1
Exhibit 99
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED INCOME STATEMENTS
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
1995 1994
---------- -------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
INTEREST INCOME
Interest and fees on loans $344,121 $270,454
Interest and dividends on securities 106,846 96,609
Interest on Federal funds sold and securities
purchased under agreements to resell 2,631 2,808
Interest on time deposits with other banks and other interest 2,068 964
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 455,666 370,835
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 12,258 13,113
Money market accounts 59,796 41,414
Regular savings 7,425 9,235
Certificates of deposit under $100,000 53,028 38,208
Certificates of deposit $100,000 and over 24,803 12,231
Other time and foreign 15,722 11,619
- -----------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 173,032 125,820
- -----------------------------------------------------------------------------------------------------------------------------
Interest on short-term borrowings 36,103 18,802
Interest on long-term debt 14,041 4,250
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 223,176 148,872
- -----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 232,490 221,963
PROVISION FOR LOAN LOSSES (NOTE 3) 83 79
- -----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 232,407 221,884
- -----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 34,939 31,580
Commissions and fees on fiduciary activities 12,404 12,515
Investment services income and trading account revenue 7,936 7,226
Merchant discount fees 2,422 2,043
Net realized gain (loss) and write-down on securities 568 (284)
Other income 19,865 20,239
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 78,134 73,319
- -----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 106,953 100,903
Net occupancy expense 16,412 16,375
Equipment expense 11,243 11,241
Systems and processing expense 8,078 8,333
FDIC insurance expense 6,914 10,210
Marketing expense 6,769 6,223
Communication expense 7,352 6,391
Supplies expense 4,523 4,186
Foreclosed properties expense (income), net (3,338) (3,443)
Other expenses 20,867 20,081
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 185,773 180,500
- -----------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 124,768 114,703
Income tax expense 45,980 43,012
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 78,788 $ 71,691
=============================================================================================================================
PER COMMON SHARE:
Net income $ 2.79 $ 2.50
Cash dividends .88 .55
=============================================================================================================================
Weighted average common shares outstanding 28,278 28,653
=============================================================================================================================
See notes to supplemental consolidated financial statements.
99-1
2
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
----------------------------- -----------
1995 1994 1994
----------- ----------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks $ 449,865 $ 410,082 $ 513,916
Time deposits with other banks 1,219 4,166 3,855
Securities:
Held to maturity (market value $1,642,218, $1,611,863 and
$1,559,241, respectively) 1,626,604 1,662,897 1,643,867
Available for sale (amortized cost $670,638, $521,741
and $710,960, respectively) 670,075 497,371 689,464
- ----------------------------------------------------------------------------------------------------------------------------
Total securities 2,296,679 2,160,268 2,333,331
- ----------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under
agreements to resell 103,321 81,082 28,134
Trading account securities 33,628 18,640 8,617
Loans:
Commercial 2,697,362 2,139,735 2,289,552
Consumer--amortizing mortgages 1,512,373 1,352,928 1,385,081
Consumer--other 1,159,003 1,049,376 1,055,943
Real estate--construction 169,362 124,196 134,513
Real estate--commercial mortgages and other 342,201 352,358 316,242
- ----------------------------------------------------------------------------------------------------------------------------
Total loans 5,880,301 5,018,593 5,181,331
Unearned discount and net deferred loan fees 6,826 9,527 9,365
- ----------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net deferred
loan fees 5,873,475 5,009,066 5,171,966
Allowance for possible loan losses (note 3) 128,834 139,880 129,436
- ----------------------------------------------------------------------------------------------------------------------------
Total net loans 5,744,641 4,869,186 5,042,530
- ----------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 120,047 113,123 111,075
Foreclosed properties 8,909 14,045 10,091
Other assets 212,061 209,379 227,178
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $8,970,370 $7,879,971 $8,278,727
============================================================================================================================
LIABILITIES
Deposits:
Demand (non-interest-bearing) $1,165,350 $1,165,517 $1,252,136
NOW accounts 765,542 845,616 868,000
Money market accounts 1,933,053 1,513,193 1,611,794
Regular savings 373,913 498,023 472,188
Certificates of deposit under $100,000 1,396,420 1,359,848 1,342,621
Certificates of deposit $100,000 and over 691,801 464,178 393,301
Other time 295,627 314,551 307,439
Foreign 102,495 56,887 60,300
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 6,724,201 6,217,813 6,307,779
- ----------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 1,073,082 692,855 929,840
Long-term debt 278,189 161,739 271,473
Other liabilities 200,770 160,856 101,962
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 8,276,242 7,233,263 7,611,054
- ----------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $5 par value; authorized 50,000,000 shares; issued:
27,630,197 shares at September 30, 1995; 28,713,799 shares at September
30, 1994 and 28,725,069
shares at December 31, 1994 138,151 143,569 143,625
Capital surplus 91,394 130,818 130,933
Retained earnings 467,451 390,965 409,638
Deferred compensation on restricted stock (1,599) (2,429) (2,161)
Employee stock ownership plan obligation (691) (831) (781)
- ----------------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 694,706 662,092 681,254
Net unrealized gains (losses) on securities available
for sale, net of tax (578) (15,384) (13,581)
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 694,128 646,708 667,673
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $8,970,370 $7,879,971 $8,278,727
============================================================================================================================
See notes to supplemental consolidated financial statements.
99-2
3
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Net
Unrealized
Deferred Employee Gains
Compensation Stock (Losses) on
on Ownership Securities
Common Capital Retained Restricted Plan Available
(dollars in thousands except per share amounts) Stock Surplus Earnings Stock Obligation for Sale Total
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1994 $139,574 $128,195 $336,648 $ (1,851) $ (1,053) $ 22,049 $623,562
Issuance of 101,312 common shares in connection
with Employee Benefit Plan, net of
discount on
Dividend Reinvestment Plan 507 1,222 - - - - 1,729
Issuance of 48,289 shares of restricted
common stock 240 1,273 - (1,425) - - 88
Amortization of deferred compensation on
restricted stock - - - 746 - - 746
Reduction in employee stock ownership plan
obligation - - - - 162 - 162
Four-for-three stock split of pooled company 3,224 (2) (3,222) - - - -
Net income - - 71,691 - - - 71,691
Cash dividends declared ($.63 per common share) - - (16,432) - - - (16,432)
Cash dividends declared by pooled company - - (827) - - - (827)
Change in net unrealized gains (losses)
on securities
available for sale, net of tax - - - - - (37,433) (37,433)
Adjustment for change in fiscal year of pooled
company 24 74 3,107 101 60 - 3,366
Other - 56 - - - - 56
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1994 $143,569 $130,818 $390,965 $ (2,429) $ (831) $(15,384) $646,708
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 $143,625 $130,933 $409,638 $ (2,161) $ (781) $(13,581) $667,673
Issuance of 340,915 common shares
in connection
with Employee Benefit Plan, net
of discount on
Dividend Reinvestment Plan 1,705 5,231 - - - - 6,936
Issuance of 12,095 shares of restricted
common stock 61 347 - (321) - - 87
Repurchase of 1,448,152 shares of common stock (7,240) (45,748) - - - - (52,988)
Amortization of deferred compensation on
restricted stock - - - 883 - - 883
Reduction in Employee Stock Ownership Plan
obligation - - - - 90 - 90
Net income - - 78,788 - - - 78,788
Cash dividends declared ($.78 per common share) - - (20,067) - - - (20,067)
Cash dividends declared by pooled company - - (908) - - - (908)
Change in net unrealized gains (losses)
on securities
available for sale, net of tax - - - - - 13,003 13,003
Other - 631 - - - - 631
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1995 $138,151 $ 91,394 $467,451 $ (1,599) $ (691) $ (578) $694,128
===================================================================================================================================
See notes to supplemental consolidated financial statements.
99-3
4
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30
1995 1994
----------- -----------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 78,788 $ 71,691
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 83 79
Depreciation of premises and equipment 10,378 10,692
Amortization of intangible assets 2,918 2,949
Other amortization (accretion), net (5,263) 91
Deferred income tax expense 8,903 1,512
Net realized (gain) loss and write-down on securities (568) 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 (4,254) (2,756)
Increase in accrued interest payable 18,109 9,541
Increase in trading account securities (25,011) (6,377)
(Increase) decrease in other assets 649 (19,078)
Increase in other liabilities 78,967 51,320
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 163,668 119,778
- -----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net (increase) decrease in time deposits with other banks 2,636 (1,971)
Proceeds from sales of securities available for sale 651,280 1,313,729
Proceeds from maturities of securities available for sale 118,088 150,041
Purchases of securities available for sale (723,898) (789,847)
Proceeds from maturities of securities held to maturity 214,632 165,285
Purchases of securities held to maturity (196,323) (812,572)
Net (increase) decrease in Federal funds sold and securities
purchased under agreements to resell (75,187) 66,778
Net increase in loans (701,409) (318,677)
Purchase of bank subsidiary, net of cash acquired -- (1,784)
Proceeds from sales of premises and equipment 201 882
Purchases of premises and equipment (19,520) (14,214)
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (729,500) (242,350)
- -----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 416,422 11,845
Net increase (decrease) in short-term borrowings 143,242 (63,908)
Net advances from Federal Home Loan Bank 7,922 98,292
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 7,023 1,818
Cash dividends paid (20,975) (17,259)
Repurchase of common stock (52,988) --
Other 1,581 1,810
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 501,781 18,839
- -----------------------------------------------------------------------------------------------------
Decrease in cash and due from banks (64,051) (103,733)
Adjustment for change in fiscal year of pooled company -- (1,307)
Cash and due from banks, January 1 513,916 515,122
- -----------------------------------------------------------------------------------------------------
Cash and due from banks, September 30 $ 449,865 $ 410,082
=====================================================================================================
Cash paid during the period for:
Interest expense $ 205,067 $ 139,167
Income taxes 28,711 45,833
Noncash investing activities:
Foreclosures 1,012 1,463
Securities transferred to held to maturity from
available for sale -- 203,764
- -----------------------------------------------------------------------------------------------------
See notes to supplemental consolidated financial statements.
99-4
5
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The supplemental interim consolidated financial statements should be read
in conjunction with the supplemental consolidated financial statements and
notes thereto presented in the Corporation's 1994 Annual Report to Shareholders
as revised to give retroactive effect to the merger with Heritage as discussed
below. The supplemental 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.
These supplemental interim consolidated financial statements give
retroactive effect to the merger with Heritage Federal Bancshares, Inc.,
(Heritage) on November 1, 1995, in a transaction accounted for as a
pooling-of-interests. The supplemental consolidated financial statements have
been restated for all periods presented as if Heritage and the Corporation had
always been combined. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for as a
pooling-of-interests in financial statements that do not include the date of
consummation. These financial statements do not extend through the date of
consummation; however, they will become the historical financial statements of
the Corporation upon issuance of the financial statements for the period that
includes the date of the transaction.
Prior to the combination, Heritage's fiscal year ended June 30. In
recording the pooling-of-interests combination, Heritage's financial statements
for the 12 months ended December 31, 1994, were combined with the Corporation's
financial statements for the same period and Heritage's financial statements
for the years ended June 30, 1993 and 1992 were combined with the Corporation's
financial statements for the years ended December 31, 1993 and 1992,
respectively. An adjustment has been made to shareholders' equity as of
September 30, 1994, to include Heritage's results of operations for the six
months ended December 31, 1993.
(2) NONPERFORMING ASSETS
Nonperforming assets were as follows:
SEPTEMBER 30 December 31
- ---------------------------------------------------------------------------------------------------------------------
(in thousands) 1995 1994 1994
- ---------------------------------------------------------------------------------------------------------------------
Non-accrual loans $ 16,460 $ 14,269 $ 11,674
Foreclosed properties 8,909 14,045 10,091
- ---------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 25,369 $ 28,314 $ 21,765
=====================================================================================================================
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) .43% .56% .42%
=====================================================================================================================
99-5
6
(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 $129,436 $136,512
Provision (credited) charged to operating expenses 83 79
Allowance of subsidiary purchased - 323
- ---------------------------------------------------------------------------------------------------------------------
129,519 136,914
- ---------------------------------------------------------------------------------------------------------------------
Loans charged off 12,057 11,135
Recoveries of loans previously charged off (11,372) (13,690)
- ---------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 685 (2,555)
- ---------------------------------------------------------------------------------------------------------------------
Adjustment for change in fiscal year of pooled company - 411
- ---------------------------------------------------------------------------------------------------------------------
Balance, September 30 $128,834 $139,880
=====================================================================================================================
Allowance ratios were as follows:
NINE MONTHS ENDED
SEPTEMBER 30
- ---------------------------------------------------------------------------------------------------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Allowance end of period to net loans outstanding 2.19% 2.79%
Net charge-offs (recoveries) to average loans (annualized) .02 (.07)
=====================================================================================================================
(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.
99-6
7
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.
Effective November 1, 1995, the Corporation completed the merger with
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 and 13 offices primarily in
the East Tennessee areas of Tri-Cities, Anderson County, and Roane County. In
conjunction with the acquisition, Heritage Federal Bank for Savings was merged
into First American National Bank. The transaction is accounted for as a
pooling-of-interests and, accordingly, the accompanying supplemental
consolidated financial statements have been restated to include the results of
Heritage for all periods presented. After-tax merger expenses related to the
acquisition totalled approximately $7.0 million, comprised primarily of
severance, systems conversions, investment banking and other professional fees,
and recapture of tax bad debt reserve, and were recognized predominantly after
September 30, 1995.
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.
99-7
8
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.
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 LOAN LOSS
(in thousands) LOANS RESERVE
- -------------------------------------------------------------------------------------------------
Impaired loans with loan loss reserves $ 15,183 $ 4,014
Impaired loans with no loan loss reserves 15,018 -
- -------------------------------------------------------------------------------------------------
Total $ 30,201 $ 4,014
=================================================================================================
The above loan loss reserves were primarily determined using the fair
value of the loans' collateral.
99-8
9
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 $ 32,253 $ 29,210
=====================================================================================================================
Interest income recognized on impaired loans
Accrual basis $ 283 $ 837
Cash basis 48 141
- ---------------------------------------------------------------------------------------------------------------------
Total $ 331 $ 978
=====================================================================================================================
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.
(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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