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 June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-6198
FIRST AMERICAN CORPORATION
(Exact name of Registrant as specified in its charter)
TENNESSEE 62-0799975
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
FIRST AMERICAN CENTER, NASHVILLE, TENNESSEE 37237
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 615/748-2000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common shares outstanding: 116,010,149 as of July 31, 1999.
2
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information
Item 1 Financial Statements (unaudited)
Consolidated Income Statements for the Three and Six
Months Ended June 30, 1999 and 1998 3
Consolidated Balance Sheets as of June 30, 1999 and
1998 and December 31, 1998 4
Consolidated Statements of Changes in Shareholders'
Equity for the Six Months Ended June 30, 1999
and June 30, 1998 5
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and June 30, 1998 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk 28
Part II. Other Information
Item 1 Legal Proceedings 28
Item 4 Submission of Matters to a Vote of Security Holders 28
Item 6 Exhibits and Reports on Form 8-K 29
2
3
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
(in thousands, except per share amounts) 1999 1998 1999 1998
-------- -------- -------- --------
INTEREST INCOME
Loans $240,058 $248,941 $472,467 $504,158
Securities
Taxable 97,892 80,373 190,692 149,824
Tax-exempt 4,260 3,967 9,480 7,649
Federal funds sold and securities purchased under agreements to resell 939 1,440 2,627 3,166
Mortgage loans held for sale 1,496 3,450 4,143 6,242
Time deposits with other banks and other interest 1,160 1,233 3,386 2,449
-------- -------- -------- --------
Total interest income 345,805 339,404 682,795 673,488
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 108,481 118,840 217,278 237,221
Short-term borrowings 32,623 28,687 58,459 54,430
Long-term debt 17,267 9,460 33,824 18,941
-------- -------- -------- --------
Total interest expense 158,371 156,987 309,561 310,592
-------- -------- -------- --------
NET INTEREST INCOME 187,434 182,417 373,234 362,896
PROVISION FOR LOAN LOSSES 11,089 6,337 20,323 13,275
-------- -------- -------- --------
Net interest income after provision for loan losses 176,345 176,080 352,911 349,621
-------- -------- -------- --------
NONINTEREST INCOME
Investment services income 45,691 43,053 87,107 78,473
Service charges on deposit accounts 32,467 32,500 63,851 61,963
Commissions and fees on fiduciary activities 9,951 10,566 19,776 21,370
Mortgage banking 10,255 14,873 21,727 25,615
Merchant discount fees 1,162 964 2,073 1,764
Net realized gain on sales of securities 2,225 1,466 4,564 3,151
Trading account revenue 4,974 2,102 6,114 4,059
Other 19,166 18,917 37,380 37,445
-------- -------- -------- --------
Total noninterest income 125,891 124,441 242,592 233,840
-------- -------- -------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 85,071 88,907 173,304 179,243
Subscribers' commissions 27,477 26,787 51,772 46,977
Net occupancy 13,602 13,020 26,786 25,742
Equipment 13,860 12,137 27,170 24,098
Systems and processing 5,137 3,632 9,053 7,296
Communication 8,243 7,405 17,124 14,711
Marketing 4,650 5,294 10,576 10,449
Supplies 3,062 3,024 5,873 6,388
Goodwill amortization 4,490 4,405 8,994 8,810
Merger-related charges 24,765 72,043 28,039 72,043
Other 22,143 24,974 43,692 47,822
-------- -------- -------- --------
Total noninterest expense 212,500 261,628 402,383 443,579
-------- -------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 89,736 38,893 193,120 139,882
Income tax expense 32,402 17,205 69,322 53,848
-------- -------- -------- --------
NET INCOME $ 57,334 $ 21,688 $123,798 $ 86,034
======== ======== ======== ========
PER COMMON SHARE:
Net income:
Basic $ .50 $ .19 $ 1.07 $ .77
Diluted .49 .19 $ 1.06 $ .76
Dividends declared .28 .25 .53 .45
======== ======== ======== ========
Average common shares outstanding:
Basic 115,714 111,794 115,562 111,429
Diluted 117,376 114,065 117,302 113,806
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
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FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30
---------------------------- December 31
(in thousands, except share amounts) 1999 1998 1998
------------ ------------ ------------
ASSETS
Cash and due from banks $ 981,309 $ 1,064,284 $ 1,203,358
Time deposits with other banks 16,340 5,238 297,374
Federal funds sold and securities purchased under agreement to resell 48,119 104,425 351,989
------------ ------------ ------------
Total cash and cash equivalents 1,045,768 1,173,947 1,852,721
------------ ------------ ------------
Securities:
Held to maturity (fair value $2,525,487, $964,270, and
$1,739,852, respectively) 2,574,818 1,016,704 1,730,460
Available for sale (amortized cost $4,393,104, $5,066,063, and
$4,505,730, respectively) 4,243,537 5,082,250 4,495,160
------------ ------------ ------------
Total securities 6,818,355 6,098,954 6,225,620
------------ ------------ ------------
Trading account securities 72,516 109,577 43,987
Mortgage loans held for sale 49,626 212,138 214,745
Loans:
Commercial 5,994,930 4,745,201 5,558,099
Consumer--amortizing mortgages 1,761,057 2,161,112 1,784,035
Consumer--other 2,789,647 2,676,155 2,690,227
Real estate--construction 768,774 501,515 452,191
Real estate--commercial mortgages and other 957,945 1,517,331 1,053,147
------------ ------------ ------------
Total loans 12,272,353 11,601,314 11,537,699
Unearned discount (7,349) (13,987) (12,756)
------------ ------------ ------------
Loans, net of unearned discount 12,265,004 11,587,327 11,524,943
Allowance for loan losses (188,787) (189,279) (197,681)
------------ ------------ ------------
Total net loans 12,076,217 11,398,048 11,327,262
------------ ------------ ------------
Premises and equipment, net 381,500 364,119 383,865
Other assets 1,085,182 707,369 683,570
------------ ------------ ------------
Total assets $ 21,529,164 $ 20,064,152 $ 20,731,770
============ ============ ============
LIABILITIES
Deposits:
Noninterest bearing $ 2,677,123 $ 2,936,172 $ 3,046,651
Interest-bearing 11,809,380 11,509,576 12,224,105
------------ ------------ ------------
Total deposits 14,486,503 14,445,748 15,270,756
------------ ------------ ------------
Short-term borrowings 3,264,383 2,864,933 2,213,637
Long-term debt 1,786,489 610,125 1,152,939
Other liabilities 223,921 483,179 314,643
------------ ------------ ------------
Total liabilities 19,761,296 18,403,985 18,951,975
------------ ------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; authorized 200,000,000
shares; issued: 116,894,507 shares at June 30, 1999;
112,895,895 shares at June 30, 1998, and 116,318,734
shares at December 31, 1998 292,236 282,239 290,797
Additional paid-in capital 255,001 191,239 241,333
Retained earnings 1,348,431 1,209,443 1,286,512
Deferred compensation on restricted stock (33,771) (33,543) (31,781)
------------ ------------ ------------
Realized shareholders' equity 1,861,897 1,649,378 1,786,861
Accumulated other comprehensive (loss) income, net of tax (94,029) 10,789 (7,066)
------------ ------------ ------------
Total shareholders' equity 1,767,868 1,660,167 1,779,795
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,529,164 $ 20,064,152 $ 20,731,770
============ ============ ============
See accompanying notes to consolidated financial statements.
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FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30,
1998 AND JUNE 30, 1999 COMMON DEFERRED EMPLOYEE ACCUMULATED
SHARES COMPENSATION STOCK OTHER
ISSUED ADDITIONAL ON OWNERSHIP COMPREHENSIVE
(in thousands except share AND COMMON PAID-IN RETAINED RESTRICTED PLAN INCOME (LOSS),
amounts) OUTSTANDING STOCK CAPITAL EARNINGS STOCK OBLIGATION NET OF TAX TOTAL
-------- ----------- --------- ------- ----------- -------- ---------- ---------- -----------
Balance, January 1, 1998 112,187,227 $ 280,468 $ 212,311 $ 1,161,877 $(13,341) $(163) $ 2,741 $ 1,643,893
Comprehensive income:
Net income -- -- -- 86,034 -- -- -- 86,034
Other comprehensive
income, net of tax -- -- -- -- -- -- 8,030 8,030
-----------
Comprehensive income 94,064
Cash dividends ($.45 per --
common share) -- -- (26,006) -- -- -- (26,006)
Cash dividends of pooled
companies -- -- -- (11,264) -- -- -- (11,264)
Repurchase of common stock (1,211,036) (3,028) (60,757) -- -- -- -- (63,785)
Issuance of common stock:
Acquisitions 871,156 2,178 5,524 (1,206) -- -- 18 6,514
Employee Benefit Plans, net
of discount on Dividend
Reinvestment Plan 548,400 1,371 8,906 -- -- -- -- 10,277
Restricted common stock,
net of forfeitures 500,148 1,250 22,239 -- (23,489) -- -- --
Amortization of deferred
compensation on restricted
stock -- -- -- -- 3,287 -- -- 3,287
Reduction in employee stock
ownership plan obligation -- -- -- -- -- 163 -- 163
Tax benefit from stock option
and award plans -- -- 3,018 -- -- -- -- 3,018
Other -- -- (2) 8 -- -- -- 6
----------- --------- --------- ----------- -------- ----- -------- -----------
Balance, June 30, 1998 112,895,895 $ 282,239 $ 191,239 $ 1,209,443 $(33,543) $ -- $ 10,789 $ 1,660,167
=========== ========= ========= =========== ======== ===== ======== ===========
Balance, January 1, 1999 116,318,734 $ 290,797 $ 241,333 $ 1,286,512 $(31,781) $ -- $ (7,066) $ 1,779,795
Comprehensive income:
Net income -- -- -- 123,798 -- -- -- 123,798
Other comprehensive
loss, net of tax -- -- -- -- -- -- (86,963) (86,963)
-----------
Comprehensive income 36,835
Cash dividends ($.53 per
common share) -- -- -- (61,853) -- -- -- (61,853)
Repurchase of common stock (52,377) (131) (2,000) -- -- -- -- (2,131)
Issuance of common stock:
Employee benefit plans, net
of discount on Dividend
Reinvestment Plan 498,617 1,246 9,265 -- -- -- -- 10,511
Restricted common stock,
net of forfeitures 129,533 324 5,015 -- (5,339) -- -- --
Amortization of deferred
compensation on restricted
stock -- -- -- -- 3,349 -- -- 3,349
Tax benefit from stock option
and award plans -- -- 1,388 -- -- -- -- 1,388
Other -- -- -- (26) -- -- -- (26)
----------- --------- --------- ----------- -------- ----- -------- -----------
Balance, June 30, 1999 116,894,507 $ 292,236 $ 255,001 $ 1,348,431 $(33,771) $ -- $(94,029) $ 1,767,868
=========== ========= ========= =========== ======== ===== ======== ===========
See accompanying notes to consolidated financial statements.
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FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30
----------------------------
(in thousands) 1999 1998
----------- -----------
OPERATING ACTIVITIES
Net income $ 123,798 $ 86,034
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses 20,323 13,275
Depreciation and amortization of premises and equipment 21,784 20,247
Amortization of intangible assets 12,006 12,171
Other amortization, net 8,126 8,511
Noncash portion of merger-related charges 18,907 --
Deferred income tax expense (benefit) 33,132 (2,657)
Net (gain) loss on sales and writedowns of other real estate owned (1,544) 469
Net realized gains on sales of securities (4,564) (3,151)
Net (gain) loss on sales and writedowns of premises and equipment (2,804) 374
Net (gain) loss on disposition of branches, business operations,
subsidiaries, and other assets -- (1,222)
Other, net 174 --
Change in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in mortgage loans held for sale 165,119 (101,158)
Decrease (increase) in accrued interest receivable 1,195 (6,070)
Increase in accrued interest payable 12,342 5,470
Increase in trading account securities (28,529) (45,108)
Increase in other assets (407,944) (63,924)
(Decrease) increase in other liabilities (167,492) 147,018
----------- -----------
Net cash (used in) provided by operating activities (195,971) 70,279
----------- -----------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 1,402,402 726,004
Proceeds from maturities of securities available for sale 866,128 865,570
Purchases of securities available for sale (2,137,316) (3,066,929)
Proceeds from maturities of securities held to maturity 423,057 305,532
Purchases of securities held to maturity (1,280,582) (868)
Proceeds from sales of other real estate owned 6,307 3,540
Acquisitions and divestitures, net of cash and cash equivalents 36,861 (6,741)
Net (increase) decrease in loans, net of repayments and sales (765,333) 86,986
Proceeds from sales of premises and equipment 28,212 5,003
Purchases of premises and equipment (44,632) (2,562)
----------- -----------
Net cash used in investing activities (1,464,896) (1,084,465)
----------- -----------
FINANCING ACTIVITIES
Net (decrease) increase in deposits (778,348) 214,085
Net increase in other short-term borrowings 408,656 825,271
Net repayment of other long-term debt (78) (67)
Advances from (repayments to) Federal Home Loan Bank 1,275,769 (19,624)
Issuance of common shares under Employee Benefit and Dividend Reinvestment Plans 10,511 10,277
Repurchase of common stock (2,131) (63,785)
Tax benefit related to stock options and award plans 1,388 3,018
Cash dividends paid (61,853) (37,270)
----------- -----------
Net cash provided by financing activities 853,914 931,905
----------- -----------
Decrease in cash and cash equivalents (806,953) (82,281)
Cash and cash equivalents, January 1 1,852,721 1,256,228
----------- -----------
Cash and cash equivalents, June 30 $ 1,045,768 $ 1,173,947
=========== ===========
Cash paid during the year for:
Interest expense $ 297,219 $ 278,314
Income taxes 97,785 47,529
Non-cash transactions:
Foreclosures 3,294 1,901
Change in unrealized (loss) gain on available for sale securities, net of tax (86,963) 8,048
Stock issued for acquisitions -- 6,514
Mortgage loans securitized and retained -- 583,629
=========== ===========
See accompanying notes to consolidated financial statements.
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FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and general practices within the
banking industry.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
presented in First American Corporation's ("First American") 1998 Annual Report
to Shareholders. The interim 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) PENDING MERGER
On May 31, 1999, First American and AmSouth Bancorporation ("AmSouth"), a
$20 billion bank holding company based in Birmingham, Alabama, entered into a
definitive agreement providing for the merger of First American with and into
AmSouth. Under the terms of the agreement, First American shareholders will
receive 1.871 shares of AmSouth common stock for each First American common
share. The combined company, which will be called AmSouth Bancorporation, will
be based in Birmingham and will have approximately 680 branches in nine
Southeastern states with leading market positions in Tennessee, Florida,
Alabama, and Mississippi. The company also will have a presence in Georgia,
Louisiana, Arkansas, Kentucky, and Virginia, and approximately 1,350 ATM's, the
largest ATM network in the Southeast. The merger, which is subject to regulatory
and shareholder approval, is expected to be completed in the fourth quarter of
1999 and will be accounted for as a pooling of interests.
(3) MERGER-RELATED CHARGES
First American recorded merger-related charges of $28 million during the
six months ended June 30, 1999 which included merger and integration costs of
$15.5 million and a provision of $12.5 for losses resulting from systems
conversions and process integration. The merger and integration costs included
$8.3 million of systems and operations conversion costs and $7.2 million of
other merger costs, primarily termination and personnel-related costs. The
provision establishes an allowance to absorb losses resulting from prior systems
conversions and process integration. The provision will cover dishonored return
items, unidentified customer debits, unmatched or unlocated items, and other
similar losses.
The liability balance at June 30, 1999 includes severance and
personnel-related benefits, compliance-related issues, system conversions, and
process integration. First American expects expenses of approximately $10
million to be incurred in the third quarter of 1999 related to the completion of
systems conversion of the four 1998 in-market business combinations. The
following table presents a summary of activity with respect to the
merger-related charges:
Six Months Ended June 30
---------------------------
(in millions) 1999 1998
------- -------
Balance, January 1 $ 18.8 $ --
Charged against income 17.6 72.0
Cash outlays (14.4) (67.2)
Noncash charges, net -- (4.8)
------- -------
Balance, June 30 $ 22.0 $ --
======= =======
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(4) NONPERFORMING ASSETS
Nonperforming assets were:
June 30
-------------------- December 31
(dollars in thousands) 1999 1998 1998
------- ------- -------
Nonaccrual loans $41,789 $35,728 $47,913
Foreclosed properties 8,509 7,773 7,085
------- ------- -------
Total nonperforming assets $50,298 $43,501 $54,998
======= ======= =======
90 days or more past due on accrual $41,191 $32,223 $38,696
======= ======= =======
Nonperforming assets as a percent of loans
and other real estate owned (excluding
90 days or more past due on accrual) .41% .38% .48%
======= ======= =======
(5) ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were:
Six Months Ended June 30
------------------------
(dollars in thousands) 1999 1998
-------- --------
Balance, January 1 $197,681 $187,880
Provision charged to operating expenses 20,323 13,275
Allowance of subsidiary purchased -- 1,317
-------- --------
Subtotal 218,004 202,472
-------- --------
Loans charged off 42,085 28,570
Recoveries of loans previously charged off 12,868 15,377
-------- --------
Net charge-offs 29,217 13,193
-------- --------
Balance, June 30 $188,787 $189,279
======== ========
Allowance end of period to net loans outstanding 1.54% 1.63%
Net charge-offs to average loans (annualized) .51 .22
======== ========
(6) RECENT ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards ("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 the value of derivatives as assets or
liabilities on the balance sheet. 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. The key criterion for
hedge accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows attributable to the
hedged risk during the period that the hedge is designated. SFAS No. 133 as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," is
effective for fiscal years beginning after June 15, 2000, and shall not be
applied retroactively to financial statements of prior periods. At this time,
management has not fully evaluated the impact of SFAS No. 133. First American
will adopt SFAS No. 133 prospectively on January 1, 2001.
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(7) COMPUTATION OF EARNINGS PER COMMON SHARE
Six Months Ended June 30
-----------------------
(in thousands, except per share amounts) 1999 1998
-------- --------
Basic
Average common shares outstanding 115,562 111,429
======== ========
Net income $123,798 $ 86,034
======== ========
Per share amount $ 1.07 $ .77
======== ========
Diluted
Average common shares outstanding 115,562 111,429
Dilutive common stock options and awards at average
market price 1,740 2,377
-------- --------
Average diluted shares outstanding 117,302 113,806
======== ========
Net income $123,798 $ 86,034
======== ========
Per share amount $ 1.06 $ .76
======== ========
(8) LEGAL AND REGULATORY MATTERS
First American Federal Savings Bank ("FAFSB") has a lawsuit pending
against the United States Government seeking damages for breach of contract. The
suit arose from the elimination of approximately $47 million in supervisory
goodwill upon the adoption of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989. The value and ultimate outcome of the suit are
contingent upon a number of factors, and highly uncertain. Pursuant to the
agreement under which First American acquired FAFSB in 1995, the former
shareholders of FAFSB as of December 1, 1995 will be entitled to receive
additional consideration equal in value to 50 percent of any recovery in the
litigation, net of all taxes and other expenses, including the cost of
litigation, which is received by FAFSB on or before December 1, 2000, subject to
certain limitations. Such additional consideration, if any, is payable in the
common stock of First American, 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.
Deposit Guaranty National Bank ("DGNB"), now a division of First American
National Bank ("FANB"), is a defendant in an action brought in Pike County,
Mississippi by a land owner and a gaming corporation, alleging that DGNB and the
two defendant casinos entered into an agreement, expressed or implied, to oppose
an application to operate a casino on the Big Black River in Mississippi. The
plaintiffs contend that DGNB used its influence to cause the Mississippi Gaming
Commission to deny the casinos' application. The plaintiffs seek actual damages
for injury to property and business in the total amount of $38 million and
punitive damages in the amount of $200 million. DGNB denies all liability and
has filed a Motion for Summary Judgment. It is the opinion of management and
counsel that ultimate disposition of the case should not have a material effect
on First American's consolidated financial statements.
There are from time to time other legal proceedings pending against First
American 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 First
American.
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(9) SEGMENT INFORMATION
First American operates in two business segments, Banking Services and
Enterprises, based upon management responsibility. First American's reportable
segments are strategic business operations that offer different products and
services. They are managed separately based on the fundamental differences in
their operations.
The Banking Services segment consists of the traditional banking
components of First American's wholly-owned banking subsidiaries. This segment
makes commercial, consumer, and real estate loans and provides various banking
and mortgage-related services to its customers located within First American's
market, which consists primarily of the Mid-South region of the United States.
The Enterprises segment includes:
- IFC Holdings, Inc., which distributes securities, investment, and
insurance products to customers of subscribing financial institutions
located throughout the United States;
- ISG, the investment services group of FANB;
- First American Network, Inc., a subsidiary of FANB; and
- The SSI Group Inc., a healthcare payments processing company in which
FANB holds a 49 percent interest.
The Enterprises segment provides a variety of nondeposit financial services not
available through traditional banking channels.
Banking
(in thousands) Services Enterprises Other Total
- -------------------------------------------------------------------------------------------------------------------
YEAR-TO-DATE JUNE 30, 1999
Net interest income $ 371,345 $ 1,889 $ - $ 373,234
Provision for loan losses 20,323 - - 20,323
Noninterest income, external customers 128,537 114,055 - 242,592
Noninterest expense 278,053 96,291 28,039(A) 402,383
Net pretax contribution 201,506 19,653 (28,039(A) 193,120
Average total assets 20,387,729 122,931 (49,199(B) 20,461,461
Return on average assets 1.29% 19.23%
Return on average equity 15.08 38.14
Productivity 54.47 83.05
YEAR-TO-DATE JUNE 30, 1998
Net interest income $ 360,416 $ 2,480 - $ 362,896
Provision for loan losses 13,275 - - 13,275
Noninterest income, external customers 127,541 106,299 - 233,840
Noninterest expense 280,432 91,104 72,043(a) 443,579
Net pretax contribution 194,250 17,675 (72,043(a) 139,882
Average total assets 18,657,622 108,099 (39,321(b) 18,726,400
Return on average assets 1.35% 19.70%
Return on average equity 15.92 41.36
Productivity 56.45 83.75
===================================================================================================================
(a) Merger-related charges
(b) Effect of intersegment loan, due from bank, and investment in subsidiary
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
The following discussion should be read in conjunction with the
consolidated financial statements and accompanying notes of First American
appearing within this report and by reference to First American's 1998 Annual
Report.
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 assumptions, risks, and uncertainties.
On June 1, 1999, First American and AmSouth, a $20 billion bank holding
company based in Birmingham, Alabama, entered into a definitive agreement
providing for the merger of First American with and into AmSouth. Under the
terms of the agreement, First American shareholders will receive 1.871 shares of
AmSouth common stock for each First American common share. The combined company,
which will be called AmSouth Bancorporation, will be based in Birmingham and
will have approximately 680 branches in nine Southeastern states with leading
market positions in Tennessee, Florida, Alabama, and Mississippi. The company
also will have a presence in Georgia, Louisiana, Arkansas, Kentucky, and
Virginia, and approximately 1,350 ATM's, the largest ATM network in the
Southeast. The merger, which is subject to regulatory and shareholder approval,
is expected to be completed in the fourth quarter of 1999 and will be accounted
for as a pooling of interests.
PERFORMANCE OVERVIEW
Unless otherwise indicated, all earnings per share data included in this
discussion are presented on a diluted basis.
- Net income for second quarter 1999 was $57.3 million, up from $21.7
million in second quarter 1998. Operating earnings, which exclude the
effect of $24.8 million merger-related charges, were up 3 percent to
$73.5 million in second quarter 1999.
- For the first six months of 1999, net income was $123.8 million, up
from $86.0 million in 1998. Operating earnings, which exclude the
effect of $28.0 million merger-related charges, were up 5 percent to
$142.5 million in the first half of 1999.
- Earnings per share for second quarter amounted to $.49 in 1999 and $.19
in 1998. On an operating basis, earnings per share was $.63 in both
second quarter 1999 and 1998.
- For the first six months of the year, earnings per share amounted to
$1.06 in 1999 and $.76 in 1998. On an operating basis, earnings per
share for the first six months of the year was $1.21 in 1999 and $1.19
in 1998.
- Return on assets ("ROA") for second quarter 1999 was 1.11 percent
compared to .46 percent a year earlier. ROA on an operating basis was
1.43 percent in second quarter 1999.
- For the first six months of 1999, ROA was 1.22 percent compared to .93
percent a year earlier. ROA on an operating basis was 1.40 percent in
the first half of 1999.
- Return on equity ("ROE") for second quarter 1999 was 12.47 percent
compared to 5.26 percent a year earlier. ROE on an operating basis was
15.99 percent in second quarter 1999.
- For the first six months of 1999, ROE was 13.79 percent compared to
10.59 percent a year earlier. ROE on an operating basis was 15.87
percent in the first half of 1999.
11
12
- The productivity ratio in the banking segment improved 190 basis points
to 53.36 percent for second quarter 1999 from second quarter 1998 and
improved 198 basis points to 54.47 percent for the first six months of
1999 from the first six months of 1998.
- Asset quality remained strong. Nonperforming assets were $50.3 million,
or .41 percent of total loans and foreclosed properties, at June 30,
1999, compared to $43.5 million, or .38 percent, at June 30, 1998.
- Net interest income on a taxable equivalent basis ("TEB"), which was
$192.5 million for second quarter 1999 and $383.8 million for the first
six months of 1999, increased 3 percent over the comparable periods in
1998.
- Noninterest expense, excluding merger-related charges, decreased 1
percent for second quarter 1999 over 1998 and for the first six months
of 1999 increased only 1 percent over the same period in 1998.
- Average earning assets increased 9 percent for both second quarter 1999
and the first six months of 1999 over comparable periods in 1998, while
average deposits experienced modest growth for both periods in 1999
over 1998.
- Capital adequacy remained strong and exceeded the regulatory
requirements to be classified as "well capitalized." The risk-based
capital ratio was 11.65 percent at June 30, 1999.
The selected financial data set forth in Table 1 presents certain
information highlighting the results of operations and financial condition for
First American for each of the last five quarters and for the six months ended
June 30, 1999 and 1998.
12
13
TABLE 1: SELECTED QUARTERLY FINANCIAL DATA
=================================================================================================================================
1999 1998
-------------------------- -----------------------------------------
SECOND First Fourth Third Second
QUARTER Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
CONDENSED INCOME STATEMENTS (in thousands):
Net interest income, taxable equivalent basis(1) $ 192,502 $ 191,299 $ 194,041 $ 187,360 $ 187,343
Less taxable equivalent adjustment 5,068 5,499 5,415 5,270 4,926
----------- ----------- ----------- ----------- -----------
Net interest income 187,434 185,800 188,626 182,090 182,417
Provision for loan losses (2) 11,089 9,234 19,054 8,604 6,337
Noninterest income 125,891 116,701 115,632 128,140 124,441
Noninterest expense 187,735 186,609 168,307 175,270 189,585
Merger-related charges 24,765 3,274 12,523 37,159 72,043
----------- ----------- ----------- ----------- -----------
Income before income tax expense 89,736 103,384 104,374 89,197 38,893
Income tax expense 32,402 36,920 36,543 31,700 17,205
----------- ----------- ----------- ----------- -----------
Net income $ 57,334 $ 66,464 $ 67,831 $ 57,497 $ 21,688
=========== =========== =========== =========== ===========
Operating earnings (3) $ 73,533 $ 68,952 $ 83,118 $ 75,890 $ 71,452
=========== =========== =========== =========== ===========
SELECTED PER SHARE DATA:
Net income:
Basic $ .50 $ .58 $ .59 $ .51 $ .19
Diluted .49 .57 .58 .50 .19
Operating earnings (3):
Diluted .63 .59 .71 .67 .63
Cash dividends declared .28 .25 .25 .25 .25
Book value (end of period) 15.12 15.58 15.30 15.04 14.71
Market price (end of period) 41.563 36.875 44.375 38.375 48.125
Market/book (end of period) 2.75 X 2.37 x 2.90 x 2.55 x 3.27 x
=========== =========== =========== =========== ===========
AVERAGES (in thousands):
Assets $20,661,069 $20,267,581 $20,333,130 $19,336,177 $18,879,074
Loans, net of unearned discount 11,660,183 11,415,835 11,385,949 11,142,042 11,631,714
Earning assets 18,726,443 18,344,240 18,423,046 17,636,487 17,149,566
Deposits 14,465,046 14,602,033 14,720,534 14,086,042 14,201,774
Long-term debt 1,271,598 1,195,529 1,209,973 871,991 538,197
Shareholders' equity 1,844,524 1,804,618 1,746,481 1,671,239 1,653,162
=========== =========== =========== =========== ===========
END OF PERIOD (in thousands):
Assets $21,529,164 $20,326,467 $20,731,770 $19,854,123 $20,064,152
Loans, net of unearned discount 12,265,004 11,468,872 11,524,943 11,092,918 11,587,327
Earning assets 19,269,960 18,529,745 18,658,658 17,964,882 18,117,659
Deposits 14,486,503 14,435,264 15,270,756 14,001,390 14,445,748
Long-term debt 1,786,489 1,227,744 1,152,939 1,262,068 610,125
Shareholders' equity 1,767,868 1,817,869 1,779,795 1,701,275 1,660,167
=========== =========== =========== =========== ===========
SIGNIFICANT RATIOS:
Return on average assets 1.11% 1.33% 1.32% 1.18% .46%
Return on average assets - operating (3) 1.43 1.38 1.62 1.56 1.52
Return on average equity 12.47 14.94 15.41 13.65 5.26
Return on average equity - operating (3) 15.99 15.50 18.88 18.02 17.34
Dividends declared per share to basic net income
per share (dividend payout ratio) 56.00 43.10 42.37 49.02 131.58
Productivity - banking segment (4) 53.36 55.62 49.36 51.73 55.26
Average equity to average assets 8.93 8.90 8.59 8.64 8.76
Average loans to average deposits 80.61 78.18 77.35 79.10 81.90
Average core deposits to average total deposits 84.68 86.77 86.82 87.84 88.59
Allowance to net loans (end of period) 1.54 1.65 1.72 1.72 1.63
Nonperforming assets to loans and foreclosed
properties (end of period) (5) .41 .47 .48 .38 .38
Net interest margin 4.12 4.23 4.18 4.21 4.38
=========== =========== =========== =========== ===========
OTHER STATISTICS:
Average common shares outstanding (in thousands):
Basic 115,714 115,409 115,170 112,003 111,794
Diluted 117,376 117,226 117,117 113,973 114,065
End of period common shares (in thousands) 116,895 116,692 116,319 113,102 112,896
Number of full-time equivalent employees (end of
period) 6,902 7,219 7,195 6,803 7,320
=========== =========== =========== =========== ===========
=============================================================================================
Year to Date
--------------------------
June 30, June 30,
1999 1998
----------- -----------
CONDENSED INCOME STATEMENTS (in thousands):
Net interest income, taxable equivalent basis(1) $ 383,801 $ 371,759
Less taxable equivalent adjustment 10,567 8,863
----------- -----------
Net interest income 373,234 362,896
Provision for loan losses (2) 20,323 13,275
Noninterest income 242,592 233,840
Noninterest expense 374,344 371,536
Merger-related charges 28,039 72,043
----------- -----------
Income before income tax expense 193,120 139,882
Income tax expense 69,322 53,848
----------- -----------
Net income $ 123,798 $ 86,034
=========== ===========
Operating earnings (3) $ 142,485 $ 135,798
=========== ===========
SELECTED PER SHARE DATA:
Net income:
Basic $ 1.07 $ .77
Diluted 1.06 .76
Operating earnings (3):
Diluted 1.21 1.19
Cash dividends declared .53 .45
Book value (end of period) 15.12 14.71
Market price (end of period) 41.563 48.125
Market/book (end of period) 2.75 x 3.27 x
=========== ===========
AVERAGES (in thousands):
Assets $20,461,461 $18,726,400
Loans, net of unearned discount 11,538,685 11,848,428
Earning assets 18,545,953 16,980,687
Deposits 14,533,472 14,108,877
Long-term debt 1,233,774 574,908
Shareholders' equity 1,810,897 1,638,286
=========== ===========
END OF PERIOD (in thousands):
Assets $21,529,164 $20,064,152
Loans, net of unearned discount 12,265,004 11,587,327
Earning assets 19,269,960 18,117,659
Deposits 14,486,503 14,445,748
Long-term debt 1,786,489 610,125
Shareholders' equity 1,767,868 1,660,167
=========== ===========
SIGNIFICANT RATIOS:
Return on average assets 1.22% .93%
Return on average assets - operating (3) 1.40 1.46
Return on average equity 13.79 10.59
Return on average equity - operating (3) 15.87 16.72
Dividends declared per share to basic net income
per share (dividend payout ratio) 49.53 58.44
Productivity - banking segment (4) 54.47 56.45
Average equity to average assets 8.85 8.75
Average loans to average deposits 79.39 83.98
Average core deposits to average total deposits 85.72 88.88
Allowance to net loans (end of period) 1.54 1.63
Nonperforming assets to loans and foreclosed
properties (end of period) (5) .41 .38
Net interest margin 4.17 4.41
=========== ===========
OTHER STATISTICS:
Average common shares outstanding (in thousands):
Basic 115,562 111,429
Diluted 117,302 113,806
End of period common shares (in thousands) 116,895 112,896
Number of full-time equivalent employees (end of
period) 6,902 7,320
=========== ===========
(1) Adjusted to a taxable equivalent basis based on the statutory federal
income tax rates, adjusted for applicable state income taxes net of the
related federal tax benefit.
(2) Fourth quarter 1998 includes an additional loan loss provision for
Pioneer of $9.5 million.
(3) Excludes merger-related charges and the third quarter 1998 gain on the
sale of a corporate trust business.
(4) Ratio of operating expenses to taxable equivalent net interest income
plus noninterest income excluding operations related to Enterprises,
merger-related charges, and certain nonrecurring transactions such as
asset sales.
(5) Excludes loans 90 days or more past due on accrual.
13
14
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
SECOND QUARTER 1999 VERSUS SECOND QUARTER 1998
For purposes of this discussion, net interest income is presented on a
taxable equivalent basis. Net interest income represented approximately 60
percent of total revenues for both the quarters and six months ended June 30,
1999 and 1998.
Various components of the balance sheet and their respective yields and
rates, which affect net interest income, are presented in Tables 2 (second
quarter) and 3 (year-to-date). The information presented in Table 4 provides a
summary of the effect on net interest income of changes in average balances and
changes in yields/rates. As shown in Table 4, for both the second quarter and
the first six months of 1999, the increase in net interest income resulted
primarily from an increase in the volume of earning assets partially offset by
rate-related decreases.
Net interest income for second quarter 1999 was $192.5 million, with a
4.12 percent net interest margin, which compares with $187.3 million and a 4.38
percent net interest margin for the same period in 1998. For the quarter, net
interest income increased $5.2 million and the net interest margin decreased 26
basis points.
For the first six months of 1999, net interest income was $383.8 million,
with a 4.17 percent net interest margin, which compares with $371.8 million and
a 4.41 percent net interest margin for the same period in 1998. For the
six-month period, net interest income increased $12.0 million and the net
interest margin decreased 24 basis points.
For both the quarter and six-month periods, the increase in net interest
income resulted primarily from a higher volume of earning assets, which
increased $1.6 billion or 9.2 percent. For both the quarter and six-month
periods, the lower interest rate margin resulted from a change in the mix of
earning assets (more securities, which generally have lower yields than loans)
and due to a lower benefit of net free funding arising from having a lower
percentage of earning assets being funded with noninterest-bearing sources (15.5
percent in 1999 versus 16.9 percent in 1998).
The net interest spread, which was 3.50 percent for second quarter 1999
and 3.54 percent for the first six months of 1999, declined 13 basis points for
both the quarter and six-month periods, versus comparable periods in 1998. The
decrease in the net interest spread is due to yields on earning assets
decreasing more than rates paid on interest-bearing liabilities.
The yield on earning assets, which was 7.52 percent for second quarter
1999 and 7.54 percent for the first six months of 1999, decreased 53 basis
points from second quarter 1998 and 56 basis points from the first six months of
1998. The decrease in the yield on earning assets was essentially reflective of
the overall lower interest rate environment in 1999. Also contributing to the
decreased yield on earning assets was an increase in investment securities
(which generally have lower yields than loans). Reference is made to the
"Balance Sheet Analysis" section in this discussion for additional information
on earning assets.
The lower rate paid on deposits contributed to the decrease in the
average rate paid on interest-bearing liabilities in 1999 (40 basis points lower
for second quarter and 43 basis points lower for the six-month period). Average
rates paid on interest-bearing deposits declined (46 basis points lower for
second quarter and 47 basis points lower for the six-month period) primarily due
to the general decline in market rates and the impact of First American's
pricing actions. Although average deposits increased, additional borrowings were
needed to fund the increased volume of earning assets thus contributing to the
decrease in the net interest margin (26 basis points lower for second quarter
and 24 basis points lower for the six-month period). Reference is made to the
captions "Core Deposits" and "Borrowed Funds" for additional information,
including First American's funding strategy.
14
15
TABLE 2: CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT
INCOME/EXPENSE AND YIELDS/RATES
=============================================================================================================================
Three Months Ended June 30
---------------------------------------------------------------------------
1999 1998
--------------------------------------- ----------------------------------
AVERAGE Average
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
(dollars in thousands) BALANCE EXPENSE RATE Balance Expense Rate
------------ ------------ ---- ----------- -------- ----
Interest-earning assets:(1)
Taxable securities:
Held to maturity $ 2,470,617 $ 38,822 6.30% $ 960,323 $ 15,369 6.42%
Available for sale 3,994,008 61,408 6.17 3,864,784 66,756 6.93
Tax-exempt securities
Held to maturity 52,499 1,058 8.08 41,693 809 7.78
Available for sale 291,953 5,028 6.91 273,995 5,233 7.66
------------ ------------ ---- ----------- -------- ----
Total securities 6,809,077 106,316 6.26 5,140,795 88,167 6.88
Federal funds sold and repurchase agreements 65,261 939 5.77 85,443 1,440 6.76
Mortgage loans held for sale 104,695 1,496 5.73 214,281 3,450 6.46
Loans, net of unearned discount
Commercial 5,732,558 116,550 8.15 4,707,083 99,395 8.47
Consumer-amortizing mortgages 1,742,819 36,603 8.42 2,275,575 46,643 8.22
Consumer-other 2,714,090 58,264 8.61 2,663,976 60,478 9.11
Real estate-construction 482,087 9,756 8.12 483,672 9,899 8.21
Real estate-commercial mortgages
and other 988,629 19,742 8.01 1,501,408 33,590 8.97
------------ ------------ ---- ----------- -------- ----
Loans, net of unearned discount 11,660,183 240,915 8.29 11,631,714 250,005 8.62
Other 87,227 1,207 5.55 77,333 1,268 6.58
------------ ------------ ---- ----------- -------- ----
Total earning assets(1) 18,726,443 $ 350,873 7.52% 17,149,566 $344,330 8.05%
Allowance for loan losses (188,886) (192,319)
Cash and due from banks 956,545 913,127
Other assets 1,166,967 1,008,700
------------ ------------ ---- ----------- -------- ----
Total assets 20,661,069 $18,879,074
============ ============ ==== =========== ======== ====
Deposits and borrowed funds:
Demand deposits $ 2,706,493 $ 2,735,226
Interest-bearing deposits:
NOW accounts 2,569,575 $ 14,051 2.19% 2,320,345 $ 11,503 1.99%
Money market accounts 2,255,113 16,961 3.02 2,773,721 29,503 4.27
Regular savings 1,173,278 7,554 2.58 951,340 5,448 2.30
Certificates of deposit under $100,000 2,802,473 34,270 4.90 3,047,093 39,760 5.23
Certificates of deposit $100,000 and over 1,883,433 22,600 4.81 1,495,840 20,725 5.56
Other time 741,931 9,435 5.10 753,323 10,303 5.49
Foreign 332,750 3,610 4.35 124,886 1,598 5.13
------------ ------------ ---- ----------- -------- ----
Total interest-bearing deposits 11,758,553 108,481 3.70 11,466,548 118,840 4.16
------------ ------------ ---- ----------- -------- ----
Total deposits 14,465,046 14,201,774
Federal funds purchased and repurchase
agreements 2,439,898 28,108 4.62 1,908,217 23,862 5.02
Other short-term borrowings 349,356 4,515 5.18 341,775 4,825 5.66
Long-term debt 1,271,598 17,267 5.45 538,197 9,460 7.05
------------ ------------ ---- ----------- -------- ----
Total interest-bearing deposits and
borrowed funds 15,819,405 $ 158,371 4.02% 14,254,737 $156,987 4.42%
------------ ------------ ---- ----------- -------- ----
Total deposits and borrowed funds 18,525,898 16,989,963
Other liabilities 290,647 235,949
Shareholders' equity 1,844,524 1,653,162
------------ ------------ ---- ----------- -------- ----
Total liabilities and shareholders' equity $ 20,661,069 $18,879,074
============ ============ ==== =========== ======== ====
Net interest income(1) $ 192,502 $187,343
Provision for loan losses 11,089 6,337
Noninterest income 125,891 124,441
Noninterest expense 212,500 261,628
------------ ------------ ---- ----------- -------- ----
Income before income tax expense 94,804 43,819
Income tax expense 37,470 22,131
------------ ------------ ---- ----------- -------- ----
Net income $ 57,334 $ 21,688
============ ============ ==== =========== ======== ====
Net interest spread 3.50% 3.63%
Benefit of interest-free funding .62 .75
------------ ------------ ---- ----------- -------- ----
Net interest margin 4.12% 4.38%
============ ============ ==== =========== ======== ====
(1) Yields/rates and income/expense amounts are presented on a fully
taxable equivalent basis based on the statutory federal income tax
rates, adjusted for applicable state income taxes net of the related
federal tax benefit; related interest income includes taxable
equivalent adjustments of $5.1 million in the three months ended June
30, 1999 and $4.9 million in three months ended June 30, 1998.
Nonaccrual loans are included in average loans and average earning
assets. Consequently, yields on those items are lower than they would
have been if these loans had earned at their contractual rates of
interest. Yields on all securities are computed based on carrying
value. Loan fees considered an integral part of the lending function
are included in rates and related interest categories.
15
16
TABLE 3: CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT
INCOME/EXPENSE AND YIELDS/RATES
- -========================================================================================================================
Year-to-Date June 30
-------------------------------------------------------------------
1999 1998
------------------------------------ ----------------------------
AVERAGE Average
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
(dollars in thousands) BALANCE EXPENSE RATE Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:(1)
Taxable securities:
Held to maturity $ 2,223,662 $ 71,123 6.45% $ 810,975 $ 26,113 6.49%
Available for sale 3,981,205 124,291 6.30 3,653,348 126,372 6.98
Tax-exempt securities
Held to maturity 48,204 1,951 8.16 40,226 1,524 7.64
Available for sale 331,704 11,573 7.04 265,781 10,137 7.69
- -------------------------------------------------------------------------------------------------------------------------
Total securities 6,584,775 208,938 6.40 4,770,330 164,146 6.94
Federal funds sold and repurchase agreements 149,292 2,627 3.55 104,954 3,166 6.08
Mortgage loans held for sale 141,327 4,143 5.91 180,910 6,242 6.96
Loans, net of unearned discount
Commercial 5,602,077 224,718 8.09 4,662,811 194,948 8.43
Consumer-amortizing mortgages 1,754,160 73,413 8.44 2,562,262 104,408 8.22
Consumer-other 2,707,758 115,352 8.59 2,647,250 120,922 9.21
Real estate-construction 467,863 18,841 8.12 482,759 19,767 8.26
Real estate-commercial mortgages
and other 1,006,827 41,851 8.38 1,493,346 66,250 8.95
- -------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount 11,538,685 474,175 8.29 11,848,428 506,295 8.62
Other 131,874 3,479 5.32 76,065 2,502 6.63
- -------------------------------------------------------------------------------------------------------------------------
Total earning assets(1) 18,545,953 $ 693,362 7.54% 16,980,687 $682,351 8.10%
Allowance for loan losses (193,035) (190,245)
Cash and due from banks 981,449 920,102
Other assets 1,127,094 1,015,856
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 20,461,461 $18,726,400
=========================================================================================================================
Deposits and borrowed funds:
Demand deposits $ 2,763,267 $ 2,695,868
Interest-bearing deposits:
NOW accounts 2,556,061 $ 27,359 2.16% 2,222,738 $ 21,606 1.96%
Money market accounts 2,411,090 36,159 3.02 2,834,435 60,533 4.31
Regular savings 1,110,134 13,613 2.47 954,975 11,279 2.38
Certificates of deposit under $100,000 2,843,649 69,903 4.96 3,079,436 80,460 5.27
Certificates of deposit $100,000 and over 1,777,158 44,745 5.08 1,445,585 39,558 5.52
Other time 774,519 19,081 4.97 752,889 20,646 5.53
Foreign 297,594 6,418 4.35 122,951 3,139 5.15
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 11,770,205 217,278 3.72 11,413,009 237,221 4.19
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 14,533,472 14,108,877
Federal funds purchased and repurchase
agreements 2,306,988 51,394 4.49 1,811,556 44,928 5.00
Other short-term borrowings 280,166 7,065 5.09 336,399 9,502 5.70
Long-term debt 1,233,774 33,824 5.53 574,908 18,941 6.64
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits and
borrowed funds 15,591,133 $ 309,561 4.00% 14,135,872 $310,592 4.43%
- -------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowed funds 18,354,400 16,831,740
Other liabilities 296,164 256,374
Shareholders' equity 1,810,897 1,638,286
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity 20,461,461 $ 18,726,400
=========================================================================================================================
Net interest income(1) $ 383,801 $371,759
Provision for loan losses 20,323 13,275
Noninterest income 242,592 233,840
Noninterest expense 402,383 443,579
- -------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 203,687 148,745
Income tax expense 79,889 62,711
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 123,798 $ 86,034
=========================================================================================================================
Net interest spread 3.54% 3.67%
Benefit of interest-free funding .63 .74
- -------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.17% 4.41%
=========================================================================================================================
(1) Yields/rates and income/expense amounts are presented on a fully taxable
equivalent basis based on the statutory federal income tax rates,
adjusted for applicable state income taxes net of the related federal tax
benefit; related interest income includes taxable equivalent adjustments
of $10.6 million in six months ended June 30, 1999 and $8.9 million in
six months ended June 30, 1998. Nonaccrual loans are included in average
loans and average earning assets. Consequently, yields on those items are
lower than they would have been if these loans had earned at their
contractual rates of interest. Yields on all securities are computed
based on carrying value. Loan fees considered an integral part of the
lending function are included in rates and related interest categories.
16
17
TABLE 4: RATE-VOLUME RECAP
===================================================================================================================
THREE MONTHS ENDED JUNE 30, 1999 SIX MONTHS ENDED JUNE 30, 1999
VS. VS.
THREE MONTHS ENDED JUNE 30, 1998 SIX MONTHS ENDED JUNE 30, 1998
--------------------------------- ---------------------------------
TOTAL INCREASE (DECREASE)(1) TOTAL INCREASE (DECREASE)(1)
INCREASE DUE TO INCREASE DUE TO
-------------------- -------------------
(in millions) (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN INTEREST INCOME:
Securities:
Taxable
Held to maturity $ 23,453 $ 24,171 $ (718) $ 45,010 $ 45,488 $ (478)
Available for sale (5,348) 2,232 (7,580) (2,081) 11,341 (13,422)
Tax-exempt
Held to maturity 249 210 39 427 302 125
Available for sale (205) 343 (548) 1,436 2,514 (1,078)
-------- --------
Total securities 18,149 28,612 (10,463) 44,792 62,435 (17,643)
-------- --------
Loans, net of unearned discount (9,090) 612 (9,702) (32,120) (13,236) (18,884)
Mortgage loans held for sale (1,954) (1,764) (190) (2,099) (1,366) (733)
Federal funds sold and securities purchased
under agreements to resell (501) (340) (161) (539) 1,337 (1,876)
Other (61) 162 (223) 977 1,836 (859)
-------- --------
Total change in interest income 6,543 31,661 (25,118) 11,011 62,899 (51,888)
-------- --------
CHANGE IN INTEREST EXPENSE:
NOW accounts 2,548 1,236 1,312 5,753 3,240 2,513
Money market accounts (12,542) (5,516) (7,026) (24,374) (9,041) (15,333)
Regular savings 2,106 1,271 835 2,334 1,833 501
Certificates of deposit under $100,000 (5,490) (3,192) (2,298) (10,557) (6,161) (4,396)
Certificates of deposit $100,000 and greater 1,875 5,370 (3,495) 5,187 9,073 (3,886)
Other interest-bearing deposits 1,144 2,662 (1,518) 1,714 5,330 (3,616)
Short-term borrowings 3,936 6,875 (2,939) 4,029 11,129 (7,100)
Long-term debt 7,807 12,891 (5,084) 14,883 21,707 (6,824)
-------- --------
Total change in interest expense 1,384 17,232 (15,848) (1,031) 31,975 (33,006)
-------- --------
CHANGE IN NET INTEREST INCOME $ 5,159 14,429 (9,270) $ 12,042 30,924 (18,882)
=======================================================================================================================
(1) Amounts are adjusted to a fully taxable basis, based on the statutory
federal income tax rates, adjusted for applicable state income taxes
net of the related federal tax benefit. The effect of volume change is
computed by multiplying the change in volume by the prior year rate.
The effect of rate change is computed by multiplying the change in rate
by the prior period volume. Rate/volume change is computed by
multiplying the change in volume by the change in rate and included in
the rate change.
PROVISION FOR LOAN LOSSES
This topic is addressed under the caption, "Allowance and Provision for
Loan Losses."
NONINTEREST INCOME
Noninterest income remains a significant component of First American's
total revenues, comprising approximately 40 percent of total revenues for both
the quarters and six months ended June 30, 1999 and 1998.
For second quarter 1999, noninterest income totaled $125.9 million, up
$1.5 million or 1 percent from second quarter 1998. The largest increases came
from investment services income (up $2.6 million, or 6 percent) and trading
account revenue (up $2.9 million, or 137 percent). The increase in investment
services income was primarily attributable to retail brokerage commissions of
the Enterprises segment. Growth in investment services income is an indicator of
how First American is succeeding in implementing its strategy of transforming
from a bank to a financial services company. The higher trading account revenue
was primarily due to gains on terminations of recently purchased interest rate
swaps. These increases were partially offset by a $4.6 million, or 31 percent,
decrease in mortgage banking income, which reflected the larger volume of
mortgage loans processed in 1998 due to the low interest rate environment. Table
5 presents additional detail about the composition of noninterest income for the
quarter ended June 30, 1999 and 1998.
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For the six months ended June 30, 1999, noninterest income totaled $242.6
million, up $8.7 million, or 4 percent, from the same period in 1998. The
largest increase was in investment services income (up $8.6 million or 11
percent), which was primarily attributable to retail brokerage commissions of
the Enterprises segment. Another significant increase occurred in trading
account revenue (up $2.1 million or 51 percent), which was primarily due to
gains on terminations of recently purchased interest rate swaps. These increases
were partially offset by a $3.9 million, or 15 percent, decrease in mortgage
banking income, which reflected the larger volume of mortgage loans processed in
1998 due to the low interest rate environment. Table 5 presents additional
detail about the composition of noninterest income for the six months ended June
30, 1999 and 1998.
TABLE 5: NONINTEREST INCOME
====================================================================================================================
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------------------ ------------------------------------
1999 vs. 1998 1999 vs. 1998
--------------- ---------------
(dollars in thousands) 1999 1998 $ Change % 1999 1998 $ Change %
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Investment services income $ 45,691 $ 43,053 $ 2,638 6% $ 87,107 $ 78,473 $ 8,634 11%
Service charges on deposit accounts 32,467 32,500 (33) -- 63,851 61,963 1,888 3
Commissions and fees on fiduciary activities 9,951 10,566 (615) (6) 19,776 21,370 (1,594) (7)
Mortgage banking 10,255 14,873 (4,618) (31) 21,727 25,615 (3,888) (15)
Merchant discount fees 1,162 964 198 21 2,073 1,764 309 18
Net realized gain on sale of securities 2,225 1,466 759 52 4,564 3,151 1,413 45
Trading account revenue 4,974 2,102 2,872 137 6,114 4,059 2,055 51
Other:
Open-end credit fees 3,570 3,114 456 15 6,595 5,864 731 12
Other service fees 3,458 3,092 366 12 6,607 5,847 760 13
Insurance and acceptance commissions 1,440 1,593 (153) (10) 2,597 3,089 (492) (16)
Fees and service charges on letters of
credit 1,324 1,315 9 1 2,470 2,760 (290) (11)
Miscellaneous 9,374 9,803 (429) (4) 19,111 19,885 (774) (4)
-------- -------- ------- -------- -------- -------
Total other income 19,166 18,917 249 1 37,380 37,445 (65) --
-------- -------- ------- -------- -------- -------
Total noninterest income $125,891 $124,441 $ 1,450 1 $242,592 $233,840 $ 8,752 4
=================================================================================================================================
NONINTEREST EXPENSE
For second quarter 1999, total noninterest expense decreased $49.1
million, or 19 percent, compared to second quarter 1998. Total noninterest
expense includes merger-related charges, which decreased $47.3 million from
second quarter 1998. In 1999, second quarter merger-related charges totaled
$24.8 million compared to $72 million of merger-related charges for the same
period in 1998. Refer to Note 3 to the consolidated financial statements for a
discussion of the merger-related charges.
For second quarter 1999, noninterest expense excluding merger-related
charges decreased $1.9 million, or 1 percent, from second quarter 1998. The
largest decrease occurred in salaries and employee benefits ($3.8 million or 4
percent), due primarily to synergies achieved in connection with the 1998
mergers (the number of employees was down 6 percent at June 30, 1999 from a year
ago). This large decrease was partially offset by increases in equipment expense
(up $1.7 million) related to branch automation and by increases in systems and
processing expense (up $1.5 million) due to higher volumes. Table 6 presents
additional detail about the composition of noninterest expense for the quarter
ended June 30, 1999 and 1998.
For the six months ended June 30, 1999, total noninterest expense
decreased $41.2 million, or 9 percent, compared to the same period in 1998.
Total noninterest expense includes merger-related charges, which decreased $44
million from the first six months of 1998. In the first six months of 1999,
merger-related charges totaled $28 compared to $72 million of merger-related
charges for the first six months of 1998. Refer to Note 3 to the consolidated
financial statements for a discussion of the merger-related charges.
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For the first six months of 1999, noninterest expense excluding
merger-related charges increased $2.8 million, or 1 percent, from one year ago.
The largest increases occurred in (a) subscribers' commissions (up $4.8
million), directly related to the increase in brokerage activity income of the
Enterprises segment, (b) equipment expense (up $3.1 million) related to branch
automation, (c) communication expense (up $2.4 million) related to network
telecommunications and courier services, and (d) systems and processing expense
(up $1.8 million) due to higher volumes. These increases were partially offset
by a decrease in salaries and employee benefits ($5.9 million or 3 percent), due
primarily to synergies achieved in connection with the 1998 mergers (the number
of employees was down 6 percent at June 30, 1999 from a year ago). Table 6
presents additional detail about the composition of noninterest expense for the
six months ended June 30, 1999 and 1998.
TABLE 6: NONINTEREST EXPENSE
================================================================================================================================
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
--------------------------------------- ---------------------------------------------
1999 vs. 1998 1999 vs. 1998
---------------- ---------------
(dollars in thousands) 1999 1998 $ Change % 1999 1998 $ Change %
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits $ 85,071 $ 88,907 $ (3,836) (4)% $ 173,304 $ 179,243 $ (5,939) (3)%
Subscribers' commissions 27,477 26,787 690 3 51,772 46,977 4,795 10
Net occupancy 13,602 13,020 582 4 26,786 25,742 1,044 4
Equipment 13,860 12,137 1,723 14 27,170 24,098 3,072 13
Systems and processing 5,137 3,632 1,505 41 9,053 7,296 1,757 24
Communication 8,243 7,405 838 11 17,124 14,711 2,413 16
Marketing 4,650 5,294 (644) (12) 10,576 10,449 127 1
Supplies 3,062 3,024 38 1 5,873 6,388 (515) (8)
Goodwill amortization 4,490 4,405 85 2 8,994 8,810 184 2
Other:
Software 3,119 2,958 161 5 6,045 6,374 (329) (5)
Loan/credit 2,488 2,529 (41) (2) 5,166 4,521 645 14
Amortization of mortgage
servicing rights/impairment 3,056 3,321 (265) (8) 5,696 5,368 328 6
Noninterest deposit 2,484 1,829 655 36 5,107 3,566 1,541 43
Other real estate (income)
expense (266) (558) 292 (52) (1,096) (409) (687) 168
Professional fees 4,614 4,902 (288) (6) 7,961 8,422 (461) (5)
(Gain) loss on sale of
fixed assets (1,940) 483 (2,423) (512) (2,889) 589 (3,478) (590)
Miscellaneous taxes 1,785 2,216 (431) (19) 4,100 5,091 (991) (19)
Miscellaneous 6,803 7,294 (491) (7) 13,602 14,300 (698) (5)
--------- --------- -------- --------- --------- --------
Total other expense 22,143 24,974 (2,831) (11) 43,692 47,822 (4,130) (9)
--------- --------- -------- --------- --------- --------
Subtotal noninterest
expense 187,735 189,585 (1,850) (1) 374,344 371,536 2,808 1
Merger-related charges 24,765 72,043 (47,278) (66) 28,039 72,043 (44,004) (61)
--------- --------- -------- --------- --------- --------
Total noninterest
expense $ 212,500 $ 261,628 $(49,128) (19) $ 402,383 $ 443,579 $(41,196) (9)
==============================================================================================================================
INCOME TAXES
Income tax expense for the second quarter of 1999 was $32.4 million, or
36.1 percent of pretax income, versus $17.2 million, or 44.2 percent of pretax
income for the same period in 1998. The decrease in the effective tax rate for
second half 1999 compared to 1998 was attributable to a more favorable effective
state income tax rate in 1999 coupled with 1998 nondeductible merger-related
charges.
Income tax expense for the six months ended June 30, 1999 was $69.3
million, or 35.9 percent of pretax income, versus $53.8 million, or 38.5 percent
of pretax income, for the same period in 1998. The decrease in the effective tax
rate for the first half of 1999 compared to 1998 was primarily attributable to a
more favorable effective state income tax rate.
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO
Loans comprised the largest component of earning assets. Average loans
decreased $310 million, or 2.6 percent, from June 30, 1998 to June 30, 1999.
During 1998, First American
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securitized approximately $1.2 billion of mortgage loans, which were contributed
to a Real Estate Investment Trust established by First American of which
approximately $623 million was securitized between June 30, 1998, and June 30,
1999. Securitizations and retention result in a change in classification from
loans to securities on the balance sheet and affect the growth rates of reported
loans and investment securities. Excluding the effect of securitizations,
participations, divestitures, and business combinations except Deposit Guaranty
and Pioneer, average loans increased $344.5 million, or 3 percent, during the
first six months of 1999 compared with the same period in 1998. The increase was
primarily driven by increases in commercial loans.
In addition to the effect of divestitures and securitizations, loan
balances have been affected by unanticipated client attrition through first
quarter 1999 associated with operational and customer issues, which resulted
from the integration of Deposit Guaranty. During second quarter 1999 service
quality was returning to normalized levels, and First American is continuing to
focus on retaining clients, providing historical levels of customer service, and
generating new business.
INVESTMENT SECURITIES PORTFOLIO
The securities portfolio is the second largest component of earning
assets, representing 35 percent of average earning assets during the first six
months of 1999 compared with 28 percent during the first six months of 1998. The
increase in the investment securities portfolio between the first six months of
1998 and 1999 was primarily attributable to two factors: (1) the securitization
and retention of mortgage loans and (2) the strategic increase in the portfolio.
Excluding the effects of the securitizations, average investment securities
increased 18 percent for the first six months of 1999 compared with the same
period in 1998.
DEPOSITS
Average total deposits increased $425 million, or 3 percent, from June
30, 1998 to June 30, 1999. Excluding the effect of business combinations except
Deposit Guaranty and Pioneer and divestitures, average total deposits for the
first six months of 1999 were essentially level with the first six months of
1998.
Core deposits are First American's primary source of funding and consist
of total deposits less certificates of deposit $100,000 and over and foreign
deposits. Average core deposits for the first six months of 1999 compared with
the same period in 1998 were essentially level.
As shown in Table 7, decreases in money market accounts and certificates
of deposit less than $100,000 were the primary types of core deposits that
decreased in the first six months of 1999 compared with the same period in 1998.
Reductions in balances of core deposits reflect an overall industry trend of
funds moving out of traditional deposits into higher yielding alternative
investment products, as well as some now-improving service quality issues
associated with the Deposit Guaranty integration. Programs currently in place to
increase core funding include the offering of updated products, such as the
First American Platinum Account, High Yield Savings Account, and the Select
Rewards Program. First American has responded to the service quality issues by:
(1) offering a "5-Minute Guarantee" to clients (i.e., clients receive $5 if not
served within five minutes while in a teller line), (2) specialized service
training, (3) balancing retention with new sales in the retail incentive
compensation plans, and (4) adding a senior service executive to the retail bank
organization. First American is responding to the overall industry trend to
invest in alternative products with its ISG Funds, which is made up of 16
individual mutual funds and 5 additional tailored "fund-of-funds." First
American believes that continued flexibility and innovation will be required of
financial services companies to attract future funding.
First American's core deposits are expected to increase at a slower pace
than loans during the remainder of 1999.
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TABLE 7: AVERAGE CORE DEPOSITS AND BORROWED FUNDS
===============================================================================================================
Year-to-Date Year-to-Date June 30, 1999 vs.
June 30, 1999 June 30, 1998 June 30, 1998
----------------- ----------------- ------------------
(dollars in millions) Amount % $ Change % $ Change %
- ---------------------------------------------------------------------------------------------------------------
Demand deposits (noninterest bearing) $ 2,763.3 15% $ 2,695.9 16% $ 67.4 3%
NOW accounts 2,556.1 14 2,222.7 13 333.4 15
Money market account 2,411.1 13 2,834.4 17 (423.3) (15)
Regular savings 1,110.1 6 955.0 6 155.1 16
Certificates of deposit under $100,000 2,843.6 16 3,079.4 18 (235.8) (8)
Other time deposits 774.5 4 752.9 5 21.6 3
--------- --------- --------
Total core deposits 12,458.7 68 12,540.3 75 (81.6) (1)
--------- --------- --------
Certificates of deposit $100,000
and over 1,777.2 10 1,445.6 8 331.6 23
Foreign 297.6 1 123.0 1 174.6 142
--------- --------- --------
Total deposits 14,533.5 79 14,108.9 84 424.6 3
--------- --------- --------
Short-term borrowings:
Federal funds purchased and
repurchase agreements 2,307.0 13 1,811.5 11 495.5 27
FHLB advances 209.6 1 240.6 1 (31.0) (13)
Other 70.5 -- 95.8 1 (25.3) (26)
--------- --------- --------
Total short-term borrowings 2,587.1 14 2,147.9 13 439.2 20
--------- --------- --------
Long-term debt:
Subordinated and senior notes 199.1 1 165.4 1 33.7 20
FHLB advances 1,031.6 6 407.0 2 624.6 153
Other 3.1 -- 2.5 -- .6 22
--------- --------- --------
Total long-term debt 1,233.8 7 574.9 3 658.9 115
--------- --------- --------
Total $18,354.4 100% $16,831.7 100% $1,522.7 9%
===========================================================================================================
BORROWED FUNDS
Between June 30, 1998 and June 30, 1999, First American placed more
reliance on borrowed funds, including certificates of deposit $100,000 and over,
and short- and long-term debt.
CAPITAL
First American's capital position remained strong during the first six
months of 1999. The ratio of average equity to average assets was 8.85 percent
during the first six months of 1999, which compared to 8.75 percent during the
same period in 1998. The increases in shareholders' equity between June 30, 1998
and June 30, 1999, were primarily attributable to increases in comprehensive
income and issuance of shares for employee benefit plans offset by dividends
paid to shareholders. The "Consolidated Statements of Changes in Shareholders'
Equity" provide additional detail on the changes in shareholders' equity during
the first six months of 1999.
On July 15, 1999, First American's Board of Directors approved a
quarterly cash dividend of $.28 per share on its common stock. This dividend
will be payable on August 31, 1999, to shareholders of record on August 13,
1999.
Federal regulators prescribe capital guidelines applicable to First
American and its bank and thrift subsidiaries, which as of June 30, 1999, are
classified as "well-capitalized," the highest regulatory capital rating. Table 8
summarizes the risk-based and related ratios for First American and its
principal subsidiary, FANB.
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TABLE 8: CAPITAL RATIOS (1)
====================================================================================================================
CORPORATION FIRST AMERICAN NATIONAL BANK
------------------------------------ --------------------------------------
JUNE 30 DECEMBER 31 JUNE 30 December 31
--------------------- ------------ ------------------------- ----------
1999 1998 1998 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------
Total risk-based capital ratio 11.65% 11.56% 12.16% 11.86% 11.63% 12.40%
Tier I risk-based capital ratio 9.91 9.63 10.25 10.73 10.38 11.15
Tier I leverage ratio 8.03 7.57 7.72 8.76 8.46 8.88
====================================================================================================================
(1) Risk-based capital ratios were computed using realized equity (total
shareholders' equity exclusive of net unrealized gains (losses) on
securities available for sale, net of tax).
CREDIT RISK MANAGEMENT
NONPERFORMING ASSETS
First American's asset quality remains strong as evidenced by its ratio
of nonperforming assets (excluding loans 90 days or more past due on accrual
status) to total loans and foreclosed properties of .41 percent at June 30,
1999, which is down from .48 percent at December 31, 1998, and up slightly from
.38 percent at June 30, 1998.
Nonperforming assets (excluding loans 90 days or more past due on accrual
status) totaled $50.3 million at June 30, 1999, down $4.7 million, or 8.5
percent, from year-end 1998 and up $6.8 million from June 30, 1998.
Note 4 to the consolidated financial statements presents the composition
of nonperforming assets and balances of loans contractually past due 90 days or
more as to interest or principal payments at June 30, 1999, December 31, 1998,
and June 30, 1998.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
As a financial services company which assumes lending and credit risks as
a principal element of its business, First American recognizes that credit
losses will be experienced in the normal course of business. Accordingly, First
American consistently applies a comprehensive methodology and procedural
discipline, which is updated on a quarterly basis at the subsidiary level to
determine the adequacy of the allowance for loan losses. The allowance for loan
losses is based on assessments of the probable estimated losses inherent in the
loan portfolio.
Table 9 provides an analysis of the changes in the allowance for the
first half of 1999 and 1998. The $8.9 million decrease in the allowance during
the first six months of 1999 from December 31, 1998, was primarily attributable
to a $7.9 million charge-off in the first quarter of 1999 in connection with a
commercial loan to a company doing business as a sub-prime lender that filed for
protection under federal bankruptcy laws.
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TABLE 9: ALLOWANCE FOR LOAN LOSSES
==================================================================================================
Six Months Ended June 30
------------------------
(dollars in thousands) 1999 1998
-------- --------
Balance at beginning of period $197,681 $187,880
Loans charged off:
Commercial 19,933(1) 6,427
Consumer--amortizing mortgages 1,099 1,413
Consumer--other 20,549 20,378
Real estate--construction 153 190
Real estate--commercial mortgages and other 351 162
-------- --------
Total charge-offs 42,085 28,570
-------- --------
Recoveries of loans previously charged off:
Commercial 5,748 3,850
Consumer--amortizing mortgages 278 601
Consumer--other 6,388 10,256
Real estate--construction 49 23
Real estate--commercial mortgages and other 405 647
-------- --------
Total recoveries 12,868 15,377
-------- --------
Net charge-offs 29,217 13,193
-------- --------
Provision charged to operating expenses 20,323 13,275
Net change due to business combination -- 1,317
-------- --------
Balance at end of period $188,787 $189,279
======== ========
Allowance to net loans, end of period 1.54% 1.63%
Allowance to nonperforming loans 451.76 529.78
Allowance to nonperforming assets 375.34 435.11%
Net charge-offs to average loans (annualized) .51 .22
Net charge-offs to average loans (annualized) excluding charge-off of
loan to sub-prime lender .37 .22
===================================================================================================
(1) Includes charge-off of $7,949 thousand of a loan to a sub-prime lender.
Excluding the effect of the first quarter charge-off to the sub-prime
lender, net charge-offs increased $8.1 million in the first half of 1999 over
the first half of 1998. The increase is primarily attributable to an increase in
losses charged off in the commercial loan portfolio.
MARKET RISK MANAGEMENT
INTEREST RATE SENSITIVITY
In the normal course of business, first American is exposed to market
risk arising from fluctuations in interest rates. First American's
asset/liability management team determines the appropriate amounts of
on-balance-sheet (e.g., loans, investment securities, deposits) and off-
balance-sheet items (e.g., interest rate swaps) to maintain consistent growth of
net interest income with acceptable levels of interest rate risk. Measurement
tools used to facilitate the management of interest rate risk include an
earnings simulation model, an economic value of equity model, and gap analysis
computations.
First American believes that interest rate risk is best measured by
earnings simulation modeling. Forecasted levels of earning assets,
interest-bearing liabilities, and off-balance-sheet financial instruments are
combined with the Asset/Liability Committee's ("ALCO's") forecast of interest
rates for the next 12 to 24 months and other factors in order to produce various
earnings simulations. To limit interest rate risk, First American has guidelines
for earnings at risk which state that net income should not vary by more than 8
percent for a 150 basis point change in rates from ALCO's most likely interest
rate forecast over the next twelve months. First American operated within these
parameters during the first six months of 1999 and in 1998.
First American's economic value of equity model measures the extent that
estimated economic values of assets, liabilities, and off-balance-sheet items
will change as a result of changes in interest rates. To help limit interest
rate risk, First American has a guideline stating that for an instantaneous 150
basis point change in interest rates, the economic value of equity will not
change by more than 20 percent from the base case. During the first six months
of 1999, First American operated within these limits.
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First American's interest rate sensitivity gap model measures the
difference between assets and liabilities repricing or maturing within specified
time periods. The net interest sensitivity position at June 30, 1999, was a
negative 33 percent (a net liability sensitive position) at a one-year repricing
horizon. A cumulative net liability sensitivity (negative amount) indicates that
net interest income has a tendency to increase if interest rates decline.
Although the gap model is a tool used to manage interest rate risk, the model is
limited in its usefulness because the gap position is a snapshot of interest
sensitivity for one point in time, whereas interest rate gap sensitivity can
change on a daily basis.
DERIVATIVE INSTRUMENTS
Derivative financial instruments are used by First American to improve
the balance between interest-sensitive assets and interest-sensitive
liabilities. First American uses derivatives as one means to manage its interest
rate sensitivity while continuing to meet the credit and deposit needs of
customers.
At June 30, 1999, First American held interest rate contracts with
notional values totaling $575 million and a net positive fair value (unrealized
net pre-tax gain) of $8 million. At June 30, 1998, First American held interest
rate contracts with notional values totaling $3.3 billion and a net positive
fair value (unrealized net pre-tax gain) of $12 million. All of these were
hedges of interest-bearing assets or liabilities, in conjunction with First
American's management of its exposure to changes in the interest rate
environment. The instruments utilized are noted in the following table, along
with their notional amounts and fair values at June 30, 1999 and 1998.
TABLE 10: DERIVATIVE INSTRUMENTS
Weighted
Weighted Average Rate Average
Related Variable Rate Notional ----------------------- Maturity Fair
(dollars in thousands) Asset/Liability Amount Paid Received Years Value
- ----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1999
Interest rate swaps Commercial loans $575,000 5.03%(2) 6.58%(2) 2.8 $ 7,927
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest rate contracts $575,000 $ 7,927
==================================================================================================================================
June 30, 1998
Interest rate swaps Money market deposits $ 150,000 5.97%(1) 5.69%(2) 1.6 $ (234)
Interest rate swaps Available for sale securities 100,000 5.54 (1) 5.67 (2) 4.6 234
Interest rate swaps Available for sale securities 50,000 5.78 (2) 5.46 (3) 3.3 (613)
Interest rate swaps Commercial loans 825,000 5.69 (2) 6.61 (2) 3.9 20,577
Interest rate swaps FHLB advances 85,000 6.33 (1) 5.70 (2) 6.2 (2,282)
Interest rate swaps Mortgage loans 20,482 6.65 (1) 5.70 (4) 9.1 (683)
Forward interest rate swaps Money market deposits 500,000 6.11 (1) 5.69 (2,5) 2.1 (938)
Forward interest rate swaps Available for sale securities 1,300,000 6.10 (1) N/A (2,6) 2.5 (4,888)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest rate swaps 3,030,482 11,173
Interest rate floors Commercial loans 250,000 N/A 5.45 (7) 2.9 1,119
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest rate contracts $ 3,280,482 $ 12,292
==================================================================================================================================
(1) Fixed rate.
(2) Variable rate which reprices quarterly based on 3-month LIBOR.
(3) Variable rate which reprices quarterly based on constant maturity
treasury index.
(4) Variable rate which reprices monthly based on 1-month LIBOR.
(5) Forward swap periods have become effective for $100 million and will
begin at various dates during 1998 and 1999 for $400 million. Variable
rates were unknown at June 30, 1998, for forward swaps which were not yet
effective.
(6) Forward swap periods begin at various dates during 1998 and 1999.
Variable rates were unknown at June 30, 1998, for forward swaps which
were not yet effective.
(7) Fixed rate strike price, based on 3-month LIBOR.
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 June 30, 1999, there were
$18.5 million of deferred net gains related to
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terminated derivatives contracts, and there were $1.7 million of deferred net
gains at June 30, 1998. Deferred gains and losses on off-balance-sheet
derivative activities are recognized as interest income or interest expense over
the original periods covered by the related hedge.
Net interest income for the first six months of 1999 included derivative
products pretax net expense of $.1 million, compared with $2.5 million for the
first six months of 1998. Although the stand-alone effect of First American's
derivative products on net interest income can vary, hedges are intended to
improve First American's overall exposure to changes in the interest rate
environment and, therefore, should not be evaluated on a stand-alone basis.
Credit risk exposure due to off-balance-sheet derivative activities is
closely monitored, and counterparties to these contracts are selected based on
their creditworthiness as well as their market-making ability. As of June 30,
1999, all outstanding derivative transactions were with counterparties with
credit ratings of A-2 or better. Enforceable bilateral netting contracts between
First American and its counterparties allow for the netting of gains and losses
in determining net credit exposure to the counterparty. First American's net
credit exposure on outstanding interest rate swaps was $9.3 million at June 30,
1999.
In June 1998 the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instrument and Hedging Activities," which now
has an effective date of fiscal years beginning after June 15, 2000. SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. It requires an entity to recognize all derivatives
as either assets or liabilities in the statement of financial position and to
measure those instruments at fair value. Under certain conditions, a derivative
may be specifically designated as a fair value hedge or a cash flow hedge. The
accounting for changes in the fair value of a derivative will depend on the
intended use of the derivative and the resulting designation. At this time,
management has not fully evaluated the impact of SFAS No. 133. First American
will adopt SFAS No. 133 prospectively on January 1, 2001.
LIQUIDITY MANAGEMENT
The ALCO is responsible for ensuring that sufficient funds are available
to meet the demands of depositors, borrowers, and creditors. Liquid assets,
which include cash and cash equivalents (less Federal Reserve requirements),
time deposits with other banks, federal funds sold and securities purchased
under agreements to resell, mortgage loans held for sale, trading account
securities, and securities that are estimated to mature within one year,
amounted to:
- $1.17 billion, or 6 percent of earning assets, at June 30, 1999, versus
- $1.73 billion, or 9.5 percent of earning assets, at June 30, 1998.
The decrease in the ratio is primarily attributable to a decrease in the
balances of mortgage loans held for sale, securities maturing within one year,
and cash and due from banks, and a higher level of earning assets. In addition
to assets included in liquid assets, available-for-sale securities maturing
after one year, which can be sold to meet liquidity needs, had a balance of
$3.93 billion at June 30, 1999, compared to $4.57 billion one year earlier.
First American's liquidity is enhanced by a sizeable base of core
deposits. Additional funds can be raised from regional, national, and
international money markets as certificates of deposit $100,000 and over,
federal funds purchased, and securities sold under agreements to repurchase. As
shown in Table 11 and discussed under the captions, "Core Deposits" and
"Borrowed Funds," First American has increased its reliance on noncore
interest-bearing liabilities to fund earning assets.
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TABLE 11: LIQUIDITY RATIOS
=================================================================================================
Six Months Ended June 30 Year Ended
--------------------------- December 31,
1999 1998 1998
- -------------------------------------------------------------------------------------------------
Average core deposits to average total deposits 85.72% 88.88% 88.08%
Average core deposits to average earning assets 67.18 73.85 71.70
Long-term debt to total assets (end of period) 8.30 3.04 5.56
=================================================================================================
An additional source of liquidity is First American's three-year $100
million revolving credit agreement. The credit facility agreement expires in
July 2001. First American had no borrowings under the credit agreement facility
in 1999.
YEAR 2000 READINESS DISCLOSURE
The term "Year 2000 issue" refers to the necessity of converting
computer/microprocessor-controlled information systems so that such systems
recognize four digits to identify a year in any given date field and are able to
differentiate between years in the twentieth and twenty-first centuries (e.g.,
1900 and 2000). First American continued to make progress towards Year 2000
readiness during the second quarter of 1999.
To address the Year 2000 issue in 1997, First American adopted a
broad-based approach designed to encompass its total environment. A project
manager and a project team comprised of managers from various areas were
appointed. A Steering Committee made up of senior management provides direction
to the team and the team has been responsible for evaluating Year 2000 impact on
products and systems, developing a plan for bringing those products and systems
to Year 2000 ready levels, and testing or verifying that readiness. The team has
used a 5-phase approach comprised of awareness, assessment, remediation,
validation, and implementation phases. Areas of risk addressed by the project
team include:
- Business Systems Applications;
- Technical Infrastructure;
- Credit Administration;
- Facilities Systems; and
- Vendor and Third Party Assessment.
Beginning in 1999, testing validation of mission critical business
systems and applications identified during the assessment process was a key
focus area. By the end of the first quarter, remediation of mission critical
applications was 100 percent complete. Early in the second quarter,
recertification of internal testing processes for mission critical systems was
also complete. Testing with non-mission critical systems vendors, third-party
service providers, and customers will continue throughout 1999.
During the second quarter of 1999, the major emphasis for the project
revolved around cash and liquidity planning, contingency planning, "clean
management" (as defined below), communications, and completion of testing the
non-mission critical and third party supported systems. Continued emphasis was
placed on ensuring that remediated mission critical systems are functioning
properly in First American's production environment.
Other areas of emphasis in 1999 include updated risk assessments of
corporate borrowers, facilities' remediation and testing, and the development of
a plan to maintain the Year 2000 readiness of systems previously remediated.
With respect to credit issues, First American continues to monitor large
borrower relationships, focusing on those considered "high risk" (defined as
corporate borrowers with loans of $10 million or greater). An update of the
original Year 2000 evaluation of all "high risk" borrowers, which was conducted
in 1998, is complete. For the remainder of 1999, First American intends to
update the evaluations of these borrowers on a periodic basis. Significant
progress has also been made in the area of facilities management, and all of
First American's multi-tenant facilities have now been remediated and
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tested for Year 2000 readiness. Also, the development of a plan to control
changes to First American's systems environment began in the first quarter. As a
result, it is anticipated that a general moratorium on changes made to FANB's
systems will be implemented in the fourth quarter to preserve the Year 2000
ready environment. Additionally, First American has instituted a "clean
management" process, which facilitates the monitoring and approval of all
changes made to system applications pursuant to guidance issued by the Federal
Financial Institutions Examination Council ("FFIEC") to ensure that changes made
do not impact Year 2000-ready software code.
Contingency planning in anticipation of the Year 2000 issue was an area
of key focus in the second quarter. The event/contingency team's primary
objective is to develop plans addressing actions to be taken before, during and
after the event period. According to the FFIEC, "event planning" is a proactive
and detailed planning process that covers monitoring specific operations prior
to, during, and after January 1, 2000, detecting problems and resolving issues
related to whether and how to implement business resumption contingency plans,
and communicating with appropriate bank officials and customers. It also
involves personnel issues (e.g., vacation/leave policies, the availability of
subject matter experts) and communications issues (e.g., command centers,
internal and external notification procedures, call center scripts). Throughout
1999, First American's event/contingency planning team has been in the process
of developing detailed plans for each of these areas. This team is also
responsible for evaluating the existing contingency plans in place for the First
American's core processes and to modify them where necessary to satisfy
potential Year 2000 risks. The contingency planning process was completed during
the second quarter using a four phased approach approved by a committee of the
First American's Board of Directors. Third-party internal audit partners were
also involved in the review and approval of the process. Cross-functional
desktop testing of the plans for all defined core business processes was also
completed during the second quarter. Further live simulation testing of these
plans will be completed in the third quarter to ensure that involved
participants will know how to react and communicate in a timely manner to
minimize any potential customer impact.
It is anticipated that major focus for the third and fourth quarters of
1999 will be to revise and finalize the event planning process, continue with
both employee training and client communications, and monitor the clean
management process.
First American does not expect Year 2000 costs to exceed $5 million in
the aggregate, exclusive of any costs that might be associated with contingency
planning or implementation of contingency planning. External expenses are
estimated at $2.2 million. Internal allocation of existing staff is estimated to
total approximately $2.5 million.
First American's management believes its 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.
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PART I. FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information called for by this item is incorporated herein by
reference to the "Market Risk Management" caption of the
Management's Discussion and Analysis included as Item 2 of Part 1 of
this report and to the "Interest Rate Sensitivity" and "Derivatives"
subsections of Items 7 and 7A contained in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Legal proceedings are included in Note 8 to First American's
Consolidated Financial Statements for the six months ended June 30,
1999 included herein. See Part I, Item 1.
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of shareholders was held on April 15, 1999. At the
annual meeting, the shareholders voted on the election of directors.
A tabulation of votes is as follows:
Name For Abstain
---- --- -------
George M. Clark, III 93,133,912 3,096,724
Earnest W. Deavenport, Jr. 93,380,802 2,849,834
Warren A. Hood, Jr. 93,494,701 2,735,935
Martha R. Ingram 93,516,047 2,714,589
James R. Martin 93,499,405 2,731,231
John N. Palmer 93,525,581 2,705,055
E. B. Robinson, Jr. 93,457,198 2,773,438
Roscoe R. Robinson 93,355,906 2,874,730
J. Kelley Williams, Sr. 93,524,723 2,705,913
William S. Wire, II 93,512,387 2,718,249
The name of each other director whose term of office as a director
continued after the annual meeting is as follows: (until 2000
meeting) Dennis C. Bottorff, James A. Haslam, II, Walter G.
Knestrick, Robert A. McCabe, Jr., Celia A. Wallace, Toby S. Wilt;
(until 2001 meeting) Reginald D. Dickson, Gene C. Koonce, Dale W.
Polley, James F. Smith, Jr., Cal Turner, Jr., Ted H. Welch, and
David K. Wilson.
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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 three months ended March 31, 1998.
3.2 By-laws of the Registrant currently in effect as amended
September 17, 1998, are incorporated herein by reference to
Exhibit 3.2 of the Registrant's Form 10-Q for the nine months
ended September 30, 1998.
11 "Computation of Earnings per Common Share" is included in
Note 7 to the Consolidated Financial Statements for the six
months ended June 30, 1999, and June 30, 1998. See Part I,
Item 1.
15 Letter regarding unaudited interim financial
information from KPMG LLP, dated July 13, 1999,
included herein.
27.1 Financial Data Schedule for interim year-to-date period ended
June 30, 1999 included herein. (For SEC use only)
27.2 Restated Financial Data Schedule for interim year-to-date
period ended June 30, 1998, included herein. (For SEC use
only)
(b) Reports on Form 8-K
A report on Form 8-K dated May 31, 1999 was filed under Item 5
("Other Events") and Item 7 ("Financial Statements and Exhibits")
that includes as Exhibits:
4.1 Amendment, dated as of May 31, 1999, to Rights Agreement,
dated as of July 16, 1998, by and between First American
Corporation and First Chicago Trust Company of New York,
as Rights Agent.
99.1 Press Release issued June 1, 1999 which announced the
merger of First American Corporation with and into AmSouth
Bancorporation.
99.2 Analyst Presentation Materials dated June 1, 1999.
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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: August 10, 1999
-------------------------------------
/s/ Marvin J. Vannatta, Jr.
-------------------------------------------
Marvin J. Vannatta, Jr.
Executive Vice President and
Principal Accounting Officer
Date: August 10, 1999
-------------------------------------
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