1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-6198
FIRST AMERICAN CORPORATION
(Exact name of Registrant as specified in its charter)
TENNESSEE 62-0799975
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
FIRST AMERICAN CENTER, NASHVILLE, TENNESSEE 37237
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 615/748-2000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common shares outstanding: 57,790,150 as of March 31, 1998.
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FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
INDEX
Part I. Financial Information Page
- ------- --------------------- ----
Item 1 Financial Statements (unaudited)
Consolidated Income Statements for the Three
Months Ended March 31, 1998 and 1997 3
Consolidated Balance Sheets as of March 31, 1998 and
1997 and December 31, 1997 4
Consolidated Statements of Changes in Shareholders'
Equity for the Three Months Ended March 31, 1998
and March 31, 1997 5
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and March 31, 1997 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 1 Legal Proceedings 19
Item 6 Exhibits and Reports on Form 8-K 19
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FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Quarter Ended
March 31
----------------------
(in thousands except per share amounts) 1998 1997
- ----------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $151,298 $138,702
Interest and dividends on securities 43,580 40,567
Interest on federal funds sold and securities purchased under
agreements to resell 987 888
Interest on time deposits with other banks and other interest 1,055 1,143
- ----------------------------------------------------------------------------------------------
Total interest income 196,920 181,300
- ----------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 5,449 4,515
Money market accounts 25,455 25,390
Regular savings 1,332 1,771
Certificates of deposit under $100,000 20,302 21,970
Certificates of deposit $100,000 and over 12,023 10,142
Other time and foreign 6,500 6,266
- ----------------------------------------------------------------------------------------------
Total interest on deposits 71,061 70,054
- ----------------------------------------------------------------------------------------------
Interest on short-term borrowings 17,357 13,356
Interest on long-term debt 6,119 4,956
- ----------------------------------------------------------------------------------------------
Total interest expense 94,537 88,366
- ----------------------------------------------------------------------------------------------
NET INTEREST INCOME 102,383 92,934
PROVISION FOR LOAN LOSSES 4,000 --
- ----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 98,383 92,934
- ----------------------------------------------------------------------------------------------
NONINTEREST INCOME
Investment services income 32,863 29,994
Service charges on deposit accounts 16,754 14,721
Commissions and fees on fiduciary activities 4,987 4,700
Merchant discount fees 780 840
Net realized gain on sales of securities 1,100 147
Trading account revenue 402 369
Other 13,253 10,980
- ----------------------------------------------------------------------------------------------
Total noninterest income 70,139 61,751
- ----------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 51,141 47,295
Subscribers' commissions 20,190 17,802
Net occupancy 7,369 6,828
Equipment 5,886 4,814
Systems and processing 3,529 3,931
Communication 3,945 3,374
Marketing 3,576 2,656
Supplies 1,414 1,606
Foreclosed properties expense (income), net 39 (627)
Other 10,997 11,858
- ----------------------------------------------------------------------------------------------
Total noninterest expense 108,086 99,537
- ----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 60,436 55,148
Income tax expense 22,790 21,118
- ----------------------------------------------------------------------------------------------
NET INCOME $ 37,646 $ 34,030
==============================================================================================
PER COMMON SHARE:
Net income:
Basic $ .66 $ .58
Diluted .64 .56
Dividends declared .20 .155
==============================================================================================
AVERAGE COMMON SHARES OUTSTANDING:
Basic 57,118 59,081
Diluted 59,096 60,757
==============================================================================================
See notes to consolidated financial statements.
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FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31 December 31
----------------------------- -----------
(dollars in thousands, except share amounts) 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 539,902 $ 476,013 $ 530,662
Time deposits with other banks 63,840 17,863 2,245
Securities:
Held to maturity (fair value $651,816, $799,205, and $572,586,
respectively) 648,964 802,547 570,699
Available for sale (amortized cost $2,288,081, $1,759,072, and
$1,941,352, respectively) 2,293,754 1,732,223 1,940,343
- --------------------------------------------------------------------------------------------------------------------------------
Total securities 2,942,718 2,534,770 2,511,042
- --------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under agreements to resell 39,417 17,358 129,952
Trading account securities 70,001 59,954 63,011
Loans:
Commercial 3,251,140 3,105,167 3,309,218
Consumer--amortizing mortgages 1,531,741 1,750,259 1,763,579
Consumer--other 1,547,536 1,362,939 1,563,636
Real estate--construction 205,511 175,414 193,226
Real estate--commercial mortgages and other 379,794 363,939 391,865
- --------------------------------------------------------------------------------------------------------------------------------
Total loans 6,915,722 6,757,718 7,221,524
Unearned discount (4,402) (8,873) (4,953)
- --------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount 6,911,320 6,748,845 7,216,571
Allowance for loan losses (114,854) (122,551) (115,393)
- --------------------------------------------------------------------------------------------------------------------------------
Total net loans 6,796,466 6,626,294 7,101,178
- --------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 200,753 169,219 196,106
Foreclosed properties 3,679 4,530 3,528
Other assets 404,813 302,902 334,096
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $11,061,589 $10,208,903 $10,871,820
================================================================================================================================
LIABILITIES
Deposits:
Demand (noninterest-bearing) $ 1,390,752 $ 1,351,427 $ 1,353,941
NOW accounts 1,088,873 871,799 915,201
Money market accounts 2,412,884 2,388,446 2,491,586
Regular savings 262,215 306,795 264,447
Certificates of deposit under $100,000 1,513,275 1,672,671 1,570,357
Certificates of deposit $100,000 and over 914,754 749,387 941,032
Other time 357,770 363,865 366,933
Foreign 120,895 98,447 104,182
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 8,061,418 7,802,837 8,007,679
- --------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 1,377,271 1,080,393 1,326,827
Long-term debt 409,514 323,262 409,821
Other liabilities 321,849 148,268 218,754
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,170,052 9,354,760 9,963,081
- --------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; authorized 100,000,000 shares; issued:
57,790,150 shares at March 31, 1998; 58,643,784 shares at
March 31, 1997; and 58,260,642 shares at December 31, 1997 144,475 146,610 145,652
Additional paid-in capital 77,015 134,047 106,228
Retained earnings 697,046 594,648 670,930
Deferred compensation on restricted stock (30,984) (4,373) (13,341)
Employee stock ownership plan obligation -- (436) (163)
- --------------------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 887,552 870,496 909,306
Accumulated other comprehensive income (loss), net of tax 3,985 (16,353) (567)
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 891,537 854,143 908,739
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,061,589 $10,208,903 $10,871,820
================================================================================================================================
See notes to consolidated financial statements.
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FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, COMMON DEFERRED EMPLOYEE ACCUMULATED
1997 AND MARCH 31, 1998 SHARES COMPENSATION STOCK OTHER
ISSUED ADDITIONAL ON OWNERSHIP COMPREHENSIVE
(dollars in thousands except per AND COMMON PAID-IN RETAINED RESTRICTED PLAN INCOME (LOSS),
share amounts) OUTSTANDING STOCK CAPITAL EARNINGS STOCK OBLIGATION NET OF TAX TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1997 59,262,998 $148,158 $157,792 $569,851 $ (2,066) $(443) $ (4,585) $868,707
Comprehensive income:
Net income -- -- -- 34,030 -- -- --
Other comprehensive loss, net
of tax -- -- -- -- -- -- (11,768)
Comprehensive income 22,262
Issuance of common shares in
connection with Employee
Benefit Plans, net of discount
on Dividend Reinvestment Plan 366,812 917 6,445 -- -- -- -- 7,362
Issuance of shares of restricted
common stock 93,672 234 2,595 -- (2,829) -- -- --
Repurchase of shares of common
stock (1,430,220) (3,575) (42,721) -- -- -- -- (46,296)
Issuance of common shares for
purchase of Hartsville
Bancshares, Inc. 350,522 876 9,223 -- -- -- -- 10,099
Amortization of deferred
compensation on restricted
stock -- -- -- -- 522 -- -- 522
Reduction in employee stock
ownership plan obligation -- -- -- -- -- 7 -- 7
Cash dividends declared ($.155
per common share) -- -- -- (9,233) -- -- -- (9,233)
Tax benefit from stock option
and award plans -- -- 712 -- -- -- -- 712
Other -- -- 1 -- -- -- -- 1
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 58,643,784 $146,610 $134,047 $594,648 $ (4,373) $(436) $(16,353) $854,143
===================================================================================================================================
Balance, January 1, 1998 58,260,642 $145,652 $106,228 $670,930 $(13,341) $(163) $ (567) $908,739
Comprehensive income:
Net income -- -- -- 37,646 -- -- --
Other comprehensive income,
net of tax -- -- -- -- -- -- 4,552
Comprehensive income 42,198
Issuance of common shares in
connection with Employee
Benefit Plans, net of discount
on Dividend Reinvestment Plan 289,572 724 4,284 -- -- -- -- 5,008
Issuance of shares of restricted
common stock 416,506 1,041 18,107 -- (19,148) -- -- --
Repurchase of shares of common
stock (1,176,570) (2,942) (53,577) -- -- -- -- (56,519)
Amortization of deferred
compensation on restricted
stock -- -- -- -- 1,505 -- -- 1,505
Reduction in employee stock
ownership plan obligation -- -- -- -- -- 163 -- 163
Cash dividends declared ($.20 per
common share) -- -- -- (11,530) -- -- -- (11,530)
Tax benefit from stock option and
award plans -- -- 1,973 -- -- -- -- 1,973
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 57,790,150 $144,475 $ 77,015 $697,046 $(30,984) $ -- $ 3,985 $891,537
===================================================================================================================================
See notes to consolidated financial statements.
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FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31
-------------------------
(in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 37,646 $ 34,030
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Provision for loan losses 4,000 --
Depreciation and amortization of premises and equipment 4,795 4,437
Amortization of intangible assets 2,969 2,775
Other amortization, net 1,665 551
Deferred income tax expense 878 2,923
Net gain on sales and writedowns of foreclosed property (37) (769)
Net realized gains on sales of securities (1,100) (147)
Net (gain) loss on sales and writedowns of premises and equipment (56) 5
Change in assets and liabilities, net of effects from
acquisitions:
Decrease (increase) in accrued interest receivable 1,211 (2,358)
Increase in accrued interest payable 708 2,954
(Increase) decrease in trading account securities (6,990) 256
(Increase) decrease in other assets (79,169) 11,979
Increase (decrease) in other liabilities 102,387 (107,755)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 68,907 (51,119)
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 112,804 121,136
Proceeds from maturities of securities available for sale 147,311 85,883
Purchases of securities available for sale (573,965) (257,285)
Proceeds from maturities of securities held to maturity 125,312 51,293
Purchases of securities held to maturity (5,371) (19,106)
Proceeds from sales of foreclosed property 496 4,016
Acquisitions, net of cash and cash equivalents acquired -- 2,769
Net decrease (increase) in loans, net of repayments and sales 71,404 (33,699)
Proceeds from sales of premises and equipment 68 156
Purchases of premises and equipment (9,454) (10,027)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (131,395) (54,864)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 53,739 (71,733)
Net increase (decrease) in other short-term borrowings 50,417 (82,979)
(Repayment to) advances from Federal Home Loan Bank (267) 528
Net repayment of other long-term debt (33) (78)
Issuance of common shares under Employee Benefit and Dividend
Reinvestment Plans 5,008 7,362
Repurchase of common stock (56,519) (46,296)
Tax benefit related to stock options 1,973 712
Cash dividends paid (11,530) (9,233)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 42,788 (201,717)
- -------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (19,700) (307,700)
Cash and cash equivalents, January 1 662,859 818,934
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, March 31 $ 643,159 $ 511,234
===================================================================================================================
Cash paid during the year for:
Interest expense $ 93,829 $ 84,920
Income taxes 626 1,416
Non-cash transactions:
Foreclosures 568 496
Stock issued for acquisitions -- 10,099
Mortgage loans securitized and retained 229,471 --
===================================================================================================================
See notes to consolidated financial statements.
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FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and general practices within the
banking industry.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
presented in First American Corporation's (the "Corporation" or "First
American") 1997 Annual Report to Shareholders. The quarterly consolidated
financial statements reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for interim
periods. All such adjustments are of a normal recurring nature. Certain prior
year amounts have been reclassified to conform with the current year
presentation. The results for interim periods are not necessarily indicative of
results to be expected for the complete fiscal year.
(2) NONPERFORMING ASSETS
Nonperforming assets were as follows:
March 31 December 31
------------------------------------
(dollars in thousands) 1998 1997 1997
- ------------------------------------------------------------------------------------
Nonaccrual loans $15,420 $11,248 $15,090
Foreclosed properties 3,679 4,530 3,528
- ------------------------------------------------------------------------------------
Total nonperforming assets $19,099 $15,778 $18,618
====================================================================================
90 days or more past due on accrual $11,626 $19,038 $13,152
====================================================================================
Nonperforming assets as a percent of loans
and foreclosed properties (excluding
90 days or more past due on accrual) .28% .23% .26%
====================================================================================
(3) ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
Three Months Ended March 31
---------------------------
(in thousands) 1998 1997
- -------------------------------------------------------------------------
Balance, January 1 $115,393 $123,265
Provision charged to operating expenses 4,000 --
Allowance of subsidiary purchased -- 711
- -------------------------------------------------------------------------
119,393 123,976
- -------------------------------------------------------------------------
Loans charged off 7,568 5,894
Recoveries of loans previously charged off 3,029 4,469
- -------------------------------------------------------------------------
Net charge-offs 4,539 1,425
- -------------------------------------------------------------------------
Balance, March 31 $114,854 $122,551
=========================================================================
Allowance ratios were as follows:
Three Months Ended March 31
---------------------------
1998 1997
- ----------------------------------------------------------------------------
Allowance end of period to net loans outstanding 1.66% 1.82%
Net charge-offs to average loans (annualized) .26 .09
============================================================================
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(4) ACQUISITIONS
On December 7, 1997, the Corporation entered into a definitive
agreement providing for the merger of Deposit Guaranty Corp. ("Deposit
Guaranty") into the Corporation. Terms of the agreement provide for Deposit
Guaranty shareholders to receive 1.17 shares of the Corporation's common stock
for each outstanding share of Deposit Guaranty common stock in a transaction to
be accounted for as a pooling-of-interests. Deposit Guaranty is a financial
services holding company headquartered in Jackson, Mississippi. At March 31,
1998, Deposit Guaranty had total assets of $7.2 billion and total shareholders'
equity of $648.4 million. Deposit Guaranty had 174 banking offices in
Mississippi, Louisiana, Arkansas, and Tennessee, and mortgage offices in
Oklahoma, Nebraska, Texas, Indiana, and Iowa at March 31, 1998. The transaction
is expected to be completed during the second quarter of 1998.
The following unaudited proforma data summarizes the combined results
of operations of the Corporation and Deposit Guaranty as if the business
combination had been consummated on January 1, 1997.
Three Months Ended March 31
----------------------------
(in thousands except per share amounts) 1998 1997
- -------------------------------------------------------------------------
Summary income statement:
Net interest income $ 172,517 $ 164,380
Provision for loan losses 6,000 1,875
Noninterest income 105,063 92,402
Noninterest expense 174,114 165,853
Income tax expense 35,480 32,411
- -------------------------------------------------------------------------
Net income $ 61,986 $ 56,643
=========================================================================
Basic earnings per share $ .59 $ .52
Diluted earnings per share .58 .51
=========================================================================
End of period balance sheet:
Assets $18,212,672 $16,983,368
Shareholders' equity 1,539,984 1,431,169
=========================================================================
Effective January 1, 1997, the Corporation completed its acquisition of
Hartsville Bancshares, Inc. ("Hartsville"), a holding company with $90 million
in assets, by exchanging approximately 350,000 shares of the Corporation's
common stock for all of the outstanding shares of Hartsville. The acquisition
was accounted for as a purchase. The purchase price in excess of the fair value
of net assets acquired of $6 million was recorded as goodwill and is being
amortized on a straight-line basis over 15 years. Hartsville was the parent of
CommunityFirst Bank, which operated five branches in Middle Tennessee.
CommunityFirst was simultaneously merged with and into First American National
Bank ("FANB"), a wholly-owned subsidiary of the Corporation.
(5) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," was adopted by the Corporation on January 1,
1998. SFAS 130 establishes standards for reporting comprehensive income.
Comprehensive income includes net income and other comprehensive income which is
defined as non-owner related transactions in equity. Prior periods have been
reclassified to reflect the application of the provisions of SFAS No. 130. The
following table sets
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forth the amounts of other comprehensive income included in equity along with
the related tax effect for the three months ended March 31, 1998 and 1997:
(in thousands) PRE-TAX (EXPENSE) NET OF TAX
AMOUNT BENEFIT AMOUNT
MARCH 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
Net unrealized gains on securities available for sale arising during 1998 $ 7,793 $(2,565) $ 5,228
Less: Reclassification adjustment for net gains realized in net income 1,100 (424) 676
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 6,693 $(2,141) $ 4,552
=====================================================================================================================
March 31, 1997
- ---------------------------------------------------------------------------------------------------------------------
Net unrealized losses on securities available for sale arising during 1997 $(19,111) $ 7,433 $(11,678)
Less: Reclassification adjustment for net gains realized in net income 147 (57) 90
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive loss $(19,258) $ 7,490 $(11,768)
=====================================================================================================================
(6) ACCOUNTING MATTERS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to
shareholders. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Adoption of SFAS No. 131 will expand disclosures related
to the consolidated financial statements. The Corporation adopted SFAS 131 on
January 1, 1998 and is currently evaluating its operations to determine the
appropriate disclosures with respect to SFAS No. 131.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," revises and standardizes the disclosure requirements
for employers' pensions and other postretirement benefits plans. This standard
does not change the measurement or recognition of such plans. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. Restatement of
disclosures for earlier periods presented is required unless the information is
not readily available, in which case, all available information and a
description of the information not available shall be included in the notes to
the financial statements. The disclosure requirements of SFAS No. 132 have been
designed to provide information that is more comparable, understandable, and
concise for the users of this information. The Corporation adopted SFAS 132 on
January 1, 1998.
(7) EARNINGS PER COMMON SHARE
Basic earnings per share ("EPS") is computed by dividing income
available to common shareholders (numerator) by the weighted average number of
common shares outstanding (denominator). Diluted EPS is computed by dividing
income available to common shareholders by the weighted average number of shares
outstanding adjusted to reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
(8) COMMON STOCK
The Corporation purchased 1.2 million shares of First American
Corporation common stock in the open market during the first three months of
1998 at a total cost of $56.5 million. Under Tennessee law, such shares have
been recognized as authorized but unissued. Accordingly, the
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Corporation reduced the par value and reflected the excess of the purchase price
over par of such repurchased shares as a reduction from additional paid-in
capital.
(9) LEGAL AND REGULATORY MATTERS
Following the adoption of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, Charter Federal Savings Bank ("Charter" or now
"FAFSB"), brought an action against the Office of Thrift Supervision and the
Federal Deposit Insurance Corporation 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. Charter also filed suit against the United
States Government ("Government") in the Court of Federal Claims based on breach
of contract. Pending the Supreme Court's review of the Winstar decision, FAFSB's
action was stayed. In July 1996, the Supreme Court affirmed the lower court's
decision in Winstar. The stay was automatically lifted and FAFSB's suit is now
proceeding. The Government, however, has filed a motion to dismiss the suit
based on the prior Fourth Circuit decision. This motion has not yet been decided
by the Federal Claims Court.
The value of FAFSB's claims against the Government, as well as their
ultimate outcome, are contingent upon a number of factors, some of which are
outside of FAFSB's control, and are highly uncertain as to substance, timing and
the dollar amount of any damages which might be awarded should FAFSB finally
prevail. Under the Agreement and Plan of Reorganization as amended by and
between FAFSB and the Corporation, in the event that FAFSB is successful in this
litigation, the FAFSB 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 FAFSB 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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MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the
consolidated financial statements of First American Corporation (the
"Corporation" or "First American") appearing within this report and by reference
to the Corporation's 1997 Annual Report.
To the extent that statements in this discussion relate to the plans,
objective, or future performance of First American, these statements may be
deemed to be forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are based on
management's current expectations and the current economic environment. Actual
strategies and results in future periods may differ materially from those
currently expected due to various risks and uncertainties.
OVERVIEW
Net income for the first quarter of 1998 was $37.6 million, up 11
percent from $34 million earned in the first quarter of 1997. Basic earnings per
share increased 14 percent to $.66 during the first quarter of 1998 compared to
$.58 during the first quarter of 1997. Diluted earnings per share rose 14
percent to $.64 in the first quarter of 1998 from $.56 during the first quarter
of 1997. Return on average assets improved to 1.42 percent in the first quarter
of 1998 versus 1.37 percent in the first quarter of 1997. Return on average
equity also improved to 17.21 percent in the first quarter of 1998 compared to
15.78 percent in the first quarter of 1997.
On April 16, 1998, First American's Board of Directors increased the
quarterly cash dividend on its common stock by 25 percent to $.25 per share from
$.20 per share, effective with the second quarter 1998 dividend payable on May
29, 1998.
On December 7, 1997, First American entered into a definitive agreement
providing for the merger of Deposit Guaranty Corp. ("Deposit Guaranty") into
First American. Terms of the agreement provide for Deposit Guaranty shareholders
to receive 1.17 shares of First American's common stock for each outstanding
share of Deposit Guaranty common stock in a transaction to be accounted for as a
pooling-of-interests. Deposit Guaranty is a financial services holding company
headquartered in Jackson, Mississippi. At March 31, 1998, Deposit Guaranty had
total assets of $7.2 billion and total shareholders' equity of $648.4 million.
Deposit Guaranty had 174 banking offices in Mississippi, Louisiana, Arkansas,
and Tennessee and mortgage offices in Oklahoma, Nebraska, Texas, Indiana, and
Iowa at March 31, 1998. The transaction is expected to be completed during the
second quarter of 1998.
Effective January 1, 1997, First American acquired Hartsville
Bancshares, Inc. ("Hartsville"), a bank holding company with $90 million in
assets, by exchanging approximately 350,000 shares of the Corporation's common
stock for all of the outstanding shares of Hartsville. Hartsville had five
branches in Middle Tennessee and operated under the name CommunityFirst Bank.
Immediately following the merger of Hartsville with and into First American,
CommunityFirst Bank was merged with and into First American National Bank
("FANB"), the principal subsidiary of First American. The acquisition was
accounted for as a purchase.
On April 3, 1998, First American completed the sale of three branches
in Virginia with total deposits of approximately $38 million for a gain of
approximately $2.7 million. The sale of the three branches were a part of the
implementation of First American's Distribution Management System ("DMS") which
is designed to reconfigure First American's distribution system to determine the
best mix of distribution alternatives for clients and to maximize return on
capital investment.
On April 22, 1998, First American entered into a definitive agreement
to merge Peoples Bank of Dickson ("Peoples Bank") into First American in a
transaction valued at approximately $48 million. Peoples Bank is a $135 million
asset bank headquartered in Dickson, Tennessee, with six banking offices in
Middle Tennessee. Terms of the agreement provide for Peoples Bank shareholders
to receive 3.7 shares of First American's common stock for each outstanding
share of Peoples Bank in
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a transaction to be accounted for as a pooling-of-interests. The transaction is
subject to shareholder and regulatory approval and is expected to close before
year-end 1998.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income on a taxable equivalent basis represented 60
percent of total revenues in both the first quarter of 1998 and the first
quarter of 1997. For purposes of this discussion, total revenues consist of the
sum of net interest income and noninterest income. Net interest income is the
difference between total interest income earned on earning assets such as loans
and securities and total interest expense incurred on interest-bearing
liabilities such as deposits. Net interest income on a taxable equivalent basis
was $103.2 million in the first quarter of 1998, up $9.3 million, or 10 percent,
from $93.9 million in the first quarter of 1997. The $9.3 million increase in
net interest income resulted primarily from an increase in the volume of earning
assets ($5.7 million net interest income impact) and an improvement in the net
interest spread ($3.6 million net interest income impact). During the first
quarter of 1998, average earning assets increased $602.6 million, or 7 percent,
to $9.87 billion from $9.27 billion in the first quarter of 1997. The increase
in average earning assets was essentially due to increases in loans ($486.2
million) and investment securities ($120.7 million). Interest-bearing
liabilities averaged $8.38 billion during the first quarter of 1998, an increase
of $564.8 million, or 7 percent, from $7.82 billion in the first quarter of
1997. During the first quarter of 1998 compared to the same period in 1997,
interest-bearing deposits grew $196.5 million, or 3 percent, to $6.61 billion;
federal funds purchased and securities sold under agreements to repurchase
increased $180.2 million, or 20 percent, to $1.07 billion; and short-term
borrowings increased $101.2 million, or 51 percent, to $301.6 million.
The net interest spread contributed to the increase in net interest
income by improving 16 basis points during the first quarter of 1998 compared to
the first quarter of 1997. The net interest spread increased to 3.55 percent in
the first quarter of 1998 from 3.39 percent in the first quarter of 1997 as
average yields on earning assets increased 15 basis points while the average
rate paid on interest-bearing liabilities decreased 1 basis point. The 15 basis
point increase in the yield on earning assets to 8.12 percent from 7.97 percent
was primarily due to an increase in the yield on loans to 8.59 percent in the
first three months of 1998 from 8.46 percent in the first three months of 1997.
Factors contributing to the increased yield on loans were increased yields on
consumer and commercial loans, a portion of which reflects an increase in the
contribution to interest income from derivatives that hedged loan yields and a
higher average prime rate in 1998 compared to 1997. Factors contributing to the
1 basis point decrease in the average rate paid on interest-bearing liabilities
to 4.57 percent from 4.58 percent were deposit pricing actions on money market,
NOW, and regular savings accounts and a decrease in the expense involved in
hedging the rates paid on interest-bearing deposits.
As net interest income increased and the net interest spread improved,
the net interest margin increased 13 basis points to 4.24 percent in the first
quarter of 1998 from 4.11 percent in the first quarter of 1997.
NONINTEREST INCOME
Total noninterest income represented 40 percent of total revenues in
both the first quarter of 1998 and the first quarter of 1997. Total noninterest
income increased $8.4 million, or 14 percent, to $70.1 million in the first
quarter of 1998 from $61.8 million in the first quarter of 1997. Noninterest
income, excluding net realized securities gains, totaled $69.0 million, an
increase of $7.4 million, or 12 percent, from $61.6 million in the first quarter
of 1997. The increase in noninterest income in the first quarter of 1998 over
the first quarter of 1997 included a $2.9 million, or 10 percent, increase in
investment services income; a $2.0 million, or 14 percent, increase in service
charges on deposit accounts; and a $2.3 million, or 21 percent, increase in
other income. The $2.9 million improvement in investment services income over
the first quarter of 1997 resulted primarily from growth in retail
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brokerage commissions related to mutual funds, equities, and annuities sales
associated with the operations of IFC Holdings, Inc. ("IFC"). The $2.0 million
increase in service charges on deposit accounts is attributable to fee increases
and product changes in conjunction with the utilization of a customer
information system called VISION. Other income included a $.8 million increase
in real estate fees resulting from an increased volume of mortgage loans
originated. Excluding IFC, total noninterest income increased $4.9 million, or
14 percent.
NONINTEREST EXPENSE
Total noninterest expense increased $8.6 million, or 9 percent, to
$108.1 million for the first quarter of 1998 compared with $99.5 million for the
same period in 1997. Contributing to the $8.6 million increase were noninterest
expenses of IFC which rose $2.8 million primarily due to increases in
subscribers' commissions related to IFC's brokerage activities. Excluding IFC,
noninterest expense increased $5.8 million, or 8 percent.
Significant changes from the first quarter of 1998 compared to the
first quarter of 1997 in noninterest expense, exclusive of IFC, included
increases in salaries and employee benefits, equipment expense, net foreclosed
properties expense, and communication expense offset by a decrease in other
general and administrative expenses. Explanations for the changes, exclusive of
IFC, between the first quarter of 1998 compared to the first quarter of 1997 are
outlined as follows:
- - Salaries and benefits increased $3.5 million, or 8 percent, to $47.0
million from $43.5 million principally due to merit increases and
incentive programs.
- - Equipment expense increased $1.1 million, or 24 percent, to $5.8
million from $4.7 million as the result of an increase in personal
computer rental expense and a greater usage of computer maintenance
contracts specifically related to automated teller machines ("ATMs").
Additional ATMs (the number of ATMs increased by 67, or 17 percent, to
451 at March 31, 1998, from 384 at March 31, 1997) were added during
1997 as part of the implementation of lower-priced yet more convenient,
distribution alternatives.
- - Net foreclosed properties expense increased $.7 million to $39 thousand
from $.6 million of net foreclosed properties income.
- - Communication expense increased $.6 million, or 18.1 percent, to $3.6
million from $3.0 million due to higher expenditures for
telecommunications.
First American's productivity ratio in the traditional banking business
improved to 55.14 percent for the first quarter of 1998 compared to 56.88
percent for the first quarter of 1997. The improvement in the productivity ratio
means that the Corporation spent $1.74 less to generate $100 of bank revenue
during the first three months of 1998 compared to the same time period last
year.
As discussed in detail in the Corporation's 1997 Annual Report, First
American has adopted a broad-based approach designed to encompass total systems
and non-systems environments in addressing the "Year 2000" issue. First American
is meeting the objectives as defined in its Year 2000 work plan initiative in
accordance with the established timeline. First American continues to expect to
be substantially Year 2000 compliant by the end of 1998 and that costs of the
overall Year 2000 initiative will not exceed $5 million in the aggregate.
INCOME TAXES
Income tax expense for the first quarter of 1998 and 1997 was $22.8
million and $21.1 million, respectively. The major factor for the 8 percent
increase in income tax expense was the higher income before income taxes.
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BALANCE SHEET REVIEW
ASSETS
Total assets of First American rose $852.7 million, or 8 percent, to
$11.06 billion at March 31, 1998, compared to $10.21 billion at March 31, 1997.
The growth in total assets was primarily due to a $407.9 million, or 16 percent,
increase in investment securities and a $162.5 million, or 2 percent, increase
in loans net of unearned discount. During the first quarter of 1998, $229
million of mortgage loans were securitized and transferred to the investment
securities portfolio. Of the $229 million mortgage loans that were securitized,
$31 million was transferred to the available for sale securities portfolio and
$198 million was transferred to the held to maturity securities portfolio.
Excluding the effect of the $229 million mortgage loan securitization and
transfer to investment securities and the purchase of $200 million of
installment loans during the second quarter of 1997, loans net of unearned
discount increased $191.9 million, or 3 percent, and investment securities
increased $178.5 million, or 7 percent. Leading the growth in loans were
consumer-other loans which increased $184.6 million, or 14 percent, primarily
due to the purchase of $200 million of installment loans on June 30, 1997, and
commercial loans which increased $146.0 million, or 5 percent.
Consumer-amortizing mortgages decreased $218.5 million, or 12 percent; excluding
the effect of the securitization and transfer to investment securities of $229
million of mortgage loans, consumer-amortizing mortgages increased $11.0
million, or .6 percent. Also contributing to asset growth were increases in
other assets ($101.9 million), cash and due from banks ($63.9 million), and time
deposits with other banks ($46 million).
Total assets of First American increased $189.8 million from $10.87
billion at December 31, 1997, to $11.06 billion at March 31, 1998. The increase
in total assets from December 31, 1997, to March 31, 1998, was primarily due to
a $431.7 million increase in investment securities offset by a $305.3 million
decrease in loans net of unearned discount. Also contributing to asset growth
were increases in other assets ($70.7 million) and time deposits with other
banks ($61.6 million) offset by a decrease in federal funds sold and securities
purchased under agreements to resell ($90.5 million). Excluding the effect of
the $229 million mortgage loan securitization and transfer to investment
securities, investment securities increased $202.2 million and loans decreased
$75.8 million from year end 1997 to March 31, 1998. Balances in all categories
of loans, with the exception of real estate-construction which increased $12.3
million, declined slightly from December 31, 1997, to March 31, 1998.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
Management's policy is to maintain the allowance for 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 to earnings necessary,
after loan charge-offs and recoveries, to maintain the allowance at an
appropriate level. Determining the appropriate level of the allowance and the
amount of the provision for loan losses involves uncertainties and matters of
judgment and therefore cannot be determined with precision.
The allowance for loan losses was $114.9 million at March 31, 1998,
$122.6 million at March 31, 1997, and $115.4 million at December 31, 1997. The
allowance for loan losses was 1.66 percent and 1.82 percent of net loans at
March 31, 1998, and 1997, respectively, and 1.60 percent of net loans at
December 31, 1997. In the first quarter of 1998, the allowance was increased by
a provision of $4 million and decreased by net charge-offs of $4.5 million
compared to no provision and net charge-offs of $1.4 million in the first
quarter of 1997. Net charge-offs as a percentage of average loans on an
annualized basis amounted to .26 percent and .09 percent, respectively, in the
first quarters of 1998 and 1997. Activity in the allowance for loan losses in
the first quarter of 1997 also included a $.7 million increase due to the
January 1, 1997, acquisition of Hartsville.
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ASSET QUALITY
First American's nonperforming assets (excluding loans 90 days past due
on accrual status) were $19.1 million at March 31, 1998, $15.8 million at March
31, 1997, and $18.6 million at December 31, 1997. Nonperforming assets
(excluding loans 90 days past due on accrual status) at March 31, 1998,
represented .28 percent of total loans and foreclosed properties, compared to
.23 percent at March 31, 1997, and .26 percent at December 31, 1997. At March
31, 1998, nonperforming assets consisted of $15.4 million of nonaccrual loans
and $3.7 million of foreclosed properties.
Other potential problem loans consist of loans that are currently not
considered nonperforming but on which information about possible credit problems
has caused management to doubt the ability of the borrowers to comply fully with
present repayment terms. At March 31, 1998, such loans totaled approximately $47
million compared with $57 million at March 31, 1997, and $61 million at December
31, 1997. Depending on the economy and other factors, these loans and others,
which may not be presently identified, could become nonperforming assets in the
future.
LIABILITIES
Total deposits increased $258.6 million, or 3 percent, to $8.06 billion
at March 31, 1998 from $7.80 billion at March 31, 1997. Core deposits, which are
defined as total deposits less certificates of deposit $100,000 and over and
foreign deposits, were $7.03 billion at March 31, 1998, an increase of $70.8
million, or 1 percent, from $6.96 billion at March 31, 1997. Short-term
borrowings increased $296.9 million, or 27 percent, to $1.38 billion at March
31, 1998, from $1.08 billion at March 31, 1997. The increase in short-term
borrowings was primarily attributable to federal funds purchased from
correspondent banks ($109.6 million); sweep repurchase agreements ($80.1
million), in which customer demand deposit account balances are swept into
overnight interest earning accounts; and a reclassification from long- to
short-term borrowings of $108.5 million variable rate and $5.5 million fixed
rate advances from the Federal Home Loan Bank ("FHLB"). Long-term debt increased
$86.2 million, or 27 percent, to $409.5 million at March 31, 1998, from $323.3
million at March 31, 1997, with most of the increase due to the addition of $200
million variable rate borrowings from the FHLB offset by $114 million of FHLB
borrowings that were reclassified from long-term to short-term as discussed
above.
Total deposits increased $53.7 million, or 1 percent, from $8.01
billion at December 31, 1997 to $8.06 billion at March 31, 1998. Core deposits
increased $63.3 million, or 1 percent from $6.96 billion at December 31, 1997,
to $7.03 billion at March 31, 1998. Short-term borrowings increased $50.4
million from $1.33 billion at December 31, 1997.
DERIVATIVE INSTRUMENTS
First American has utilized off balance sheet derivative products for a
number of years in managing its interest rate sensitivity. Generally, a
derivative transaction is a payments exchange agreement whose value derives from
an underlying asset or underlying reference rate or index. The use of
non-complex, non-leveraged derivative products has reduced the Company's
exposure to changes in the interest rate environment. By using derivative
products such as interest rate swaps and futures contracts to alter the nature
of (hedge) specific assets or liabilities on the balance sheet (for example to
change a variable to a fixed rate obligation), the derivative product offsets
fluctuations in net interest income from the otherwise unhedged position. In
other words, if net interest income from the otherwise unhedged position changes
(increases or decreases) by a given amount, the derivative product should
produce close to the opposite result, making the combined amount (otherwise
unhedged position impact plus the derivative product position impact)
essentially unchanged. Derivative products have enabled First American to
improve its balance between interest-sensitive assets and interest-sensitive
liabilities by managing interest rate sensitivity, while continuing to meet the
lending and deposit needs of its customers.
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In conjunction with managing interest rate sensitivity, at March 31,
1998, First American had derivatives with notional values totaling $2.38
billion. These derivatives had a net positive fair value (unrealized net pre-tax
gain) of $16.8 million. Notional amounts are key elements of derivative
financial instrument agreements. However, notional amounts do not represent the
amounts exchanged by the parties to derivatives and do not measure First
American's exposure to credit or market risks. The amounts exchanged are based
on the notional amounts and the other terms of the underlying derivative
agreements. At March 31, 1997, First American had derivatives with notional
values totaling $1.15 billion. These derivatives had a net positive fair value
(unrealized net pre-tax gain) of $2.7 million at March 31, 1997. The instruments
utilized are noted in the following table along with their notional amounts and
fair values at March 31, 1998 and 1997.
Weighted
Average
Weighted Average Rate Maturity
Related Variable Rate Notional -------------------------- -------- Fair
(in thousands) Asset/Liability Amount Paid Received Years Value
- -----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1998
Interest rate swaps Money market deposits $ 150,000 5.97% (1) 5.68% (2) 1.8 $ (78)
Interest rate swaps Available for sale securities 100,000 5.54 (1) 5.72 (2) 4.8 1,952
Interest rate swaps Loans 775,000 5.64 (2) 6.61 (1) 4.0 20,496
Forward interest rate
swaps Money market deposits 600,000 6.46 (3) 5.65 (3) 1.0 (2,074)
Forward interest rate Available for sale
swaps securities 750,000 6.24 (4) N/A (4) 2.3 (3,516)
---------- -------
$2,375,000 $16,780
===================================================================================================================================
March 31, 1997
Interest rate swaps Money market deposits $ 200,000 5.67% (1) 5.53% (5) 2.3 $ 3,804
Interest rate swaps Loans 350,000 5.55 (2) 6.65 (1) 4.5 (2,824)
Forward interest rate Available for sale
swaps securities 200,000 7.01 (6) N/A (6) 3.6 (117)
Forward interest rate
swaps Money market deposits 400,000 6.27 (6) N/A (6) 1.5 1,857
---------- -------
$1,150,000 $ 2,720
===================================================================================================================================
(1) Fixed rate.
(2) Variable rate which reprices quarterly based on 3-month LIBOR.
(3) Forward swap periods have become effective for $150 million and will
begin at various dates during 1998 for $450 million. The rates to be
paid are fixed and were set at the inception of the contracts. Variable
rates to be received are based on 3-month LIBOR, repricing quarterly,
but were unknown for $450 million of forward swaps at March 31, 1998,
since the related forward swap periods had not yet begun.
(4) Forward swap periods begin at various dates during 1998. 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) Variable rate which reprices quarterly based on 3-month LIBOR, except
for $25 million which reprices every 6 months based on 6-month LIBOR.
(6) Forward swap periods began at various dates during 1997, except for
$100 million to begin in April 1998 related to available for sale
securities. 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.
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. At March 31, 1998, there were
$1.5 million of deferred net gains related to terminated derivatives contracts,
and there were $3.5 million of deferred net losses at March 31, 1997. Deferred
gains and losses on off balance sheet derivative activities are recognized as
interest income or interest expense over the original covered periods.
Net interest income for the quarter ended March 31, 1998, was increased
by derivative products income of $1.7 million. Net interest income for the
quarter ended March 31, 1997, was increased by $.6 million derivative products
income. The increase in derivative products net income in first quarter 1998
from first quarter 1997 was primarily due to actions taken later in 1997 to
create a derivatives position more balanced between pay-fixed and receive-fixed
interest rate swaps.
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Credit risk exposure due to off-balance-sheet hedging is closely
monitored, and counterparts to these contracts are selected on the basis of
their credit worthiness, as well as their market-making ability. As of March 31,
1998, all outstanding derivative transactions were with counterparts with credit
ratings of A-2 or better. Enforceable bilateral netting contracts between First
American and its counterparts allow for the netting of gains and losses in
determining net credit exposure. First American's net credit exposure on
outstanding derivatives was $18.1 million on March 31, 1998. Given the credit
standing of the counterparts to the derivative contracts, Management believes
that this credit exposure is reasonable in light of its objectives.
CAPITAL POSITION
Total shareholders' equity was $891.5 million, or 8.06 percent of total
assets, at March 31, 1998, $854.1 million, or 8.37 percent of total assets, at
March 31, 1997, and $908.7 million, or 8.36 percent of total assets, at December
31, 1997. Total shareholders' equity increased $37.4 million, or 4 percent, from
March 31, 1997, to March 31, 1998, resulting principally from comprehensive
income offset by common stock repurchases and dividends to shareholders. Total
shareholders' equity decreased $17.2 million, or 2 percent, from December 31,
1997, which was primarily due to common stock repurchases and dividends to
shareholders offset by comprehensive income.
During the first quarter of 1998, First American declared cash
dividends on its common stock of $.20 per common share compared to $.155 per
common share in the first quarter of 1997, an increase of 29 percent. The
dividend payout ratio was 30.30 percent in the first quarter of 1998 compared to
26.72 percent in the first quarter of 1997. On April 16, 1998, the First
American Board of Directors increased the quarterly cash dividend on its common
stock from $.20 per share to $.25 per share effective with the second quarter
1998 dividend payable on May 29, 1998, to shareholders of record on April 29,
1998.
The Federal Reserve Board and the Office of the Comptroller of the
Currency ("OCC") promulgate risk-based capital guidelines and regulations which
require bank holding companies and national banks to maintain minimum capital
ratios. As of March 31, 1998, the Corporation and FANB had ratios which exceeded
the regulatory requirements to be classified as "well capitalized," the highest
regulatory rating. At March 31, 1998, the Corporation and FANB had total
risk-based capital ratios of 11.17 percent and 10.81 percent, respectively, Tier
I risk-based capital ratios of 8.80 percent and 9.56 percent, respectively, and
Tier I leverage capital ratios of 7.39 percent and 8.12 percent, respectively.
In order to be considered well capitalized, the total risk-based capital ratio
must be a minimum of 10 percent, the Tier I risk-based capital ratio must equal
or exceed 6 percent, and the Tier I leverage capital ratio must equal or exceed
5 percent.
First American Federal Savings Bank ("FAFSB") is subject to capital
requirements adopted by the Office of Thrift Supervision, which are similar but
not identical to those issued by the Federal Reserve Board and the OCC. At March
31, 1998, FAFSB had ratios which exceeded the regulatory requirements to be
classified as "well capitalized."
LIQUIDITY
Liquidity management consists of maintaining sufficient cash levels to
fund operations and to meet the requirements of borrowers, depositors, and
creditors. Liquid assets include cash and cash equivalents (which consist of
cash and due from banks, interest-bearing deposits in banks, and federal funds
sold and securities purchased under agreements to resell) less Federal Reserve
Bank reserve requirements in addition to trading account securities and
securities that are estimated to mature within one year. Liquid assets totaled
$1,003.4 million and $930.2 million at March 31, 1998, and 1997, respectively,
which was approximately 10 percent of earning assets at both quarter ends.
Available for sale securities maturing after one year, which had a balance of
$1.97 billion at March 31, 1998, compared to $1.62 billion at March 31, 1997 can
also be sold to meet liquidity needs. The overall liquidity position of First
American is further enhanced by a high proportion of core deposits, which
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provide a stable funding base. Core deposits comprised 87 percent of total
deposits at March 31, 1998, versus 89 percent at March 31, 1997.
An additional source of liquidity is First American's three-year $70
million revolving credit agreement, which expired on March 31,1998, but was
extended for 60 days. A new revolving credit agreement is in the process of
negotiation. First American had no borrowings under the revolving agreement
during 1998 or 1997.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information called for by this item is incorporated by reference to
Item 3 of the Registrant's annual report on Form 10-K for the year
ended December 31, 1997, and Note 9 to the Corporation's Consolidated
Financial Statements for the quarter ended March 31, 1998 included
herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ ----------------------------------------------------
3.1 Restated Charter of the Registrant currently in
effect as amended and corrected included herein.
3.2 By-laws of the Registrant currently in effect as
amended January 16, 1997, are incorporated herein by
reference to Exhibit 3.2 of the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1996.
11 Statement regarding computation of basic and diluted
per share earnings is included in Note 7 to the
Consolidated Financial Statements for the quarter
ended March 31, 1998. See Part 1, Item 1.
15 Letter regarding unaudited interim financial
information from KPMG Peat Marwick LLP, dated April
16, 1998.
27 Financial Data Schedule for interim year-to-date
period ended March 31, 1998. (For SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST AMERICAN CORPORATION
(Registrant)
/s/ Dale W. Polley
-----------------------------------------
Dale W. Polley
President and Principal Financial Officer
Date: April 30, 1998
------------------------------------
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