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 September 30, 1995
Amended Report
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: 27,910,274 as of November 1, 1995.
2
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
INDEX
Part I. Financial Information Page
- -------------------------------- ----
Item 1 Financial Statements (unaudited)
Consolidated Income Statements for the Three and Nine
Months Ended September 30, 1995 and 1994 3
Consolidated Balance Sheets as of September 30, 1995,
September 30, 1994 and December 31, 1994 4
Consolidated Statements of Changes in Shareholders' Equity for
the Nine Months Ended September 30, 1995
and September 30, 1994 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1995 and September 30, 1994 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 12
Part II. Other Information
- ----------------------------
Item 1 Legal Proceedings 19
Item 6 Exhibits and Reports on Form 8-K 19
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3
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
INTEREST INCOME
Interest and fees on loans $113,296 $ 89,169 $325,556 $252,144
Interest and dividends on securities 33,464 28,849 98,354 89,136
Interest on Federal funds sold and securities
purchased under agreements to resell 628 848 2,305 2,691
Interest on time deposits with other banks and other interest 828 299 1,583 840
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 148,216 119,165 427,798 344,811
- ---------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 3,549 3,913 10,951 11,735
Money market accounts 21,328 14,500 59,427 41,003
Regular savings 1,863 2,436 5,967 7,374
Certificates of deposit under $100,000 15,700 11,126 44,125 31,484
Certificates of deposit $100,000 and over 9,656 4,703 22,979 11,044
Other time and foreign 5,669 4,158 15,722 11,619
- ---------------------------------------------------------------------------------------------------------------------
Total interest on deposits 57,765 40,836 159,171 114,259
- ---------------------------------------------------------------------------------------------------------------------
Interest on short-term borrowings 12,832 7,066 36,103 18,802
Interest on long-term debt 4,422 1,885 13,216 3,783
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 75,019 49,787 208,490 136,844
- ---------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 73,197 69,378 219,308 207,967
PROVISION FOR LOAN LOSSES (NOTE 3) - - - -
- ---------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 73,197 69,378 219,308 207,967
- ---------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 11,402 10,646 33,758 30,507
Commissions and fees on fiduciary activities 4,221 3,849 12,300 12,378
Investment services income and trading account revenue 2,786 1,840 7,920 7,018
Merchant discount fees 893 783 2,293 1,974
Net realized gain (loss) and write-down on securities 154 2 508 (284)
Other income 6,946 6,414 19,324 19,667
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest income 26,402 23,534 76,103 71,260
- ---------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 33,940 33,018 102,553 96,990
Net occupancy expense 5,272 5,226 15,757 15,717
Equipment expense 3,686 3,885 11,057 11,065
Systems and processing expense 2,317 2,062 7,573 7,880
FDIC insurance expense (226) 3,184 6,146 9,409
Marketing expense 2,149 2,389 6,621 5,940
Communication expense 2,340 2,135 7,127 6,178
Supplies expense 1,575 1,384 4,401 4,018
Foreclosed properties expense (income), net (26) (2,456) (3,291) (3,454)
Other expenses 6,764 6,381 18,985 18,363
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense 57,791 57,208 176,929 172,106
- ---------------------------------------------------------------------------------------------------------------------
Income before income tax expense 41,808 35,704 118,482 107,121
Income tax expense 15,298 13,016 43,488 40,433
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 26,510 $ 22,688 $ 74,994 $ 66,688
=====================================================================================================================
PER COMMON SHARE:
Net income $ 1.05 $ .87 $ 2.92 $ 2.56
Cash dividends .28 .21 .78 .63
=====================================================================================================================
Weighted average common shares outstanding 25,245 26,117 25,687 26,077
=====================================================================================================================
See notes to consolidated financial statements.
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FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
-------------------------- -----------
1995 1994 1994
----------- ---------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks $ 436,007 $ 395,640 $ 498,273
Time deposits with other banks 1,219 4,166 3,855
Securities:
Held to maturity (market value $1,460,228, $1,470,300 and
$1,410,504, respectively) 1,461,771 1,514,079 1,485,311
Available for sale (amortized cost $647,460, $495,660
and $685,880, respectively) 646,782 471,359 664,748
- --------------------------------------------------------------------------------------------------------------------
Total securities 2,108,553 1,985,438 2,150,059
- --------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under
agreements to resell 80,321 80,282 26,634
Trading account securities 33,628 18,640 8,617
Loans:
Commercial 2,688,107 2,131,273 2,280,702
Consumer--amortizing mortgages 1,280,026 1,105,521 1,136,768
Consumer--other 1,146,000 1,036,302 1,042,688
Real estate--construction 166,355 114,358 127,228
Real estate--commercial mortgages and other 307,299 318,505 282,856
- --------------------------------------------------------------------------------------------------------------------
Total loans 5,587,787 4,705,959 4,870,242
Unearned discount and net deferred loan fees 5,120 6,830 6,932
- --------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net deferred
loan fees 5,582,667 4,699,129 4,863,310
Allowance for possible loan losses (note 3) 126,495 137,587 127,148
- --------------------------------------------------------------------------------------------------------------------
Total net loans 5,456,172 4,561,542 4,736,162
- --------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 113,386 106,476 104,244
Foreclosed properties 8,897 13,553 9,607
Other assets 205,716 201,610 219,730
- --------------------------------------------------------------------------------------------------------------------
Total assets $8,443,899 $7,367,347 $7,757,181
====================================================================================================================
LIABILITIES
Deposits:
Demand (non-interest-bearing) $1,155,298 $1,157,758 $1,243,863
NOW accounts 704,705 771,045 789,137
Money market accounts 1,915,993 1,490,776 1,590,164
Regular savings 309,870 413,978 392,089
Certificates of deposit under $100,000 1,153,352 1,139,852 1,122,848
Certificates of deposit $100,000 and over 641,125 426,351 355,221
Other time 295,627 314,551 307,439
Foreign 102,495 56,887 60,300
- --------------------------------------------------------------------------------------------------------------------
Total deposits 6,278,465 5,771,198 5,861,061
- --------------------------------------------------------------------------------------------------------------------
Short-term borrowings 1,073,082 692,855 929,840
Long-term debt 260,144 152,052 252,067
Other liabilities 194,225 154,382 97,517
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 7,805,916 6,770,487 7,140,485
- --------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $5 par value; authorized 50,000,000
shares; issued: 24,967,732 shares at September 30, 1995;
26,134,713 shares at September 30, 1994 and 26,144,846
shares at December 31, 1994 124,839 130,674 130,724
Capital surplus 78,792 119,436 119,549
Retained earnings 436,335 363,900 381,408
Deferred compensation on restricted stock (1,333) (1,808) (1,629)
- --------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 638,633 612,202 630,052
Net unrealized gains (losses) on securities available
for sale, net of tax (650) (15,342) (13,356)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 637,983 596,860 616,696
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $8,443,899 $7,367,347 $7,757,181
====================================================================================================================
See notes to consolidated financial statements.
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5
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NET
UNREALIZED
DEFERRED GAINS
COMPENSATION (LOSSES)
ON ON SECURITIES
NINE MONTHS ENDED SEPTEMBER 30, 1994, AND COMMON CAPITAL RETAINED RESTRICTED AVAILABLE
SEPTEMBER 30, 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 101,312 common shares in
connection with Employee Benefit Plan, net
of discount on Dividend Reinvestment Plan 507 1,222 - - - 1,729
Issuance of 45,200 shares of restricted common
stock 226 1,199 - (1,425) - -
Amortization of deferred compensation on
restricted stock - - - 557 - 557
Net income - - 66,688 - - 66,688
Cash dividends declared ($.63 per common
share) - - (16,432) - - (16,432)
Change in net unrealized gains and losses on
securities available for sale, net of tax - - - - (37,391) (37,391)
- ----------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994 $130,674 $119,436 $363,900 $ (1,808) $(15,342) $596,860
======================================================================================================================
Balance, January 1, 1995 $130,724 $119,549 $381,408 $ (1,629) $(13,356) $616,696
Issuance of 261,661 common shares in
connection with Employee Benefit Plan and
Dividend Reinvestment Plan, net of discount 1,308 4,717 - - - 6,025
Issuance of 9,377 shares of restricted common
stock 47 274 - (321) - -
Repurchase of 1,448,152 shares of common stock (7,240) (45,748) - - - (52,988)
Amortization of deferred compensation on
restricted stock - - - 617 - 617
Net income - - 74,994 - - 74,994
Cash dividends declared ($.78 per common
share) - - (20,067) - - (20,067)
Change in net unrealized gains and losses on
securities available for sale, net of tax - - - - 12,706 12,706
- ----------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 $124,839 $ 78,792 $436,335 $ (1,333) $ (650) $637,983
======================================================================================================================
See notes to consolidated financial statements.
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6
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------
1995 1994
--------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 74,994 $ 66,688
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses - -
Depreciation of premises and equipment 9,969 10,320
Amortization of intangible assets 2,573 2,530
Accretion, net (4,958) (51)
Deferred income tax expense 8,091 1,400
Net realized (gain) loss and write down on securities (508) 284
Net gain on sales of premises and equipment (31) (170)
Change in assets and liabilities, net of effects from purchase
of bank subsidiary:
Increase in accrued interest receivable (4,105) (3,020)
Increase in accrued interest payable 17,813 9,548
Increase in trading account securities (25,011) (6,377)
(Increase) decrease in other assets 58 (19,161)
Increase in other liabilities 78,895 50,880
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 157,780 112,871
- -------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net (increase) decrease in time deposits with other banks 2,636 (1,971)
Proceeds from sales of securities available for sale 641,261 1,313,729
Proceeds from maturities of securities available for sale 116,088 137,041
Purchases of securities available for sale (713,739) (784,726)
Proceeds from maturities of securities held to maturity 162,146 121,085
Purchases of securities held to maturity (137,331) (774,532)
Net (increase) decrease in Federal funds sold and securities
purchased under agreements to resell (53,687) 64,503
Net increase in loans (720,010) (320,914)
Purchase of bank subsidiary, net of cash acquired - (1,784)
Proceeds from sales of premises and equipment 201 882
Purchases of premises and equipment (19,281) (13,920)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (721,716) (260,607)
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 417,404 35,627
Net increase (decrease) in short-term borrowings 143,242 (63,908)
Net advances from Federal Home Loan Bank 8,500 100,000
Redemption of 7 5/8% debentures at 101.22% - (13,759)
Net repayment of other long-term debt (446) -
Net proceeds from issuance of common stock 6,025 1,729
Cash dividends paid (20,067) (16,432)
Repurchase of common stock (52,988) -
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 501,670 43,257
- -------------------------------------------------------------------------------------------------------------------------------
Decrease in cash and due from banks (62,266) (104,479)
Cash and due from banks, January 1 498,273 500,119
- -------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, September 30 $ 436,007 $ 395,640
===============================================================================================================================
Cash paid during the period for:
Interest expense $ 190,677 $ 127,132
Income taxes 27,405 44,027
Noncash investing activities:
Foreclosures 986 1,366
Securities transferred to held to maturity from
available for sale - 203,764
- -------------------------------------------------------------------------------------------------------------------------------
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. All such adjustments are of a normal recurring nature.
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:
SEPTEMBER 30 December 31
- -------------------------------------------------------------------------------------------------------------
(in thousands) 1995 1994 1994
- -------------------------------------------------------------------------------------------------------------
Non-accrual loans $ 16,219 $ 14,075 $ 11,510
Foreclosed properties 8,897 13,553 9,607
- -------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 25,116 $ 27,628 $ 21,117
=============================================================================================================
90 days or more past due
on accrual $ 4,245 $ 3,822 $ 4,530
=============================================================================================================
Nonperforming assets as a percent of loans and
foreclosed properties (excluding 90 days or
more past due on accrual) .45% .59% .43%
=============================================================================================================
(3) ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses were as follows:
NINE MONTHS ENDED
SEPTEMBER 30
- -------------------------------------------------------------------------------------------------------------
(in thousands) 1995 1994
- -------------------------------------------------------------------------------------------------------------
Balance, January 1 $127,148 $134,124
Provision (credited) charged to operating expenses - -
Allowance of subsidiary purchased - 323
- -------------------------------------------------------------------------------------------------------------
127,148 134,447
- -------------------------------------------------------------------------------------------------------------
Loans charged off 12,023 10,549
Recoveries of loans previously charged off (11,370) (13,689)
- -------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 653 (3,140)
- -------------------------------------------------------------------------------------------------------------
Balance, September 30 $126,495 $137,587
=============================================================================================================
Allowance ratios were as follows:
NINE MONTHS ENDED
SEPTEMBER 30
- -------------------------------------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------------------------------------
Allowance end of period to net loans outstanding 2.27% 2.93%
Net charge-offs (recoveries) to average loans (annualized) .02 (.09)
=============================================================================================================
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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 $100.0 million from the Federal Home Loan
Bank on December 29, 1994. The advance has a maturity of three years and
interest which is payable and reprices monthly based on LIBOR. The Corporation
borrowed $108.5 million from the Federal Home Loan Bank on September 29, 1995.
The advance has a maturity of three years and interest which is payable and
reprices monthly based on LIBOR. Also on September 29, 1995, the Corporation
prepaid a $100 million variable rate Federal Home Loan Bank advance which had
an original maturity of August 2, 1997.
At September 30, 1995, the average interest rate on the $208.5
million of Federal Home Loan Bank advances was 5.875%.
(5) ACQUISITIONS
In September 1995, First American Enterprises, a wholly-owned
subsidiary of the Corporation, entered into an agreement to purchase 49% of the
stock of The SSI Group, Inc. (SSI), for approximately $8.6 million. SSI
provides healthcare payments processing. The transaction is expected to be
completed during the first quarter of 1996, subject to approval by regulatory
authorities. The transaction is anticipated to be accounted for under the
equity method of accounting.
In July 1995, the Corporation signed a definitive merger agreement
under which all of the outstanding shares including shares from the expected
conversions of convertible debentures and convertible preferred stock of First
City Bancorp, Inc. (First City) will be exchanged for approximately $47 million
of First American Corporation's stock. Of the total First American Corporation
common stock to be exchanged in the transaction, up to 80% is anticipated to be
repurchased in the open market. First City is a bank holding company which
operates First City Bank and Citizens Bank, both Tennessee state chartered
banks, and Tennessee Credit Corporation, a consumer finance company. As of
September 30, 1995, First City had $347.6 million in assets, 11 banking
offices, and nine consumer finance locations in the middle Tennessee area. The
merger is expected to be completed during the first quarter of 1996, subject to
approval by regulatory authorities and by First City's shareholders. The
transaction is anticipated to be accounted for as a purchase.
In May 1995, the Corporation signed a definitive merger agreement
under which all of the outstanding shares of Charter Federal Savings Bank
(Charter) will be exchanged for approximately $79 million of First American
Corporation common stock. Up to 100% of the total Corporation shares to be
exchanged in the transaction will be repurchased in the open market. Charter
is a federal savings bank headquartered in Bristol, Virginia with $745.5
million in assets at September 30, 1995, and 27 branches (eight in Knoxville,
Tennessee; five in Bristol, Tennessee and Bristol, Virginia; and 14 in other
locations in southwestern Virginia). The merger is expected to be completed
during the fourth quarter of 1995, subject to approval by regulatory
authorities and by Charter's shareholders. The transaction is anticipated to
be accounted for as a purchase.
Since the execution of the original merger agreement, Charter has
filed a lawsuit against the United States government seeking damages for breach
of contract and unlawful taking of property arising out of the revocation by
the United States of Charter's right to treat supervisory goodwill as an asset
for regulatory purposes. On October 11, 1995, the merger agreement was amended
to provide that Charter's shareholders may receive additional consideration
consisting of shares of First American Corporation's stock with value equal to
50% of any goodwill litigation recovery, net of certain related expenses
including federal and state income taxes, received within five years of
approval of the merger by the Office of Thrift Supervision. Additionally,
Charter has agreed to waive its right to terminate the merger agreement if the
fair market value of First American Corporation stock is above $43.50 per
share.
On October 31, 1995 (effective November 1, 1995), the Corporation
completed the merger with Heritage Federal Bancshares, Inc. (Heritage) by
exchanging approximately 2.9 million shares of First American Corporation
common stock for all of the outstanding shares of Heritage. Heritage was the
holding company for Heritage Federal Bank for Savings, a federal savings bank
with $526.5 million in assets at September 30, 1995, and 13 offices primarily
in the East Tennessee areas of Tri-Cities, Anderson County, and Roane County.
The transaction will be accounted for as a pooling of interests.
8
9
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, 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.
(6) ACCOUNTING MATTERS
During 1993, the Financial Accounting Standards Board (FASB) 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 apply to all loans except for large
groups of smaller-balance homogeneous loans that are collectively evaluated for
impairment including credit card, residential mortgage, and consumer
installment loans. The Statements also do not apply to loans that are measured
at fair value or the lower of cost or fair value, leases, and debt securities
as defined by SFAS No. 115.
A loan is impaired when it is probable that the Corporation will be
unable to collect the scheduled payments of principal and interest due under
the contractual terms of the loan agreement. Generally, impaired loans must 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. If the
measure of the impaired loan is less than the recorded investment in the loan,
a creditor shall recognize an impairment by creating a valuation allowance with
a corresponding charge to the provision for loan losses or by adjusting an
existing valuation allowance for the impaired loan with a corresponding charge
or credit to the provision for loan losses.
The Corporation adopted SFAS Nos. 114 and 118 effective January 1,
1995, on a prospective basis. The adoption of the pronouncements had no
material impact on the Corporation's consolidated financial statements. The
impact to historical and current amounts related to in-substance foreclosures
was not material, and accordingly, historical amounts have not been restated.
The Corporation's consumer loans are currently divided into various
groups of smaller-balance homogeneous loans that are collectively evaluated for
impairment and, thus, not subject to the provisions of SFAS Nos. 114 and 118.
Substantially all other loans of the Corporation are evaluated for impairment
under the provisions of SFAS Nos. 114 and 118. Most of the Corporation's
impaired loans are measured on a loan-by-loan basis.
The Corporation considers all loans on non-accrual status to be
impaired. 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. Delays or shortfalls in loan payments are evaluated
along with various other factors to determine if a loan is impaired.
Generally, delinquencies under 90 days are considered insignificant unless
certain other factors are present which indicate impairment is probable. The
decision to place a loan on non-accrual status is also 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 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 as 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.
Loans not on non-accrual status are classified as impaired in
certain cases when there is inadequate protection by the current net worth and
financial capacity of the borrower or of the collateral pledged, if any. In
those cases, such loans have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt, and if such deficiencies are not
corrected, there is a probability that the Corporation will sustain some loss.
In such cases, interest income continues to accrue as long as the loan does not
meet the Corporation's criteria for non-accrual status.
9
10
Generally, the Corporation also classifies as impaired any loans
whose terms have been modified in a troubled debt restructuring after January
1, 1995. Interest is generally accrued on such loans that continue to meet the
modified terms of their loan agreements.
The Corporation's charge-off policy for impaired loans is similar to
its charge-off policy for all loans in that loans are charged off in the month
when they are considered uncollectible.
The impaired loans and related loan loss reserve amounts at
September 30, 1995 follow:
AS OF SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------------------------------------
RECORDED
INVESTMENT
IN IMPAIRED LOAN LOSS
(in thousands) LOANS RESERVE
- --------------------------------------------------------------------------------------------------------------
Impaired loans with loan loss reserves $ 14,750 $ 3,941
Impaired loans with no loan loss reserves 13,845 -
- --------------------------------------------------------------------------------------------------------------
Total $ 28,595 $ 3,941
==============================================================================================================
The above loan loss reserves were primarily determined using the fair value of
the loans' collateral .
The following details the average recorded investment in impaired loans for the
quarter and nine months ended September 30, 1995, and the related total amount
of interest income recognized on the accrual and cash basis during those
periods that such loans were impaired.
FOR THE PERIODS ENDED
SEPTEMBER 30, 1995
- -------------------------------------------------------------------------------------------------------------
NINE
(in thousands) QUARTER MONTHS
- -------------------------------------------------------------------------------------------------------------
Average recorded investment in impaired loans $ 30,394 $ 27,435
=============================================================================================================
Interest income recognized on impaired loans
Accrual basis $ 251 $ 741
Cash basis 48 141
- -------------------------------------------------------------------------------------------------------------
Total $ 299 $ 882
=============================================================================================================
During March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which must be adopted by the Corporation by January 1, 1996. SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. At this time the Corporation is evaluating when and how it
will adopt SFAS No. 121. Adoption of SFAS No. 121 is not expected to have a
material effect on the Corporation's consolidated financial statements.
During May 1995, the FASB issued SFAS No. 122, "Accounting for
Mortgage Servicing Rights--An Amendment of FASB Statement No. 65." SFAS No.
122 amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities,"
to require that rights to service mortgage loans for others be recognized as
separate assets, however those servicing rights are acquired. An enterprise
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells or securitizes those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans (without the mortgage servicing
rights) based on their relative fair values. SFAS No. 122 also requires that
capitalized mortgage servicing rights be assessed for impairment based on the
fair value of those rights. SFAS No. 122 must be adopted by the Corporation by
January 1, 1996, and applies prospectively to transactions in which an
enterprise sells or securitizes mortgage loans with servicing rights retained
and to impairment evaluations of all amounts capitalized as mortgage servicing
rights, including those purchased before the adoption of SFAS 122. At this
time the Corporation is evaluating when and how it will adopt SFAS No. 122, as
well as the possible financial impact of the statement on the Corporation's
consolidated financial statements.
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(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 1.4 million shares of First American
Corporation stock in the open market during the first nine months of 1995 at a
total cost of $53.0 million. Under Tennessee law, such repurchased 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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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 third quarter of 1995 was $26.5 million, or $1.05
per share, compared with $22.7 million, or $.87 per share, for the third
quarter of 1994. The $3.8 million increase in third quarter 1995 earnings
compared to the same time last year included a $3.8 million increase in net
interest income, a $2.9 million increase in non-interest income, and a $.6
million increase in non-interest expense. For the third quarter of 1995,
return on average assets (ROA) and return on average equity (ROE) were 1.29%
and 16.40%, respectively.
Net income for the nine months ended September 30, 1995, was $75.0
million, or $2.92 per share, compared with $66.7 million, or $2.56 per share,
for the first nine months of 1994. The $8.3 million increase in earnings for
the first nine months ended September 30, 1995, compared to the same period
last year included an $11.3 million increase in net interest income, a $4.8
million increase in non-interest income, and a $4.8 million increase in
non-interest expense. For the nine months ended September 30, 1995, ROA and
ROE were 1.28% and 15.67%, respectively.
In September 1995, First American Enterprises, a wholly-owned
subsidiary of First American, entered into an agreement to purchase 49% of the
stock of The SSI Group, Inc. (SSI), for approximately $8.6 million. SSI
provides healthcare payments processing. The transaction is expected to be
completed during the first quarter of 1996, subject to approval by regulatory
authorities. The transaction is anticipated to be accounted for under the
equity method of accounting.
In July 1995, First American signed a definitive merger agreement
under which all of the outstanding shares, including shares from the expected
conversions of convertible debentures and convertible preferred stock, of First
City Bancorp, Inc. (First City) will be exchanged for approximately $47 million
of First American common stock. Of the total First American shares to be
exchanged in the transaction, up to 80% are anticipated to be repurchased in
the open market. First City is a bank holding company which operates First
City Bank and Citizens Bank, both Tennessee state chartered banks, and
Tennessee Credit Corporation, a consumer finance company. First City had
$347.6 million in assets, 11 banking offices, and nine consumer finance
locations in the middle Tennessee area as of September 30, 1995. The merger is
expected to be completed during the first quarter of 1996, subject to approval
by regulatory authorities and by First City's shareholders. The transaction is
expected to be accounted for as a purchase.
In May 1995, First American signed a definitive merger agreement
under which all of the outstanding shares of Charter Federal Savings Bank
(Charter) will be exchanged for approximately $79 million of First American
common stock. Up to 100% of the total First American shares to be exchanged in
the transaction are expected to be repurchased in the open market. Charter is
a federal savings bank headquartered in Bristol, Virginia with $745.5 million
in assets at September 30, 1995, and 27 branches (eight in Knoxville,
Tennessee; five in Bristol, Tennessee and Bristol, Virginia; and 14 in other
locations in southwestern Virginia). The merger is expected to be completed
during the fourth quarter of 1995, subject to approval by regulatory
authorities and by Charter's shareholders. The transaction is anticipated to
be accounted for as a purchase.
Since the execution of the original merger agreement, Charter has
filed a lawsuit against the United States government seeking damages for breach
of contract and unlawful taking of property arising out of the revocation by
the United States of Charter's right to treat supervisory goodwill as an asset
for regulatory purposes. On October 11, 1995, the merger agreement was amended
to provide that Charter's shareholders may receive additional consideration
consisting of shares of First American's stock with value equal to 50% of any
goodwill litigation recovery, net of certain related expenses, including
federal and state income taxes, received within five years of approval of the
merger by the Office of Thrift Supervision. Additionally, Charter has agreed
to waive its right to terminate the merger agreement if the fair market value
of First American stock is above $43.50 per share.
On October 31, 1995 (effective November 1, 1995), First American
completed the merger with Heritage Federal Bancshares, Inc. (Heritage) by
exchanging approximately 2.9 million shares of First American common stock for
all of the outstanding shares of Heritage. Heritage was the holding company
for Heritage Federal Bank for Savings, a federal savings bank with $526.5
million in assets at September 30, 1995, and 13 offices primarily in the East
Tennessee areas of Tri-Cities, Anderson County, and Roane County. The
transaction will be accounted for as a pooling of interests.
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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 $74.1 million in the third quarter of 1995 on a taxable equivalent basis.
This was up $3.9 million, or 5%, from $70.2 million in the third quarter of
1994. For the nine months ended September 30, 1995, net interest income on a
taxable equivalent basis increased $11.3 million, or 5%, to $221.9 million from
$210.6 million in the first nine months 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
$149.1 million for the third quarter of 1995, compared to $120.0 million for
the third quarter of 1994, an increase of $29.1 million, or 24%. Of the $29.1
million increase, $13.1 million resulted from an increase in average yields and
$16.0 million was due to a higher volume of earning assets (primarily loans).
The average yield on earning assets increased 69 basis points to 7.88% from
7.19%, primarily due to a higher interest rate environment in short-term
financial instruments in the third quarter of 1995 compared to the third
quarter of 1994. For example, the national prime lending rate and six-month
treasury security yields averaged 8.77% and 5.60%, respectively, in the third
quarter of 1995 compared to 7.50% and 5.11%, respectively, in the third quarter
of 1994. Average earning assets rose $883.0 million, or 13%, to $7.50 billion.
Average loans increased $794.6 million, or 17%, to $5.37 billion, average
securities increased $98.4 million, or 5%, to $2.04 billion, and average money
market investments dropped $10.0 million, or 10%, to $88.0 million.
Total interest income on a taxable equivalent basis amounted to
$430.4 million for the nine months ended September 30, 1995, compared to $347.4
million for the comparable period in 1994, an increase of $83.0 million, or
24%. Of the $83.0 million increase, $47.6 million resulted from an increase in
average yields and $35.4 million was due to a higher volume of earning assets
(primarily loans). The average yield on earning assets increased 88 basis
points to 7.96% from 7.08%, primarily due to a higher average interest rate
environment in the first nine months of 1995 compared to the first nine months
of 1994. For example, the national prime lending rate and 5-year treasury
security yields averaged 8.87% and 6.63%, respectively, in the first nine
months of 1995 compared to 6.81% and 6.37%, respectively, in the first nine
months of 1994. Average earning assets rose $668.4 million, or 10%, to $7.23
billion. Average loans increased $682.6 million, or 15%, to $5.14 billion,
average securities increased $24.8 million to $2.00 billion, and average money
market investments dropped $39.0 million to $84.2 million.
Total interest expense in the third quarter of 1995 increased $25.2
million to $75.0 million from the third quarter of 1994. Of the increase,
$17.4 million was due to higher average interest rates paid on interest-bearing
funds and $7.8 million resulted from an increase in the volume of
interest-bearing liabilities. The average rate paid on interest-bearing
liabilities increased 110 basis points to 4.75% from 3.65%, reflecting a higher
interest rate environment for short-term financial instruments. For example,
the Federal funds rate averaged 5.80% in the third quarter of 1995 versus 4.49%
in the third quarter of 1994. In the third quarter of 1995, average
interest-bearing liabilities grew $852.3 million, or 16%, to $6.27 billion from
$5.42 billion in the third quarter of 1994. Average interest-bearing deposits
increased $467.7 million, or 10%, to $5.09 billion, average short-term
borrowings rose $250.4 million, or 37%, to $928.5 million, and average
long-term debt increased $134.2 million, or 114%, to $251.8 million.
Total interest expense in the nine months ended September 30, 1995,
increased $71.7 million to $208.5 million from the first nine months of 1994.
Of the increase, $54.8 million was due to higher average interest rates paid on
interest-bearing funds and $16.9 million resulted from an increase in the
volume of interest-bearing liabilities. The average rate paid on
interest-bearing liabilities increased 122 basis points to 4.64% from 3.42%,
reflecting a higher average interest rate environment for the nine months ended
September 30, 1995, compared to the first nine months of 1994. For example,
the Federal funds rate averaged 5.88% in the first nine months of 1995 versus
3.88% in the nine months ended September 30, 1994. In the first nine months of
1995, average interest-bearing liabilities grew $659.6 million, or 12%, to
$6.01 billion from $5.35 billion in the first nine months
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of 1994. Average interest-bearing deposits increased $323.3 million, or 7%, to
$4.88 billion, average short-term borrowings rose $160.3 million, or 22%, to
$877.6 million, and average long-term debt increased $176.0 million, or 232%,
to $251.9 million.
Net interest income in the third quarter of 1995 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 third quarter of 1995, First American's net interest spread declined 41
basis points to 3.13% from 3.54% for the third quarter of 1994. This decline
was due primarily to a 110 basis point increase in the rates paid on
interest-bearing liabilities which exceeded the 69 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 3.92% for the third quarter of 1995 as
compared with 4.21% for the same quarter a year earlier.
Net interest income in the nine months ended September 30, 1995,
increased primarily as a result of the increase in the volume of earning assets
partially offset by a lower net interest spread. For the first nine months of
1995, First American's net interest spread declined 34 basis points to 3.32%
from 3.66% for the nine months ended September 30, 1994. This decline was due
primarily to a 122 basis point increase in the rates paid on interest-bearing
liabilities which exceeded the 88 basis point increase in yields on earning
assets. As the net interest spread declined, the net interest margin decreased
to 4.10% for the first nine months of 1995 as compared with 4.29% for the same
period 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 $26.4 million for the third quarter of
1995 compared with $23.5 million for the third quarter of 1994, an increase of
$2.9 million, or 12%. Non-interest income, excluding net realized gain (loss)
and write-down on securities, totalled $26.2 million in the third quarter of
1995, an increase of $2.7 million, or 12%, from $23.5 million in the third
quarter of 1994. The increase from the third quarter of 1994 is primarily due
to a $.9 million, or 51%, increase in investment services income and trading
account revenue and a $.8 million, or 7%, increase in service charges on
deposit accounts. The 51% increase in investment services income and trading
account revenue over the prior year's third quarter resulted principally from
increases in sales of investment products. The increase in service charges on
deposits was primarily due to a 12% increase in the average number of retail
deposit accounts over the third quarter of 1994.
Total non-interest income was $76.1 million for the first nine
months of 1995 compared with $71.3 million for the nine months ended September
30, 1994, an increase of $4.8 million, or 7%. Non-interest income, excluding
net realized gain (loss) and write-down on securities, totalled $75.6 million,
an increase of $4.1 million, or 6%, from $71.5 million in the first nine months
of 1994. The increase from the nine months ended September 30, 1994, is
primarily due to a $3.3 million, or 11%, increase in service charges on deposit
accounts resulting principally from a 10% increase in the average number of
retail deposit accounts, and a $.9 million, or 13%, increase in investment
services income and trading account revenue, resulting primarily from higher
trading account profits.
NON-INTEREST EXPENSE
Total non-interest expense increased $.6 million, or 1%, to $57.8
million for the third quarter of 1995 compared with $57.2 million for the same
period in 1994. The increase is primarily attributable to a $2.4 million
decrease in foreclosed properties income, net of expenses, due principally to
lower gains on the sales of foreclosed properties, and higher salaries and
employee benefits ($.9 million, a 3% increase) due principally to merit
increases. Additionally, there were increases of under $.5 million each in
several other non-interest expense categories. The above-mentioned increases
in non-interest expense were partially offset by a $3.4 million decrease in
FDIC insurance expense related to the rebate of FDIC insurance due to reduction
in the assessment rate from 23 cents per $100 of deposits to four cents per
$100 effective June 1, 1995, for the best-rated institutions. 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
57.5% in the third quarter of 1995, down from 61.0% in the third quarter of
1994.
Total non-interest expense increased $4.8 million, or 3%, to $176.9
million for the first nine months of 1995 compared with $172.1 million for the
same period in 1994. The increase is primarily attributable to higher salaries
and employee benefits ($5.6 million, a 6% increase), marketing expense ($.7
million, an 11% increase), communication expense ($.9 million, a 15% increase),
and other expenses ($.6 million, a 3% increase). These increases in
non-interest expense were partially offset by a $3.4 million decrease in FDIC
insurance expense
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related to the rebate of FDIC insurance premiums. Salaries and employee
benefits increased due to merit increases, incentive compensation, and
additional employees resulting from the March 1994 transfer of certain computer
programming functions to the Company previously handled by an outside vendor
and the April 1, 1994, acquisition of First Fidelity. Marketing and
communication expenses increased during the first nine months of 1995 primarily
due to several direct mail campaigns promoting the Company's new check card, a
new consumer bank service called "Loan by Phone," and several existing money
market and checking account products. First American's operating efficiency
ratio equaled 59.4% in the first nine months of 1995 compared to 61.1% in the
nine months ended September 30, 1994.
INCOME TAXES
During the third quarters of 1995 and 1994, First American's income
tax expense was $15.3 million and $13.0 million, respectively. The major
factor for the increase in income tax expense was the higher income before
income taxes.
During the first nine months of 1995 and 1994, income tax expense
totalled $43.5 million and $40.4 million, respectively. The primary factor for
the increase in income tax expense was the increase in income before income
taxes.
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, First
American, at September 30, 1995, had derivatives with notional values totaling
$1.49 billion. These derivatives had a net negative fair value (unrealized net
pre-tax loss) of $12.0 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 September 30, 1994, First American had
derivatives with notional values totaling $1.45 billion. These derivatives had
a net positive fair value (unrealized net pre-tax gain) of $13.2 million at
September 30, 1994. The instruments utilized are noted in the following table
along with their notional amounts and fair values at September 30, 1995 and
1994.
Weighted
Average
Weighted Average Rate Maturity
Related Variable Rate Notional --------------------- -------- Fair
(in thousands) Asset/Liability Amount Paid Received Years Value
- -----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1995
Interest rate swaps Money market deposits $ 500,000 5.99% (1) 5.92% (2) 1.7 $ 314
Interest rate swaps Long-term debt 200,000 7.11 (1) 5.86 (3) 1.0 (2,699)
Forward interest rate swaps Money market deposits 650,000 7.81 (4) N/A (4) 1.1 (4) (8,857)
Futures contracts (5) Money market deposits 140,000 N/A N/A 1.1 (5) (729)
---------- --------
$1,490,000 $(11,971)
=======================================================================================================================
September 30, 1994
Interest rate swaps Money market deposits $ 550,000 5.55% (1) 4.98% (2) 1.5 $ 11,830
Interest rate swaps Long-term debt 100,000 6.32 (1) 4.88 (3) 1.9 502
Interest rate swaps Loans 100,000 5.25 (3) 6.90 (1) 4.1 (1,244)
Basis swaps Held to maturity 200,000 5.11 (6) 4.75 (3) .5 (223)
securities
Forward interest rate swaps Money market deposits 200,000 6.64 (7) N/A (7) 1.7 (7) 1,722
Futures contracts (8) Money market deposits 300,000 N/A N/A 1.4 (8) 654
---------- --------
$1,450,000 $ 13,241
=======================================================================================================================
(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.
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(3) Variable rate which reprices quarterly based on 3-month LIBOR.
(4) Forward swap periods began in June 1995 for $200 million and will begin
December 1995 for $450 million. The rates paid are fixed and were set at
the inception of the contracts. Variable rates are based on 3-month LIBOR
and were 5.87% for the contracts which began in June 1995, but are currently
unknown on the contracts which begin in December 1995 since they will not be
established until the affected periods begin.
(5) Represents $140 million short position of Eurodollar futures contracts
which in aggregate simulates a $35 million 2- year interest rate swap.
(6) Variable rate which reprices quarterly based on 5-year constant maturity
Treasury rate less a constant spread.
(7) Forward swap periods begin in June 1995. 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.
(8) Represents $300 million short position of Eurodollar futures contracts
which in aggregate simulates a $100 million 1.5-year interest rate swap.
Net interest income for the quarter ended September 30, 1995, was
increased by derivative products income of $.8 million. Net interest income
for the quarter ended September 30, 1994, was decreased by $.3 million
derivative products expense. Net interest income for the nine months ended
September 30, 1995, was increased by derivative products income of $3.3
million. Net interest income for the first nine months of 1994 was decreased
by $5.2 million of 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 $10.1 million at September 30,
1995, and $3.8 million at September 30, 1994. Deferred gains and losses on
off-balance-sheet derivative activities are recognized as interest income or
interest expense over the original covered periods.
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
September 30, 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 $.4 million on
September 30, 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 increased $1.08 billion, or 15%, to
$8.44 billion at September 30, 1995, compared to $7.36 billion one year
earlier. The growth in total assets is primarily due to the $883.5 million, or
19%, increase in loans, net of unearned discount and net deferred loan fees, to
$5.58 billion at September 30, 1995, from $4.70 billion at September 30, 1994.
Leading the growth in loans were commercial loans, which increased $556.8
million, or 26%, over a broad range of industry categories. Also, consumer
amortizing mortgages increased $174.5 million, or 16%. Total assets of $8.44
billion at September 30, 1995, were $686.7 million, or 9%, higher than total
assets of $7.76 billion at December 31, 1994. The increase in total assets
from December 31, 1994, resulted primarily from a $719.4 million, or 15%,
increase in loans, net of unearned discount and net deferred loan fees, from
$4.86 billion of loans at December 31, 1994. The growth in loans was led by a
$407.4 million, or 18%, increase in commercial loans over a variety of industry
categories and consumer amortizing loans, which rose $143.3 million, or 13%,
from December 31, 1994. The increase in loan volume from September 30, 1994,
to September 30, 1995, as well as from December 31, 1994, to September 30,
1995, reflects the positive economic conditions in Tennessee and selected
markets in adjacent states and the success of First American's marketing
programs.
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.
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In order to maintain the allowance at an appropriate level, First
American's loan loss methodology produced no provision for loan losses during
the third quarters of 1995 and 1994 nor during the nine month periods ended
September 30, 1995 and 1994. The primary factors leading to no provision for
loan losses in the third quarter and nine months ended September 30, 1995, were
favorable net loan charge-off experience and a continuation of favorable asset
quality indicators discussed under the caption "Asset Quality." In the third
quarters of 1995 and 1994, gross charge-offs were $4.5 million and $3.5 million
while recoveries totalled $4.4 million and $4.3 million, respectively. Net
charge-offs were $.1 million in the third quarter of 1995 as compared to $.8
million of net recoveries in the third quarter of 1994. In the first nine
months of 1995 and 1994, gross charge-offs were $12.0 million and $10.6 million
while recoveries totalled $11.3 million and $13.7 million, respectively. Net
charge-offs were $.7 million in the nine months ended September 30, 1995, as
compared to $3.1 million of net recoveries in the nine months ended September
30, 1994.
The allowance for possible loan losses was $126.5 million at September
30, 1995, compared with $137.6 million at September 30, 1994, and $127.1
million at December 31, 1994. The allowance for possible loan losses
represented 2.27% and 2.93% of net loans at September 30, 1995 and 1994,
respectively, and 2.61% at December 31, 1994.
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
First American's nonperforming assets (excluding loans 90 days past
due on accrual status) were $25.1 million at September 30, 1995, compared with
$27.6 million at September 30, 1994, a decrease of 9%. Nonperforming assets at
September 30, 1995, were $4.0 million, or 19%, higher than the December 31,
1994, nonperforming asset balance of $21.1 million. Nonperforming assets at
September 30, 1995 (excluding loans 90 days past due on accrual status),
represented .45% of total loans and foreclosed properties, compared to .59% at
September 30, 1994, and .43% at December 31, 1994. At September 30, 1995,
nonperforming assets were comprised of $16.2 million of non-accrual loans and
$8.9 million of foreclosed properties.
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 September 30, 1995, loans totalling
approximately $48 million, while not considered nonperforming loans, were
classified in First American's internal loan grading system as substandard or
worse, compared with approximately $78 million of such loans at September 30,
1994, and approximately $75 million at December 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 $6.28 billion at September 30, 1995, an increase
of $507.3 million, or 9%, from $5.77 billion a year earlier. Core deposits,
which are defined as total deposits excluding certificates of deposit $100,000
and over and foreign deposits, totalled $5.53 billion at September 30, 1995,
and $5.29 billion at September 30, 1994, a 5% increase. Short-term borrowings
increased $380.2 million, or 55%, from September 30, 1994, to $1.07 billion at
September 30, 1995. Long-term debt increased $108.1 million from September 30,
1994, to a balance of $260.1 million at September 30, 1995. The increase in
long-term debt was primarily due to a $100.0 million advance from the Federal
Home Loan Bank (FHLB) on December 29, 1994, and a $108.5 million advance from
the FHLB on September 29, 1995, of which $100.0 million was used to prepay
another FHLB advance which had an original maturity of August 2, 1997.
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Total deposits at September 30, 1995, were $417.4 million, or 7%,
higher than total deposits of $5.86 billion at December 31, 1994. Core
deposits at September 30, 1995, were $89.3 million higher than total core
deposits of $5.45 billion at December 31, 1994. Short-term borrowings
increased $143.2 million, or 15%, from December 31, 1994, to September 30,
1995.
CAPITAL POSITION
Total shareholders' equity was $638.0 million, or 7.56%, of total
assets at September 30, 1995, $596.9 million, or 8.10%, of total assets at
September 30, 1994, and $616.7 million, or 7.95% of total assets at December
31, 1994. Book value per share was $25.55 on September 30, 1995, $22.84 at
September 30, 1994, and $23.59 at December 31, 1994.
Total shareholders' equity increased $21.3 million from December 31,
1994, principally from $54.9 million of earnings retention ($75.0 million of
net income less $20.1 million of dividends), a $12.7 million decrease in the
net unrealized losses on securities available for sale, and the repurchase of
$53.0 million of common stock.
In the third quarter of 1995, First American declared cash dividends
on its common stock of $.28 per share compared to $.21 per share in the third
quarter of 1994, a 33% increase. The dividend payout ratio was 27% in the
third quarter of 1995 compared to 24% in the third quarter of 1994. Cash
dividends for the first nine months of 1995 were $.78 versus $.63 in the first
nine months of 1994, a 24% increase.
First American repurchased 1.4 million shares of First American
Corporation stock in the open market during the first nine months of 1995 at an
average price of $36.59 per share. Under Tennessee law, such repurchased
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 September 30, 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 September 30, 1995,
the Company and FANB, respectively, had total risk-based capital ratios of
11.52% and 10.72%, Tier I risk-based capital ratios of 9.50% and 9.46%, and
Tier I leverage capital ratios of 7.64% and 7.65%. 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 $691.8 million and
$571.6 million at September 30, 1995 and 1994, respectively, and $832.5 million
at December 31, 1994. The estimated average maturity of securities was 4.0
years and 5.0 years at September 30, 1995 and 1994, respectively, and 4.2 years
at December 31, 1994. The average repricing life of the total securities
portfolio was 1.9 years and 3.1 years at September 30, 1995 and 1994,
respectively, and 2.3 years at December 31, 1994. The overall liquidity
position of First American is further enhanced by a high proportion of core
deposits, which provide a stable funding base. Core deposits comprised 88% of
total deposits at September 30, 1995, versus 92% at September 30, 1994, and 93%
at December 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 nine months of 1995.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation and seven (7) other financial institutions are
defendants in two companion lawsuits, one filed in the U.S.
District Court for the Western District of Tennessee and the
other filed in the Circuit Court for Shelby County, Tennessee.
The federal court action seeks unspecified damages and alleges
a conspiracy or combination among the defendant banks to fix
the amount of overdraft and insufficient funds charges. The
state court action seeks compensatory and punitive damages in
the amount of $25 million under state law theories, including
implied contract and unconscionability, based on the imposition
of overdraft and insufficient funds charges unrelated to cost.
Summary judgment was granted in favor of the defendant banks in
the federal action. The plaintiffs appealed, and the Sixth
Circuit Court of Appeals affirmed the District Court's granting
of summary judgment and denied the plaintiff's subsequent
petition for rehearing. In October 1995, the plaintiffs filed
a petition for a writ of certiorari with the United States
Supreme Court. The state court action was dismissed as a
result of motions filed by the defendant banks. An appeal was
filed by the plaintiffs. The Tennessee Court of Appeals
affirmed the trial court's dismissal of the lawsuit. The
plaintiffs then appealed to the Tennessee Supreme Court, which
initially denied the plaintiffs' request for permission to
appeal. A petition to rehear the Supreme Court's denial of
permission to appeal has been granted. 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.
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
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Number Description
------ ----------------------------------------------
11 Statement regarding computation of per share
earnings is included in Note 7 to the
Consolidated Financial Statements for the
Quarter Ended September 30, 1995. See Part
1, Item 1.
15 Letter regarding unaudited interim financial
information from KPMG Peat Marwick LLP, dated
October 19, 1995, except for the fifth
paragraph of Note 5, as to which the date is
November 1, 1995.
27 Financial Data Schedule for interim
year-to-date period ended September 30, 1995.
(For SEC use only)
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(b) Reports on Form 8-K
A report on Form 8-K dated July 5, 1995, was voluntarily filed
under Item 5 disclosing that First American Corporation entered
into a definitive merger agreement under which all of the
outstanding shares of First City Bancorp, Inc. will, subject to
certain terms and conditions, be exchanged for First American
Corporation common stock.
A report on Form 8-K dated August 15, 1995, was voluntarily
filed under Item 5 to attach thereto and incorporate by
reference therein the First American Corporation unaudited
proforma combined condensed financial data reflecting pending
acquisitions by First American Corporation of Heritage Federal
Bancshares, Inc. and Charter Federal Savings Bank.
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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 E. Simmons
--------------------------------------------
Martin E. Simmons
Executive Vice President, General Counsel,
Secretary and Principal Financial Officer
Date: November 10, 1995
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