1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-6198
FIRST AMERICAN CORPORATION
(Exact name of Registrant as specified in its charter)
TENNESSEE 62-0799975
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
FIRST AMERICAN CENTER, NASHVILLE, TENNESSEE 37237
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 615/748-2000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common shares outstanding: 25,865,307 as of April 24, 1995.
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PART I. FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
FOR QUARTER ENDED MARCH 31, 1995
2
3
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
QUARTER ENDED
MARCH 31
--------------------------
1995 1994
---------- ----------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
INTEREST INCOME
Interest and fees on loans $102,242 $ 78,311
Interest and dividends on securities 32,513 30,773
Interest on Federal funds sold and securities
purchased under agreements to resell 803 1,193
Interest on time deposits with other banks and other interest 351 295
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 135,909 110,572
- ------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 3,742 3,774
Money market accounts 18,120 12,501
Regular savings 2,126 2,454
Certificates of deposit under $100,000 13,302 10,042
Certificates of deposit $100,000 and over 5,157 2,761
Other time and foreign 4,688 3,807
- ------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 47,135 35,339
- ------------------------------------------------------------------------------------------------------------------------
Interest on short-term borrowings 11,312 5,144
Interest on long-term debt 4,410 939
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 62,857 41,422
- ------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 73,052 69,150
PROVISION FOR LOAN LOSSES (NOTE 3) - -
- ------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 73,052 69,150
- ------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 10,705 9,421
Commissions and fees on fiduciary activities 3,903 4,234
Investment services income and trading account revenue 2,833 2,652
Merchant discount fees 675 624
Net realized gain (loss) and write down on securities 17 (403)
Other income 6,072 7,107
- ------------------------------------------------------------------------------------------------------------------------
Total non-interest income 24,205 23,635
- ------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 34,209 31,668
Net occupancy expense 5,244 5,413
Equipment expense 3,452 3,587
Systems and processing expense 2,452 3,419
FDIC insurance expense 3,191 3,099
Marketing expense 2,030 1,690
Communication expense 2,421 1,986
Supplies expense 1,474 1,326
Foreclosed properties expense (income), net (614) (776)
Other expenses 5,866 5,533
- ------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 59,725 56,945
- ------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 37,532 35,840
Income tax expense 13,614 13,900
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 23,918 $ 21,940
========================================================================================================================
PER COMMON SHARE:
Net income $ 0.92 $ .84
Cash dividends 0.25 .21
========================================================================================================================
Weighted average common shares outstanding 26,094 26,041
========================================================================================================================
See notes to consolidated financial statements.
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4
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31 DECEMBER 31
--------------------------- --------------
1995 1994 1994
----------- ----------- --------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks $ 379,708 $ 358,477 $ 498,273
Time deposits with other banks 22,104 21,875 3,855
Securities:
Held to maturity (market value $1,396,141, $1,061,373 and
$1,410,504, respectively) 1,435,336 1,066,333 1,485,311
Available for sale (amortized cost $548,112, $1,027,337
and $685,880, respectively) 538,208 1,025,499 664,748
- ------------------------------------------------------------------------------------------------------------------------
Total securities 1,973,544 2,091,832 2,150,059
- ------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under
agreements to resell 69,164 257,338 26,634
Trading account securities 14,491 6,623 8,617
Loans:
Commercial 2,364,694 1,867,734 2,280,702
Consumer--amortizing mortgages 1,164,754 1,044,943 1,136,768
Consumer--other 1,049,720 1,015,843 1,042,688
Real estate--construction 137,140 96,622 127,228
Real estate--commercial mortgages and other 308,278 308,844 282,856
- ------------------------------------------------------------------------------------------------------------------------
Total loans 5,024,586 4,333,986 4,870,242
Unearned discount and net deferred loan fees 6,479 7,864 6,932
- ------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net deferred
loan fees 5,018,107 4,326,122 4,863,310
Allowance for possible loan losses (note 3) 127,057 137,151 127,148
- ------------------------------------------------------------------------------------------------------------------------
Total net loans 4,891,050 4,188,971 4,736,162
- ------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 107,330 102,925 104,244
Foreclosed properties 9,578 17,171 9,607
Other assets 180,024 275,543 219,730
- ------------------------------------------------------------------------------------------------------------------------
Total assets $7,646,993 $7,320,755 $7,757,181
========================================================================================================================
LIABILITIES
Deposits:
Demand (non-interest-bearing) $1,081,231 $1,176,669 $1,243,863
NOW accounts 753,269 812,699 789,137
Money market accounts 1,683,243 1,466,220 1,590,164
Regular savings 360,928 435,144 392,089
Certificates of deposit under $100,000 1,149,742 1,117,603 1,122,848
Certificates of deposit $100,000 and over 458,876 334,119 355,221
Other time 302,282 321,337 307,439
Foreign 78,067 25,013 60,300
- ------------------------------------------------------------------------------------------------------------------------
Total deposits 5,867,638 5,688,804 5,861,061
- ------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 800,714 867,950 929,840
Long-term debt 252,082 52,366 252,067
Other liabilities 96,774 136,035 97,517
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 7,017,208 6,745,155 7,140,485
- ------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $5 par value; authorized 50,000,000
shares; issued: 25,844,162 shares at March 31, 1995;
26,062,254 shares at March 31, 1994 and 26,144,846
shares at December 31, 1994 129,221 130,311 130,724
Capital surplus 109,833 118,439 119,549
Retained earnings 398,786 330,113 381,408
Deferred compensation on restricted stock (1,633) (2,138) (1,629)
- ------------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 636,207 576,725 630,052
Net unrealized gains (losses) on securities available
for sale, net of tax (6,422) (1,125) (13,356)
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 629,785 575,600 616,696
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $7,646,993 $7,320,755 $7,757,181
========================================================================================================================
See notes to consolidated financial statements.
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FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NET
UNREALIZED
DEFERRED GAINS
COMPENSATION (LOSSES)
ON ON SECURITIES
THREE MONTHS ENDED MARCH 31, 1994, AND COMMON CAPITAL RETAINED RESTRICTED AVAILABLE
MARCH 31, 1995 STOCK SURPLUS EARNINGS STOCK FOR SALE TOTAL
--------- --------- -------- ----------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Balance, January 1, 1994 $129,941 $117,015 $313,644 $ (940) $ 22,049 $581,709
Issuance of 28,853 common shares in
connection with Employee Benefit Plan, net
of discount on Dividend Reinvestment Plan 144 277 - - - 421
Issuance of 45,200 shares of restricted common
stock 226 1,147 - (1,373) - -
Amortization of deferred compensation on
restricted stock - - - 175 - 175
Net income - - 21,940 - - 21,940
Cash dividends declared ($.21 per common
share) - - (5,471) - - (5,471)
Change in net unrealized gains and losses on
securities available for sale, net of taxes - - - - (23,174) (23,174)
- ------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1994 $130,311 $118,439 $330,113 $ (2,138) $ (1,125) $575,600
========================================================================================================================
Balance, January 1, 1995 $130,724 $119,549 $381,408 $ (1,629) $ (13,356) $616,696
Issuance of 87,416 common shares in
connection with Employee Benefit Plan, net
of discount on Dividend Reinvestment Plan 437 1,381 - - - 1,818
Issuance of 6,900 shares of restricted common
stock 35 171 - (206) - -
Repurchase of 395,000 shares of common stock (1,975) (11,268) - - - (13,243)
Amortization of deferred compensation on
restricted stock - - - 202 - 202
Net income - - 23,918 - - 23,918
Cash dividends declared ($.25 per common
share) - - (6,540) - - (6,540)
Change in net unrealized gains and losses on
securities available for sale, net of taxes - - - - 6,934 6,934
- ------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1995 $129,221 $109,833 $398,786 $ (1,633) $ (6,422) $629,785
========================================================================================================================
See notes to consolidated financial statements.
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6
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31
--------------------------
1995 1994
---------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 23,918 $ 21,940
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses - -
Depreciation of premises and equipment 3,235 3,377
Amortization of intangible assets 858 788
Other amortization (accretion), net (2,502) (303)
Deferred income tax expense (benefit) 3,479 (1,090)
Net realized (gain) loss and write down on securities (17) 403
Net (gain) loss on sales of premises and equipment 17 (176)
Change in assets and liabilities:
Increase in accrued interest receivable (610) (743)
Increase (decrease) in accrued interest payable 2,721 (15)
(Increase) decrease in trading account securities (5,874) 5,640
(Increase) decrease in other assets 31,580 (107,336)
Increase (decrease) in other liabilities (3,457) 42,875
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 53,348 (34,640)
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net increase in time deposits with other banks (18,249) (19,680)
Proceeds from sales of securities available for sale 284,177 787,062
Proceeds from maturities of securities available for sale 4,300 86,899
Purchases of securities available for sale (148,840) (544,022)
Proceeds from maturities of securities held to maturity 77,683 48,331
Purchases of securities held to maturity (26,714) (457,126)
Net increase in Federal funds sold and securities
purchased under agreements to resell (42,530) (112,553)
Net (increase) decrease in loans (154,888) 16,993
Proceeds from sales of premises and equipment 43 748
Purchases of premises and equipment (6,381) (4,278)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (31,399) (197,626)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 6,577 (1,754)
Net increase (decrease) in short-term borrowings (129,126) 111,187
Redemption of 7 5/8% debentures at 101.22% - (13,759)
Net proceeds from issuance of common stock 1,818 421
Cash dividends paid (6,540) (5,471)
Repurchase of common stock (13,243) -
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (140,514) 90,624
- ------------------------------------------------------------------------------------------------------------------------
Decrease in cash and due from banks (118,565) (141,642)
Cash and due from banks, January 1 498,273 500,119
- ------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, March 31 $ 379,708 $ 358,477
========================================================================================================================
Cash paid during the period for:
Interest expense $ 60,136 $ 41,437
Income taxes 703 3,486
Noncash investing activities:
Foreclosures 98 775
- ------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
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FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and general practices within the
banking industry.
The interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto presented in the
Corporation's 1994 Annual Report to Shareholders. The quarterly consolidated
financial statements reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for interim
periods. Certain prior year amounts have been reclassified to conform with
current year presentation. The results for interim periods are not necessarily
indicative of results to be expected for the complete fiscal year.
(2) NONPERFORMING ASSETS
Nonperforming assets were as follows:
MARCH 31 December 31
- ------------------------------------------------------------------------------------------------------------------------
(in thousands) 1995 1994 1994
- ------------------------------------------------------------------------------------------------------------------------
Non-accrual loans $ 10,505 $ 21,392 $ 11,510
Foreclosed properties 9,578 17,171 9,607
- ------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 20,083 $ 38,563 $ 21,117
========================================================================================================================
90 days or more past due
on accrual $ 7,329 $ 3,868 $ 4,530
========================================================================================================================
Nonperforming assets as a percent of
loans and foreclosed properties .40% .89% .43%
========================================================================================================================
(3) ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses were as follows:
THREE MONTHS ENDED
MARCH 31
- ------------------------------------------------------------------------------------------------------------------------
(in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Balance, January 1 $127,148 $134,124
Provision (credited) charged to operating expenses - -
- ------------------------------------------------------------------------------------------------------------------------
127,148 134,124
- ------------------------------------------------------------------------------------------------------------------------
Loans charged off 3,535 2,468
Recoveries of loans previously charged off (3,444) (5,495)
- ------------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 91 (3,027)
- ------------------------------------------------------------------------------------------------------------------------
Balance, March 31 $127,057 $137,151
========================================================================================================================
Allowance ratios were as follows:
THREE MONTHS ENDED
MARCH 31
- ------------------------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Allowance end of period to net loans outstanding 2.53% 3.17%
Net charge-offs (recoveries) to average loans (annualized) .01 (.29)
========================================================================================================================
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(4) LONG-TERM DEBT
On January 31, 1994, the Corporation redeemed the remaining balance of
approximately $13.6 million of its 7 5/8% debentures due in 2002, at a price of
101.22%.
The Corporation borrowed $100 million from the Federal Home Loan Bank on
August 2, 1994, and $100 million on December 29, 1994. Each advance has a
maturity of three years and interest which is payable and reprices monthly
based on LIBOR. At March 31, 1995, the average interest rate on the $200
million was 6.18%.
(5) ACQUISITIONS
In February 1995, the Corporation signed a definitive merger agreement
under which all of the outstanding shares of Heritage Federal Bancshares, Inc.
(Heritage Federal) will be exchanged for approximately $103 million of First
American Corporation common stock. Heritage Federal is a holding company for
Heritage Federal Bank for Savings, which is 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.
On April 1, 1994, the Corporation consummated its purchase of all of the
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 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 transaction was accounted
for as a purchase.
(6) ACCOUNTING MATTERS
During 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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 were 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 were not materially impacted by the adoption
of SFAS No. 114 and SFAS No. 118.
(7) EARNINGS PER COMMON SHARE
Earnings per common share amounts are computed by dividing net income by
the weighted average number of common shares outstanding during each respective
period.
(8) COMMON STOCK
The Corporation purchased 395,000 shares of First American Corporation
stock in the open market during the first quarter of 1995 at a total cost of
$13.2 million. Under Tennessee law, such shares have been recognized as
authorized but unissued. Accordingly, the excess of the purchase price over
par has been reflected as a reduction from capital surplus.
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PART I. FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR QUARTER ENDED MARCH 31, 1995
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the
consolidated financial statements appearing within this report. Reference
should also be made to First American Corporation's 1994 Annual Report for a
complete discussion of factors that impact results of operations, liquidity,
and capital.
OVERVIEW
Net income for the first quarter of 1995 was $23.9 million, or $.92 per
share compared with $21.9 million, or $.84 per share, for the first quarter of
1994. The $2.0 million increase in first quarter 1995 earnings compared to the
same time last year included a $3.9 million increase in net interest income, a
$.6 million increase in non-interest income, and a $2.8 million increase in
non-interest expense. Return on average assets (ROA) and return on average
equity (ROE) were 1.28% and 15.22%, respectively.
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 $103 million of First
American common stock. Heritage Federal is a holding company for Heritage
Federal Bank for Savings, which is 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.
On April 1, 1994, First American consummated its purchase of all of the
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, 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 transaction was
accounted for as a purchase.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is First American's largest source of income and was
$73.9 million in the first quarter of 1995 on a taxable equivalent basis. This
was up $3.9 million, or 6%, from $70.0 million in the first quarter of 1994.
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. Net interest income is
affected by the volume and mix of earning assets and interest-bearing
liabilities and the corresponding interest yields and costs.
Total interest income on a taxable equivalent basis amounted to $136.8
million for the first quarter of 1995, compared to $111.4 million for the first
quarter of 1994, an increase of $25.4 million, or 23%. Of the $25.4 million
increase, $16.9 million resulted from an increase in average yields and $8.5
million was due to a higher volume of earning assets (primarily loans). The
average yield on earning assets increased 98 basis points to 7.95% from 6.97%,
reflecting a higher interest rate environment in the first quarter of 1995
compared to the first quarter of 1994. For example, the national prime lending
rate and 5-year treasury security yields averaged 8.83% and 7.39%,
respectively, in the first quarter of 1995 compared to 6.02% and 5.48%,
respectively, in the first quarter of 1994. Average earning assets rose $492.6
million, or 8%, to $6.98 billion. Average loans increased $596.8 million, or
14%, to $4.90 billion, average securities declined $2.0 million to $1.99
billion, and average money market investments dropped $102.2 million to $80.3
million.
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Total interest expense in the first quarter of 1995 increased $21.4
million to $62.9 million from the first quarter of 1994. Of the increase,
$17.6 million was due to higher average interest rates paid on interest-bearing
funds and $3.8 million resulted from an increase in the volume of
interest-bearing liabilities. The average rate paid on interest-bearing
liabilities increased 124 basis points to 4.43% from 3.19%, reflecting a higher
interest rate environment. For example, the Federal funds rate averaged 5.95%
in the first quarter of 1995 versus 3.21% in the first quarter of 1994. In the
first quarter of 1995, average interest-bearing liabilities grew $489.0
million, or 9%, to $5.78 billion from $5.27 billion in the first quarter of
1994. Average interest-bearing deposits increased $170.3 million, or 4%, to
$4.66 billion, average short-term borrowings rose $123.5 million, or 17%, to
$847.6 million, and average long-term debt increased $195.2 million, or 343%,
to $252.1 million.
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 yield on earning assets and
the rate paid on interest-bearing liabilities. For the first quarter of 1995,
First American's net interest spread declined 26 basis points to 3.52% from
3.78% for the first quarter of 1994. This decline was due primarily to a 124
basis point increase in the rates paid on interest-bearing liabilities which
exceeded the 98 basis point increase in yields on earning assets. As the net
interest spread declined, the net interest margin, which is net interest income
expressed as a percentage of average earning assets, decreased to 4.30% for the
first quarter of 1995 as compared with 4.38% for the same quarter a year
earlier.
PROVISION FOR LOAN LOSSES
This topic is addressed under the caption "Allowance and Provision for
Possible Loan Losses."
NON-INTEREST INCOME
Total non-interest income was $24.2 million for the first quarter of 1995
compared with $23.6 million for the first quarter of 1994, an increase of $.6
million, or 2%. Non-interest income, excluding net securities losses totalled
$24.2 million, an increase of $.2 million, or 1%, from $24.0 million in the
first quarter of 1994. The increase from the first quarter of 1994 includes a
$1.3 million, or 14%, increase in service charges on deposit accounts primarily
due to a 10% increase in the number of retail deposit accounts and a $1.0
million, or 15%, decline in other income. Other income in the first quarter of
1994 included $.4 million of vendor incentives in excess of the current quarter
and a $.4 million gain on a leveraged lease buy-out with no corresponding gain
in the first quarter of 1995.
NON-INTEREST EXPENSE
Total non-interest expense increased $2.8 million, or 5%, to $59.7
million for the first quarter of 1995 compared with $56.9 million for the same
period in 1994. Salaries and employee benefits increased $2.5 million, or 8%,
from the same period in 1994 due to merit increases, incentive compensation,
and additional employees resulting from the transfer of certain computer
programming functions to the Company and the acquisition of First Fidelity.
Systems and processing expense declined $1.0 million from the first quarter of
1994 due to amendments in March 1994 to First American's agreement with an
outside vendor that provides data processing and telecommunication services.
The agreement was amended to transfer certain software programming functions to
First American which has resulted in cost reductions in systems and processing
expense and increases in other non-interest expense categories, such as
salaries and benefits. First American's operating efficiency ratio
(non-interest expense as a percentage of the sum of net interest income, on a
fully taxable basis, and non-interest income) equaled 60.9% in the first
quarter of 1995, essentially unchanged from the first quarter of 1994.
INCOME TAXES
During the first quarters of 1995 and 1994, First American's income tax
expense was $13.6 million and $13.9 million, respectively.
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ASSET/LIABILITY MANAGEMENT
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 derivative
products 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 product offsets
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
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 lending and deposit needs of its customers.
In conjunction with managing interest rate sensitivity, at March 31,
1995, First American had derivatives with notional values totaling $1.84
billion. These derivatives had a net positive fair value (unrealized net
pre-tax gain) of $4.7 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 March 31, 1994, First American had derivatives with notional
values totaling $1.45 billion. These derivatives had a net positive fair value
of $4.7 million at March 31, 1994. The instruments utilized are noted in the
following table along with their notional amounts and fair values at March 31,
1995 and 1994.
Weighted
Average
Weighted Average Rate Maturity
Related Variable Rate Notional ------------------------------- -------- Fair
(in thousands) Asset/Liability Amount Paid Received Years Value
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1995
Interest rate swaps Money market deposits $ 450,000 5.85% (1) 6.39% (2) 1.4 $ 6,679
Interest rate swaps Long-term debt 200,000 7.11 (1) 6.27 (3) 1.6 (860)
Interest rate swaps Loans 200,000 6.45 (3) 7.39 (1) 4.2 1,888
Forward interest rate
swaps Money market deposits 650,000 7.81 (4) N/A (4) 1.6 (4) (3,422)
Basis swaps Held to maturity securities 200,000 6.18 (5) 6.38 (3) .1 391
Futures contracts (6) Money market deposits 140,000 N/A N/A 1.6 (6) -
---------- -------
$1,840,000 $ 4,676
====================================================================================================================================
March 31, 1994
Interest rate swaps Money market deposits $ 900,000 4.49% (1) 3.67% (2) 1.0 $ 5,327
Basis swaps Held to maturity securities 200,000 3.46 (5) 3.25 (3) 1.1 (1,579)
Futures contracts (7) Money market deposits 350,000 N/A N/A 1.6 (7) 940
---------- -------
$1,450,000 $ 4,688
====================================================================================================================================
(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 $140 million short position of Eurodollar futures contracts
which in aggregate simulates a $35 million 2-year interest rate swap.
(7) Represents $350 million short position of Eurodollar futures contracts
which in aggregate simulates an $87.5 million 2-year interest rate swap.
Net interest income for the quarter ended March 31, 1995, was increased by
derivative products income of $1.2 million. Net interest income for the
quarter ended March 31, 1994, was decreased by $2.6 million derivative products
expense.
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. Deferred gains related to
terminated derivatives contracts amounted to $4.8 million at March 31, 1995,
and $.1 million at March 31, 1994. Deferred gains and losses on
off-balance-sheet derivative activities are recognized as interest income or
interest expense over the original covered periods.
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Credit risk exposure due to off-balance-sheet hedging 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 March
31, 1995, 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 $7.7 million on March 31, 1995. 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
ASSETS
Total assets of First American rose $326.2 million, or 5%, to $7.65
billion at March 31, 1995, compared to $7.32 billion one year earlier. The
growth in total assets is primarily due to the $692.0 million, or 16%, increase
in loans, net of unearned discount and net deferred loan fees, to $5.02 billion
at March 31, 1995, from $4.33 billion at March 31, 1994. Leading the growth in
loans were commercial loans, which increased $497.0 million, or 27%, over a
broad range of industry categories and consumer amortizing mortgages, which
increased $119.8 million, or 11%. The increase in loan volume reflects the
positive economic conditions in Tennessee and selected markets in adjacent
states and the success of First American's marketing programs. Partially
offsetting the increase in loans was a decrease in Federal funds sold and
securities purchased under agreements to resell of $188.2 million, or 73%, and
a $118.3 million, or 6%, decline in total securities.
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. 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, First
American's loan loss methodology produced no provision for loan losses during
the first quarters of 1995 and 1994. The primary factors leading to no
provision for loan losses in the first quarter of 1995 were the continued
improvement in asset quality as discussed under the caption "Asset Quality" and
favorable net loan charge-off experience. In the first quarters of 1995 and
1994, gross charge-offs were $3.5 million and $2.5 million while recoveries
totalled $3.4 million and $5.5 million, respectively. Net charge-offs were
$.1 million in the first quarter of 1995 as compared to $3.0 million of net
recoveries in the first quarter of 1994.
The allowance for possible loan losses was $127.1 million at March 31,
1995, compared with $137.2 million at March 31, 1994. The allowance for
possible loan losses represented 2.53% and 3.17% of net loans at March 31, 1995
and 1994, respectively.
Effective January 1, 1995, First American adopted prospectively Statement
of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosure." These pronouncements
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. First American's financial position and results of
operations were not materially impacted by the adoption of SFAS No. 114 and
SFAS No. 118.
ASSET QUALITY
Nonperforming assets of the Corporation were $20.1 million at March 31,
1995, compared with $38.6 million at March 31, 1994, a decrease of 48%.
Nonperforming assets at March 31, 1995, represented .40% of total loans and
foreclosed properties, compared to .89% at March 31, 1994. At March 31, 1995,
nonperforming assets were comprised of $10.5 million of non-accrual loans and
$9.6 million of foreclosed properties.
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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 March 31, 1995, loans totalling
approximately $72 million, while not considered nonperforming loans, were
classified in First American's internal loan grading system as substandard or
worse, compared with approximately $79 million of such loans at March 31, 1994.
Depending on the economy and other factors, these loans and others, which may
not be presently identified, could become nonperforming assets in the future.
LIABILITIES
Total deposits were $5.87 billion at March 31, 1995, an increase of $178.8
million, or 3%, from $5.69 billion a year earlier. Core deposits, which are
defined as total deposits excluding certificates of deposit $100,000 and over
and foreign deposits, totalled $5.33 billion at March 31, 1995 and 1994.
Long-term debt increased $199.7 million from March 31, 1994, to a balance of
$252.1 million at March 31, 1995, due to two separate $100.0 million advances
from the Federal Home Loan Bank occurring on December 29, 1994, and August 2,
1994.
CAPITAL POSITION
In the first quarter of 1995, First American declared cash dividends on
its common stock of $.25 per share compared to $.21 per share in the first
quarter of 1994, a 19% increase. The dividend payout ratio was 27% in the
first quarter of 1995 compared to 25% in the first quarter of 1994. Total
shareholders' equity was $629.8 million, or 8.24%, of total assets at March 31,
1995, as compared with $575.6 million, or 7.86%, of total assets at March 31,
1994. Book value per share was $24.37 and $22.09 on March 31, 1995 and 1994,
respectively.
First American purchased 395,000 shares of First American Corporation
stock in the open market during the first quarter of 1995 at an average price
of $33.52 per share. Under Tennessee law, such shares have been recognized as
authorized but unissued. Accordingly, the excess of the purchase price over
par has been reflected as a reduction from capital surplus.
The Federal Reserve Board and Office of the Comptroller of the Currency
(OCC) regulations require that bank holding companies and national banks
maintain minimum capital ratios. As of March 31, 1995, the Company and its
principal subsidiary, First American National Bank (FANB), had ratios which
exceeded the regulatory requirements to be classified as "well capitalized,"
the highest regulatory capital rating. At March 31, 1995, the Company and
FANB, respectively, had total risk-based capital ratios of 12.55% and 11.18%,
Tier I risk-based capital ratios of 10.44% and 9.92%, and Tier I leverage
capital ratios of 8.06% and 7.70%. In order to be considered well capitalized,
the total risk-based capital ratio must be a minimum of 10%, the Tier I
risk-based capital ratio must equal or exceed 6%, and the Tier I leverage
capital ratio must be 5% or greater.
LIQUIDITY
Liquidity management consists of maintaining sufficient cash levels to
fund operations and to meet the requirements of borrowers, depositors, and
creditors. Liquid assets, which include cash and cash equivalents (less
Federal Reserve Bank reserve requirements), money market instruments, and
securities that will mature within one year, amounted to $603.6 million and
$753.9 million at March 31, 1995 and 1994, respectively. The estimated average
maturity of securities was 5.1 years and 4.3 years at March 31, 1995 and 1994,
respectively. The average repricing life of the total securities portfolio was
2.4 years and 3.1 years at March 31, 1995 and 1994, respectively. The overall
liquidity position of the First American is further enhanced by a high
proportion of core deposits, which provide a stable funding base. Core
deposits comprised 91% of total deposits at March 31, 1995, versus 94% at March
31, 1994.
Effective March 31, 1995, the total commitment on First American's
revolving credit agreement was increased to $70 million from $50 million and
the termination date of the agreement was extended to March 31, 1998 from March
31, 1997. There were no revolving credit borrowings outstanding during the
first quarter of 1995.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation and seven other financial institutions are
defendants in a class action lawsuit brought in the Circuit
Court of Shelby County, Tennessee. The lawsuit alleges
antitrust, unconscionability, usury, and contract claims
arising out of the defendants' returned check charges. The
asserted plaintiff class consists of depositors who have been
charged returned check or overdraft fees. The plaintiffs are
requesting compensatory and punitive damages of $25 million
against each defendant. The 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ ----------------------------------------------
10 $70 million revolving credit agreement and
amendments related thereto.
11 Statement regarding computation of per share
earnings is included in Note 7 to the
Consolidated Financial Statements for the
Quarter Ended March 31, 1995. See Part 1,
Item 1.
15 Letter regarding unaudited interim financial
information from KPMG Peat Marwick LLP, dated
April 20, 1995.
27 Financial Data Schedule for interim
year-to-date period ended March 31, 1995.
(for SEC use only)
(b) Reports on Form 8-K
A report on Form 8-K dated February 23, 1995, was filed under
item 5 disclosing that First American Corporation entered into
a definitive merger agreement under which all of the
outstanding shares of Heritage Federal Bancshares, Inc. will,
subject to certain terms and conditions, be exchanged for First
American Corporation common stock.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST AMERICAN CORPORATION
---------------------------
(Registrant)
/s/ Martin Simmons
----------------------------------------------
Martin E. Simmons
Executive Vice President, General Counsel,
Secretary and Principal Financial Officer
Date: May 3, 1995
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FIRST AMERICAN CORPORATION
QUARTERLY STATEMENT ON FORM
10-Q
FOR QUARTER ENDED MARCH 31, 1995
EXHIBIT INDEX
Exhibit
Number Description
------ ----------------------------------------------
10 $70 million revolving credit agreement and
amendments related thereto.
15 Letter regarding unaudited interim financial
information from KPMG Peat Marwick LLP, dated
April 20, 1995.
27 Financial Data Schedule for interim
year-to-date period ended March 31, 1995.
(for SEC use only)
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