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Filed Pursuant to Rule 424(b)(3)
Registration No. 33-59844
INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT IS SUBJECT TO
COMPLETION PURSUANT TO RULE 424 UNDER THE SECURITIES ACT OF 1933. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 415
UNDER THE SECURITIES ACT OF 1933. A FINAL PROSPECTUS SUPPLEMENT AND
PROSPECTUS WILL BE DELIVERED TO PURCHASERS OF THESE SECURITIES. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED DECEMBER 11, 1995
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 12, 1993)
$50,000,000
FIRST AMERICAN CORPORATION
% SUBORDINATED NOTES DUE 2005
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Interest on the Subordinated Notes offered hereby (the "Subordinated
Notes") is payable semi-annually on and of each year, commencing
, 1996. The Subordinated Notes are not redeemable prior to maturity
and will mature on , 2005.
The Subordinated Notes are unsecured and subordinated to all present and
future senior indebtedness of First American Corporation (the "Company").
Payment of principal of the Subordinated Notes may be accelerated only in the
case of the bankruptcy of the Company. There is no right of acceleration in the
case of a default in the payment of interest on the Subordinated Notes or in the
performance of any covenant or agreement of the Company with respect to the
Subordinated Notes. See "Description of Securities -- Events of Default; Limited
Rights of Acceleration" in the accompanying Prospectus.
The Subordinated Notes will be issued only in fully registered form and
will be represented by one or more Global Notes (the "Global Notes") registered
in the name of a nominee of The Depository Trust Company, as Global Depositary
(the "Depositary"). Beneficial interests in the Global Notes will be shown on
and transfers thereof will be effected only through, the records maintained by
the Depositary (with respect to participants' interests) and its participants.
The Subordinated Notes will trade in the Depositary's Same-Day Funds Settlement
System until maturity, and secondary market trading activity for the
Subordinated Notes will therefore settle in immediately available funds. All
payments of principal and interest will be made by the Company in immediately
available funds. See "Description of Subordinated Notes -- Global Notes" and
"-- Same-Day Settlement and Payment."
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THE SUBORDINATED NOTES ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS
OF ANY BANK OR NONBANK SUBSIDIARY OF THE COMPANY AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO
WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
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Per Note.............................. % % %
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Total................................. $ $ $
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(1) Plus accrued interest, if any, from December , 1995.
(2) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $100,000.
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The Subordinated Notes are offered by the several Underwriters, subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that the
Subordinated Notes will be ready for delivery in book-entry form only through
the facilities of The Depository Trust Company in New York, New York on or about
December , 1995, against payment therefor in immediately available funds.
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MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
J.C. BRADFORD & CO.
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The date of this Prospectus Supplement is December , 1995.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SUBORDINATED
NOTES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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THE COMPANY
First American Corporation ("First American" or the "Company"), a Tennessee
corporation, is a bank holding company headquartered in Nashville, Tennessee. As
of September 30, 1995, the Company had total consolidated assets of
approximately $9.0 billion and shareholders' equity of approximately $694.1
million. As of September 30, 1995, First American ranked, on the basis of
aggregate deposits held by First American National Bank ("FANB"), First
American's principal subsidiary, as the third largest bank holding company
headquartered in Tennessee.
In addition to FANB, the Company owns all of the capital stock of First
American National Bank of Kentucky ("FANBKY"), a national banking association
headquartered in Bowling Green, Kentucky, First American Federal Savings Bank
("FAFSB"), a federal savings bank headquartered in Roanoke, Virginia, and First
American Enterprises, Inc. ("First American Enterprises"), which was formed to
develop sources of fee income in non-traditional financial service businesses.
The Company derives its income from interest, dividends and management fees
received from its subsidiaries.
The Company's corporate office is located at First American Center,
Nashville, Tennessee 37237-0700 and its telephone number is (615) 748-2000.
RECENT DEVELOPMENTS
Effective November 1, 1995, the Company acquired Heritage Federal
Bancshares, Inc. ("Heritage"), in exchange for approximately 2.9 million shares
of the Company's Common Stock, par value $5.00 per share (the "Common Stock").
Prior to the merger, 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 acquisition was accounted for as a pooling
of interests.
On December 1, 1995, the Company completed the acquisition of Charter
Federal Savings Bank ("Charter") by exchanging approximately 1.7 million shares
of Common Stock for all of the outstanding shares of Charter. At September 30,
1995, Charter had approximately $745.5 million in assets. The acquisition was
accounted for as a purchase. In connection with the acquisition, Charter was
renamed First American Federal Savings Bank.
In July 1995, the Company signed a definitive merger agreement under which
all of the outstanding shares of First City Bancorp, Inc. ("First City") will be
exchanged for approximately $47 million in shares of the Company's Common Stock.
Of the total shares of Common Stock to be exchanged in the transaction, up to
100% may 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.
The Company purchased 1.4 million shares of its Common 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
value has been reflected as a reduction from capital surplus. The repurchased
shares have been used to fund the Company's various employee benefit plans and
for acquisitions, and additional shares to be repurchased are expected to be
used for such purposes.
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USE OF PROCEEDS
The net proceeds of the Subordinated Notes will be approximately $49.6
million (assuming an offering price of 100%), after deduction of the
underwriting discount and estimated offering expenses. The net proceeds of the
offering will be used for general corporate purposes, including acquisitions and
the possible repurchase, in open market transactions, of shares of the Company's
Common Stock.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at September 30, 1995, and as adjusted as of such date to give effect to
the sale of the Subordinated Notes offered hereby.
ACTUAL(1) AS ADJUSTED
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(DOLLARS IN THOUSANDS)
Long-term debt:
% Subordinated Notes due 2005..................................... $ -- $ 50,000
6 7/8% Subordinated Notes due 2003................................... 49,759 49,759
Other................................................................ 228,430 228,430
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Total long-term debt......................................... 278,189 328,189
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Total shareholders' equity............................................. 694,128 694,128(2)
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Total long-term debt and shareholders' equity.......................... $ 972,317 $ 1,022,317(2)
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Capital ratios:
Tier 1 leverage capital.............................................. 7.81% 7.77%
Tier 1 risk-based capital............................................ 10.03 10.03
Total risk-based capital............................................. 12.02 12.76
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(1) After giving effect to the acquisition of Heritage.
(2) Does not reflect any adjustment for the possible repurchase of shares of the
Company's Common Stock with any portion of the proceeds of the offering.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain consolidated financial data of the
Company for the five years ended December 31, 1994, and the nine months ended
September 30, 1995 and September 30, 1994. The financial information contained
herein has been restated to reflect the acquisition by the Company of Heritage
effective November 1, 1995, which acquisition was accounted for as a pooling of
interests. The information is qualified in its entirety by the detailed
information and consolidated financial statements included in the documents
incorporated herein by reference. See "Incorporation of Certain Documents by
Reference" in the accompanying Prospectus.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
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1995 1994 1994 1993 1992 1991 1990
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(DOLLARS IN THOUSANDS)
SUMMARY OF OPERATIONS:
Interest income....................... $ 455,666 $ 370,835 $ 507,036 $ 474,332 $ 488,837 $ 550,162 $ 670,479
Interest expense...................... 223,176 148,872 208,794 187,132 220,640 320,182 430,858
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Net interest income(1)................ 232,490 221,963 298,242 287,200 268,197 229,980 239,621
Provision for loan losses............. 83 79 (9,919) (41,405) 39,249 53,066 194,301
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Net interest income after provision
for loan losses..................... 232,407 221,884 308,161 328,605 228,948 176,914 45,320
Non-interest income................... 78,134 73,319 87,598 88,928 77,325 82,914 111,219
Non-interest expense.................. 185,773 180,500 241,153 248,776 240,099 232,774 232,136
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Income (loss) before income tax
expense (benefit) and cumulative
effect of changes in accounting
principles.......................... 124,768 114,703 154,606 168,757 66,174 27,054 (75,597)
Net income (loss)..................... $ 78,788 $ 71,691 $ 97,202 $ 107,325 $ 46,153 $ 18,049 $ (62,204)
========= ========= ========= ========= ========= ========= =========
SELECTED AVERAGE BALANCES:
Assets................................ $8,377,650 $7,723,950 $7,785,831 $7,322,284 $6,986,807 $6,698,812 $7,412,833
Earning assets........................ 7,728,907 7,058,757 7,119,433 6,672,027 6,387,123 6,128,024 6,813,290
Securities............................ 2,191,493 2,159,620 2,158,159 2,251,764 1,902,785 1,476,967 1,614,425
Loans(2).............................. 5,442,061 4,767,531 4,851,386 4,214,138 4,044,470 4,326,087 4,843,872
Deposits.............................. 6,400,155 6,174,420 6,179,334 5,967,034 5,893,301 5,715,065 6,150,916
Shareholders' equity.................. 693,164 635,313 644,247 550,840 442,103 392,530 424,389
SELECTED PERIOD-END BALANCES:
Assets................................ $8,970,370 $7,879,971 $8,278,727 $7,707,781 $7,256,798 $6,883,673 $6,984,380
Earning assets........................ 8,308,322 7,273,222 7,545,903 7,041,597 6,418,745 6,195,760 6,311,174
Securities............................ 2,296,679 2,160,268 2,333,331 2,203,708 2,098,511 1,744,155 1,584,876
Loans(2).............................. 5,873,475 5,009,066 5,171,966 4,669,571 4,059,554 4,173,161 4,603,707
Deposits.............................. 6,724,201 6,217,813 6,307,779 6,150,551 6,018,768 5,816,460 6,039,216
Shareholders' equity.................. 694,128 646,708 667,673 623,562 503,899 401,647 383,146
FINANCIAL RATIOS:
Return on average assets.............. 1.26% 1.24% 1.25% 1.47% 0.66% 0.27% (0.84)%
Return on average common shareholders'
equity.............................. 15.20 15.09 15.09 19.48 10.44 4.60 (14.66)
Common shareholders' equity to
assets.............................. 7.74 8.21 8.06 8.09 6.94 5.83 5.49
Tier 1 leverage capital(3)............ 7.81 8.06 8.31 7.61 6.83 5.70 5.22
Tier 1 risk-based capital(3).......... 10.03 10.70 10.96 11.20 10.30 8.08 7.10
Total risk-based capital(3)........... 12.02 12.81 13.04 13.41 11.88 9.66 8.63
Net interest margin................... 4.07 4.25 4.24 4.37 4.26 3.86 3.68
Operating efficiency ratio(4)......... 59.50 60.60 60.44 62.81 68.66 72.85 70.85
LOAN QUALITY AT PERIOD-END:
Net charge-offs to average loans...... 0.02% (0.07)% (0.04)% 0.16% 0.96% 1.40% 2.46%
Nonperforming assets as a % of loans
and foreclosed properties........... 0.43 0.56 0.42 0.91 2.24 3.45 4.58
Nonperforming loans as a % of loans... 0.28 0.28 0.23 0.49 1.52 2.19 3.52
Allowance for possible loan losses as
a % of:
Loans(2)............................ 2.19 2.79 2.50 2.92 4.52 4.38 4.14
Nonperforming loans................. 782.71 980.31 1,108.75 549.98 298.09 200.02 117.55
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(1) Net interest income (in thousands) on a fully taxable basis (based on the
statutory federal income tax rate, adjusted for applicable state income
taxes net of the related federal tax benefit) for the respective periods
set forth above was $235,062, $224,542, $301,689, $291,242, $272,357,
$236,609 and $250,711, respectively.
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(2) Net of unearned discount and net deferred loan fees.
(3) Pursuant to the 1992 guidelines.
(4) Operating efficiency ratio is calculated as the ratio of non-interest
expense to the sum of (i) net interest income, on a fully taxable
equivalent basis and (ii) non-interest income (including securities gains
and losses). For the nine months ended September 30, 1995, the calculation
excludes the effects of a Federal Deposit Insurance Corporation ("FDIC")
insurance premium refund, certain accruals and the repurchase of the
Company's Common Stock in the open market in connection with the
acquisition of Charter. For the year ended December 31, 1994, the
calculation excludes $9.7 million of losses in the fourth quarter on sales
of securities available for sale. For the year ended December 31, 1993, the
calculation excludes a contribution of $10.0 million to First American
Foundation. For the year ended December 31, 1990, the calculation excludes
the $34.3 million gain on the sale of credit card receivables.
FINANCIAL REVIEW
The following information gives retroactive effect to the acquisition of
Heritage and should be read in conjunction with the Company's 1994 consolidated
financial information and detailed financial information, including the related
management's discussion and analysis, contained in the documents incorporated
herein by reference. See "Incorporation of Certain Documents by Reference."
The Company's earnings were $78.8 million for the nine months ended
September 30, 1995, an increase of 9.9% from the $71.7 million for the
comparable period in 1994. The increase in earnings for the nine months ended
September 30, 1995 reflected a 4.7% increase in net interest income and a 6.6%
increase in non-interest income, while non-interest expenses increased 2.9%.
Earnings for the first nine months of 1995 represented returns on average assets
and average common shareholders' equity of 1.26% and 15.20%, respectively,
compared to returns of 1.24% and 15.09%, respectively, for the same period in
1994.
Net interest income is First American's largest source of revenue and was
$232.5 million for the first nine months of 1995, an increase of $10.5 million,
or 4.7%, from $222.0 million in the comparable 1994 period. 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 amounted to $455.7 million in the 1995 nine month
period, compared to $370.8 million for the first nine months of 1994, an
increase of 22.9%. For the nine months ended September 30, 1995, total interest
expense amounted to $223.2 million, an increase of 49.9% from $148.9 million in
the comparable 1994 period. 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. Average
earning assets increased $670.2 million during the nine months ended September
30, 1995, or 9.5%, to $7.73 billion over the same period in 1994, while average
interest-bearing liabilities increased $654.2 million, or 11.3%, to $6.47
billion. The net interest margin decreased 18 basis points to 4.07% in the 1995
nine month period from 4.25% during the first nine months of 1994.
Total non-interest income was $78.1 million for the nine months ended
September 30, 1995, an increase of 6.6% versus the first nine months of 1994.
Service charges on deposit accounts, the primary component of non-interest
income, were $34.9 million for the nine months ended September 30, 1995, an
increase of 10.6% over the comparable 1994 period. Service charge income for the
1995 nine month period increased principally as a result of an increase in the
average number of retail deposit accounts. Increases in investment services
income as well as merchant discount fees also contributed to the increase in
non-interest income.
Total non-interest expense amounted to $185.8 million for the nine months
ended September 30, 1995, an increase of $5.3 million, or 2.9%, from $180.5
million in the comparable 1994 period. The increase during the 1995 nine month
period is primarily attributable to higher salaries and employee benefits which
increased $6.1 million, or 6.0%, marketing expenses, which increased $0.5
million, or 8.8%, and communication expense, which increased $1.0 million, or
15.0%, relative to the nine months ended September 30, 1994. These
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increases in non-interest expense were partially offset by a $3.3 million
decrease in FDIC insurance expense 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. Marketing and communications 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 customer bank service
called "Loan by Phone" and several existing money market and checking account
products. First American's operating efficiency ratio was 59.5% in the first
nine months of 1995, versus 60.6% in the first nine months of 1994.
During the first nine months of 1995, the Company's income tax expense
increased $3.0 million versus the 1994 nine month period to $46.0 million, which
increase was primarily attributable to higher income before income taxes.
SUPERVISION AND REGULATION
The following discussion supersedes and replaces the discussion under
"Supervision and Regulation" in the accompanying Prospectus.
GENERAL
First American is a bank holding company subject to the supervision of the
Federal Reserve Board under the Bank Holding Company Act ("BHCA"). First
American is the parent company of FANB and FANBKY both of which are national
banks and, as such, are subject to the supervision of, and are regularly
examined by, the Office of the Comptroller of the Currency (the "OCC"). FAFSB
(formerly, Charter) is a separate savings association subsidiary of First
American and, as a result, First American is also a savings and loan holding
company registered under the Home Owners Loan Act ("HOLA"), subject, together
with FAFSB, to the supervision and regulation of the Office of Thrift
Supervision ("OTS"). Each of the Company's banking subsidiaries is also insured
by, and subject to the regulations of, the FDIC, and is also affected
significantly by the actions of the Federal Reserve Board by virtue of its role
in regulating money supply and credit availability, as well as by the U.S.
economy in general. Areas subject to regulation by federal authorities include
loan loss reserves, investments, loans, mergers, issuance of securities, payment
of dividends, establishment and closing of branches, product offerings and other
aspects of operations.
The Company's non-banking subsidiaries are subject to the supervision of
the Federal Reserve Board, and other non-banking subsidiaries may be subject to
the supervision of other regulatory agencies including the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc. and
state securities regulators.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund, the
primary components of which are the Savings Association Insurance Fund ("SAIF")
and the Bank Insurance Fund ("BIF"), in the event the depository institution
becomes in danger of default or is in default. For example, under Federal
Reserve Board policy, First American is expected to serve as a source of
financial and managerial strength to each of its subsidiary banks and to commit
resources to support each of them. This support may be required at times when
First American would not otherwise be inclined to provide it.
Under the "cross guarantee" provisions of the Federal Deposit Insurance Act
("FDIA"), any FDIC-insured subsidiary of First American can be held liable for
any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured subsidiary
or (ii) any assistance provided by the FDIC to any commonly controlled
FDIC-insured subsidiary "in danger of default." "Default" is defined generally
as the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the SAIF or the BIF, or both. The FDIC's claim for
damages
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is superior to claims of shareholders of the insured depository institution or
its holding company but is subordinate to claims of depositors, secured
creditors and holders of subordinated debt (other than affiliates) of the
commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or other
resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other unsecured senior creditor,
subordinated creditor, general creditor or shareholder. This provision would
give depositors a preference over general and subordinated creditors and
shareholders in the event a receiver is appointed to distribute the assets of
any of the bank subsidiaries of the Company.
CAPITAL
The Federal Reserve Board and the OCC have adopted substantially similar
risk-based capital and leverage guidelines applicable to U.S. banking
organizations. The minimum guideline for the ratio of total capital ("Total
Capital") to risk-weighted assets (including certain off-balance-sheet
activities, such as standby letters of credit) is 8.00%. At least half of the
Total Capital must be composed of common stockholders' equity, and to the extent
applicable, minority interests in the equity accounts of consolidated
subsidiaries, non-cumulative perpetual preferred stock and a limited amount of
cumulative perpetual preferred stock, less disallowed intangibles ("Tier 1
Capital"). The remainder, which is "Tier 2 Capital," may consist of subordinated
debt (or certain other qualifying debt issued prior to March 12, 1988), other
preferred stock and a limited amount of loan loss reserves. In addition, each of
the federal bank regulatory agencies has established minimum leverage capital
ratio guidelines. These guidelines provide for a minimum Tier 1 leverage capital
ratio (Tier 1 Capital to total assets, less disallowed intangibles) of 3% for
banks and bank holding companies that meet certain specified criteria, including
that such financial institutions have the highest regulatory examination rating
and are not contemplating significant growth or expansion. All other
institutions are expected to maintain a leverage ratio of at least 100 to 200
basis points above the minimum. At September 30, 1995, First American's Tier 1
risk-based capital and total risk-based capital ratios were 10.03% and 12.02%,
respectively, and its Tier 1 leverage capital ratio at September 30, 1995 was
7.81%, each of which exceeded the minimum ratios established by the Federal
Reserve Board.
At September 30, 1995, FANB's Tier 1 risk-based, total risk-based and Tier
1 leverage capital ratios were 9.46%, 10.72% and 7.65%, respectively (prior to
restatement to give effect to the acquisition of Heritage), and FANBKY's were
17.21%, 18.10% and 9.96%, respectively, all of which exceeded the minimum ratios
established by the OCC.
FAFSB is, and Heritage formerly was, subject to capital requirements
adopted by the OTS, which are similar but not identical to those issued by the
Federal Reserve Board and the OCC. Under the OTS' capital guidelines, a savings
association is required to maintain tangible capital of at least 1.5% of
tangible assets, core (leverage) capital of at least 3% of the association's
adjusted total assets and risk-based capital of at least 8% of risk-weighted
assets. At September 30, 1995, Heritage's tangible capital ratio was 9.82%, its
core (leverage) capital ratio was 9.89%, its Tier 1 risk-based capital ratio was
24.33% and its total risk-based capital ratio was 25.38%. At September 30, 1995,
Charter's tangible capital ratio was 6.30%, its core (leverage) capital ratio
was 6.30%, its Tier 1 risk-based capital ratio was 13.00% and its total
risk-based capital ratio was 14.23%.
As a result of a federal law enacted in 1991 that required each federal
banking agency to revise its risk-based capital standards to ensure that those
standards take adequate account of interest rate risk, concentration of credit
risk and the risks of nontraditional activities, each of the federal banking
agencies has revised the risk-based capital guidelines described above to take
account of concentration of credit risk and risk of nontraditional activities.
In addition, the Federal Reserve Board, the FDIC and the OCC recently adopted a
new rule that amended, effective September 1, 1995, the capital standards to
include explicitly a bank's exposure to declines in the economic value of its
capital due to changes in interest rates as a factor to be considered in
evaluating a bank's capital adequacy. This rule does not codify a measurement
framework for assessing the level of a bank's interest rate exposure. Such
agencies have issued for comment a joint policy
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statement that describes the process to be used to measure and assess the
exposure of a bank's net economic value to changes in interest rates. These
agencies have indicated that in the second step of this regulation process they
intend to issue a proposed rule that would establish an explicit minimum capital
charge for interest rate risk based on the level of a bank's measured interest
rate exposure. The agencies intend to implement the second step after the
agencies and the banking industry have had more experience with the proposed
supervisory and measurement process. First American does not believe that these
recent proposals and revisions to the capital guidelines will materially impact
its operations.
The OTS regulatory capital requirements already incorporate an interest
rate risk component. Under the OTS regulation, a savings institution's interest
rate risk is measured by the decline in the net portfolio value of its assets
that would result from a hypothetical 200 basis point increase or decrease in
interest rates, divided by the estimated economic value of the institution's
assets. A savings institution whose interest rate risk exposure exceeds 2% would
be required to deduct an amount equal to one-half of the difference between the
institution's interest rate risk and 2%, multiplied by the estimated economic
value of the institution's assets. The OTS, however, has postponed requiring any
such deductions from capital until an appeals process is developed for the
measurement of an institution's interest rate risk. The Company does not believe
that these recent revisions to the OTS capital guidelines will materially impact
the operations of FAFSB.
ACQUISITION AND EXPANSION
The BHCA requires any bank holding company to obtain the prior approval of
the Federal Reserve Board before it may acquire all or substantially all of the
assets of any bank, or ownership or control of any voting shares of any bank,
if, after acquiring such shares, it would own or control, directly or
indirectly, more than 5% of the voting shares of such bank.
Recently, Congress enacted an interstate banking law establishing both
nationwide and statewide concentration limits. Effective September 29, 1995,
federal nationwide concentration limits prohibit a bank holding company which
controls more than 10% of the total amount of deposits of insured depository
institutions in the U.S. from further acquisitions; federal statewide
concentration limits prohibit an acquisition if, upon consummation of the
transaction, a bank holding company would control 30% or more of the total
amount of deposits of insured depository institutions in the state which is the
home state of the bank or bank holding company being acquired. The Company
estimates that, as of September 30, 1995, it held approximately 10% of all such
deposits in Tennessee and 1% of all such deposits in Kentucky. Although
individual state deposit caps are not superseded by the legislation, the
Tennessee General Assembly, in its 1995 session, adopted conforming legislation
which adopts the deposit caps enacted by Congress. The legislation also repealed
the Tennessee laws previously applicable to acquisitions by bank holding
companies, and reenacted in modified form one of these laws, the Tennessee Bank
Structure Act (the "TBSA"). Under the TBSA, as reenacted, no bank holding
company, whether a Tennessee or out-of-state company, may acquire any bank in
Tennessee that has been in operation less than five years or organize a new bank
in Tennessee, except in the case of certain interim bank mergers and
acquisitions of banks in financial difficulty. Under the Tennessee laws
pertaining to bank mergers, which (with the exception of a merger between a
Tennessee bank and an out-of-state bank) were not directly affected by the new
legislation, banks in separate counties in Tennessee which have been in
operation at least five years may merge. Banks with principal offices in the
same county may merge, even if one or both have been in operation less than five
years. The effect of these provisions is that First American in the future may
acquire banks in Tennessee which have been in operation for over five years but
may not form or acquire a new bank in any Tennessee county other than Davidson
County, in which the main office of FANB is located.
The BHCA currently prohibits the Federal Reserve Board from approving an
application from a bank holding company to acquire shares of a bank located
outside the state in which the operations of the holding company's banking
subsidiaries are principally conducted, unless such an acquisition is
specifically authorized by statute of the state in which the bank whose shares
are to be acquired is located. However, under the recently enacted federal
interstate banking law described above, the restriction on interstate
acquisitions was abolished effective September 1995, and thereafter, bank
holding companies from any state were able to acquire banks and bank holding
companies located in any other state, subject to certain conditions, including
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the nationwide and state imposed concentration limits described above. Banks
also will be able to branch across state lines by acquisition, merger or de
novo, effective June 1, 1997 (unless state law would permit such interstate
branching at an earlier date), provided certain conditions are met, including
that applicable state law must expressly permit such de novo interstate
branching. Both Virginia and Tennessee have enacted interstate branching laws in
response to the federal law. The Virginia law is effective July 1, 1995 and the
Tennessee law is effective June 1, 1997.
BANK REGULATION
Payment of Dividends. First American is a legal entity separate and
distinct from its subsidiary banks and its nonbank subsidiaries. First
American's revenues (on a parent company only basis) result, in part, from
dividends paid to First American by its subsidiaries. The right of First
American, and consequently the right of creditors and shareholders of First
American, to participate in any distribution of the assets or earnings of any
subsidiary through the payment of such dividends or otherwise is necessarily
subject to the prior claims of creditors of the subsidiary (including
depositors, in the case of banking subsidiaries), except to the extent that
claims of First American in its capacity as a creditor may be recognized.
There are statutory and regulatory restrictions applicable to the payment
of dividends by subsidiary banks to First American. National banks are required
to obtain the prior approval of the OCC for the payment of dividends if the
total of all dividends declared in any year exceeds the total of (i) such bank's
net profits (as defined by the OCC) for that year plus (ii) the retained net
profits (as defined by the OCC) for the preceding two years, less any required
transfers to surplus. In addition, national banks may only pay dividends to the
extent that retained net profits (including the portion transferred to surplus)
exceed statutory bad debts. In accordance with these regulations, at September
30, 1995, FANB had approximately $198.6 million and FANBKY had approximately
$2.0 million available for distribution as dividends to First American without
the prior approval of the OCC.
OTS regulations also impose limitations on the payment of dividends and
other capital distributions (including stock repurchases and cash mergers) by
savings institutions, such as FAFSB. Under these regulations, a savings
association, such as FAFSB, that exceeds its fully phased-in capital
requirements both immediately prior to and on a pro forma basis after giving
effect to, a proposed capital distribution (a "Tier 1 Association") is generally
permitted without prior approval of (but with prior notice to) the OTS to make a
capital distribution during a calendar year equal to the greater of (i) 100% of
its net earnings to date during the calendar year, plus the amount that would
reduce by one-half its "surplus capital ratio" (i.e., the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar year;
or (ii) 75% of its net income for the previous four quarters. Restrictions on
the ability to make capital distributions would be imposed if the institution's
capital fell below its regulatory requirement or the OTS notified the
institution that it was in need of more than normal supervision, or that the
distribution would constitute an unsafe or unsound practice. Pursuant to this
regulation, as of September 30, 1995, Heritage and Charter were Tier 1
Associations and had approximately $21.2 million and $14.3 million,
respectively, available to distribution as dividends to shareholders.
In addition to the foregoing, under the FDIA, insured depository
institutions, such as FANB and FANBKY, are prohibited from making capital
distributions, including the payment of dividends, if, after making such a
distribution, the institutions would become "undercapitalized" (as such term is
used in the statute).
FDIC Insurance. The Company's subsidiary banks are subject to FDIC deposit
insurance assessments. The FDIC has promulgated risk-based deposit insurance
assessment regulations which became effective in 1993. Under these regulations,
insured institutions are assigned assessment risk classifications based upon
capital levels and supervisory evaluations. The annual assessment rates for
insured institutions for semi-annual periods in 1995 currently range from 0.23%
to 0.31%, depending on the institution's assessment risk classification. Under
these regulations, both FANB's and FANBKY's assigned assessment rate for the
first semi-annual period of 1995 was 0.23%. With the exception of deposits
attributable to the acquisition of First Fidelity Bank, FSB (the predecessor to
FANBKY), a SAIF insured institution acquired by FANB in 1994 for
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approximately $6.5 million, and deposits attributable to the acquisition of
Heritage and Charter, FANB pays its premiums at the BIF rate. FANBKY, as a
former savings and loan association, and FAFSB, as a federal savings bank, pay
their premiums at the SAIF rate. Thus, First American's deposit insurance
premium expenses may be affected by changes in both the BIF and the SAIF
assessment rate. On August 8, 1995, the FDIC voted to reduce the assessment
rates paid by most banks and to keep existing assessment rates intact for
savings associations. Under the revised rate structure, the best-rated banks
will pay assessments at 0.04% of insured deposits, while the weakest ones will
continue to pay at the 0.31% rate. The revised rate structure became effective
on a retroactive basis as of June 1, 1995. As a result of the revised rate
structure, the Company received a refund of $3.4 million in the third quarter of
1995. On November 14, 1995, the FDIC further reduced the rate structure for the
BIF starting in January 1996. Under the new rate structure, the best-rated banks
will pay only the statutory annual minimum assessment of $2,000 per year, while
the weakest ones will pay at a rate of 0.27%. Current federal law provides that
the SAIF assessment rate may not be less than 0.18% from January 1, 1994 through
December 31, 1997. After December 31, 1997, the SAIF assessment rate must be a
rate determined by the FDIC to be appropriate to increase the SAIF's reserve
ratio to 1.25% of insured deposits or such higher percentage as the FDIC
determines to be appropriate, but the assessment rate may not be less than
0.15%. Several alternatives are being considered by the FDIC and by Congress to
mitigate the effect of the expected premium disparity between the SAIF and the
BIF, including assessing a one-time fee on SAIF members to recapitalize the SAIF
to the same level as the BIF. The administration has discussed in general
proposals that would involve a reduction in SAIF premiums, but would also
require a one-time special payment by SAIF-insured institutions. First American
at this time cannot predict the effect any differential in deposit insurance
assessment rates or a one-time fee on SAIF members may have on its operations.
Community Reinvestment Act. The Company's subsidiary banks also are
subject to the requirements of the Community Reinvestment Act of 1976 ("CRA").
The CRA imposes on financial institutions an affirmative and ongoing obligation
to meet the credit needs of their local communities, including low- and
moderate-income neighborhoods, consistent with the safe and sound operation of
those institutions. Each financial institution's efforts in meeting community
credit needs currently are evaluated as part of the examination process, as well
as when an institution applies to undertake a merger or acquisition or to open a
branch facility. Under recently enacted revisions to the CRA regulations, the
current CRA assessment system will be replaced with a new evaluation system that
will rate institutions based on their actual performance (rather than efforts)
in meeting community credit needs. Under these new regulations, each institution
will be evaluated based on the degree to which it is providing loans (the
lending test), branches and other services (the service test) and investments
(the investment test) to low- and moderate-income areas in the communities it
serves, based on the communities' demographics, characteristics and needs, the
institution's capacity, product offerings and business strategy. Each depository
institution will have to report to its federal supervisory agency and make
available to the public data on the geographic distribution of its loan
applications, denial, originations and purchases. Institutions will continue to
receive one of four composite ratings: Outstanding, Satisfactory, Needs to
Improve or Substantial Noncompliance. The new rules are scheduled to go into
effect in stages from July 1995 to January 1997. First American does not believe
that the new CRA regulations will substantially change its programs and policies
designed to meet the needs of its communities.
Certain Transactions with Affiliates. Provisions of the Federal Reserve
Act impose restrictions on the type, quantity and quality of transactions
between affiliates of an insured bank (including First American and its nonbank
subsidiaries) and the insured bank itself. Under these restrictions, an insured
bank (or savings institution) and its subsidiaries are, among other things,
limited in engaging in "covered transactions" with any one affiliate to no more
than 10% of the capital stock and surplus of the insured bank (or savings
institution); and with all affiliates in the aggregate, to no more than 20% of
the capital stock and surplus of the bank (or savings institution). "Covered
transactions" are defined by statute to include a loan or extension of credit,
as well as a purchase of securities issued by an affiliate, a purchase of assets
(unless otherwise exempted by the Federal Reserve Board), the acceptance of
securities issued by the affiliate as collateral for a loan and the issuance of
a guarantee, acceptance, or letter of credit on behalf of an affiliate. In
addition, any transaction with an affiliate, including loans, contractual
arrangements and purchases, must be on terms and conditions
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that are substantially the same or at least as favorable to the bank (or savings
institution) as those prevailing at the time for comparable transactions with
non-affiliated companies. The purpose of these restrictions is to prevent the
misuse of the resources of the bank by its uninsured affiliates. An exception to
the quantitative restrictions is provided for transactions between two insured
banks or savings institutions that are within the same holding company structure
where the holding company owns 80% or more of each institution.
Any loans made by the Company's bank subsidiaries to their respective
executive officers, directors or 10% shareholders, as well as entities such
persons control, are required to be made on terms substantially the same as
those offered to unaffiliated individuals and to involve not more than the
normal risk of repayment, and are subject to individual and aggregate limits
depending on the person involved. Further, provisions of the BHCA prohibit a
bank holding company and its subsidiaries from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
Other Safety and Soundness Regulations. The federal banking agencies have
broad powers under current federal law to take prompt corrective action to
resolve problems of insured depository institutions. The extent of these powers
depends upon whether the institutions in question are categorized as "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized," as such terms are defined
under uniform regulations defining such capital levels issued by each of the
federal banking agencies.
In addition, FDIC regulations require that management report on its
institution's responsibility for preparing financial statements, and
establishing and maintaining an internal control structure and procedures for
financial reporting and compliance with designated laws and regulations
concerning safety and soundness; and that independent auditors attest to and
report separately on assertions in management's reports concerning the
effectiveness of the internal control structure over financial reporting and
compliance with such laws and regulations, using FDIC-approved audit procedures.
The FDIA also requires each of the federal banking agencies to develop
regulations addressing certain safety and soundness standards for insured
depository institutions and depository institutions holding companies, including
operational and managerial standards, asset quality, earnings and stock
valuation standards, as well as compensation standards (but not dollar levels of
compensation). Each of the federal banking agencies has issued regulations and
interagency guidelines implementing these standards. The regulations and
guidelines set forth general operational and managerial standards in the areas
of internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
compensation, fees and benefits. Recently proposed rules would add asset quality
and earnings standards to the guidelines. The current rules contemplate that
each federal agency would determine compliance with these standards through the
examination process, and if necessary to correct weaknesses, require an
institution to file a written safety and soundness compliance plan.
Qualified Thrift Lender Test. Under the HOLA, savings institutions, such
as FAFSB, are required to maintain a minimum of 65% of their total portfolio
assets (as defined in the statute) in certain investments ("Qualified Thrift
Investments") on a monthly average basis in nine out of every twelve months in
order to remain a "Qualified Thrift Lender." Qualified Thrift Investments
generally consist of (i) loans that were made to purchase, refinance, construct,
improve or repair domestic residential or manufactured housing, (ii) home equity
loans, (iii) securities backed by or representing an interest in mortgages on
domestic residential or manufactured housing, (iv) obligations issued by the
federal deposit insurance agencies and (v) shares of stock issued by any Federal
Home Loan Bank. Subject to a limitation of 200% of assets, Qualified Thrift
Investments also include consumer loans, investments in certain subsidiaries,
loans for the purchase or construction of schools, churches, nursing homes and
hospitals, 200% of investments in loans for low- to moderate-income housing and
certain other community oriented investments, and shares of stock issued by the
Federal Home Loan Mortgage Corporation or the Federal National Mortgage
Association.
A savings institution that does not become or remain a Qualified Thrift
Lender must either convert to a bank charter or comply with certain restrictions
on its activities, branching powers and ability to obtain advances from the
Federal Home Loan Bank. As of September 30, 1995, Heritage maintained 85.93%,
and
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Charter maintained 89.30%, of its portfolio assets in Qualified Thrift
Investments, which in each case was in excess of the 65% minimum under the
Qualified Thrift Lender test.
Interest Rate Limitations. The maximum permissible rates of interest on
most commercial and consumer loans made by FANB are governed by Tennessee's
general usury law and the Tennessee Industrial Loan and Thrift Companies Act
("Industrial Loan Act"). Certain other usury laws affect limited classes of
loans, but the laws referenced above are by far the most significant.
Tennessee's general usury law authorizes a floating rate of 4% per annum over
the average prime or base commercial loan rate, as published by the Federal
Reserve Board from time to time, subject to an absolute limit of 24% per annum.
The Industrial Loan Act, which also is generally applicable to most of the loans
made by FANB in Tennessee, authorizes an interest rate of 24% per annum and also
allows certain loan charges, generally on a more liberal basis than does the
general usury law.
RATIOS OF EARNINGS TO FIXED CHARGES
The following are the Company's consolidated ratios of earnings to fixed
charges for each of the years in the five year period ended December 31, 1994
and for the nine months ended September 30, 1995 and 1994, giving effect to the
acquisition of Heritage, which was accounted for as a pooling of interests:
NINE MONTHS
ENDED
SEPTEMBER
30, YEAR ENDED DECEMBER 31,
----------- --------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
Ratio of Earnings to Fixed Charges:
Excluding interest on deposits........................ 3.43 5.77 5.18 8.51 4.36 1.92 *
Including interest on deposits........................ 1.56 1.77 1.74 1.90 1.30 1.08 *
* Earnings were inadequate to cover fixed charges by $75.6 million in 1990.
For purposes of computing the consolidated ratios, earnings represent
consolidated net income of the Company plus applicable income taxes and fixed
charges. Fixed charges represent interest expense (exclusive of interest on
deposits in one case and inclusive of such interest in the other), amortization
of debt discount and appropriate issuance costs and one-third (the amount deemed
to represent an appropriate interest factor) of net rent expense under all lease
commitments.
DESCRIPTION OF SUBORDINATED NOTES
The following description of the Subordinated Notes (referred to in the
accompanying Prospectus as the "Securities") supplements, and to the extent
inconsistent therewith replaces, the description of the general terms and
provisions of the Securities set forth in the accompanying Prospectus under the
heading "Description of Securities," to which description reference is hereby
made. Capitalized terms used and not defined herein have the meaning set forth
in the accompanying Prospectus.
GENERAL
The Subordinated Notes offered hereby constitute a series of Securities
described in the accompanying Prospectus to be issued under the Original
Indenture, as amended by the Second Supplemental Indenture to be dated as of
, 1995 (the Original Indenture as so amended, the "Indenture")
between the Company and the Trustee.
The Subordinated Notes will be limited to $50,000,000 aggregate principal
amount, will be direct, unsecured, subordinated obligations of the Company and
will mature on , 2005. Interest on the Subordinated Notes will be
payable at the rate per annum shown on the cover page of this Prospectus
Supplement from December , 1995, or from the most recent interest payment date
to which interest has been paid or provided for, semiannually on
and of each year, commencing on , 1996, to the
persons in whose names the Subordinated Notes are registered at the close of
business on the and , as the case may be, next preceding
such interest payment date.
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The Subordinated Notes are not redeemable at the option of the Company prior to
maturity and do not provide for any sinking fund.
GLOBAL NOTES
The Subordinated Notes will be issued in the form of one or more fully
registered permanent Global Notes registered in the name of a nominee of the
Depositary. Unless and until it is exchanged in whole or in part for individual
certificates evidencing Subordinated Notes in definitive form represented
thereby, a Global Note may not be transferred except as a whole (i) by the
Depositary to a nominee of the Depositary, (ii) by a nominee of the Depositary
to the Depositary or another nominee of the Depositary or (iii) by the
Depositary or any such nominee to a successor of the Depositary or a nominee of
such successor.
Upon the issuance of the Global Notes, the Depositary or its nominee will
credit, on its book-entry registration and transfer system, the respective
principal amounts of the Subordinated Notes represented by such Global Notes to
the accounts of institutions that have accounts with the Depositary
("participants") as designated by the Underwriters. Ownership of beneficial
interests in the Global Notes will be limited to participants or persons that
may hold interests through participants. Ownership of beneficial interest in the
Global Notes will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary (with respect to
interests of participants) and the records of participants (with respect to
persons other than participants). The laws of some states require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and such laws may impair the ability to transfer beneficial
interests in the Global Notes.
So long as the Depositary, or its nominee, is the registered owner of the
Global Notes, the Depositary or its nominee, as the case may be, will be
considered the sole owner or holder of the Subordinated Notes represented by
such Global Notes for all purposes under the Indenture. Except as set forth
below, owners of beneficial interests in the Global Notes will not be entitled
to have Subordinated Notes registered in their names, will not receive or be
entitled to receive physical delivery of Subordinated Notes in definitive form
and will not be considered the registered owners or holders thereof under the
Indenture.
Subject to certain restrictions in the Indenture, payment of principal of,
premium, if any, and interest, if any, on the Subordinated Notes held by the
Depositary or its nominee will be made to the Depositary or its nominee, as the
case may be, as the registered owner of the Global Notes representing such
Subordinated Notes. None of the Company, the Underwriters or the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the Global
Notes or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that the Depositary, upon receipt of any payment of
principal, premium, if any, or any interest in respect of the Global Notes, will
credit immediately participants' accounts with payments in amounts proportionate
to their respective beneficial interests in the principal amount of such Global
Notes as shown on the records of the Depositary or its nominee. The Company also
expects that payments by participants to owners of beneficial interests in the
Global Notes held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such participants.
If the Depositary is at any time unwilling, unable or ineligible to
continue as depositary and a successor depositary is not appointed by the
Company within 90 days or an Event of Default has occurred and is continuing,
the Company will issue Subordinated Notes in definitive form in exchange for the
Global Notes representing the Subordinated Notes. In addition, the Company may
at any time and in its sole discretion, determine not to have the Subordinated
Notes represented by Global Notes and, in such event, will issue Subordinated
Notes in definitive form in exchange for the Global Notes. Further, if the
Company so specifies with respect to the Subordinated Notes, an owner of a
beneficial interest in a Global Note may, on terms acceptable to the Company and
the Depositary, receive Subordinated Notes in definitive form in exchange for
such beneficial interests. In any such instance, an owner of a beneficial
interest in a Global Note will be
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entitled to physical delivery in definitive form of Subordinated Notes equal in
principal amount to such beneficial interest and to have such Subordinated Notes
registered in its name.
The Depositary has advised the Company as follows: it is a limited-purpose
trust company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Securities Exchange Act of 1934, as amended. The
Depositary holds securities that its participants deposit with it. The
Depositary also facilitates the settlement among participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in participants' accounts, thereby
eliminating the need for physical movement of securities certificates. Direct
participants include securities brokers and dealers, banks, trust companies,
clearing corporations, and certain other organizations. The Depositary is owned
by a number of its direct participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the Depositary's systems is also available to others
such as securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a direct participant, either
directly or indirectly. The rules applicable to the Depositary and its
participants are on file with the Securities and Exchange Commission.
SUBORDINATION
As described in the accompanying Prospectus, the Subordinated Notes are
subordinate and subject in right of payment to the prior payment in full of all
existing and future Senior Indebtedness of the Company. See "Description of
Securities -- Subordination of Securities" in the accompanying Prospectus. The
Indenture does not prohibit or limit the incurrence of additional indebtedness,
senior or subordinated, by the Company.
As described in the accompanying Prospectus, payment of the principal of
the Subordinated Notes may be accelerated only in the case of certain events
involving the bankruptcy, insolvency or reorganization of the Company. There is
no right of acceleration in the case of a default by the Company in the
performance of any covenant or agreement in the Subordinated Notes or Indenture,
including the failure to pay principal of or interest on the Subordinated Notes
when due. See "Description of Securities -- Events of Default; Limited Rights of
Acceleration" in the accompanying Prospectus.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement by purchasers of the Subordinated Notes will be made in
immediately available funds. All payments by the Company to the Depositary of
principal and interest will be made in immediately available funds.
So long as any Subordinated Notes are represented by Global Notes
registered in the name of the Depositary or its nominee, such Subordinated Notes
will trade in the Depositary's Same-Day Funds Settlement System, and secondary
market trading in such Subordinated Notes will therefore be required by the
Depositary to settle in immediately available funds. No assurance can be given
as to the effect, if any, of settlement in immediately available funds on
trading activity in the Subordinated Notes.
TRUSTEE
Chemical Bank, a New York banking corporation, will serve as the Trustee
with respect to the Subordinated Notes.
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UNDERWRITING
Subject to the terms and conditions set forth in the Purchase Agreement,
the Company has agreed to sell to each of the Underwriters named below, and each
of the Underwriters has severally agreed to purchase, the principal amount of
the Subordinated Notes set forth opposite its name below.
PRINCIPAL
UNDERWRITER AMOUNT
- -------------------------------------------------------------------------------- -----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................................... $
Morgan Stanley & Co. Incorporated...............................................
J.C. Bradford & Co. ............................................................
-----------
Total.............................................................. $50,000,000
==========
In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all the Subordinated
Notes offered hereby if any of the Subordinated Notes are purchased. The
Underwriters have advised the Company that they propose initially to offer the
Subordinated Notes to the public at the public offering price set forth on the
cover page of this Prospectus Supplement, and to certain dealers at such price
less a concession not in excess of % of the principal amount of the
Subordinated Notes. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of % of the principal amount of the Subordinated
Notes to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended,
or contribute to payments the Underwriters may be required to make in respect
thereof.
The Subordinated Notes will not be listed on any securities exchange. The
Company has been advised by the several Underwriters that the several
Underwriters currently intend to make a market in the Subordinated Notes, as
permitted by applicable laws and regulations. The several Underwriters are not
obligated, however, to make a market in the Subordinated Notes and any such
market-making may be discontinued at any time at the sole discretion of the
several Underwriters. Accordingly, no assurance can be given as to the liquidity
of, or trading markets for, the Subordinated Notes.
The Underwriters and their respective affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
LEGAL MATTERS
Certain legal matters will be passed upon for the Underwriters by Gibson,
Dunn & Crutcher, New York, New York.
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- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, THE SUBORDINATED NOTES IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
The Company........................... S-2
Recent Developments................... S-2
Use of Proceeds....................... S-3
Capitalization........................ S-3
Summary Consolidated Financial Data... S-4
Financial Review...................... S-5
Supervision and Regulation............ S-6
Ratios of Earnings to Fixed Charges... S-12
Description of Subordinated Notes..... S-12
Underwriting.......................... S-15
Legal Matters......................... S-15
PROSPECTUS
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Supervision and Regulation............ 2
Use of Proceeds....................... 8
Ratios of Earnings to Fixed Charges... 8
Description of Securities............. 9
Plan of Distribution.................. 13
Legal Matters......................... 14
Experts............................... 14
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$50,000,000
FIRST AMERICAN
CORPORATION
% SUBORDINATED NOTES DUE 2005
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
J.C. BRADFORD & CO.
DECEMBER , 1995
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