1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 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: 110,067,071 as of October 31, 1998.
2
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
INDEX
Part I. Financial Information Page
- -------------------------------- ----
Item 1 Financial Statements (unaudited)
Consolidated Income Statements for the Three and Nine
Months Ended September 30, 1998 and September 30, 1997 3
Consolidated Balance Sheets as of September 30, 1998 and
1997 and December 31, 1997 4
Consolidated Statements of Changes in Shareholders'
Equity for the Nine Months Ended September 30, 1998
and September 30, 1997 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and September 30, 1997 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3 Quantitative and Qualitative Disclosures about Market Risk 24
Part II. Other Information
- -----------------------------
Item 1 Legal Proceedings 25
Item 6 Exhibits and Reports on Form 8-K 25
2
3
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -----------------------
(in thousands, except per share amounts) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $226,550 $244,200 $706,394 $704,685
Interest and dividends on securities 97,720 64,026 249,321 200,591
Interest on federal funds sold and securities purchased under
agreements to resell 1,253 1,332 3,847 4,317
Interest on time deposits with other banks and other interest 1,408 1,351 3,843 3,819
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 326,931 310,909 963,405 913,412
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 10,508 10,436 30,161 30,873
Money market accounts 27,569 30,532 87,141 89,988
Regular savings 4,714 5,496 14,331 16,489
Certificates of deposit under $100,000 35,527 39,893 109,811 119,486
Certificates of deposit $100,000 and over 20,326 16,322 57,359 46,455
Other time and foreign 11,928 11,720 34,692 34,712
- ---------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 110,572 114,399 333,495 338,003
- ---------------------------------------------------------------------------------------------------------------------------
Interest on short-term borrowings 32,224 23,642 84,758 64,205
Interest on long-term debt 12,813 7,121 31,343 20,175
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 155,609 145,162 449,596 422,383
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 171,322 165,747 513,809 491,029
PROVISION FOR LOAN LOSSES 7,000 1,875 18,000 5,625
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 164,322 163,872 495,809 485,404
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Investment services income 37,832 31,108 115,867 92,819
Service charges on deposit accounts 33,454 28,721 93,083 82,497
Mortgage banking 11,021 8,048 35,870 25,730
Commissions and fees on fiduciary activities 10,669 9,874 31,153 28,687
Merchant discount fees 1,162 985 2,926 2,775
Net realized gain on sales of securities 2,154 1,479 5,297 2,871
Trading account revenue 2,751 744 6,810 3,264
Other income 26,445 19,126 62,693 49,948
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 125,488 100,085 353,699 288,591
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 78,895 82,802 248,750 247,168
Subscribers' commissions 22,444 18,165 69,421 53,126
Net occupancy expense 12,411 11,940 37,033 35,239
Equipment expense 10,803 10,993 33,370 31,632
Systems and processing expense 3,864 3,980 11,160 12,104
Communication expense 6,791 6,310 20,602 18,890
Marketing expense 4,353 5,515 14,576 15,598
Supplies expense 2,527 3,726 8,498 11,207
Goodwill amortization 4,124 4,252 12,572 12,061
Merger and integration costs 37,159 - 109,202 -
Other expenses 21,042 20,638 66,415 61,619
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 204,413 168,321 631,599 498,644
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 85,397 95,636 217,909 275,351
Income tax expense 30,473 35,140 81,881 100,942
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 54,924 $ 60,496 $136,028 $174,409
===========================================================================================================================
PER COMMON SHARE:
Net income:
Basic $ .52 $ .57 $1.29 $1.63
Diluted .51 .56 1.26 1.60
Dividends declared .25 .20 .70 .555
===========================================================================================================================
Average common shares outstanding:
Basic 105,839 106,190 105,465 106,946
Diluted 107,801 108,393 107,698 109,222
===========================================================================================================================
See notes to consolidated financial statements.
3
4
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30 December 31
--------------------------- -------------
(dollars in thousands, except share amounts) 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 855,815 $ 948,261 $ 987,520
Time deposits with other banks 18,114 13,186 13,463
Securities:
Held to maturity (fair value $1,845,928, $810,481, and $723,228,
respectively) 1,830,530 805,915 715,027
Available for sale (amortized cost $4,588,508, $3,108,019, and
$3,392,894, respectively) 4,610,754 3,111,159 3,395,494
- ---------------------------------------------------------------------------------------------------------------------------
Total securities 6,441,284 3,917,074 4,110,521
- ---------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under agreements to resell 35,542 110,351 189,542
Trading account securities 48,698 72,559 64,469
Loans:
Commercial 4,684,429 4,447,835 4,570,941
Consumer--amortizing mortgages 1,570,368 2,783,776 2,783,097
Consumer--other 2,504,770 2,543,184 2,524,577
Real estate--construction 511,584 403,649 400,557
Real estate--commercial mortgages and other 1,252,583 1,330,943 1,374,661
- ---------------------------------------------------------------------------------------------------------------------------
Total loans 10,523,734 11,509,387 11,653,833
Unearned discount (11,180) (11,067) (12,101)
- ---------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount 10,512,554 11,498,320 11,641,732
Allowance for loan losses (180,137) (180,362) (180,043)
- ---------------------------------------------------------------------------------------------------------------------------
Total net loans 10,332,417 11,317,958 11,461,689
- ---------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 343,443 354,251 362,047
Other assets 788,259 694,309 645,185
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $18,863,572 $17,427,949 $17,834,436
===========================================================================================================================
LIABILITIES
Deposits:
Demand (noninterest-bearing) $ 2,642,565 $ 2,579,572 $ 2,647,765
NOW accounts 2,154,669 1,777,547 1,879,520
Money market accounts 2,613,471 2,796,889 2,875,958
Regular savings 792,211 864,432 859,690
Certificates of deposit under $100,000 2,672,579 2,987,590 2,929,845
Certificates of deposit $100,000 and over 1,358,211 1,173,245 1,390,148
Other time 723,781 732,177 718,349
Foreign 248,489 114,510 104,182
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 13,205,976 13,025,962 13,405,457
- ---------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,445,675 2,099,847 1,969,639
Long-term debt 1,252,068 386,500 596,218
Other liabilities 363,958 402,284 319,145
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 17,267,677 15,914,593 16,290,459
- ---------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; authorized 200,000,000 shares; issued:
106,937,996 shares at September 30, 1998; 106,131,209 shares at
September 30, 1997; and 106,032,013 shares at December 31, 1997 267,345 265,328 265,080
Additional paid-in capital 145,768 175,795 163,902
Retained earnings 1,199,518 1,084,824 1,126,803
Deferred compensation on restricted stock (30,943) (14,645) (13,341)
Employee stock ownership plan obligation - (224) (163)
- ---------------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 1,581,688 1,511,078 1,542,281
Accumulated other comprehensive income, net of tax 14,207 2,278 1,696
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,595,895 1,513,356 1,543,977
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $18,863,572 $17,427,949 $17,834,436
===========================================================================================================================
See notes to consolidated financial statements.
4
5
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, COMMON DEFERRED EMPLOYEE ACCUMULATED
1997 AND SEPTEMBER 30, 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 105,109,909 $262,775 $239,661 $ 953,062 $ (2,066) $ (443) $ (3,016) $1,449,973
Comprehensive income:
Net income - - - 174,409 - - -
Other comprehensive income,
net of tax - - - - - - 5,294
Comprehensive income 179,703
Issuance of common shares in
connection with Employee Benefit
Plans, net of discount on
Dividend Reinvestment Plan 1,005,435 2,513 15,538 - - - - 18,051
Issuance of shares of restricted
common stock 459,674 1,149 14,002 - (15,151) - - -
Repurchase of shares of common
stock (5,954,855) (14,887) (164,899) - - - - (179,786)
Issuance of common shares for
purchase of Hartsville
Bancshares, Inc. 350,522 876 9,223 - - - - 10,099
Issuance of common shares for
acquisitions of pooled company 5,160,436 12,901 58,929 13,938 - - - 85,768
Amortization of deferred
compensation on restricted stock - - - - 2,572 - - 2,572
Reduction in employee stock
ownership plan obligation - - - - - 219 - 219
Cash dividends declared ($.555 per -
common share) - - - (32,710) - - (32,710)
Cash dividends declared by pooled -
company - - - (23,875) - - (23,875)
Tax benefit from stock option and
award plans - - 3,312 - - - - 3,312
Other 88 1 29 - - - - 30
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 106,131,209 $265,328 $175,795 $1,084,824 $(14,645) $ (224) $ 2,278 $1,513,356
===================================================================================================================================
Balance, January 1, 1998 106,032,013 $265,080 $163,902 $1,126,803 $(13,341) $ (163) $ 1,696 $1,543,977
Comprehensive income:
Net income - - - 136,028 - - -
Other comprehensive income,
net of tax - - - - - - 12,493
Comprehensive income 148,521
Issuance of common shares in
connection with Employee Benefit
Plans, net of discount on Dividend
Reinvestment Plan 735,551 1,839 11,998 - - - - 13,837
Issuance of shares of restricted
common stock 481,377 1,203 21,456 - (22,659) - - -
Repurchase of shares of common
stock (1,182,099) (2,955) (61,538) - - - - (64,493)
Issuance of common shares for -
acquisition of pooled company 871,156 2,178 5,524 (1,206) - 18 6,514
Amortization of deferred compensation
on restricted stock - - - - 5,057 - - 5,057
Reduction in employee stock
ownership plan obligation - - - - - 163 - 163
Cash dividends declared ($.70 per -
common share) - - - (52,722) - - (52,722)
Cash dividends declared by pooled -
company - - - (9,384) - - (9,384)
Tax benefit from stock option and
award plans - - 4,428 - - - - 4,428
Other (2) - (2) (1) - - - (3)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 106,937,996 $267,345 $145,768 $1,199,518 $(30,943) $ - $ 14,207 $1,595,895
===================================================================================================================================
See notes to consolidated financial statements.
5
6
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended
September 30
-----------------------------
(in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $136,028 $174,409
Adjustments to reconcile net income to net cash and cash equivalents provided by
operating activities:
Provision for loan losses 18,000 5,625
Depreciation and amortization of premises and equipment 28,063 28,273
Amortization of intangible assets 26,712 22,485
Other amortization, net 4,421 1,139
Deferred income tax expense 7,622 12,479
Net loss (gain) on sales and writedowns of other real estate owned 1,143 (4,063)
Net realized gains on sales and write-downs of securities (5,297) (2,871)
Net loss (gain) on sales and writedowns of premises and equipment 448 (37)
Net gain on sales of branches, business operations and subsidiaries (8,294) (2,105)
Change in assets and liabilities, net of effects from acquisitions and dispositions:
(Increase) decrease in mortgage warehouse loans (3,675) 4,758
Increase in accrued interest receivable (14,742) (9,972)
(Decrease) increase in accrued interest payable (4,210) 8,802
Decrease (increase) in trading account securities 15,771 (9,265)
Increase in other assets (187,199) (5,682)
Increase in other liabilities 47,219 11,549
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 62,010 235,524
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 1,286,619 1,770,597
Proceeds from maturities of securities available for sale 1,287,778 377,360
Purchases of securities available for sale (3,708,646) (1,973,234)
Proceeds from maturities of securities held to maturity 438,279 345,928
Purchases of securities held to maturity (386,685) (190,210)
Proceeds from sales of other real estate owned 8,208 14,510
Acquisitions, net of cash and cash equivalents acquired 11,262 76,597
Sales of branches, business operations and subsidiaries, net of cash and cash
equivalents disposed of 11,793 2,007
Net increase in loans, net of repayments and sales (23,590) (473,144)
Proceeds from sales of premises and equipment 7,868 4,849
Purchases of premises and equipment (17,169) (58,430)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,084,283) (103,170)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in deposits (277,266) (470,114)
Net increase in other short-term borrowings 636,941 151,281
Advances from Federal Home Loan Bank 489,979 208,516
Net repayment of other long-term debt (101) (136)
Proceeds from early termination of swap contract on long-term debt - 2,038
Issuance of common shares under Employee Benefit and Dividend Reinvestment Plans 13,837 18,051
Repurchase of common stock (64,493) (179,786)
Tax benefit related to stock options 4,428 3,312
Cash dividends paid (62,106) (56,870)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 741,219 (323,708)
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (281,054) (191,354)
Cash and cash equivalents, January 1 1,190,525 1,263,152
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, September 30 $ 909,471 $1,071,798
===========================================================================================================================
Cash paid during the year for:
Interest expense $ 453,806 $ 413,581
Income taxes 46,179 66,497
Non-cash transactions:
Foreclosures 3,021 3,861
Stock issued for acquisitions 6,514 94,636
Mortgage loans securitized and retained 1,206,958 -
===========================================================================================================================
See notes to consolidated financial statements.
6
7
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 First American Corporation's (the "Corporation" or "First
American") consolidated financial statements which include the accounts of
Deposit Guaranty Corp. ("Deposit Guaranty") for all periods presented in
accordance with the pooling-of-interests method of accounting for business
combinations. 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. 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) ACQUISITIONS
Effective May 1, 1998, the Corporation completed the merger of Deposit
Guaranty with and into the Corporation by exchanging approximately 48.7 million
shares of First American common stock for all of the outstanding shares of
Deposit Guaranty (based on an exchange ratio of 1.17 shares of First American
common stock for each share of Deposit Guaranty common stock). Deposit Guaranty
was a $7.2 billion asset financial services holding company headquartered in
Jackson, Mississippi, with banking offices in Mississippi, Louisiana, Arkansas,
and Tennessee. The transaction was accounted for as a pooling of interests, and
accordingly, the consolidated financial statements have been restated to include
the results of Deposit Guaranty for all periods presented. Merger and
integration costs of $72.6 million, net of tax, which are comprised primarily of
investment banking, severance, and systems conversions costs, have been
recognized in 1998.
In April 1998 and in conjunction with the Deposit Guaranty business
combination, the number of authorized shares was increased from 100 million to
200 million.
Net interest income, noninterest income, and net income as originally
reported by First American and Deposit Guaranty for the three months and the
nine months ended September 30, 1997 are presented in the table below:
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
--------------------------------------- ----------------------------------------
First Deposit First Deposit
(in thousands) American Guaranty Combined American Guaranty Combined
- ----------------------------------------------------------------------------------------------------------------
Net interest income $ 95,896 $ 69,851 $165,747 $282,379 $208,650 $491,029
Noninterest income 64,250 35,835 100,085 188,840 99,751 288,591
Net income 37,233 23,263 60,496 106,604 67,805 174,409
================================================================================================================
7
8
Other mergers and acquisitions completed by First American since January 1,
1997, are presented in the following table (in millions):
Common
Shares Cash Accounting
Financial Institution State Date Assets Issued Paid Treatment
- --------------------------------------------------------------------------------------------------------------
Jefferson Guaranty Bancorp, Inc. LA Jan. 1997 $299 2.1 $10 Purchase
- --------------------------------------------------------------------------------------------------------------
Hartsville Bancshares, Inc. TN Jan. 1997 90 0.4 - Purchase
- --------------------------------------------------------------------------------------------------------------
First Capital Bancorp, Inc. LA Mar. 1997 186 1.8 - Pooling
- --------------------------------------------------------------------------------------------------------------
NBC Financial Corporation LA July 1997 69 0.5 - Purchase
- --------------------------------------------------------------------------------------------------------------
CitiSave Financial Corporation LA Aug. 1997 75 - 19 Purchase
- --------------------------------------------------------------------------------------------------------------
Victory Bancshares, Inc. TN Mar. 1998 131 0.9 - Pooling
==============================================================================================================
For the acquisitions accounted for as pooling-of-interests combinations,
the results of operations have been included in the consolidated financial
statements from the beginning of the year acquired or from the date of the
acquisition when preacquisition amounts were not material. Prior period
financial statements have not been restated since the changes would have been
immaterial. For acquisitions accounted for as purchase business combinations,
the results of operations have been included in the consolidated financial
statements from the respective dates of acquisition. The purchase price in
excess of the net assets acquired has been recorded as goodwill and is being
amortized on a straight-line basis over 15 years. The proforma effect on prior
financial statements of these acquisitions is not significant.
On June 1, 1997, the Corporation issued .8 million shares of its common
stock in exchange for the 2 percent interest in Deposit Guaranty National Bank
("DGNB") owned by minority shareholders. With this acquisition the Corporation
became the sole shareholder of DGNB.
Subsequent to September 30, 1998, the following business combinations
have been completed or are pending (in millions):
Common Assets
Shares at
Financial Institution State Effective Date Issued 9/30/98
- -------------------------------------------------------------------------------------------------------
Completed:
Peoples Bank of Dickson TN October 1, 1998 .9 $ 142
The Middle Tennessee Bank TN October 1, 1998 1.2 225
CSB Financial Corporation TN October 1, 1998 .9 148
Pending:
Pioneer Bancshares, Inc. TN November 20, 1998 - (1) 991
=======================================================================================================
(1) The terms of the agreement provide for shareholders of Pioneer
Bancshares, Inc. ("Pioneer") to receive 1.65 shares of First American
common stock for each outstanding share of Pioneer common stock.
Pioneer is subject to shareholder approval.
The business combinations noted in the table above will be accounted for
as poolings of interests. The Corporation's financial statements will be
restated as a result of the Pioneer combination.
8
9
(3) NONPERFORMING ASSETS Nonperforming assets were as follows:
September 30 December 31
----------------------------------------------
(dollars in thousands) 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------
Nonaccrual loans $ 30,303 $ 42,214 $ 36,294
Foreclosed properties 5,580 7,197 7,023
- ---------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 35,883 $ 49,411 $ 43,317
=========================================================================================================
Loans on accrual past due 90 days or more $41,076 $ 32,323 $ 29,382
=========================================================================================================
Nonperforming assets as a percent of loans
and foreclosed properties (excluding loans
on accrual past due 90 days or more) .34% .43% .37%
=========================================================================================================
(4) ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses and the allowance ratios
were as follows:
Nine Months Ended
September 30
---------------------------------
(in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------
Balance, January 1 $180,043 $185,470
Provision charged to operating expenses 18,000 5,625
Allowance of subsidiary sold - (252)
Allowance of business combinations except Deposit Guaranty 1,317 8,252
- ---------------------------------------------------------------------------------------------------
199,360 199,095
- ---------------------------------------------------------------------------------------------------
Loans charged off 38,853 39,005
Recoveries of loans previously charged off 19,630 20,272
- ---------------------------------------------------------------------------------------------------
Net charge-offs 19,223 18,733
- ---------------------------------------------------------------------------------------------------
Balance, September 30 $180,137 $180,362
===================================================================================================
Allowance end of period to net loans outstanding 1.71% 1.57%
Net charge-offs to average loans (annualized) .23 .23
===================================================================================================
(5) ACCOUNTING MATTERS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," was adopted by the Corporation on January 1, 1998. SFAS
No. 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.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for years 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 plans to adopt SFAS
No. 131 for 1998 and is currently evaluating its operations to determine the
appropriate disclosures with respect to SFAS No. 131.
9
10
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 are
intended to provide information that is more comparable, understandable, and
concise for the users of this information. The Corporation adopted SFAS No. 132
on January 1, 1998.
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Gains or losses
resulting from changes in the values of derivatives will be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting with the key criterion for hedge accounting being that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999, and shall not be applied retroactively to financial statements of
prior periods. At this time, the Corporation is evaluating when and how it will
adopt SFAS No. 133 as well as the possible impact of the statement on the
Corporation's consolidated financial statements.
(6) COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- ---------------------------
(in thousands, except per share amounts) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Basic
Average common shares outstanding 105,839 106,190 105,465 106,946
=========================================================================================================================
Net income $ 54,924 $ 60,496 $136,028 $174,409
=========================================================================================================================
Per share amount $ .52 $ .57 $1.29 $1.63
=========================================================================================================================
Diluted
Average common shares outstanding 105,839 106,190 105,465 106,946
Dilutive common stock options at average market price 1,962 2,203 2,233 2,276
- -------------------------------------------------------------------------------------------------------------------------
Average diluted shares outstanding 107,801 108,393 107,698 109,222
=========================================================================================================================
Net income $ 54,924 $ 60,496 $136,028 $174,409
=========================================================================================================================
Per share amount $ .51 $ .56 $1.26 $1.60
=========================================================================================================================
(7) 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"
which was subsequently acquired by First American), 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
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Supreme Court affirmed the lower court's decision in Winstar. The stay was
automatically lifted and FAFSB's suit is now proceeding. The Government filed a
motion to dismiss the suit based on the prior Fourth Circuit decision, and FAFSB
filed a Motion for Partial Summary Judgment. These motions have 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 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 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 and accompanying notes of First American
Corporation (the "Corporation" or "First American") appearing within this report
and by reference to the Corporation's consolidated financial statements and
management's discussion and analysis contained in the Form 8-K filed on July 14,
1998.
To the extent that statements in this discussion relate to the plans,
objectives, 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 third quarter of 1998 was $54.9 million with diluted
earnings per share of $.51. Operating earnings, exclusive of merger and
integration costs in connection with the business combination with Deposit
Guaranty of $37.2 million ($22.8 million, net of tax) and a gain on the sale of
the Deposit Guaranty corporate trust business of $7 million ($4.4 million, net
of tax), were up 21 percent to $73.3 million from $60.5 million in the third
quarter of 1997. Diluted earnings per share, exclusive of the merger and
integration costs and the corporate trust gain, also increased 21 percent to
$.72 from $.56 in the third quarter of 1997. Excluding the merger and
integration costs and the corporate trust gain, return on average assets ("ROA")
improved to 1.59 percent in the third quarter of 1998 compared to 1.41 percent
in the third quarter of 1997 and return on average equity ("ROE") improved to
18.57 percent in the third quarter of 1998 compared to 16.08 percent in the
third quarter of 1997.
Net income for the nine months ended September 30, 1998, was $136 million
with diluted earnings per share of $1.26. Excluding merger and integration costs
of $109.2 million ($72.6 million, net of tax) and the corporate trust gain, net
income for the nine months ended September 30, 1998, was $204.2 million, up 17
percent from $174.4 million earned during the first nine months of 1997. Diluted
earnings per share, exclusive of the merger and integration costs and the
corporate trust gain, rose 19 percent during the first nine months of 1998 to
$1.90 from $1.60 during the same time period last year. Excluding the merger and
integration costs and the corporate trust gain, ROA improved to 1.52 percent
during the first nine months of 1998 versus 1.38 percent during the first nine
months of 1997 and ROE increased to 17.61 percent compared to 15.72 percent.
Effective May 1, 1998, the Corporation completed the merger of Deposit
Guaranty with and into the Corporation by exchanging approximately 48.7 million
shares of First American common stock for all of the outstanding shares of
Deposit Guaranty. Deposit Guaranty was a $7.2 billion asset financial services
holding company headquartered in Jackson, Mississippi, with banking offices in
Mississippi, Louisiana, Arkansas, and Tennessee. The transaction was accounted
for under the pooling-of-interests method of accounting for business
combinations and, accordingly, the consolidated financial statements have been
restated to include the results of Deposit Guaranty for all periods presented.
The $109.2 million of merger and integration costs recognized during 1998 in
connection with the integration of Deposit Guaranty into First American included
$26 million of severance and retention costs, $21 million of systems-related
costs, $19 million of investment banking fees, $15 million to establish a
charitable foundation for the Deposit Guaranty markets, and $28.2 million of
other expenses. Expected synergies to be gained from the Deposit Guaranty merger
are on target and are expected to approximate $88 million, which is the amount
previously reported in the Corporation's 1997 Annual Report. Cost and revenue
enhancement initiatives accounting for $77 million of annualized synergies have
already been implemented during the first nine months of 1998. The expected
benefits of the initiatives include workforce reduction ($31 million), systems
conversion-
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related savings ($15 million), enhanced product lines and pricing changes ($14
million), sale of First Mortgage and McAfee Mortgage adjusted for lost revenue
($4 million), revenue enhancements due to doubling of annuities sales force ($6
million), branch closures ($2 million), and other ($5 million). The Corporation
expects to achieve the full $88 million of synergies in 1999.
Effective March 23, 1998, First American acquired Victory Bancshares,
Inc. ("Victory"), a bank holding company in West Tennessee with $131 million in
assets by exchanging approximately .9 million shares of the Corporation's common
stock for all of the outstanding shares of Victory. The acquisition was
accounted for as a pooling of interests. Results of operations of Victory were
included in the Corporation's financial statements from the date of acquisition,
as prior amounts were not material. NOTE 2 to the consolidated financial
statements presents details of acquisition activity during 1997.
On April 3, 1998, First American completed the sale of three branches in
Virginia with total deposits of approximately $37 million for a pre-tax gain of
$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.
Effective July 11, 1998, First American sold First Mortgage Corp., a
mortgage subsidiary operating in Nebraska, Iowa, and Oklahoma, and recognized a
pretax loss of approximately $2.4 million, which was included in second quarter
results. On August 16, 1998, First American Corporation completed the sale of
McAfee Mortgage, a mortgage subsidiary in Texas, and recognized a gain, net of
tax, of $73 thousand, which finalized the strategic process of focusing the
Corporation's mortgage operations on primarily in-market mortgage businesses.
The sale of DGNB's corporate trust business to The Bank of New York,
which was completed on August 31, 1998, resulted in a gain of $7 million ($4.4
million net of tax), involved the transfer of approximately 900 bond trustee and
agency relationships representing $8 billion in outstanding securities for
municipalities and corporations located primarily in Mississippi and Louisiana.
On October 1, 1998, First American completed the merger with CSB
Financial Corporation ("CSB Financial") by exchanging .9 million shares of First
American common stock for all of the outstanding shares of CSB Financial in a
transaction accounted for as a pooling of interests. CSB Financial was a $148
million asset bank holding company headquartered in Kingston Springs, Tennessee,
with four banking offices in Cheatham County. In addition to a community bank,
CSB Financial subsidiaries included a lease financing subsidiary; a financial
planning and insurance, annuity, mutual fund, and securities sales subsidiary;
and a mobile home financing subsidiary.
On October 1, 1998 First American completed the merger with The Middle
Tennessee Bank ("Middle Tennessee") by exchanging 1.2 million shares of First
American common stock for all of the outstanding shares of Middle Tennessee in a
transaction accounted for as a pooling of interests. Middle Tennessee was a $225
million asset bank headquartered in Columbia, Tennessee, with seven banking
offices.
On October 1, 1998, First American completed the merger with Peoples Bank
of Dickson ("Peoples Bank") by exchanging .9 million shares of First American
common stock for all of the outstanding shares of Peoples Bank in a transaction
accounted for as a pooling of interests. Peoples Bank was a $142 million asset
bank headquartered in Dickson, Tennessee, with six banking offices in Middle
Tennessee.
On May 28, 1998, First American entered into a definitive agreement to
merge Pioneer, a $991 million bank holding company headquartered in Chattanooga,
Tennessee, into First American. Pioneer is the parent company of Pioneer Bank,
Valley Bank, and Pioneer Bank f. s. b., a federal savings bank, with 34 banking
offices in southeast Tennessee and northwest Georgia. Terms of the agreement
provide for Pioneer's shareholders to receive 1.65 shares of First American's
common stock for each outstanding share of Pioneer common stock in a transaction
to be accounted for as a pooling of
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interests. The transaction is subject to approval by Pioneer's shareholders and
is expected to close in the fourth quarter of 1998. The Corporation's financial
statements will be restated as a result of the Pioneer combination.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
For purposes of this discussion, total revenues consist of the sum of net
interest income on a taxable equivalent basis 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 paid on
interest-bearing liabilities, such as deposits. Net interest income on a taxable
equivalent basis represented 58 percent of total revenues in the third quarter
of 1998 versus 63 percent in the third quarter of 1997 and 60 percent of total
revenues in the first nine months of 1998 versus 63 percent in the first nine
months of 1997, which is reflective of the Corporation's continuing
transformation from a traditional bank holding company to a financial services
company. Net interest income was $173.9 million in the third quarter of 1998, up
$5.4 million, or 3 percent, from $168.5 million in the third quarter of 1997.
The $5.4 million increase in net interest income resulted primarily from an
increase in the volume of earning assets ($13.4 million net interest income
impact) offset by a decrease in the net interest spread ($8 million net interest
income impact). Net interest income on a taxable equivalent basis was $521.8
million in the first nine months of 1998, up $22.7 million, or 5 percent, from
$499.1 million in the first nine months of 1997. The $22.7 million increase in
net interest income resulted primarily from an increase in the volume of earning
assets ($30.9 million net interest income impact) offset by a decrease in the
net interest spread ($8.2 million net interest income impact).
During the third quarter of 1998 average earning assets increased $1.32
billion, or 9 percent, to $16.72 billion from $15.40 billion in the third
quarter of 1997. Average earning assets increased $1.01 billion, or 7 percent,
for the first nine months of 1998 to $16.30 billion from $15.29 billion for the
same period in 1997. Average investment securities increased $2.19 billion, or
58 percent, during the third quarter of 1998 compared to the third quarter of
1997 and $1.06 billion, or 27 percent, during the first nine months of 1998
compared to the first nine months of 1997. Given loan repayments and relatively
softer loan demand during 1998 as compared with 1997 and in anticipation of a
continuing declining long-term interest rate environment with accelerated
prepayments on loans and mortgage-backed securities, the Corporation
strategically increased its investment securities portfolio. Average loans
decreased $829.9 million, or 7 percent, during the third quarter of 1998
compared to the third quarter of 1997 and $17.6 million, or .2 percent, during
the first nine months of 1998 compared to the first nine months of 1997.
During 1998 $1.21 billion of mortgage loans were securitized and
retained. Approximately half of the increase in average investment securities
was due to the securitization of mortgage loans and the contribution to a real
estate investment trust, which is a subsidiary of the Corporation.
Interest-bearing liabilities averaged $14.01 billion during the third
quarter of 1998, an increase of $1.19 billion, or 9 percent, from $12.82 billion
in the third quarter of 1997. Interest-bearing liabilities averaged $13.62
billion during the first nine months of 1998, an increase of $906.9 million, or
7 percent, from $12.72 billion in the first nine months of 1997. In order to
fund an increased level of earning assets in the most economically desirable
manner, the Corporation placed more reliance on noncore interest-bearing
liabilities during 1998 as compared to 1997. Interest-bearing deposits were up
$170.9 million, or 2 percent, during the third quarter of 1998, and federal
funds purchased and other short-term borrowings increased $600 million, or 33
percent, and long-term debt increased $415.7 million, or 93 percent. During the
first nine months of 1998 compared to the same period in 1997, federal funds
purchased and other short-term borrowings increased $476.3 million, or 28
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percent, and long-term debt increased $255.8 million, or 60 percent, while
interest-bearing deposits increased $174.8 million, or 2 percent.
The net interest spread was 3.41 percent for the third quarter of 1998
and 3.56 percent for the first nine months of 1998 which compared to 3.59
percent for the third quarter of 1997 and 3.62 percent for the first nine months
of 1997. The decrease in the net interest spread from the third quarter of 1997
to the third quarter of 1998 reflected a 26 basis point decrease in the average
yield on earning assets and an 8 basis point decrease in the average rate paid
on interest-bearing liabilities. The decrease in the net interest spread from
the first nine months of 1997 to the first nine months of 1998 reflected a 9
basis point decrease in the average yield on earning assets and a 3 basis point
decrease in the average rate paid on interest-bearing liabilities.
The decrease in the yield on earning assets to 7.82 percent during the
third quarter of 1998 (from 8.08 percent during the third quarter of 1997) and
the decrease in the average yield on earning assets to 7.97 percent during the
first nine months of 1998 (from 8.06 percent for the comparative period in 1997)
was essentially due to decreases in yields on investment securities and the
relative size of the investment securities portfolio to total earning assets.
The interest rate environment impacts the rates that First American earns on
investment securities, charges for loans, and pays on interest-bearing
liabilities. As rates for home mortgages significantly declined in 1998,
mortgage prepayments increased at a rapid pace, which resulted in a decrease in
the average yield on the investment securities portfolio as lower yielding
mortgage-backed securities replaced higher yielding mortgage-backed securities.
Also contributing to the lower yield on the investment securities portfolio was
the increase in volume of investment securities during 1998 at lower yields
compared to 1997. The yield on loans was relatively unchanged at 8.51 percent
for the third quarter of 1998 versus 8.52 percent for the third quarter of 1997
and increased to 8.54 percent during the first nine months of 1998 compared to
8.52 percent during the first nine months of 1997.
Factors contributing to the decrease in the average rate paid on
interest-bearing liabilities to 4.41 percent in the third quarter of 1998 from
4.49 percent in the third quarter of 1997 and to 4.41 percent in the first nine
months of 1998 from 4.44 percent in the first nine months of 1997 were deposit
pricing actions offset by funding mix changes and an increase in the average
rate paid on noncore sources of funds. Through the use of VISION, a customer
information system that captures product utilization, transaction behavior,
profitability, and buying preferences, the Corporation reviewed its deposit
products and adjusted rates accordingly and offered updated products, including
the Tailored Money Sweep account.
The net interest margin decreased to 4.12 percent and 4.28 percent in the
third quarter and first nine months of 1998, respectively, from 4.34 percent and
4.36 percent in the third quarter and first nine months of 1997, respectively,
due primarily to a decline in the net interest spread and a slightly lower
contribution from the benefit of noninterest-bearing deposits.
PROVISION FOR LOAN LOSSES
This topic is addressed under the caption, "Allowance and Provision for
Loan Losses."
NONINTEREST INCOME
Total noninterest income represented 42 percent of total revenues in the
third quarter of 1998 compared with 37 percent in the third quarter of 1997 and
40 percent of total revenues during the first nine months of 1998 compared to 37
percent in the same time period in 1997. Total noninterest income increased
$25.4 million, or 25 percent, to $125.5 million in the third quarter of 1998
from $100.1 million in the third quarter of 1997 and $65.1 million, or 23
percent, to $353.7 million in the first nine months of 1998 compared to $288.6
million in the first nine months of 1997. During the third quarter of 1998 First
American completed the sale of Deposit Guaranty's corporate trust business for a
gain of $7 million. Noninterest income, exclusive of the gain on the sale of the
corporate trust business, totaled $118.5 million in the third quarter of 1998,
an increase of $18.4 million, or 18
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percent, from the third quarter of 1997 and totaled $346.7 million in the first
nine months of 1998, an increase of $58.1 million, or 20 percent, from the first
nine months of 1997.
All major categories of noninterest income experienced solid increases
for the third quarter and for the first nine months of 1998. Significant changes
in noninterest income were attributable to increases in investment services
income, service charges on deposit accounts, mortgage banking income, trading
account revenue, and commissions and fees on fiduciary activities.
Investment services income increased $6.7 million, or 22 percent, during
the third quarter of 1998 over the third quarter of 1997 and $23 million, or 25
percent, during the first nine months of 1998 over the first nine months of
1997. The increase in investment services income was substantially due to growth
in retail brokerage commissions related to mutual funds, equities, and annuities
sales of IFC Holdings, Inc. ("IFC"). IFC is the nation's largest marketer of
mutual funds, annuities, and other investment products sold through financial
institutions.
The $4.7 million, or 16 percent, increase in service charges on deposit
accounts for the third quarter of 1998 and the $10.6 million, or 13 percent,
increase for the first nine months of 1998 reflected fee increases and product
changes in conjunction with the utilization of a customer information system
called VISION. Increases primarily occurred in overdraft charges and commercial
analysis fees.
Mortgage banking income was up $3 million, or 37 percent, in the third
quarter of 1998 and $10.1 million, or 39 percent, in the first nine months of
1998. The substantial increases were due to a larger volume of mortgage loans
processed and to an increase in net gains on the sale of mortgage warehouse
loans of $1.5 million in the third quarter of 1998 and $4.6 million in the first
nine months of 1998 compared with the respective time periods in 1997.
Trading account revenue increased $2 million, or 270 percent, in the
third quarter of 1998 and $3.5 million, or 109 percent, in the first nine months
of 1998 due to increased activity as the Corporation benefited from an active
securities market.
Commissions and fees on fiduciary activities increased $.8 million, or 8
percent, during the third quarter of 1998 and $2.5 million, or 9 percent, during
the first nine months of 1998, principally as the result of a growth in
customers and assets under management and increased fees on the existing
customer base, which reflected an increase in the value of assets under
management due to favorable market conditions.
Net realized gains on sales of securities were up $.7 million, or 46
percent, in the third quarter of 1998 and $2.4 million, or 85 percent, in the
first nine months of 1998. Excluding net realized gains on sales of securities
and the gain on the sale of Deposit Guaranty's corporate trust business,
noninterest income was up $17.7 million, or 18 percent in the third quarter of
1998 and $55.7 million, or 19 percent, in the first nine months of 1998.
Other income (exclusive of the gain on the sale of Deposit Guaranty's
corporate trust business) increased $.3 million, or 1 percent, in the third
quarter of 1998 and $5.7 million, or 11 percent, in the first nine months of
1998. Other income during the third quarter and first nine months of 1997
included a $2.1 million gain on the sale of Tennessee Credit Corporation and
First City Life Insurance Company. Increases in the third quarter of 1998 from
the third quarter of 1997 included a $.9 million increase in other corporate
service fees and a $.6 million increase in open-end non-loan fees. Significant
changes in other income in the first nine months of 1998 compared to the same
period in 1997 resulted from a $2.7 million gain on the sale of three branches
in Virginia, a $2.2 million increase in open-end non-loan fees, a $2 million
increase in other corporate service fees, a $1 million increase in collection
expenses and related bank fees, and a $.9 million additional gain on the fourth
quarter 1997 sale of First American's corporate trust assets offset by a $2.4
million loss on the sale of First Mortgage's operations. Increases in open-end
non-loan fees were pushed up by interchange fees generated by the "Check Card"
product for both the third quarter of 1998 and the first nine months of 1998.
Increases in other corporate service fees were essentially due to automated
teller
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("ATM") transactions. The $1 million increase in collection expenses and related
bank fees was primarily attributable to official check fees and syndication
fees.
NONINTEREST EXPENSE
Total noninterest expense increased $36.1 million, or 21 percent, to
$204.4 million for the third quarter of 1998 compared with $168.3 million for
the same period in 1997 and $133 million, or 27 percent, to $631.6 million for
the first nine months of 1998 compared with $498.6 million for the same period
in 1997. Excluding merger and integration costs of $37.2 million in the third
quarter of 1998 and $109.2 million in the first nine months of 1998, noninterest
expense decreased $1.1 million, or .6 percent, in the third quarter of 1998 and
increased $23.8 million, or 5 percent, during the first nine months of 1998.
First American's productivity ratio in the traditional banking business,
excluding the merger and integration costs and the gain on the sale of Deposit
Guaranty's corporate trust business, improved to 52.83 percent for the third
quarter of 1998 and 55.91 percent for the first nine months of 1998 compared to
58.78 percent and 59.44 percent for the respective time periods in 1997. The
improvement in the productivity ratio was the result of improved expense control
and the effect of cost savings in connection with the merger with Deposit
Guaranty.
The largest increase in noninterest expense (exclusive of merger and
integration costs) was due to First American's fee-generating business of IFC.
The increase in IFC's subscribers' commissions comprised approximately 69
percent of the increase in noninterest expense (exclusive of merger and
integration costs) for the first nine months of 1998. Subscribers' commissions
were up $4.3 million, or 24 percent, in the third quarter of 1998 and $16.3
million, or 31 percent, from the respective time periods in 1997, reflecting
increases in IFC's brokerage activities.
Salaries and benefits expense decreased $3.9 million, or 5 percent, for
the third quarter of 1998 and increased only $1.6 million, or less than 1
percent, for the first nine months of 1998. The decrease in salaries and
benefits expense for the third quarter of 1998 was due to a reduction in the
number of employees, which reflected synergies in connection with the merger
with Deposit Guaranty. The slight increase in salaries and benefits expense for
the first nine months of 1998 was attributable to increases in merit pay and
incentive program expenses offset by decreases resulting from a reduction in the
number of employees.
Net occupancy expense was up $.5 million, or 4 percent, for the third
quarter of 1998 and $1.8 million, or 5 percent, for the first nine months of
1998 primarily due to increased leased space and rental rates.
Equipment expense was down $.2 million, or 2 percent, for the third
quarter of 1998 and was up $1.7 million, or 5 percent, for the first nine months
of 1998. The increase in equipment expense for the first nine months of 1998
over the comparable period in 1997 was attributable to rental expense which was
up due to the rental of personal computers and expansion of branch teller
automation equipment.
Systems and processing expense was down $.1 million, or 3 percent, for
the third quarter of 1998 and was down $.9 million, or 8 percent, for the first
nine months of 1998, which was essentially due to the renegotiation of the
equipment component of an outsourcing contract.
Communication expense was up $.5 million, or 8 percent, for the third
quarter of 1998 and was up $1.7 million, or 9 percent, for the first nine months
of 1998. The increases for both periods resulted from higher expenditures for
network telecommunications and courier services offset by decreases in postage
expense.
Marketing expense was down $1.2 million, or 21 percent, for the third
quarter of 1998 and was down $1 million, or 7 percent, for the first nine months
of 1998. Marketing synergies gained from the merger with Deposit Guaranty are
reflected in the decrease in marketing expense.
Supplies expense was down $1.2 million, or 32 percent, for the third
quarter of 1998 and was down $2.7 million, or 24 percent, for the first nine
months of 1998, which reflected the effect of higher expenditures in 1997
related to purchase acquisitions and a reduction in expenditures in 1998
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prior to the merger of DGNB into First American National Bank, which occurred on
September 1, 1998.
Other expense consists of many smaller expense categories such as legal
fees, directors' fees, contributions, travel and entertainment, other real
estate expenses, and others. Other expense was up $.4 million, or 2 percent, for
the third quarter of 1998 and was up $4.8 million, or 8 percent, for the first
nine months of 1998 over the respective time periods in 1997. The increase in
other expenses during the third quarter of 1998 was reduced by the effect of
synergies in connection with the Deposit Guaranty merger. Contributing to the
$4.8 million increase in other expenses for the first nine months of 1998 were
increases in the amortization of mortgage servicing rights ($1.7 million, or 32
percent) and other real estate ($2.9 million, or 78 percent) offset by decreases
in numerous other categories of other noninterest expense. The increase in the
amortization of mortgage servicing rights was primarily attributable to an
increased portfolio of mortgage servicing rights.
The term "Year 2000 issue" refers to the necessity of converting computer
information systems so that such systems recognize more than two digits to
identify a year in any given date field, and are thereby able to differentiate
between years in the twentieth and twenty-first centuries ending with the same
two digits (e.g. 1900 and 2000). To address the Year 2000 issue, First American
has adopted a broad-based approach designed to encompass First American's total
environment.
First American has appointed a project manager from its information
technology ("IT") group and a project team comprised of managers from various
areas of the organization to address the Year 2000 issue. Overseeing the project
is a steering committee made up of senior management. The project team is
responsible for evaluating Year 2000 impact to each area's products and systems,
developing a plan for bringing those products and systems to compliant levels,
and testing or verifying that compliance. Areas being addressed by the project
team include:
- Business Systems Applications--This involves Year 2000 remediation of
application software that is used to perform specific business functions
such as deposits or loan systems.
- Technical Infrastructure--This involves Year 2000 remediation of the
hardware and software environment used to run application software, and
includes PC networks, telecommunications, mainframe computers, operating
systems, and productivity software.
- Credit Administration--In this area, the project team is reviewing the
risk associated with Year 2000 status of the Corporation's clients and
depositors.
- Facilities Systems--This involves Year 2000 remediation of systems such
as elevators, HVAC systems, security systems, lighting systems, and
utilities.
- Vendor and Third Party Assessment--In this area, the project team has
conducted an inventory of the systems and products provided by third
parties and has contacted the providers regarding the status of their
Year 2000 compliance. This has been a broad-based effort including IT
vendors, nonIT vendors, and public utilities.
First American's project team is using a 5-phase approach in its Year
2000 project made up of awareness, assessment, remediation, validation, and
implementation phases. For IT systems, all in-house programs were remediated as
of December, 1997 and are now being tested for Year 2000 compliance. For vendor
supplied systems, First American has contacted the suppliers and determined the
compliance of these systems. Necessary upgrades to these systems are in process,
but are not yet complete. The project team is in the process of testing the
Corporation's vendor supplied systems, and anticipates having substantially
completed the testing of all mission critical applications by the end of 1998.
For nonIT systems, the project team has contacted vendors to establish the Year
2000 compliance of these products, and anticipates having substantially
completed testing of these products by the end of 1998.
First American estimates that the cost of its Year 2000 project will not
exceed $5 million dollars in the aggregate and that the cost will not be
material to earnings. Actual expenditures to date and anticipated future
expenditures are within this estimate. First American management believes its
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approach to the Year 2000 issue to be comprehensive, and does not expect the
Year 2000 issue to have a material impact on its results of operations,
liquidity or financial condition. However, given the widespread nature of the
problem, and the number of factors outside of the Corporation's direct control,
management is continuously evaluating the risks associated with Year 2000. In
order to help mitigate these risks, a Year 2000 element is being developed for
the existing corporate contingency plan, which will focus on mission critical
systems (both IT and nonIT) that are believed to be at high risk for
noncompliance.
INCOME TAXES
During the third quarters of 1998 and 1997, income tax expense was $30.5
million (effective tax rate of 35.7 percent) and $35.1 million (effective tax
rate of 36.7 percent), respectively. During the nine months ended September 30,
1998, and 1997, income tax expense was $81.9 million (effective tax rate of 37.6
percent) and $100.9 million (effective tax rate of 36.7 percent), respectively.
The decrease in the effective tax rate for the third quarter of 1998 compared to
the third quarter of 1997 was primarily attributable to a more favorable
effective state income tax rate. The increase in the effective tax rate for the
first nine months of 1998 over the first nine months of 1997 was primarily due
to nondeductible merger and integration costs in connection with the business
combination with Deposit Guaranty.
BALANCE SHEET REVIEW
ASSETS
Total assets of First American rose $1.43 billion, or 8 percent, to
$18.86 billion at September 30, 1998, from $17.43 billion at September 30, 1997.
The growth in total assets was primarily due to a $2.52 billion, or 64 percent,
increase in investment securities, offset by a $985.7 million, or 9 percent,
decrease in loans. Total assets of First American increased $1.03 billion, or 6
percent, from $17.83 billion at December 31, 1997, to $18.86 billion at
September 30, 1998. The increase in total assets from December 31, 1997, to
September 30, 1998, was primarily due to a $2.33 billion, or 57 percent,
increase in investment securities offset by a $1.13 billion, or 10 percent,
decrease in loans. Average investment securities increased $1.06 billion, or 27
percent, and average loans decreased $17.6 million, or .2 percent, during the
first nine months of 1998 compared to the first nine months of 1997. Excluding
the effect of the securitizations and retention, average investment securities
increased $561.3 million, or 14 percent, between September 30, 1997, and
September 30, 1998. Excluding the effect of securitizations, loan sales, loan
purchases, divestures and business combinations (except Deposit Guaranty),
average loans during the first nine months of 1998 increased $294 million, or 3
percent, when compared to the first nine months of 1997. Total average loans
exclusive of consumer mortgages increased $433.6 million, or 5 percent, during
the first nine months of 1998 compared to the first nine months of 1997.
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 $180.1 million at September 30, 1998,
$180.4 million at September 30, 1997, and $180 million at December 31, 1997. The
allowance for loan losses was 1.71 percent and 1.57 percent of net loans at
September 30, 1998, and 1997, respectively, and 1.55 percent of net loans at
December 31, 1997. The allowance was maintained at approximately $180 million
based upon management's assessment that economic conditions affecting borrowers
remain essentially unchanged.
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In the third quarter of 1998, the allowance was increased by a provision
of $7 million and decreased by net charge-offs of $7 million compared to a
provision of $1.9 million and net charge-offs of $10.1 million in the third
quarter of 1997. Net charge-offs as a percentage of average loans on an
annualized basis amounted to .26 percent and .35 percent, respectively, in the
third quarters of 1998 and 1997.
During the first nine months of 1998, the allowance was increased by a
provision of $18 million and reduced by net charge-offs of $19.2 million
compared to a provision of $5.6 million and net charge-offs of $18.7 million in
the first nine months of 1997. For the nine months ended September 30, 1998, and
1997, activity in the allowance for loan losses also included increases of $1.3
million and $8.3 million, respectively, which consisted of the allowance of
acquisitions. Net charge-offs as a percentage of average loans on an annualized
basis amounted to .23 percent for both the nine months ended September 30, 1998,
and 1997.
ASSET QUALITY
First American's asset quality remains strong as evidenced by the decline
in the ratio of nonperforming assets (excluding loans 90 days past due on
accrual status) to total loans and foreclosed properties to .34 percent at
September 30, 1998, from .43 percent at September 30, 1997, and .37 percent at
December 31, 1997. Nonperforming assets were $35.9 million at September 30,
1998, $49.4 million at September 30, 1997, and $43.3 million at December 31,
1997. At September 30, 1998, nonperforming assets consisted of $30.3 million of
nonaccrual loans and $5.6 million of foreclosed properties. First American has
not experienced asset quality problems related to foreign markets and hedge
funds due to a lack of exposure in those areas.
Other potential problem loans consist of loans that are currently not
considered nonperforming but on which information about possible credit problems
has caused management to doubt the ability of the borrowers to comply fully with
present repayment terms. At September 30, 1998, such loans totaled approximately
$87.1 million. 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 $180 million, or 1 percent, to $13.21 billion at
September 30, 1998, from $13.03 billion at September 30, 1997. Average deposits
for the first nine months of 1998 compared to the first nine months of 1997
increased 2 percent. Short-term borrowings increased $345.8 million, or 16
percent, to $2.45 billion at September 30, 1998, from $2.10 billion at September
30, 1997, which was primarily due to an increase in federal funds purchased and
securities sold under agreements to repurchase ($671.7 million) offset by a
decrease in borrowings from the Federal Home Loan Bank ("FHLB") ($276.9
million). The level of federal funds purchased and repurchase agreements can
fluctuate significantly on a daily basis depending on funding needs and
availability of sources of funds to meet those needs. Long-term debt increased
$865.6 million, or 224 percent, to $1.25 billion at September 30, 1998, from
$386.5 million at September 30, 1997, which reflected the addition of $930
million variable rate borrowings from the Federal Home Loan Bank ("FHLB"). In
order to fund an increased level of earning assets in the most economically
desirable manner, the Corporation placed more reliance on non-core sources of
funds during the first nine months of 1998 compared to the first nine months of
1997.
Total deposits decreased $199.5 million, or 1 percent, from $13.41
billion at December 31, 1997, to $13.21 billion at September 30, 1998.
Short-term borrowings increased $476 million, or 24 percent, from $1.97 billion
at December 31, 1997, which was primarily attributable to increases in federal
funds purchased and securities sold under agreements to repurchase ($635.1
million) offset by a decrease in borrowings from the FHLB ($158.7 million).
Long-term debt increased $655.9 million, or 110 percent, which resulted
primarily from the addition of $645 million variable rate borrowings from the
FHLB.
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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 effectively alter
the interest rate characteristics of specific assets or liabilities on the
balance sheet (for example to change a variable to a fixed rate obligation), the
derivative product offsets fluctuations in net interest income from the
otherwise unhedged position. In other words, if net interest income from the
otherwise unhedged position changes (increases or decreases) by a given amount,
the derivative product should produce close to the opposite result, making the
combined amount (otherwise unhedged position impact plus the derivative product
position impact) essentially unchanged. Derivative products have enabled First
American to improve its balance between interest-sensitive assets and
interest-sensitive liabilities by managing interest rate sensitivity, while
continuing to meet the lending and deposit needs of its customers.
In conjunction with managing interest rate sensitivity, at September 30,
1998, First American had derivatives with notional values totaling $3.24
billion. These derivatives had a net positive fair value (unrealized net pre-tax
gain) of $.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
September 30, 1997, First American had derivatives with notional values totaling
$2.55 billion. These derivatives had a net positive fair value (unrealized
pre-tax gain) of $11.4 million at September 30, 1997. The instruments utilized
are noted in the following table along with their notional amounts and fair
values at September 30, 1998 and 1997.
Weighted
Average
Weighted Average Rate Maturity
Related Variable Rate Notional ----------------------------- ---------- Fair
(in thousands) Asset/Liability Amount Paid Received Years Value
- ----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998
Interest rate swaps Money market deposits $ 150,000 5.97% (1) 5.59% (2) 1.4 $ (1,998)
Interest rate swaps Available for sale securities 110,100 5.04 (1) 5.77 (2) 4.2 (1,234)
Interest rate swaps Available for sale securities 50,000 5.69 (2) 5.33 (3) 4.1 (304)
Interest rate swaps Loans 825,000 5.69 (2) 6.61 (1) 3.7 47,413
Interest rate swaps FHLB borrowings 85,000 6.33 (1) 5.63 (2) 6.0 (6,365)
Interest rate swaps Mortgages 20,100 6.65 (1) 5.63 (4) 8.8 (1,176)
Forward interest rate
swaps Money market deposits 450,000 6.06 (1) 5.63 (2,5) 2.1 (7,762)
Forward interest rate
swaps Available for sale securities 1,300,000 6.10 (1) 5.56 (2,6) 2.2 (31,228)
Floors Loans 250,000 5.45 (1) 5.67 (2) 2.6 3,450
---------- ---------
$3,240,200 $ 796
=================================================================================================================================
September 30, 1997
Interest rate swaps Money market deposits $ 250,000 5.80% (1) 5.74% (7) 1.8 $ 1,012
Interest rate swaps Loans 675,000 5.73 (2) 6.66 (1) 4.5 11,821
Forward interest rate
swaps Available for sale securities 250,000 6.53 (1) N/A (2,8) 3.0 (919)
Forward interest rate
swaps Money market deposits 850,000 6.36 (1) 5.73 (2,9) 1.4 (1,018)
Interest rate swaps FHLB borrowings 75,000 6.36 (1) 5.73 (2) 6.9 (257)
Interest rate swaps Available for sale securities 25,000 5.78 (2) 5.83 (3) 5.0 (271)
Interest rate swaps Mortgages 21,585 6.65 (1) 5.66 (4) 9.8 (307)
Caps Certificates of deposits 100,000 6.88 (1) 5.72 (2) .2 -
Floors Loans 300,000 5.37 (1) 5.76 (2) 3.0 1,320
---------- ---------
$2,546,585 $ 11,381
=================================================================================================================================
(1) Fixed rate.
(2) Variable rate which reprices quarterly based on 3-month LIBOR.
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(3) Variable rate which reprices quarterly based on the constant maturity
treasury index.
(4) Variable rate which reprices monthly based on 1-month LIBOR.
(5) Forward swap periods have become effective for $150 million and will begin
at various dates during 1999 for $300 million. Variable rates were unknown
at September 30, 1998, for forward swaps which were not yet effective.
(6) Forward swap periods have become effective for $250 million and will begin
at various dates during 1998 and 1999 for $1.05 billion. Variable rates
were unknown at September 30, 1998, for forward swaps which were not yet
effective.
(7) Variable rate which reprices quarterly based on 3-month LIBOR, except for
$25 million which reprices semi-annually based on 6-month LIBOR.
(8) Forward swap periods begin in September 1998. Variable rates were unknown
at September 30, 1997, since their related forward swap periods had not
yet begun.
(9) Forward swap periods have become effective for $200 million and will begin
at various dates during 1998 and 1999 for $650 million. Variable rates were
unknown at September 30, 1997, for forward swaps which were not yet
effective.
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 September 30, 1998, there
were $1.9 million of deferred net gains related to terminated derivatives
contracts, and there were $3.0 million of deferred net gains at September 30,
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 September 30, 1998 and 1997,
was increased by derivative products income of $1.0 million and $.3 million,
respectively. Net interest income for the nine months ended September 30, 1998
and 1997, was increased by derivative products income of $3.2 million and $1.1
million, respectively. The increase in derivative products net interest income
for year-to-date 1998 over year-to-date 1997 was primarily due to actions taken
in mid-1997 to create a derivatives position more balanced between pay-fixed and
receive-fixed interest rate swaps.
Credit risk exposure due to off-balance-sheet hedging is closely
monitored, and counterparts to these contracts are selected on the basis of
their credit worthiness, as well as their market-making ability. As of September
30, 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 on September 30, 1998 was $28.8 million. 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 $1.60 billion, or 8.46 percent of total
assets, at September 30, 1998, $1.51 billion, or 8.68 percent of total assets,
at September 30, 1997, and $1.54 billion, or 8.66 percent of total assets, at
December 31, 1997. Total shareholder's equity increased $82.5 million, or 5
percent, from September 30, 1997, to September 30, 1998, resulting principally
from comprehensive income (net income plus unrealized gains on securities
available for sale) and issuance of shares for employee benefit plans offset by
dividends to shareholders and common stock repurchases. Total shareholders'
equity increased $51.9 million, or 3 percent, from December 31, 1997, to
September 30, 1998, which was primarily due to comprehensive income and issuance
of shares in connection with employee benefit plans offset by common stock
repurchases and dividends to shareholders.
During the third quarter of 1998, First American declared cash dividends
on its common stock of $.25 per common share compared to $.20 per common share
in the third quarter of 1997, an increase of 25 percent. Cash dividends for the
first nine months of 1998 were $.70 per share, an increase of 26 percent over
the same time period last year.
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 September 30, 1998, the Corporation and FANB had ratios which
exceeded the regulatory requirements to be classified as "well capitalized," the
highest regulatory rating. At September 30, 1998, the Corporation and FANB had
total risk-based capital ratios of 11.17 percent and 11.53 percent,
respectively, Tier I risk-based capital ratios of 9.26
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percent and 10.31 percent, respectively, and Tier I leverage capital ratios of
7.47 percent and 11.24 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 ("OTS"), which are
similar but not identical to those issued by the Federal Reserve Board and the
OCC. At June 30, 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
$1.45 billion and $1.17 billion at September 30, 1998, and 1997, respectively,
which was approximately 8.5 percent and 7.5 percent of earning assets,
respectively. Available for sale securities maturing after one year, which can
be sold to meet liquidity needs, had a balance of $3.95 billion at September 30,
1998, compared to $3.08 billion at September 30, 1997. The overall liquidity
position of First American is further enhanced by a high proportion of core
deposits, which provide a stable funding base. Core deposits comprised 88
percent of total deposits at September 30, 1998, versus 90 percent at September
30, 1997.
An additional source of liquidity is First American's three-year $100
million revolving credit agreement which became effective in July 1998 and
replaced the 1994 $70 million revolving credit agreement. First American had no
borrowings under either revolving agreement during 1998 or 1997.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk were included
in the Management's discussion and analysis contained in First American's Form
8-K filed on July 14, 1998. There have been no significant changes in the
contractual balances and the estimated fair value of First American's on-balance
sheet derivative financial instruments, the notional amount and estimated fair
value of the company's off-balance sheet derivative financial instruments, or
weighted-average interest rates.
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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 7 to the Corporation's
Consolidated Financial Statements for the quarter ended September
30, 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 is incorporated herein by reference to
Exhibit 3.1 of the Registrant's Form 10-Q for the period
ended March 31, 1998.
3.2 By-laws of the Registrant currently in effect as amended
September 17, 1998, are included herein.
10 Rights Agreement dated July 16, 1998 is incorporated herein
by reference to Exhibit 1 under Item 2 of Form 8-A filed
November 10, 1998.
11 "Computation of Earnings per Common Share" is included in
Note 6 to the Consolidated Financial Statements for the three
and nine months ended September 30, 1998 and September 30, 1997.
See Part 1, Item 1.
15 Letter regarding unaudited interim financial information from
KPMG Peat Marwick LLP dated October 15, 1998 included
herein.
27.1 Financial Data Schedule for interim year-to-date period ended
September 30, 1998 included herein.
27.2 Restated Financial Data Schedule for interim year-to-date
period ended September 30, 1997 included herein.
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(b) Reports on Form 8-K
(1) A report on Form 8-K dated July 14, 1998 was filed under Item
5 ("Other Events") that includes as Exhibit 99 thereto the
following giving retroactive effect to the merger of Deposit
Guaranty Corp. into First American Corporation on May 1, 1998
in a transaction accounted for as a pooling of interest:
Selected Financial Data
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Quantitative and
Qualitative Disclosures about Market Risk
Supplementary Financial Data
Independent Auditors' Report
Supplemental Consolidated Balance Sheets as of
December 31, 1997 and 1996
Supplemental Consolidated Statements of Income for
the years ended December 31, 1997, 1996, and 1995
Supplemental Consolidated Statements of Changes in
Shareholders' Equity for the Years ended December 31,
1997, 1996 and 1995
Supplemental Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995
Notes to the Supplemental Consolidated Financial
Statements
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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/ Allan R. Landon
-------------------------------------------
Allan R. Landon
Executive Vice President, CFO and Principal
Financial Officer
Date: November 13, 1998
-------------------------------------
/s/ Marvin J. Vannatta, Jr.
-------------------------------------------
Marvin J. Vannatta, Jr.
Executive Vice President and Principal
Accounting Officer
Date: November 13, 1998
-------------------------------------
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