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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1995. Commission File Number 0-6198.
FIRST AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
TENNESSEE 62-0799975
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
FIRST AMERICAN CENTER,
NASHVILLE, TENNESSEE 37237-0700
(Address of principal executive offices) (ZIP CODE)
Registrant's telephone number, including area code: 615/748-2000
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $5 per share and associated
Series A Junior Preferred Stock Purchase Rights
(Title of Class)
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Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value (computed on the basis of the reported last
sale price on February 8, 1996) of shares of Common Stock, par value $5 per
share, held by non-affiliates of the Registrant was $1,254,316,760.43. The
market value calculation assumes (i) that all shares beneficially held by
members of the Board of Directors of the Registrant are shares owned by
"affiliates," a status which each of the directors individually disclaims, and
(ii) that shares beneficially owned by the Registrant's subsidiaries are owned
by "affiliates".
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Outstanding at
Class February 8, 1996
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Common Stock, $5 par value: 29,628,776
DOCUMENTS INCORPORATED BY REFERENCE:
Document from which portions are Part of Form 10-K
incorporated by reference to which incorporated
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1. Proxy Statement dated March 21, 1996 Part III
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TABLE OF CONTENTS
Page
PART I
Items 1-2 Business and Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Statistical Information . . . . . . . . . . . . . . . . . . . . . . . . . 4
Supervision and Regulation . . . . . . . . . . . . . . . . . . . . . . . . 4
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 4 Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
PART II
Item 5 Market for the Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . 15
Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7 Management's Discussion and Analysis of Results
of Operations and Financial Condition . . . . . . . . . . . . . . . . . . . 6
Item 8 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . 7
Item 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . 57
PART III
Item 10 Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . 57
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Item 12 Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Item 13 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . 60
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
i.
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PART I
Items 1-2: BUSINESS AND PROPERTIES
GENERAL
First American Corporation (the "Corporation"), a Tennessee corporation,
was incorporated in 1968 and is registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended ("BHCA"), and as a savings and
loan holding company under the Home Owner's Loan Act, as amended ("HOLA"). The
Corporation owns all of the capital stock of First American National Bank
("FANB"), a national banking association headquartered in Nashville, Tennessee;
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. ("FAE"), a Tennessee corporation
headquartered in Nashville, Tennessee.
The Corporation coordinates the financial resources of the consolidated
enterprise and maintains systems of financial, operational and administrative
controls that allow coordination of selected policies and activities. The
Corporation derives its income from interest, dividends and management fees
received from its subsidiaries. The mailing address of the principal executive
offices of the Corporation is First American Center, Nashville, Tennessee
37237-0700, and the telephone number is (615) 748-2000.
Effective November 1, 1995, the Corporation completed its acquisition of
Heritage Federal Bancshares, Inc. ("Heritage"). This acquisition was accounted
for as a pooling of interests, and, consequently, the information for prior
years has been restated to give effect to the acquisition of Heritage. As of
December 31, 1995, the Corporation had total assets of approximately $9.68
billion, total deposits of $7.38 billion, shareholders' equity of approximately
$795.5 million, and net income of $103.1 million. As of December 31, 1995,
FANB had total assets of approximately $9.05 billion, total deposits of $6.93
billion, shareholder's equity of approximately $724.0 million, and net income
of $103.3 million for 1995. As of December 31, 1995, the Corporation estimates
that it ranked, on the basis of aggregate deposits in Tennessee held by FANB,
the Corporation's principal subsidiary, as the second largest bank holding
company headquartered in Tennessee.
The Corporation's subsidiary banks engage in lending in the following
areas: commercial, consumer -- amortizing mortgages, consumer -- other, real
estate -- construction, and real estate -- commercial mortgages and other. The
risk involved to the Corporation and its subsidiary banks in making these loans
varies based on, among other things, the amount of the loan, the length of
amortization of the principal, the type of collateral, if any, used to secure
the loan, and characteristics of the borrower. For a further discussion of the
Corporation's and its subsidiary banks' lending activities, see the following
sections of Management's Discussion and Analysis of Results of Operations and
Financial Condition, included in this Report as Item 7: Loans, pages 33-35;
Allowance and Provision for Possible Loan Losses, pages 36-38; and Asset
Quality, pages 38-40.
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For a discussion of the Corporation's and its subsidiary banks' investment
activities, see the following sections of Management's Discussion and Analysis
of Results of Operations and Financial Condition, included in this Report as
Item 7: Securities, pages 31-32; and Asset Liability Management, pages 28-31.
For a discussion of the Corporation's and its subsidiary banks' deposit
and other funding activities, see the following sections of Management's
Discussion and Analysis of Results of Operations and Financial Condition,
included in this Report as Item 7: Deposits, pages 40-41; Other Borrowed Funds,
page 42; and Liqudity, pages 43-44.
COMMERCIAL BANKING
Founded in 1883, FANB had banking offices in 30 Tennessee counties
containing approximately 72% of Tennessee's population at December 31, 1995. On
the basis of deposits at December 31, 1995, the Corporation estimates that
FANB was the second largest bank in Tennessee, and had the largest deposit base
in the Nashville-Davidson County, Tennessee market, the largest deposit base
in the Tri-Cities (Sullivan and Washington Counties, Tennessee) market, the
second largest deposit base in the Knoxville (Knox County, Tennessee) market,
the sixth largest deposit base in the Memphis (Shelby County, Tennessee)
market, and the seventh largest deposit base in the Chattanooga (Hamilton
County, Tennessee) market.
At December 31, 1995, FANB had a total of 147 banking offices in both
Tennessee and Virginia, with banking offices in the 15 largest counties in
Tennessee (measured by aggregate bank deposits of banks in the county at June
30, 1995) and in 18 of the 20 most populous Tennessee cities.
FANB offers the services generally performed by commercial banks of like
size and character. FANB also offers 24-hour banking service through automated
teller machines located at a majority of its banking offices and at other
locations. At December 31, 1995, FANB operated a total of 210 automated teller
machines. Of these, 150 were in banking offices and 60 were freestanding.
FANB also provides trust services and investment management services for
customers of the Corporation's subsidiary banks. The trust functions, both
individual and corporate, of the Corporation and investment management were
formerly provided by First American Trust Company ("FATC") and Lee, Robinson &
Steine, Inc. ("LRS"), a non-banking wholly owned subsidiary of FATC that was a
registered investment advisor. Effective as of September 30, 1995, FATC was
merged into FANB, and LRS was dissolved. Since that time, FANB has provided
the individual and corporate trust functions and investment management services
of the Corporation.
FANB also owns First Amtenn Life Insurance Company, which underwrites
credit life and accident and health insurance on extensions of credit made by
FANB, and Ameristar Capital Markets, Inc., a broker/dealer registered with the
National Association of Securities Dealers, Inc. ("NASD"), which provides
securities brokerage services.
FANBKY, headquartered in Bowling Green, Kentucky, also offers the services
generally performed by commercial banks of like size and character. At
December 31, 1995, FANBKY had
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three banking offices in two Kentucky counties, Warren and Simpson, which
contained approximately 2.6% of Kentucky's population, and offered 24-hour
banking service through three automated teller machines located on the premises
of the banking offices. On the basis of deposits at December 31, 1995, the
Corporation estimates that FANBKY had the second largest deposit base in the
combined Warren and Simpson Counties market.
FAFSB offers the services generally performed by savings banks of like
size and character. At December 31, 1995, FAFSB had 14 branches in the
southwestern region of Virginia and offered 24-hour banking service through 10
automated teller machines. On the basis of deposits at December 31, 1995, the
Corporation estimates that FAFSB had the sixth largest deposit base in the
Bristol City/Washington County, Virginia market. Until December 1, 1995, FAFSB
was known as Charter Federal Savings Bank ("Charter") when it was acquired by
the Corporation. As a result of the acquisition, FANB acquired six additional
branches.
FAE, formerly a division of the Corporation, was incorporated in 1995 for
the purpose of developing sources of non-traditional financial services income.
FAE has, to date, concentrated its efforts in exploring the potential of fee
income generation in the areas of health care payment processing, insurance
company relational database services, and third-party marketing and securities
distribution.
RECENT DEVELOPMENTS
On March 11, 1996, the Corporation completed its acquisition of First City
Bancorp, Inc., a Tennessee corporation headquartered in Murfreesboro, Tennessee
("FCBI"),which owned First City Bank, a Tennessee chartered bank with principal
offices in Murfreesboro, Tennessee, and Citizens Bank, a Tennessee chartered
bank with principal offices located in Smithville, Tennessee, both of which
were merged with and into FANB. The Corporation acquired FCBI through a
tax-free exchange of stock valued at approximately $47 million in a transaction
accounted for as a purchase. As of December 31, 1995, FCBI had total
consolidated assets of approximately $361.1 million and shareholders' equity of
approximately $21.5 million.
As a result of the merger, FANB acquired 11 banking offices and 12 free
standing automated teller machines in five Tennessee counties. In addition,
FANB acquired First City Life Insurance ("FCLI") and Tennessee Credit
Corporation ("TCC"), both former subsidiaries of First City Bank, which,
respectively, sell credit life insurance and engage in consumer finance
activities. TCC has nine offices in the middle Tennessee area.
On September 12, 1995, the Corporation signed an agreement to purchase 49%
of The SSI Group, Inc., a healthcare claims processing company, for $8,575,000
in cash. The transaction is anticipated to close in the first quarter of 1996.
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STATISTICAL INFORMATION
Management's Discussion and Analysis of Results of Operations and
Financial Condition and the Consolidated Year-End Balance Sheets, which discuss
the Corporation and its subsidiaries from a financial perspective, are
contained in Items 7 and 8 of this Report.
SUPERVISION AND REGULATION
General
The Corporation and its subsidiaries are subject to extensive regulation
under state and federal statutes and regulations. The discussion in this
section, which summarizes certain of such statutes and regulations, does not
purport to be complete and is qualified in its entirety by reference to such
statutes and regulations, and in certain circumstances, proposed regulations.
Based on the results of the Corporation's internal and external audit
procedures and regulatory examinations, Management believes that the
Corporation and its subsidiary banks are in substantial compliance with the
statutes and regulations discussed below except to the extent that
non-compliance with such statutes and regulations would not have a material
adverse effect on the financial operations of the Corporation and its
subsidiaries taken as a whole.
The Corporation is a bank holding company subject to the supervision of
the Federal Reserve Board under the BHCA and a savings bank holding company
subject to the supervision of the Office of Thrift Supervision ("OTS") under
HOLA. FANB and FANBKY are national banks and, as such, are subject to the
supervision of, and are regularly examined by, the Office of the Comptroller of
Currency ("OCC"). FAFSB is a federal savings bank and, as such, is subject to
the supervision of, and is regularly examined by, the OTS. Each of the
Corporation's depository institution subsidiaries is also insured by, and
subject to the regulations of, the Federal Deposit Insurance Corporation (the
"FDIC"), and is also affected significantly by the actions of the Federal
Reserve Board by virtue of its role in regulating money supply and credit
availability, as well as 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 offering and other aspects of operations.
The Corporation'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 NASD, 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 in the
event the depository institution becomes in danger of default or is in default.
For example, under Federal Reserve Board policy, the Corporation 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 the Corporation would not otherwise be inclined to
provide it.
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Under the "cross guarantee" provisions of the Federal Deposit Insurance
Act ("FDIA"), any FDIC-insured subsidiary of the Corporation can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured
subsidiary or (ii) any assistance provided by the FDIC to any commonly
controlled FDIC-insured subsidiary "in danger of default." "Default" is defined
generally as the appointment of a conservator or receiver and "in danger of
default" is defined generally as the existence of certain conditions indicating
that a default is likely to occur in the absence of regulatory assistance. The
FDIC may decline to enforce the cross-guarantee provisions if it determines
that a waiver is in the best interest of the Savings Association Insurance Fund
("SAIF") or the Bank Insurance Fund ("BIF"), or both. The FDIC's claim for
damages 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 general or unsecured senior
liability, subordinated liability, 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 Corporation.
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 shareholders' 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 December 31, 1995, the
Corporation's Tier 1 risk-based capital and total risk-based capital ratios
were 9.97% and 12.59%, respectively, and its Tier 1 leverage capital ratio at
December 31, 1995 was 8.09%, each of which exceeded the minimum ratios
established by the Federal Reserve Board.
At December 31, 1995, FANB's Tier 1 risk-based, total risk-based and Tier
1 leverage capital ratios were 9.80%, 11.05% and 7.89%, respectively, and
FANBKY's were 18.09%, 18.99% and 8.81%, respectively, all of which exceeded the
minimum ratios established by the OCC.
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FAFSB is 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's capital guidelines, a savings bank 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 December 31, 1995, FAFSB's
tangible ratio was 7.43%, its core (leverage) capital ratio was 7.43%, Tier 1
capital ratio was 15.16% of risk-weighted assets and its total risk-based
capital ratio was 16.28%.
Under the FDIC Improvement Act of 1991 each federal banking agency was
required 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 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, if adopted, 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.
The OTS regulatory capital requirements which are applicable to FAFSB
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 form 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.
Payment of Dividends
The Corporation is a legal entity separate and distinct from its
subsidiaries. The Corporation's revenues (on a parent company only basis)
result, in part, from dividends paid by its subsidiaries. The right of the
Corporation, and consequently the rights of creditors and shareholders of the
Corporation, to participate in any distribution of the assets or earnings of
any subsidiary through the payment of such dividends or otherwise is
necessarily subject to the prior claims of creditors of the subsidiary
(including depositors, in the case of banking subsidiaries), except to the
extent that claims of the Corporation in its capacity as a creditor may be
recognized.
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There are statutory and regulatory restrictions applicable to the payment
of dividends by subsidiary banks to the Corporation. National banks are
required to obtain the prior approval of the OCC for the payment of dividends
if the total of all dividends declared in any year exceeds the total of (i)
such bank's net profits (as defined by the OCC) for that year plus (ii) the
retained net profits (as defined by the OCC) for the preceding two years, less
any required transfers to surplus. In addition, national banks may only pay
dividends to the extent that retained net profits (including the portion
transferred to surplus) exceed statutory bad debts.
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 bank
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 ("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.
In accordance with the regulations of the OCC and the OTS, at December 31,
1995, the Corporation's banking subsidiaries had approximately $202.6 million
available for distribution as dividends to the Corporation without prior
regulatory approval.
The Corporation is further restricted by certain long-term debt as more
fully set forth in Note 9 to the Corporation's Consolidated Financial
Statements, included in this Report under Item 8, and incorporated herein by
reference.
In addition to the foregoing, under the FDIA, insured depository
institutions are prohibited from making capital distributions, including the
payment of dividends, if, after making such distribution, the institutions
would become "undercapitalized" (as such term is used in the statute).
Certain Transactions with Affiliates
Provisions of the Federal Reserve Act impose restrictions on the type,
quantity and quality of transactions between affiliates of an insured bank
(including the Corporation and its nonbank subsidiaries) and the insured bank
(or savings institution) 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,
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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 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.
Transactions with Insiders
Any loans made by the Corporation's depository institution subsidiaries to
its executive officers and directors, 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 not involve 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.
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.
The BHCA currently permits bank holding companies from any state to
acquire banks and bank holding companies located in any other state, subject to
certain conditions, including certain nationwide and state imposed
concentration limits. Under these concentration limits, a bank holding company
which controls more than 10% of the total amount of deposits of insured
depository institutions in the United States is prohibited 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 Corporation estimates that as of December 31, 1995, it held
less than 11.3% of all such deposits in Tennessee, less than 1.0% of all such
deposits in Kentucky and less than 1.0% of all such deposits in Virginia.
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 repeals, as of September 29, 1995, the Tennessee laws previously
applicable to acquisitions by bank holding companies, and reenacts 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
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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 the
Corporation 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, where the main office of FANB is
located.
Under federal law, 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 de novo interstate branching at an earlier date), provided certain
conditions are met, including that applicable state law must expressly permit
such de novo interstate branching. Tennessee has enacted an interstate
branching law in response to the federal law which is effective June 1, 1997.
This law, however, does not expressly permit de novo interstate branching.
(See "Recent Banking Legislation.")
FDICIA
In 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") which, among other matters, authorized
additional borrowings by the FDIC in order to provide funds for the resolution
of failing financial institutions. FDICIA also instituted certain changes to
the supervisory process, including provisions that mandate certain regulatory
agency actions against undercapitalized institutions within specified time
limits.
Prompt Corrective Regulatory Action. FDICIA requires the federal
banking regulators to assign each insured institution to one of five capital
categories: "well capitalized", "adequately capitalized" or one of three
undercapitalized categories, and to take progressively more restrictive actions
towards an institution depending upon the assigned category. Under the "prompt
corrective action" regulations adopted pursuant to FDICIA, in order to be
considered "adequately capitalized", national banks must have a Tier 1
risk-based capital ratio of at least 4%, a total risk-based capital ratio of at
least 8% and a Tier 1 leverage ratio of at least 4%. Well capitalized
institutions are those with a Tier 1 risk-based capital ratio above 6%, a total
risk-based capital ratio above 10%, and a Tier 1 leverage capital ratio above 5%
and which are not subject to a written agreement, order or capital directive to
maintain capital at a specified level. FANB, FANBKY, and FAFSB exceeded the
minimum capital ratios of the "well capitalized" category as of December 31,
1995.
All institutions, regardless of their capital levels, are restricted from
making any capital distribution or paying any management fees that would cause
the institution to fail to satisfy the minimum levels for any of its capital
requirements. Furthermore, national banks are prohibited from paying
dividends, making other distributions or paying any management fees to a parent
corporation if, after such payment, the bank would fail to have a Tier 1
risk-based capital ratio of 4%, a total risk-based capital ratio of 8% and a
Tier 1 leverage ratio of 4%. An institution that fails to meet the minimum
level for any relevant capital measure (an "undercapitalized institution") may
be: (i) subject to increased monitoring by the appropriate federal banking
regulator; (ii) required to submit an acceptable capital restoration plan
within 45 days; (iii) subject to asset growth limits; and (iv) required to
obtain prior regulatory approval for acquisitions, branching and new lines of
businesses.
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The capital restoration plan must include a guarantee by the institution's
holding company (under which the holding company would be liable up to the
lesser of 5% of the institution's total assets or the amount necessary to bring
the institution into capital compliance as of the date it failed to comply with
its capital restoration plan) that the institution will comply with the plan
until it has been adequately capitalized on average for four consecutive
quarters.
The bank regulatory agencies have discretionary authority to reclassify
well capitalized institutions as adequately capitalized or to impose on
adequately capitalized institutions requirements or actions specified for
undercapitalized institutions if the agency determines after notice and an
opportunity for hearing that the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, which can consist of
the receipt of an unsatisfactory examination rating if the deficiencies cited
are not corrected. A significantly undercapitalized institution, as well as
any undercapitalized institution that did not submit an acceptable capital
restoration plan, may be subject to regulatory demands for recapitalization,
broader application of restrictions on transactions with affiliates,
limitations on interest rates paid on deposits, asset growth and other
activities, possible replacement of directors and officers, and restrictions on
capital distributions by any bank holding company controlling the institution.
Any company controlling the institution could also be required to divest the
institution or the institution could be required to divest subsidiaries. The
senior executive officers of a significantly undercapitalized institution may
not receive bonuses or increases in compensation without prior approval and the
institution is prohibited from making payments of principal or interest on its
subordinated debt. If an institution's ratio of tangible capital to total
assets falls below a level established by the appropriate federal banking
regulator, which may not be less than 2% nor more than 65% of the minimum
tangible capital level otherwise required (the "critically undercapitalized
level"), the institution will be subject to conservatorship or receivership
within 90 days unless periodic determinations are made that forbearance from
such action would better protect the deposit insurance fund. Unless
appropriate findings and certifications are made by the appropriate federal
bank regulatory agencies, a critically undercapitalized institution must be
placed in receivership if it remains critically undercapitalized on average
during the calendar quarter beginning 270 days after the date it became
critically undercapitalized.
FDIC Insurance. The Corporation's subsidiary depository institutions
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 (whether members of BIF or
SAIF) are assigned assessment risk classifications based upon capital levels and
supervisory evaluations. Based on this system, the assessment rate for insured
institutions for the first semi-annual period in 1995 ranged from 0.23% to 0.31%
and for the second semi-annual period in 1995 ranged from 0.04% to 0.31%,
depending on the institution's assessment risk classification. (See also Note
16, page 98, to the Corporation's Consolidated Financial Statements, included in
this Report under Item 8, and incorporated herein by reference.)
Standards for Safety and Soundness. Under FDICIA, federal bank
regulatory agencies have also proposed standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation, fees and benefits. The compensation
standards prohibit employment contracts,
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compensation or benefit arrangements, stock option plans, fee
arrangements or other compensatory arrangements that provide excessive
compensation, fees or benefits or that could lead to material financial loss.
Brokered Deposits. FDICIA amended the Federal Deposit Insurance Act to
prohibit insured depository institutions that are adequately capitalized (but
do not meet the capital standards for well capitalized institutions) from
accepting brokered deposits unless a waiver has been obtained from the FDIC and
generally bars undercapitalized institutions from accepting any brokered
deposits. Deposit brokers are required to register with the FDIC. The
Corporation's subsidiary banks are not prohibited from accepting brokered
deposits and are not required to seek a waiver under these regulations.
Consumer Protection Provisions. FDICIA seeks to encourage enforcement of
existing consumer protection laws and enacts new consumer-oriented provisions
including a requirement of notice to regulators and customers for any proposed
branch closing and provisions intended to encourage the offering of "lifeline"
banking accounts and lending in distressed communities. FDICIA also requires
depository institutions to make additional disclosures to depositors with
respect to the rate of interest and the terms of their deposit accounts.
Extensive regulations governing "Truth in Savings" became effective in 1993.
Miscellaneous. FDICIA also made extensive changes in the applicable rules
regarding audit, examinations and accounting. FDICIA generally requires annual
on-site full-scope examinations by each bank's primary federal regulator.
FDICIA also imposes new responsibilities on management, the independent audit
committee and outside accountants to develop, approve, or attest to reports
regarding the effectiveness of internal controls and legal compliance.
FDICIA also required the Federal Reserve Board to prescribe standards that
limit the risks posed by an insured institution's "exposure" to any other
depository institution in order to limit the risk that a failure of a large
depository institution would pose to an insured depository institution.
FDICIA broadly defines exposure to include extensions of credit to the other
institution; purchases of, or investments in, securities issued by the other
institution; securities issued by the other institution and accepted as
collateral for an extension of credit to any person; and similar transactions
defined by regulation to constitute exposure. Accordingly, the Federal Reserve
Board has established procedures and "benchmark" standards to limit an insured
depository institution's credit and settlement exposure to each of its
correspondent banks.
Under FDICIA, the federal bank regulatory agencies have also established
minimum loan to value ratios (with limited permitted exceptions) for real
estate mortgage and construction loans.
Community Reinvestment Act
The Corporation's subsidiary depository institutions 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
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evaluated as part of the examination process, as well as when an
institution applies to undertake a merger, 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 would
rate institutions based on their actual performance (rather than efforts) in
meeting community credit needs. Under these new regulations, each institution
would 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 would 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 would 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.
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, 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.
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Interest Rate Limitations
The maximum permissible rates of interest on most commercial and consumer
loans made by FANB are governed by Tennessee's general usury law and the
Tennessee Industrial Loan and Thrift Companies Act ("Industrial Loan Act").
Most commercial and consumer loans made by FANBKY are governed by Kentucky's
general usury law. Under Virginia law, usury limits do not generally apply to
the type of loans most commonly made by savings institutions such as FAFSB.
Certain other usury laws affect limited classes of loans, but the laws
referenced above are by far the most significant. Tennessee's general usury
law authorizes a floating rate of 4% per annum over the average prime or base
commercial loan rate, as published by the Federal Reserve Board from time to
time, subject to an absolute 24% per annum limit. The Industrial Loan Act,
which also is generally applicable to most of the loans made by FANB in
Tennessee, authorizes an interest rate of 24% per annum and also allows certain
loan charges, generally on a more liberal basis than does the general usury
law. Kentucky's general usury law provides for a legal rate of interest of 8%
or less per annum; however, by written agreement, parties may agree for the
payment of interest at any rate under any written contract or other written
obligation where the original principal amount is in excess of $15,000. For
loans where the original principal amount is $15,000 or less, any rate allowed
national banking associations under federal law is permissible.
Environmental Regulation
As real estate lenders and as owners of real property, financial
institutions such as the Corporation and its subsidiary banks may become subject
to liability under various statutes and regulations applicable to property
owners, specifically including those which impose liability with respect to the
environmental condition of real property. The Corporation's primary exposure
under these statutes and regulations stems from the lending activities of its
subsidiary commercial banks, FANB, FANBKY, and FAFSB, which have adopted
policies and procedures to identify and monitor their exposure to avoid any
material loss or liability related to the environmental condition of mortgaged
property. Environmental liability can also result from mergers and
acquisitions, and the Corporation has implemented procedures to identify and
avoid any material loss or liability related to the acquisition of real property
through mergers and acquisitions.
Recent Banking Legislation
Riegle-Neal Interstate Banking and Branching Efficiency Act
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("IBBEA") will significantly impact future bank acquisitions, mergers, and
interstate branching. Among other matters, the IBBEA permits, or will permit,
commercial bank holding companies to (1) as of September 29, 1995, acquire
banks nationwide, regardless of whether such acquisitions are authorized under
the law of the host state, one year after enactment of the legislation; (2)
fully merge or consolidate into a single, legal entity after June 1, 1997,
subject to the right of individual states to "opt in" or "opt out" of this
authority before that date; (3) establish new branches on an interstate basis
provided that such action is specifically authorized by the law of the host
state; and (4) as of September 29, 1995, engage in certain agency relationships
(receive deposits, renew time deposits, close loans, service loans and
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receive payments on loans and other obligations) as agent for any bank or thrift
affiliate, irrespective of whether the affiliate is located in the same State as
the agent bank. Overall, the IBBEA, which, with certain limited exceptions, is
the exclusive means by which bank holding companies can obtain interstate
branches, should encourage an increase in consolidation and competition and
promote geographic diversification in the banking industry.
Tennessee has enacted an interstate branching law in response to the
federal law which is effective June 1, 1997.
Riegle Community Development and Regulatory Improvement Act
The Riegle Community Development and Regulatory Improvement Act ("RCDRIA")
is an effort to alleviate certain regulatory burdens imposed on the banking
industry by amending sections of FDICIA and other statutes pertaining to the
regulation of financial institutions and financial institution holding
companies. For example, as amended by the RCDRIA, FDICIA empowers each agency
to adopt its own standards for safety and soundness relating to quality,
earnings, and stock valuation as the agency deems appropriate.
The RCDRIA also contains the following provisions: various community
development initiatives; measures to promote the securitization of small
business loans; changes to the National Flood Insurance Program and changes to
the Bank Secrecy Act in terms of money laundering; protection against bank
insolvency of the security interests of public entities in bank assets pledged
to secure the entities' deposits; restrictions on certain high-rate, high-fee
mortgages; and disclosure requirements for reverse mortgages.
COMPETITION
The activities in which the Corporation engages are very competitive.
Generally, the lines of activity and markets served by the Corporation involve
competition with money market mutual funds, national and state banks, mutual
savings banks, savings and loan associations, finance companies, brokerage
firms, credit unions and other financial institutions located primarily in the
southeastern region of the United States. The principal methods of competition
center around such aspects as interest rates on loans and deposits, lending
limits, customer services, location of offices, provision of financial
services, and other service delivery systems. Some of the Corporation's
competitors are major corporations with substantially more assets and personnel
than the Corporation and its subsidiaries.
The Corporation's subsidiary banks actively compete for loans and
deposits with other commercial banks, savings and loan associations, and credit
unions. Consumer finance companies, department stores, factors, mortgage
brokers and insurance companies are also significant competitors for various
types of loans. FANB competes for various types of fiduciary and trust
business from other banks, trust and investment companies, investment advisory
firms and others.
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EMPLOYEES
As of December 31, 1995, the Corporation and its subsidiaries employed
3,591 full-time equivalent officers and employees, compared with 3,449 at
December 31, 1994.
Item 3: LEGAL PROCEEDINGS
Note 16 to the Corporation's Consolidated Financial Statements, included
in this Report under Item 8, is hereby incorporated in this Item 3 by
reference.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1995.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Corporation's Common Stock is traded on the National Association of
Securities Dealers Automated Quotation National Market System (the "Nasdaq
National Market System") under the symbol "FATN." At the close of business on
February 8, 1996, there were approximately 9,607 holders of record of the
Corporation's Common Stock. The following table sets out the quarterly high and
low sales prices of the Corporation's Common Stock. The dividends declared
during each quarter for the last two years are also shown.
STOCK PRICES
DIVIDENDS
HIGH LOW DECLARED
------ ------- ---------
1994
----
First Quarter $32.000 $29.125 $.21
Second Quarter 34.750 28.750 .21
Third Quarter 35.000 31.000 .21
Fourth Quarter 33.125 26.125 .25
======= ======= ====
1995
----
First Quarter $34.375 $26.875 $.25
Second Quarter 36.000 33.250 .25
Third Quarter 44.250 35.875 .28
Fourth Quarter 50.250 42.125 .28
======= ======= ====
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See SUPERVISION AND REGULATION, PAYMENT OF DIVIDENDS. See also, Notes 9 and 16
to the Corporation's Consolidated Financial Statements, included in this Report
under Item 8, which are incorporated herein by reference.
ITEM 6: SELECTED FINANCIAL DATA
The table "Selected Financial Data" on page 17 hereof is incorporated in
this Item 6 by reference.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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TABLE 1: SELECTED FINANCIAL DATA: 1991-1995
==================================================================================================================================
Year Ended December 31
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
CONDENSED INCOME STATEMENTS (in thousands):
Net interest income, taxable equivalent basis* $ 315,761 $ 301,689 $ 291,242 $ 272,357 $ 236,609
Less taxable equivalent adjustment 3,451 3,447 4,042 4,160 6,629
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 312,310 298,242 287,200 268,197 229,980
Provision for loan losses 83 (9,919) (41,405) 39,249 53,066
Non-interest income 108,487 85,715 88,379 77,325 82,914
Non-interest expense 252,448 239,270 248,227 240,099 232,774
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and cumulative
effect of changes in accounting principles 168,266 154,606 168,757 66,174 27,054
Income tax expense 65,186 57,404 61,348 20,021 9,005
- ----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in
accounting principles 103,080 97,202 107,409 46,153 18,049
Cumulative effect of changes in accounting
principles, net of tax - - (84) - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $103,080 $97,202 $107,325 $46,153 $18,049
==================================================================================================================================
PER COMMON SHARE:
Net income $3.64 $3.39 $3.79 $1.76 $.73
Cash dividends declared and paid 1.06 .88 .55 .20 -
Book value (end of year) 26.93 23.24 22.34 17.86 17.16
Market price (end of year) 47.38 26.88 32.00 27.50 18.00
Market/book (end of year) 1.76x 1.16x 1.43x 1.54x 1.05x
==================================================================================================================================
AVERAGES (in thousands):
Assets $8,554,146 $7,785,831 $7,322,284 $6,986,807 $6,698,812
Loans, net of unearned discount and net deferred
loan fees 5,592,273 4,851,386 4,214,138 4,044,470 4,326,087
Earning assets 7,898,742 7,119,433 6,672,027 6,387,123 6,128,024
Deposits 6,538,746 6,186,809 5,975,643 5,902,743 5,723,451
Long-term debt 292,455 109,031 60,134 17,890 17,952
Shareholders' equity 704,290 644,247 550,840 442,103 392,530
==================================================================================================================================
END OF PERIOD (in thousands):
Assets $9,681,629 $8,278,727 $7,707,781 $7,256,798 $6,883,673
Loans, net of unearned discount and net deferred
loan fees 6,425,976 5,171,966 4,669,571 4,059,554 4,173,161
Earning assets 8,899,747 7,545,903 7,041,597 6,418,745 6,195,760
Deposits 7,382,294 6,307,779 6,150,551 6,018,768 5,816,460
Long-term debt 421,791 271,473 77,053 18,477 17,833
Shareholders' equity 795,532 667,673 623,562 503,899 401,647
==================================================================================================================================
SIGNIFICANT RATIOS:
Return on average assets 1.21% 1.25% 1.47% .66% .27%
Return on average common equity 14.64 15.09 19.48 10.44 4.60
Dividends declared per share to net income per
share (dividend payout ratio) 29.12 25.96 14.51 11.36 -
Operating efficiency ratio** 58.20 60.25 62.75 68.66 72.85
Average equity to average assets 8.23 8.27 7.52 6.33 5.86
Average loans to average deposits 85.53 78.41 70.52 68.52 75.59
Average core deposits to average total deposits 89.32 92.85 93.13 92.68 92.74
Allowance to net loans (end of year) 2.06 2.50 2.92 4.52 4.38
Nonperforming assets to loans and foreclosed
properties (end of year)*** .46 .42 .91 2.24 3.45
Net interest margin 4.00 4.24 4.37 4.26 3.86
==================================================================================================================================
OTHER STATISTICS:
Number of common shareholders (end of year) 9,092 10,380 10,731 10,646 10,284
Average common shares outstanding (in thousands) 28,315 28,670 28,355 26,509 23,337
End of period common shares (in thousands) 29,540 28,725 27,915 28,213 23,395
Number of full-time equivalent employees
(end of year) 3,591 3,449 3,309 3,260 3,313
Number of banking offices 164 155 151 152 153
Number of automatic teller machines 224 181 150 139 137
==================================================================================================================================
* Adjusted to a taxable equivalent basis based on the statutory Federal
income tax rates, adjusted for applicable state income taxes net of the
related Federal tax benefit.
** Ratio of operating expenses to taxable equivalent net interest income
plus non-interest income. For 1995, calculation excludes $7.3 million of
merger-related expenses and $3.0 million gain on sale of branches in the
fourth quarter. For 1994, calculation excludes $9.7 million of losses in
the fourth quarter on sales of securities available for sale. For 1993,
calculation excludes the $10.0 million Foundation contribution.
*** Excludes loans 90 days or more past due on accrual.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The following is Management's discussion and analysis of First American
Corporation's results of operations and financial condition for 1995. It
should be read in conjunction with the consolidated financial statements and
accompanying notes and other data included herein. Tables 2 through 12
referred to in this discussion may be found on pages 48-56.
1995 ACQUISITIONS
Effective November 1, 1995, First American acquired Heritage Federal
Bancshares, Inc. ("Heritage") by exchanging approximately 2.9 million shares of
First American common stock for all of the outstanding shares of Heritage.
Heritage was merged with and into First American. Heritage was the holding
company for Heritage Federal Bank for Savings, a federal savings bank which was
merged into First American National Bank ("FANB") and which had $526 million of
assets and 13 offices primarily in the east Tennessee areas of Tri-Cities,
Anderson County, and Roane County. The transaction was accounted for as a
pooling of interests, and accordingly, prior year information has been restated
as if First American and Heritage had always been combined.
Effective December 1, 1995, First American acquired Charter Federal
Savings Bank ("Charter") by exchanging approximately 1.8 million shares of
First American common stock for all of the outstanding shares of Charter, a
federal savings bank headquartered in Bristol, Virginia, with $725 million of
assets and 27 branches (eight in Knoxville, Tennessee; five in Bristol,
Tennessee and Bristol, Virginia; and 14 in other locations in southwestern
Virginia). The transaction was accounted for as a purchase, and accordingly,
Charter has been reflected in the financial position and results of operations
of First American from the date of acquisition. Simultaneously with the
acquisition, the name of Charter was changed to First American Federal Savings
Bank ("FAFSB"). The Virginia branches of the Corporation are operated under
this legal entity.
OVERVIEW
Net income for 1995 was $103.1 million, or $3.64 per share, compared with
$97.2 million, or $3.39 per share, in 1994. Return on average assets ("ROA")
was 1.21% in 1995 and 1.25% in 1994 and return on average equity ("ROE") was
14.64% for 1995 and 15.09% in 1994.
Net income for 1995 was decreased by $7.5 million of expenses, net of tax,
related to the Heritage merger, or $.26 per share, and increased by a $1.9
million gain on the sale of two branches, net of tax, or $.06 per share. Net
income for 1994 was increased by a $6.1 million negative provision for loan
losses, net of tax, or $.22 per share, and reduced by $5.9 million of losses,
net of tax, or $.21 per share, in the fourth quarter on sales of securities
available for sale. With these transactions excluded in both years, net income
increased 12% to $108.7 million in 1995, or $3.84 per share, versus $97.0
million in 1994, or $3.38 per share; ROA was 1.27% in 1995 versus 1.25% in
1994; and ROE was 15.44% in 1995 and 15.06% during 1994.
Net interest income on a taxable equivalent basis increased 5% during 1995
to $315.8 million due primarily to loan growth. Average loans increased 15%
from 1994.
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GRAPH 1
GRAPH 2
19
22
GRAPH 3
GRAPH 4
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Non-interest income rose 11% to $105.5 million in 1995 from $95.4 million
in 1994 excluding the $3.0 million (pre-tax) gain on sale of branches for the
year ended December 31, 1995, and the $9.7 million (pre-tax) losses on sales of
securities available for sale recorded in the fourth quarter of 1994.
Excluding the $7.3 million of expenses (pre-tax) related to the Heritage merger
in the fourth quarter of 1995, non-interest expense increased 2% to $245.2
million in 1995 from $239.3 million in 1994. With these transactions excluded,
the operating efficiency ratio improved over 200 basis points from 60.25% in
1994 to 58.20% in 1995.
During 1995, FDIC insurance expense decreased $5.6 million from the 1994
level of $13.6 million due to a reduction in the assessment rate on a majority
of the Company's deposits from $.23 per $100 of deposits to $.04 per $100
effective June 1, 1995, for well capitalized institutions. Additionally,
effective January 1, 1996, this rate decreased to $.00 per $100 of deposits,
subject to the statutory requirement that banks pay at least $2,000 per year in
FDIC insurance premiums. The 1995 assessment rate for the Company's deposits
obtained through acquisitions of various thrift institutions insured by the
Savings Association Insurance Fund, however, remained $.23 per $100 of deposits
for well capitalized institutions.
During 1995 the ratio of net charge-offs to average loans outstanding was
.07% and at December 31, 1995, the ratio of nonperforming assets to total loans
and foreclosed properties was .46%. The $83 thousand provision for loan losses
in 1995 represents Heritage's provision expense recorded prior to its merger
with First American. This provision compares to a negative $9.9 million
(pre-tax) provision in 1994.
During 1995, First American entered into a definitive merger agreement
under which all of the outstanding shares of First City Bancorp, Inc. ("First
City") will be exchanged for approximately 1.1 million shares of First American
common stock. Of the total First American stock to be exchanged in the
transaction, up to 100% may be repurchased in the open market. First City is a
bank holding company headquartered in Murfreesboro, Tennessee which operates
two Tennessee state chartered banks and a consumer finance company. As of
December 31, 1995, First City had $361 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 First City's shareholders. The transaction will be accounted for
as a purchase.
In September 1995, First American entered into an agreement to purchase
49% of the stock of The SSI Group, Inc. ("SSI"), a healthcare payments
processing company, for approximately $8.6 million. The transaction is
expected to be completed during the first quarter of 1996 and is anticipated to
be accounted for under the equity method of accounting.
TABLE 1 presents selected financial data for First American for the past
five years. A more detailed discussion and analysis of the 1995 results of
operations and financial condition follows.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income on a taxable equivalent basis represented 74% of total
revenues in 1995 and 78% in 1994. For purposes of this discussion, total
revenues consist of the sum of net interest
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income and non-interest income. Net interest income in 1995 was $315.8 million,
up $14.1 million, or 5%, from $301.7 million in 1994. Net interest income is
the difference between total interest income earned on loans, securities and
other earning assets and total interest expense incurred on deposits and other
interest-bearing liabilities. Throughout this discussion, tax-exempt interest
income has been adjusted to a fully taxable equivalent basis in order to be
comparable to interest income which is subject to Federal income tax. This
adjustment has been calculated using a Federal income tax rate of 35%, adjusted
for applicable non-deductible interest expense (for tax purposes) to purchase or
carry tax-exempt obligations.
National and international interest rates significantly impact the market
rates First American charges for loans, earns on investment securities, and
pays on interest-bearing liabilities. The average national prime lending rate
and certain longer-term market indices directly impact market rates charged on
new loans and existing adjustable rate loans. Yields on many of the Company's
newly purchased debt securities are affected by Treasury securities yields.
Rates paid on interest-bearing liabilities are primarily impacted by changes in
the Federal funds rate, LIBOR (London Interbank Offering Rate) and certain
longer-term indices. Competitive factors also impact yields on earning assets
and rates paid on interest-bearing liabilities.
Most external interest rates were higher on average for 1995 than 1994.
During years in which average external interest rates increase, First
American's average yields on earning assets and rates paid on interest-bearing
liabilities will generally rise. The increase will not be precisely the same
magnitude nor will it occur at the same time as increases in external indices.
This is because some of First American's earning assets and interest-bearing
liabilities do not reprice immediately or at the same time upon a change in
external rates. The following chart compares selected average interest rates
for 1995 and 1994 and rates in effect on December 31, 1995 and 1994.
=========================================================================================================================
Selected External Interest Rates Average Rates During Rates at December 31
-------------------- --------------------
1995 1994 Increase 1995 1994 Increase
-------------------- -------- -------------------- --------
Prime - daily 8.83% 7.15% 1.68 8.50% 8.50% -
Federal funds - daily 5.83 4.21 1.62 5.48 5.45 .03
LIBOR (London Interbank Offering Rate) -
3 month 6.02 4.87 1.15 5.63 6.50 (.87)
Treasury security yields:
3 month 5.63 4.40 1.23 5.08 5.69 (.61)
6 month 5.75 4.88 .87 5.15 6.49 (1.34)
1 year 5.94 5.32 .62 5.21 7.21 (2.00)
3 year 6.25 6.27 (.02) 5.29 7.79 (2.50)
5 year 6.38 6.69 (.31) 5.44 7.81 (2.37)
Conventional 30-year fixed-rate first mortgages 7.95 8.35 (.40) 7.11 9.18 (2.07)
=========================================================================================================================
Interest income, interest expense and the resulting net interest income
are all impacted by fluctuations in the volume and mix of earning assets and
interest-bearing liabilities and the corresponding interest yields and rates
paid. TABLE 2 highlights the effect that changes in volume, mix and rates had
on net interest income from 1994 to 1995 and from 1993 to 1994. TABLE 3
presents detailed average balance sheets, taxable equivalent interest income,
interest expense, and corresponding yields and rates for the past five years.
Interest income was $623.2 million in 1995, an increase of $112.7 million,
or 22%, from $510.5 million during 1994. Of the $112.7 million increase, $55.9
million was due to a higher volume of earning assets (primarily loans) and
$56.8 million resulted from an increase in average yields.
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First American's two primary types of earning assets are loans and
securities. During 1995, average earning assets rose $779.3 million, or 11%,
to $7.90 billion from $7.12 billion in 1994. Average loans increased $741.0
million, or 15%, to $5.59 billion during the year ended December 31, 1995, from
$4.85 billion during 1994. Average total securities increased $29.2 million,
or 1%, to $2.19 billion in 1995 from $2.16 billion during 1994. During the
year ended December 31, 1995, loans averaged 70.8% of total earning assets and
securities averaged 27.7%. During 1994, loans averaged 68.1% of total earning
assets and securities averaged 30.3% of earning assets. Changes in average
balances and other pertinent items are discussed in more detail under the
captions "Securities" and "Loans."
The average yield on earning assets rose 72 basis points during 1995 to
7.89% from 7.17% during 1994. The average yield on loans increased 70 basis
points to 8.45% during 1995. The average yield on total securities increased
56 basis points in 1995 to 6.58% from 6.02% during 1994. The increase in the
average yields on earning assets reflected a higher interest rate environment
on average during 1995 compared to 1994, especially for short-term rates. For
example, the prime rate averaged 8.83% during 1995 versus 7.15% in 1994,
three-month LIBOR averaged 6.02% in 1995 compared to 4.87% during 1994, and the
one-year Treasury bill yield averaged 5.94% in 1995 versus 5.32% during 1994.
However, average Treasury securities yields beyond the one-year maturity
generally decreased. Since First American's earning assets include a
combination of adjustable rate instruments with various repricing terms and
fixed rate loans and securities with varying maturities which do not reprice
upon a change in external rates, a portion of the impact of a change in
external rates occurs immediately and the remaining impact occurs as loans
repay and securities mature or are sold.
Interest expense was $307.4 million in the year ended December 31, 1995,
an increase of 47% over interest expense of $208.8 million in 1994. Of the
$98.6 million increase, $71.9 million was due to higher average rates paid on
interest-bearing liabilities and $26.7 million resulted from increased volumes
of interest-bearing liabilities.
During 1995, average interest-bearing liabilities increased $748.7
million, or 13%, to $6.61 billion from $5.86 billion in 1994. Average
interest-bearing deposits grew $413.7 million, or 8%, to $5.43 billion, average
short-term borrowings increased $151.6 million, or 20%, to $892.0 million and
average long-term debt increased $183.4 million, or 168%, to $292.4 million.
Changes in average balances and other relevant information are discussed in
more detail under the captions "Deposits" and "Other Borrowed Funds."
The average cost of interest-bearing liabilities in 1995 rose 109 basis
points to 4.65% from 3.56% during 1994. For the year ended December 31, 1995,
the average rate on interest-bearing deposits increased 94 basis points to
4.40%, the average rate on short-term borrowings rose 172 basis points to
5.57%, and the average rate on long-term debt increased 35 basis points to
6.83%. The increase in the average rates on interest-bearing deposits and
short-term borrowings primarily reflected higher average short-term rates. For
example, the Federal funds rate averaged 5.83% during 1995 compared to 4.21% in
1994. Increases in external short-term rates tend to have an immediate impact
on interest rates of First American's money market accounts and short-term
borrowings and a delayed effect on certificates of deposit, which have varying
fixed rate maturities, and NOW and regular savings accounts, which tend to be
less interest-sensitive on a short-term basis than money
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market accounts. To the extent that First American has utilized derivatives to
change a variable rate obligation to a fixed rate obligation, a change in
external interest rates generally did not have an immediate impact on the
Company's total borrowing costs including the effects of derivatives. This
topic is discussed under the caption "Derivatives." The increase in interest
rates on First American's long-term debt primarily reflected the increase in
average interest rates in 1995 over 1994 of Federal Home Loan Bank advances with
interest rates tied to one-month LIBOR.
Net interest income increased primarily as a result of the increase in the
volume of earning assets partially offset by a lower net interest spread. Net
interest spread is the difference between the average yield on earning assets
and the average rate on interest-bearing liabilities. First American's net
interest spread decreased from 3.61% in 1994 to 3.24% in 1995. This 37 basis
point decline reflects the 109 basis point increase in the rates paid on
interest-bearing liabilities which exceeded the 72 basis point increase in
yields on earning assets.
As the Company's net interest spread declined, the net interest margin,
which is net interest income expressed as a percentage of average earning
assets, decreased 24 basis points to 4.00% in 1995 from 4.24% in 1994. The
primary factor leading to the decline in net interest margin was the change in
the mix of deposits and other interest-bearing liabilities away from demand
deposits, NOW accounts, and regular savings toward funding sources with higher
interest rates. Average non-interest bearing demand deposits represented 14.1%
of average earning assets during 1995 compared to 16.5% in 1994. Average NOW
accounts comprised 10.2% of average earning assets during 1995 versus 12.3% in
1994 and had average interest rates of 2.00% and 1.99%, respectively, during
1995 and 1994. Regular savings averaged 5.1% of average earning assets in
1995, down from 7.2% in 1994, and had average interest rates of 2.38% during
1995 and 1994. All other interest-bearing liabilities averaged 68.4% of
earning assets during 1995, up from 62.8% in 1994, and had average
interest-rates of 5.22% and 4.01%, respectively, during 1995 and 1994. The net
interest margin also declined due to the increase in average external interest
rates during 1995 which caused the average rates on interest-bearing
liabilities to increase initially at a faster pace than the Company's ability
to increase average yields on interest-earning assets since, in aggregate, the
interest-bearing liabilities tend to reprice faster than interest-earning
assets. Additionally, the Heritage and Charter acquisitions negatively
affected the net interest margin since the net interest margins of those
companies were lower than First American's. The competitive environment also
put downward pressure on the net interest margin.
Management currently anticipates net interest income will increase in 1996
due to expected growth in earning assets (primarily loans). However, it is
also anticipated that the net interest margin will decline in 1996 due to
continued competitive pressures, a shift in the mix of deposits and other
interest-bearing liabilities away from demand deposits, NOW accounts, and
regular savings toward more expensive funding sources, and the impact of the
1995 and 1996 acquisitions since the acquired institutions had or have lower
net interest margins than First American. Though the acquisitions may
initially have a negative impact on the net interest margin, by redeploying
proceeds from sales of lower yielding securities into higher yielding loans and
other earning assets or by reducing certain interest-bearing liabilities, over
time the acquisitions should mirror the Company's net interest margin exclusive
of acquisitions. Though the net interest margin for all of 1996 is expected to
be lower than 1995, the net interest margin is anticipated to reach a low point
in the first quarter of 1996 and then
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begin trending upward due to repositioning the earning assets of recent
acquisitions and other factors, assuming external conditions do not deviate
significantly from expectations.
Management continues to concentrate on improving loan pricing, reducing
funding costs, improving the mix of earning assets, increasing the ratio of
earning assets to total assets, and managing interest rate sensitivity. The
various techniques used to assist in managing the Company's balance sheet and
interest rate sensitivity are discussed under the caption "Asset/Liability
Management."
PROVISION FOR LOAN LOSSES
This topic is addressed under the caption "Allowance and Provision for
Possible Loan Losses."
NON-INTEREST INCOME
Non-interest income of $108.5 million in 1995 increased $22.8 million, or
27%, from 1994. Non-interest income represented 26% of total revenues during
1995 compared to 22% in 1994. The increase in non-interest income in 1995 over
1994 was due in large part to losses on sales of securities available for sale
during the fourth quarter of 1994 when $85 million of securities available for
sale were sold at a $9.7 million loss in order to improve the Company's overall
interest sensitivity by reinvesting the proceeds of these depreciated
securities in higher yielding securities with shorter maturities. Also
contributing to the 1995 increase in non-interest income was a $3.0 million
gain on the sale of two branches in the fourth quarter of 1995. There were no
branch sales in 1994. Non-interest income, excluding the 1995 gain on branches
sold, totalled $105.5 million for 1995, an increase of $10.1 million, or 11%,
from $95.4 million in 1994, excluding the $9.7 million securities loss in the
fourth quarter of 1994.
The increase in non-interest income excluding the above transactions was
primarily attributable to increases in service charges on deposit accounts
($4.9 million, an 11% increase); "other income" ($1.8 million, a 7% increase);
and investment services income ($.9 million, a 9% increase). The increase in
service charges on deposit accounts was primarily due to 12% growth in the
average number of retail deposit accounts. "Other income" for 1995 included a
$1.7 million increase in interchange fees from the Check Card introduced in
late 1994, a $1.1 million increase in income and fees related to selling and
servicing residential mortgage loans, and a net decrease in the various other
classifications within "other income." The improvement in investment services
income over 1994 resulted principally from growth in institutional brokerage
commissions and retail commissions related to mutual fund sales.
Management currently expects non-interest income to increase in 1996, as
generating more fee income from existing products and developing new sources of
fee income are two key objectives over the next several years. The Company's
goal is for non-interest income to grow at least 15% next year.
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NON-INTEREST EXPENSE
Non-interest expense increased $13.1 million, or 5%, during 1995 to $252.4
million from $239.3 million in 1994. A significant portion of the increase was
due to $7.3 million of merger-related expenses paid for various items from the
Heritage merger such as employee severance, systems conversions, investment
banking and other professional fees. Exclusive of the Heritage merger-related
expenses, 1995 non-interest expense increased $5.8 million, or 2%.
Salaries and employee benefits increased $8.3 million, or 6%, for the year
ended December 31, 1995, to $143.9 million, primarily due to merit increases
and higher incentive compensation. The number of full-time equivalent
employees increased to 3,591 at December 31, 1995, from 3,449 at December 31,
1994, primarily as a result of the Charter acquisition on December 1, 1995.
Approximately 190 former Charter employees were included in the Company's total
3,591 employees at December 31, 1995. Exclusive of the Charter acquisition,
the number of full-time equivalent employees decreased by 48 in part due to the
elimination of duplicate functions after the Heritage acquisition.
FDIC insurance expense decreased $5.6 million to $8.0 million in 1995 from
$13.6 million in 1994 due to a reduction in the assessment rate on a majority
of the deposits from $.23 per $100 of deposits to $.04 per $100 effective June
1, 1995, for well-capitalized institutions. Effective January 1, 1996, FDIC
premiums for the Bank Insurance Fund ("BIF") for well-capitalized institutions
decreased to $.00 per $100 of deposits, subject to the statutory requirement
that all institutions pay at least $2,000 annually for bank deposits. The
Company's deposit liabilities include approximately $1.20 billion of deposits
which were obtained through the acquisitions of various thrift institutions
that are insured by the Savings Association Insurance Fund ("SAIF"). During
1995 the rate charged on SAIF insured deposits for well-capitalized
institutions remained at $.23 per $100 of deposits.
The SAIF fund is undercapitalized as a result of losses sustained by the
S&L industry during the late 1980's and early 1990's. While failures of thrift
institutions have diminished during the past two years, the premiums charged on
SAIF deposits have not adequately recapitalized the fund because of interest
paid on debt incurred to pay depositors of failed institutions. To adequately
capitalize the SAIF fund, Congress has proposed legislation to levy a one-time
assessment on SAIF deposits. While this proposed legislation has not been
enacted into law, various proposals generally would require payment of up to 85
basis points on SAIF deposits. Under what is believed to be the most widely
accepted proposal, banks that obtained SAIF deposits through acquisitions (where
the FDIC premium is computed under the "Oakar Amendment" to the Federal Deposit
Insurance Act) would receive a 20% discount to allow for deposit runoff that
occurs subsequent to acquisitions. The discount would apply to the SAIF
deposits acquired by FANB. This proposal is part of the 1996 Budget
Reconciliation Act and as of year-end 1995 had not been signed into law. Should
passage of such legislation occur, the Company is expected to record a one-time
charge estimated to be approximately $5.5 million, net of tax. In addition, the
proposal would impose up to a 2.5 basis point annual charge on all insured
deposits of depository institutions in order to pay interest on the debt
incurred by the Financing Corporation. Should this become effective, it will
increase the Company's total BIF and SAIF premiums in 1996 over currently
anticipated amounts by $1.1 million, net of tax, based on deposits at December
31, 1995.
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GRAPH 5
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Systems and processing expense increased $1.5 million, or 16%, to $11.4
million during 1995 due to an increase in processing expense related to the
Check Card introduced in late 1994, higher processing charges related to
increased volume levels, and a variety of projects for system enhancements.
Marketing expenses increased $.8 million, or 9%, and communication expenses
increased $1.3 million, or 15%, primarily due to direct mail campaigns
promoting First American's new Check Card, a new consumer bank service called
"Loan by Phone," several new small business loan products, and several
existing money market and checking account products. Other expenses decreased
$1.7 million, or 6%.
The operating efficiency ratio represents the ratio of operating expenses
to taxable equivalent net interest income plus non-interest income. Exclusive
of the impact of $7.3 million of merger-related expenses on non-interest
expense and the effect on non-interest income of the $3.0 million gain on sale
of branches, First American's 1995 operating efficiency ratio improved to
58.20%, which is the equivalent of spending $58.20 to earn $100 of revenues.
The ratio was 60.25% in 1994 (exclusive of the impact on non-interest income of
the $9.7 million of losses on securities available for sale realized in the
fourth quarter of 1994). Management continues to emphasize expense control as
a means to improve efficiency and profitability. Our near-term objective is to
improve the operating efficiency ratio to less than 57% for 1997 for First
American's banking operations.
INCOME TAXES
Income tax expense in 1995 was $65.2 million, which resulted in an
effective tax rate of 38.7% of pre-tax income. Income tax expense for 1994 was
$57.4 million which resulted in an effective tax rate of 37.1% of pre-tax
income. The lower effective tax rate for 1994 was attributable to a decrease
of $1.3 million related to the net change in the valuation allowance determined
under Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes." The effective tax rate for 1994 without regard to this item
was 38.0% of pre-tax income. For additional information on income taxes of the
Company see NOTE 12 to the consolidated financial statements.
ASSET/LIABILITY MANAGEMENT
INTEREST RATE SENSITIVITY
The purpose of managing First American's interest rate sensitivity is to
maintain growth in net interest income while limiting exposure to the
potentially adverse effects of changes in interest rates. Through this
process, Management seeks to maximize net interest income within liquidity,
capital, and interest rate risk constraints. Asset/liability management is the
responsibility of the Asset/Liability Committee, which is comprised of senior
executives of First American. The Committee regularly reviews First American's
balance sheet, net interest income performance, and forecasts of net interest
income under numerous alternative simulated interest rate environments. The
objective of the review is to identify risks and opportunities relative to
balance sheet and margin strategies. Additionally, the Committee formulates
and monitors compliance with policies and guidelines relating to interest rate
sensitivity.
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An important tool used in this process is the earnings simulation model.
The model captures earning assets, interest-bearing liabilities and
off-balance-sheet financial instruments and combines the various factors
affecting interest rate sensitivity into an earnings projection that
incorporates the Asset/Liability Committee's forecast of the most likely
interest rate environment for the next 12 months. Interest rate sensitivity is
determined by assessing the impact on net interest income of multiple rising
and falling interest rate scenarios. The model is updated at least monthly and
more often as considered necessary.
Management's asset/liability objective is to manage the interest
sensitivity position so that net income will not be impacted more than 5% for
interest rates varying up to 150 basis points from the Committee's most likely
interest rate forecast over the next 12 months. A 5% impact on net income
corresponds approximately to a 2.5% impact on net interest income. Throughout
1995, First American operated within this guideline. The Asset/Liability
Committee's assessment of the most likely interest rate scenario includes
decreases in the prime and Federal funds rates during the first half of 1996
with essentially stable interest rates during the remainder of the year.
Another measure of interest rate sensitivity is the "static gap" approach,
which compares the volume of assets to the volume of liabilities subject to
repricing over a series of future time periods. TABLE 4 presents First
American's interest rate sensitivity at December 31, 1995 and 1994, and
reflects that First American was positioned more favorably in both cases for a
lower interest rate environment than for a higher interest rate environment.
At December 31, 1995, the net of interest-earning assets and interest-bearing
liabilities repricing in a one-year period as a percent of earning assets was a
cumulative net liability sensitivity of 12.9%. In other words, based on the
December 31, 1995, balance sheet, the amount of liabilities repricing in 1996
in excess of the amount of assets repricing in 1996, together with the effect
of related off-balance-sheet activities, was $1,147.4 million, or 12.9% of all
earning assets. This compares with a cumulative one-year repricing net
liability sensitivity of $949.7 million, or 12.6%, at year-end 1994.
For interest rate sensitivity purposes, First American classifies regular
savings, NOW, and money market deposits, which in aggregate amounted to $3.22
billion at December 31, 1995, as immediately rate-sensitive since none of these
deposits carry contractual rate guarantees or early withdrawal penalties. The
classification of regular savings and NOW accounts as immediately
rate-sensitive is, in the opinion of Management, a conservative approach in
measuring maximum interest rate sensitivity since, based on past experience,
rates paid on regular savings and NOW balances ($1.19 billion at December 31,
1995) have generally not been immediately interest rate sensitive. If NOW and
regular savings accounts were not considered interest-sensitive, the cumulative
one-year repricing difference at December 31, 1995, would have been $41.2
million net asset interest-sensitive, or .5% of earning assets.
DERIVATIVES
Generally, a derivatives transaction is a bilateral contract or payments
exchange agreement whose value derives from the value of an underlying asset or
underlying reference rate or index. First American has utilized
off-balance-sheet derivative products for a number of years in managing its
interest rate sensitivity. The use of non-complex, non-leveraged derivative
products has reduced the Company's exposure to changes in the interest rate
environment. By using derivatives, such as
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interest rate swaps and futures contracts, to alter the nature of (hedge)
specific assets or liabilities on the balance sheet (for example, to change a
variable rate obligation to a fixed rate obligation), the derivative products
offset fluctuations in net interest income from the otherwise unhedged
position. In other words, if net interest income from the otherwise unhedged
position changes (increases or decreases) by a given amount, the derivative
product should produce close to the opposite result, making the combined amount
(otherwise unhedged position impact plus the derivative product position
impact) essentially unchanged. Derivative products have enabled First American
to improve its balance between interest-sensitive assets and interest-sensitive
liabilities by managing interest rate sensitivity, while continuing to meet the
credit and deposit needs of customers.
In aggregate, many of First American's securities and loans with fixed
rates may be funded with variable rate money market deposits. Consequently,
net interest income can be negatively affected if short-term interest rates
rise quickly. To reduce this exposure, the Company has entered into interest
rate swaps on which the Company pays a fixed rate and receives a variable rate
tied to three-month LIBOR. Thus, these swaps act to "fix" the rates paid on a
portion of the money market account balances for the period of time covered by
the swaps, which in turn reduces the potential negative impact on net interest
income of rising interest rates. First American also utilizes short positions
in exchange-traded Eurodollar futures contracts that are the economic
equivalent of fixed-pay interest rate swaps. NOTE 15 to the consolidated
financial statements presents the derivative financial instruments outstanding
at December 31, 1995 and 1994.
At December 31, 1995, First American had interest rate swaps with notional
values totalling $1.40 billion and futures contracts with notional values of
$140 million. At December 31, 1995, these derivatives had net negative fair
values (unrealized net pre-tax losses) of $14.1 million. Notional amounts are
key elements of derivative financial instrument agreements. However, notional
amounts do not represent the amounts exchanged by the parties to derivatives
and do not measure First American's exposure to credit or market risks. The
amounts of payments exchanged are based on the notional amounts and the other
terms of the underlying derivative agreements. At December 31, 1994, the
Company had interest rate and basis swaps with notional values totalling $1.70
billion. These derivatives had a total of $17.9 million of net positive fair
values (unrealized net pre-tax gains) at December 31, 1994. For estimated fair
value information related to all financial instruments, see NOTE 17 to the
consolidated financial statements.
As First American's individual derivative contracts approach maturity,
they may be terminated and replaced with derivatives with longer maturities
which offer more interest rate risk protection. NOTE 15 to the consolidated
financial statements presents the net deferred gain related to terminated
derivative contracts. The net deferred gain totalled $.5 million at December
31, 1995, and $6.2 million at December 31, 1994. Deferred gains and losses on
off-balance-sheet derivative activities are recognized as interest income or
interest expense over the original covered periods. Of the $.5 million of net
deferred gain at December 31, 1995, $4.5 million of net deferred losses will
reduce net interest income during 1996 and $5.0 million of net deferred gains
will be recognized in the years 1997 to 1999.
Net interest income for the year ended December 31, 1995, included
derivative products net income of $3.6 million, consisting of $2.2 million in
additional interest income on loans, $.1 million increase in interest income on
securities, $3.2 million reduction in interest expense on money market
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deposits, and $1.9 million in additional interest expense on long-term debt.
This compares to $4.3 million of derivatives products net expense in 1994 which
consisted of $1.4 million in additional interest income on loans, $.7 million
reduction in interest income on securities, $4.6 million additional interest
expense on money market deposits, and $.4 million in additional interest
expense on long-term debt.
The derivative products net income (expense) represents the net of all
income and expenses related to derivatives. For example, when First American
enters into an interest rate swap linked to money market deposits, it typically
pays a fixed rate that is higher than the initial variable rate it receives.
The net difference is a component of derivative products expense. If the index
rate, which is generally 3-month LIBOR, increases, the out-of-pocket cost of
the contract declines while the fair value of the contract increases. If First
American terminates its position in the contract prior to maturity as part of
its strategy in managing interest rate risk, any gain or loss is deferred and
amortized over the remaining period of the original maturity of the derivative
contract. The amortization of deferred gains and losses is also a component of
derivative products income or expense. The change in derivative products net
expense in 1994 to net income in 1995 reflected primarily the amortization of
deferred gains on terminated derivatives contracts and the increase in average
short-term rates in 1995 compared to 1994.
All derivatives activity is conducted under close Management and Board of
Directors supervision and according to detailed policies and procedures
governing these activities. Policy prohibits the use of leveraged and complex
derivatives. The Board also sets interim limitations on the total notional
amount of derivatives contracts that may be outstanding at any time.
Off-balance-sheet derivative activities give rise to credit risk when
interest rate changes move in the Company's favor. In such cases, First
American relies on the ability of the contract counterparts to make contractual
payments over the remaining lives of the contracts. Credit risk exposure due
to off-balance-sheet derivative activities is closely monitored, and
counterparts to these contracts are selected on the basis of their credit
worthiness, as well as their market-making ability. As of December 31, 1995,
all outstanding derivative transactions were with counterparts with credit
ratings of A-2 or better. Enforceable bilateral netting contracts between
First American and its counterparts allow for the netting of gains and losses
in determining net credit exposure. First American's net credit exposure on
outstanding interest rate swaps was $.2 million on December 31, 1995.
FINANCIAL CONDITION
SECURITIES
Securities generated 23% of total taxable equivalent interest income for
the year ended December 31, 1995 compared to 25% in the year before. In
addition to producing interest income, the securities portfolio satisfies
pledging requirements on deposits and borrowings and is an important component
of asset/liability, interest rate sensitivity and liquidity management, which
are discussed in more detail under the captions "Asset/Liability Management" and
"Liquidity."
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First American's total securities portfolio of $2,133.6 million at
December 31, 1995, consisted of $1,202.5 million of securities available for
sale (market value) and $931.1 million of securities held to maturity
(amortized cost). This compares to a total securities portfolio of $2,333.3
million at December 31, 1994, which consisted of $689.4 million of securities
available for sale and $1,643.9 million of securities held to maturity. The
$712.8 million decrease in securities held to maturity and $513.1 million
increase in securities available for sale included the 1995 transfers of
approximately $694.0 million of securities from the classification of held to
maturity to available for sale, which are discussed in more detail in NOTE 4 to
the consolidated financial statements. Additionally, Management determined
that it had the intent and ability to hold to maturity $203.7 million of
securities purchased during 1995, which was less than the maturities of $273.9
million of held to maturity securities. Also during 1995, sales and maturities
of available for sale securities exceeded purchases of those securities by
$456.0 million.
Although total securities decreased $199.7 million, or 9%, to $2.13
billion at December 31, 1995, total average securities increased $29.2 million,
or 1%, to $2.19 billion during 1995 from $2.16 billion during 1994. The
increase in total average securities reflects differences in the timing of
maturities, sales, and purchases of securities in 1995 compared to 1994.
The average estimated maturity of the total securities portfolio was 4.0
years at December 31, 1995 (1.9 years for securities held to maturity and 5.7
years for securities available for sale), compared with 4.5 years at year-end
1994 (4.3 years for securities held to maturity and 4.9 years for securities
available for sale). The expected maturity for government and corporate
securities is the stated maturity, and the expected maturity for
mortgage-backed securities is based on current estimates of average maturities,
which include prepayment assumptions. In addition, many of the Company's
security holdings are floating rate, repricing at intervals as short as monthly
and as long as annually. The average repricing life of the total securities
portfolio was 1.9 years at December 31, 1995 (1.7 years for securities held to
maturity and 2.1 years for securities available for sale) compared with 2.4
years at December 31, 1994 (2.8 years for securities held to maturity and 1.4
years for securities available for sale). TABLE 5 presents the estimated
average maturity, average repricing life, and weighted average yields for
securities held to maturity and securities available for sale at December 31,
1995.
All mortgage-backed securities classified as U.S. Government agencies and
corporations were issued or guaranteed by the Government National Mortgage
Association ("Ginnie Mae"), the Federal National Mortgage Association ("Fannie
Mae"), or the Federal Home Loan Mortgage Corporation ("Freddie Mac").
Essentially all other mortgage-backed securities consisted of Planned
Amortization Class ("PAC") collateralized mortgage obligations ("CMOs"), which
were purchased because of their high credit quality and relatively certain
average lives. On December 31, 1995, mortgage-backed security holdings
included $419.4 million of floating rate mortgage-backed securities, of which
$23.1 million were classified as held to maturity and $396.3 million were
classified as available for sale. At year-end 1995, over 99.9% of the
Company's debt securities were investment grade with the remaining .1% unrated.
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LOANS
Loans represent First American's largest component of earning assets,
producing 76% of interest income for the year ended December 31, 1995, compared
to 74% during 1994. During 1995, average loans increased $741.0 million, or
15%, to $5.59 billion from $4.85 billion. The Charter acquisition on December
1, 1995 resulted in a $412.5 million increase in total loans but caused average
loans in 1995 to increase only $34.4 million.
The increase in average loan volume was primarily a reflection of focused
sales efforts, effective marketing, and the positive economic conditions in
Tennessee and selected markets in adjacent states. The U.S. economy continued
its expansion in 1995 although at a slower pace than in 1994. During 1995, the
economies of Tennessee and other southeastern states continued to outperform
the U.S. economy in a number of categories. Management currently expects loan
growth, exclusive of acquisitions, to continue in 1996, although at a slower
pace than 1995.
TABLE 12 presents end of period loan balances by category for the past
five years. TABLE 6 presents the maturities of loans, exclusive of consumer
loans, outstanding at December 31, 1995.
Average commercial loans increased $489.3 million, or 24%, to $2.53
billion during 1995 from $2.04 billion during 1994. During 1995 and 1994,
commercial loans averaged 45% and 42% of total loans, respectively.
The increase in the average balances of commercial loans occurred over a
broad range of industry categories with especially strong lending growth to
companies in health care, transportation, wholesale trade, retail, and
manufacturers of machinery, transportation equipment, and fabricated metals.
First American's continued emphasis on a concentrated, organized sales effort
with effective administrative support and responsive credit decisions
contributed to the increase in average loans in 1995 over 1994. Also
contributing were marketing campaigns tailored for specific markets, such as
the direct mail campaign coupled with branch-level advertising promoting
owner-occupied commercial mortgages for small businesses. The positive
economic conditions in the Company's primary markets also supported First
American's commercial loan growth. First American's commercial loan growth in
1995 allowed it to remain a market leader in the state of Tennessee in the
arenas of small business (revenues under $10 million) and middle markets
(revenues of $10 million to $100 million).
Consumer loans, which consist of consumer amortizing mortgages and other
consumer loans, averaged $2.59 billion during 1995, as compared with $2.36
billion during 1994, an increase of $236.9 million, or 10%. Total average
consumer loans were 46% of total loans at December 31, 1995, compared with 49%
at year-end 1994.
Average consumer amortizing mortgages, which consist principally of
residential mortgages, increased $152.5 million, or 11%, to $1.48 billion
during 1995 from $1.33 billion during 1994. This increase resulted primarily
from increases in new and existing home sales in First American's markets.
Average consumer amortizing mortgages comprised 26% of First American's total
loans during 1995 compared to 27% in 1994.
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GRAPH 6
34
37
Average other consumer loans increased $84.4 million, or 8%, to $1.11
billion during 1995 from $1.03 billion during 1994. Of the $84.4 million
increase in average other consumer loans, approximately $43 million resulted
from an increase in automobile installment loans, approximately $10 million was
due to higher student loans, and the remainder of the increase resulted from
various other consumer loan categories. Average consumer-other loans
represented 20% of First American's total average loans during 1995 and 22% in
1994.
In the second quarter of 1995, First American reintroduced credit cards
after being out of that market since 1990. The Company's principal subsidiary,
FANB, entered into two related agreements, one with a third party marketing and
program management organization and the other with a processing and servicing
organization. Under these agreements, FANB owns the credit card receivables
and is responsible for credit losses and a portion of marketing costs. The
marketing and management organization receives portfolio fee income and is
responsible for marketing campaigns, general program management, and losses
incurred as the result of fraud. The processing and servicing organization is
responsible for billing, collections, and evaluating credit applications in
accordance with FANB's credit criteria. Though credit card receivables
averaged only $4.2 million during 1995, such balances grew to $17.6 million by
December 31, 1995.
Commercial real estate loans, which include real estate construction and
real estate commercial mortgages, increased 3%, or $14.8 million, to average
$473.1 million during 1995 compared with an average of $458.3 million during
1994. There have been, and continue to be, selective opportunities for
commercial real estate lending in First American's markets. However,
commercial real estate lending is not a high priority market for First
American. Average total commercial real estate loans represented 9% of total
loans during 1995 compared with 9% during 1994.
First American's loans are predominantly to borrowers residing in or doing
business in Tennessee, Virginia, Kentucky, and selected markets in other
adjacent states. First American seeks to exercise prudent risk management in
lending, including diversification by loan category and by industry segment, as
well as by identification of credit risks. The Company's lending activities
are performed by relationship managers organized by broad industry
classification. Based on Standard Industrial Classification ("SIC") codes,
there were no industry concentrations within the commercial loan category in
excess of 10% of total loans, at December 31, 1995 and 1994.
First American's ten largest outstanding loan relationships at December
31, 1995, amounted to $238.3 million, or 4% of total loans, compared to $210.4
million, or 4% of total loans, at year-end 1994. At December 31, 1995, the
largest loan relationship had $38.2 million outstanding, which compared to the
regulatory legal lending limit for FANB of $121 million at December 31, 1995.
First American had $1.6 million international loans outstanding at
December 31, 1995, and $.6 million at December 31, 1994. During both years,
such loans were principally related to foreign entities with operations in
Tennessee.
NOTE 15 to the consolidated financial statements discusses
off-balance-sheet loan commitments and risks.
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ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSSES
Management's policy is to maintain the allowance for possible loan losses
at a level which is adequate to absorb estimated loan losses inherent in the
loan portfolio. The provision for loan losses is a charge (credit) to earnings
necessary, after loan charge-offs and recoveries, to maintain the allowance at
an appropriate level. The level of the allowance is determined on a quarterly
basis using procedures which include: (1) categorizing commercial and
commercial real estate loans into risk categories to estimate loss
probabilities based primarily on the historical loss experience of those risk
categories; (2) analyzing significant commercial and commercial real estate
credits and calculating specific reserves as necessary; (3) assessing various
homogeneous consumer loan categories to estimate loss probabilities based
primarily on historical loss experience; (4) reviewing unfunded commitments;
and (5) considering various other factors, such as changes in credit
concentrations, loan mix, and economic conditions which may not be specifically
quantified in the loan analysis process. Determining the appropriate level of
the allowance and the amount of the provision for loan losses involves
uncertainties and matters of judgment and therefore cannot be determined with
precision.
The 1995 provision for loan losses of $83 thousand was recorded by
Heritage prior to its merger with First American. Aside from this provision,
First American recognized no provision for loan losses in 1995 under the
methodology generally described above. The primary contributing factors for
this provision level in 1995 were the continued favorable levels of asset
quality as discussed under the caption "Asset Quality" and relatively low net
loan charge-off experience discussed below. During 1994, the allowance
assessment process described above produced a $9.9 million negative provision.
During the years ended December 31, 1995 and 1994, total loan charge-offs
were $18.8 million and $15.9 million, respectively, while total recoveries
amounted to $15.1 million and $18.0 million, respectively, resulting in net
charge-offs of $3.7 in 1995 and net recoveries of $2.1 million in 1994. The
ratio of net charge-offs to average loans was .07% in 1995 and the ratio of net
recoveries to average loans was .04% in 1994. Management anticipates an
increase in net charge-offs in 1996 compared to 1995 principally due to
increasing consumer-other loan balances and related delinquencies and fewer
recoveries.
Of the major loan categories, consumer-other had the highest net
charge-offs in both 1995 and 1994. Consumer-other loans represent various
categories of consumer loans, except residential mortgages, and include
installment loans, credit lines, student loans, and credit cards. Net
charge-offs for consumer-other loans were $6.8 million, or .61% of average
consumer-other loans, during 1995 and were $2.0 million, or .20% of average
consumer-other loans, during 1994. At December 31, 1995, past due
consumer-other loans were .99% of total consumer-other loans compared to .73%
at December 31, 1994. First American generally charges off consumer loans on
which principal or interest is past due more than 120 days. Additionally, the
Company generally charges off the entire loan balance for consumers who declare
bankruptcy.
Future provisions for loan losses depend on such factors as asset quality,
net loan charge-offs, loan growth and other criteria discussed above. The
appropriate level of the allowance for possible loan losses and the
corresponding provision will continue to be determined quarterly based on the
36
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GRAPH 7
GRAPH 8
37
40
allowance assessment methodology. Management currently does not anticipate
there will be a significant provision for possible loan losses in 1996.
However, changes in circumstances affecting the various factors of the
Company's methodology could significantly affect the amount of the 1996
provision.
The allowance for possible loan losses was $132.4 million at December 31,
1995, as compared to $129.4 million at December 31, 1994. The $3.0 million
increase in the allowance during 1995 reflects a $.1 million provision for loan
losses, $3.7 million of net loan charge-offs, and $6.6 million of allowance for
possible loan losses on Charter's financial statements as of the date of
acquisition. The total allowance for possible loan losses represented 2.06% of
net loans at December 31, 1995, compared to 2.50% at December 31, 1994.
The allowance for possible loan losses is comprised of an allocated
portion and an unallocated, or general, portion. The allocated portion is
maintained to cover estimated losses applicable to specific segments of the
loan portfolio. The unallocated portion is maintained to absorb losses which
probably exist as of the evaluation date but are not identified by the more
objective processes used for the allocated portion of the allowance for loan
losses due to risk of error or imprecision. While the total allowance consists
of an allocated portion and an unallocated portion, these terms are primarily
used to describe a process. Both portions of the allowance are available to
provide for inherent loss in the entire portfolio.
TABLE 7 presents a five-year recap of the activity in the allowance for
possible loan losses. The table also contains the year-end allocation of the
allowance for possible loan losses among the various loan portfolios and the
unallocated portion of the allowance for each of the past five years.
ASSET QUALITY
The ratio of nonperforming assets to total loans and foreclosed properties
was .46% at December 31, 1995, up slightly from .42% at December 31, 1994.
Nonperforming assets include non-accrual and restructured loans and foreclosed
properties and exclude loans 90 days or more past due on accrual. At December
31, 1995, nonperforming assets totalled $29.4 million and consisted of $18.7
million of nonaccrual loans and $10.7 million of foreclosed properties. This
compared to $21.8 million of nonperforming assets at December 31, 1994,
comprised of $11.7 million of nonaccrual loans and $10.1 million of foreclosed
properties. Excluding the Charter acquisition, nonperforming assets were $26.3
million at December 31, 1995, or .44% of total loans and foreclosed properties.
The favorable levels of nonperforming assets resulted from the
continuation of efforts to maintain asset quality and collect the full balance
due on nonperforming assets, as well as from a reduction in the level of loans
criticized or classified by First American's internal loan grading and review
process. Management is committed to maintaining a strong credit culture by
improving portfolio management concepts in the area of credit and industry
concentrations, refining credit risk rating and credit scoring systems, and
maintaining a disciplined adherence to existing credit policies and procedures.
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GRAPH 9
GRAPH 10
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42
TABLE 8 summarizes changes in nonperforming assets for each of the past
five years and presents the composition of the nonperforming asset balance at
the end of each year.
Total past due loans at December 31, 1995, excluding non-accrual loans,
were .87% of total loans compared to .67% at December 31, 1994. Loans under 90
days past due at December 31, 1995, excluding non-accrual loans, were .77% of
total loans compared to .58% of total loans at December 31, 1994. The increase
in total past due loans was primarily attributable to increases in
delinquencies in the loan categories of consumer-other and consumer amortizing
mortgages.
Other potential problem loans consist of loans that are currently not
considered nonperforming but on which information about possible credit
problems has caused Management to doubt the ability of the borrowers to comply
fully with present repayment terms. At December 31, 1995, loans totalling
$67.2 million, while not considered nonperforming, were classified under the
Company's internal loan grading system as substandard or worse. This compares
to $77.3 million of such loans at December 31, 1994. Depending on the economy
and other factors, these loans and others, which may not be presently
identified, could become nonperforming assets in the future.
DEPOSITS
Total deposits, First American's largest source of funding, averaged $6.54
billion during 1995, compared with $6.19 billion during 1994, an increase of
$351.9 million, or 6%. Excluding the Charter acquisition, average deposits
increased 5%.
Average deposits increased during 1995, in part due to the continued
success of First American's money market deposit account, the First American
Investment Reserve ("FAIR") account. This account combines many features
common among money market mutual funds including a minimum opening balance
requirement of $1,000 and a competitive rate. FAIR account balances averaged
$1.74 billion in 1995, up $313.0 million, or 22%, from 1994. The FAIR account
is important to marketing and liquidity strategies in that it satisfies a known
customer need while providing First American a stable core source of funding at
rates favorable to many alternative sources of funding. On December 31, 1995,
FAIR account balances outstanding were $1.98 billion and the interest rate paid
was 4.50%. Average deposits also increased during 1995 due to the $205.5
million increase in average balances of certificates of deposit of $100,000 and
over to $607.0 million during 1995 from $401.5 million in 1994.
First American's core deposit base, which represents total deposits
excluding certificates of deposit $100,000 and over and foreign deposits,
averaged $5.84 billion, or 89% of total deposits, during 1995, as compared with
$5.74 billion, or 93% of total deposits, during 1994. Core deposits
represented 74% of average earning assets during 1995 and 81% during 1994.
Core deposits provide a stable, low-cost source of funds for the Company.
TABLE 9 details maturities of certificates of deposits $100,000 and over
at December 31, 1995 and 1994.
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GRAPH 11
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OTHER BORROWED FUNDS
In addition to deposits, other sources of funding utilized by First
American include short-term borrowings and long-term debt. Total short-term
borrowings include Federal funds purchased from correspondent banks, securities
sold under agreements to repurchase (repurchase agreements), and other
short-term borrowings, principally funds due to the U.S. Treasury Department in
tax and loan accounts.
Federal funds purchased and securities sold under repurchase agreements
averaged $792.0 million during 1995, a $110.8 million, or 16%, increase over
the previous year. Other short-term borrowings averaged $100.0 million during
1995 compared with $59.2 million during 1994.
Long-term debt averaged $292.4 million during 1995 compared to $109.0
million during 1994. Long-term debt increased $150.3 million to $421.8 million
as of December 31, 1995 from $271.5 million on December 31, 1994. Most of the
increase in long-term debt from December 31, 1994, occurred in the fourth
quarter of 1995. During October 1995, First American borrowed $45.0 million
from the Federal Home Loan Bank ("FHLB") at an interest rate tied to one-month
LIBOR with a maturity of October 2, 1998. FHLB fixed rate borrowings increased
$49.2 million effective December 1, 1995, with the acquisition of Charter. On
December 18, 1995, First American issued $50.0 million of subordinated notes
due December 18, 2005. This brought the total subordinated notes outstanding
at December 31, 1995 to $100.0 million. The $50.0 million of notes issued in
1995 bear interest at a face amount of 6.625%, payable semiannually. The notes
were sold at a discount, resulting in an effective interest rate of 6.761%. At
December 31, 1995, First American's variable rate borrowings totalled $264.0
million and had a weighted average interest rate of 5.88%, and total fixed rate
borrowings were $157.8 million and had a weighted average interest rate of
6.19%.
On January 31, 1994, First American redeemed the remaining balance of
$13.6 million of its 7 5/8% debentures due in 2002. These debentures were
redeemed at a price of 101.22% of par.
CAPITAL POSITION
Total shareholders' equity amounted to $795.5 million, or 8.22% of total
assets, at December 31, 1995, compared to $667.7 million, or 8.06% of total
assets at December 31, 1994. The $127.8 million increase in total
shareholders' equity resulted principally from $74.3 million of earnings
retention ($103.1 million of net income less $28.8 million of dividends). Also
contributing to the increase in total shareholders' equity was the net issuance
of $31.7 million of common stock, which consisted of $80.4 million of common
stock issued in the acquisition of Charter and the issuance of $13.7 million of
common stock in connection with employee benefit and dividend reinvestment
plans less $62.4 million of common stock repurchased for those purposes. Total
shareholders' equity also increased by the $17.1 million change in net
unrealized gains and losses on securities available for sale, net of tax. The
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY detail the changes
in shareholders' equity during 1995, and NOTES 1 AND 4 to the consolidated
financial statements provide further information regarding unrealized gains and
losses on available for sale securities.
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During 1995, First American paid dividends at the rate of $1.06 per share,
up 20% from $.88 per share during 1994. The dividend payout ratio (calculated
by dividing the dividend rate per share by net income per share) was 29%
during 1995 versus 26% during 1994.
The Federal Reserve Board and the OCC risk-based capital guidelines and
regulations for bank holding companies and national banks require minimum
levels of capital based upon applying various risk ratings to defined
categories of assets and to certain off-balance-sheet items. Under the
risk-based capital requirements, total capital consists of Tier I capital
(essentially realized common equity less disallowed intangible assets) plus
Tier II capital (essentially qualifying long-term debt and a portion of the
allowance for possible loan losses). Assets by type, or category, are assigned
risk-weights of 0% to 100%, depending on regulatory assigned levels of credit
risk associated with such assets. Off-balance-sheet items are considered in
the calculation of risk-adjusted assets through conversion factors established
by regulators. These items are assigned risk-weightings and are included in
total risk-adjusted assets.
These regulations require bank holding companies and national banks to
maintain certain minimum capital ratios. As of December 31, 1995, the Company,
its principal subsidiary, FANB, and First American National Bank of Kentucky
("FANBKY") all had ratios which exceeded the regulatory requirements to be
classified as "well capitalized," the highest regulatory capital rating. TABLE
10 summarizes risk-based capital and related ratios for the Company and FANB.
FAFSB is 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. As of December 31, 1995, FAFSB had ratios which exceeded the regulatory
requirements to be classified as "well capitalized."
Of the total First American shares to be exchanged in the proposed First
City transaction, up to 100% may be repurchased in the open market. Following
these purchases, the Company is expected to continue to exceed all applicable
regulatory capital requirements.
LIQUIDITY
Liquidity management involves maintaining sufficient cash levels
(including the ability to access markets to raise additional cash) to fund
operations and to meet the requirements of borrowers, depositors, and
creditors. Liquid assets include cash and cash equivalents (less Federal
Reserve Bank reserve requirements discussed at NOTE 3 to the consolidated
financial statements), money market instruments, and securities that mature
within one year. At December 31, 1995, the carrying value of First American's
liquid assets amounted to $1,085.4 million, or 12% of earning assets, which
compared with $859.8 million, or 11%, at December 31, 1994.
In addition, First American has securities available for sale maturing
after one year which can be sold to meet liquidity needs. The market value of
securities available for sale which mature after one year was $1.01 billion at
December 31, 1995. Since held to maturity securities are purchased with the
intent to hold them to maturity, such securities are generally a source of
liquidity only to the extent interest and principal payments are received
thereon. NOTES 1 AND 4 to the consolidated financial statements discuss
accounting for securities in further detail. Maturity of securities is also
discussed under the caption "Securities."
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Liquidity is reinforced by maintaining a relatively stable funding base,
which is achieved by diversifying funding sources, extending the contractual
maturity of liabilities, and limiting corporate reliance on volatile short-term
purchased funds. First American's strategy is to fund assets to the maximum
extent possible with core deposits, which provide a sizable source of
relatively stable and low-cost funds. Core deposits totalled $6.49 billion, or
67% of total assets at December 31, 1995, compared with $5.85 billion, or 71%,
at December 31, 1994. Loans represented 99% of core deposits at December 31,
1995 compared to 88% at December 31, 1994.
Short-term funding needs can arise from declines in deposits or other
funding sources, drawdowns of loan commitments, and requests for new loans.
Relationships with a stable and growing customer base and a current network of
about 275 downstream correspondent banks routinely supply some of these funds.
Additional funds, if needed, can be raised from regional, national, and
international money markets. Short-term funding sources, comprised of non-core
deposits and short-term borrowings totalled $1.83 billion, or 19% of total
assets, at December 31, 1995, compared to $1.38 billion, or 17%, at December
31, 1994.
Shareholders' equity and long-term debt also contribute to liquidity by
reducing the need to continually rely on short-term purchased funds. At
December 31, 1995, the ratio of equity to assets was 8.22% compared to 8.06% at
December 31, 1994. At the end of 1995, long-term debt totalled 4% of total
assets versus 3% of total assets at December 31, 1994.
An additional source of liquidity is the Company's three-year $70 million
revolving credit agreement which will expire March 31, 1998. First American
had no borrowings under this agreement during 1995.
The CONSOLIDATED STATEMENTS OF CASH FLOWS report net cash provided or used
by operating, investing, and financing activities, and the net effect of those
activities on cash and cash equivalents. As such, it is a tool in analyzing
liquidity. During 1995, cash provided by operating activities was $111.6
million compared to $86.0 million of cash provided by operations in 1994. The
largest component of cash provided by operating activities in both years was
net income. Investing activities utilized $656.3 million of cash in 1995 and
$532.7 million in 1994. The largest component of cash used in investing
activities in 1995 was loan growth, which amounted to $851.0 million, and the
largest component in 1994 was the purchase of available for sale securities,
which utilized $1.1 billion. Also reflected in investing activities were
repositionings of securities and money market instruments. Financing
activities provided $525.3 million in net cash in 1995 and $446.9 million in
1994. During 1995, financing activities included increases in deposits of
$599.6 million and long-term debt of $101.1 million and reductions in
short-term debt of $101.1 million, as well as cash utilized to purchase First
American common stock for use in the Charter acquisition and for employee
benefit plans. During 1994, financing activities included increases in
deposits of $101.8 million and net increases in short-term and long-term
borrowings of $367.1 million.
Management believes First American has sufficient liquidity to meet all
known commitments, which include the anticipated First City and SSI
acquisitions, long-term obligations, and other commitments, as well as
reasonable borrower, depositor, and creditor needs under normal economic
conditions over the next 12 months and reasonably foreseeable future.
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IMPACT OF INFLATION
First American's asset and liability structure is substantially different
from that of an industrial company in that most of its assets and liabilities
are monetary in nature. Management believes the impact of inflation on
financial results depends upon the Company's ability to react to changes in
interest rates and, by such reaction, reduce the inflationary impact on
performance. Interest rates do not necessarily move in the same direction, or
at the same magnitude, as the prices of other goods and services. As discussed
previously, Management seeks to manage the relationship between
interest-sensitive assets and liabilities in order to protect against wide
interest rate fluctuations, including those resulting from inflation.
EARNINGS PERFORMANCE FOR 1994 VERSUS 1993
The previous discussion concentrated on First American's 1995 results of
operations and financial condition. The following discussion recaps the
Company's results of operations for 1994 compared to 1993.
Net income for 1994 was $97.2 million, or $3.39 per share, as compared
with $107.3 million, or $3.79 per share, for 1993. Net income for 1994 was
increased by a $6.1 million negative provision for loan losses, net of tax, or
$.22 per share, and reduced by $5.9 million of losses, net of tax, or $.21 per
share, in the fourth quarter on sales of securities available for sale. Net
income for 1993 was increased by a $28.6 million negative provision for loan
losses, net of tax, or $1.01 per share, and reduced by a $6.5 million
charitable contribution, net of tax, or $.23 per share, and the $.1 million
cumulative effect of changes in accounting principles. With these transactions
excluded in both years, net income increased 14% to $97.0 million in 1994, or
$3.38 per share, versus $85.3 million in 1993, or $3.01 per share.
Taxable equivalent net interest income increased $10.5 million, or 4%, to
$301.7 million in 1994 from $291.2 million in 1993. Total interest income on a
taxable equivalent basis amounted to $510.5 million for 1994 compared to $478.3
million in 1993, an increase of $32.2 million, or 7%. The increase resulted
principally from a higher volume of earning assets. Average earning assets
increased $447.4 million, or 7%, to $7.12 billion in 1994 from $6.67 billion in
1993, while the average yield on earning assets was 7.17% in both years.
Average loans increased $637.2 million, or 15%, to $4.85 billion, average
securities decreased $93.6 million, or 4%, to $2.16 billion, and average other
interest-bearing investments decreased $96.2 million to $109.9 million.
Total interest expense for 1994 increased $21.7 million, or 12%, to $208.8
million from $187.1 million in 1993. Of the increase, $11.0 million was due to
an increase in the volume of interest-bearing liabilities and $10.7 million
resulted from an increase in average interest rates paid on interest-bearing
funds. Average interest-bearing liabilities increased $326.7 million, or 6%,
to $5.86 billion in 1994 from $5.53 billion during 1993. Average
interest-bearing deposits increased $174.3 million, or 4%, to $5.01 billion,
average short-term borrowings increased $103.5 million, or 16%, to $740.4
million, and long-term debt increased $48.9 million, or 81%, to $109.0 million.
The average rate paid on interest-bearing liabilities increased 18 basis points
to 3.56% in 1994 from 3.38% in 1993.
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Net interest income in 1994 increased primarily as a result of the
increase in the volume of earning assets partially offset by a lower net
interest spread. The net interest spread decreased 18 basis points to 3.61% in
1994 from 3.79% in 1993. This decline was due to an 18 basis point increase in
the rates paid on interest-bearing liabilities. The net interest margin
decreased to 4.24% in 1994 from 4.37% during 1993. Average external interest
rates during 1994 were higher than 1993. Factors affecting the Company's
interest rates are discussed under the caption "Net Interest Income."
Additionally, contributing to the decline in the average yield on securities
from 1993 to 1994 was the fact that many of the fixed rate instruments maturing
throughout 1994 and in the latter part of 1993 were purchased during 1990 and
1991 when average rates were higher than rates in effect during 1994 and the
latter part of 1993.
In order to maintain the allowance for possible loan losses at an
appropriate level, First American's loan loss methodology produced a $9.9
million (pre-tax) negative provision in 1994. The primary factors leading to
the negative provision were favorable net loan charge-off experience and a
continuation of improvements in asset quality indicators. During the year
ended December 31, 1994, there were net loan recoveries of $2.1 million, which
compared to net loan charge-offs of $6.8 million in the year ended December 31,
1993. The ratio of net recoveries to average loans was .04% in 1994 compared
to a ratio of net charge-offs to average loans of .16% in 1993. Nonperforming
assets (excluding loans 90 days past due on accrual) decreased 49% during 1994
to $21.8 million at December 31, 1994 from $42.5 million at December 31, 1993.
The ratio of nonperforming assets to total loans and foreclosed properties was
.42% at December 31, 1994, compared with .91% a year earlier.
Non-interest income of $85.7 million in 1994 declined $2.7 million, or 3%,
from 1993. This decline is due in large part to losses on securities available
for sale of $10.0 million during 1994 compared to losses of $2.0 million in
1993. Virtually all of the 1994 losses occurred during the fourth quarter when
$85 million of securities available for sale were sold at a $9.7 million loss.
The securities sold had the longest maturities and were the most depreciated in
value in the available for sale category. The proceeds were invested in higher
yielding securities with shorter maturities, which improved First American's
overall interest rate sensitivity.
Non-interest income, excluding net securities losses totalled $95.7
million for 1994, an increase of $5.3 million, or 6%, from $90.4 million in
1993. This increase was primarily attributable to increases in service charges
on deposit accounts ($3.4 million, an 8% increase); "other income" ($2.5
million, a 12% increase); and commissions and fees on fiduciary activities ($.9
million, a 6% increase). The increase in service charges on deposit accounts
is primarily due to 8% growth in the number of retail deposit accounts. The
increase in "other income" consisted primarily of $1.3 million of increase from
insurance commissions and official check rebates. These increases in income
were partially offset by a decline in investment services income ($.7 million,
a 7% decrease) attributable to a decrease in the sale of investment products.
Non-interest expenses decreased $9.0 million, or 4%, during 1994 to $239.3
million. The decline was primarily due to a $10.0 million charitable
contribution in 1993 to First American Foundation, a not-for-profit private
foundation formed to facilitate the Company's charitable contributions. There
was no similar contribution in 1994. Also contributing to the decrease in
non-interest expense was a $3.5 million decrease in net foreclosed properties
expense. FANBKY,
46
49
acquired in the fourth quarter of 1993, and First Fidelity Savings Bank,
F.S.B., of Crossville, Tennessee, acquired in the second quarter of 1994,
produced a $4.2 million increase in non-interest expense in 1994 compared to
1993. Exclusive of the 1993 charitable contribution and the non-interest
expense of the two acquisitions, non-interest expense was $233.9 million in
1994 compared to $237.0 million in 1993. Salaries and employee benefits
increased $12.6 million, or 10%, in 1994 reflecting merit increases, higher
incentive compensation, and a 4% increase in the number of full time equivalent
employees. Systems and processing expense declined $5.1 million following the
amendment in March 1994 to First American's agreement with an outside vendor
that provides data processing and telecommunications services. The agreement
was amended to transfer certain software programming functions and related
personnel to the Company, which resulted in cost reductions in systems and
processing expense and increases in other non-interest expense categories, such
as salaries and benefits.
Excluding the $9.7 million (pre-tax) losses on sales of securities
available for sale recorded in the fourth quarter of 1994, non-interest income
rose 8% to $95.4 million in 1994 from $88.4 million in 1993. Excluding the
$10.0 million (pre-tax) charitable contribution in 1993, non-interest expense
rose less than 1% to $239.3 million. With these transactions excluded, the
operating efficiency ratio improved from 62.75% to 60.25%.
Income tax expense was $57.4 million in 1994, which compared to $61.3
million in 1993. The primary factor for the decrease was the decline in income
before income taxes.
47
50
TABLE 2: RATE-VOLUME RECAP
=====================================================================================================================
1995 from 1994 1994 from 1993
--------------------------------- ------------------------------------
Total Increase (Decrease)* Total Increase (Decrease)*
Increase Due to Increase Due to
-------------------- -----------------------
(in millions) (Decrease) Volume Rate (Decrease) Volume Rate
- ---------------------------------------------------------------------------------------------------------------------
Change in interest income:
Securities:
Taxable
Held to maturity $12.9 $ 3.1 $ 9.8 $ 2.9 $ 6.7 $ (3.8)
Available for sale .8 (1.5) 2.3 (19.3) (14.7) (4.6)
Tax-exempt
Held to maturity .1 .1 - .6 .6 -
Available for sale - - - - - -
----- -----
Total securities 13.8 1.8 12.0 (15.8) (6.1) (9.7)
----- -----
Loans 96.2 57.4 38.8 50.3 49.3 1.0
Federal funds sold and securities purchased
under agreements to resell 1.7 .1 1.6 (1.8) (2.4) .6
Time deposits with other banks .2 .1 .1 (.9) (.9) -
Other .8 .2 .6 .4 .2 .2
----- -----
Total change in interest income 112.7 55.9 56.8 32.2 32.2 -
----- -----
Change in interest expense:
NOW, money market, and savings accounts 21.1 3.4 17.7 10.7 6.0 4.7
Certificates of deposit 38.4 10.6 27.8 (2.0) (1.3) (.7)
Other interest-bearing deposits 6.0 1.6 4.4 (1.2) (.2) (1.0)
Short-term borrowings 20.3 5.8 14.5 11.4 2.8 8.6
Long-term debt 12.8 11.9 .9 2.8 3.5 (.7)
----- -----
Total change in interest expense 98.6 26.7 71.9 21.7 11.0 10.7
----- -----
Change in net interest income $14.1 $ 33.0 $(18.9) $ 10.5 $ 19.5 $ (9.0)
====================================================================================================================
* Amounts are adjusted to a fully taxable basis, based on the statutory
Federal income tax rates, adjusted for applicable state income taxes net of
the related Federal tax benefit. The effect of volume change is computed by
multiplying the change in volume by the prior year rate. The effect of rate
change is computed by multiplying the change in rate by the prior year
volume. Rate/volume change is computed by multiplying the change in volume
by the change in rate and included in the effect on income of rate change.
48
51
TABLE 3: CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND YIELDS/RATES
==================================================================================================================================
1995 1994 1993
-------------------------- -------------------------- ----------------------------
Average Average Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(in millions) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:*
Taxable securities:
Held to maturity $1,502.8 $ 98.5 6.55% $1,449.9 $ 85.6 5.90% $1,341.5 $ 82.7 6.16%
Available for sale 663.1 43.8 6.61 688.1 43.0 6.26 899.2 62.3 6.93
Tax-exempt securities
Held to maturity 20.9 1.5 7.18 19.8 1.4 7.07 11.1 .8 7.21
Available for sale .6 - 5.72 .4 - 5.63 - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities 2,187.4 143.8 6.58 2,158.2 130.0 6.02 2,251.8 145.8 6.47
- ----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and repurchase
agreements 79.9 4.8 6.02 78.6 3.1 3.99 152.1 4.9 3.24
Loans, net of unearned discount and net
deferred loan fees:
Commercial 2,527.3 213.0 8.43 2,038.0 151.4 7.42 1,773.6 120.6 6.81
Consumer-amortizing mortgages 1,479.1 117.0 7.91 1,326.6 102.5 7.73 1,059.4 88.7 8.37
Consumer-other 1,112.8 99.0 8.89 1,028.4 84.4 8.21 936.3 80.7 8.62
Real estate-construction 163.9 15.3 9.36 113.6 9.1 8.00 110.3 8.8 7.99
Real estate-commercial mortgages
and other 309.2 28.0 9.06 344.7 28.7 8.33 334.5 27.0 8.06
- ----------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and
net deferred loan fees 5,592.3 472.3 8.45 4,851.3 376.1 7.75 4,214.1 325.8 7.73
- ----------------------------------------------------------------------------------------------------------------------------------
Other 39.1 2.3 5.64 31.3 1.3 4.05 54.0 1.8 3.32
- ----------------------------------------------------------------------------------------------------------------------------------
Total earning assets* 7,898.7 $623.2 7.89% 7,119.4 $510.5 7.17% 6,672.0 $478.3 7.17%
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses (129.7) (139.9) (175.3)
Cash and due from banks 460.1 494.5 491.0
Other assets 325.0 311.8 334.6
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $8,554.1 $7,785.8 $7,322.3
==================================================================================================================================
Deposits and borrowed funds:
Demand deposits $1,112.9 $1,174.7 $1,137.8
Interest-bearing deposits:
NOW accounts 806.4 $ 16.1 2.00% 877.9 $ 17.5 1.99% 793.5 $ 16.5 2.08%
Money market accounts 1,805.8 82.7 4.58 1,516.1 57.7 3.81 1,411.7 47.2 3.35
Regular savings 404.5 9.6 2.38 510.5 12.1 2.38 487.1 12.9 2.65
Certificates of deposit under $100,000 1,406.9 72.8 5.17 1,347.2 52.8 3.92 1,397.4 56.8 4.06
Certificates of deposit $100,000 and over 607.0 35.3 5.82 401.5 16.9 4.22 384.6 14.9 3.86
Other time 303.8 16.9 5.57 317.9 14.5 4.56 337.7 16.7 4.96
Foreign 91.4 5.3 5.75 41.0 1.7 4.04 25.8 .7 2.74
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 5,425.8 238.7 4.40 5,012.1 173.2 3.46 4,837.8 165.7 3.43
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits 6,538.7 6,186.8 5,975.6
Federal funds purchased and repurchase
agreements 792.0 42.6 5.38 681.2 25.8 3.80 587.1 15.5 2.64
Other short-term borrowings 100.0 6.2 6.18 59.2 2.7 4.51 49.8 1.6 3.19
Long-term debt 292.4 19.9 6.83 109.0 7.1 6.48 60.1 4.3 7.13
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits and
borrowed funds 6,610.2 $307.4 4.65% 5,861.5 $208.8 3.56% 5,534.8 $187.1 3.38%
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowed funds 7,723.1 7,036.2 6,672.6
Other liabilities 126.7 105.4 98.8
Shareholders' equity 704.3 644.2 550.9
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $8,554.1 $7,785.8 $7,322.3
==================================================================================================================================
Net interest income* $315.8 $301.7 $291.2
Provision for loan losses .1 (9.9) (41.4)
Non-interest income 108.5 85.7 88.4
Non-interest expense 252.4 239.3 248.2
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense
and cumulative effect of
changes in accounting principles 171.8 158.0 172.8
Income tax expense 68.7 60.8 65.4
- ----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
changes in accounting principles 103.1 97.2 107.4
Cumulative effect of changes in accounting
principles, net of tax - - (.1)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $103.1 $ 97.2 $107.3
==================================================================================================================================
Net interest spread 3.24% 3.61% 3.79%
Benefit of interest-free funding .76 .63 .58
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.00% 4.24% 4.37%
==================================================================================================================================
* Loan fees and amortization of net deferred loan fees (costs), which are
considered an integral part of the lending function and are included in
yields and related interest categories, amounted to $6.3 million in 1995,
$4.8 million in 1994, $2.3 million in 1993, $(.8) million in 1992, and
$(.3) million in 1991. Yields/rates and income/expense amounts are
presented on a fully taxable equivalent basis based on the statutory
Federal income tax rates, adjusted for applicable state income taxes net of
the related
N/A Information not considered meaningful.
49
52
==========================================================================================================
1992 1991 Average Balance Income/Expense
- --------------------------- ------------------------- -------------------- --------------------------
5-Year 5-Year
Annual Annual
Average Average Compound Compound
Average Income/ Yield/ Average Income/ Yield/ % Change Growth Rate % Change Growth Rate
Balance Expense Rate Balance Expense Rate 1995/1994 1995/1990 1995/1994 1995/1990
- ----------------------------------------------------------------------------------------------------------
$1,747.5 $130.5 7.47% $1,456.2 $115.6 7.94% 3.65% .17% 15.07% (5.12)%
148.8 10.0 6.72 - - - (3.63) N/A 1.85 N/A
6.5 .5 7.69 20.8 1.8 8.43 5.56 (29.96) 7.14 (32.99)
- - - - - - 50.00 N/A 42.47 N/A
- ----------------------------------------------------------------------------------------------------------
1,902.8 141.0 7.41 1,477.0 117.4 7.95 1.35 6.26 10.62 .65
- ----------------------------------------------------------------------------------------------------------
261.7 10.0 3.82 217.0 13.3 6.16 1.65 (21.94) 54.84 (26.90)
1,739.5 121.0 6.95 1,893.6 166.7 8.81 24.01 3.57 40.69 (.19)
847.8 81.2 9.58 819.7 87.7 10.70 11.50 12.10 14.15 5.18
914.3 86.9 9.50 973.5 103.6 10.64 8.21 .39 17.30 (4.69)
158.4 12.7 8.03 225.7 20.3 8.98 44.28 (13.81) 68.13 (13.83)
384.5 33.2 8.65 413.5 41.2 9.95 (10.30) (7.31) (2.44) (10.48)
- ----------------------------------------------------------------------------------------------------------
4,044.5 335.0 8.28 4,326.0 419.5 9.70 15.27 2.92 25.58 (1.63)
- ----------------------------------------------------------------------------------------------------------
178.1 7.0 3.91 108.0 6.6 6.12 24.92 (13.21) 76.92 (19.97)
- ----------------------------------------------------------------------------------------------------------
6,387.1 $493.0 7.72% 6,128.0 $556.8 9.09% 10.95 3.00 22.06% (1.78)%
- ----------------------------------------------------------------------------------------------------------
(188.7) (191.1) (7.29) (2.94)
467.1 410.5 (6.96) 2.72
321.3 351.4 4.23 (1.34)
- ----------------------------------------------------------------------------------------------------------
$6,986.8 $6,698.8 9.87% 2.91%
==========================================================================================================
$1,049.7 $ 885.6 (5.26)% 3.72%
682.4 $ 18.7 2.73% 586.2 $ 24.0 4.10% (8.14) 6.89 (8.00)% (8.79)%
1,429.9 48.3 3.38 1,448.4 79.8 5.51 19.11 4.57 43.33 (4.33)
416.6 14.3 3.43 352.7 18.2 5.15 (20.76) 1.96 (20.66) (13.48)
1,525.5 78.7 5.16 1,703.1 117.8 6.92 4.43 (5.51) 37.88 (13.12)
412.6 20.3 4.92 402.7 28.0 6.95 51.18 (.58) 108.88 (6.84)
366.7 21.2 5.78 332.0 23.8 7.17 (4.44) (1.29) 16.55 (7.90)
19.3 .7 3.61 12.7 .7 5.65 122.93 30.23 211.76 22.77
- ----------------------------------------------------------------------------------------------------------
4,853.0 202.2 4.17 4,837.8 292.3 6.04 8.25 .73 37.82 (8.56)
- ----------------------------------------------------------------------------------------------------------
5,902.7 5,723.4 5.69 1.21
519.5 16.3 3.14 457.3 25.1 5.48 16.27 4.02 65.12 (3.61)
20.2 .7 3.82 22.8 1.4 6.26 68.92 11.86 129.63 4.82
17.9 1.4 7.69 18.0 1.4 7.82 168.26 73.68 180.28 67.71
- ----------------------------------------------------------------------------------------------------------
5,410.6 $220.6 4.08% 5,335.9 $320.2 6.00% 12.77 2.10 47.22% (6.53)%
- ----------------------------------------------------------------------------------------------------------
6,460.3 6,221.5 9.76 2.33
84.4 84.8 20.21 3.95
442.1 392.5 9.33 10.67
- ----------------------------------------------------------------------------------------------------------
$6,986.8 $6,698.8 9.87% 2.91%
==========================================================================================================
$272.4 $236.6 4.67% 4.72%
39.2 53.1 N/A (66.40)
77.3 82.9 26.57 (.16)
240.1 232.8 5.56 1.84
- ----------------------------------------------------------------------------------------------------------
70.4 33.6 8.60 N/A
24.2 15.6 12.64 N/A
- ----------------------------------------------------------------------------------------------------------
46.2 18.0 6.07 N/A
- - N/A (100.00)
- ----------------------------------------------------------------------------------------------------------
$ 46.2 $ 18.0 6.07% N/A
==========================================================================================================
3.64% 3.09%
.62 .77
- ----------------------------------------------------------------------------------------------------------
4.26% 3.86%
==========================================================================================================
Federal tax benefit; related interest income includes taxable equivalent
adjustments of $3.5 million in 1995, $3.4 million in 1994, $4.0 million in
1993, $4.2 million in 1992, and $6.6 million in 1991. Non-accrual and
restructured loans are included in average loans and average earning assets.
Consequently, yields on these items are lower than they would have been if
these loans had earned at their contractual rates of interest. Prior to
December 31, 1991, certain securities were classified as investment securities
based on the Corporation's ability and interest to hold such securities for the
foreseeable future. For purposes of this schedule, average investment
securities prior to December 31, 1991 and related income have been classified
to held to maturity. Yields on all securities are computed based on carrying
value.
50
53
TABLE 4: INTEREST RATE SENSITIVITY ANALYSIS
====================================================================================================================================
Interest-Sensitive Periods
---------------------------------------------------------------------------
Months
-------------------------------------------
Over Over
Three Six Total
Within Through Through One 1-5
(in millions) Three Six Twelve Year Years
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
Earning assets:
Securities:
Available for sale $ 483.5 $ 34.8 $ 69.7 $ 588.0 $ 545.4
Held to maturity 158.8 66.3 180.5 405.6 446.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities 642.3 101.1 250.2 993.6 991.5
Loans 2,456.9 312.1 547.9 3,316.9 2,305.7
Other earning assets 340.2 - - 340.2 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 3,439.4 $ 413.2 $ 798.1 $ 4,650.7 $3,297.2
===================================================================================================================================
Interest-bearing liabilities:
Interest-bearing deposits:
NOW, money market, and savings accounts $ 3,220.4 $ - $ - $ 3,220.4 $ -
Certificates of deposit 841.2 567.4 518.3 1,926.9 501.7
Other interest-bearing deposits 221.7 28.5 58.1 308.3 157.0
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 4,283.3 595.9 576.4 5,455.6 658.7
Other borrowed funds 1,177.5 - - 1,177.5 24.8
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,460.8 595.9 576.4 6,633.1 683.5
Net effect of swaps (1,435.0) 200.0 400.0 (835.0) 835.0
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 4,025.8 $ 795.9 $ 976.4 $ 5,798.1 $1,518.5
===================================================================================================================================
Interest sensitivity gap:
For the indicated period $ (586.4) $ (382.7) $ (178.3) $(1,147.4) $1,778.7
Cumulative (586.4) (969.1) (1,147.4) (1,147.4) 631.3
Cumulative, as a percent of total earning assets (6.59)% (10.89)% (12.89)% (12.89)% 7.09%
===================================================================================================================================
DECEMBER 31, 1994
Earning assets:
Securities:
Available for sale $ 167.4 $ 215.1 $ 180.1 $ 562.6 $ 119.9
Held to maturity 308.4 24.0 32.1 364.5 1,047.5
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities 475.8 239.1 212.2 927.1 1,167.4
Loans 1,866.5 311.5 423.7 2,601.7 1,960.2
Other earning assets 40.6 - - 40.6 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 2,382.9 $ 550.6 $ 635.9 $ 3,569.4 $3,127.6
===================================================================================================================================
Interest-bearing liabilities:
Interest-bearing deposits:
NOW, money market, and savings accounts $ 2,952.0 $ - $ - $ 2,952.0 $ -
Certificates of deposit 520.4 438.5 361.6 1,320.5 415.4
Other interest-bearing deposits 117.2 35.6 52.6 205.4 162.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 3,589.6 474.1 414.2 4,477.9 577.7
Other borrowed funds 1,139.5 1.2 .5 1,141.2 4.0
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4,729.1 475.3 414.7 5,619.1 581.7
Net effect of swaps (450.0) (200.0) (450.0) (1,100.0) 1,100.0
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 4,279.1 $ 275.3 $ (35.3) $ 4,519.1 $1,681.7
===================================================================================================================================
Interest sensitivity gap:
For the indicated period $(1,896.2) $ 275.3 $ 671.2 $ (949.7) $1,445.9
Cumulative (1,896.2) (1,620.9) (949.7) (949.7) 496.2
Cumulative, as a percent of total earning assets (25.13)% (21.48)% (12.59)% (12.59)% 6.58%
===================================================================================================================================
51
54
Interest-Sensitive Periods
-------------------------------
Over 5
(in millions) Years Total
- ----------------------------------------------------------------------------------
DECEMBER 31, 1995
Earning assets:
Securities:
Available for sale $ 69.1 $1,202.5
Held to maturity 79.3 931.0
- ----------------------------------------------------------------------------------
Total securities 148.4 2,133.5
Loans 803.4 6,426.0
Other earning assets - 340.2
- ----------------------------------------------------------------------------------
Total earning assets $ 951.8 $8,899.7
==================================================================================
Interest-bearing liabilities:
Interest-bearing deposits:
NOW, money market, and savings accounts $ - $3,220.4
Certificates of deposit 1.7 2,430.3
Other interest-bearing deposits - 465.3
- ----------------------------------------------------------------------------------
Total interest-bearing deposits 1.7 6,116.0
Other borrowed funds 157.8 1,360.1
- ----------------------------------------------------------------------------------
Total interest-bearing liabilities 159.5 7,476.1
Net effect of swaps - -
- ----------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 159.5 $7,476.1
==================================================================================
Interest sensitivity gap:
For the indicated period 792.3 $1,423.6
Cumulative 1,423.6 1,423.6
Cumulative, as a percent of total earning assets 16.00% 16.00%
==================================================================================
DECEMBER 31, 1994
Earning assets:
Securities:
Available for sale $ 7.0 $ 689.5
Held to maturity 231.9 1,643.9
- ----------------------------------------------------------------------------------
Total securities 238.9 2,333.4
Loans 610.0 5,171.9
Other earning assets - 40.6
- ----------------------------------------------------------------------------------
Total earning assets $ 848.9 $7,545.9
==================================================================================
Interest-bearing liabilities:
Interest-bearing deposits:
NOW, money market, and savings accounts $ - $2,952.0
Certificates of deposit - 1,735.9
Other interest-bearing deposits - 367.7
- ----------------------------------------------------------------------------------
Total interest-bearing deposits - 5,055.6
Other borrowed funds 56.1 1,201.3
- ----------------------------------------------------------------------------------
Total interest-bearing liabilities 56.1 6,256.9
Net effect of swaps - -
- ----------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 56.1 $6,256.9
==================================================================================
Interest sensitivity gap:
For the indicated period $ 792.8 $1,289.0
Cumulative 1,289.0 1,289.0
Cumulative, as a percent of total earning assets 17.08% 17.08%
==================================================================================
Each column includes earning assets and interest-bearing liabilities that are
estimated to mature or reprice within the respective time frame. All floating
rate balance sheet items are included as "within three months" regardless of
maturity. Non-earning assets (cash and due from banks, premises and equipment,
foreclosed properties, and other assets), non-interest-bearing liabilities
(demand deposits and other liabilities) and shareholders' equity are considered
to be non-interest-sensitive for purposes of this presentation and thus are not
included in the above table.
In the table, all NOW, money market, and savings accounts are reflected as
interest-sensitive within three months. NOW accounts, savings, and certain
money market accounts are not totally interest-sensitive in all interest rate
environments. If NOW and regular savings accounts were not considered
interest-sensitive, the one year cumulative net asset interest-sensitive gap
position and percent of earning assets would be $41.2 million and .46%,
respectively, for 1995 as compared to a net asset interest-sensitive gap
position and percent of earning assets of $390.5 million and 5.17%,
respectively, for 1994.
52
55
TABLE 5: SECURITY PORTFOLIO ANALYSIS
============================================================================================================================
Estimated Maturity at December 31, 1995
------------------------------------------------------------------------------------------
Total
Within 1 Year 1-5 Years 5-10 Years After 10 Years Amortized Cost
------------------------------------------------------------------------------------------
(in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY: (1)
U.S. Gov. agencies and
corporations:
Mortgage-backed $150.1 6.51% $ 537.2 6.85% $ 18.2 6.43% $ 1.0 6.28% $ 706.5 6.76%
Other - - 101.1 4.74 - - - - 101.1 4.74
Obligations of state and
political subdivisions (2) 1.0 6.53 7.9 5.94 6.4 5.61 14.4 4.94 29.7 5.40
Other debt securities:
Mortgage-backed 51.5 7.37 41.1 6.77 - - - - 92.6 7.10
Other - - 1.2 7.93 - - - - 1.2 7.92
- -----------------------------------------------------------------------------------------------------------------------------
Total debt securities held to
maturity $202.6 6.73% $ 688.5 6.52% $ 24.6 6.22% $ 15.4 5.02% $ 931.1(3) 6.54%
=============================================================================================================================
SECURITIES AVAILABLE FOR SALE:(1)
U.S. Treasury $ 99.9 4.53% $ 77.8 5.01% $ - -% $ - -% $ 177.7 4.74%
U.S. Gov. agencies and
corporations:
Mortgage-backed 34.9 6.82 422.9 6.97 137.4 6.83 194.3 7.05 789.5 6.96
Other 5.5 5.70 15.3 5.60 11.0 6.49 - - 31.8 5.92
Obligations of state and
political subdivisions(2) 3.1 5.15 - - - - - - 3.1 5.15
Other debt securities:
Mortgage-backed - - 150.4 6.72 - - - - 150.4 6.72
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities available
for sale $143.4 5.15% $ 666.4 6.66% $148.4 6.81% $194.3 7.05% $1,152.5 6.55%
====================================================================================================== ======
Total equity securities 43.9
--------
Total securities available
for sale $1,196.4
========
TOTAL SECURITIES:
Total debt securities $346.0 6.07% $1,354.9 6.59% $173.0 6.73% $209.7 6.90% $2,083.6 6.55%
====================================================================================================== ======
Total equity securities 43.9
--------
Total securities $2,127.5
============================================================================================================================
TABLE 5: SECURITY PORTFOLIO ANALYSIS
=================================================================================
--------------------------------------------
Market Average Average
Value Maturity Repricing
--------------------------------------------
(in millions) Amount Years Years
- ---------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY: (1)
U.S. Gov. agencies and
corporations:
Mortgage-backed $ 709.3 1.8 2.7
Other 100.9 2.1 1.4
Obligations of state and
political subdivisions (2) 29.6 9.0 9.0
Other debt securities:
Mortgage-backed 92.9 1.1 1.1
Other 1.2 3.0 3.0
- ---------------------------------------------------------------------------------
Total debt securities held to
maturity $ 933.9 1.9 1.7
=================================================================================
SECURITIES AVAILABLE FOR SALE:(1)
U.S. Treasury $ 177.6 .6 .6
U.S. Gov. agencies and
corporations:
Mortgage-backed 796.5 7.4 3.6
Other 32.1 4.1 2.0
Obligations of state and
political subdivisions(2) 3.1 .1 .1
Other debt securities:
Mortgage-backed 149.3 3.0 3.0
- ---------------------------------------------------------------------------------
Total debt securities available
for sale $1,158.6 5.7 2.1
===================================== ============================
Total equity securities 43.9
--------
Total securities available
for sale $1,202.5(3)
========
TOTAL SECURITIES:
Total debt securities $2,092.5 4.0 1.9
===================================== ============================
Total equity securities 43.9
--------
Total securities $2,136.4
=================================================================================
(1) Yields on all securities were computed based on carrying value.
(2) Yields presented on a taxable equivalent basis, based on the statutory
Federal income tax rate, adjusted for applicable state income taxes net of
the related Federal tax benefit.
(3) Securities held to maturity were reported on the consolidated balance
sheet at amortized cost and securities available for sale were reported on
the consolidated balance sheet at market value for a combined total of
$2,133.6 million.
TABLE 6: MATURITIES OF LOANS, EXCLUSIVE OF CONSUMER LOANS
=====================================================================
Maturities at December 31, 1995
------------------------------------------
Within 1-5 After
(in millions) 1 Year Years 5 Years Total
- ------------------------------------------------------------------------------
Commercial loans $1,073.4 $1,386.6 $363.8 $2,823.8
Real estate--construction loans 87.2 74.5 25.0 186.7
Real estate--commercial mortgages
and other 77.0 185.9 92.0 354.9
- ------------------------------------------------------------------------------
Total $1,237.6 $1,647.0 $480.8 $3,365.4
==============================================================================
For maturities over one year:
Loans with fixed interest rates $ 955.0 $192.9 $1,147.9
Loans with floating interest rates 692.0 287.9 979.9
- ------------------------------------------------------------------------------
Total $1,647.0 $480.8 $2,127.8
==============================================================================
56
TABLE 7: ALLOWANCE FOR POSSIBLE LOAN LOSSES
===================================================================================================================================
Year Ended December 31
------------------------------------------------------------------
(in thousands) 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses, January 1 $129,436 $136,512 $183,446 $182,957 $190,532
Loans charged off:
Commercial 3,070 3,933 10,509 28,147 36,700
Consumer--amortizing mortgages 313 401 1,365 3,283 2,515
Consumer--other 14,787 10,644 13,375 17,000 15,407
Real estate--construction 555 - 594 2,462 15,123
Real estate--commercial mortgages and other 23 939 1,332 3,364 6,069
- -----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 18,748 15,917 27,175 54,256 75,814
- -----------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 5,390 7,776 10,432 7,860 9,742
Consumer--amortizing mortgages 767 694 1,470 451 131
Consumer--other 8,032 8,611 7,611 6,789 3,937
Real estate--construction 380 143 128 198 432
Real estate--commercial mortgages and other 502 802 709 198 931
- -----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 15,071 18,026 20,350 15,496 15,173
- -----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 3,677 (2,109) 6,825 38,760 60,641
- -----------------------------------------------------------------------------------------------------------------------------------
Change in allowance due to subsidiaries purchased 6,573 323 1,296 - -
Provision charged (credited) to operating expenses 83 (9,919) (41,405) 39,249 53,066
Adjustment for change in fiscal year of pooled company - 411 - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $132,415 $129,436 $136,512 $183,446 $182,957
===================================================================================================================================
Allocation of allowance for possible loan losses, end of year:
Commercial $ 41,604 $ 38,596 $ 35,366 $ 74,013 $ 87,686
Consumer loans 18,621 21,420 32,649 44,425 38,699
Real estate 6,478 11,579 16,095 22,636 29,105
Unallocated/general 65,712 57,841 52,402 42,372 27,467
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $132,415 $129,436 $136,512 $183,446 $182,957
===================================================================================================================================
Net charge-offs (recoveries) as a percent of average loans, net .07% (.04)% .16% .96% 1.40%
Allowance to net loans (end of year) 2.06 2.50 2.92 4.52 4.38
===================================================================================================================================
Percent of total year-end loans:
Commercial 43.9% 44.2% 41.9% 42.9% 42.7%
Consumer--amortizing mortgages 27.8 26.7 27.7 23.1 19.4
Consumer--other 19.9 20.4 21.0 22.4 23.5
Real estate--construction 2.9 2.6 2.4 2.8 4.5
Real estate--commercial mortgages and other 5.5 6.1 7.0 8.8 9.9
- ------------------------------------------------------------------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0%
====================================================================================================================================
TABLE 8: NONPERFORMING ASSET ACTIVITY
====================================================================================================================================
Year Ended December 31
--------------------------------------------------------------------
(in thousands) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1 $21,765 $42,450 $91,686 $145,923 $213,145
Transfers in and new foreclosed properties 21,294 14,676 40,658 79,204 131,814
Change in nonperforming assets due to subsidiaries purchased 3,091 208 199 - -
Payments received (11,549) (15,592) (58,107) (59,136) (80,686)
Sales of foreclosed properties (3,605) (9,379) (15,767) (29,030) (41,364)
Charge-offs and write-downs (1,133) (2,300) (9,834) (37,773) (59,815)
Return to earning status (510) (7,150) (6,644) (7,916) (18,442)
Other - (969) 259 414 1,271
Adjustment for change in fiscal year for pooled company - (179) - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $29,353 $21,765 $42,450 $ 91,686 $145,923
====================================================================================================================================
December 31
--------------------------------------------------------------------
1995 1994 1993 1992 1991
--------------------------------------------------------------------
Non-accrual loans $18,670 $11,674 $22,944 $61,085 $ 89,263
Restructured loans - - - 455 2,205
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 18,670 11,674 22,944 61,540 91,468
Foreclosed properties 10,683 10,091 19,506 30,146 54,455
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $29,353 $21,765 $42,450 $91,686 $145,923
====================================================================================================================================
Nonperforming assets to total loans plus foreclosed properties* .46% .42% .91% 2.24% 3.45%
====================================================================================================================================
90 days or more past due on accrual $ 6,123 $ 4,530 $ 4,764 $ 7,434 $ 12,287
====================================================================================================================================
* Excludes loans 90 days or more past due on accrual.
53
57
TABLE 9: CERTIFICATES OF DEPOSIT $100,000 AND OVER
====================================================================================================================================
Maturities at December 31
---------------------------------
(in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
3 months or less $383,531 $152,677
Over 3 through 6 months 177,934 83,634
Over 6 through 12 months 121,149 88,054
Over 12 months 67,877 68,936
- ------------------------------------------------------------------------------------------------------------------------------------
Total $750,491 $393,301
====================================================================================================================================
TABLE 10: RISK-BASED CAPITAL AND RELATED RATIOS
====================================================================================================================================
"Well Capitalized" First American National
Minimum Corporation Bank
---------------------------- ----------------------------------
December 31 (in thousands) Regulatory Ratio 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL COMPONENTS
Tier I capital:
Realized shareholders' common equity $ 792,002 $ 681,254 $ 720,904 $ 617,190
Less disallowed intangibles (62,842) (20,619) (36,701) (19,699)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Tier I capital 729,160 660,635 684,203 597,491
- ------------------------------------------------------------------------------------------------------------------------------------
Tier II capital:
Allowable allowance for possible
loan losses 91,882 75,466 87,821 74,371
Unsecured holding company debt 99,280 49,735 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Tier II capital 191,162 125,201 87,821 74,371
- ------------------------------------------------------------------------------------------------------------------------------------
Total capital $ 920,322 $ 785,836 $ 772,024 $ 671,862
====================================================================================================================================
Risk-adjusted assets $7,310,022 $6,025,824 $6,984,533 $5,895,882
Quarterly average assets 9,018,365 7,951,318 8,672,790 7,734,622
====================================================================================================================================
CAPITAL RATIOS *
Tier I risk-based capital ratio 6.00% 9.97% 10.96% 9.80% 10.13%
Total risk-based capital ratio 10.00 12.59 13.04 11.05 11.40
Tier I leverage ratio 5.00 8.09 8.31 7.89 7.72
====================================================================================================================================
* Risk-based capital ratios were computed using realized equity (total
shareholders' equity exclusive of net unrealized gains (losses) on securities
available for sale, net of tax).
54
58
TABLE 11: QUARTERLY FINANCIAL DATA
=======================================================================================================================
Three Months Ended
------------------------------------------------------------------------
(in thousands except per share amounts) December 31 September 30 June 30 March 31
- -----------------------------------------------------------------------------------------------------------------------
1995
Net interest income $79,812 $77,410 $77,425 $77,663
Net interest income, taxable equivalent basis* 80,692 78,288 78,276 78,505
Provision for loan losses - 24 28 31
Non-interest income 31,919 26,606 25,562 24,400
Non-interest expense 68,190 60,174 61,729 62,355
Net income 24,336 27,713 25,768 25,263
- -----------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Net income $ .86 $ .99 $ .91 $ .88
Cash dividends paid .28 .28 .25 .25
Common stock price
High 50.25 44.25 36.00 34.38
Low 42.13 35.88 33.25 26.88
Last trade 47.38 43.13 35.88 33.50
- -----------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS:
Return on average assets (annualized) 1.06% 1.27% 1.24% 1.26%
Return on average common equity (annualized) 13.12 15.79 14.88 14.86
Net interest margin 3.82 3.87 4.07 4.26
=======================================================================================================================
1994
Net interest income $76,279 $73,969 $74,161 $73,833
Net interest income, taxable equivalent basis* 77,147 74,806 75,040 74,696
Provision for loan losses (9,997) 21 13 44
Non-interest income 13,920 23,862 24,335 23,598
Non-interest expense 60,294 59,929 60,425 58,622
Net income 25,511 24,095 23,700 23,896
- -----------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Net income $ .89 $ .84 $ .83 $ .83
Cash dividends paid .25 .21 .21 .21
Common stock price
High 33.13 35.00 34.75 32.00
Low 26.13 31.00 28.75 29.13
Last trade 26.88 33.00 32.75 29.75
- -----------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS:
Return on average assets (annualized) 1.27% 1.23% 1.23% 1.27%
Return on average common equity (annualized) 15.09 14.63 14.99 15.67
Net interest margin 4.19 4.17 4.25 4.34
=======================================================================================================================
* Adjusted to a taxable equivalent basis based on the statutory Federal
income tax rates, adjusted for applicable state income taxes net of the
related Federal tax benefit.
55
59
TABLE 12: CONSOLIDATED YEAR-END BALANCE SHEETS
======================================================================================================================
December 31
---------------------------------------------------------------------------
(in thousands) 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 494,496 $ 513,916 $ 515,122 $ 694,460 $ 539,364
Securities:
U.S. Treasury and other U.S. Government
agencies and corporations 1,813,782 2,116,371 2,144,726 2,044,919 1,644,234
Obligations of states and political
subdivisions 32,787 21,730 21,573 9,552 8,234
Other 287,008 195,230 37,409 46,040 94,151
- ----------------------------------------------------------------------------------------------------------------------
Total securities 2,133,577 2,333,331 2,203,708 2,100,511 1,746,619
- ----------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 291,042 28,134 153,860 123,450 184,018
Loans:
Commercial
Commercial and industrial 2,157,164 1,734,783 1,446,781 1,286,503 1,349,697
For purchasing or carrying securities 57,386 32,921 41,098 43,128 63,600
Financial institutions 68,106 77,113 98,462 92,353 92,023
Other domestic loans 539,559 444,112 373,716 326,622 293,818
International 1,612 623 - 170 563
- ----------------------------------------------------------------------------------------------------------------------
Total commercial loans 2,823,827 2,289,552 1,960,057 1,748,776 1,799,701
- ----------------------------------------------------------------------------------------------------------------------
Consumer
Amortizing mortgages 1,784,836 1,385,081 1,295,307 941,594 818,869
Installment 1,046,615 870,451 801,820 718,101 722,526
Single payment 14,272 17,185 21,747 30,711 95,818
Open end 221,034 168,307 159,900 163,437 169,566
- ----------------------------------------------------------------------------------------------------------------------
Total consumer loans 3,066,757 2,441,024 2,278,774 1,853,843 1,806,779
- ----------------------------------------------------------------------------------------------------------------------
Real estate
Construction 186,655 134,513 112,353 116,459 188,428
Commercial mortgages and other 354,918 316,242 330,983 361,419 417,754
- ----------------------------------------------------------------------------------------------------------------------
Total real estate loans 541,573 450,755 443,336 477,878 606,182
- ----------------------------------------------------------------------------------------------------------------------
Total loans 6,432,157 5,181,331 4,682,167 4,080,497 4,212,662
Unearned discount and net deferred loan fees 6,181 9,365 12,596 20,943 39,500
- ----------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net
deferred loan fees 6,425,976 5,171,966 4,669,571 4,059,554 4,173,162
Allowance for possible loan losses 132,415 129,436 136,512 183,446 182,957
- ----------------------------------------------------------------------------------------------------------------------
Total net loans 6,293,561 5,042,530 4,533,059 3,876,108 3,990,205
- ----------------------------------------------------------------------------------------------------------------------
Premises and equipment 129,419 111,075 109,320 110,228 117,700
Foreclosed properties 10,683 10,091 19,506 30,146 54,455
Other assets 328,851 239,650 173,206 321,895 251,312
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $9,681,629 $8,278,727 $7,707,781 $7,256,798 $6,883,673
======================================================================================================================
LIABILITIES
Deposits:
Demand (non-interest-bearing) $1,266,285 $1,252,136 $1,240,543 $1,133,321 $1,041,801
Time 5,971,048 4,995,343 4,878,033 4,850,846 4,757,902
Foreign 144,961 60,300 31,975 34,601 16,757
- ----------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 7,382,294 6,307,779 6,150,551 6,018,768 5,816,460
- ----------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold
under agreements to repurchase 788,569 855,618 664,826 588,950 496,691
Other short-term borrowings 149,718 74,222 91,937 19,629 24,087
Long-term debt 421,791 271,473 77,053 18,477 17,833
Other liabilities 143,725 101,962 99,852 107,075 126,955
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 8,886,097 7,611,054 7,084,219 6,752,899 6,482,026
- ----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock 147,699 143,625 139,574 134,998 116,976
Capital surplus 162,254 130,933 128,195 124,331 79,907
Retained earnings 483,973 409,638 336,648 246,816 205,602
Deferred compensation on restricted stock (1,263) (2,161) (1,851) (1,073) (653)
Employee Stock Ownership Plan (661) (781) (1,053) (1,173) -
Net unrealized gains (losses) on securities
available for sale, net of tax 3,530 (13,581) 22,049 - (185)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 795,532 667,673 623,562 503,899 401,647
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $9,681,629 $8,278,727 $7,707,781 $7,256,798 $6,883,673
======================================================================================================================
56
60
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in Item 14(a)(1) and (2) are included in
this Report beginning on page 68 and are incorporated in this Item 8 by
reference. The table "Quarterly Financial Data" on page 55 hereof,
"Consolidated Year-End Balance Sheets" on page 56 hereof, and "Consolidated
Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates"
on pages 49-50 hereof are incorporated in this Item 8 by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers of the Registrant
The following is a list of the Corporation's executive officers, their
ages and their positions and offices during the last five years (listed
alphabetically).
Officer Age Business Experience - Past 5 years
- ------- --- ----------------------------------
James C. Armistead, Jr. 48 Since June 1992, Mr. Armistead has served as
Executive Vice President-Middle Market/Corporate
Banking of FANB. From August 1991 until June
1992, he served as a Senior Vice President of
FANB. From 1984 until April 1991 he served as
Senior Executive Vice President and head of the
banking division of Metropolitan Federal Savings
Loan Association, which, in 1991, changed its
name to Metropolitan Federal Bank, F.S.B.
("Metropolitan"). In April 1991, Metropolitan
was declared insolvent by the OTS and placed in
receivership with the Resolution Trust Company
named as receiver. The assets of Metropolitan
were transferred to Metropolitan Federal Savings
and Loan Association, F.A., a new thrift created
by the OTS. From April 1991 until August 1991,
Mr. Armistead was an officer of Metropolitan
Federal Savings and Loan Association, F.A.
Dennis C. Bottorff 51 Mr. Bottorff serves as Chairman, President and
Chief Executive Officer of the Corporation and as
Chairman and Chief Executive Officer of FANB.
From November 1991 until January 1994, Mr.
Bottorff also served as President of
57
61
FANB. From September 1990 until November 1991, he
was President and Chief Operating Officer of
C&S/Sovran Corporation.
John W. Boyle, Jr. 55 Mr. Boyle is President, Corporate Bank of FANB and
has served in such capacity since January 1992.
From 1990 to January 1992, he was group executive
vice president of C&S/Sovran Corporation, U.S.
Banking Group.
R. Booth Chapman 55 Since September 1991, Mr. Chapman has served as
Executive Vice President - Independent Loan
Review of FANB. From December 1990 to September
1991, he was Senior Vice President, Corporate
Special Assets, for C&S/Sovran Corporation.
Brian L. Cooper 37 Mr. Cooper is Executive Vice President - Marketing
of FANB and has served in such capacity since
September 1995. From August 1985 until March 1992,
he was First Vice President of Security Pacific
Bank. From March 1992 through August 1995, he
served as Senior Vice President -- Marketing &
Electronic Banking of Banc One Corporation
(Western Region).
Emery F. Hill 52 Mr. Hill is Executive Vice President - Operations
and Technology of FANB and has served in this
position since March 1992. He served as Group
Executive Officer of Information Management with
C&S/Sovran Corporation from 1990 to September
1991 and with NationsBank from September 1991
until March 1992.
Carroll E. Kimball 33 Ms. Kimball is Executive Vice President - Director
of Investor Relations of the Corporation and
Executive Vice President - Strategic Planning,
Asset Liability Management, and Investor Relations
of FANB and has served in such capacity since
March 1995. From January 1991 until January
1992, she served in the Finance Department of
C&S/Sovran Corporation. Since January 1992, she
has served in Strategic Planning and Investor
Relations areas of FANB.
Rufus B. King 50 Mr. King is Executive Vice President and Chief
Credit Officer of FANB and has served in such
position since July 1989.
58
62
John W. Logan 53 Mr. Logan is Executive Vice President -
Investments of the Corporation and FANB and has
served in such position since 1991.
Robert A. McCabe, Jr. 45 Mr. McCabe is President - FAE and Vice Chairman of
the Board of Directors of the Corporation and
FANB. From January 1992 until January 1994, he
served as President, General Bank of FANB. From
March 1991 until January 1992 he served as
President, Corporate Bank of FANB. From April
1987 until March 1991, Mr. McCabe served as
President and Chief Operating Officer of FANB -
Knoxville, Tennessee.
Dale W. Polley 46 Mr. Polley serves as Vice Chairman of the Board of
Directors of the Corporation and also serves as
President of FANB. From November 1992 through
1994, he also served as Principal Financial
Officer of the Corporation and FANB. From
December 1991 until January 1994, he served as
Vice Chairman and Chief Administrative Officer of
the Corporation and FANB and, from November 1992
through 1994, also served as Principal Financial
Officer of the Corporation and FANB. From 1990
until December 1991, he was Group Vice President
and Treasurer of C&S/Sovran Corporation.
Martin E. Simmons 56 Mr. Simmons is Executive Vice President -
Administration, Secretary, Principal Financial
Officer, and General Counsel of the Corporation
and FANB. From August 1992 until January 1994, he
served as Executive Vice President, Secretary and
General Counsel of the Corporation and FANB. From
1973 to August 1992, Mr. Simmons was a partner
with the Nashville law firm of Dearborn & Ewing
and served as Chairman of the firm's management
committee from 1988 through 1991 and during
previous periods.
John W. Smithwick 52 Mr. Smithwick is Executive Vice President - Human
Resources of FANB and has served in such capacity
since 1986.
Terry S. Spencer 39 Mr. Spencer serves as Executive Vice President and
Treasurer of the Corporation and as Executive Vice
President of FANB. From September 1993 until March
1995, he served as Executive Vice
President-Development of FANB. From December 1991
until September 1993, he served as Senior Vice
President-Director of Strategic Planning of FANB.
From
59
63
1989 until December 1991 he served as Senior Vice
President - Manager of Strategic Planning of
C&S/Sovran Corporation.
M. Terry Turner 41 Mr. Turner serves as President - General Bank of
FANB and has served in this position since
January 1994. He served as Executive Vice
President - Business and Professional Banking of
FANB from January 1991 until January 1994. From
June 1990 until January 1991, he was City
President of FANB in Nashville.
Marvin J. Vannatta, Jr. 52 Mr. Vannatta serves as Executive Vice President
and Principal Accounting Officer of the
Corporation and FANB and as Cashier of FANB.
From April 1994 until March 1995, he served as
Senior Vice President, Principal Accounting
Officer and Treasurer of the Corporation. From
January 1994 until March 1995, Mr. Vannatta
served as Senior Vice President and as the
Cashier of FANB. From 1981 until January 1994, he
served in various capacities, including Senior
Vice President, Controller and Cashier of FANB.
The additional information required by Item 405 of Regulation S-K is
contained in the Corporation's Notice of 1996 Annual Meeting of Shareholders
and Proxy Statement (the "1996 Proxy Statement") filed with the Securities and
Exchange Commission within 120 days of the Corporation's year-end pursuant to
Regulation 14A. Such information appears in the sections entitled "Election of
Directors" and "Reports of Beneficial Ownership" in the 1996 Proxy Statement
and is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
This information appears in the sections entitled "Executive
Compensation", "Human Resources Committee Interlocks and Insider
Participation", "Compensation of Directors" and "Retirement Plans" in the 1996
Proxy Statement, and is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information appears in the section entitled "Security Ownership of
Certain Beneficial Owners and Management" in the 1996 Proxy Statement, and is
incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information appears in the sections entitled "Certain Transactions"
and "Human Resources Committee Interlocks and Insider Participation" in the
1996 Proxy Statement, and is incorporated herein by reference.
60
64
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
The Report of KPMG Peat Marwick LLP, Independent Certified
Public Accountants
Consolidated Income Statements of First American Corporation
and Subsidiaries for the three years ended December 31, 1995,
1994, and 1993
Consolidated Balance Sheets of First American Corporation and
Subsidiaries at December 31, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity of
First American Corporation and Subsidiaries for the three
years ended December 31, 1995, 1994, and 1993
Consolidated Statements of Cash Flows of First American
Corporation and Subsidiaries for the three years ended
December 31, 1995, 1994, and 1993
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial
Statements or the notes thereto.
The following reports and consents are submitted herewith:
Accountants' Consent by
KPMG Peat Marwick LLP -- Exhibit 23
61
65
3. Exhibits
Exhibit
Number Description
------- -----------
3.1 Restated Charter (previously filed as Exhibit 1 to the
Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1991, and incorporated
herein by reference).
3.2 By-Laws of the Corporation currently in effect as
amended January 18, 1996, included on pages 107-128
hereof.
4.1 The Corporation agrees to provide the Securities and
Exchange Commission, upon request, copies of
instruments defining the rights of holders of long-term
debt of the Corporation, and all of its subsidiaries
for which consolidated or unconsolidated financial
statements are required to be filed with the Securities
and Exchange Commission.
4.2 Rights Agreement, dated December 14, 1988, between
First American Corporation and First American Trust
Company, N.A. (previously filed as Exhibit 1 to a
Current Report on Form 8-K dated December 14, 1988, and
incorporated herein by reference).
4.3(a) Indenture, dated as of April 22, 1993, between First
American Corporation and Chemical Bank, as Trustee
(previously filed as Exhibit 4.1 to Registration
Statement No. 33-59844 and incorporated herein by
reference).
4.3(b) Supplemental Indenture, dated as of April 22, 1993,
between First American Corporation and Chemical Bank, as
Trustee (previously filed as Exhibit 4.2 to Registration
Statement No. 33-59844 and incorporated herein by
reference).
10.3(a) First American STAR Award Plan (previously filed as
Exhibit 10.03(b) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1986 and
incorporated herein by reference).
10.3(b) First American Corporation 1991 Employee Stock
Incentive Plan (previously filed as part of the
Corporation's Notice of Annual Meeting and Proxy
Statement dated March 18, 1991 for the annual meeting
of shareholders held April 18, 1991 and incorporated
herein by reference).
62
66
10.3(c) 1993 Non-Employee Director Stock Option Plan
(previously filed as part of the Corporation's Notice
of Annual Meeting and Proxy Statement dated March 18,
1993 for the annual meeting of shareholders held April
15, 1993 and incorporated herein by reference).
10.3(d) First American Corporation 1992 Executive Early
Retirement Program (previously filed as Exhibit 10.4(a)
to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
10.3(e) First American Corporation Directors' Deferred
Compensation Plan (previously filed as Exhibit 19.1 to
the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
10.3(f) First American Corporation Supplemental Executive
Retirement Program dated as of January 1, 1989
(previously filed as Exhibit 19.2 to the Corporation's
Annual Report on Form 10-K for the year ended December
31, 1992 and incorporated herein by reference).
10.3(g) Form of Deferred Compensation Agreement approved by the
Human Resources Committee of the Board of Directors of
the Corporation on December 21, 1995 (previously filed
as Exhibit 10.3(h) to the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference) and entered into by
the Corporation and John Boyle and Dennis Bottorff, as
amended and restated and included on page 129 hereof.
10.3(h) Restated and Amended First American Corporation First
Incentive Reward Savings Thrift Plan (previously filed
as Exhibit 4 to Registration Statement No. 33-57385
filed January 20, 1995 and incorporated herein by
reference).
10.3(i) Form of Key Employee Change in Control Agreement by and
between the Corporation and its Executive Officers and
included on page 137 hereof.
11 Calculation of earnings per share is included in
Note 1 to the consolidated financial statements
contained herein on page 72 and incorporated herein by
reference.
63
67
13 First American Corporation's Annual Report to
Shareholders for the fiscal year ended December 31,
1995. Such report, except for the portions included
herein, is furnished for the information of the
Securities and Exchange Commission and is not "filed" as
part of this Report.
21 List of Subsidiaries included on page 145 hereof.
23 Consent of KPMG Peat Marwick LLP, independent
accountants included on page 146 hereof.
27 Financial Data Schedule included on pages 147-148
hereof.
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
(b) Five reports on Form 8-K were filed during the last quarter of 1995.
1) October 3, 1995 -- Item 5 ("Other Event") Report that includes as
Exhibit 99(a) thereto the Corporation's revised unaudited pro forma
combined condensed financial data reflecting the acquisition of the
Corporation of Heritage and Charter for the five years ended December 31,
1994 and the six months ended June 30, 1995 and 1994 and incorporates
Exhibit 99(a) from the Corporation's August 15, 1995 Form 8-K.
2) October 13, 1995 -- Item 5 ("Other Event") Report incorporating
Exhibit 99(a) from the Corporation's October 3, 1995 Form 8-K.
3) November 15, 1995 -- Item 2 ("Acquisition or Disposition of Assets")
and Item 7 ("Financial Statements, Pro Form Financial Statements and
Exhibits") Report that includes historical financial data for Heritage
and incorporates Exhibit 99 from the Corporation's August 15, 1995 Form
8-K and incorporates Exhibit 99(a) from the Corporation's October 3,
1995 Form 8-K.
4) December 6, 1995 -- Item 5 ("Other Events") Report that includes as
Exhibit 99(a) thereto the following audited supplemental consolidated
financial statements of the Corporation and subsidiaries giving
retroactive effect to the merger of Heritage with and into the
Corporation on November 1, 1995 in a transaction accounted for as a
pooling of interests:
(a) Supplemental Consolidated Balance Sheets as of December 31,
1994 and 1993;
(b) Supplemental Consolidated Statements of Income for the years
ended December 31, 1994, 1993 and 1992;
64
68
(c) Supplemental Consolidated Statements of Changes in
Shareholders' Equity for the years ended December 31, 1994, 1993
and 1992;
(d) Supplemental Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1993 and 1992;
(e) Notes to the Supplemental Consolidated Financial Statements; and
(f) Independent Auditors' Report.
5) December 8, 1995 -- Item 5 ("Other Events") Report that includes as
Exhibit 99 thereto the following unaudited supplemental consolidated
financial statements of the Corporation and subsidiaries giving
retroactive effect to the merger of Heritage with and into the
Corporation on November 1, 1995 in a transaction accounted for as a
pooling of interests:
(a) Supplemental Consolidated Balance Sheets as of September 30,
1995 and 1994 and December 31, 1994;
(b) Supplemental Consolidated Statements of Income for the nine
months ended September 30, 1995 and 1994;
(c) Supplemental Consolidated Statements of Changes in
Shareholders' Equity for the nine months ended September 30, 1995
and 1994;
(d) Supplemental Consolidates Statements of Cash Flows for the nine
months ended September 30, 1995 and 1994; and
(e) Notes to the Supplemental Consolidated Financial Statements.
65
69
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTAL DATA
Page
----
Independent Auditors' Report 67
Financial Statements:
Consolidated Income Statements of First American
Corporation and Subsidiaries for the three years
ended December 31, 1995, 1994, and 1993 68
Consolidated Balance Sheets of First American Corporation
and Subsidiaries at December 31, 1995 and 1994 69
Consolidated Statements of Changes in Shareholders' Equity
of First American Corporation and Subsidiaries for the
three years ended December 31, 1995, 1994, and 1993 70
Consolidated Statements of Cash Flows of First American
Corporation and Subsidiaries for the three years ended
December 1995, 1994, and 1993 71
Notes to Consolidated Financial Statements 72
Supplemental Data:
Consolidated Average Balance Sheets and Taxable Equivalent
Income/Expense and Yields/Rates for the five years ended
December 31, 1995, 1994, 1993, 1992 and 1991 49
Consolidated Year-End Balance Sheets of First American
Corporation and Subsidiaries at December 31, 1995, 1994,
1993, 1992 and 1991 56
66
70
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
First American Corporation:
We have audited the accompanying consolidated balance sheets of First
American Corporation and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
American Corporation and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in note 4 to the consolidated financial statements, the
Corporation adopted in 1993 the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards (Statement) No.
115, Accounting for Certain Investments in Debt and Equity Securities. Also,
as discussed in note 13 to the consolidated financial statements, the
Corporation adopted in 1993 the provisions of Statements No. 109, Accounting
for Income Taxes; No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions; and No. 112, Employers' Accounting for Postemployment
Benefits.
/s/ KPMG Peat Marwick LLP
-------------------------------------
KPMG Peat Marwick LLP
Nashville, Tennessee
January 19, 1996
67
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- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED INCOME STATEMENTS
First American Corporation and Subsidiaries
Year Ended December 31
--------------------------------------------
(dollars in thousands except per share amounts) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $469,449 $373,163 $322,151
Interest and dividends on securities 143,299 129,510 145,486
Interest on Federal funds sold and securities purchased under
agreements to resell 4,811 3,108 4,904
Interest on time deposits with other banks and other interest 2,140 1,255 1,791
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 619,699 507,036 474,332
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 16,128 17,477 16,476
Money market accounts 82,648 57,695 47,249
Regular savings 9,624 12,126 12,897
Certificates of deposit under $100,000 72,742 52,817 56,801
Certificates of deposit $100,000 and over 35,329 16,943 14,864
Other time and foreign 22,196 16,147 17,460
- ----------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 238,667 173,205 165,747
- ----------------------------------------------------------------------------------------------------------------------------
Interest on short-term borrowings (note 8) 48,751 28,529 17,100
Interest on long-term debt (note 9) 19,971 7,060 4,285
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 307,389 208,794 187,132
- ----------------------------------------------------------------------------------------------------------------------------
Net Interest Income 312,310 298,242 287,200
Provision for loan losses (note 5) 83 (9,919) (41,405)
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 312,227 308,161 328,605
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 48,545 43,605 40,250
Commissions and fees on fiduciary activities 16,571 16,252 15,364
Investment services income 10,358 9,490 10,181
Merchant discount fees 3,279 2,834 2,321
Trading account revenue 373 (327) (21)
Net realized gain (loss) on sales and writedowns of securities (note 4) 737 (9,997) (2,028)
Gain on sales of branches (note 2) 3,000 - 1,000
Other income 25,624 23,858 21,312
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 108,487 85,715 88,379
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 143,909 135,616 123,061
Net occupancy expense (note 6) 21,874 21,556 22,930
Equipment expense 15,686 15,094 14,679
FDIC insurance expense 7,974 13,607 13,921
Systems and processing expense (note 6) 11,389 9,856 14,959
Contribution to First American Foundation (note 11) - - 10,000
Communication expense 9,863 8,557 7,418
Marketing expense 9,153 8,363 6,856
Supplies expense 4,471 3,749 4,155
Foreclosed properties expense (income), net (6,070) (5,732) (2,211)
Merger-related expenses (note 2) 7,269 - -
Other expenses 26,930 28,604 32,459
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 252,448 239,270 248,227
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE AND CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES 168,266 154,606 168,757
Income tax expense (note 12) 65,186 57,404 61,348
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES 103,080 97,202 107,409
Cumulative effect of changes in accounting principles, net
of tax (note 13) - - (84)
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $103,080 $ 97,202 $107,325
============================================================================================================================
PER COMMON SHARE:
Income before cumulative effect of changes in accounting
principles and net income $ 3.64 $3.39 $ 3.79
Dividends declared 1.06 .88 .55
============================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 28,315 28,670 28,355
============================================================================================================================
See accompanying notes to consolidated financial statements.
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72
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
First American Corporation and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------
December 31
----------------------------------
(dollars in thousands) 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks (note 3) $ 494,496 $ 513,916
Time deposits with other banks 26,733 3,855
Securities (note 4):
Held to maturity (market value $933,911 and $1,559,241, respectively) 931,084 1,643,867
Available for sale (amortized cost $1,196,414 and $710,960, respectively) 1,202,493 689,464
- -------------------------------------------------------------------------------------------------------------------------
Total securities 2,133,577 2,333,331
- -------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under agreements to resell 291,042 28,134
Trading account securities 22,419 8,617
Loans (note 5):
Commercial 2,823,827 2,289,552
Consumer--amortizing mortgages 1,784,836 1,385,081
Consumer--other 1,281,921 1,055,943
Real estate--construction 186,655 134,513
Real estate--commercial mortgages and other 354,918 316,242
- -------------------------------------------------------------------------------------------------------------------------
Total loans 6,432,157 5,181,331
Unearned discount and net deferred loan fees 6,181 9,365
- -------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net deferred loan fees 6,425,976 5,171,966
Allowance for possible loan losses 132,415 129,436
- -------------------------------------------------------------------------------------------------------------------------
Total net loans 6,293,561 5,042,530
- -------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net (note 6) 129,419 111,075
Foreclosed properties 10,683 10,091
Other assets (notes 7 and 12) 279,699 227,178
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $9,681,629 $8,278,727
=========================================================================================================================
LIABILITIES
Deposits:
Demand (non-interest-bearing) $1,266,285 $1,252,136
NOW accounts 811,862 868,000
Money market accounts 2,031,796 1,611,794
Regular savings 376,725 472,188
Certificates of deposit under $100,000 1,679,792 1,342,621
Certificates of deposit $100,000 and over 750,491 393,301
Other time 320,382 307,439
Foreign 144,961 60,300
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 7,382,294 6,307,779
- -------------------------------------------------------------------------------------------------------------------------
Short-term borrowings (note 8) 938,287 929,840
Long-term debt (note 9) 421,791 271,473
Other liabilities (note 10) 143,725 101,962
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 8,886,097 7,611,054
- -------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (notes 6, 10, 15, and 16)
SHAREHOLDERS' EQUITY (NOTES 4, 9, 10, 14, AND 16)
Preferred stock, without par value; authorized 2,500,000 shares - -
Common stock, $5 par value; authorized 50,000,000 shares; issued:
29,539,819 shares at December 31, 1995; 28,725,069 shares at
December 31, 1994 147,699 143,625
Capital surplus 162,254 130,933
Retained earnings 483,973 409,638
Deferred compensation on restricted stock (1,263) (2,161)
Employee stock ownership plan obligation (661) (781)
- -------------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 792,002 681,254
Net unrealized gains (losses) on securities available for sale, net of tax 3,530 (13,581)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 795,532 667,673
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,681,629 $8,278,727
=========================================================================================================================
See accompanying notes to consolidated financial statements.
69
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- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
First American Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
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, DECEMBER 31, 1992 $134,998 $124,331 $246,816 $(1,073) $(1,173) $ - $503,899
Issuance of 225,863 common shares in connection
with Employee Benefit Plan, net of discount
on Dividend Reinvestment Plan (note 10) 1,130 2,740 - - - - 3,870
Issuance of 47,000 shares of restricted common stock
(note 10) 235 984 - (1,219) - - -
Amortization of deferred compensation on restricted
stock (note 10) - - - 581 - - 581
Reduction in employee stock ownership plan
obligation (note 10) - - - - 120 - 120
Three-for-two stock split of pooled company 3,211 - (3,211) - - - -
Net income - - 107,325 - - - 107,325
Cash dividends declared ($.55 per common share) - - (14,282) - - - (14,282)
Net unrealized gains on securities available
for sale, net of tax (note 4) - - - - - 22,049 22,049
Other - 140 - (140) - - -
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 139,574 128,195 336,648 (1,851) (1,053) 22,049 623,562
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of 112,582 common shares in connection
with Employee Benefit Plan, net of discount
on Dividend Reinvestment Plan (note 10) 562 1,338 - - - - 1,900
Issuance of 48,289 shares of restricted common stock
(note 10) 241 1,272 - (1,425) - - 88
Amortization of deferred compensation on restricted
stock (note 10) - - - 1,014 - - 1,014
Reduction in employee stock ownership plan
obligation (note 10) - - - - 212 - 212
Four-for-three stock split of pooled company 3,224 (2) (3,222) - - - -
Net income - - 97,202 - - - 97,202
Cash dividends declared ($.88 per common share) - - (22,968) - - - (22,968)
Cash dividends declared by pooled company - - (1,129) - - - (1,129)
Change in net unrealized gains (losses) on securities
available for sale, net of tax (note 4) - - - - - (35,630) (35,630)
Adjustment for change in fiscal year of pooled
company (note 2) 24 74 3,107 101 60 - 3,366
Tax benefit from stock option and award plans - 56 - - - - 56
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 143,625 130,933 409,638 (2,161) (781) (13,581) 667,673
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of 678,587 common shares in connection
with Employee Benefit Plan, net of discount
on Dividend Reinvestment Plan (note 10) 3,393 10,302 - - - - 13,695
Issuance of 16,095 shares of restricted common stock 81 498 - (492) - 87
Repurchase of 1,645,158 shares of common stock (note 14) (8,226) (54,121) - - - - (62,347)
Issuance of 1,765,235 common shares for purchase of
Charter Federal 8,826 71,547 - - - - 80,373
Amortization of deferred compensation on restricted
stock - - - 1,390 - - 1,390
Reduction in employee stock ownership plan
obligation (note 10) - - - - 120 - 120
Net income - - 103,080 - - - 103,080
Cash dividends declared ($1.06 per common share) - - (27,883) - - - (27,883)
Cash dividends declared by pooled company - - (908) - - - (908)
Change in net unrealized gains losses on securities
available for sale, net of tax - - - - - 17,111 17,111
Tax benefit from stock option and award plans - 3,095 - - - - 3,095
Other - - 46 - - - 46
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $147,699 $162,254 $483,973 $(1,263) $(661) $ 3,530 $795,532
====================================================================================================================================
See accompanying notes to consolidated financial statements.
70
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q
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
First American Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
(in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 103,080 $ 97,202 $ 107,325
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 83 (9,919) (41,405)
Write-downs on foreclosed properties 239 70 1,503
Depreciation of premises and equipment 14,538 14,606 14,389
Cumulative effect of changes in accounting principles, net of tax - - 84
Amortization of intangible assets 4,152 3,937 3,848
Other amortization (accretion), net (4,218) (874) 3,829
Deferred income tax expense 18,005 10,366 11,348
Net realized (gain) loss on sales and write-downs of securities (737) 9,997 2,028
Net (gain) loss on sales and write-downs of premises and equipment (287) (262) 525
Gain on sales of branches (3,000) - (1,000)
Change in assets and liabilities, net of effects from acquisitions and
sales of branches:
(Increase) decrease in accrued interest receivable (25,116) (6,895) 6,414
Increase (decrease) in accrued interest payable 20,591 10,637 (3,751)
(Increase) decrease in trading account securities (13,802) 3,646 (4,382)
(Increase) decrease in other assets (4,160) (39,964) 41,276
Increase (decrease) in other liabilities 2,199 (6,579) (28,401)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 111,567 85,968 113,630
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net (increase) decrease in time deposits with other banks (18,925) (1,660) 115,104
Proceeds from sales of securities available for sale 1,108,411 1,418,380 858,609
Proceeds from maturities of securities available for sale 187,449 164,085 348,476
Purchases of securities available for sale (839,869) (1,106,865) (1,593,558)
Proceeds from maturities of securities held to maturity 273,922 214,211 908,784
Purchases of securities held to maturity (203,729) (842,053) (555,370)
Net (increase) decrease in Federal funds sold and securities purchased
under agreements to resell (262,908) 119,726 (28,660)
Acquisitions, net of cash acquired 2,979 (1,784) (25,572)
Sales of branches, net of cash sold (24,451) - (51,318)
Net increase in loans (850,998) (481,656) (452,392)
Proceeds from sales of premises and equipment 1,413 6,411 656
Purchases of premises and equipment (29,567) (21,518) (14,525)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (656,273) (532,723) (489,766)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 599,568 101,811 1,059
Net increase (decrease) in short-term borrowings (101,142) 173,077 148,184
Proceeds from issuance of long-term debt 49,513 - 49,680
Advances from Federal Home Loan Bank 52,724 208,061 9,748
Net repayment of other long-term debt (1,116) (14,076) (1,804)
Other - 36 (582)
Issuance of common shares under Employee Benefit and Dividend
Reinvestment Plans 13,782 1,988 4,795
Repurchase of common stock (62,347) - -
Tax benefit related to stock options 3,095 56 -
Cash dividends paid (28,791) (24,097) (14,282)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 525,286 446,856 196,798
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and due from banks (19,420) 101 (179,338)
Adjustment for change in fiscal year of pooled company - (1,307) -
Cash and due from banks, beginning of year 513,916 515,122 694,460
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of year $ 494,496 $ 513,916 $ 515,122
====================================================================================================================================
Cash paid during the year for:
Interest expense $ 286,798 $ 198,002 $ 182,291
Income taxes 37,129 56,619 51,162
Non-cash investing activities:
Foreclosures 4,133 2,008 16,226
Reclassification of investment securities (note 4) 693,968 203,764 368,638
Stock issued for acquisition (note 2) 80,373 - -
====================================================================================================================================
See accompanying notes to consolidated financial statements.
71
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- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1: DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF OPERATIONS
First American Corporation ("Corporation") is the Nashville-based parent
company of First American National Bank ("FANB"), First American National Bank
of Kentucky ("FANBKY"), First American Federal Savings Bank ("FAFSB"), and
First American Enterprises, Inc. The Corporation's bank and thrift
subsidiaries operate 164 offices and make commercial, consumer, and real estate
loans and provide various banking and mortgage-related services to its
customers, located within the Corporation's market, which consists primarily of
Tennessee, Virginia, Kentucky and selected markets in other adjacent states.
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements of First American Corporation have
been prepared in conformity with generally accepted accounting principles
including general practices of the banking industry. The following is a
summary of the more significant accounting policies of the Corporation.
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Prior period
financial statements have been restated to reflect the acquisition of Heritage
Federal Bancshares, Inc., ("Heritage") on November 1, 1995, in a transaction
accounted for as a pooling-of-interests.
SECURITIES
Effective December 31, 1993, the Corporation adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires investments
in equity securities that have a readily determinable fair value and
investments in debt securities to be classified into three categories, as
follows: held to maturity debt securities, trading securities, and securities
available for sale.
Under SFAS No. 115, classification of a debt security as held to maturity
is based on the Corporation's positive intent and ability to hold such security
to maturity. Securities held to maturity are stated at cost adjusted for
amortization of premiums and accretion of discounts, unless there is a decline
in value which is considered to be other than temporary, in which case the cost
basis of such security is written down to market and the amount of the
write-down is included in earnings.
72
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Securities that are bought and held principally for the purpose of selling
them in the near term are classified as trading account securities, which are
valued at market with unrealized gains and losses included in earnings. Gains
or losses on sales and adjustments to market value of trading account
securities are included in non-interest income in the consolidated income
statements.
Securities classified as available for sale, which are reported at market
value with unrealized gains and losses excluded from earnings and reported, net
of tax, in a separate component of shareholders' equity, include all securities
not classified as trading account securities or securities held to maturity.
These include securities used as part of the Corporation's asset/liability
strategy which may be sold in response to changes in interest rates, prepayment
risk, the need or desire to increase capital, and other similar factors. Gains
or losses on sale of securities available for sale are recognized at the time
of sale, based upon specific identification of the security sold, and are
included in non-interest income in the consolidated income statements.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation enters into interest rate swap, forward interest rate
swap, and basis swap transactions (swaps), as well as futures contracts, in
connection with its asset/liability management program in managing interest
rate exposure arising out of non-trading assets and liabilities. The impact of
a swap is accrued over the life of the agreement based on expected settlement
payments and is recorded as an adjustment to interest income or expense in the
period in which it accrues and in the category appropriate to the related asset
or liability. The related amount receivable from or payable to the swap
counterpart is included in other assets or liabilities in the consolidated
balance sheets. Realized and unrealized gains and losses on futures contracts
which are designated as effective hedges of interest rate exposure arising out
of non-trading assets and liabilities are deferred and recognized as interest
income or interest expense, in the category appropriate to the related asset or
liability, over the covered periods or lives of the hedged assets or
liabilities. Gains or losses on early terminations of derivative financial
instruments that modify the underlying characteristics of specified assets or
liabilities are deferred and amortized as an adjustment to the yield or rate of
the related assets or liabilities over the remaining covered period.
On a limited basis, the Corporation also enters into interest rate swap
agreements, as well as interest rate cap and floor agreements, with customers
desiring protection from possible adverse future fluctuations in interest
rates. As an intermediary, the Corporation generally maintains a portfolio of
matched offsetting interest rate contract agreements. At the inception of such
agreements, the portion of the compensation related to credit risk and ongoing
servicing, if any, is deferred and taken into income over the term of the
agreements.
LOANS
Loans are stated at the principal amount outstanding. Unearned discount,
deferred loan fees net of loan acquisition costs, and the allowance for
possible loan losses are shown as reductions of loans. Loan origination and
commitment fees and certain loan related costs are being deferred and the net
amount amortized as an adjustment of the related loan's yield over the
contractual life of the
73
77
loan. Unearned discount represents the unamortized amount of finance charges,
principally related to certain installment loans. Interest income on most
loans is accrued based on the principal amount outstanding. Interest income on
installment loans which have unearned discounts is recognized primarily by the
sum-of-the-month's digits method.
The Corporation adopted, on a prospective basis effective January 1, 1995,
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures." These pronouncements apply to impaired 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 adoption of the pronouncements had no material impact
on the Corporation's consolidated financial statements.
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. Impaired loans are measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than the recorded investment in the loan, a creditor shall
recognize an impairment by creating a valuation allowance with a corresponding
charge to the provision for loan losses or by adjusting an existing valuation
allowance for the impaired loan with a corresponding charge or credit to the
provision for loan losses.
The Corporation's consumer loans are 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.
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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. Consumer loans on which interest or
principal is past due more than 120 days are charged off.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The provision for loan losses represents a charge (credit) to earnings
necessary, after loan charge-offs and recoveries, to maintain the allowance for
possible loan losses at an appropriate level which is adequate to absorb
estimated losses inherent in the loan portfolio. Such estimated losses arise
primarily from the loan portfolio but may also be derived from other sources,
including commitments to extend credit and standby letters of credit. The
level of the allowance for possible loan losses is determined on a quarterly
basis using procedures which include: (1) categorizing commercial and
commercial real estate loans into risk categories to estimate loss
probabilities based primarily on the historical loss experience of those risk
categories; (2) analyzing significant commercial and commercial real estate
credits and calculating specific reserves as necessary; (3) assessing various
homogeneous consumer loan categories to estimate loss probabilities based
primarily on historical loss experience; (4) reviewing unfunded commitments;
and (5) considering various other factors, such as changes in credit
concentrations, loan mix, and economic conditions which may not be specifically
quantified in the loan analysis process.
The allowance for possible loan losses consists of an allocated portion
and an unallocated, or general, portion. The allocated portion is maintained
to cover estimated losses applicable to specific segments of the loan
portfolio. The unallocated portion is maintained to absorb losses which
probably exist as of the evaluation date but are not identified by the more
objective processes used for the allocated portion of the allowance for loan
losses due to risk of error or imprecision. While the total allowance consists
of an allocated portion and an unallocated portion, these terms are primarily
used to describe a process. Both portions of the allowance are available to
provide for inherent loss in the entire portfolio.
The allowance for possible loan losses is increased (decreased) by
provisions for loan losses charged (credited) to expense and is reduced
(increased) by loans charged off net of recoveries on loans previously charged
off. The provision for loan losses is based on management's determination of
the amount of the allowance necessary to provide for estimated loan losses
based on its evaluation of the loan portfolio. Determining the appropriate
level of the allowance and the amount of the
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provision for loan losses involves uncertainties and matters of judgment and
therefore cannot be determined with precision.
FORECLOSED PROPERTIES
Foreclosed properties include property acquired in situations in which the
Corporation has physical possession of a debtor's assets (collateral)
regardless of whether formal foreclosure proceedings have taken place.
Foreclosed properties are valued at the lower of cost or fair value minus
estimated costs to sell. The fair value of the assets is the amount that the
Corporation could reasonably expect to receive for them in a current sale
between a willing buyer and a willing seller, that is, other than in a forced
or liquidation sale. Cost includes loan principal, accrued interest,
foreclosure expense, and expenditures for subsequent improvements. The excess
of cost over fair value minus estimated costs to sell at the time of
foreclosure is charged to the allowance for possible loan losses. Subsequent
write-downs to fair value minus estimated costs to sell are included in
foreclosed properties expense.
DEPRECIATION AND AMORTIZATION
Premises and equipment is stated at cost less accumulated depreciation and
amortization, which is computed principally on the straight-line method based
on the estimated useful lives of the respective assets.
GOODWILL AND OTHER INTANGIBLES
For acquisitions accounted for as purchases, the net assets have been
adjusted to their fair values as of the respective acquisition dates. The
value of core deposit rights and the excess of the purchase price of
subsidiaries over net assets acquired (goodwill) are being amortized on a
straight-line basis over periods ranging from ten to twenty years. Core
deposit rights and the excess of the purchase price of subsidiaries over net
assets acquired, net of amounts amortized, are included in other assets in the
consolidated balance sheets.
The carrying value of the excess of the purchase price of subsidiaries
over net assets acquired will be reviewed if the facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill will
not be recoverable, as determined based on the undiscounted cash flows of an
entity acquired over the remaining amortization period, the Corporation's
carrying value of the goodwill will be reduced by the estimated shortfall of
cash flows.
EMPLOYEE BENEFIT PLANS
The Corporation provides a variety of benefit plans to eligible employees.
Retirement plan expense is accrued each year, and plan funding represents at
least the minimum amount required by the Employee Retirement Income Security
Act of 1974, as amended. Differences between expense and funded amounts are
carried in other assets or other liabilities. Beginning in 1993, the
Corporation recognizes postretirement benefits other than pensions on an
accrual basis, and effective December 31, 1993, other postemployment benefits
are also recognized on an accrual basis. The Corporation
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also makes contributions to an employee thrift and profit-sharing plan based on
employee contributions and performance levels of the Corporation.
INCOME TAXES
The Corporation files a consolidated Federal income tax return, except for
its credit life insurance subsidiary, which files a separate return. Effective
January 1, 1993, the Corporation adopted SFAS No. 109, "Accounting for Income
Taxes," which requires a change from the deferred method of accounting under
Accounting Principles Bulletin No. 11 to the asset and liability method of
accounting for income taxes. Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets are reduced by
a valuation allowance, if necessary, to an amount that more likely than not
will be realized.
EARNINGS PER COMMON SHARE
Earnings per common share amounts are computed by dividing net income by
the weighted average number of common shares outstanding during each year.
COMMON STOCK
Under Tennessee law, when a corporation purchases its common stock in the
open market, such repurchased shares are recognized as authorized but unissued.
Accordingly, the Corporation reduces the par value and reflects the excess of
the purchase price over par of any such repurchased shares as a reduction from
capital surplus.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with current
year presentation.
USES OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of related revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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NOTE 2: ACQUISITIONS AND SALES
Effective November 1, 1995, the Corporation acquired Heritage by
exchanging approximately 2.9 million shares of First American Corporation
common stock for all of the outstanding shares of Heritage. Heritage was
merged with and into the Corporation with the Corporation as the surviving
entity. Heritage was the holding company for Heritage Federal Bank for
Savings, a federal savings bank which was merged into FANB, and had
approximately $526 million in assets and 13 offices primarily in the east
Tennessee areas of Tri-Cities, Anderson County, and Roane County. The
transaction was accounted for as a pooling-of-interests and accordingly, the
accompanying consolidated financial statements have been restated to include
the accounts and operations of Heritage for all periods presented. 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
December 31, 1994, to include Heritage's results of operations for the six
months ended December 31, 1993. After-tax merger expenses related to the
acquisition totalled approximately $7.5 million, comprised primarily of
payments for severance, systems conversions, and investment banking and other
professional fees and recapture of tax bad debt reserve, and were recognized in
1995.
Separate net interest income and net income for the periods prior to the
merger are presented in the following table:
Unaudited Nine
Months Ended Year Ended December 31
-------------- ----------------------
(in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------
Net interest income
First American Corporation $219,308 $279,626 $267,439
Heritage 13,182 18,616 19,761
- ------------------------------------------------------------------------------
Total $232,490 $298,242 $287,200
==============================================================================
Net income
First American Corporation $ 74,994 $90,732 $101,813
Heritage 3,794 6,470 5,512
- ------------------------------------------------------------------------------
Net income $ 78,788 $97,202 $107,325
==============================================================================
On December 1, 1995, the Corporation exchanged approximately 1.8 million
shares of First American Corporation common stock for all outstanding shares of
Charter Federal Savings Bank ("Charter"), a federal savings bank headquartered
in Bristol, Virginia with 27 branches (eight in Knoxville, Tennessee; five in
Bristol, Tennessee and Bristol, Virginia; and 14 in other locations in
southwestern Virginia). This transaction was accounted for as a purchase, and
accordingly, the results of operations of Charter are included in the
Corporation's consolidated income statement beginning December 1, 1995. The
name of Charter was changed to First American Federal Savings Bank and the
Virginia branches of the Corporation are operated under this legal entity.
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The excess of the purchase price over the fair value of the net
identifiable assets acquired of $40 million has been recorded as goodwill and
is being amortized on a straight-line basis over fifteen years.
The purchase agreement also provides that Charter's shareholders may
receive additional consideration consisting of shares of First American
Corporation's stock with a value equal to 50% of any goodwill litigation
recovery, net of certain related expenses, received within five years of the
merger. See note 16.
The following unaudited proforma financial information presents the
combined results of operations of the Corporation and Charter as if the
acquisition had occurred as of the beginning of 1994, after giving effect to
certain adjustments, including amortization of goodwill. The proforma
financial information does not necessarily reflect the results of operations
that would have occurred had the Corporation and Charter constituted a single
entity during such periods.
Year Ended December 31
----------------------
(in thousands, except per share amounts) 1995 1994
- ------------------------------------------------------------------
Net interest income $333,203 $321,261
Net income 102,669 99,875
Earnings per share 3.43 3.28
==================================================================
On April 1, 1994, the Corporation consummated its purchase of all of the
outstanding shares of Fidelity Crossville Corporation ("FCC"), the parent
company of First Fidelity Savings Bank, F.S.B. ("First Fidelity") located in
Crossville, Tennessee, for $6.5 million. First Fidelity was a Federal stock
savings bank with offices in Crossville and Fairfield Glade, Tennessee with
total assets of $48.7 million on March 31, 1994. In conjunction with the
acquisition, First Fidelity was merged into FANB and First Fidelity's two
offices became branches of FANB. The acquisition was accounted for using the
purchase method. Accordingly, the purchase price was allocated to assets
acquired and liabilities assumed based on their estimated fair values. The
purchase price in excess of the fair value of net assets acquired of $3.1
million is being amortized on a straight-line basis over 10 years. First
Fidelity's results of operations have been included in the Corporation's
consolidated income statement since the date of acquisition.
In September 1995, the Corporation entered into an agreement to purchase
49% of the stock of The SSI Group, Inc. ("SSI"), a healthcare payments
processing company, for approximately $8.6 million. The transaction is
expected to be completed during the first quarter of 1996 and to be accounted
for under the equity method of accounting.
Under the terms of a definitive merger agreement dated July 1995, as
amended, the Corporation will acquire all of the outstanding shares of First
City Bancorp, Inc. ("First City") in exchange for approximately 1.1 million
shares of First American Corporation's common stock. Of the total First
American Corporation 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, headquartered in Murfreesboro, Tennessee, which operates First City
Bank and Citizens Bank, both Tennessee state chartered banks, and Tennessee
Credit Corporation, a consumer finance company. As of December 31, 1995, First
City had $361 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
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quarter of 1996, subject to approval by First City's shareholders. The
transaction will be accounted for as a purchase.
During the year ended December 31, 1995, the Corporation consummated the
sale of two branches with deposits of approximately $39.6 million. The
transaction resulted in a $3.0 million gain.
Included within results of operations during the year ended December 31,
1993, was the sale by Heritage of certain branches. The buyer assumed
approximately $54.8 million of deposits. Heritage reported a gain on sale of
$1.0 million.
NOTE 3: CASH AND DUE FROM BANKS
The Corporation's bank subsidiaries are required to maintain reserves, in
the form of cash and balances with the Federal Reserve Bank, against its
deposit liabilities. Approximately $95.3 million and $166.7 million of the
cash and due from banks balance at December 31, 1995 and 1994, respectively,
represented reserves maintained in order to meet Federal Reserve requirements.
NOTE 4: SECURITIES
SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gains, gross unrealized losses, and
approximate market values of securities held to maturity at December 31, 1995
and 1994, are presented in the following table:
Unrealized
Amortized ------------------- Market
(in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
U.S. Treasury and other U.S. Government
agencies and corporations $ 807,591 $ 4,687 $ 2,095 $ 810,183
Obligations of states and political subdivisions 29,683 156 257 29,582
Other debt securities (primarily mortgage-backed
securities) 93,810 684 348 94,146
- ----------------------------------------------------------------------------------------------------
Total securities held to maturity $ 931,084 $ 5,527 $ 2,700 $ 933,911
====================================================================================================
DECEMBER 31, 1994
U.S. Treasury and other U.S. Government
agencies and corporations $1,463,285 $ 780 $73,477 $1,390,588
Obligations of states and political subdivisions 21,730 31 1,459 20,302
Other debt securities (primarily mortgage-backed
securities) 158,852 15 10,516 148,351
- ----------------------------------------------------------------------------------------------------
Total securities held to maturity $1,643,867 $ 826 $85,452 $1,559,241
====================================================================================================
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Included in U.S. Treasury and other U.S. Government agencies and
corporations securities held to maturity were agency-issued mortgage-backed
securities amounting to $706.5 million ($709.3 million market value) at
December 31, 1995 and $1,122.8 million ($1,064.6 million market value) at
December 31, 1994. Mortgage-backed securities included in other debt
securities amounted to $92.6 million ($92.9 million market value) at December
31, 1995 and $156.2 million ($145.6 million market value) at December 31, 1994.
SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains, gross unrealized losses, and
approximate market values of securities available for sale at December 31, 1995
and 1994, are presented in the following table:
Unrealized
Amortized ------------------ Market
(in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
U.S. Treasury and other U.S. Government
agencies and corporations $ 999,004 $ 9,431 $ 2,244 $1,006,191
Obligations of states and political subdivisions 3,105 - - 3,105
Other debt securities 150,445 742 1,850 149,337
- -----------------------------------------------------------------------------------------------------
Total debt securities 1,152,554 10,173 4,094 1,158,633
Equity securities (essentially Federal Reserve
Bank and Federal Home Loan Bank stock) 43,860 - - 43,860
- -----------------------------------------------------------------------------------------------------
Total securities available for sale $1,196,414 $10,173 $ 4,094 $1,202,493
=====================================================================================================
DECEMBER 31, 1994
U.S. Treasury and other U.S. Government
agencies and corporations $674,582 $ 48 $21,544 $ 653,086
Other debt securities 2,165 - - 2,165
- -----------------------------------------------------------------------------------------------------
Total debt securities 676,747 48 21,544 655,251
Equity securities (essentially Federal Reserve
Bank and Federal Home Loan Bank stock) 34,213 - - 34,213
- -----------------------------------------------------------------------------------------------------
Total securities available for sale $710,960 $ 48 $21,544 $ 689,464
=====================================================================================================
Included in U.S. Treasury and other U.S. Government agencies and
corporations securities available for sale were agency-issued mortgage-backed
securities amounting to $789.5 million ($796.5 million market value) at
December 31, 1995 and $326.8 million ($306.3 million market value) at December
31, 1994. Mortgage-backed securities included in other debt securities
amounted to $150.4 million ($149.3 million market value) at December 31, 1995.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
a Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." The FASB permitted a
one-time opportunity to reassess the appropriateness of the designation of all
securities held upon the initial application of the Special Report. The
Corporation reviewed its current designation of all securities in conjunction
with liquidity needs and management of interest rate risk and transferred
$532.4 million of securities from held to maturity to available for sale. At
the time of transfer, such securities had an unrealized gain of $1.2 million
($.7 million net of tax).
In conjunction with the Heritage acquisition, the Corporation transferred
$161.6 million of securities previously classified as held to maturity by
Heritage to securities available for sale in order to maintain the
Corporation's existing interest rate risk position. At the time of transfer,
such securities had an unrealized loss of $.5 million ($.3 million net of tax).
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Included within total securities classified as available for sale at
December 31, 1993, were $203.8 million of securities classified as such due to
regulatory restrictions even though the Corporation had the intent and ability
to hold such securities to maturity. Upon a regulatory revision in 1994, which
allowed those securities to be classified as held to maturity, the Corporation
transferred such securities from available for sale to held to maturity. At
the time of transfer, the securities had an unrealized loss of $1.0 million
($.6 million net of taxes). In accordance with SFAS No. 115, such unrealized
loss was retained as a component of shareholders' equity and is being amortized
over the remaining lives of the securities.
The sale of securities available for sale resulted in a net realized gain
of $2.0 million in 1995, and net realized losses during 1994 and 1993 of $10.0
million, and $2.0 million, respectively. Gross realized gains and losses on
such sales were as follows:
Year Ended December 31
----------------------------------------------------------------------
1995 1994 1993
--------------------- -------------------- ---------------------
Gross Gross Gross Gross Gross Gross
Realized Realized Realized Realized Realized Realized
(in thousands) Gains Losses Gains Losses Gains Losses
- -----------------------------------------------------------------------------------------------------------------
U.S. Treasury and other U.S.
Government agencies and corporations $5,887 $3,929 $8,799 $18,796 $1,680 $3,708
- -----------------------------------------------------------------------------------------------------------------
Total securities available for sale $5,887 $3,929 $8,799 $18,796 $1,680 $3,708
=================================================================================================================
TOTAL SECURITIES
The amortized cost and approximate market values of debt securities at
December 31, 1995, by average estimated maturity are shown below. The expected
maturity for governmental and corporate securities is the stated maturity, and
the expected maturity for mortgage-backed securities and other asset-backed
securities is based on current estimates of average maturities, which include
prepayment assumptions.
Securities Held to Maturity Securities Available for Sale
--------------------------- -----------------------------
(in thousands) Amortized Market Amortized Market
Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------
Due in one year or less $ 202,556 $ 202,340 $ 143,448 $ 144,042
Due after one year through five years 688,522 692,177 666,405 667,973
Due after five years through ten years 24,557 24,073 148,391 149,907
Due after ten years 15,449 15,321 194,310 196,711
- --------------------------------------------------------------------------------------------------------
Total debt securities 931,084 933,911 1,152,554 1,158,633
Equity securities - - 43,860 43,860
- --------------------------------------------------------------------------------------------------------
Total securities $ 931,084 $ 933,911 $1,196,414 $1,202,493
========================================================================================================
At December 31, 1995 and 1994, the Corporation held securities with
amortized cost amounting to $705.7 million and $527.9 million, respectively,
which were issued or guaranteed by the Federal National Mortgage Association
and $763.7 million and $756.3 million, respectively, which were issued or
guaranteed by the Federal Home Loan Mortgage Corporation.
Securities carried in the consolidated balance sheets at approximately
$1,570.8 million and $1,648.2 million at December 31, 1995 and 1994,
respectively, were pledged to secure public and trust deposits and for other
purposes as required or permitted by law.
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NOTE 5: LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Corporation's bank and thrift subsidiaries make commercial, consumer,
and real estate loans to its customers, located within the Corporation's
market, which consists primarily of Tennessee, Virginia, Kentucky and selected
markets in other adjacent states. Although the bank and thrift subsidiaries
have a diversified loan portfolio, a substantial portion of their debtors'
ability to honor their contracts is dependent upon economic conditions in the
Corporation's market.
Loans are either secured or unsecured based on the type of loan and the
financial condition of the borrower. The loans are generally expected to be
repaid from cash flow or proceeds from the sale of selected assets of the
borrower; however, the Corporation is exposed to risk of loss on loans due to
the borrower's difficulties, which may arise from any number of factors
including problems within the respective industry or economic conditions,
including those within the Corporation's market.
Transactions in the allowance for possible loan losses were as follows:
Year Ended December 31
-----------------------------------
(in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Balance, January 1 $129,436 $136,512 $183,446
Provision (credited) charged to operating expenses 83 (9,919) (41,405)
Allowance of subsidiaries purchased (note 2) 6,573 323 1,296
- -----------------------------------------------------------------------------------------------
Subtotal 136,092 126,916 143,337
- -----------------------------------------------------------------------------------------------
Loans charged off 18,748 15,917 27,175
Recoveries of loans previously charged off (15,071) (18,026) (20,350)
- -----------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 3,677 (2,109) 6,825
- -----------------------------------------------------------------------------------------------
Adjustment for change in fiscal year of pooled company - 411 -
- -----------------------------------------------------------------------------------------------
Balance, December 31 $132,415 $129,436 $136,512
===============================================================================================
Net charge-offs (recoveries) by major loan categories were as follows:
Year Ended December 31
------------------------------------
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------
Commercial $(2,320) $(3,843) $ 77
Consumer--amortizing mortgages (454) (293) (105)
Consumer--other 6,755 2,033 5,764
Real estate--construction 175 (143) 466
Real estate--commercial mortgages and other (479) 137 623
- --------------------------------------------------------------------------------------
Total net charge-offs (recoveries) $ 3,677 $(2,109) $6,825
======================================================================================
At December 31, 1995 and 1994, loans on a non-accrual status amounted to
$18.7 million and $11.7 million, respectively. Interest income not recognized
on non-accrual loans was approximately $.3 million in 1995, $.3 million in
1994, and $1.2 million in 1993. Interest income recognized on a cash basis on
non-accrual loans was $3.0 million, $.8 million, and $1.2 million for the same
respective periods.
Directors and executive officers (and their associates, including
companies in which they hold ten percent or more ownership) of the Corporation
and its significant subsidiary, FANB, had loans outstanding with the
Corporation and its subsidiaries of $35.8 million and $13.6 million at December
31, 1995 and 1994, respectively. During 1995, $1,472.5 million of new loans or
advances on existing loans were made to such related persons, repayments from
such persons totalled $1,448.7 million,
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and $1.6 million of existing loans were to persons no longer considered
related. The Corporation believes that such loans were made on substantially
the same terms, including interest and collateral, as those prevailing at the
time for comparable transactions with other borrowers and did not involve more
than the normal risk of collectibility or present other unfavorable features at
the time such loans were made.
Impaired loans and related loan loss reserve amounts at December 31, 1995
follow:
(in thousands) Recorded Loan Loss
Investment Reserve
- ----------------------------------------------------------------
Impaired loans with loan loss reserves $18,506 $4,157
Impaired loans with no loan loss reserves 16,092 -
- ----------------------------------------------------------------
Total $34,598 $4,157
================================================================
The average recorded investment in impaired loans for the twelve months
ended December 31, 1995 was $28 million and the related total amount of
interest income recognized on the accrual and cash basis for the period that
such loans were impaired was $982 thousand and $188 thousand, respectively.
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 value. 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 will be adopted by the Corporation on 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 No. 122. Adoption of No. 122 is
not expected to have a material effect on the Corporation's consolidated
financial statements.
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NOTE 6: PREMISES AND EQUIPMENT AND LEASE COMMITMENTS
Premises and equipment is summarized as follows:
December 31
--------------------
(in thousands) 1995 1994
- ---------------------------------------------------------------
Land $ 22,488 $ 21,007
Buildings 102,191 98,554
Furniture and equipment 114,791 101,193
Leasehold improvements 32,794 18,421
- ---------------------------------------------------------------
Subtotal 272,264 239,175
Accumulated depreciation and amortization (142,845) (128,100)
- ---------------------------------------------------------------
Total premises and equipment $129,419 $111,075
===============================================================
Depreciation and amortization expense of premises and equipment for 1995,
1994, and 1993 was $14.5 million, $14.6 million, and $14.4 million,
respectively.
Non-cancelable minimum operating lease commitments for real property
amount to $9.4 million for 1996; $8.7 million for 1997; $8.3 million for 1998;
$8.2 million for 1999; $7.2 million for 2000; and $32.1 million thereafter. In
the normal course of business, management expects that leases will be renewed
or replaced by other leases. Rent expense, net of rental income on bank
premises, for 1995, 1994, and 1993 was $5.1 million, $4.1 million, and $3.2
million, respectively. Rental income on bank premises for 1995, 1994, and 1993
was $3.8 million, $4.2 million, and $4.3 million, respectively.
The Corporation has a data processing outsourcing agreement expiring in
2001 that has an average annual base expense, as amended in 1994, of $8.5
million. Total annual fees vary with cost of living adjustments and changes in
services provided by the vendor, which services depend upon the Corporation's
volume of business and system needs. The related expense is included in
systems and processing expense in the consolidated income statements.
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 will be adopted by the Corporation on 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. Adoption of SFAS No. 121 is not expected to have a material
effect on the Corporation's consolidated financial statements.
NOTE 7: INTANGIBLE ASSETS
Total intangible assets representing core deposit rights, mortgage
servicing rights and excess of purchase price of subsidiaries over net assets
acquired amounted to $68.1 million and $26.6 million at December 31, 1995 and
1994, respectively, and are included in other assets on the consolidated
balance sheets. Amortization expense of intangible assets was $4.2 million,
$3.9 million, and $3.8 million, in 1995, 1994, and 1993, respectively. See
note 2.
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NOTE 8: SHORT-TERM BORROWINGS
Short-term borrowings are issued on normal banking terms and consisted of
the following:
Year Ended December 31
----------------------
(in thousands) 1995 1994
- ----------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase $788,569 $855,618
Other short-term borrowings 149,718 74,222
- ----------------------------------------------------------------------------------------------------
Total short-term borrowings $938,287 $929,840
====================================================================================================
At December 31, 1994, Federal funds purchased and securities sold under
agreements to repurchase included Federal funds purchases of $25.0 million due
within three months (none in 1995). Other short-term borrowings included U.S.
Treasury tax and loan accounts of $68.6 million and $72.7 million in 1995 and
1994, respectively. In addition, December 31, 1995 included fixed rate
borrowings from Federal Home Loan Bank ("FHLB") of $34.0 million (due within
three months), $9.0 million (due within six months), $18.0 million (due within
nine months), and $18.0 million (due within one year).
The following table presents information regarding Federal funds purchased
and securities sold under agreements to repurchase:
Year Ended December 31
----------------------------------------
(in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements
to repurchase:
Amount outstanding at December 31 $788,569 $855,618 $664,826
Average rate at December 31 4.79 % 4.96 % 2.75 %
Average amount outstanding during the year $791,975 $681,170 $587,059
Average rate paid for the year 5.38 % 3.80 % 2.64 %
Maximum amount outstanding at any month-end $910,653 $855,618 $672,614
======================================================================================================
NOTE 9: LONG-TERM DEBT
Long-term debt consisted of the following:
Year Ended December 31
----------------------
(in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances $321,544 $219,655
6 7/8% non-callable subordinated notes (effective rate of 6.965%) due 2003,
interest payable semiannually (less unamortized discount of $233 in
1995 and $265 in 1994) 49,767 49,735
6 5/8% non-callable subordinated notes (effective rate of 6.761%) due 2005,
interest payable semiannually (less unamortized discount of $486 in 1995) 49,514 -
Other 966 1,302
Employee stock ownership plan obligation - 781
- -----------------------------------------------------------------------------------------------------
Total long-term debt $421,791 $271,473
=====================================================================================================
At December 31, 1995, the $321.5 million of advances from the FHLB
consisted of $264.0 million of advances with interest rates tied to one month
LIBOR and $57.5 million of advances with fixed interest rates. Included in
these amounts are advances of $35.2 million maturing in 1997, $267.9 million
maturing in 1998 and $18.4 million maturing after 2002. The Corporation's FHLB
advances are collateralized by a blanket pledge of 1-4 family mortgage loans.
On January 31, 1994, the Corporation redeemed the remaining balance of
approximately $13.6 million of its 7 5/8% debentures due in 2002, at a price of
101.22% of par.
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The Corporation owns a parking garage which was financed through an
Industrial Revenue Bond due April 1, 1997. Indebtedness at December 31, 1995
and 1994, totalled $.8 million and $1.1 million, respectively. Sinking fund
requirements of this debt amount to $.4 million for 1996 and the balance of $.4
million is due in 1997. The interest rate on these bonds is 5.9% for the
remaining life of the bonds.
See note 10 for discussion of the employee stock ownership plan ("ESOP")
obligation.
The Corporation entered into an unsecured revolving credit agreement in
1994. As amended in 1995, the agreement provides for loans up to $70.0
million. Under the terms of the agreement, which expires in March 1998, the
Corporation pays a fee for the availability of these funds computed at the rate
of 3/16 of 1% per annum on the commitment. Interest to be paid on the
outstanding balances will be computed based on the prime interest rate of the
lending banks, Eurodollar rates, or adjusted certificate of deposit rates, as
selected by the Corporation. The Corporation had no revolving credit
borrowings outstanding at December 31, 1995 or 1994.
The terms of these agreements provide for, among other things,
restrictions on payment of cash dividends and purchases, redemptions, and
retirement of capital shares. Under the Corporation's most restrictive debt
covenant, approximately $141.7 million of retained earnings was available to
pay dividends as of December 31, 1995.
NOTE 10: EMPLOYEE BENEFITS
RETIREMENT PLAN
The Corporation and its subsidiaries participate in a non-contributory
retirement plan with death and disability benefits covering substantially all
employees with one or more years of service. The benefits are based on years
of service and average monthly earnings of a participant for the 60 consecutive
months which produce the highest average earnings.
The following table sets forth the plan's funded status and amounts
recognized in the Corporation's consolidated balance sheets at December 31,
1995 and 1994:
(in thousands) 1995 1994
- ---------------------------------------------------------------------------------------------
Plan assets at fair value, primarily U.S. bonds and listed stocks $108,278 $86,868
- ---------------------------------------------------------------------------------------------
Actuarial present value of benefits for service rendered to date:
Accumulated benefit obligation, including vested benefits of $87,212 and
$74,630, respectively 91,354 78,481
Additional benefits based on projected future compensation 15,692 12,099
- ---------------------------------------------------------------------------------------------
Projected benefit obligation 107,046 90,580
- ---------------------------------------------------------------------------------------------
Plan assets in excess of accumulated benefit obligation 16,924 8,387
- ---------------------------------------------------------------------------------------------
Plan assets greater (less) than projected benefit obligation 1,232 (3,712)
Unrecognized net loss from past experience different from that assumed and
effects of changes in assumptions 8,550 11,411
Unrecognized net transition asset (1,504) (2,069)
Unrecognized prior service cost 778 582
- ---------------------------------------------------------------------------------------------
Prepaid pension cost $9,056 $6,212
=============================================================================================
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Net pension expense included the following components:
Year Ended December 31
----------------------------
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Service cost for benefits earned during the period $ 2,784 $ 2,882 $ 2,600
Interest cost on projected benefit obligation 6,900 6,639 6,276
Actual return on plan assets (20,708) 997 (7,022)
Net amortization and deferral 13,097 (9,047) 704
- --------------------------------------------------------------------------------
Net periodic pension expense $ 2,073 $ 1,471 $ 2,558
================================================================================
As of January 1, 1994, the Corporation elected to change its method of
measuring the market-related value of plan assets from utilizing a calculation
based on 50% book value plus 50% fair market value to utilization of 100% fair
market value. The change had the effect of decreasing 1994 net periodic
pension expense by $1.6 million.
The following table presents assumptions used in determining the actuarial
present value of the projected benefit obligation for the pension plan:
Year Ended December 31
-----------------------
1995 1994
- --------------------------------------------------------------------------
Weighted average discount rate 7.25% 8.0%
Rate of increase in future compensation level 4.5 4.5
Expected long-term rate of return on plan assets 9.0 9.0
==========================================================================
SUPPLEMENTAL RETIREMENT PLAN
The Corporation has a supplemental retirement plan which provides
supplemental retirement benefits to certain executives of the Corporation. The
expense was $.2 million in 1995, $.2 million in 1994, and $.1 million in 1993.
Benefit payments from the plan are made from general assets of the Corporation.
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation in 1995 were 7.25% and 4.5%, respectively, and in 1994 were 8.0% and
4.5%, respectively.
OTHER POSTRETIREMENT BENEFITS
In addition to pension benefits, the Corporation and its subsidiaries have
defined postretirement benefit plans that provide medical insurance and death
benefits for retirees and eligible dependents. Because the death benefit plan
is not significant, it is combined with the health care plan for disclosure
purposes.
Effective January 1, 1993, the Corporation adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," which
requires the cost of postretirement benefits other than pensions to be
recognized on an accrual basis as employees perform services to earn such
benefits. The Corporation's previous practice, like most companies, was to
expense such costs on a pay-as-you-go basis. The Corporation recognized this
change during 1993 as a cumulative effect of a change in accounting principle,
resulting in a one-time non-cash charge of $17.5 million before taxes ($11.6
million after taxes). This charge represents the discounted present value of
expected future retiree medical and death benefits attributed to employees'
service rendered prior to 1993. See note 13.
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The status of the plans at December 31, 1995 and 1994, was as follows:
December 31
----------------
(in thousands) 1995 1994
- ------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $12,841 $11,903
Fully eligible, active plan participants 1,067 1,555
Other active plan participants 3,576 3,964
- ------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 17,484 17,422
Plan assets at market value - -
- ------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess of plan assets 17,484 17,422
Unrecognized net gain (loss) from past experience different from that
assumed and effects of changes in assumptions 1,540 912
- ------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $19,024 $18,334
==========================================================================================
The components of net periodic expense for postretirement benefits in 1995
and 1994 were as follows:
Year Ended December 31
----------------------
(in thousands) 1995 1994
- ----------------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 291 $ 362
Interest cost on accumulated postretirement benefit obligation 1,230 1,292
- ----------------------------------------------------------------------------------------
Net periodic postretirement benefit expense $1,521 $1,654
========================================================================================
The Corporation continues to fund medical and death benefit costs
principally on a pay-as-you-go basis.
For measurement purposes, a 10.25% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1995, declining
gradually to 5.5% per year by 2011 and remaining at that level thereafter. The
discount rate used to determine the accumulated postretirement benefit
obligation was 7.25% in 1995 and 8.0% in 1994, and the assumed long-term rate
of compensation increase was 4.5% in 1995 and 1994.
The health care cost trend rate assumption has a significant effect on the
accumulated postretirement benefit obligation and net periodic benefit costs.
A 1% increase in the trend rate for health care costs would have increased the
accumulated postretirement benefit obligation by $1.3 million as of December
31, 1995, and the net periodic expense (service cost and interest cost) would
have increased by $.1 million for 1995.
POSTEMPLOYMENT BENEFITS
Effective December 31, 1993, the Corporation adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," which requires employers
to recognize a liability for postemployment benefits under certain
circumstances. The Corporation's short-term and long-term disability benefits,
survivor income benefits, and certain other benefits are governed by this
statement. The Corporation recognized this item during the fourth quarter of
1993 as a cumulative effect of a change in accounting principle, resulting in a
one-time non-cash charge of $2.0 million before taxes ($1.3 million after
taxes). Prior to this date, postemployment benefit expenses were recognized
on a pay-as-you-go basis. See note 13.
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OTHER EMPLOYEE BENEFITS
The Corporation has executive incentive compensation plans covering
certain officers and other key employees of the Corporation. The plans provide
for incentives based on the attainment of annual and long-term performance
goals. Executive incentive compensation plans also include stock option
programs, which provide for the granting of statutory incentive stock options
and non-statutory options to key employees. Additionally, the Corporation has
a stock option plan for non-employee directors. As of December 31, 1995, the
Corporation had 3.6 million shares of common stock reserved for issuance under
these plans.
From 1991 through 1995, the Corporation issued approximately 243 thousand
shares of restricted common stock to certain executive officers. The
restrictions lapse within 15 years of issuance; however, if certain performance
criteria are met, restrictions will lapse earlier. The amount recorded for the
restricted stock issued is based on the market value of the Corporation's
common stock on the award dates and is shown as deferred compensation in the
consolidated statements of changes in shareholders' equity. Such compensation
expense is recognized over a 3- to 15-year period.
Stock options granted under option programs have been at 85% to 133% of
the market price on the day of grant. Each stock option is for one share of
common stock. Some options are exercisable immediately, while some options are
exercisable over a period of time and may be exercisable earlier if certain
performance criteria are met. All options expire within a ten-year period from
the date of grant. The market price of the Corporation's stock was $47.38 at
December 31, 1995.
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The following table presents a summary of stock option and restricted
stock activity:
Total Exercisable Exercise
Available Option Shares Option Shares Price
for Grant Outstanding Outstanding Per Share
- ---------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING, DECEMBER 31, 1992 763,758 1,626,457 1,000,750 7.085 - 27.375
Shares reserved 200,000 - - N/A
Options granted (234,500) 234,500 - 25.50 - 33.125
Restricted stock incentive awards (83,400) - - N/A
Options which became exercisable - - 106,440 14.75 - 22.875
Options exercised - (202,544) (202,544) 7.085 - 27.375
Options cancelled or expired 4,250 (19,731) (16,181) 21.125 - 27.375
- ---------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING, DECEMBER 31, 1993 650,108 1,638,682 888,465 7.085 - 33.125
Shares reserved 1,515,393 - - N/A
Options granted (547,617) 547,617 91,167 10.75 - 40.00
Restricted stock incentive awards (49,317) - - N/A
Options which became exercisable - - 196,937 7.085 - 29.50
Options exercised - (116,339) (116,339) 7.085 - 27.750
Options cancelled or expired 129,642 (135,937) (94,437) 8.785 - 40.00
Adjustment for change in fiscal year of
pooled company (72,381) 65,558 114,076 7.085 - 17.56
- ---------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING, DECEMBER 31, 1994 1,625,828 1,999,581 1,079,869 7.085 - 40.00
Shares reserved 948,030 - - N/A
Options granted (315,872) 315,872 50,872 16.02 - 43.75
Restricted stock incentive awards (29,594) - - N/A
Options which become exercisable - - 284,071 7.085 - 40.00
Options exercised - (604,902) (604,902) 7.085 - 30.375
Options cancelled or expired 44,630 (46,003) (3,343) 10.75 - 43.75
Heritage Plan terminated (339,598) - - N/A
- ---------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING, DECEMBER 31, 1995 1,933,424 1,664,548 806,567 7.085 - 43.75
===============================================================================================================
The Corporation has a combination savings thrift and profit-sharing plan
("FIRST Plan") available to all employees (except hourly paid and special
exempt-salaried employees). In connection with the plan, 2,285,000 shares of
the Corporation's common stock have been reserved for issuance. At year-end
1995, 1,463,000 of these shares had been issued. During 1995, 1994, and 1993,
121,355 shares, 149,360 shares, and 94,193 shares, respectively, were purchased
in the open market for the FIRST Plan. During 1995, 45,130 shares were issued
by the Corporation in connection with the FIRST Plan (none in 1994 or 1993).
The plan is funded by employee and employer contributions. The Corporation's
annual contribution to the plan is based upon the amount of basic contributions
of participants, participants' compensation, and the achievement of certain
corporate performance standards and may be made in the form of cash or the
Corporation's common stock with a market value equal to the cash contribution
amount. Total plan expense in both 1995 and 1994 was $3.5 million and $3.0
million in 1993. During 1995, 1994 and 1993 the Corporation matched employees'
qualifying contributions 100%.
Heritage, which merged with the Corporation effective November 1, 1995,
maintained an ESOP. The ESOP, which remains in existence, covers substantially
all former Heritage employees who qualified as to age and length of service.
Annual contributions to the ESOP are equal to the required principal and
interest payments related to the ESOP loan. Dividends paid on shares held by
the ESOP are used to reduce the outstanding debt. The consolidated financial
statements for each of the years ended December 31, 1995, 1994, and 1993,
include compensation expense of approximately $.1 million.
During 1995, the ESOP refinanced its notes payable with borrowings from
the Corporation. The new loan, which has essentially the same terms as the
prior borrowings, is payable in quarterly
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principal payments of approximately $30 thousand plus interest at the lender's
base rate through March 30, 2002. At December 31, 1995, the note payable bore
interest at 8.5% and had a balance of $.7 million.
During 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes a new optional method of accounting
for stock-based compensation based on calculations of fair value at grant date.
Under this method, the fair value of a stock option is recognized as
compensation expense over the service period (generally the vesting period).
SFAS No. 123 requires that if a company continues to account for stock options
under APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion
25"), it must provide proforma net income and earnings per share information
"as if" the new fair value approach had been adopted. The recognition
provisions of SFAS No. 123 may be adopted upon issuance. The disclosure
provisions are effective for years beginning after December 15, 1995; however,
the proforma disclosures shall include the effects of all awards granted in
fiscal years beginning after December 15, 1994. It is expected that the
Corporation will continue to account for stock-based compensation under Opinion
25.
NOTE 11: FIRST AMERICAN FOUNDATION
The Corporation's non-interest expenses for 1993 included a $10.0 million
charitable contribution to First American Foundation, a not-for-profit private
foundation formed in 1993 to facilitate the Corporation's charitable
contributions.
NOTE 12: INCOME TAXES
The components of the income tax provision are presented below:
Year Ended December 31
---------------------------
(in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------
Income tax expense from operations:
Current Federal income taxes $39,814 $39,834 $42,476
Current state income taxes 7,367 7,204 7,524
Deferred Federal income tax expense 15,226 9,964 12,724
Deferred state income tax expense (benefit) 2,779 402 (1,376)
- ----------------------------------------------------------------------------
Total income tax expense from operations 65,186 57,404 61,348
- ----------------------------------------------------------------------------
Income tax expense (benefit) reported in
stockholders' equity related to:
Securities available for sale 10,907 (22,690) 14,039
Employee stock option and award plans (3,095) (56) -
- ----------------------------------------------------------------------------
Total income tax expense (benefit) reported in
stockholders' equity 7,812 (22,746) 14,039
- ----------------------------------------------------------------------------
Total income taxes $72,998 $34,658 $75,387
============================================================================
The following table presents a reconciliation of the provision for income
taxes as shown in the consolidated income statements with that which would be
computed by applying the statutory Federal income tax rate of 35% to income
before income tax expense and the cumulative effect of changes in accounting
principles.
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Year Ended December 31
----------------------------
(in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------
Tax expense at statutory rates $58,893 $54,112 $59,065
Increase (decrease) in taxes resulting from:
Tax-exempt interest (2,276) (2,214) (2,413)
State income taxes, net of Federal income tax benefit 6,595 4,945 4,004
Other, net 1,974 561 692
- -----------------------------------------------------------------------------------
Total income tax expense from operations $65,186 $57,404 $61,348
===================================================================================
As discussed in the summary of significant accounting policies, the
Corporation prospectively adopted SFAS No. 109 as of January 1, 1993. The
cumulative effect of the adoption of SFAS No. 109 was a $12.8 million benefit.
See note 13.
SFAS No. 109 requires that the tax benefit of deductible temporary
differences be recorded as an asset to the extent that management assesses the
utilization of such temporary differences to be "more likely than not." In
accordance with SFAS No. 109, the realization of tax benefits of deductible
temporary differences depends on whether the Corporation has sufficient taxable
income within the carryback and carryforward period permitted by the tax law to
allow for utilization of the deductible amounts. As of January 1, 1993, the
Corporation had net deductible temporary differences of $165.5 million. For
state purposes, Tennessee law does not permit carrybacks and thus a valuation
allowance was established for the portion of the net deductible temporary
differences for which realization was uncertain. A valuation allowance of $3.9
million was established (as of January 1, 1993).
The net change in the valuation allowance for 1994 was a decrease of $1.3
million. In 1993, the net change in the valuation allowance was a decrease of
$2.6 million; consisting of an increase related to the adoption of SFAS No. 106
(accounting for postretirement benefits) of $1.1 million, an increase related
to the adoption of SFAS No. 112 (accounting for postemployment benefits) of $.1
million, and a decrease of $3.8 million related to continuing operations.
The net deferred tax asset is included in other assets on the consolidated
balance sheets. Management believes that it is more likely than not that the
deferred tax asset will be realized. The tax effects of temporary differences
that give rise to a significant portion of the deferred tax asset and deferred
tax liability at December 31, 1995 and 1994, are as follows:
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Year Ended December 31
----------------------
(in thousands) 1995 1994
- -------------------------------------------------------------------------------
Deferred tax assets
Allowance for loan losses $45,747 $48,042
Postretirement benefit obligation 8,027 7,975
Deferred directors' compensation 2,227 2,142
Deferred loan fees 399 1,567
Unrealized loss on securities available for sale - 8,651
Other 11,274 7,897
- ------------------------------------------------------------------------------
Total deferred tax asset 67,674 76,274
Less valuation allowance - -
- ------------------------------------------------------------------------------
Total deferred tax asset, net of valuation allowance 67,674 76,274
- ------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant, and equipment 4,812 5,379
Direct lease financing 29,346 13,931
Unrealized gain on securities available for sale 2,256 -
Purchase accounting 5,585 1,688
Other 6,507 3,686
- ------------------------------------------------------------------------------
Total deferred tax liability 48,506 24,684
- ------------------------------------------------------------------------------
Net deferred tax asset $19,168 $51,590
==============================================================================
Retained earnings at December 31, 1995 includes approximately $4.1 million
of income that has not been subject to tax because of deductions for bad debts
allowed for Federal income tax purposes. Deferred income taxes have not been
provided on such bad debt deductions since it is not intended to use the
accumulated bad debt deductions for purposes other than to absorb loan losses.
The tax liability would have been $1.6 million at December 31, 1995 if this
portion of retained earnings were used for purposes other than as described.
During 1994, the Corporation and the Internal Revenue Service ("IRS")
reached a settlement agreement related to the IRS's examination of the
Corporation's 1989 and 1990 consolidated Federal income tax returns. Such
settlement had no material impact on the Corporation's consolidated financial
statements.
NOTE 13: CHANGES IN ACCOUNTING PRINCIPLES
The cumulative effect of changes in accounting principles reflected in the
1993 consolidated income statement relates to the Corporation's 1993 adoption
of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," and No. 112, "Employers' Accounting for Postemployment Benefits,"
discussed in note 10 (employee benefits), and SFAS No. 109, "Accounting for
Income Taxes," discussed in note 12 (income taxes).
Year Ended
(in thousands) December 31, 1993
- -----------------------------------------------------------------------------
SFAS No. 106 regarding postretirement benefits, net of tax $(11,550)
SFAS No. 109 regarding income taxes 12,766
SFAS No. 112 regarding postemployment benefits, net of tax (1,300)
- -----------------------------------------------------------------------------
Total $(84)
=============================================================================
NOTE 14: COMMON STOCK
In December 1994, the Board of Directors authorized the repurchase of up
to 800,000 shares of the Corporation's common stock. Stock repurchases would
be made in the open market or in privately negotiated transactions from time to
time subject to market conditions and regulatory
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guidelines. Repurchased shares would be used to fund the Corporation's various
employee benefit plans and potential future acquisitions.
In addition to the above authorization, in 1995, the Board authorized the
Corporation to purchase the number of remaining shares necessary to consummate
the Charter acquisition and to purchase up to 100% of the shares required to
consummate the First City transaction.
During 1995, the Corporation purchased 1.6 million shares in the open
market at a total cost of $62.3 million. As of December 31, 1995, all
repurchased shares had been used to fund various employee benefit plans and the
acquisition of Charter.
NOTE 15: OFF-BALANCE-SHEET AND DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Corporation is a party to financial
transactions which have off-balance-sheet risk. Such transactions arise in
meeting customers' financing needs and from the Corporation's activities in
reducing its own exposure to fluctuations in interest rates. Off-balance-sheet
items involving customers consist primarily of commitments to extend credit and
letters of credit, which generally have fixed expiration dates. These
instruments may involve, to varying degrees, elements of credit and interest
rate risk. To evaluate credit risk, the Corporation uses the same credit
policies in making commitments and conditional obligations on these instruments
as it does for instruments reflected on the balance sheet. Collateral
obtained, if any, varies but may include deposits held in financial
institutions; U.S. Treasury securities or other marketable securities;
income-producing commercial properties; accounts receivable; property, plant,
and equipment; and inventory. The Corporation's exposure to credit risk under
commitments to extend credit and letters of credit is the contractual
(notional) amount of the instruments. Interest rate swap transactions and
futures contracts may have credit and interest rate risk significantly less
than the contractual amount.
COMMITMENTS
Commitments to extend secured or unsecured credit are contractual
agreements to lend money providing there is no violation of any condition.
Commitments may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. At year-end 1995 and 1994,
respectively, the Corporation had $2.2 billion and $1.9 billion of unfunded
commitments to extend credit. Of these amounts, unfunded commitments for
borrowers with loans on non-accrual status were $1.1 million at December 31,
1995, and $.5 million at December 31, 1994.
Standby letters of credit are commitments issued by the Corporation to
guarantee the performance of a customer to a third party. As of December 31,
1995 and 1994, the Corporation had standby letters of credit issued amounting
to approximately $221.3 million and $188.8 million, respectively. The
Corporation also had commercial letters of credit of $32.0 million and $54.7
million at December 31, 1995 and 1994, respectively. Commercial letters of
credit are conditional commitments issued by the Corporation to facilitate
trade for corporate customers. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers.
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The Corporation contracts to buy and sell foreign exchange primarily to
meet the financing needs of its customers and to hedge its own exposure against
market risk. At December 31, 1995 and 1994, the Corporation had $31.9 million
and $26.2 million, respectively, of foreign exchange forward contracts, which
is the sum of customers' contracts with the Corporation and the Corporation's
offsetting contracts to minimize its exposure.
DERIVATIVES
The Corporation's principal objective in holding or issuing derivative
financial instruments is the management of interest rate exposure arising out
of nontrading assets and liabilities. The Corporation's earnings are subject
to risk of interest rate fluctuations to the extent that interest-earning
assets and interest-bearing liabilities mature or reprice at different times or
in differing amounts. Asset/liability management activities are aimed at
maximizing net interest income within liquidity, capital and interest rate risk
constraints established by management. The Corporation's objective is to
manage the interest sensitivity position so that net income will not be
impacted more than 5% for interest rates varying up to 150 basis points from
the Corporation's most likely interest rate forecast over the next 12 months.
To achieve its risk management objective, the Corporation uses a
combination of derivative financial instruments, particularly interest rate
swaps and futures contracts. The instruments utilized are noted in the
following table along with their notional amounts and fair values at year-end
1995 and 1994:
Weighted
Average
Weighted Average Rate Maturity
Related Variable Rate Notional ----------------------- -------- Fair
(in thousands) Asset/Liability Amount Paid Received Years Value
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1995
Interest rate swaps Money market deposits $ 900,000 5.90% (1) 5.87% (2) 1.9 $ (7,295)
Interest rate swaps Long-term debt 200,000 7.11 (1) 5.85 (3) .8 (2,935)
Forward interest rate
swaps Money market deposits 300,000 7.21 (4) 5.81 (4) .7 (2,854)
Futures contracts (5) Money market deposits 140,000 N/A N/A .9 (967)
---------- --------
$1,540,000 $(14,051)
===================================================================================================================
DECEMBER 31, 1994
Interest rate swaps Money market deposits $ 450,000 5.85% (1) 5.71% (2) 1.7 $ 13,426
Interest rate swaps Long-term debt 200,000 7.11 (1) 6.06 (3) 1.8 2,477
Interest rate swaps Loans 200,000 5.90 (3) 7.39 (1) 4.4 (4,273)
Forward interest rate
swaps Money market deposits 650,000 7.81 (6) N/A (6) 1.9 5,946
Basis swaps Held to maturity securities 200,000 5.72 (7) 5.56 (2) .3 286
---------- --------
$1,700,000 $ 17,862
===================================================================================================================
(1) Fixed rate.
(2) Variable rate which reprices quarterly based on 3-month LIBOR except for
$25 million which reprices every 6 months based on 6-month LIBOR.
(3) Variable rate which reprices quarterly based on 3-month LIBOR.
(4) Forward swap periods began in June 1995 for $200 million and December
1995 for $100 million. The rates paid are fixed and were set at the
inception of the contracts. Variable rates are based on 3-month LIBOR and
reprice quarterly.
(5) Represents $140 million short position of Eurodollar futures contracts
which in aggregate simulates a $35 million 2-year interest rate swap.
(6) Forward swap periods began in June 1995 for $200 million and in December
1995 for $450 million. The rates to be paid are fixed and were set at the
inception of the contracts. Variable rates are based on 3-month LIBOR
when the affected periods begin.
(7) Variable rate which reprices quarterly based on 5-year constant maturity
Treasury rate less a constant spread.
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100
Notional amounts are key elements of derivative financial instrument
agreements. However, notional amounts do not represent the amounts exchanged
by the parties to derivatives and do not measure the Corporation's exposure to
credit or market risks. The amounts exchanged are based on the notional
amounts and the other terms of the underlying derivative agreements. The
Corporation's credit exposure at the reporting date from derivative financial
instruments is represented by the fair value of instruments with a positive
fair value at that date and is presented above along with the notional amounts
of the instruments. Credit risk disclosures, however, relate to losses that
would be recognized if counterparts failed completely to perform their
obligations.
The risk that counterparts to derivative financial instruments might
default on their obligations is monitored on an ongoing basis. To manage the
level of credit risk, the Corporation reviews the credit standing of its
counterparts and enters into master netting agreements whenever possible, and
when appropriate, obtains collateral. Master netting agreements incorporate
rights of setoff that provide for the net settlement of subject contracts with
the same counterparts in the event of default.
Interest rate swap contracts are primarily used to convert certain
deposits and long-term debt to fixed interest rates or to convert certain
groups of customer loans to fixed rates. The Corporation's net credit exposure
with interest rate swap counterparts totalled $.2 million at December 31, 1995,
and $18.3 million at December 31, 1994.
The table below summarizes, by notional amounts, the activity for each
major category of derivative financial instruments.
Forward
Interest Rate Swaps Swaps
----------------------- -------
Pay Pay Futures
(in thousands) Fixed Receive Fixed Fixed Basis Swaps Contracts
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1993 900,000 - - 200,000 300,000
Additions 600,000 200,000 650,000 - 475,000
Maturities/terminations (850,000) - - - (775,000)
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1994 650,000 200,000 650,000 200,000 -
Additions 750,000 - - - 140,000
Maturities/terminations (300,000) (200,000) (350,000) (200,000) -
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $1,100,000 $ - $ 300,000 $ - $140,000
================================================================================================
The table below presents the net deferred gains (losses) related to
terminated derivative financial instruments at December 31, 1995 and 1994.
Deferred gains of $8.7 million and $6.2 million are included in other
liabilities on the consolidated balance sheet at December 31, 1995 and 1994,
respectively, and deferred losses of $8.2 million are included in other assets
on the consolidated balance sheet at December 31, 1995.
==============================================
December 31,
-----------------------
(in thousands) 1995 1994
- ----------------------------------------------
Interest rate swaps $ (990) $2,792
Futures contracts 1,516 3,369
- ----------------------------------------------
Total deferred gains $ 526 (1) $6,161 (2)
==============================================
(1) $4.5 million of net deferred losses to be recognized during 1996 and $5.0
million of net deferred gains to be recognized during 1997 through 1999.
(2) $4.6 million of deferred gains recognized during 1995 and $1.5 million of
deferred gains to be recognized during 1996.
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NOTE 16: LEGAL AND REGULATORY MATTERS
The extent to which dividends may be paid to the Corporation from its
subsidiaries is governed by applicable laws and regulations. For the
Corporation's national bank subsidiaries, the approval of the OCC is required
if dividends declared in any year exceed net profits for that year (as defined
under the National Bank Act) combined with the retained net profits of the two
preceding years. In addition, a national bank may not pay a dividend, make any
other capital distribution, or pay management fees if such payment would cause
it to fail to satisfy certain minimum capital requirements. FAFSB is subject
to capital requirements adopted by the Office of Thrift Supervision ("OTS").
Under these regulations, a savings association that exceeds its fully phased-in
capital requirements both immediately prior to and on a proforma basis after
giving effect to a proposed capital distribution is generally permitted without
prior approval of the OTS to make a capital distribution during a calendar year
equal to the greater of (i) 100% of 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. In accordance with the most restrictive regulations, at
December 31, 1995, the above subsidiaries had $202.6 million available for
distribution as dividends to the Corporation.
The Savings Association Insurance Fund ("SAIF") is undercapitalized as a
result of losses sustained by the S&L industry during the late 1980's and early
1990's. While failures of thrift institutions have diminished during the past
two years, the premiums charged on SAIF deposits have not adequately
recapitalized the fund because of interest paid on debt incurred to pay
depositors of failed institutions. To adequately capitalize the SAIF fund,
Congress has proposed legislation to levy a one-time assessment on SAIF
deposits. While this proposed legislation has not been enacted into law,
various proposals generally would require payment of up to 85 basis points on
SAIF deposits. Under what is believed to be the most widely accepted proposal,
banks that obtained SAIF deposits through acquisitions (where the FDIC premium
is computed under the "Oakar Amendment" to the Federal Deposit Insurance Act)
would receive a 20% discount to allow for deposit runoff that occurs subsequent
to acquisitions. The discount would apply to the SAIF deposits acquired by
FANB. This proposal is part of the 1996 Budget Reconciliation Act and as of
year-end 1995 had not been signed into law. Should passage of such legislation
occur, the Corporation is expected to record a one-time charge estimated to be
approximately $5.5 million, net of tax. In addition, the proposal would impose
up to a 2.5 basis point annual charge on all insured deposits of depository
institutions in order to pay interest on the debt incurred by the Financing
Corporation. Should this become effective, it will increase the Corporation's
total Bank Insurance Fund and SAIF premiums in 1996 over currently anticipated
amounts by $1.1 million, net of tax, based on deposits at December 31, 1995.
The Corporation and seven other financial institutions are defendants in a
class action lawsuit brought in the Circuit Court of Shelby County, Tennessee.
The lawsuit alleges antitrust, unconscionability, usury, and contract claims
arising out of the defendant's returned check charges. The asserted plaintiff
class consists of depositors who have been charged returned check or overdraft
fees. The plaintiffs are requesting compensatory and punitive damages of $25.0
million against each defendant. The antitrust, unconscionability, and usury
claims were previously dismissed, and in December 1993, the Circuit Court
granted the defendants' motion for summary judgment, dismissing the remaining
claims. The plaintiffs appealed to the Tennessee Court of Appeals, which
affirmed the
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102
Circuit Court's dismissal of the action. The plaintiffs then appealed
to the Tennessee Supreme Court, and the Corporation is currently awaiting a
hearing before this appellate court. In addition, a related antitrust lawsuit
alleging a price fixing conspiracy involving the same facts has been filed by
the plaintiffs against the Corporation and eight other financial institutions
in the U.S. District Court for the Western District of Tennessee. In March
1994, the District Court granted the defendants' motion for summary judgment
dismissing the action. The plaintiffs appealed to the Sixth Circuit Court of
Appeals, which affirmed the District Court's granting of summary judgement.
The plaintiffs then sought permission to appeal to the United States Supreme
Court. The Corporation is currently awaiting a decision as to whether the U.S.
Supreme Court will hear the case. Management believes these suits are without
merit and, based upon information currently known and on advice of counsel,
that they will not have a material adverse effect on the Corporation's
consolidated financial statements.
Following the adoption of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), Charter (now FAFSB), brought an action
against the OTS and FDIC seeking injunctive and other relief, contending that
Congress' elimination of supervisory goodwill required rescission of certain
supervisory transactions. The Federal District Court found in Charter's favor,
but in 1992 the Fourth Circuit Court of Appeals reversed, and the U.S. Supreme
Court denied Charter's petition for certiorari. In 1995, the Federal Circuit
Court found in favor of another thrift institution in a similar case (Winstar
Corp. v. United States) in which the association sought damages for breach of
contract. Following this decision, Charter filed suit against the United
States Government ("Government") in the Court of Federal Claims based on breach
of contract. The Government sought Supreme Court review of the Winstar
decision and the Supreme Court granted the Government's petition. The
Government has agreed to stay Charter's action pending the Supreme Court's
decision in the Winstar case.
The value of Charter's claims against the Government, as well as their
ultimate outcome, are contingent upon a number of factors, some of which are
outside of Charter's control, and are highly uncertain as to substance, timing
and the dollar amount of any damages which might be awarded should Charter
finally prevail. Under the Agreement and Plan of Reorganization as amended by
and between Charter and the Corporation, in the event that Charter is
successful in this litigation, the Charter shareholders as of December 1, 1995
will be entitled to receive additional consideration equal in value to 50% of
any recovery, net of all taxes and certain other expenses, including the costs
and expenses of such litigation, received on or before December 1, 2000 subject
to certain limitations in the case of certain business combinations. Such
additional consideration, if any, is payable in the common stock of the
Corporation, based on the average per share closing price on the date of
receipt by Charter of the last payment constituting a recovery from the
Government.
Also, there are from time to time other legal proceedings pending against
the Corporation and its subsidiaries. In the opinion of management and
counsel, liabilities, if any, arising from such proceedings presently pending
would not have a material adverse effect on the consolidated financial
statements of the Corporation.
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103
NOTE 17: FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments for
both on- and off-balance-sheet assets and liabilities for which it is
practicable to estimate fair value. The techniques used for this valuation are
significantly affected by the assumptions used, including the amount and timing
of future cash flows and the discount rate. Such estimates involve
uncertainties and matters of judgment and therefore cannot be determined with
precision. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets. Accordingly, the aggregate
fair value amounts presented are not meant to represent the underlying value of
the Corporation.
December 31
----------------------------------------------
1995 1994
---------------------- ---------------------
Estimated Estimated
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------------------
Financial instruments (assets):
Cash and short-term investments $ 521,229 $ 521,229 $ 517,771 $ 517,771
Securities held to maturity 931,084 933,911 1,643,867 1,559,241
Securities available for sale 1,202,493 1,202,493 689,464 689,464
Federal funds sold and securities
purchased under agreements to resell 291,042 291,042 28,134 28,134
Trading account securities 22,419 22,419 8,617 8,617
Loans, net of unearned discount and net
deferred loan fees 6,425,976 6,321,584 5,171,966 4,964,536
Financial instruments (liabilities):
Non-interest bearing deposits $1,266,285 $1,266,285 $1,252,136 $1,252,136
Interest-bearing deposits 6,116,009 6,133,450 5,055,643 4,927,289
Short-term borrowings 938,287 938,287 929,840 929,840
Long-term debt 421,791 419,816 271,473 264,466
===================================================================================================================================
100
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The estimated fair values for the Corporation's off-balance-sheet
financial instruments are summarized as follows:
December 31
----------------------------------------------------------
1995 1994
----------------------------- -------------------------
Contractual or Estimated Contractual Estimated
Notional Fair or Notional Fair
(in thousands) Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------------------
Commitments to extend credit $2,220,500 $ 2,477 $1,888,789 $ 2,501
Standby letters of credit 221,341 1,050 188,833 953
Commercial letters of credit 32,032 80 54,706 141
Interest rate swaps 1,100,000 (10,230) 850,000 11,630
Forward interest rate swaps 300,000 (2,854) 650,000 5,946
Basis swaps - - 200,000 286
Futures contracts 140,000 (967) - -
===================================================================================================================================
The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments:
Short-term financial instruments -- The carrying amounts of short-term
financial instruments, including cash, Federal funds sold and
purchased and resell and repurchase agreements approximate fair
value. These instruments expose the Corporation to limited credit risk
and have no stated maturity or mature within one year or less and carry
interest rates which approximate market.
Securities held to maturity securities available for sale, and
trading account securities -- Fair values are based on quoted market
prices or dealer quotes. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar
securities.
Loans -- For variable loans that reprice frequently, fair values are
based on carrying values. The fair values for certain homogeneous
categories of loans, such as residential mortgages, are estimated using
quoted market prices for securities backed by similar loans, adjusted
for differences in loan characteristics. The fair values for other
performing loans are estimated by discounting estimated future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit risk and for similar maturities.
Included within financial assets are certain nonperforming assets,
consisting primarily of nonperforming loans, the fair values of which
are based principally on the lower of the amount due from customers or
the fair value of the loans' collateral, which is the amount the
Corporation could reasonably expect to receive in a current sale
between a willing buyer and seller other than in a forced or
liquidation sale.
Deposits -- The fair value of deposits with no stated maturity, such
as demand deposits, NOW accounts, money market accounts, and regular
savings accounts, is equal to the amount payable on demand at the
reporting date. The fair value of certificates of deposits and other
fixed maturity time deposits is estimated using the rates currently
offered for deposits of similar remaining maturities. Any foreign
deposits are valued at the carrying value due to the frequency with
which rates for such deposits are adjusted to a market rate.
Short-term borrowings -- Fair value is estimated to equal the
carrying amount since these instruments have a relatively short
maturity.
Long-term debt -- Rates for long-term debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
Off-balance-sheet instruments -- The fair value of commitments to
extend credit is based on unamortized deferred loan fees and costs. For
letters of credit, fair value is estimated using fees currently
charged to enter into similar agreements with similar maturities. The
fair value of the Corporation's outstanding futures contracts is based
on quoted market prices, and the estimated fair value of interest rate
swaps is based on estimated costs to settle the obligations with the
counterparts at the reporting date.
NOTE 18: PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for First American Corporation (Parent
Company only) was as follows:
101
105
CONDENSED INCOME STATEMENTS
Year Ended December 31
---------------------------------------
(in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
Income
Dividends from subsidiaries:
Banks $ 27,836 $ 46,955 $ 14,254
Fees from subsidiaries 2,722 2,714 -
Interest from subsidiaries 3,076 2,102 1,359
Interest on time deposits with other banks and other income 589 262 1,131
- ------------------------------------------------------------------------------------------------------
Total income 34,223 52,033 16,744
- ------------------------------------------------------------------------------------------------------
Expenses
Interest expense on long-term debt 3,639 3,595 3,751
Other expenses 5,731 4,270 2,100
- ------------------------------------------------------------------------------------------------------
Total expenses 9,370 7,865 5,851
- ------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of changes in
accounting principles 24,853 44,168 10,893
Reduction to consolidated income taxes arising from parent
company loss 1,204 1,058 1,295
- ------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings (loss) of subsidiaries
and cumulative effect of changes in accounting principles 26,057 45,226 12,188
- ------------------------------------------------------------------------------------------------------
Equity in undistributed earnings (loss) of subsidiaries before
cumulative effect of changes in accounting principles:
Banks 77,023 51,976 95,221
- ------------------------------------------------------------------------------------------------------
Total equity in undistributed earnings of subsidiaries 77,023 51,976 95,221
- ------------------------------------------------------------------------------------------------------
Net income before cumulative effect of changes in accounting
principles 103,080 97,202 107,409
Cumulative effect of changes in accounting principles, net of tax - - (84)
- ------------------------------------------------------------------------------------------------------
Net income $103,080 $97,202 $107,325
======================================================================================================
CONDENSED BALANCE SHEETS
December 31
--------------------------------------
(in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------
Assets
Cash $ 41 $ 2,476
Securities available for sale 540 540
Short-term investments with subsidiary 80,185 71,466
Employee stock ownership plan loan 661 -
Investment in subsidiaries, at cost adjusted for equity in earnings and
net unrealized gains (losses) on securities available for sale 809,076 639,326
Other equity investments 5,064 4,471
Other assets 4,942 2,839
- ------------------------------------------------------------------------------------------------------
Total assets $ 900,509 $721,118
=======================================================================================================
Liabilities and shareholders' equity
Long-term debt $ 99,280 $ 50,515
Other liabilities 5,697 2,930
- -------------------------------------------------------------------------------------------------------
Total liabilities 104,977 53,445
- -------------------------------------------------------------------------------------------------------
Preferred stock, without par value - -
Common stock, $5 par value 147,699 143,625
Capital surplus 162,254 130,933
Retained earnings 483,973 409,638
Deferred compensation on restricted stock (1,263) (2,161)
Employee stock ownership plan obligation (661) (781)
- -------------------------------------------------------------------------------------------------------
Realized shareholders' equity 792,002 681,254
Net unrealized gains (losses) on securities available for sale, net of tax 3,530 (13,581)
- -------------------------------------------------------------------------------------------------------
Total shareholders' equity 795,532 667,673
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 900,509 $721,118
=======================================================================================================
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CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
-----------------------------------------------
(in thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $103,080 $ 97,202 $107,325
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed income of subsidiaries (77,023) (51,976) (95,221)
Cumulative effect of changes in accounting principles,
net of tax - - 84
Amortization 34 32 735
Deferred income tax expense 12 284 44
Change in assets and liabilities:
Increase (decrease) in accrued interest payable 118 (56) 724
(Increase) decrease in other assets (4,696) 706 (500)
Increase (decrease) in other liabilities 4,037 (1,656) 1,416
- ---------------------------------------------------------------------------------------------
Net cash provided by operating activities 25,562 44,536 14,607
- ---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net increase in short-term securities with subsidiary (8,719) (1,399) (19,128)
Proceeds from maturity of securities held to maturity - 174 50,070
Purchases of securities held to maturity - - (50,691)
Purchases of securities available for sale - (540) -
Net increase in employee stock ownership plan loan (661) - -
Acquisitions - (6,476) (27,500)
Investment in other equity investments (587) (100) -
Net (increase) decrease in investment in subsidiary 7,500 - (5,925)
- ---------------------------------------------------------------------------------------------
Net cash used in investing activities (2,467) (8,341) (53,174)
- ---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 49,513 - 49,680
Repayment of long-term debt (782) (13,593) (1,501)
Issuance of common shares for Employee Benefit and
Dividend Reinvestment Plans 13,782 1,988 4,795
Repurchase of common stock (62,347) - -
Tax benefit-related to stock options 3,095 56 -
Cash dividends paid (28,791) (24,097) (14,282)
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (25,530) (35,646) 38,692
- ---------------------------------------------------------------------------------------------
Increase (decrease) in cash (2,435) 549 125
Adjustment for change in fiscal year of pooled company - 1,600 -
Cash, beginning of year 2,476 327 202
- ---------------------------------------------------------------------------------------------
Cash, end of year $ 41 $ 2,476 $ 327
=============================================================================================
Cash paid during the year for:
Interest expense $ 3,521 $ 3,651 $ 3,027
Income taxes 36,861 51,373 43,363
Non-cash investing activities:
Stock issued for acquisition (note 2) 80,373 - -
- ---------------------------------------------------------------------------------------------
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRST AMERICAN CORPORATION
(Registrant)
BY: /s/ DENNIS C. BOTTORFF
-------------------------
DENNIS C. BOTTORFF,
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date: March 21, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Dennis C. Bottorff /s/ Martin E. Simmons
----------------------------- -------------------------
Dennis C. Bottorff Martin E. Simmons
Chairman, President, Chief Executive Executive Vice President,
Officer and Director General Counsel, Secretary, and
Principal Financial Officer
Dated: March 21, 1996 Dated: March 21, 1996
/s/ Marvin J. Vannatta, Jr.
---------------------------
Marvin J. Vannatta, Jr.
Executive Vice President and
Principal Accounting Officer
Dated: March 21, 1996
104
108
/s/ Sam H. Anderson, Jr. /s/ Robert A. McCabe, Jr.
- ------------------------------ ---------------------------
SAM H. ANDERSON, JR. ROBERT A. MCCABE, JR.
Director Director
Dated: March 21, 1996 Dated: March 21, 1996
/s/ William O. McCoy
- ------------------------------ ---------------------------
SAMUEL E. BEALL, II WILLIAM O. MCCOY
Director Director
Dated: March , 1996 Dated: March 21, 1996
--
/s/ Earnest W. Deavenport, Jr. /s/ Dale W. Polley
- ------------------------------ ---------------------------
EARNEST W. DEAVENPORT, JR. DALE W. POLLEY
Director Director
Dated: March 21, 1996 Dated: March 21, 1996
/s/ Reginald D. Dickson /s/ Dr. Roscoe R. Robinson
- ------------------------------ --------------------------
REGINALD D. DICKSON DR. ROSCOE R. ROBINSON
Director Director
Dated: March 21, 1996 Dated: March 21, 1996
/s/ James F. Smith, Jr.
- ------------------------------ --------------------------
T. SCOTT FILLEBROWN, JR. JAMES F. SMITH, JR.
Director Director
Dated: March , 1996 Dated: March 21, 1996
--
/s/ James A. Haslam, II /s/ Cal Turner, Jr.
- ------------------------------ ---------------------------
JAMES A. HASLAM, II CAL TURNER, JR.
Director Director
Dated: March 21, 1996 Dated: March 21, 1996
/s/ Martha R. Ingram /s/ Ted H. Welch
- ------------------------------ ---------------------------
MARTHA R. INGRAM TED H. WELCH
Director Director
Dated: March 21, 1996 Dated: March 21, 1996
/s/ Walter G. Knestrick
- ------------------------------ ---------------------------
WALTER G. KNESTRICK DAVID K. WILSON
Director Director
Dated: March 21, 1996 Dated: March , 1996
--
/s/ Gene C. Koonce
- ------------------------------ ---------------------------
GENE C. KOONCE TOBY S. WILT
Director Director
Dated: March 21, 1996 Dated: March , 1996
--
/s/ James R. Martin /s/ William S. Wire, II
- ------------------------------ ---------------------------
JAMES R. MARTIN WILLIAM S. WIRE, II
Director Director
Dated: March 21, 1996 Dated: March 21, 1996
105
109
EXHIBIT INDEX
NUMBER NAME PAGE
- ------ ---- ----
Exhibit 3.2 By-laws of the Corporation 107
Exhibit 10.3(h) Amended Salary Deferral Agreement 129
Exhibit 10.3(j) Form of Key Employee Change in
Control Agreement 137
Exhibit 21 List of Subsidiaries 145
Exhibit 23 Accountants' Consent 146
Exhibit 27 Financial Data Schedule (for SEC use only) 147
106
110
For purposes of EDGAR filing for 12/31/95 Form 10-K:
APPENDIX TO ELECTRONIC FORMAT DOCUMENT
Graph #1: In the Overview section of Management's Discussion and Analysis,
this bar graph depicts the Company's net income (loss) per share
for 1991 through 1995. For 1995, this graph also depicts the
Company's 1995 earnings per share based on earnings exclusive of
merger-related expenses and gain on sales of branches. For 1994,
this graph also depicts the Company's 1994 earnings per share based
on earnings exclusive of negative loan loss provision and available
for sale securities losses recognized in the fourth quarter of
1994. For 1993, this graph also depicts the Company's 1993
earnings per share based on earnings exclusive of negative loan
loss provisions in the last three quarters of 1993 and charitable
contribution to First American Foundation in the fourth quarter of
1993. This graph appears in the paper format version of the
document and not in this electronic filing.
Graph #2: In the Overview section of Management's Discussion and Analysis,
this bar graph depicts the Company's return on average equity for
1991 through 1995. For 1995, this graph also depicts the Company's
return on average equity based on earnings exclusive of
merger-related expenses and gain on sales of branches. For 1994,
this graph also depicts the Company's 1994 return on average equity
based on earnings exclusive of negative loan loss provision and
available for sale securities losses realized in the fourth quarter
of 1994. For 1993, this graph also depicts the Company's 1993
return on average equity based on earnings exclusive of negative
loan loss provisions in the last three quarters of 1993 and
charitable contribution to First American Foundation in the fourth
quarter of 1993. This graph appears in the paper format version of
the document and not in this electronic filing.
Graph #3: In the Overview section of Management's Discussion and Analysis,
this bar graph depicts the Company's return on average assets for
1991 through 1995. For 1995, this graph also depicts the Company's
1995 return on average assets based on earnings exclusive of
merger-related expenses and gain on sales of branches. For 1994,
this graph also depicts the Company's 1994 return on average assets
based on earnings exclusive of negative loan loss provision and
available for sale securities losses realized in the fourth quarter
of 1994. For 1993, this graph also depicts the Company's 1993
return on average assets based on earnings exclusive of negative
loan loss provisions in the last three quarters of 1993 and
charitable contribution to First American Foundation in the fourth
quarter of 1993. This graph appears in the paper format version of
the document and not in this electronic filing.
111
Graph #4: In the Net Interest Income section of Management's Discussion and
Analysis, this bar graph depicts the Company's interest income
(taxable equivalent basis) for 1991 through 1995. This graph
appears in the paper format version of the document and not in this
electronic filing.
Graph #5: In the Non-Interest Expense section of Management's Discussion and
Analysis, this bar graph depicts the Company's operating efficiency
ratio for 1991 through 1995. For 1995, the ratio excludes
merger-related expenses and gain on sales of branches. For 1994,
the ratio excludes available for sale securities losses realized in
the fourth quarter of 1994. For 1993, the ratio excludes the
charitable contribution to First American Foundation. This graph
appears in the paper format version of the document and not in this
electronic filing.
Graph #6: In the Loans section of Management's Discussion and Analysis, this
bar graph depicts the Company's loans, net of discount and fees, at
year-end 1991 through 1995. This graph appears in the paper format
version of the document and is not in the electronic filing.
Graph #7: In the Allowance and Provision for Possible Loan Losses section of
Management's Discussion and Analysis, this bar graph depicts the
Company's allowance to net loans at year-end 1991 through 1995.
This graph appears in the paper format version of the document and
is not in this electronic filing.
Graph #8: In the Allowance and Provision for Possible Loan Losses section of
Management's Discussion and Analysis, this bar graph depicts the
Company's net charge-offs (recoveries) to average loans for 1991
through 1995. This graph appears in the paper format version of
the document and is not in this electronic filing.
Graph #9: In the Asset Quality section of Management's Discussion and
Analysis, this line graph depicts the Company's nonperforming
assets to loans and foreclosed properties at year-end 1991 through
1995. This graph appears in the paper format version of the
document and is not in this electronic filing.
Graph #10: In the Deposits section of Management's Discussion and Analysis,
this bar graph depicts the Company's core deposits at year-end 1991
through 1995. This graph appears in the paper format version of
the document and is not in this electronic filing.
Graph #11: In the Capital Position section of Management's Discussion and
Analysis, this bar graph depicts the Company's average equity to
average assets for 1991 through 1995. This graph appears in the
paper format version of the document and is not in this electronic
filing.