized as interest income or
interest expense over the original covered periods. Of the $6.1 million of
deferred gains at December 31, 1994, $4.6 million will be recognized in net
interest income during 1995 and $1.5 million will be recognized in 1996.
Net interest income for the year ended December 31, 1994, included
derivative products net expense of $4.3 million, consisting of $1.4 million in
additional interest income on loans, $.7 million reduction in interest income
on securities, $4.6 million in additional interest expense on money market
deposits and $.4 million in additional
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interest expense on long-term debt. This compares to $8.3 million of
derivatives products net expense in 1993 which consisted almost entirely of
additional interest expense on money market deposits.
This net expense represents the net of all income and expenses related
to derivatives. For example, when First American enters into an interest rate
swap linked to money market deposits, it initially pays a fixed rate that is
higher than the variable rate it receives. The net difference is a component
of derivative products expense. If the index rate, which is generally 3-month
LIBOR, increases, the out-of-pocket cost of the contract declines while the
fair value of the contract increases. If First American terminates its
position in the contract prior to maturity as part of its strategy in managing
interest rate risk, any gain or loss is deferred and amortized. The
amortization of deferred gains and losses is also a component of derivative
products income or expense. The reduction in derivative products net expense
from 1993 to 1994 resulted primarily from rising rates in 1994.
All derivatives activity is conducted under close Management and Board
of Directors supervision and according to detailed policies and procedures
governing these activities. Policy prohibits the use of leveraged and complex
derivatives. The Board also sets limitations on the total notional amount of
derivatives contracts that may be outstanding at any time.
Off-balance-sheet derivative activities give rise to credit risk when
interest rate changes move in the Company's favor. In such cases, First
American relies on the ability of the counterparts to off-balance-sheet
derivative contracts to make contractual payments over the remaining lives of
the contracts. Credit risk exposure due to off-balance-sheet derivative
activities is closely monitored, and counterparts to these contracts are
selected on the basis of their credit worthiness, as well as their
market-making ability. As of December 31, 1994, all outstanding derivative
transactions were with counterparts with credit ratings of A-2 or better.
Enforceable bilateral netting contracts between First American and its
counterparts allow for the netting of gains and losses in determining net
credit exposure. First American's net credit exposure on outstanding
derivatives was $18.3 million on December 31, 1994. Given the credit standing
of the counterparts to the derivative contracts, Management believes that this
credit exposure is reasonable in light of its objectives.
FINANCIAL CONDITION
SECURITIES
Securities generated 25% of total taxable equivalent interest income
for the year ended December 31, 1994. In addition to producing interest
income, the securities portfolio satisfies pledging requirements on deposits
and is an important component of asset/liability, interest rate sensitivity and
liquidity management, which
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are discussed in more detail under the captions "Asset/Liability Management"
and "Liquidity."
First American's total securities portfolio of $2,150.0 million at
December 31, 1994, consisted of $664.7 million of securities available for sale
(market value) and $1,485.3 million of securities held to maturity (amortized
cost). This compares to a total securities portfolio of $2,050.8 million at
December 31, 1993, which consisted of $1,392.9 million of securities available
for sale and $657.8 million of securities held to maturity. The $827.5 million
increase in securities held to maturity and $728.2 million decrease in
securities available for sale reflect the 1994 transfer of $203.8 million of
securities from the classification of available for sale to held to maturity,
which is discussed in more detail at NOTE 3 to the consolidated financial
statements. Additionally, Management determined that it had the intent and
ability to hold to maturity $802.0 million of securities purchased during 1994,
which exceeded the maturities of $177.8 million of held to maturity securities.
Also during 1994, sales and maturities of available for sale securities
exceeded purchases of those securities by $466.8 million.
Although total securities increased $99.2 million, or 5%, to $2.15
billion at December 31, 1994, total average securities declined $143.2 million,
or 7%, to $1.98 billion during 1994. The decline in total average securities
reflects the funding of new loans, as well as differences in the timing of
maturities, sales, and purchases of securities in 1994 compared to 1993. The
average yield of total securities in 1994 was 6.07%, down from 6.48% in 1993,
as securities maturing in both years bore higher yields than yields on
reinvestment securities despite generally rising interest rates throughout
1994.
The average estimated maturity of the total securities portfolio was
4.2 years at December 31, 1994 (3.8 years for securities held to maturity and
5.0 years for securities available for sale), compared with 4.9 years at
year-end 1993 (4.4 years for securities held to maturity and 5.1 years for
securities available for sale). The expected maturity for government and
corporate securities is the stated maturity, and the expected maturity for
mortgage-backed securities is based on current estimates of average maturities,
which include prepayment assumptions. The average repricing life of the total
securities portfolio was 2.3 years at December 31, 1994 (2.7 years for
securities held to maturity and 1.4 years for securities available for sale).
TABLE 5 presents the estimated average maturity and weighted average yields for
securities held to maturity and securities available for sale at December 31,
1994.
All mortgage-backed securities classified as U.S. Government agencies
and corporations were issued or guaranteed by the Government National Mortgage
Association (Ginnie Mae), the Federal National Mortgage Association (Fannie
Mae), or the Federal Home Loan Mortgage Corporation (Freddie Mac). Essentially
all other mortgage-backed securities consisted of Planned Amortization Class
(PAC)
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collateralized mortgage obligations (CMOs), which were purchased because of
their high credit quality and relatively certain average lives. On December
31, 1994, mortgage-backed security holdings included $289.0 million of floating
rate mortgage-backed securities, of which $125.3 million were classified as
held to maturity and $163.7 million were classified as available for sale. At
year-end 1994, over 99.8% of the Company's debt securities were investment
grade with the remaining .2% unrated.
LOANS
Loans represent First American's largest component of earning assets,
producing 74% of interest income for the year ended December 31, 1994. During
1994, average loans increased $672.3 million, or 17%, to $4.54 billion.
Excluding acquisitions, average loans increased 14%.
The increase in average loan volume is a reflection of positive
economic conditions in Tennessee and selected markets in adjacent states and
the success of First American's marketing efforts. During 1994, the U.S.
economy continued to post gains, while the southeastern states outperformed the
national averages. During this same time, the Tennessee economy led the
southeast in a number of economic categories. Additionally, the Company's
marketing efforts contributed to increased lending in certain target areas.
Management currently expects loan growth to continue in 1995, although at a
slower pace than 1994.
The average yield on loans was 7.74% during 1994 as compared to 7.64%
during 1993. TABLE 3 contains average loan balances and TABLE 12 presents end
of period loan balances by category for the past five years. TABLE 6 presents
the maturities of loans, exclusive of consumer loans, outstanding at December
31, 1994.
Average commercial loans increased $262.7 million, or 15%, to $2.03
billion during 1994 from $1.77 billion during 1993. During 1994 and 1993,
commercial loans averaged 45% and 46% of total loans, respectively.
The increase in the average balances of commercial loans occurred over
a broad range of industry categories. The continued strong performance in the
Tennessee and southeastern economies were important catalysts for First
American's commercial loan growth. Also contributing were marketing campaigns
aimed at the small business market (revenues under $10 million) and the middle
market (revenues of $10 million to $100 million). As an example, during 1994
First American launched a small business equipment loan promotion guaranteeing
20-minute credit decisions. This was made possible by the 1993 re-engineering
of the small business lending underwriting process. Efforts like these
contributed to First American becoming a market leader in the state of
Tennessee in the small business and middle markets.
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[GRAPH 6 - See Appendix]
LOANS, NET OF DISCOUNT AND FEES
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Consumer loans, which consist of consumer amortizing mortgages and
other consumer loans, averaged $2.10 billion during 1994, as compared with
$1.69 billion during 1993, an increase of $403.5 million, or 24%. Total
average consumer loans were 46% of total loans at December 31, 1994, compared
with 44% at year-end 1993.
Average consumer amortizing mortgages, which consist principally of
residential mortgages, increased $309.9 million, or 40%, during 1994.
Exclusive of acquisitions, average consumer amortizing mortgages increased 25%.
This increase results primarily from increases in new and existing home sales
in First American's markets.
Average other consumer loans increased $93.6 million, or 10%, in 1994,
primarily due to an $84.2 million increase in average automobile installment
loans. Average other consumer loans did not increase as much as some of the
Company's peers in part because Management made a decision not to match the low
pricing that developed during 1994 in certain consumer loan markets such as
indirect auto lending. In addition, First American does not have a credit card
portfolio, which is a product generating consumer loan growth for many of its
peers.
Commercial real estate loans, which include real estate construction
and real estate commercial mortgages, averaged $415.7 million during 1994,
compared with $409.5 million during 1993. There have been, and continue to be,
selective opportunities for commercial real estate lending in First American's
markets. However, commercial real estate lending is not a high priority market
for First American. Average total commercial real estate loans represented 9%
of total loans at December 31, 1994, compared with 10% at December 31, 1993.
Essentially all of First American's loans are to borrowers residing in
or doing business in Tennessee and selected markets in adjacent states. First
American seeks to exercise prudent risk management in lending, including
diversification by loan category and by industry segment, as well as by
identification of credit risks. The Company's lending activities are performed
by relationship managers organized by broad industry classification. Based on
Standard Industrial Classification (SIC) codes, there were no industry
concentrations within the commercial loan category in excess of 10% of total
loans, at December 31, 1994 and 1993.
First American's ten largest outstanding loan relationships at
December 31, 1994, amounted to $210.4 million, or 4% of total loans, compared
to $225.7 million, or 5% of total loans, at year-end 1993. At December 31,
1994 and 1993, First American had no loans classified as highly leveraged
transactions, as defined by banking regulations. First American had $.6
million international loans outstanding at December 31, 1994, and essentially
no such loans at December 31, 1993.
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NOTE 15 to the consolidated financial statements discusses
off-balance-sheet loan commitments and risks.
ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSSES
Management's policy is to maintain the allowance for possible loan
losses at a level which is adequate to absorb estimated loan losses inherent in
the loan portfolio. The provision for loan losses is a charge (credit) to
earnings necessary, after loan charge-offs and recoveries, to maintain the
allowance at an appropriate level. The level of the allowance is determined on
a quarterly basis using procedures which include assessments of: (1)
individual criticized and classified credits, other significant credits, and
non-criticized/classified commercial and commercial real estate credits to
estimate loss probability; (2) various consumer loan categories to estimate
loss probabilities based primarily on historical loss experience; (3) unfunded
commitments; and (4) various other factors, such as changes in credit
concentrations, loan mix, and economic conditions which may not be specifically
quantified in the loan analysis process. 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.
In order to maintain the allowance at an appropriate level during
1994, the methodology generally described above produced no provision for loan
losses in each of the first three quarters of 1994 and a $10 million negative
provision in the fourth quarter of 1994. This compares to a $42 million
negative provision reported in 1993. The primary factors resulting in the
negative $10 million provision for 1994 were the continued improvement in asset
quality as discussed under the caption "Asset Quality" and favorable net loan
charge-off experience.
During the years ended December 31, 1994 and 1993, total loan
charge-offs were $15.3 million and $26.6 million, respectively, while total
recoveries amounted to $18.0 million and $20.3 million, respectively, resulting
in net recoveries of $2.7 million in 1994 and net charge-offs of $6.3 million
in 1993. The ratio of net recoveries to average loans was .06% in 1994
compared to a ratio of net charge-offs to average loans of .16% in 1993.
Future provisions for loan losses depend on such factors as asset
quality, net loan charge-offs, loan growth and other criteria discussed above.
The appropriate level of the allowance for possible loan losses and the
corresponding provision will continue to be determined quarterly based on the
allowance assessment methodology. Management currently does not anticipate
that there will be any significant provision for possible loan losses in 1995.
The allowance for possible loan losses was $127.1 million at December
31, 1994, as compared to $134.1 million at December 31, 1993. The $7.0 million
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decline in the allowance during 1994 reflects the $10.0 million negative
provision for loan losses and $2.7 million of net loan recoveries. The total
allowance for possible loan losses represented 2.61% of net loans at December
31, 1994, compared to 3.09% at December 31, 1993.
[GRAPH 7 - See Appendix]
ALLOWANCE TO NET LOANS
[GRAPH 8 - See Appendix]
NET CHARGE-OFF (RECOVERY) RATIO
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The allowance for possible loan losses is comprised of an allocated
portion and an unallocated, or general, portion. The allocated portion is
maintained to cover estimated losses applicable to specific segments of the
loan portfolio. The unallocated portion is maintained to absorb losses which
probably exist as of the evaluation date but are not identified by the more
objective processes used for the allocated portion of the allowance for loan
losses due to risk of error or imprecision. While the total allowance consists
of an allocated portion and an unallocated portion, these terms are primarily
used to describe a process. Both portions of the allowance are available to
provide for inherent loss in the entire portfolio.
TABLE 7 presents a five-year recap of the activity in the allowance
for possible loan losses. The table also contains the year-end allocation of
the allowance for possible loan losses among the various loan portfolios and
the unallocated portion of the allowance for each of the past five years.
ASSET QUALITY
Nonperforming assets, which include non-accrual and restructured loans
and foreclosed properties, continued to decline during 1994. Nonperforming
assets decreased 48% during 1994 to $21.1 million at December 31, 1994. This
decline follows a 54% drop in 1993, a 37% decrease in 1992 and a 32% decline in
1991. Over the last four years, nonperforming assets have decreased 90%, or
$188.6 million from $209.7 million at December 31, 1990, to $21.1 million at
December 31, 1994. The ratio of nonperforming assets to total loans and
foreclosed properties was .43% at December 31, 1994, compared with .93% a year
earlier. The improvement in asset quality resulted from the continuation of
efforts to improve asset quality and collect the full balance due on
nonperforming assets, as well as from a reduction in the level of loans
criticized or classified by First American's internal loan grading and review
process. Management continues to focus on strengthening the credit culture by
improving portfolio management concepts in the area of credit and industry
concentrations, by refining credit risk rating systems, and maintaining a
disciplined adherence to existing credit policies and procedures.
TABLE 8 summarizes changes in nonperforming assets for each of the
past five years and presents the composition of the nonperforming asset balance
at the end of each year.
Other potential problem loans consist of loans that are currently not
considered nonperforming but on which information about possible credit
problems has caused Management to doubt the ability of the borrowers to comply
fully with present repayment terms. At December 31, 1994, loans totalling
$75.1 million, while not considered nonperforming, were classified under the
Company's internal loan grading system as substandard or worse. This was
essentially the same level as a year ago.
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Depending on the economy and other factors, these loans and others which may
not be presently identified could become nonperforming assets in the future.
[GRAPH 9 - See Appendix]
NONPERFORMING ASSETS TO LOANS
AND FORECLOSED PROPERTIES
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DEPOSITS
Total deposits, First American's largest source of funding, averaged
$5.73 billion during 1994, compared with $5.51 billion during 1993, an increase
of $220.3 million, or 4%. Exclusive of acquisitions, average deposits
increased 1% during 1994, primarily due to the success of First American's
money market deposit account, the First American Investment Reserve ("FAIR")
account. This account combines many features common among money market mutual
funds including a minimum balance requirement of $1,000 and a competitive rate.
FAIR account balances averaged $1.43 billion in 1994, up $108.1 million, or 8%,
from 1993. The FAIR account is key to marketing and liquidity strategies in
that it satisfies a known customer need while providing First American a stable
core source of funding at rates favorable to many alternative sources of
funding. On December 31, 1994, FAIR account balances outstanding were $1.54
billion and the interest rate paid was 4.60%.
First American's core deposit base, which represents total deposits
excluding certificates of deposit $100,000 and over and foreign deposits,
averaged $5.33 billion, or 93% of total deposits, during 1994, as compared with
$5.14 billion, or 93% of total deposits, during 1993. Core deposits provide a
stable, low-cost source of funds for the Company.
TABLE 9 details maturities of certificates of deposits $100,000 and
over at December 31, 1994 and 1993.
OTHER BORROWED FUNDS
In addition to deposits, other sources of funding utilized by First
American include short-term borrowings and long-term debt. Total short-term
borrowings include Federal funds purchased from correspondent banks, securities
sold under agreements to repurchase (repurchase agreements), and other
short-term borrowings, principally funds due to the U.S. Treasury Department in
tax and loan accounts.
Federal funds purchased and securities sold under repurchase
agreements averaged $681.2 million during 1994, a 16% increase over the
previous year. The average rate paid on Federal funds purchased and securities
sold under repurchase agreements for 1994 was 3.80%, 116 basis points more than
the 2.64% average rate paid in 1993. The net funds purchased position (Federal
funds purchased and repurchase agreements less Federal funds sold and
securities purchased under agreements to resell) at year-end 1994 was $829.0
million, up from $520.0 million at year-end 1993.
Other short-term borrowings averaged $59.2 million during 1994
compared with $49.8 million during 1993. The average rate paid on other
short-term
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borrowings was 4.51% in 1994, an increase of 132 basis points from 3.19% in
1993.
[GRAPH 10 - See Appendix]
CORE DEPOSITS
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Long-term debt averaged $95.9 million during 1994 compared to $51.5
million during 1993. During 1994 long-term debt increased $186.1 million to
$252.1 million as of December 31, 1994, due to two borrowings of $100 million
each from the Federal Home Loan Bank. Each borrowing has a maturity of three
years and interest which is payable and reprices monthly based on LIBOR. At
December 31, 1994, the borrowings had an average interest rate of 6.08%.
On January 31, 1994, First American redeemed the remaining balance of
$13.6 million of its 7 5/8% debentures due in 2002. These debentures were
redeemed at a price of 101.22% of par.
The average rate paid on long-term borrowings was 6.61% in 1994
compared to 7.48% in 1993. The long-term debt to equity ratio was 40.9% at
December 31, 1994, compared to 11.3% at December 31, 1993, which is reflective
of the additional debt issued during 1994.
CAPITAL POSITION
Total shareholders' equity amounted to $616.7 million, or 7.95% of
total assets, at December 31, 1994, compared to $581.7 million, or 8.09% of
total assets at December 31, 1993. The $35.0 million increase in total
shareholders' equity resulted principally from $67.7 million of earnings
retention ($90.7 million of net income less $23.0 million of dividends). The
impact of earnings retention was reduced by the $35.4 million change in net
unrealized gains and losses on securities available for sale, net of tax. The
Consolidated Statements of Changes in Shareholders' Equity details the changes
in shareholders' equity during 1994, and NOTES 1 AND 3 to the consolidated
financial statements provide further information regarding unrealized gains and
losses on available for sale securities.
During 1994, First American paid dividends of $.88 per share, up 60%
from $.55 per share during 1993. The dividend payout ratio was 25% during 1994
versus 14% during 1993. The Board of Directors voted to increase the quarterly
cash dividend from $.21 per share to $.25 per share during the fourth quarter
of 1994 based on First American's capital position and financial performance.
The Federal Reserve Board and the OCC risk-based capital guidelines
and regulations for bank holding companies and national banks require minimum
levels of capital based upon applying various risk ratings to defined
categories of assets and to certain off-balance-sheet items. Under the
risk-based capital requirements, total capital consists of Tier I capital
(essentially realized common equity less intangible assets) and Tier II capital
(essentially qualifying long-term debt and a portion of the allowance for
possible loan losses). Assets by type, or category, are assigned risk-weights
of 0% to 100%, depending on regulatory assigned levels of credit risk
associated with such assets. Off-balance-sheet items are considered in the
calculation
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of risk-adjusted assets through conversion factors established by regulators.
These items are assigned the same risk-weighting as on-balance-sheet items and
are included in total risk-adjusted assets.
[GRAPH 11 - See Appendix]
AVERAGE EQUITY TO AVERAGE ASSETS
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At December 31, 1994, these regulations required bank holding
companies and national banks to maintain certain minimum capital ratios. As of
December 31, 1994, the Company, its principal subsidiary, First American
National Bank (FANB), and FANBKY all had ratios which exceeded the regulatory
requirements to be classified as "well capitalized," the highest regulatory
capital rating. TABLE 10 summarizes risk-based capital and related ratios for
the Company and FANB.
In December 1994, the Board of Directors authorized the repurchase of
up to 800,000 shares of First American's common stock. It is anticipated that
stock repurchases will be made in the open market or in privately negotiated
transactions from time to time during 1995, subject to market conditions and
regulatory guidelines. Following these purchases, the Company is expected to
continue to exceed all applicable regulatory capital requirements. It is
anticipated that the repurchased shares will be used to fund First American's
various employee benefit plans and potential future acquisitions.
LIQUIDITY
Liquidity management involves maintaining sufficient cash levels
(including the ability to access markets to raise additional cash) to fund
operations and to meet the requirements of borrowers, depositors, and
creditors. Higher levels of liquidity bear higher corresponding costs,
measured in terms of lower yields on short-term, more liquid earning assets,
and higher interest expense involved in extending liability maturities. Liquid
assets include cash and cash equivalents (less Federal Reserve Bank reserve
requirements discussed at NOTE 2 to the consolidated financial statements),
money market instruments, and securities that mature within one year. At
December 31, 1994, the carrying value of First American's liquid assets
amounted to $832.5 million, or 12% of earning assets, which compares with
$702.1 million, or 11%, at December 31, 1993.
In addition, First American has securities available for sale maturing
after one year which can be sold to meet liquidity needs. The market value of
securities available for sale which mature after one year was $329.7 million at
December 31, 1994. Since held to maturity securities are purchased with the
intent to hold them to maturity, such securities are generally a source of
liquidity only to the extent interest and principal payments are received
thereon. NOTES 1 AND 3 to the consolidated financial statements discuss
accounting for securities in further detail. Decisions to purchase securities
or sell available for sale securities are based on current and expected
economic and financial conditions, including the interest rate environment and
loan demand, and other on-and off-balance-sheet positions. Maturity of
securities is also discussed under the caption "Securities."
Liquidity is reinforced by maintaining a relatively stable funding
base, which is achieved by diversifying funding sources, extending the
contractual maturity of
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liabilities, and limiting corporate reliance on volatile short-term purchased
funds. First American's strategy is to fund assets to the maximum extent
possible with core deposits, which provide a sizable source of relatively
stable and low-cost funds. Core deposits totalled $5.45 billion, or 70% of
total assets at December 31, 1994, compared with $5.36 billion, or 75%, at
December 31, 1993.
Short-term funding needs can arise from declines in deposits or other
funding sources, drawdowns of loan commitments, and requests for new loans.
Relationships with a stable and growing customer base and a network of about
300 downstream correspondent banks routinely supply some of these funds.
Additional funds, if needed, can be raised from national money markets.
Short-term funding sources, comprised of non-core deposits and other
interest-bearing liabilities totalled $1.35 billion, or 17% of total assets, at
December 31, 1994, compared to $1.09 billion, or 15%, at December 31, 1993.
Shareholders' equity and long-term debt also contribute to liquidity
by reducing the need to continually rely on short-term purchased funds. At
December 31, 1994, the ratio of equity to assets was 7.95% compared to 8.09% at
December 31, 1993. At the end of 1994, long-term debt totalled 3% of total
assets and 41% of total shareholders' equity versus 1% of total assets and 11%
of total shareholders' equity at December 31, 1993.
During the first quarter of 1993, First American filed a shelf
registration statement with the Securities and Exchange Commission to issue
$100 million of subordinated debt securities. The Company issued $50 million
of subordinated notes under the shelf registration statement during second
quarter 1993. The remaining $50 million shelf registration is available for
future needs.
An additional source of liquidity is the Company's three-year $50
million revolving credit agreement which will expire March 31, 1997. First
American had no borrowings outstanding under this agreement during 1994.
Management believes First American has sufficient liquidity to meet
all reasonable borrower, depositor, and creditor needs in the present economic
environment.
IMPACT OF INFLATION
First American's asset and liability structure is substantially
different from that of an industrial company in that most of its assets and
liabilities are monetary in nature. Management believes the impact of
inflation on financial results depends upon the Company's ability to react to
changes in interest rates and, by such reaction, reduce the inflationary impact
on performance. Interest rates do not necessarily move in the same direction,
or at the same magnitude, as the prices of
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other goods and services. As discussed previously, Management seeks to manage
the relationship between interest-sensitive assets and liabilities in order to
protect against wide interest rate fluctuations, including those resulting from
inflation.
EARNINGS PERFORMANCE FOR 1993 VERSUS 1992
The previous discussion has concentrated on First American's 1994
results of operations and financial condition. The following discussion recaps
the Company's results of operations for 1993 compared to 1992.
Net income for 1993 was $101.8 million or $3.93 per share as compared
with $42.0 million or $1.74 per share for 1992. The earnings improvement was
primarily attributable to a $42.0 million negative provision for loan losses in
1993 compared to a $38.5 million charge in 1992, an $80.5 million decrease in
the provision for loan losses. Net income for 1993 also included a $15.7
million increase in taxable equivalent net interest income, an $11.1 million
improvement in non-interest income, and a $7.5 million increase in non-interest
expense.
The negative provision for loan losses resulted primarily from
continued improvement in asset quality as evidenced by a 64% decrease in
nonperforming loans to $21.7 million at December 31, 1993, from $60.3 million
at year-end 1992 and an 84% decline in net charge-offs to $6.3 million in 1993
from $38.4 million in 1992.
The 6% increase in 1993 net interest income (computed on a taxable
equivalent basis) to $271.5 million was primarily due to an increase in average
earning assets and a slightly improved net interest margin. Average earning
assets increased 5% to $6.18 billion in 1993 from $5.90 billion in 1992, while
the net interest margin on earning assets increased 5 basis points to 4.39%.
During 1993, First American had a higher volume of interest-bearing liabilities
repricing at a lower interest rate than earning assets repricing; thus, net
interest income benefited from declining interest rates. The net interest
spread increased 10 basis points to 3.80% in 1993 from 3.70% in 1992. The net
interest margin and spread improvements in 1993 generally reflect a lower
interest rate environment for First American.
The 15% improvement in non-interest income in 1993 was due primarily
to increased fee income resulting from new products and services introduced in
1993. Approximately 55% of the increase was due to additional investment
services income related to sales of annuities, mutual funds and other
investment products.
The $7.5 million, or 3%, increase in non-interest expense in 1993
resulted primarily from a $10.0 million charitable contribution made during the
fourth quarter of 1993 to First American Foundation. Non-interest expense in
1993 also included an $8.1 increase in salaries and employee benefits and a
$13.1 million decline in net foreclosed properties expense. Exclusive of the
contribution, non-interest expense
43
46
decreased $2.5 million or 1%. The operating ratio improved to 63.2% in 1993
(exclusive of the Foundation contribution) from 69.1% in 1992.
Income tax expense was $57.4 million in 1993, an increase of $39.9
million over the 1992 income tax expense of $17.5 million. The major factor
for the increase was the increase in the Company's income before income tax
expense.
44
47
TABLE 1: SELECTED FINANCIAL DATA: 1990-1994
===================================================================================================================================
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands except per share amounts) 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed income statements:
Net interest income, taxable equivalent
basis* $ 283,073 $ 271,481 $ 255,848 $ 223,089 $ 237,943
Less taxable equivalent adjustment 3,447 4,042 4,160 6,629 11,090
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 279,626 267,439 251,688 216,460 226,853
Provision for loan losses (10,000) (42,000) 38,500 51,570 193,677
Non-interest income 84,856 85,817 74,691 80,493 111,168
Non-interest expense 229,615 235,963 228,426 221,685 221,134
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense
(benefit) and cumulative effect of changes
in accounting principles 144,867 159,293 59,453 23,698 (76,790)
Income tax expense (benefit) 54,135 57,396 17,481 6,761 (14,369)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
changes in accounting principles 90,732 101,897 41,972 16,937 (62,421)
Cumulative effect of changes in
accounting principles, net of tax - (84) - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 90,732 $ 101,813 $ 41,972 $ 16,937 $ (62,421)
===================================================================================================================================
Per common share:
Net income (loss) $ 3.48 $ 3.93 $ 1.74 $ .73 $ (2.69)
Cash dividends declared .88 .55 .20 - .31
Cash dividends paid .88 .55 .20 - .63
Book value (end of year) 23.59 22.38 18.16 16.47 15.79
Market price (end of year) 26.88 32.00 27.50 18.00 6.38
Market/book (end of year) 1.14 X 1.43 x 1.51 x 1.09 x .40 x
===================================================================================================================================
Averages:
Assets $7,264,352 $6,806,492 $6,466,297 $6,192,106 $6,898,181
Loans, net of unearned discount and net
deferred loan fees 4,543,886 3,871,555 3,682,891 3,954,369 4,462,207
Earning assets 6,621,678 6,182,257 5,896,212 5,654,669 6,334,529
Deposits 5,734,410 5,514,068 5,414,165 5,240,438 5,666,069
Long-term debt 95,875 51,503 17,065 17,421 17,981
Shareholders' equity 595,881 512,099 418,507 376,085 410,104
===================================================================================================================================
End of period:
Assets $7,757,181 $7,188,322 $6,716,320 $6,376,967 $6,480,262
Loans, net of unearned discount and net
deferred loan fees 4,863,310 4,340,088 3,699,301 3,807,257 4,225,854
Earning assets 7,052,475 6,550,150 5,907,761 5,722,724 5,831,353
Deposits 5,861,061 5,690,558 5,521,839 5,332,065 5,556,026
Long-term debt 252,067 65,945 16,896 17,321 17,632
Shareholders' equity 616,696 581,709 468,321 385,310 368,009
===================================================================================================================================
Significant ratios:
Return on average assets 1.25 % 1.50 % .65 % .27 % (.90)%
Return on average common equity 15.23 19.90 10.03 4.50 (15.22)
Dividends declared per share to net
income per share (dividend payout ratio) 25.29 13.99 11.49 - N/A
Operating efficiency ratio** 60.80 63.24 69.11 73.02 70.24
Average equity to average assets 8.20 7.52 6.47 6.07 5.95
Average loans to average deposits 79.23 70.21 68.02 75.46 78.75
Average core deposits to average total
deposits 92.93 93.19 92.84 92.89 89.40
Allowance to net loans (end of year) 2.61 3.09 4.90 4.75 4.50
Nonperforming assets to loans and
foreclosed properties (end of year) .43 .93 2.39 3.68 4.91
Net interest margin 4.27 4.39 4.34 3.95 3.76
===================================================================================================================================
Other statistics:
Number of common shareholders (end of
year) 9,304 9,606 9,453 10,284 10,609
Average common shares outstanding (in
thousands) 26,093 25,913 24,082 23,337 23,224
End of period common shares (in
thousands) 26,145 25,988 25,786 23,395 23,311
Number of full-time equivalent employees
(end of year) 3,273 3,138 3,075 3,126 3,539
Number of banking offices 142 138 134 135 141
Number of automatic teller machines 169 138 122 120 123
====================================================================================================================================
* Adjusted to a taxable equivalent basis based on the statutory Federal
income tax rates, adjusted for applicable state income taxes net of
the related Federal tax benefit.
** Ratio of operating expenses to taxable equivalent net interest income
plus non-interest income. For 1994, calculation excludes $9.7 million
of losses in the fourth quarter on sales of securities available for
sale. For 1993, calculation excludes the $10.0 million Foundation
contribution. For 1990, calculation excludes the $34.3 million gain
on sale of credit card receivables.
N/A Information not considered meaningful.
45
48
TABLE 2: RATE-VOLUME RECAP
====================================================================================================================================
1994 from 1993 1993 from 1992
------------------------------------ -------------------------------------
Increase (Decrease)* Increase (Decrease)*
Total Due to Total Due to
Increase -------------------- Increase -------------------
(in millions) (Decrease) Volume Rate (Decrease) Volume Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Change in interest income:
Securities:
Taxable $(18.2) $ (9.9) $ (8.3) $ 4.0 $ 23.7 $ (19.7)
Tax-exempt .7 .7 - .3 .3 -
Loans 55.9 51.3 4.6 (4.1) 15.4 (19.5)
Federal funds sold and securities
purchased under agreements to resell (1.7) (2.2) .5 (4.5) (3.8) (.7)
Time deposits with other banks (.9) (.9) - (4.8) (4.6) (.2)
Other .4 .2 .2 (.3) (.3) -
------ -----
Total change in interest income 36.2 31.2 5.0 (9.4) 21.8 (31.2)
------ -----
Change in interest expense:
NOW, money market, and savings
accounts 11.1 5.6 5.5 (3.5) 4.2 (7.7)
Certificates of deposit .9 (.4) 1.3 (19.5) (4.8) (14.7)
Other interest-bearing deposits (1.3) (.2) (1.1) (4.5) (1.3) (3.2)
Short-term borrowings 11.4 2.8 8.6 - 3.1 (3.1)
Long-term debt 2.5 3.3 (.8) 2.4 2.6 (.2)
------ -----
Total change in interest expense 24.6 10.9 13.7 (25.1) 5.6 (30.7)
------ -----
Change in net interest income $ 11.6 $ 19.3 $ (7.7) $ 15.7 $ 12.4 $ 3.3
====================================================================================================================================
* Amounts are adjusted to a fully taxable basis, based on the
statutory Federal income tax rates, adjusted for applicable state
income taxes net of the related Federal tax benefit. The effect of
volume changes is computed by multiplying the change in volume by
the prior year rate. The effect of rate changes is computed by
multiplying the change in rate by the prior year volume.
Rate/volume changes are computed by multiplying the change in
volume by the change in rate and are included in the effect on
income of rate changes.
46
49
TABLE 3: CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT
INCOME/EXPENSE AND YIELDS/RATES
====================================================================================================================================
1994 1993 1992
---------------------------- ---------------------------- --------------------------
Average Average Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(in millions) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:*
Securities:
Taxable $1,955.7 $118.5 6.06% $2,108.4 $136.7 6.48% $1,788.8 $132.7 7.42%
Tax-exempt 20.4 1.4 6.63 10.9 .7 6.86 6.3 .4 7.23
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 1,976.1 119.9 6.07 2,119.3 137.4 6.48 1,795.1 133.1 7.42
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and repurchase
agreements 75.2 2.9 3.86 143.8 4.6 3.20 244.7 9.1 3.76
Loans, net of unearned discount and net
deferred loan fees:
Commercial 2,030.3 150.7 7.42 1,767.6 120.3 6.81 1,733.2 120.4 6.95
Consumer-amortizing mortgages 1,082.5 82.7 7.64 772.6 63.2 8.18 555.7 52.4 9.42
Consumer-other 1,015.4 83.4 8.21 921.8 79.5 8.62 895.9 85.2 9.51
Real estate-construction 105.8 8.5 8.04 104.2 8.3 7.95 152.5 12.2 8.00
Real estate-commercial mortgages
and other 309.9 26.3 8.47 305.3 24.4 7.98 345.6 29.6 8.57
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and
net deferred loan fees 4,543.9 351.6 7.74 3,871.5 295.7 7.64 3,682.9 299.8 8.14
- ------------------------------------------------------------------------------------------------------------------------------------
Other 26.5 1.1 4.15 47.7 1.6 3.35 173.5 6.7 3.86
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets* $6,621.7 $475.5 7.18% 6,182.3 $439.3 7.11% 5,896.2 $448.7 7.61%
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses (137.5) (173.0) (186.6)
Cash and due from banks 481.2 480.9 457.4
Other assets 299.0 316.3 299.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $7,264.4 $6,806.5 $6,466.3
====================================================================================================================================
Deposits and borrowed funds:
Demand deposits $1,167.2 $1,129.3 $1,040.3
Interest-bearing deposits:
NOW accounts 800.7 $ 15.6 1.95% 722.9 $ 14.5 2.00% 625.9 $ 16.0 2.56%
Money market accounts 1,493.0 57.2 3.83 1,392.0 46.7 3.36 1,408.3 47.6 3.38
Regular savings 422.5 9.7 2.29 405.0 10.2 2.51 352.8 11.4 3.21
Certificates of deposit under $100,000 1,127.6 43.6 3.87 1,151.5 45.0 3.90 1,232.3 60.1 4.88
Certificates of deposit $100,000 and
over 364.5 15.3 4.20 349.9 13.1 3.74 368.6 17.5 4.75
Other time 317.9 14.5 4.56 337.7 16.7 4.96 366.7 21.2 5.78
Foreign 41.0 1.7 4.04 25.8 .7 2.74 19.2 .7 3.61
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 4,567.2 157.6 3.45 4,384.8 146.9 3.35 4,373.8 174.5 3.99
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 5,734.4 5,514.1 5,414.1
Federal funds purchased and repurchase
agreements 681.2 25.8 3.80 587.1 15.5 2.64 519.5 16.3 3.14
Other short-term borrowings 59.2 2.7 4.51 49.8 1.6 3.19 20.2 .8 3.82
Long-term debt 95.9 6.3 6.61 51.5 3.8 7.48 17.1 1.3 7.69
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits and
borrowed funds 5,403.5 $192.4 3.56% 5,073.2 $167.8 3.31% 4,930.6 $192.9 3.91%
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowed funds 6,570.7 6,202.5 5,970.9
Other liabilities 97.8 91.9 76.9
Shareholders' equity 595.9 512.1 418.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $7,264.4 $6,806.5 $6,466.3
====================================================================================================================================
Net interest income* $283.1 $271.5 $255.8
Provision for loan losses (10.0) (42.0) 38.5
Non-interest income 84.8 85.8 74.7
Non-interest expense 229.6 236.0 228.4
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense
(benefit) and cumulative effect of
changes in accounting principles 148.3 163.3 63.6
Income tax expense (benefit) 57.6 61.4 21.6
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
changes in accounting principles 90.7 101.9 42.0
Cumulative effect of changes in accounting
principles, net of tax - (.1) -
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 90.7 $101.8 $ 42.0
====================================================================================================================================
Net interest spread 3.62% 3.80% 3.70%
Benefit of interest-free funding .65 .59 .64
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.27% 4.39% 4.34%
====================================================================================================================================
* Loan fees and amortization of net deferred loan fees (costs), which
are considered an integral part of the lending function and are
included in yields and related interest categories, amounted to $4.4
million in 1994, $2.2 million in 1993, $(.8) million in 1992, $(2.7)
million in 1991, and $(.3) million in 1990. Yields/rates and
income/expense amounts are presented on a fully taxable equivalent
basis based on the statutory Federal income tax rates adjusted for
applicable state income taxes net of the related Federal tax benefit;
related interest income includes taxable equivalent adjustments of
$3.4 million in 1994, $4.0 million in 1993, $4.2 million in 1992, $6.6
million in 1991, and $11.1 million in 1990. Non-accrual and
restructured loans are included in average loans and average earning
assets. Consequently, yields on these items are lower than they would
have been if these loans had earned at their contractual rates of
interest.
N/A Information not considered meaningful.
47
50
===============================================================================================================
1991 1990 Average Balance Income/Expense
- -------------------------- ------------------------- -------------------- ---------------------
5-Year 5-Year
Annual Annual
Average Average Compound Compound
Average Income/ Yield/ Average Income/ Yield/ % Change Growth Rate % Change Growth Rate
Balance Expense Rate Balance Expense Rate 1994/1993 1994/1989 1994/1993 1994/1989
- ---------------------------------------------------------------------------------------------------------------
$1,382.7 $109.4 7.91% $1,409.3 $121.2 8.60% (7.24)% 7.37% (13.31)% .44%
20.8 1.8 8.43 124.1 11.1 8.93 87.16 (33.44) 100.00 (37.17)
- ---------------------------------------------------------------------------------------------------------------
1,403.5 111.2 7.92 1,533.4 132.3 8.63 (6.76) 5.29 (12.74) (1.63)
- ---------------------------------------------------------------------------------------------------------------
196.5 11.9 6.06 264.0 21.9 8.28 (47.71) (14.27) (36.96) (28.20)
1,887.4 166.2 8.80 2,114.4 214.4 10.14 14.86 (.90) 25.27 (8.67)
526.0 55.9 10.63 534.1 58.4 10.94 40.11 16.04 30.85 7.54
951.6 101.3 10.65 1,066.6 123.1 11.54 10.15 (1.58) 4.91 (9.01)
218.9 19.6 8.97 334.7 31.2 9.33 1.54 (21.89) 2.41 (27.11)
370.5 37.7 10.17 412.4 44.7 10.84 1.51 (6.96) 7.79 (13.56)
- ---------------------------------------------------------------------------------------------------------------
3,954.4 380.7 9.63 4,462.2 471.8 10.57 17.37 (.01) 18.90 (7.68)
- ---------------------------------------------------------------------------------------------------------------
100.3 6.1 6.01 74.9 6.2 8.38 (44.44) (31.00) (31.25) (40.13)
- ---------------------------------------------------------------------------------------------------------------
5,654.7 $509.9 9.02% 6,334.5 $632.2 9.98% 7.11 .66 8.24% (7.01)%
- ---------------------------------------------------------------------------------------------------------------
(189.9) (150.2) (20.52) 11.61
399.7 391.3 .06 3.92
327.6 322.6 (5.47) .90
- ---------------------------------------------------------------------------------------------------------------
$6,192.1 $6,898.2 6.73% .72%
===============================================================================================================
$ 877.2 $ 920.1 3.36% 4.32%
538.4 $ 21.5 4.00% 530.4 $ 22.9 4.32% 10.76 8.18 7.59% (8.02)%
1,427.5 78.7 5.51 1,422.6 102.1 7.17 7.26 5.73 22.48 (7.75)
304.5 15.7 5.14 321.5 17.0 5.28 4.32 2.49 (4.90) (13.21)
1,388.0 93.8 6.76 1,546.6 121.0 7.83 (2.08) (7.43) (3.11) (20.26)
360.1 24.7 6.86 576.2 46.4 8.05 4.17 (12.33) 16.79 (23.96)
332.0 23.8 7.17 324.2 25.5 7.87 (5.86) 1.90 (13.17) (8.57)
12.7 .7 5.65 24.5 1.9 7.71 58.91 (2.10) 142.86 (16.55)
- ---------------------------------------------------------------------------------------------------------------
4,363.2 258.9 5.93 4,746.0 336.8 7.10 4.16 (.75) 7.28 (14.81)
- ---------------------------------------------------------------------------------------------------------------
5,240.4 5,666.1 4.00 .17
457.3 25.1 5.48 650.3 51.2 7.88 16.03 .05 66.45 (15.33)
22.8 1.4 6.26 57.1 4.9 8.58 18.88 (4.18) 68.75 (15.85)
17.4 1.4 7.79 18.0 1.4 7.82 86.21 38.67 65.79 33.24
- ---------------------------------------------------------------------------------------------------------------
4,860.7 $286.8 5.90% 5,471.4 $394.3 7.21% 6.51 (.40) 14.66% (14.39)%
- ---------------------------------------------------------------------------------------------------------------
5,737.9 6,391.5 5.94 .35
78.1 96.6 6.42 3.06
376.1 410.1 16.36 4.99
- ---------------------------------------------------------------------------------------------------------------
$6,192.1 $6,898.2 6.73% .72%
===============================================================================================================
$223.1 $237.9 4.27% 1.30%
51.6 193.7 (76.19) N/A
80.5 111.2 (1.17) 1.76
221.7 221.1 (2.71) .41
- ---------------------------------------------------------------------------------------------------------------
30.3 (65.7) (9.19) 77.57
13.4 (3.3) (6.19) 68.82
- ---------------------------------------------------------------------------------------------------------------
16.9 (62.4) (10.99) 84.87
- - (100.00) N/A
- ---------------------------------------------------------------------------------------------------------------
$ 16.9 $(62.4) (10.90)% 84.87%
===============================================================================================================
3.12% 2.77%
.83 .99
- ---------------------------------------------------------------------------------------------------------------
3.95% 3.76%
===============================================================================================================
48
51
TABLE 4: INTEREST RATE SENSITIVITY ANALYSIS
====================================================================================================================================
Interest-Sensitive Periods
-----------------------------------------------------------------------------
Months
----------------------------
Over Over
Three Six Total
Within Through Through One 1-5 Over 5
(in millions) Three Six Twelve Year Years Years Total
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994
Earning assets:
Securities $ 421.9 $ 221.2 $ 204.3 $ 847.4 $ 1,092.6 $ 210.1 $ 2,150.1
Loans 1,804.5 257.0 385.6 2,447.1 1,835.3 580.9 4,863.3
Other earning assets 39.1 - - 39.1 - - 39.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 2,265.5 $ 478.2 $ 589.9 $ 3,333.6 $ 2,927.9 $ 791.0 $ 7,052.5
===================================================================================================================================
Interest-bearing liabilities:
Interest-bearing deposits:
NOW, money market, and savings accounts $ 2,771.4 $ - $ - $ 2,771.4 $ - $ - $2,771.4
Certificates of deposit 442.3 343.7 308.4 1,094.4 383.7 - 1,478.1
Other interest-bearing deposits 117.2 35.6 52.6 205.4 162.3 - 367.7
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 3,330.9 379.3 361.0 4,071.2 546.0 - 4,617.2
Other borrowed funds 1,128.8 1.0 - 1,129.8 - 52.1 1,181.9
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4,459.7 380.3 361.0 5,201.0 546.0 52.1 5,799.1
Net effect of swaps (450.0) (200.0) (450.0) (1,100.0) 1,100.0 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 4,009.7 $ 180.3 $ (89.0) $ 4,101.0 $ 1,646.0 $ 52.1 $ 5,799.1
===================================================================================================================================
Interest sensitivity gap:
For the indicated period $(1,744.2) $ 297.9 $ 678.9 $ (767.4) $ 1,281.9 $ 738.9 $ 1,253.4
Cumulative (1,744.2) (1,446.3) (767.4) (767.4) 514.5 1,253.4 1,253.4
Cumulative, as a percent of
total earning assets (24.73)% (20.51)% (10.88)% (10.88)% 7.30% 17.77% 17.77%
===================================================================================================================================
DECEMBER 31, 1993
Earning assets:
Securities $ 494.8 $ 96.1 $ 200.6 $ 791.5 $ 998.1 $ 261.2 $2,050.8
Loans 1,628.0 215.4 410.8 2,254.2 1,620.4 465.5 4,340.1
Other earning assets 159.2 - - 159.2 - - 159.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 2,282.0 $ 311.5 $ 611.4 $ 3,204.9 $2,618.5 $ 726.7 $6,550.1
===================================================================================================================================
Interest-bearing liabilities:
Interest-bearing deposits:
NOW, money market, and savings accounts $ 2,664.2 $ - $ - $ 2,664.2 $ - $ - $2,664.2
Certificates of deposit 508.7 379.6 253.2 1,141.5 290.0 2.8 1,434.3
Other interest-bearing deposits 115.0 52.1 46.1 213.2 145.9 - 359.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 3,287.9 431.7 299.3 4,018.9 435.9 2.8 4,457.6
Other borrowed funds 745.8 11.0 - 756.8 - 65.9 822.7
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4,033.7 442.7 299.3 4,775.7 435.9 68.7 5,280.3
Net effect of swaps and futures (900.0) 150.0 200.0 (550.0) 550.0 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 3,133.7 $ 592.7 $ 499.3 $4,225.7 $ 985.9 $ 68.7 $5,280.3
===================================================================================================================================
Interest sensitivity gap:
For the indicated period $ (851.7) $ (281.2) $ 112.1 $(1,020.8) $1,632.6 $ 658.0 $1,269.8
Cumulative (851.7) (1,132.9) (1,020.8) (1,020.8) 611.8 1,269.8 1,269.8
Cumulative, as a percent of
total earning assets (13.00)% (17.30)% (15.58)% (15.58)% 9.34% 19.38% 19.38%
===================================================================================================================================
Each column includes earning assets and interest-bearing liabilities that are
estimated to mature or reprice within the respective time frame. All floating
rate balance sheet items are included as "within three months" regardless of
maturity. Non-earning assets (cash and due from banks, premises and equipment,
foreclosed properties, and other assets), non-interest-bearing liabilities
(demand deposits and other liabilities) and shareholders' equity are considered
to be non-interest-sensitive for purposes of this presentation and thus are not
included in the above table.
In the table, all NOW, money market, and savings accounts are reflected as
interest-sensitive within three months. NOW accounts, savings, and certain
money market accounts are not totally interest-sensitive in all interest rate
environments. If NOW and regular savings accounts were not considered
interest-sensitive, the one year cumulative net asset interest-sensitive gap
position and percent of earning assets would be $413.8 million and 5.87%,
respectively, for 1994 as compared to a net asset interest-sensitive gap
position and percent of earning assets of $201.0 million and 3.07%,
respectively, for 1993.
49
52
TABLE 5: SECURITY PORTFOLIO ANALYSIS
====================================================================================================================================
Estimated Maturity at December 31, 1994
-----------------------------------------------------------------------------------------------------------
Total Market Average Average
Within 1 Year 1-5 Years 5-10 Years After 10 Years Amortized Cost Value Maturity Repricing
-----------------------------------------------------------------------------------------------------------
(in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Years Years
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO
MATURITY:
U.S. Treasury $ 49.6 4.02% $ 125.2 5.05% $ - - % $ - - % $ 174.8 4.76% $ 169.4 1.3 1.3
U.S. Gov. agencies
and corporations:
Mortgage-backed 89.5 6.80 654.7 6.67 241.0 6.23 50.2 4.78 1,035.4 6.49 983.1 4.1 2.8
Other 1.5 3.76 93.2 4.40 - - - - 94.7 4.39 89.6 2.9 .3
Obligations of state
and political
subdivisions* .9 6.03 5.9 6.26 7.0 5.38 7.7 4.55 21.5 5.35 20.1 8.0 8.0
Other debt
securities:
Mortgage-backed 9.8 6.60 122.2 6.37 24.2 5.94 - - 156.2 6.32 145.6 3.9 3.9
Other - - 2.7 6.89 - - - - 2.7 6.90 2.7 4.0 4.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt
securities held to
maturity $151.3 5.84% $1,003.9 6.22% $272.2 6.19% $ 57.9 4.75% $1,485.3** 6.12% $1,410.5 3.8 2.7
====================================================================================================================================
SECURITIES AVAILABLE
FOR SALE:
U.S. Treasury $301.3 6.29% $ 25.3 7.22% $ - - % $ - - % $ 326.6 6.36% $ 325.9 .6 .6
U.S. Gov. agencies
and corporations -
mortgage backed 1.9 4.33 81.1 6.67 120.5 6.50 $123.3 7.09 326.8 6.75 306.3 9.4 2.2
Obligations of state
and political
subdivisions* 2.2 4.98 - - - - - - 2.2 4.98 2.2 .1 .1
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt
securities
available for sale $305.4 6.27% $ 106.4 6.80% $120.5 6.50% $123.3 7.09% $ 655.6 6.55% $ 634.4 5.0 1.4
==================================================================================== ==== ==============
Total equity
securities 30.3 30.3
-------- -------
Total securities
available for sale $ 685.9 $ 664.7**
======= =======
TOTAL SECURITIES:
Total debt
securities $456.7 6.13% $1,110.3 6.28% $392.7 6.29% $181.2 6.34% $2,140.9 6.25% $2,044.9 4.2 2.3
==================================================================================== ==== ==============
Total equity
securities 30.3 30.3
------- -------
Total securities $2,171.2 $2,075.2
====================================================================================================================================
* Yields presented on a taxable equivalent basis, based on the statutory
Federal income tax rate, adjusted for applicable state income taxes
net of the related Federal tax benefit.
** Securities held to maturity were reported on the balance sheet at
amortized cost and securities available for sale were reported on the
balance sheet at market value for a combined total of $2,150.0
million.
TABLE 6: MATURITIES OF LOANS, EXCLUSIVE OF CONSUMER LOANS
====================================================================================================================================
Maturity at December 31, 1994
------------------------------------------------------
Within 1-5 After
(in millions) 1 Year Years 5 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial loans $1,110.8 $ 932.2 $237.7 $2,280.7
Real estate--construction loans 71.1 39.5 16.6 127.2
Real estate--commercial mortgages
and other 67.0 143.3 72.5 282.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,248.9 $1,115.0 $326.8 $2,690.7
====================================================================================================================================
For maturities over one year:
Loans with floating interest rates $ 277.9 $165.6 $ 443.5
Loans with fixed interest rates 837.1 161.2 998.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,115.0 $326.8 $1,441.8
====================================================================================================================================
50
53
TABLE 7: ALLOWANCE FOR POSSIBLE LOAN LOSSES
===============================================================================================================================
(in thousands) 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses, January 1 $134,124 $181,108 $181,031 $190,000 $116,658
Loans charged off:
Commercial 3,901 10,094 28,047 36,610 71,159
Consumer--amortizing mortgages 386 1,365 3,268 2,513 2,317
Consumer--other 10,593 13,232 16,870 15,394 19,472
Real estate--construction - 594 2,462 15,123 9,155
Real estate--commercial mortgages and other 444 1,332 3,265 6,069 30,897
- -------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 15,324 26,617 53,912 75,709 133,000
- -------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 7,776 10,432 7,860 9,742 8,355
Consumer--amortizing mortgages 694 1,462 451 131 130
Consumer--other 8,610 7,606 6,782 3,934 3,233
Real estate--construction 143 128 198 432 160
Real estate--commercial mortgages and other 802 709 198 931 2,140
- -------------------------------------------------------------------------------------------------------------------------------
Total recoveries 18,025 20,337 15,489 15,170 14,018
- -------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) (2,701) 6,280 38,423 60,539 118,982
- -------------------------------------------------------------------------------------------------------------------------------
Change in allowance due to subsidiaries
purchased (sold) 323 1,296 - - (1,353)
Provision charged (credited) to operating
expenses (10,000) (42,000) 38,500 51,570 193,677
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $127,148 $134,124 $181,108 $181,031 $190,000
===============================================================================================================================
Allocation of allowance for possible loan
losses, end of year:
Commercial $ 38,571 $ 35,174 $ 73,801 $ 87,309 $ 89,797
Consumer loans 20,380 31,716 43,200 37,869 39,917
Real estate 10,356 14,832 21,735 28,386 43,786
Unallocated/general 57,841 52,402 42,372 27,467 16,500
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $127,148 $134,124 $181,108 $181,031 $190,000
===============================================================================================================================
Net charge-offs (recoveries) as a percent of average
loans, net (.06)% .16% 1.04% 1.53% 2.67%
Allowance to net loans (end of year) 2.61 3.09 4.90 4.75 4.50
===============================================================================================================================
Percent of total year-end loans:
Commercial 46.9% 44.9% 46.9% 46.7% 47.6%
Consumer--amortizing mortgages 23.3 23.4 17.3 13.6 12.4
Consumer--other 21.4 22.3 24.1 25.2 24.5
Real estate--construction 2.6 2.4 3.0 4.8 6.6
Real estate--commercial mortgages and other 5.8 7.0 8.7 9.7 8.9
- -------------------------------------------------------------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0%
===============================================================================================================================
TABLE 8: NONPERFORMING ASSET ACTIVITY
===============================================================================================================================
Year Ended December 31
----------------------------------------------------------
(in thousands) 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------------------
Balance, January 1 $ 40,547 $ 88,995 $142,154 $209,691 $115,061
Transfers in and new foreclosed properties 14,884 40,857 79,204 131,814 258,768
Payments received (15,592) (58,107) (59,136) (80,686) (54,580)
Sales of foreclosed properties (9,313) (14,972) (27,711) (40,535) (24,652)
Charge-offs and write-downs (2,259) (9,582) (37,600) (59,688) (78,680)
Return to earning status (7,150) (6,644) (7,916) (18,442) (6,226)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $ 21,117 $ 40,547 $ 88,995 $142,154 $209,691
===============================================================================================================================
Non-accrual loans $ 11,510 $ 21,666 $ 59,894 $ 87,283 $160,605
Restructured loans - - 455 2,205 -
- -------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 11,510 21,666 60,349 89,488 160,605
Foreclosed properties 9,607 18,881 28,646 52,666 49,086
- -------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 21,117 $ 40,547 $ 88,995 $142,154 $209,691
===============================================================================================================================
Nonperforming assets to total loans plus
foreclosed properties .43% .93% 2.39% 3.68% 4.91%
===============================================================================================================================
90 days or more past due (not included in
non-accrual category) $ 4,530 $ 4,764 $ 7,434 $ 12,287 $ 13,495
===============================================================================================================================
51
54
TABLE 9: CERTIFICATES OF DEPOSIT $100,000 AND OVER
===============================================================================================================================
Maturity at December 31
------------------------
(IN THOUSANDS) 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
3 months or less $145,290 $139,532
Over 3 through 6 months 75,693 74,784
Over 6 through 12 months 71,995 40,691
Over 12 months 62,243 41,278
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL $355,221 $296,285
===============================================================================================================================
TABLE 10: RISK-BASED CAPITAL AND RELATED RATIOS
===============================================================================================================================
"Well Capitalized" First American National
Minimum Corporation Bank
----------- -----------------------
December 31 (in thousands) Regulatory Ratio 1994 1993 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL COMPONENTS
Tier I capital:
Realized shareholders' common
equity $ 630,052 $ 559,660 $ 568,184 $ 515,528
Less disallowed intangibles (19,594) (18,965) (18,674) (18,121)
- -------------------------------------------------------------------------------------------------------------------------------
Total Tier I capital 610,458 540,695 549,510 497,407
- -------------------------------------------------------------------------------------------------------------------------------
Tier II capital:
Allowable allowance for possible
loan losses 73,178 62,932 71,524 61,362
Unsecured holding company debt 49,735 49,703 - -
- -------------------------------------------------------------------------------------------------------------------------------
Total Tier II capital 122,913 112,635 71,524 61,362
- -------------------------------------------------------------------------------------------------------------------------------
Total capital $ 733,371 $ 653,330 $ 621,034 $ 558,769
===============================================================================================================================
Risk-adjusted assets $5,800,290 $4,963,377 $5,667,535 $4,837,499
Quarterly average assets 7,430,864 7,123,221 7,212,040 6,861,491
===============================================================================================================================
CAPITAL RATIOS *
Tier I risk-based capital ratio 6.00% 10.52% 10.89% 9.70% 10.28%
Total risk-based capital ratio 10.00 12.64 13.16 10.96 11.55
Tier I leverage ratio 5.00 8.22 7.59 7.62 7.25
===============================================================================================================================
* Risk-based capital ratios were computed using realized equity (total
shareholders' equity exclusive of net unrealized gains (losses) on
securities available for sale, net of tax) and exclude the 7 5/8%
debentures redeemed January 31, 1994.
52
55
TABLE 11: QUARTERLY FINANCIAL DATA
===============================================================================================================================
Three Months Ended
--------------------------------------------------------------
(in thousands except per share amounts) December 31 September 30 June 30 March 31
- -------------------------------------------------------------------------------------------------------------------------------
1994
Net interest income $ 71,659 $ 69,378 $ 69,439 $ 69,150
Net interest income, taxable equivalent basis* 72,527 70,215 70,318 70,013
Provision for loan losses (10,000) - - -
Non-interest income 13,596 23,534 24,091 23,635
Non-interest expense 57,509 57,208 57,953 56,945
Net income 24,044 22,688 22,060 21,940
- -------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Net income $ .92 $ .87 $ .85 $ .84
Cash dividends paid .25 .21 .21 .21
Common stock price
High 33.13 35.00 34.75 32.00
Low 26.13 31.00 28.75 29.13
Last trade 26.88 33.00 32.75 29.75
- -------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS:
Return on average assets 1.28% 1.24% 1.23% 1.25%
Return on average common equity 15.37 14.90 15.09 15.55
Net interest margin 4.23 4.21 4.29 4.38
===============================================================================================================================
1993
Net interest income $ 69,552 $ 66,409 $ 66,665 $ 64,813
Net interest income, taxable equivalent basis* 70,791 67,252 67,632 65,806
Provision for loan losses (24,000) (10,000) (10,000) 2,000
Non-interest income 22,549 23,065 21,589 18,614
Non-interest expense 68,265 56,957 56,955 53,786
Income before cumulative effect of changes in
accounting principles 30,723 27,724 26,030 17,420
Net income 29,423 27,724 26,030 18,636
- -------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Income before cumulative effect of changes in accounting
principles $ 1.18 $ 1.07 $ 1.01 $ .67
Net income 1.13 1.07 1.01 .72
Cash dividends paid .15 .15 .15 .10
Common stock price
High 34.13 34.50 33.75 30.25
Low 28.13 28.25 27.00 25.25
Last trade 32.00 33.75 29.38 29.50
- -------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS:
Return on average assets 1.64% 1.64% 1.55% 1.07%
Return on average common equity 21.37 21.08 20.96 14.67
Net interest margin 4.32 4.37 4.44 4.45
===============================================================================================================================
* Adjusted to a taxable equivalent basis based on the statutory Federal income
tax rates, adjusted for applicable state income taxes net of the related
Federal tax benefit.
53
56
TABLE 12: CONSOLIDATED YEAR-END BALANCE SHEETS
===============================================================================================================================
December 31
---------------------------------------------------------------
(in thousands) 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 498,273 $ 500,119 $ 672,747 $ 527,548 $ 514,082
Securities:
U.S. Treasury and other U.S. Government
agencies and corporations 1,937,274 1,995,712 1,936,068 1,562,805 1,232,793
Obligations of states and political
subdivisions 21,482 21,326 9,304 8,234 105,670
Other 191,303 33,781 42,572 90,764 170,332
- -------------------------------------------------------------------------------------------------------------------------------
Total securities 2,150,059 2,050,819 1,987,944 1,661,803 1,508,795
- -------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 26,634 144,785 95,450 160,018 71,820
Loans:
Commercial
Commercial and industrial 1,725,933 1,440,707 1,280,016 1,342,874 1,622,421
For purchasing or carrying securities 32,921 41,098 43,128 63,600 49,606
Financial institutions 77,113 98,462 92,353 92,023 69,001
Other domestic loans 444,112 373,716 326,622 293,818 292,243
International 623 - 170 563 1,017
- -------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 2,280,702 1,953,983 1,742,289 1,792,878 2,034,288
- -------------------------------------------------------------------------------------------------------------------------------
Consumer
Amortizing mortgages 1,136,768 1,015,852 641,953 522,952 531,555
Installment 857,196 788,281 701,679 702,094 729,455
Single payment 17,185 21,747 30,711 95,818 134,826
Open end 168,307 159,901 163,437 169,566 183,038
- -------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 2,179,456 1,985,781 1,537,780 1,490,430 1,578,874
- -------------------------------------------------------------------------------------------------------------------------------
Real estate
Construction 127,228 106,624 110,452 183,583 284,159
Commercial mortgages and other 282,856 302,772 325,475 374,755 381,864
- -------------------------------------------------------------------------------------------------------------------------------
Total real estate loans 410,084 409,396 435,927 558,338 666,023
- -------------------------------------------------------------------------------------------------------------------------------
Total loans 4,870,242 4,349,160 3,715,996 3,841,646 4,279,185
Unearned discount and net deferred loan fees 6,932 9,072 16,695 34,389 53,331
- -------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net
deferred loan fees 4,863,310 4,340,088 3,699,301 3,807,257 4,225,854
Allowance for possible loan losses 127,148 134,124 181,108 181,031 190,000
- -------------------------------------------------------------------------------------------------------------------------------
Total net loans 4,736,162 4,205,964 3,518,193 3,626,226 4,035,854
- -------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 104,244 102,596 101,324 108,259 119,327
Foreclosed properties 9,607 18,881 28,646 52,666 49,086
Other assets 232,202 165,158 312,016 240,447 181,298
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $7,757,181 $7,188,322 $6,716,320 $6,376,967 $6,480,262
===============================================================================================================================
LIABILITIES
Deposits:
Demand (non-interest-bearing) $1,243,863 $1,232,951 $1,126,615 $1,033,068 $1,015,748
Time 4,556,898 4,425,632 4,360,623 4,282,240 4,526,129
Foreign 60,300 31,975 34,601 16,757 14,149
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 5,861,061 5,690,558 5,521,839 5,332,065 5,556,026
- -------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold
under agreements to repurchase 855,618 664,826 588,950 496,691 440,475
Other short-term borrowings 74,222 91,937 19,629 24,087 22,411
Long-term debt 252,067 65,945 16,896 17,321 17,632
Other liabilities 97,517 93,347 100,685 121,493 75,709
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 7,140,485 6,606,613 6,247,999 5,991,657 6,112,253
- -------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock 130,724 129,941 128,931 116,976 116,557
Capital surplus 119,549 117,015 114,350 79,907 79,309
Retained earnings 381,408 313,644 226,113 189,080 172,143
Deferred compensation on restricted stock (1,629) (940) (1,073) (653) -
Net unrealized gains (losses) on securities
available for sale, net of tax (13,356) 22,049 - - -
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 616,696 581,709 468,321 385,310 368,009
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $7,757,181 $7,188,322 $6,716,320 $6,376,967 $6,480,262
===============================================================================================================================
54
57
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedule listed in Item 14(a)(1) and (2)
are included in this Report beginning on Page 65 and are incorporated in this
Item 8 by reference. The table "Quarterly Financial Data" on page 53 hereof,
"Consolidated Year-End Balance Sheets" on page 54 hereof, and "Consolidated
Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates"
on pages 47-48 hereof are incorporated in this Item 8 by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers of the Registrant
The following is a list of the Corporation's executive officers, their
ages and their positions and offices during the last five years (listed
alphabetically).
Officer Age Business Experience - Past 5 years
- ------- --- ----------------------------------
James C. Armistead, Jr. 47 Since June 1992, Mr. Armistead has served as Executive Vice President-Middle
Market/Corporate Banking of FANB. From August 1991 until June 1992 he served
as a Senior Vice President of FANB. From 1984 until April 1991 he served as
Senior Executive Vice President and head of the banking division of
Metropolitan Federal Savings and Loan Association in Nashville, which in 1991
changed its name to Metropolitan Federal Bank, F.S.B. ("Metropolitan"). In
April 1991, Metropolitan was declared insolvent by the Office of Thrift
Supervision ("OTS") and placed in receivership with the Resolution Trust
Corporation appointed as receiver. The assets of Metropolitan were transferred
to Metropolitan Federal Savings and Loan Association, F.A., a new thrift
institution created by the OTS. From April 1991 until August 1991 Mr.
Armistead was an officer of Metropolitan Federal Savings and Loan Association,
F.A.
55
58
Dennis C. Bottorff 50 Mr. Bottorff serves as Chairman, President and Chief Executive Officer of the
Corporation and as Chief Executive Officer of FANB. From November 1991 until
January, 1994, Mr. Bottorff also served as President of FANB. From September
1990 until November 1991, he was President and Chief Operating Officer of
C&S/Sovran Corporation.
John W. Boyle, Jr. 54 Mr. Boyle is President, Corporate Bank of FANB and has served in such capacity
since January 1992. From 1990 to January 1992, he was group executive vice
president of C&S/Sovran Corporation, U.S. Banking Group.
R. Booth Chapman 54 Since September 1991 Mr. Chapman has served as Executive Vice President -
Independent Loan Review of FANB. From December 1990 to September 1991, he was
Senior Vice President, Corporate Special Assets, for C&S/Sovran Corporation.
Emery F. Hill 51 Mr. Hill is Executive Vice President - Operations and Technology of FANB and
has served in this position since March 1992. He served as Group Executive
Officer of Information Management with C&S/Sovran Corporation from 1990 to
September 1991 and with NationsBank from September 1991 until March 1992.
Rufus B. King 49 Mr. King is Executive Vice President and Chief Credit Officer of FANB and has
served in such position since July 1989.
John W. Logan 52 Mr. Logan is Executive Vice President - Investments of the Corporation and
FANB. From August 1987 until 1991 Mr. Logan was Executive Vice President of
First American Corporation.
Robert A. McCabe, Jr. 44 Mr. McCabe is President - First American Enterprises and Vice Chairman of the
Board of Directors of the Corporation and FANB. From January 1992 until
January 1994, he served as President, General Banking of FANB. From March 1991
until January 1992 he served as President, Corporate Banking of FANB. From
April 1987 until March 1991, Mr.
56
59
McCabe served as President and Chief Operating Officer of FANB - Knoxville,
Tennessee.
Robert E. McNeilly, Jr. 62 Mr. McNeilly is President of FATC, and has served in this position since
January 1992. From 1986 through 1991 he served as Chairman of the Board of
Directors of FANB-Nashville.
Dale W. Polley 45 Mr. Polley serves as Vice Chairman of the Board of Directors of the
Corporation and FANB and also serves as President of FANB. From November 1992
through 1994, he also served as Principal Financial Officer of the Corporation
and FANB. From December 1991 until January 1994, he served as Vice Chairman
and Chief Administrative Officer of the Corporation and FANB and since
November 1992, also served as Principal Financial Officer of the Corporation
and FANB. From 1990 until December 1991, he was group executive vice
president and treasurer of C&S/Sovran Corporation.
Martin E. Simmons 55 Mr. Simmons is Executive Vice President - Administration, Secretary and
General Counsel of the Corporation and FANB. He also serves as Principal
Financial Officer of the Corporation and FANB. From August 1992 until January
1994, he served as Executive Vice President, Secretary and General Counsel of
the Corporation and FANB. From 1973 to August 1992, Mr. Simmons was a partner
with the Nashville law firm of Dearborn & Ewing and served as Chairman of the
firm's management committee from 1988 through 1991 and during previous
periods.
John W. Smithwick 51 Mr. Smithwick is Executive Vice President - Human Resources of FANB and has
served in such capacity since 1986.
Terry S. Spencer 38 Mr. Spencer serves as Executive Vice President and Treasurer of the
Corporation and as Executive Vice President of FANB. From September 1993
until March 1995, he served as Executive Vice President -Development of FANB.
From December 1991 until September 1993, he served as Senior Vice President-
Director of Strategic Planning of FANB. From 1989 until December 1991 he
served as Senior Vice President - Manager of Strategic Planning of Sovran
Financial Corporation.
57
60
M. Terry Turner 40 Mr. Turner serves as President - General Bank of FANB and has served in this
position since January, 1994. He served as Executive Vice President Business
and Professional Banking of FANB from January 1991 until January 1994. From
June 1990 until January 1991, he was City President of FANB in Nashville.
Marvin J. Vannatta, Jr. 51 Mr. Vannatta serves as Executive Vice President and Principal Accounting
Officer of the Corporation and FANB and as Cashier of FANB. From April 1994
until March 1995, he served as Senior Vice President, Principal Accounting
Officer and Treasurer of the Corporation. From January 1994 until March 1995,
Mr. Vannatta served as Senior Vice President and as the Cashier of FANB. From
1981 until January, 1994 he served in various capacities, including Senior
Vice President, Controller and Cashier of FANB.
The additional information required by Item 405 of Regulation S-K is
contained in the Corporation's Notice of 1995 Annual Meeting of Shareholders
and Proxy Statement (the "1995 Proxy Statement") filed with the Securities and
Exchange Commission within 120 days of the Corporation's year-end pursuant to
Regulation 14A. Such information appears in the sections entitled "Election of
Directors" and "Reports of Beneficial Ownership" in the 1995 Proxy Statement
and is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
This information appears in the sections entitled "Executive
Compensation", "Human Resources Committee Interlocks and Insider
Participation", "Compensation of Directors" and "Retirement Plans" in the 1995
Proxy Statement, and is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information appears in the section entitled "Security Ownership
of Certain Beneficial Owners and Management" in the 1995 Proxy Statement, and
is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information appears in the sections entitled "Certain
Transactions" and "Human Resources Committee Interlocks and Insider
Participation" in the 1995 Proxy Statement, and is incorporated herein by
reference.
58
61
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
The Report of KPMG Peat Marwick LLP, Independent
Certified Public Accountants
Consolidated Income Statements of First American
Corporation and Subsidiaries for the three years
ended December 31, 1994, 1993, and 1992
Consolidated Balance Sheets of First American
Corporation and Subsidiaries at December 31, 1994 and
1993
Consolidated Statements of Changes in Shareholders'
Equity of First American Corporation and Subsidiaries
for the three years ended December 31, 1994, 1993,
and 1992
Consolidated Statements of Cash Flows of First
American Corporation and Subsidiaries for the three
years ended December 31, 1994, 1993, and 1992
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or
the required information is shown in the Consolidated
Financial Statements or the notes thereto.
The following reports and consents are submitted herewith:
Accountants' Consent by
KPMG Peat Marwick LLP -- Exhibit 23
59
62
3. Exhibits
Exhibit
Number Description
------- -----------
2 Agreement and Plan of Merger dated February 21, 1995
by and between First American Corporation and
Heritage Bancshares, Inc. (previously filed as
Exhibit 2 to Current Report on Form 8-K filed
February 23, 1995 and incorporated herein by
reference).
3.1 Restated Charter (previously filed as Exhibit 1 to
the Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1991, and
incorporated herein by reference).
3.2 By-Laws of the Corporation currently in effect as
amended April 21, 1994 included on page 102 hereof.
4.1 The Corporation agrees to provide the SEC, upon
request, copies of instruments defining the rights of
holders of long-term debt of the Corporation, and all
of its subsidiaries for which consolidated or
unconsolidated financial statements are required to
be filed with the SEC.
4.2 Rights Agreement, dated December 14, 1988, between
First American Corporation and First American Trust
Company, N.A. (previously filed as Exhibit 1 to a
Current Report on Form 8-K dated December 14, 1988,
and incorporated herein by reference).
4.3(a) Indenture, dated as of December 15, 1972, between
First Amtenn Corporation and the Chase Manhattan
Bank, National Association, as Trustee (previously
filed as Exhibit 4(b) to Registration Statement No.
2-46447 and incorporated herein by reference).
4.3(b) Indenture, dated as of April 22, 1993, between First
American Corporation and Chemical Bank, as Trustee
(previously filed as Exhibit 4.1 to Registration
Statement No. 33-59844 and incorporated herein by
reference).
60
63
4.3(c) Supplemental Indenture, dated as of April 22, 1993,
between First American Corporation and Chemical Bank,
as Trustee (previously filed as Exhibit 4.2 to
Registration Statement No. 33-59844 and incorporated
herein by reference).
10.3(a) First American STAR Award Plan (previously filed as
Exhibit 10.03(b) to the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1986 and
incorporated herein by reference).
10.3(b) First American Corporation 1991 Employee Stock
Incentive Plan (previously filed as part of the
Corporation's Notice of Annual Meeting and Proxy
Statement dated March 18, 1991 for the annual meeting
of shareholders held April 18, 1991 and incorporated
herein by reference).
10.3(c) 1993 Non-Employee Director Stock Option Plan
(previously filed as part of the Corporation's Notice
of Annual Meeting and Proxy Statement dated March 18,
1993 for the annual meeting of shareholders held
April 15, 1993 and incorporated herein by reference).
10.3(d) Consulting Agreement (previously filed as Exhibit
10.3(a) to the Corporation's Annual Report on Form
10-K for the year ended December 31, 1992 and
incorporated herein by reference) with James F. Smith
dated January 1, 1993.
10.3(e) First American Corporation 1992 Executive Early
Retirement Program (previously filed as Exhibit
10.4(a) to the Corporation's Annual Report on Form
10-K for the year ended December 31, 1992 and
incorporated herein by reference).
10.3(f) First American Corporation Directors' Deferred
Compensation Plan (previously filed as Exhibit 19.1
to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1992 and incorporated
herein by reference).
10.3(g) First American Corporation Supplemental Executive
Retirement Program dated as of January 1, 1989
(previously filed as Exhibit 19.2 to the
Corporation's Annual
61
64
Report on Form 10-K for the year ended December 31,
1992 and incorporated herein by reference).
10.3(h) Form of Deferred Compensation Agreement approved by
the Human Resources Committee of the Board of
Directors of the Corporation on December 16, 1993
(previously filed as Exhibit 10.3(h) to the
Corporation's Annual Report on Form 10-K for the year
ended December 31, 1993 and incorporated herein by
reference) and entered into by the Corporation and
John Boyle and Dennis Bottorff, as amended and
restated and included on page 125 hereof.
10.3(i) Restated and Amended First American Corporation First
Incentive Reward Savings Thrift Plan (previously
filed as Exhibit 4 to Registration Statement No.
33-57385 filed January 20, 1995 and incorporated
herein by reference).
11 Calculation of earnings per share is included in note
1 to the consolidated financial statements contained
herein on page 73 and incorporated herein by
reference.
13 First American Corporation's Annual Report to
Shareholders for the fiscal year ended December 31,
1994. Such report, except for the portions included
herein, is furnished for the information of the
Securities and Exchange Commission and is not "filed"
as part of this Report.
21 List of Subsidiaries included on page 130 hereof.
23 Consent of KPMG Peat Marwick LLP, independent
accountants included on page 131 hereof.
27 Financial Data Schedule included herewith.
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
(b) No reports on Form 8-K were filed during the last quarter of 1994.
62
65
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTAL DATA
Page
----
Independent Auditors' Report 64
Financial Statements:
Consolidated Income Statements of First American Corporation and Subsidiaries for the
three years ended December 31, 1994, 1993, and 1992 65
Consolidated Balance Sheets of First American Corporation and Subsidiaries at December
31, 1994 and 1993 66
Consolidated Statements of Changes in Shareholders' Equity of First American
Corporation and Subsidiaries for the three years ended December 31, 1994, 1993, and
1992 67
Consolidated Statements of Cash Flows of First American Corporation and Subsidiaries
for the three years ended December 1994, 1993, and 1992 68
Notes to Consolidated Financial Statements 69
Supplemental Data:
Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and
Yields/Rates for the five years ended December 31, 1994, 1993, 1992, 1991 and 1990 47
Consolidated Year-End Balance Sheets of First American Corporation and Subsidiaries at
December 31, 1994, 1993, 1992, 1991 and 1990 54
63
66
INDEPENDENT AUDITORS' REPORT.
The Board of Directors and Shareholders
First American Corporation:
We have audited the accompanying consolidated balance sheets of First
American Corporation and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1994. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of First
American Corporation and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in note 13 to the consolidated financial statements, the
Corporation adopted in 1993 the provisions of the Financial Accounting
Standards Board's Statements of Financial Accounting Standards No. 109,
Accounting for Income Taxes; No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions; No. 112, Employers' Accounting for Postemployment
Benefits; and No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Nashville, Tennessee
January 20, 1995
64
67
- ---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED INCOME STATEMENTS
First American Corporation and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31
---------------------------------------------
(dollars in thousands except per share amounts) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $348,665 $291,930 $295,791
Interest and dividends on securities 119,355 137,134 132,984
Interest on Federal funds sold and securities purchased
under agreements to resell 2,946 4,602 9,105
Interest on time deposits with other banks and other
interest 1,087 1,600 6,666
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 472,053 435,266 444,546
- ---------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 15,613 14,488 16,006
Money market accounts 57,169 46,720 47,622
Regular savings 9,695 10,150 11,330
Certificates of deposit under $100,000 43,620 44,960 60,088
Certificates of deposit $100,000 and over 15,320 13,095 17,519
Other time and foreign 16,147 17,460 21,898
- ---------------------------------------------------------------------------------------------------------------------
Total interest on deposits 157,564 146,873 174,463
- ---------------------------------------------------------------------------------------------------------------------
Interest on short-term borrowings 28,529 17,100 17,083
Interest on long-term debt (note 8) 6,334 3,854 1,312
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 192,427 167,827 192,858
- ---------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 279,626 267,439 251,688
PROVISION FOR LOAN LOSSES (NOTE 4) (10,000) (42,000) 38,500
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 289,626 309,439 213,188
- ---------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 42,145 39,169 36,871
Commissions and fees on fiduciary activities 16,080 15,250 14,650
Investment services income 6,733 7,667 1,569
Merchant discount fees 2,736 2,199 2,088
Trading account revenue 2,201 2,493 2,435
Net loss on sales of securities available for
sale (note 3) (9,997) (2,028) (2,974)
Other income 24,958 21,067 20,052
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest income 84,856 85,817 74,691
- ---------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 130,078 117,347 109,245
Net occupancy expense (note 5) 20,686 22,043 20,930
Equipment expense 14,858 14,436 12,513
FDIC insurance expense 12,543 12,946 11,863
Systems and processing expense (note 5) 9,247 14,388 13,878
Contribution to First American Foundation (note 11) - 10,000 -
Communication expense 8,310 7,137 7,243
Marketing expense 7,979 6,519 4,636
Supplies expense 5,404 4,524 5,285
Foreclosed properties expense (income), net (5,737) (2,481) 10,653
Other expenses 26,247 29,104 32,180
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense 229,615 235,963 228,426
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE AND CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES 144,867 159,293 59,453
Income tax expense (note 12) 54,135 57,396 17,481
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES 90,732 101,897 41,972
Cumulative effect of changes in accounting principles,
net of tax (note 13) - (84) -
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 90,732 $101,813 $ 41,972
=====================================================================================================================
PER COMMON SHARE:
Income before cumulative effect of changes in
accounting principles and net income $ 3.48 $ 3.93 $ 1.74
Dividends declared .88 .55 .20
=====================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 26,093 25,913 24,082
=====================================================================================================================
See accompanying notes to consolidated financial statements.
65
68
- ---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
First American Corporation and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------
December 31
--------------------------------
(dollars in thousands) 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks (note 2) $ 498,273 $ 500,119
Time deposits with other banks 3,855 2,195
Securities (note 3):
Held to maturity (market value $1,410,504 and $670,764,
respectively) 1,485,311 657,835
Available for sale (amortized cost $685,880 and $1,356,896,
respectively) 664,748 1,392,984
- ---------------------------------------------------------------------------------------------------------------------
Total securities 2,150,059 2,050,819
- ---------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under agreements to
resell 26,634 144,785
Trading account securities 8,617 12,263
Loans (note 4):
Commercial 2,280,702 1,953,983
Consumer--amortizing mortgages 1,136,768 1,015,852
Consumer--other 1,042,688 969,929
Real estate--construction 127,228 106,624
Real estate--commercial mortgages and other 282,856 302,772
- ---------------------------------------------------------------------------------------------------------------------
Total loans 4,870,242 4,349,160
Unearned discount and net deferred loan fees 6,932 9,072
- ---------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net deferred loan
fees 4,863,310 4,340,088
Allowance for possible loan losses 127,148 134,124
- ---------------------------------------------------------------------------------------------------------------------
Total net loans 4,736,162 4,205,964
- ---------------------------------------------------------------------------------------------------------------------
Premises and equipment, net (note 5) 104,244 102,596
Foreclosed properties 9,607 18,881
Other assets (notes 6 and 12) 219,730 150,700
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $7,757,181 $7,188,322
=====================================================================================================================
LIABILITIES
Deposits:
Demand (non-interest-bearing) $1,243,863 $1,232,951
NOW accounts 789,137 797,343
Money market accounts 1,590,164 1,442,316
Regular savings 392,089 424,492
Certificates of deposit under $100,000 1,122,848 1,137,965
Certificates of deposit $100,000 and over 355,221 296,285
Other time 307,439 327,231
Foreign 60,300 31,975
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 5,861,061 5,690,558
- ---------------------------------------------------------------------------------------------------------------------
Short-term borrowings (note 7) 929,840 756,763
Long-term debt (note 8) 252,067 65,945
Other liabilities (note 9) 97,517 93,347
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 7,140,485 6,606,613
- ---------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (notes 5, 9, 15, and 16)
SHAREHOLDERS' EQUITY (NOTES 3, 8, 9, 14, AND 16)
Preferred stock, without par value; authorized 2,500,000 shares - -
Common stock, $5 par value; authorized 50,000,000 shares; issued:
26,144,846 shares at December 31, 1994; 25,988,201 shares at
December 31, 1993 130,724 129,941
Capital surplus 119,549 117,015
Retained earnings 381,408 313,644
Deferred compensation on restricted stock (1,629) (940)
- ---------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 630,052 559,660
Net unrealized gains (losses) on securities available for sale, net
of tax (note 3) (13,356) 22,049
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 616,696 581,709
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,757,181 $7,188,322
=====================================================================================================================
See accompanying notes to consolidated financial statements.
66
69
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
First American Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Net Unrealized
Deferred Gains (Losses)
Compensation on Securities
Common Capital Retained on Restricted Available
(dollars in thousands except per share amounts) Stock Surplus Earnings Stock for Sale Total
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1991 $116,976 $ 79,907 $189,080 $ (653) $ - $385,310
Issuance of 2,012,500 common shares in
connection with public stock offering
(note 14) 10,063 30,738 - - - 40,801
Issuance of 342,945 common shares in
connection with Employee Benefit and
Dividend Reinvestment Plans (note 9) 1,714 3,073 - - - 4,787
Issuance of 35,600 shares of restricted common
stock (note 9) 178 632 - (810) - -
Amortization of deferred compensation on
restricted stock (note 9) - - - 390 - 390
Net income, 1992 - - 41,972 - - 41,972
Cash dividends declared ($.20 per common
share) - - (4,939) - - (4,939)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 128,931 114,350 226,113 (1,073) - 468,321
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of 191,396 common shares in
connection with Employee Benefit
Plan, net of discount on Dividend
Reinvestment Plan (note 9) 957 2,424 - - - 3,381
Issuance of 10,600 shares of restricted common
stock (note 9) 53 241 - (294) - -
Amortization of deferred compensation on
restricted stock (note 9) - - - 427 - 427
Net income, 1993 - - 101,813 - - 101,813
Cash dividends declared ($.55 per common
share) - - (14,282) - - (14,282)
Net unrealized gains on securities available for
sale, net of tax (note 3) - - - - 22,049 22,049
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 129,941 117,015 313,644 (940) 22,049 581,709
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of 111,445 common shares in
connection with Employee Benefit
Plan, net of discount on Dividend
Reinvestment Plan (note 9) 557 1,335 - - - 1,892
Issuance of 45,200 shares of restricted common
stock (note 9) 226 1,199 - (1,425) - -
Amortization of deferred compensation on
restricted stock (note 9) - - - 736 - 736
Net income, 1994 - - 90,732 - - 90,732
Cash dividends declared ($.88 per common
share) - - (22,968) - - (22,968)
Change in net unrealized gains (losses) on
securities available for sale, net of
tax (note 3) - - - - (35,405) (35,405)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 $130,724 $119,549 $381,408 $(1,629) $(13,356) $616,696
====================================================================================================================================
See accompanying notes to consolidated financial statements.
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- ---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
First American Corporation and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31
---------------------------------------
(in thousands) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 90,732 $ 101,813 $ 41,972
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses (10,000) (42,000) 38,500
Write-downs on foreclosed properties 29 1,251 10,255
Depreciation of premises and equipment 14,101 13,831 12,310
Cumulative effect of changes in accounting principles, net of
tax - 84 -
Amortization of intangible assets 3,396 2,546 2,382
Other amortization (accretion), net (975) 4,137 546
Deferred income tax expense (benefit) 10,231 11,088 (6,250)
Net loss on sales of securities available for sale 9,997 2,028 2,974
Net (gain) loss on sales or write-downs of premises and
equipment (262) 525 2,319
Gain on sales of branch offices - - (607)
Change in assets and liabilities, net of effects from
acquisitions
and sales of branch office:
(Increase) decrease in accrued interest
receivable (6,881) 6,149 6,073
Increase (decrease) in accrued interest
payable 10,616 (3,885) (13,523)
(Increase) decrease in trading account
securities 3,646 (4,382) 8,675
(Increase) decrease in other assets (40,462) 40,476 (34,839)
Decrease in other liabilities (6,729) (27,993) (991)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 77,439 105,668 69,796
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net (increase) decrease in time deposits with other banks (1,660) 115,104 (40,095)
Proceeds from sales of securities available for sale 1,418,380 858,609 500,447
Proceeds from maturities of securities available for sale 151,085 348,476 2,327
Purchases of securities available for sale (1,102,664) (1,593,399) (585,969)
Proceeds from maturities of securities held to maturity 177,826 855,435 608,964
Purchases of securities held to maturity (802,005) (461,324) (855,040)
Net (increase) decrease in Federal funds sold and securities
purchased under agreements to resell 118,151 (47,585) 64,568
Acquisitions, net of cash acquired (1,784) (25,572) -
Sales of branch offices, net of cash sold - - (10,642)
Net (increase) decrease in loans (485,534) (483,011) 69,533
Proceeds from sales of premises and equipment 6,411 656 1,098
Purchases of premises and equipment (20,906) (14,024) (8,839)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (542,700) (446,635) (253,648)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 125,490 (16,820) 201,026
Net increase in short-term borrowings 173,077 148,184 87,801
Proceeds from issuance of long-term debt - 49,680 -
Advances from Federal Home Loan Bank 200,000 - -
Net repayment of other long-term debt (14,076) (1,804) (425)
Issuance of common shares:
Public stock offering - - 40,801
Employee Benefit and Dividend Reinvestment Plans 1,892 3,381 4,787
Cash dividends paid (22,968) (14,282) (4,939)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 463,415 168,339 329,051
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and due from banks (1,846) (172,628) 145,199
Cash and due from banks, beginning of year 500,119 672,747 527,548
- ----------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of year $ 498,273 $ 500,119 $ 672,747
======================================================================================================================
Cash paid during the year for:
Interest expense $ 181,646 $ 163,028 $ 206,425
Income taxes 53,536 47,195 16,498
Non-cash investing activities:
Foreclosures 1,958 16,054 21,507
Reclassification of investment securities (note 3) 203,764 368,638 -
======================================================================================================================
See accompanying notes to consolidated financial statements.
68
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- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of First American Corporation
have been prepared in conformity with generally accepted accounting principles
including general practices of the banking industry. The following is a
summary of the more significant accounting policies of the Corporation.
CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiaries, including its principal
subsidiary First American National Bank, as well as First American National
Bank of Kentucky and First American Trust Company, N.A. All significant
intercompany accounts and transactions have been eliminated in consolidation.
SECURITIES
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, trading securities, and securities
available for sale.
Under SFAS No. 115, classification of a debt security as held to
maturity is based on the Corporation's positive intent and ability to hold such
security to maturity. Securities held to maturity are stated at cost adjusted
for amortization of premiums and accretion of discounts, unless there is a
decline in value which is considered to be other than temporary, in which case
the cost basis of such security is written down to market and the amount of the
write-down is included in earnings.
Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading account securities,
which are valued at market with unrealized gains and losses included in
earnings. Gains or losses on sales and adjustments to market value of trading
account securities are included in non-interest income in the consolidated
income statements.
Securities classified as available for sale, which are reported at
market value with unrealized gains and losses excluded from earnings and
reported, net of tax, in a separate component of shareholders' equity, include
all securities not classified as trading account securities or securities held
to maturity. These include securities used
69
72
as part of the Corporation's asset/liability strategy which may be sold in
response to changes in interest rates, prepayment risk, the need or desire to
increase capital, and other similar factors. Gains or losses on sale of
securities available for sale are recognized at the time of sale, based upon
specific identification of the security sold, and are included in non-interest
income in the consolidated income statements.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation enters into interest rate swap, forward interest rate
swap, and basis swap transactions (swaps), as well as futures contracts, in
connection with its asset/liability management program in managing interest
rate exposure arising out of non-trading assets and liabilities. The impact
of swaps is accrued based on expected settlement payments and is recorded as an
adjustment to interest income and expense, in the period in which it accrues
and in the category appropriate to the related asset or liability, over the
life of the related agreements. The related amount receivable from or payable
to the swap counterpart is included in other liabilities or assets in the
consolidated balance sheets. Realized and unrealized gains and losses on
futures contracts which are designated as effective hedges of interest rate
exposure arising out of non-trading assets and liabilities are deferred and
recognized as interest income or interest expense, in the category appropriate
to the related asset or liability, over the covered periods or lives of the
hedged assets or liabilities. Gains or losses on early terminations of
derivative financial instruments that modify the underlying characteristics of
specified assets or liabilities are deferred and amortized as an adjustment to
the yield of the related assets or liabilities over the remaining covered
period.
On a limited basis, the Corporation also enters into interest rate
swap agreements, as well as interest rate cap and floor agreements, with
customers desiring protection from possible adverse future fluctuations in
interest rates. As an intermediary, the Corporation generally maintains a
portfolio of matched offsetting interest rate contract agreements. At the
inception of such agreements, the portion of the compensation related to credit
risk and ongoing servicing, if any, is deferred and taken into income over the
term of the agreements.
LOANS
Loans are stated at the principal amount outstanding. Unearned
discount, deferred loan fees net of loan acquisition costs, and the allowance
for possible loan losses are shown as reductions of loans. Loan origination
and commitment fees and certain loan related costs are being deferred and the
net amount amortized as an adjustment of the related loan's yield over the
contractual life of the loan. Unearned discount represents the unamortized
amount of finance charges, principally related to certain installment loans.
Interest income on loans is generally computed on the outstanding loan balance.
Interest income on installment loans which have unearned discounts is
recognized primarily by the sum-of-the-month's digits method.
70
73
Interest income is generally accrued on all loans. Commercial loans
are placed on non-accrual status when doubt as to timely collection of
principal or interest exists, or when principal or interest is past due 90 days
or more unless such loans are well-secured and in the process of collection.
The decision to place a loan on non-accrual status is based on an evaluation of
the borrower's financial condition, collateral, liquidation value, and other
factors that affect the borrower's ability to pay. Generally, at the time a
loan is placed on a non-accrual status, all interest accrued and uncollected on
the loan in the current fiscal year is reversed from income, and all interest
accrued and uncollected from the prior year is charged off against the
allowance for possible loan losses. Thereafter, interest on non-accrual loans
is recognized in interest income only to the extent that cash is received and
future collection of principal is not in doubt. If the collectibility of
outstanding principal is doubtful, such interest received is applied as a
reduction of principal. A non-accrual loan may be restored to an accruing
status when principal and interest are no longer past due and unpaid and future
collection of principal and interest on a timely basis is not in doubt.
Generally, consumer loans on which interest or principal is past due more than
120 days are charged off.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
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 which is adequate to absorb
estimated losses inherent in the loan portfolio. Such estimated losses arise
primarily from the loan portfolio but may also be derived from other sources,
including commitments to extend credit and standby letters of credit. The
level of the allowance for possible loan losses is determined on a quarterly
basis using procedures which include: (1) an evaluation of individual
criticized and classified credits as determined by internal reviews, of other
significant credits, and of non-criticized/classified commercial and commercial
real estate credits, to determine estimates of loss probability; (2) an
evaluation of various consumer loan categories to determine an estimation of
loss on such loans based primarily on historical loss experience of the
category; (3) a review of unfunded commitments; and (4) an assessment of
various other factors, such as changes in credit concentrations, loan mix, and
economic conditions which may not be specifically quantified in the loan
analysis process.
The allowance for possible loan losses consists of an allocated
portion and an unallocated, or general, portion. The allocated portion is
maintained to cover estimated losses applicable to specific segments of the
loan portfolio. The unallocated portion is maintained to absorb losses which
probably exist as of the evaluation date but are not identified by the more
objective processes used for the allocated portion of the allowance for loan
losses due to risk of error or imprecision. While the total allowance consists
of an allocated portion and an unallocated portion, these terms are primarily
used to describe a process. Both portions of the allowance are available to
provide for inherent loss in the entire portfolio.
71
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The allowance for possible loan losses is increased (decreased) by
provisions for loan losses charged (credited) to expense and is reduced
(increased) by loans charged off net of recoveries on loans previously charged
off. The provision for loan losses is based on management's determination of
the amount of the allowance necessary to provide for estimated loan losses
based on its evaluation of the loan portfolio. 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.
FORECLOSED PROPERTIES
Foreclosed properties include property acquired through foreclosure
and in-substance foreclosures. In-substance foreclosed properties are those
properties where the borrower retains title but has little or no remaining
equity in the property considering its fair value; where repayment can only be
expected to come from the operation or sale of the property; and where the
borrower has effectively abandoned control of the property or it is doubtful
that the borrower will be able to rebuild equity in the property. Foreclosed
properties are valued at the lower of cost or fair value minus estimated costs
to sell. The fair value of the assets is the amount that the Corporation could
reasonably expect to receive for them in a current sale between a willing buyer
and a willing seller, that is, other than in a forced or liquidation sale.
Cost includes loan principal, accrued interest, foreclosure expense, and
expenditures for subsequent improvements. The excess of cost over fair value
minus estimated costs to sell at the time of foreclosure is charged to the
allowance for possible loan losses. Subsequent write-downs to fair value minus
estimated costs to sell are included in foreclosed properties expense.
DEPRECIATION AND AMORTIZATION
Premises and equipment is stated at cost less accumulated depreciation
and amortization, which is computed principally on the straight-line method
based on the estimated useful lives of the respective assets.
For acquisitions accounted for as purchases, the net assets have been
adjusted to their fair values as of the respective acquisition dates. The
value of core deposit rights and the excess of the purchase price of
subsidiaries over net assets acquired are being amortized on a straight-line
basis over periods ranging from ten to twenty years. Core deposit rights and
the excess of the purchase price of subsidiaries over net assets acquired, net
of amounts amortized, are included in other assets in the consolidated balance
sheets.
The carrying value of the excess of the purchase price of subsidiaries
over net assets acquired (goodwill) will be reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of an entity acquired over the remaining amortization period, the
Corporation's carrying value of the goodwill will be reduced by the estimated
shortfall of cash flows.
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EMPLOYEE BENEFIT PLANS
The Corporation provides a variety of benefit plans to eligible
employees. Retirement plan expense is accrued each year, and plan funding
represents at least the minimum amount required by the Employee Retirement
Income Security Act of 1974, as amended. Differences between expense and
funded amounts are carried in other assets or other liabilities. Beginning in
1993, the Corporation recognizes postretirement benefits other than pensions on
an accrual basis, and effective December 31, 1993, other postemployment
benefits are also recognized on an accrual basis. The Corporation also makes
contributions to an employee thrift and profit-sharing plan based on employee
contributions and performance levels of the Corporation.
INCOME TAXES
The Corporation files a consolidated Federal income tax return, except
for its credit life insurance subsidiary, which files a separate return.
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
requires a change from the deferred method of accounting under Accounting
Principles Bulletin No. 11 to the asset and liability method of accounting for
income taxes. Under 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 are reduced by a valuation
allowance, if necessary, to an amount that more likely than not will be
realized.
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 year.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with
current year presentation.
NOTE 2: CASH AND DUE FROM BANKS
The Corporation's bank subsidiaries are required to maintain reserves,
in the form of cash and balances with the Federal Reserve Bank, against its
deposit liabilities. Approximately $161.5 million and $171.8 million of the
cash and due from banks balance at December 31, 1994 and 1993, respectively,
represented reserves maintained in order to meet Federal Reserve requirements.
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NOTE 3: SECURITIES
SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gains, gross unrealized losses,
and approximate market values of securities held to maturity at December 31,
1994 and 1993, are presented in the following table:
Unrealized
Amortized ------------------------ Market
(in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994
U.S. Treasury and other U.S. Government
agencies and corporations $1,304,977 $ 758 $63,634 $1,242,101
Obligations of states and political
subdivisions 21,482 29 1,459 20,052
Other debt securities (primarily
mortgage-backed securities) 158,852 15 10,516 148,351
- ------------------------------------------------------------------------------------------------------------
Total securities held to maturity $1,485,311 $ 802 $75,609 $1,410,504
============================================================================================================
DECEMBER 31, 1993
U.S. Treasury and other U.S. Government
agencies and corporations $ 627,229 $12,805 $ 258 $ 639,776
Obligations of states and political
subdivisions 21,326 208 211 21,323
Other debt securities 9,280 385 - 9,665
- ------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 657,835 $13,398 $ 469 $ 670,764
============================================================================================================
Included in U.S. Treasury and other U.S. Government agencies and
corporations securities held to maturity were agency-issued mortgage-backed
securities amounting to $1,035.4 million ($983.1 million market value) at
December 31, 1994 and $480.5 million ($492.3 million market value) at December
31, 1993. Mortgage-backed securities included in other debt securities
amounted to $156.2 million ($145.6 million market value) at December 31, 1994
and $6.9 million ($7.2 million market value) at December 31, 1993.
SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains, gross unrealized losses,
and approximate market values of securities available for sale at December 31,
1994 and 1993, are presented in the following table:
Unrealized
Amortized ------------------------ Market
(in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994
U.S. Treasury and other U.S. Government
agencies and corporations $ 653,429 $ 48 $21,180 $ 632,297
Other debt securities 2,165 - - 2,165
- ------------------------------------------------------------------------------------------------------------
Total debt securities 655,594 48 21,180 634,462
Equity securities (essentially Federal
Reserve Bank and Federal Home Loan
Bank stock) 30,286 - - 30,286
- ------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 685,880 $ 48 $21,180 $ 664,748
============================================================================================================
DECEMBER 31, 1993
U.S. Treasury and other U.S. Government
agencies and corporations $1,332,536 $37,397 $ 1,450 $1,368,483
Other debt securities (mortgage-backed
securities) 15,593 141 - 15,734
- ------------------------------------------------------------------------------------------------------------
Total debt securities 1,348,129 37,538 1,450 1,384,217
Equity securities (essentially Federal
Reserve Bank and Federal Home Loan
Bank stock) 8,767 - - 8,767
- ------------------------------------------------------------------------------------------------------------
Total securities available for sale $1,356,896 $37,538 $ 1,450 $1,392,984
============================================================================================================
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Included in U.S. Treasury and other U.S. Government agencies and
corporations securities available for sale were agency-issued mortgage-backed
securities amounting to $326.8 million ($306.3 million market value) at
December 31, 1994 and $992.7 million ($1,016.8 million market value) at
December 31, 1993.
Effective December 31, 1993, the Corporation adopted SFAS No. 115
which 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, trading
securities, and available for sale securities. In conjunction with the
adoption of SFAS No. 115 on December 31, 1993, the Corporation reclassified
$368.6 million of securities to the available for sale classification from the
former investment, now held to maturity, category. At that date, unrealized
appreciation on total securities available for sale amounted to $36.1 million,
resulting in an increase in shareholders' equity of $22.0 million, net of
taxes. There was no impact on the Corporation's consolidated net income as a
result of the adoption of SFAS No. 115.
Included within total securities classified as available for sale at
December 31, 1993, were $203.8 million of securities classified as such due to
regulatory restrictions even though the Corporation had the intent and ability
to hold such securities to maturity. Upon a regulatory revision in 1994, which
allowed those securities to be classified as held to maturity, the Corporation
transferred such securities from available for sale to held to maturity. At
the time of transfer, the securities had an unrealized loss of $1.0 million
($.6 million net of taxes). In accordance with SFAS No. 115, such unrealized
loss was retained as a component of shareholders' equity and is being amortized
over the remaining lives of the securities.
Net realized losses from the sale of securities available for sale for
the years ended December 31, 1994, 1993, and 1992, amounted to $10.0 million,
$2.0 million, and $3.0 million, respectively. Gross realized gains and losses
on such sales were as follows:
Year Ended December 31
----------------------------------------------------------------------
1994 1993 1992
--------------------- ---------------------- ---------------------
Gross Gross Gross Gross Gross Gross
Realized Realized Realized Realized Realized Realized
(in thousands) Gains Losses Gains Losses Gains Losses
- --------------------------------------------------------------------------------------------------------------
U.S. Treasury and other U.S.
Government agencies and corporations $ 8,799 $18,796 $1,680 $3,708 $3,367 $6,275
Other debt securities - - - - - 66
- --------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 8,799 $18,796 $1,680 $3,708 $3,367 $6,341
==============================================================================================================
TOTAL SECURITIES
The amortized cost and approximate market values of debt securities at
December 31, 1994, by average estimated maturity are shown below. The expected
maturity for governmental and corporate securities is the stated maturity, and
the
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expected maturity for mortgage-backed securities and other asset-backed
securities is based on current estimates of average maturities.
Securities Held to Maturity Securities Available for Sale
------------------------------- ---------------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------
Due in one year or less $ 151,289 $ 149,868 $ 305,368 $ 304,760
Due after one year through five years 1,003,888 955,080 106,385 99,941
Due after five years through ten years 272,183 251,981 120,548 111,250
Due after ten years 57,951 53,575 123,293 118,511
- --------------------------------------------------------------------------------------------------------------
Total debt securities 1,485,311 1,410,504 655,594 634,462
Equity securities - - 30,286 30,286
- --------------------------------------------------------------------------------------------------------------
Total securities $1,485,311 $1,410,504 $ 685,880 $ 664,748
==============================================================================================================
At December 31, 1994 and 1993, the Corporation held securities with
amortized cost amounting to $484.6 million and $503.7 million, respectively,
which were issued or guaranteed by the Federal National Mortgage Association
and $714.1 million and $856.1 million, respectively, which were issued or
guaranteed by the Federal Home Loan Mortgage Corporation.
Securities carried in the consolidated balance sheets at approximately
$1,627.0 million and $1,310.0 million at December 31, 1994 and 1993,
respectively, were pledged to secure public and trust deposits and for other
purposes as required or permitted by law.
NOTE 4: LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Corporation's bank subsidiaries make commercial, consumer, and
real estate loans to its customers, located principally within the
Corporation's primary market, which consists of Tennessee and selected markets
in adjacent states. Although the bank subsidiaries have a diversified loan
portfolio, a substantial portion of their debtors' ability to honor their
contracts is dependent upon economic conditions in the Corporation's primary
market.
Loans are either secured or unsecured based on the type of loan and
the financial condition of the borrower. The loans are generally expected to
be repaid from cash flow or proceeds from the sale of selected assets of the
borrower; however, the Corporation is exposed to risk of loss on loans due to
the borrower's difficulties, which may arise from any number of factors
including problems within the respective industry or economic conditions,
including those within the Corporation's primary market.
Transactions in the allowance for possible loan losses were as follows:
Year Ended December 31
----------------------------------------------
(in thousands) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
Balance, January 1 $134,124 $181,108 $181,031
Provision (credited) charged to operating expenses (10,000) (42,000) 38,500
Allowance of subsidiaries purchased (note 10) 323 1,296 -
- --------------------------------------------------------------------------------------------------------------
Subtotal 124,447 140,404 219,531
- --------------------------------------------------------------------------------------------------------------
Loans charged off 15,324 26,617 53,912
Recoveries of loans previously charged off (18,025) (20,337) (15,489)
- --------------------------------------------------------------------------------------------------------------
Net charge-off (recoveries) (2,701) 6,280 38,423
- --------------------------------------------------------------------------------------------------------------
Balance, December 31 $127,148 $134,124 $181,108
==============================================================================================================
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Net charge-offs (recoveries) by major loan categories were as follows:
Year Ended December 31
---------------------------------------------
(in thousands) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
Commercial $(3,875) $ (338) $20,187
Consumer--amortizing mortgages (308) (97) 2,817
Consumer--other 1,983 5,626 10,088
Real estate--construction (143) 466 2,264
Real estate--commercial mortgages and other (358) 623 3,067
- --------------------------------------------------------------------------------------------------------------
Total net charge-offs (recoveries) $(2,701) $ 6,280 $38,423
==============================================================================================================
At December 31, 1994 and 1993, loans on a non-accrual status amounted
to $11.5 million and $21.7 million, respectively. Interest income not
recognized on non-accrual loans was approximately $.3 million in 1994, $1.1
million in 1993, and $3.6 million in 1992. Interest income recognized on a
cash basis on non-accrual loans was $.8 million, $1.2 million, and $1.0 million
for the same respective periods.
Directors and executive officers (and their associates, including
companies in which they hold ten percent or more ownership) of the Corporation
and its significant subsidiary, First American National Bank, had loans
outstanding with the Corporation and its subsidiaries of $11.7 million and $5.7
million at December 31, 1994 and 1993, respectively. During 1994, $39.5
million of new loans or advances on existing loans were made to such related
persons and repayments from such persons totalled $33.5 million. The
Corporation believes that such loans were made on substantially the same terms,
including interest and collateral, as those prevailing at the time for
comparable transactions with other borrowers and did not involve more than the
normal risk of collectibility or present other unfavorable features at the time
such loans were made.
During 1993, the Financial Accounting Standards Board issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 was
amended in 1994 by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures." These pronouncements, which will
be adopted prospectively by the Corporation on January 1, 1995, require that
impaired loans be measured at the present value of expected future cash flows
discounted at the loan's effective interest rate, at the loan's observable
market price, or the fair value of the collateral if the loan is collateral
dependent. The Corporation's financial position and results of operations will
not be materially impacted upon the adoption of SFAS No. 114 and No. 118.
NOTE 5: PREMISES AND EQUIPMENT AND LEASE COMMITMENTS
Premises and equipment is summarized as follows:
December 31
-----------------------------
(in thousands) 1994 1993
- --------------------------------------------------------------------------------------------------------------
Land $ 19,419 $ 19,223
Buildings 89,750 92,329
Furniture and equipment 95,259 91,426
Leasehold improvements 18,346 16,729
- --------------------------------------------------------------------------------------------------------------
Subtotal 222,774 219,707
Accumulated depreciation and amortization (118,530) (117,111)
- --------------------------------------------------------------------------------------------------------------
Total premises and equipment $104,244 $102,596
==============================================================================================================
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Depreciation and amortization expense of premises and equipment for
1994, 1993, and 1992 was $14.1 million, $13.8 million and $12.3 million,
respectively.
Non-cancelable minimum operating lease commitments for real property
amount to $8.8 million for 1995; $8.6 million for 1996; $8.2 million for 1997;
$7.7 million for 1998; $7.4 million for 1999; and $38.5 million thereafter. In
the normal course of business, management expects that leases will be renewed
or replaced by other leases. Rent expense, net of rental income on bank
premises, for 1994, 1993, and 1992 was $4.4 million, $3.5 million, and $4.1
million, respectively. Rental income on bank premises for 1994, 1993, and 1992
was $3.8 million, $4.0 million, and $3.8 million, respectively.
The Corporation has a data processing outsourcing agreement expiring
in 2001 that has an average annual base expense, as amended in 1994, of $8.5
million. Total annual fees vary with cost of living adjustments and changes in
services provided by the vendor, which services depend upon the Corporation's
volume of business and system needs. The related expense is included in
systems and processing expense in the consolidated income statements.
NOTE 6: INTANGIBLE ASSETS
Total intangible assets representing core deposit rights and excess of
purchase price of subsidiaries over net assets acquired amounted to $25.6
million and $26.0 million at December 31, 1994 and 1993, respectively, and are
included in other assets on the consolidated balance sheets. Amortization
expense of intangible assets was $3.4 million, $2.5 million, and $2.4 million,
in 1994, 1993, and 1992, respectively.
NOTE 7: SHORT-TERM BORROWINGS
Short-term borrowings are issued on normal banking terms and consisted
of the following:
December 31
------------------------------
(in thousands) 1994 1993
- --------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase $855,618 $664,826
Other short-term borrowings 74,222 91,937
- --------------------------------------------------------------------------------------------------------------
Total short-term borrowings $929,840 $756,763
==============================================================================================================
At December 31, 1994 and 1993, Federal funds purchased and securities
sold under agreements to repurchase included Federal funds purchases of $25.0
million (due within three months) and $55.0 million (due within five months),
respectively. Other short-term borrowings is essentially composed of U.S.
Treasury tax and loan accounts.
The following table presents information regarding Federal funds
purchased and securities sold under agreements to repurchase.
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December 31
-------------------------------------------------
(in thousands) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements
to repurchase:
Amount outstanding at December 31 $855,618 $664,826 $588,950
Average rate at December 31 4.96 % 2.75 % 2.71 %
Average amount outstanding during the year $681,170 $587,059 $519,521
Average rate paid for the year 3.80 % 2.64 % 3.14 %
Maximum amount outstanding at any month-end $855,618 $672,614 $588,950
==============================================================================================================
NOTE 8: LONG-TERM DEBT
Long-term debt consisted of the following:
December 31
-------------------------------
(in thousands) 1994 1993
- --------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances $201,150 $ 1,150
6 7/8% subordinated notes (effective rate of 6.965%) due 2003, interest
payable semiannually (less unamortized discount of $265 in 1994
and $297 in 1993) 49,735 49,703
7 5/8% debentures due December 15, 2002, interest payable semiannually - 13,593
Other 1,182 1,499
- --------------------------------------------------------------------------------------------------------------
Total long-term debt $252,067 $65,945
==============================================================================================================
At December 31, 1994, advances from the Federal Home Loan Bank were
$201.2 million which consisted of $1.2 million maturing September 28, 2007, at
an interest rate of 3.891%, and $200.0 million maturing in 1997 with the
interest rate tied to one-month LIBOR. These advances are collateralized by a
blanket pledge of 1-4 family mortgage loans.
During the first quarter of 1993, the Corporation filed a shelf
registration statement with the Securities and Exchange Commission to issue
$100.0 million of subordinated debt securities. The Corporation issued $50.0
million of subordinated notes under the shelf registration statement during
second quarter 1993. The notes are non-callable.
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% of par.
The Corporation owns a parking garage which was financed through an
Industrial Revenue Bond due April 1, 1997. Indebtedness at December 31, 1994
and 1993, totalled $1.1 million and $1.4 million, respectively. Sinking fund
requirements of this debt amount to $.3 million for 1995 and $.4 million for
1996; the balance of $.4 million is due in 1997. The interest rate on these
bonds is 5.9% for the remaining life of the bonds.
During 1994, the Corporation entered into a three-year unsecured
revolving credit agreement which provides for loans up to $50.0 million. Under
the terms of the agreement, which expires in March 1997, the Corporation pays a
fee for the availability of these funds computed at the rate of 1/4 of 1% per
annum on the commitment. Interest to be paid on the outstanding balances will
be computed based
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on the prime interest rate of the lending banks, Eurodollar rates, or adjusted
certificate of deposit rates, as selected by the Corporation. The Corporation
had no revolving credit borrowings outstanding at December 31, 1994 or 1993.
The terms of these agreements provide for, among other things,
restrictions on payment of cash dividends and purchases, redemptions, and
retirement of capital shares. Under the Corporation's most restrictive debt
covenant, approximately $88.6 million of retained earnings was available to pay
dividends as of December 31, 1994.
NOTE 9: EMPLOYEE BENEFITS
RETIREMENT PLAN
The Corporation and its subsidiaries participate in a non-contributory
retirement plan with death and disability benefits covering substantially all
employees with one or more years of service. The benefits are based on years
of service and average monthly earnings of a participant for the 60 consecutive
months which produce the highest average earnings.
The following table sets forth the plan's funded status and amounts
recognized in the Corporation's consolidated balance sheets at December 31,
1994 and 1993:
(in thousands) 1994 1993
- --------------------------------------------------------------------------------------------------------------
Plan assets at fair value, primarily U.S. bonds and listed stocks $84,203 $84,540
- --------------------------------------------------------------------------------------------------------------
Actuarial present value of benefits for service rendered to date:
Accumulated benefit obligation, including vested benefits of $72,583 and
$71,258, respectively 76,375 74,431
Additional benefits based on projected future compensation 11,066 12,046
- --------------------------------------------------------------------------------------------------------------
Projected benefit obligation 87,441 86,477
- --------------------------------------------------------------------------------------------------------------
Plan assets in excess of accumulated benefit obligation 7,828 10,109
- --------------------------------------------------------------------------------------------------------------
Plan assets greater (less) than projected benefit obligation (3,238) (1,937)
Unrecognized net loss from past experience different from that assumed and
effects of changes in assumptions 10,522 6,009
Unrecognized net transition asset (1,805) (2,105)
Unrecognized prior service cost 620 760
- --------------------------------------------------------------------------------------------------------------
Prepaid pension cost $ 6,099 $ 2,727
==============================================================================================================
Net pension expense included the following components:
Year Ended December 31
----------------------------------------------
(in thousands) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
Service cost for benefits earned during the period $2,762 $2,484 $2,383
Interest cost on projected benefit obligation 6,423 6,096 5,593
Actual return on plan assets 1,075 (6,987) (4,003)
Net amortization and deferral (8,869) 956 (1,804)
- --------------------------------------------------------------------------------------------------------------
Net periodic pension expense $1,391 $2,549 $2,169
==============================================================================================================
As of January 1, 1994, the Corporation elected to change its method of
measuring the market-related value of plan assets from utilizing a calculation
based on 50% book value plus 50% fair market value to utilization of 100% fair
market value. The change had the effect of decreasing 1994 net periodic
pension expense by $1.6 million.
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The following table presents assumptions used in determining the
actuarial present value of the projected benefit obligation for the pension
plan:
Year Ended December 31
----------------------------
1994 1993
- --------------------------------------------------------------------------------------------------------------
Weighted average discount rate 8.0% 7.5%
Rate of increase in future compensation level 4.5 4.5
Expected long-term rate of return on plan assets 9.0 9.0
==============================================================================================================
SUPPLEMENTAL RETIREMENT PLAN
The Corporation has a supplemental retirement plan which provides
supplemental retirement benefits to certain executives of the Corporation. The
expense was $.2 million in 1994, $.1 million in 1993, and $.7 million in 1992.
The higher level of expense in 1992 was due to early retirements. Benefit
payments from the plan are made from general assets of the Corporation. The
weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation in 1994 were 8.0% and 4.5%, respectively, and in 1993 were 7.5% and
4.5%, respectively.
OTHER POSTRETIREMENT BENEFITS
In addition to pension benefits, the Corporation and its subsidiaries
have defined postretirement benefit plans that provide medical insurance and
death benefits for retirees and eligible dependents. Because the death benefit
plan is not significant, it is combined with the health care plan for
disclosure purposes.
Effective January 1, 1993, the Corporation adopted Statement of
Financial Accounting Standards (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's
previous practice, like most companies, was to expense such costs on a
pay-as-you-go basis. The Corporation recognized this change during 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 attributed to employees' service rendered prior to
1993. See note 13.
The status of the plans at December 31, 1994 and 1993, was as follows:
December 31
-------------------------------
(in thousands) 1994 1993
- --------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $11,903 $12,699
Fully eligible, active plan participants 1,555 1,358
Other active plan participants 3,964 4,176
- --------------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 17,422 18,233
Plan assets at market value - -
- --------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess of plan assets 17,422 18,233
Unrecognized net gain (loss) from past experience different from that
assumed and effects of changes in assumptions 912 (510)
- --------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $18,334 $17,723
==============================================================================================================
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The components of net periodic expense for postretirement benefits in
1994 and 1993 were as follows:
December 31
-------------------------------
(in thousands) 1994 1993
- --------------------------------------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 362 $ 314
Interest cost on accumulated postretirement benefit obligation 1,292 1,355
- --------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit expense $ 1,654 $ 1,669
==============================================================================================================
The Corporation continues to fund medical and death benefit costs
principally on a pay-as-you-go basis. Postretirement benefit expense for 1992,
which was recorded on a cash basis, has not been restated and was $.6 million.
For measurement purposes, an 11.00% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1994, declining
gradually to 5.5% per year by 2011 and remaining at that level thereafter. The
discount rate used to determine the accumulated postretirement benefit
obligation was 8.0% in 1994 and 7.5% in 1993, and the assumed long-term rate of
compensation increase was 4.5% in 1994 and 1993.
The health care cost trend rate assumption has a significant effect on
the accumulated postretirement benefit obligation and net periodic benefit
costs. A 1% increase in the trend rate for health care costs would have
increased the accumulated postretirement benefit obligation by $1.5 million as
of December 31, 1994, and the net periodic expense (service cost and interest
cost) would have increased by $.1 million for 1994.
POSTEMPLOYMENT BENEFITS
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 the fourth quarter of
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). Prior to this date, postemployment benefit expenses were recognized on
a pay-as-you-go basis. See note 13.
OTHER EMPLOYEE BENEFITS
The Corporation has executive incentive compensation plans covering
certain officers and other key employees of the Corporation. The plans provide
for incentives based on the attainment of annual and long-term performance
goals. Executive incentive compensation plans also include stock option
programs, which provide for the granting of statutory incentive stock options
and non-statutory options to key employees. Additionally, the Corporation has
a stock option plan for non-employee directors. As of December 31, 1994, the
Corporation had 2,889,961 shares of common stock reserved for issuance under
these plans.
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During 1991 through 1994, the Corporation has issued 131,400 shares of
restricted common stock to certain executive officers. The restrictions lapse
within 15 years; however, if certain performance criteria are met, restrictions
will lapse earlier. The amount recorded for the restricted stock issued is
based on the market value of the Corporation's common stock on the award dates
and is shown as deferred compensation in the consolidated statements of changes
in shareholders' equity. Such compensation expense is recognized over a 3- to
15-year period.
Stock options granted under option programs have been at 85% to 133%
of the market price on the day of grant. Each stock option is for one share of
common stock. Some options are exercisable immediately, while some options are
exercisable over a period of time and may be exercisable earlier if certain
performance criteria are met. All options expire within a ten-year period from
the date of grant. The market price of the Corporation's stock was $26.88 at
December 31, 1994.
The following table presents a summary of stock option and restricted
stock activity:
Total Exercisable Exercise
Available Option Shares Option Shares Price
for Grant Outstanding Outstanding Per Share
- --------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING, DECEMBER 31, 1991 767,432 1,441,588 805,417 $8.875 - $27.375
Shares reserved 209,289 - - N/A
Options granted (404,455) 404,455 - 20.875 - 22.875
Restricted stock incentive awards (35,600) - - N/A
Options which became exercisable - - 546,926 8.875 - 26.875
Options exercised - (279,417) (279,417) 8.875 - 23.50
Options cancelled or expired 227,681 (227,681) (214,181) 8.875 - 27.375
Expiration of shares available for
grant (280,141) - - N/A
- --------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING, DECEMBER 31, 1992 484,206 1,338,945 858,745 8.875 - 27.375
Shares reserved 200,000 - - N/A
Options granted (234,500) 234,500 - 25.50 - 33.125
Restricted stock incentive awards (10,600) - - N/A
Options which became exercisable - - 106,440 14.75 - 22.875
Options exercised - (190,411) (190,411) 8.875 - 27.375
Options cancelled or expired 4,250 (19,731) (16,181) 21.125 - 27.375
- --------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING, DECEMBER 31, 1993 443,356 1,363,303 758,593 8.875 - 33.125
Shares reserved 1,250,000 - - N/A
Options granted (456,450) 456,450 - 30.375 - 40.00
Restricted stock incentive awards (45,200) - - N/A
Options which became exercisable - - 148,420 14.750 - 29.50
Options exercised - (115,203) (115,203) 8.875 - 27.750
Options cancelled or expired 41,600 (47,895) (6,395) 18.625 - 40.00
- --------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING, DECEMBER 31, 1994 1,233,306 1,656,655 785,415 $8.875 - $40.00
==============================================================================================================
The Corporation has a combination savings thrift and profit-sharing
plan ("FIRST Plan") available to substantially all full-time employees. In
connection with the plan, 1,285,000 shares of the Corporation's common stock
have been reserved for issuance. At year-end 1994, 1,279,000 of these shares
had been issued. During 1994, 1993, and 1992, 149,360 shares, 94,193 shares,
and 3,538 shares, respectively, were purchased in the open market for the FIRST
Plan. During 1992, 62,961 shares were issued by the Corporation in connection
with the FIRST Plan (none in 1994 or 1993). The plan is funded by employee and
employer contributions. The Corporation's annual contribution to the plan is
based upon the amount of basic contributions of participants, participants'
compensation, and the achievement of
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certain corporate performance standards and may be made in the form of cash or
the Corporation's common stock with a market value equal to the cash
contribution amount. Total plan expense in 1994, 1993, and 1992 was $3.4
million, $2.9 million, and $1.2 million, respectively. During 1994, 1993, and
1992, the Corporation matched participating employees' qualifying contributions
by 100%, 100%, and 50%, respectively.
NOTE 10: ACQUISITIONS AND SALES
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, Tennessee with
total assets of $48.7 million on 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 acquisition was accounted for using the purchase method. Accordingly, the
purchase price was allocated to assets acquired and liabilities assumed based
on their estimated fair values. The purchase price in excess of the fair value
of net assets acquired of $3.1 million is being amortized on a straight-line
basis over 10 years. First Fidelity's results of operations have been included
in the Corporation's consolidated income statement since the date of
acquisition.
On October 1, 1993, the Corporation acquired all of the outstanding
shares of First American National Bank of Kentucky (FANBKY), formerly known as
First Federal Savings and Loan Association of Bowling Green, a $219.0 million
national bank headquartered in Bowling Green, Kentucky, for $27.5 million.
This transaction was accounted for as a purchase. All financial data after the
acquisition date has been adjusted to reflect the purchase and, consistent with
the purchase method of accounting, the results of operations of FANBKY are
included in the Corporation's consolidated income statement beginning October
1, 1993. Total fair value of net assets of FANBKY on the acquisition date was
approximately $19.1 million. The excess of the purchase price over the fair
value of the net assets acquired was $8.4 million at the acquisition date and
is being amortized over 10 years. FANBKY operates three branches in Warren and
Simpson Counties in southern Kentucky.
NOTE 11: FIRST AMERICAN FOUNDATION
The Corporation's non-interest expenses for 1993 included a $10.0
million charitable contribution to First American Foundation, a not-for-profit
private foundation formed in 1993 to facilitate the Corporation's charitable
contributions.
NOTE 12: INCOME TAXES
The components of income tax expense (benefit) for the years ended
December 31 were:
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Year Ended December 31
------------------------------------------
(in thousands) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
Current income tax expense:
Federal $37,078 $39,221 $19,254
State 6,826 7,087 4,477
- --------------------------------------------------------------------------------------------------------------
Total current income tax expense 43,904 46,308 23,731
- --------------------------------------------------------------------------------------------------------------
Deferred income tax expense (benefit):
Federal 9,845 12,495 (6,247)
State 386 (1,407) (3)
- --------------------------------------------------------------------------------------------------------------
Total deferred income tax expense (benefit) from operations 10,231 11,088 (6,250)
- --------------------------------------------------------------------------------------------------------------
Total income tax expense from operations $54,135 $57,396 $17,481
==============================================================================================================
The 1992 total income tax expense for financial reporting purposes
included the benefit from utilization of tax credit carryforwards amounting to
$5.6 million (general business credit carryforwards of $4.9 million and
alternative minimum tax credits of $.7 million).
Current Federal income tax expense includes the utilization of
alternative minimum tax credits amounting to $3.4 million in 1992.
The following table presents a reconciliation of the provision for
income taxes as shown in the consolidated income statements with that which
would be computed by applying the statutory Federal income tax rates of 35% for
1994 and 1993, and 34% for 1992 to income before income tax expense and the
cumulative effect of changes in accounting principles.
Year Ended December 31
---------------------------------------------
(in thousands) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
Tax expense at statutory rates $50,704 $55,753 $20,214
Increase (decrease) in taxes resulting from:
Tax-exempt interest (2,190) (2,378) (2,771)
State income taxes, net of Federal income tax benefit 4,688 3,692 2,953
Federal income tax rate change adjustment of deferred
taxes - (1,781) -
Provision for audits in process - - 1,000
Utilization of tax credits - - (5,623)
Other, net 933 2,110 1,708
- --------------------------------------------------------------------------------------------------------------
Actual tax expense from operations $54,135 $57,396 $17,481
==============================================================================================================
Effective January 1, 1993, the Corporation prospectively adopted SFAS
No. 109, which required a change from the deferred method (an income statement
approach) of accounting for income taxes under 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 the adoption of
SFAS No. 109 was a $12.8 million benefit. See note 13.
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SFAS No. 109 requires that the tax benefit of deductible temporary
differences be recorded as an asset to the extent that management assesses the
utilization of such temporary differences to be "more likely than not." In
accordance with SFAS No. 109, the realization of tax benefits of deductible
temporary differences depends on whether the Corporation has sufficient taxable
income within the carryback and carryforward period permitted by the tax law to
allow for utilization of the deductible amounts. As of January 1, 1993, the
Corporation had net deductible temporary differences of $165.5 million. For
state purposes, Tennessee law does not permit carrybacks and thus a valuation
allowance was established for the portion of the net deductible temporary
differences for which realization was uncertain. A valuation allowance of $3.9
million was established (as of January 1, 1993).
The net change in the valuation allowance for 1994 was a decrease of
$1.3 million. In 1993, the net change in the valuation allowance was a
decrease of $2.6 million; consisting of an increase related to the adoption of
SFAS No. 106 (accounting for postretirement benefits) of $1.1 million, an
increase related to the adoption of SFAS 112 (accounting for postemployment
benefits) of $.1 million, and a decrease of $3.8 million related to continuing
operations.
Accumulated deferred taxes aggregated net assets of $50.1 million at
December 31, 1994 and $38.2 million at December 31, 1993, and are included in
other assets on the consolidated balance sheets. Management believes that it
is more likely than not that the deferred tax assets, net of the valuation
allowance (if any), will be realized. The tax effects of temporary differences
that give rise to the significant portions of deferred tax assets and deferred
tax liabilities at December 31, 1994 and 1993, are as follows:
Year Ended December 31
--------------------------
(in thousands) 1994 1993
- --------------------------------------------------------------------------------------------------------------
Deferred tax assets
Allowance for loan losses $47,550 $49,952
Postretirement benefit obligation 7,975 7,391
Deferred directors' compensation 2,142 1,993
Deferred loan fees 1,645 2,008
Unrealized loss on securities available for sale 8,513 -
Other 7,072 8,716
- --------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 74,897 70,060
Less valuation allowance - (1,346)
- --------------------------------------------------------------------------------------------------------------
Net deferred tax assets, net of valuation allowance 74,897 68,714
- --------------------------------------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant, and equipment 5,054 6,041
Direct lease financing 13,931 5,000
Unrealized gain on securities available for sale - 14,039
Core deposit intangibles 2,402 2,475
Other 3,456 2,910
- --------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 24,843 30,465
- --------------------------------------------------------------------------------------------------------------
Net deferred tax assets $50,054 $38,249
==============================================================================================================
The tax effects of timing differences that give rise to significant
portions of deferred tax expense (benefit) for the year ended December 31, 1992
are as follows:
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Year Ended
(in thousands) December 31, 1992
- --------------------------------------------------------------------------------------------------------------
Provision for loan losses $ (29)
Leasing operations (1,100)
Accelerated depreciation (1,793)
Deferred loan fees (1,342)
Pension expense 343
Write-down on foreclosed properties (398)
Accreted discount 114
Directors' deferred compensation (111)
Legal contingency 133
Charitable contributions 61
Other, net (419)
- --------------------------------------------------------------------------------------------------------------
Total deferred income tax benefit available (4,541)
Deferred tax assets recognized (1,709)
- --------------------------------------------------------------------------------------------------------------
Total deferred income tax benefit $(6,250)
==============================================================================================================
During 1994, the Corporation and the Internal Revenue Service (IRS)
reached a settlement agreement related to the IRS's examination of the
Corporation's 1989 and 1990 consolidated Federal income tax returns. Such
settlement had no material impact on the Corporation's consolidated financial
statements.
NOTE 13: CHANGES IN ACCOUNTING PRINCIPLES
The cumulative effect of changes in accounting principles reflected in
the 1993 consolidated income statement relates to the Corporation's 1993
adoption of Statements of Financial Accounting Standards (SFAS), as follows:
Year Ended
(in thousands) December 31, 1993
- --------------------------------------------------------------------------------------------------------------
SFAS No. 106 regarding postretirement benefits, net of tax $(11,550)
SFAS No. 109 regarding income taxes 12,766
SFAS No. 112 regarding postemployment benefits, net of tax (1,300)
- --------------------------------------------------------------------------------------------------------------
Total $ (84)
==============================================================================================================
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," and No. 112, "Employers' Accounting for Postemployment
Benefits," are discussed in note 9 (employee benefits), and SFAS No. 109,
"Accounting for Income Taxes," is addressed in note 12 (income taxes). See
note 3 for a discussion regarding the impact to the 1993 consolidated financial
statements resulting from the December 31, 1993, adoption of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
NOTE 14: COMMON STOCK
In December 1994, the Board of Directors authorized the repurchase of
up to 800,000 shares of the Corporation's common stock. It is anticipated that
stock repurchases will be made in the open market or in privately negotiated
transactions from time to time during 1995, subject to market conditions and
regulatory guidelines. Following these purchases, the Corporation expects to
continue to exceed all applicable regulatory capital requirements. It is
anticipated that the repurchased
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shares will be used to fund the Corporation's various employee benefit plans
and potential future acquisitions.
On September 30, 1992, the Corporation completed an underwritten
public offering of its common stock at $21.25 per share, resulting in the
issuance of 2,012,500 shares. A $40.8 million addition to shareholders' equity
in 1992 resulted from the offering.
NOTE 15: OFF-BALANCE-SHEET AND DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Corporation is a party to
financial transactions which have off-balance-sheet risk. Such transactions
arise in meeting customers' financing needs and from the Corporation's
activities in reducing its own exposure to fluctuations in interest rates.
Off-balance-sheet items involving customers consist primarily of commitments to
extend credit and letters of credit, which generally have fixed expiration
dates. These instruments may involve, to varying degrees, elements of credit
and interest rate risk. To evaluate credit risk, the Corporation uses the same
credit policies in making commitments and conditional obligations on these
instruments as it does for instruments reflected on the balance sheet.
Collateral obtained, if any, varies but may include deposits held in financial
institutions; U.S. Treasury securities or other marketable securities;
income-producing commercial properties; accounts receivable; property, plant,
and equipment; and inventory. The Corporation's exposure to credit risk under
commitments to extend credit and letters of credit is the contractual
(notional) amount of the instruments. Interest rate swap transactions and
futures contracts may have credit and interest rate risk significantly less
than the contractual amount.
COMMITMENTS
Commitments to extend secured or unsecured credit are contractual
agreements to lend money providing there is no violation of any condition.
Commitments may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. At year-end 1994 and 1993,
respectively, the Corporation had $1.9 billion and $1.3 billion of unfunded
commitments to extend credit. Of these amounts, unfunded commitments for
borrowers with loans on non-accrual status were $.5 million at December 31,
1994, and $5.3 million at December 31, 1993.
Standby letters of credit are commitments issued by the Corporation to
guarantee the performance of a customer to a third party. As of December 31,
1994 and 1993, the Corporation had standby letters of credit issued amounting
to approximately $188.8 million and $135.4 million, respectively. The
Corporation also had commercial letters of credit of $54.2 million and $56.1
million at December 31, 1994 and 1993, respectively. Commercial letters of
credit are conditional
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commitments issued by the Corporation to facilitate trade for corporate
customers. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
The Corporation contracts to buy and sell foreign exchange in order to
meet the financing needs of its customers and to hedge its own exposure against
market risk. At December 31, 1994 and 1993, the Corporation had $26.2 million
and $12.7 million, respectively, of foreign exchange forward contracts, which
is the sum of customers' contracts with the Corporation and the Corporation's
offsetting contracts to minimize its exposure.
DERIVATIVES
The Corporation's principal objective in holding or issuing derivative
financial instruments for purposes other than trading is the management of
interest rate exposure arising out of nontrading assets and liabilities. The
Corporation's earnings are subject to risk of interest rate fluctuations to the
extent that interest-earning assets and interest-bearing liabilities mature or
reprice at different times or in differing amounts. Asset/liability management
activities are aimed at maximizing net interest income within liquidity,
capital and interest rate risk constraints established by management. The
Corporation's objective is that net income will not be impacted more than 5%
from results simulated for the interest rate environment that the Corporation
considers most likely, assuming that interest rates do not vary more than 150
basis points from the most likely scenario within the next 12 months.
To achieve its risk management objective, the Corporation uses a
combination of derivative financial instruments, particularly interest rate
swaps and futures contracts. The instruments utilized are noted in the
following table along with their notional amounts and fair values at year-end
1994 and 1993.
Weighted
Average
Weighted Average Rate Maturity
Related Variable Rate Notional -------------------------- -------- Fair
(in thousands) Asset/Liability Amount Paid Received Years Value
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994
Interest rate swaps Money market deposits $ 450,000 5.85% (1) 5.71% (2) 1.7 $13,426
Interest rate swaps Long-term debt 200,000 7.11 (1) 6.06 (3) 1.8 2,477
Interest rate swaps Loans 200,000 5.90 (3) 7.39 (1) 4.4 (4,273)
Forward interest rate
swaps Money market deposits 650,000 7.81 (4) N/A (4) 1.9 (4) 5,946
Basis swaps Held to maturity securities 200,000 5.72 (5) 5.56 (2) .3 286
---------- -------
$1,700,000 $17,862
====================================================================================================================================
DECEMBER 31, 1993
Interest rate swaps Money market deposits $ 900,000 4.49% (1) 3.43% (2) 1.2 $(2,391)
Basis swaps Held to maturity securities 200,000 3.04 (5) 3.38 (2) 1.3 (615)
Futures contracts (6) Money market deposits 300,000 N/A N/A 1.5 (6) 31
---------- -------
$1,400,000 $(2,975)
====================================================================================================================================
(1) Fixed rate.
(2) Variable rate which reprices quarterly based on 3-month LIBOR except for
$25 million which reprices every 6 months based on 6-month LIBOR.
(3) Variable rate which reprices quarterly based on 3-month LIBOR.
(4) Forward swap periods begin in June 1995 for $200 million and December 1995
for $450 million. The rates to be paid are fixed and were set at the
inception of the contracts. Variable rates are based on 3-month LIBOR but
are currently unknown since they will not be established until the affected
periods begin.
(5) Variable rate which reprices quarterly based on 5-year constant maturity
Treasury rate less a constant spread.
(6) Represents $300 million short position of Eurodollar futures contracts
which in aggregate simulated a $100 million 9-month interest rate swap.
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Notional amounts are key elements of derivative financial instrument
agreements. However, notional amounts do not represent the amounts exchanged
by the parties to derivatives and do not measure the Corporation's exposure to
credit or market risks. The amounts exchanged are based on the notional
amounts and the other terms of the underlying derivative agreements. The
Corporation's credit exposure at the reporting date from derivative financial
instruments is represented by the fair value of instruments with a positive
fair value at that date and is presented above along with the notional amounts
of the instruments. Credit risk disclosures, however, relate to accounting
losses that would be recognized if counterparts failed completely to perform
their obligations.
The risk that counterparts to derivative financial instruments might
default on their obligations is monitored on an ongoing basis. To manage the
level of credit risk, the Corporation reviews the credit standing of its
counterparts and enters into master netting agreements whenever possible, and
when appropriate, obtains collateral. Master netting agreements incorporate
rights of setoff that provide for the net settlement of subject contracts with
the same counterparts in the event of default.
Interest rate swap contracts are primarily used to convert certain
deposits and long-term debt to fixed interest rates or to convert certain
groups of customer loans to fixed rates. The Corporation's net credit exposure
with interest rate swap counterparts totalled $18.3 million at December 31,
1994, and $.5 million at December 31, 1993.
The table below summarizes, by notional amounts, the activity for each
major category of derivative financial instruments.
Forward
Interest Rate Swaps Swaps
----------------------- ------------ Interest
Pay Receive Pay Futures Rate
(in thousands) Fixed Fixed Fixed Basis Swaps Contracts Floor
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 $ 550,000 $ - $ - $ - $ - $ 200,000
Additions 450,000 - - 200,000 400,000 -
Maturities/terminations (100,000) - - - (100,000) (200,000)
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 900,000 - - 200,000 300,000 -
Additions 600,000 200,000 650,000 - 475,000 -
Maturities/terminations (850,000) - - - (775,000) -
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ 650,000 $200,000 $650,000 $200,000 $ - $ -
==============================================================================================================
The table below presents the deferred gains, included in other
liabilities on the consolidated balance sheets, related to terminated
derivative financial instruments at December 31, 1994 and 1993.
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==============================================================================================================
December 31,
------------------------------------
(in thousands) 1994 1993
- --------------------------------------------------------------------------------------------------------------
Interest rate swaps $2,792 $ -
Futures contracts 3,369 79
- --------------------------------------------------------------------------------------------------------------
Total deferred gains $6,161 (1) $79 (2)
==============================================================================================================
(1) $4,645 will be amortized into income during 1995 and $1,516 will be
amortized during 1996.
(2) Amortized into income during 1994.
NOTE 16: LEGAL AND REGULATORY MATTERS
The extent to which dividends may be paid to the Corporation from its
subsidiaries is governed by applicable laws and regulations. For the
Corporation's national bank subsidiaries, the approval of the OCC is required
if dividends declared in any year exceed net profits for that year (as defined
under the National Bank Act) combined with the retained net profits of the two
preceding years. In addition, a national bank may not pay a dividend, make any
other capital distribution, or pay management fees if such payment would cause
it to fail to satisfy certain minimum capital requirements. In accordance with
the most restrictive of these restrictions, at December 31, 1994, FANB and
FANBKY had $167.6 million and $1.3 million, respectively, available for
distribution as dividends to the Corporation. For the trust company bank
subsidiary, approximately $1.4 million was available for distribution as
dividends to the Corporation as of December 31, 1994.
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 antitrust, unconscionability, usury, and
contract claims arising out of the defendant's 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 $25.0 million against each defendant. The antitrust,
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 by the
plaintiffs against the Corporation and eight other financial institutions in
the U.S. District Court for the Western District of Tennessee. In March 1994,
the District Court granted the defendants' motion for summary judgment
dismissing the action. The plaintiffs have also appealed in this lawsuit.
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.
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NOTE 17: FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures about Fair Value of Financial Instruments," requires disclosure of
fair value information about financial instruments for both on- and
off-balance-sheet assets and liabilities for which it is practicable to
estimate fair value. The techniques used for this valuation are significantly
affected by the assumptions used, including the amount and timing of future
cash flows and the discount rate. Such estimates involve uncertainties and
matters of judgment and therefore cannot be determined with precision. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets. Accordingly, the aggregate fair value amounts
presented are not meant to represent the underlying value of the Corporation.
December 31
---------------------------------------------------------
1994 1993
------------------------ -------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------
Financial instruments (assets):
Cash and short-term investments $ 502,128 $ 502,128 $ 502,314 $ 502,314
Securities held to maturity 1,485,311 1,410,504 657,835 670,764
Securities available for sale 664,748 664,748 1,392,984 1,392,984
Federal funds sold and securities purchased
under agreement to resell 26,634 26,634 144,785 144,785
Trading account securities 8,617 8,617 12,263 12,263
Loans, net of unearned discount and net
deferred loan fees 4,863,310 4,662,158 4,340,088 4,294,969
- -------------------------------------------------------------------------------------------------------------
Total financial instruments (assets) 7,550,748 $7,274,789 7,050,269 $7,018,079
Non-financial instruments (assets) 206,433 138,053
- -------------------------------------------------------------------------------------------------------------
Total assets $7,757,181 $7,188,322
=============================================================================================================
Financial instruments (liabilities):
Non-interest bearing deposits $1,243,863 $1,243,863 $1,232,951 $1,232,951
Interest bearing deposits 4,617,198 4,492,615 4,457,607 4,466,156
- -------------------------------------------------------------------------------------------------------------
Total deposits 5,861,061 5,736,478 5,690,558 5,699,107
Short-term borrowings 929,840 929,840 756,763 756,763
Long-term debt 252,067 245,895 65,945 66,516
- -------------------------------------------------------------------------------------------------------------
Total financial instruments (liabilities) 7,042,968 $6,912,213 6,513,266 $6,522,386
Non-financial instruments (liabilities and
shareholders' equity) 714,213 675,056
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $7,757,181 $7,188,322
=============================================================================================================
The estimated fair values for the Corporation's off-balance-sheet
financial instruments are summarized as follows:
December 31
-----------------------------------------------------------
1994 1993
------------------------ ----------------------------
Contractual Estimated Contractual Estimated
or Notional Fair or Notional Fair
(in thousands) Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------
Commitments to extend credit $1,881,503 $ 2,501 $1,339,216 $ 2,608
Standby letters of credit 188,833 953 135,402 718
Commercial letters of credit 54,156 135 56,077 140
Interest rate swaps 850,000 11,630 900,000 (2,391)
Forward interest rate swaps 650,000 5,946 - -
Basis swaps 200,000 286 200,000 (615)
Futures contracts - - 300,000 31
===============================================================================================================
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The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments.
Cash and short-term investments -- The carrying amounts reported in the
balance sheet approximate fair values since such instruments mature within
90 days or less and present no anticipated credit concerns.
Securities held to maturity, securities available for sale, and trading
account securities -- Fair values are based on quoted market prices or
dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans -- For variable loans that reprice frequently, fair values are based
on carrying values. The fair values for certain homogeneous categories of
loans, such as residential mortgages, are estimated using quoted market
prices for securities backed by similar loans, adjusted for differences in
loan characteristics. The fair values for other loans are estimated by
discounting estimated future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit risk and for
similar maturities.
Deposits -- The fair value of deposits with no stated maturity, such as
demand deposits, NOW accounts, money market accounts, and regular savings
accounts, is equal to the amount payable on demand at the reporting date.
The fair value of certificates of deposits and other fixed maturity time
deposits is estimated using the rates currently offered for deposits of
similar remaining maturities. Any foreign deposits are valued at the
carrying value due to the frequency with which rates for such deposits are
adjusted to a market rate.
Short-term borrowings -- Fair value is estimated to equal the carrying
amount since these instruments have a relatively short maturity.
Long-term debt -- Rates for long-term debt with similar terms and remaining
maturities are used to estimate fair value of existing debt.
Off-balance-sheet instruments -- The fair value of commitments to extend
credit is based on unamortized deferred loan fees and costs. For letters of
credit, fair value is estimated using fees currently charged to enter into
similar agreements with similar maturities. The fair value of the
Corporation's outstanding futures contracts is based on quoted market
prices, and the estimated fair value of interest rate swaps is based on
estimated costs to settle the obligations with the counterparts at the
reporting date.
NOTE 18: PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for First American Corporation (Parent
Company only) was as follows:
CONDENSED BALANCE SHEETS
December 31
-------------------------
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------
Assets
Cash $ 41 $ 41
Securities held to maturity - 174
Securities available for sale 540 -
Short-term investments with subsidiary 71,466 70,067
Investment in subsidiaries, at cost adjusted for equity in earnings and
net unrealized gains (losses) on securities available for sale 589,764 571,727
Other assets 7,152 7,135
- -----------------------------------------------------------------------------------------------------------
Total assets $668,963 $649,144
===========================================================================================================
Liabilities and shareholders' equity
Long-term debt $ 49,734 $ 63,296
Other liabilities 2,533 4,139
- -----------------------------------------------------------------------------------------------------------
Total liabilities 52,267 67,435
- -----------------------------------------------------------------------------------------------------------
Preferred stock, without par value - -
Common stock, $5 par value 130,724 129,941
Capital surplus 119,549 117,015
Retained earnings 381,408 313,644
Deferred compensation on restricted stock (1,629) (940)
- -----------------------------------------------------------------------------------------------------------
Realized shareholders' equity 630,052 559,660
Net unrealized gains (losses) on securities available for sale,
net of tax (13,356) 22,049
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 616,696 581,709
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $668,963 $649,144
===========================================================================================================
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CONDENSED INCOME STATEMENTS
Year Ended December 31
----------------------------------------
(in thousands) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
Income
Dividends from subsidiaries:
Banks $42,037 $ 11,763 $ 4,481
Trust Company 2,918 2,491 750
Fees from subsidiaries 2,714 - 866
Interest from subsidiaries 2,102 1,359 912
Interest on time deposits with other banks and other
income 262 1,131 309
- ----------------------------------------------------------------------------------------------------------
Total income 50,033 16,744 7,318
- ----------------------------------------------------------------------------------------------------------
Expenses
Interest expense on long-term debt 3,595 3,751 1,191
Other expenses 3,399 1,357 1,043
- ----------------------------------------------------------------------------------------------------------
Total expenses 6,994 5,108 2,234
- ----------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of changes
in accounting principles 43,039 11,636 5,084
Reduction to consolidated income taxes arising from parent
company loss 726 998 50
- ----------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings (loss) of
subsidiaries and cumulative effect of changes in accounting
principles 43,765 12,634 5,134
- ----------------------------------------------------------------------------------------------------------
Equity in undistributed earnings (loss) of subsidiaries
before cumulative effect of changes in accounting principles:
Banks 47,085 89,411 35,145
Trust Company (118) (148) 1,693
- ----------------------------------------------------------------------------------------------------------
Total equity in undistributed earnings of subsidiaries 46,967 89,263 36,838
- ----------------------------------------------------------------------------------------------------------
Net income before cumulative effect of changes in accounting
principles 90,732 101,897 41,972
Cumulative effect of changes in accounting principles, net
of tax - (84) -
- ----------------------------------------------------------------------------------------------------------
Net income $90,732 $101,813 $41,972
==========================================================================================================
94
97
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
(in thousands) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 90,732 $101,813 $ 41,972
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed income of subsidiaries (46,967) (89,263) (36,838)
Cumulative effect of changes in accounting principles,
net of tax - 84 -
Amortization 32 735 -
Deferred income tax expense 284 44 219
Change in assets and liabilities:
Increase (decrease) in accrued interest payable (56) 724 (16)
(Increase) decrease in other assets 606 (459) 1,643
Increase (decrease) in other liabilities (1,721) 1,293 (2,446)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 42,910 14,971 4,534
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net increase in short-term securities with subsidiary (1,399) (19,128) (30,268)
Proceeds from maturity of securities held to maturity 174 50,070 85
Purchases of securities held to maturity - (50,691) -
Purchases of securities available for sale (540) - -
Acquisitions (6,476) (27,500) -
Capital contributions to bank subsidiary - (5,000) (15,000)
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,241) (52,249) (45,183)
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt - 49,680 -
Repayment of long-term debt (13,593) (1,500) -
Issuance of common shares:
Public stock offering - - 40,801
Employee Benefit and Dividend Reinvestment Plans 1,892 3,381 4,787
Cash dividends paid (22,968) (14,282) (4,939)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (34,669) 37,279 40,649
- ----------------------------------------------------------------------------------------------------------
Increase in cash - 1 -
Cash, beginning of year 41 40 40
- ----------------------------------------------------------------------------------------------------------
Cash, end of year $ 41 $ 41 $ 40
==========================================================================================================
Cash paid during the year for:
Interest expense $ 3,651 $ 3,027 $ 1,207
Income taxes 51,373 43,363 16,466
- ----------------------------------------------------------------------------------------------------------
95
98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRST AMERICAN CORPORATION
(Registrant)
BY: /s/ DENNIS C. BOTTORFF
-----------------------------
DENNIS C. BOTTORFF,
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date: March 16, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Dennis C. Bottorff /s/ Martin E. Simmons
- --------------------------------------- -------------------------------------
Dennis C. Bottorff Martin E. Simmons
Chairman, President and Chief Executive Executive Vice
Officer and Director President, General Counsel, Secretary
Dated: March 16, 1995 and Principal Financial Officer
Dated: March 16, 1995
/s/ Marvin J. Vannatta, Jr.
--------------------------------------
Marvin J. Vannatta, Jr.
Executive Vice President and Principal
Accounting Officer
Dated: March 16, 1995
96
99
/s/ William O. McCoy
----------------------- --------------------
SAMUEL E. BEALL, II WILLIAM O. MCCOY
Director Director
Dated: Dated: March 16, 1995
/s/ Earnest W. Deavenport, Jr. /s/ Dale W. Polley
------------------------------ ------------------
EARNEST W. DEAVENPORT, JR. DALE W. POLLEY
Director Director
Dated: March 16, 1995 Dated: March 16, 1995
/s/ Reginald D. Dickson /s/ Dr. Roscoe R. Robinson
----------------------- --------------------------
REGINALD D. DICKSON DR. ROSCOE R. ROBINSON
Director Director
Dated: March 16, 1995 Dated: March 16, 1995
/s/ T. Scott Fillebrown, Jr. /s/ James F. Smith, Jr.
---------------------------- -----------------------
T. SCOTT FILLEBROWN, JR. JAMES F. SMITH, JR.
Director Director
Dated: March 16, 1995 Dated: March 16, 1995
/s/ James A. Haslam, II /s/ Cal Turner, Jr.
----------------------- -------------------
JAMES A. HASLAM, II CAL TURNER, JR.
Director Director
Dated: March 16, 1995 Dated: March 16, 1995
/s/ Martha R. Ingram /s/ Ted H. Welch
-------------------- ----------------
MARTHA R. INGRAM TED H. WELCH
Director Director
Dated: March 16, 1995 Dated: March 16, 1995
/s/ Walter G. Knestrick /s/ David K. Wilson
----------------------- -------------------
WALTER G. KNESTRICK DAVID K. WILSON
Director Director
Dated: March 16, 1995 Dated: March 16, 1995
/s/ Gene C. Koonce /s/ Toby S. Wilt
------------------ ----------------
GENE C. KOONCE TOBY S. WILT
Director Director
Dated: March 16, 1995 Dated: March 16, 1995
/s/ James R. Martin /s/ William S. Wire
------------------- -------------------
JAMES R. MARTIN WILLIAM S. WIRE
Director Director
Dated: March 16, 1995 Dated: March 16, 1995
/s/ Robert A. McCabe, Jr.
------------------------
ROBERT A. MCCABE, JR.
Director
Dated: March 16, 1995
97
100
For purposes of EDGAR filing for 12/31/94 Form 10-K:
APPENDIX TO ELECTRONIC FORMAT DOCUMENT
Graph #1: In the Overview section of Management's Discussion
and Analysis, this bar graph depicts the Company's
net income (loss) per share for 1990 through 1994.
For 1994, this graph also depicts the Company's 1994
earnings per share based on earnings exclusive of
negative loan loss provision and available for sale
securities losses realized in the fourth quarter of
1994. For 1993, this graph also depicts the
Company's 1993 based on earnings exclusive of
negative loan loss provisions in the last three
quarters of 1993 and charitable contribution to First
American Foundation in the fourth quarter of 1993.
This graph appears in the paper format version of the
document and not in this electronic filing.
Graph #2: In the Overview section of Management's Discussion
and Analysis, this bar graph depicts the Company's
return on average equity for 1990 through 1994. For
1994, this graph also depicts the Company's 1994
return on average equity based on earnings exclusive
of negative loan loss provision and available for
sale securities losses realized in the fourth quarter
of 1994. For 1993, this graph also depicts the
Company's 1993 return on average equity based on
earnings exclusive of negative loan loss provisions
in the last three quarters of 1993 and charitable
contribution to First American Foundation in the
fourth quarter of 1993. This graph appears in the
paper format version of the document and not in this
electronic filing.
Graph #3: In the Overview section of Management's Discussion
and Analysis, this bar graph depicts the Company's
return on average assets for 1990 through 1994. For
1994, this graph also depicts the Company's 1994
return on average assets based on earnings exclusive
of negative loan loss provision and available for
sale securities losses realized in the fourth quarter
of 1994. For 1993, this graph also depicts the
Company's 1993 return on average assets based on
earnings exclusive of negative loan loss provisions
in the last three quarters of 1993 and charitable
contribution to First American Foundation in the
fourth quarter of 1993. This graph appears in the
paper format version of the document and not in this
electronic filing.
98
101
Graph #4: In the Net Interest Income section of Management's
Discussion and Analysis, this bar graph depicts the
Company's net interest income (taxable equivalent
basis) for 1990 through 1994. This graph appears in
the paper format version of the document and not in
this electronic filing.
Graph #5: In the Non-Interest Expense section of Management's
Discussion and Analysis, this bar graph depicts the
Company's operating efficiency ratio for 1990 through
1994. For 1994, the ratio excludes available for
sale securities losses realized in the fourth quarter
of 1994. For 1993, the ratio excludes the charitable
contribution to First American Foundation. For 1990,
the ratio excludes the gain on the sale of credit
card receivables. This graph appears in the paper
format version of the document and not in this
electronic filing.
Graph #6: In the Loans section of Management's Discussion and
Analysis, this bar graph depicts the Company's loans,
net of discount and fees, at year-end 1990 through
1994. This graph appears in the paper format version
of the document and is not in this electronic filing.
Graph #7: In the Allowance and Provision for Possible Loan
Losses section of Management's Discussion and
Analysis, this bar graph depicts the Company's
allowance to net loans at year-end 1990 through 1994.
This graph appears in the paper format version of the
document and is not in this electronic filing.
Graph #8: In the Allowance and Provision for Possible Loan
Losses section of Management's Discussion and
Analysis, this bar graph depicts the Company's net
charge-offs (recoveries) to average loans for 1990
through 1994. This graph appears in the paper format
version of the document and is not in this electronic
filing.
Graph #9: In the Asset Quality section of Management's
Discussion and Analysis, this bar graph depicts the
Company's nonperforming assets to loans and
foreclosed properties at year-end 1990 through 1994.
This graph appears in the paper format version of the
document and is not in this electronic filing.
Graph #10: In the Deposits section of Management's Discussion
and Analysis, this bar graph depicts the Company's
core deposits at year-end 1990 through 1994. This
graph appears in the paper format version of the
document and is not in this electronic filing.
99
102
Graph #11: In the Capital Position section of Management's
Discussion and Analysis, this bar graph depicts the
Company's average equity to average assets for 1990
through 1994. This graph appears in the paper format
version of the document and not in this electronic
filing.
100
103
EXHIBIT INDEX
NUMBER NAME PAGE
- ------ ---- ----
Exhibit 3.2 By-laws of the Corporation 102
Exhibit 10.3(h) Amended Salary Deferral Agreement 125
Exhibit 21 List of Subsidiaries 130
Exhibit 23 Accountants' Consent 131
Exhibit 27 Financial Data Schedule
101