<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
Amended Report
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: 25,429,901 as of July 31, 1995.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
FOR QUARTER ENDED JUNE 30, 1995
This section has been amended to provide additional disclosures in Notes 1 and
6 to the Consolidated Financial Statements.
2
<PAGE> 3
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $110,018 $ 84,664 $212,260 $162,975
Interest and dividends on securities 32,377 29,514 64,890 60,287
Interest on Federal funds sold and securities
purchased under agreements to resell 874 650 1,677 1,843
Interest on time deposits with other banks and other interest 404 246 755 541
---------------------------------------------------------------------------------------------------------------------
Total interest income 143,673 115,074 279,582 225,646
---------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 3,660 4,048 7,402 7,822
Money market accounts 19,979 14,002 38,099 26,503
Regular savings 1,978 2,484 4,104 4,938
Certificates of deposit under $100,000 15,123 10,316 28,425 20,358
Certificates of deposit $100,000 and over 8,166 3,580 13,323 6,341
Other time and foreign 5,365 3,654 10,053 7,461
---------------------------------------------------------------------------------------------------------------------
Total interest on deposits 54,271 38,084 101,406 73,423
---------------------------------------------------------------------------------------------------------------------
Interest on short-term borrowings 11,959 6,592 23,271 11,736
Interest on long-term debt 4,384 959 8,794 1,898
---------------------------------------------------------------------------------------------------------------------
Total interest expense 70,614 45,635 133,471 87,057
---------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 73,059 69,439 146,111 138,589
PROVISION FOR LOAN LOSSES (NOTE 3) - - - -
---------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 73,059 69,439 146,111 138,589
---------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 11,651 10,440 22,356 19,861
Commissions and fees on fiduciary activities 4,176 4,295 8,079 8,529
Investment services income and trading account revenue 2,301 2,526 5,134 5,178
Merchant discount fees 725 567 1,400 1,191
Net realized gain (loss) and write down on securities 337 117 354 (286)
Other income 6,306 6,146 12,378 13,253
---------------------------------------------------------------------------------------------------------------------
Total non-interest income 25,496 24,091 49,701 47,726
---------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 34,404 32,304 68,613 63,972
Net occupancy expense 5,241 5,078 10,485 10,491
Equipment expense 3,919 3,593 7,371 7,180
Systems and processing expense 2,804 2,399 5,256 5,818
FDIC insurance expense 3,181 3,126 6,372 6,225
Marketing expense 2,442 1,861 4,472 3,551
Communication expense 2,366 2,057 4,787 4,043
Supplies expense 1,352 1,308 2,826 2,634
Foreclosed properties expense (income), net (2,651) (222) (3,265) (998)
Other expenses 6,355 6,449 12,221 11,982
---------------------------------------------------------------------------------------------------------------------
Total non-interest expense 59,413 57,953 119,138 114,898
---------------------------------------------------------------------------------------------------------------------
Income before income tax expense 39,142 35,577 76,674 71,417
Income tax expense 14,576 13,517 28,190 27,417
---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 24,566 $ 22,060 $ 48,484 $ 44,000
=====================================================================================================================
PER COMMON SHARE:
Net income $ .95 $ .85 $ 1.87 $ 1.69
Cash dividends .25 .21 0.50 .42
=====================================================================================================================
Weighted average common shares outstanding 25,731 26,073 25,911 26,057
=====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
--------------------------- ------------
1995 1994 1994
----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 413,232 $ 368,630 $ 498,273
Time deposits with other banks 26,284 2,784 3,855
Securities:
Held to maturity (market value $1,462,105, $1,505,608 and
$1,410,504, respectively) 1,461,960 1,543,636 1,485,311
Available for sale (amortized cost $558,995, $420,096
and $685,880, respectively) 558,671 399,693 664,748
--------------------------------------------------------------------------------------------------------------------
Total securities 2,020,631 1,943,329 2,150,059
--------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under
agreements to resell 83,805 190,570 26,634
Trading account securities 29,224 8,969 8,617
Loans:
Commercial 2,529,817 2,012,696 2,280,702
Consumer--amortizing mortgages 1,205,861 1,088,193 1,136,768
Consumer--other 1,084,717 1,013,252 1,042,688
Real estate--construction 153,953 96,282 127,228
Real estate--commercial mortgages and other 311,395 314,352 282,856
--------------------------------------------------------------------------------------------------------------------
Total loans 5,285,743 4,524,775 4,870,242
Unearned discount and net deferred loan fees 5,463 7,070 6,932
--------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net deferred
loan fees 5,280,280 4,517,705 4,863,310
Allowance for possible loan losses (note 3) 126,575 136,745 127,148
--------------------------------------------------------------------------------------------------------------------
Total net loans 5,153,705 4,380,960 4,736,162
--------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 110,186 104,945 104,244
Foreclosed properties 9,256 15,953 9,607
Other assets 224,823 211,543 219,730
--------------------------------------------------------------------------------------------------------------------
Total assets $8,071,146 $7,227,683 $7,757,181
====================================================================================================================
LIABILITIES
Deposits:
Demand (non-interest-bearing) $1,121,110 $1,132,747 $1,243,863
NOW accounts 731,016 798,448 789,137
Money market accounts 1,777,154 1,471,116 1,590,164
Regular savings 332,312 428,164 392,089
Certificates of deposit under $100,000 1,160,728 1,113,602 1,122,848
Certificates of deposit $100,000 and over 632,467 374,875 355,221
Other time 297,502 315,378 307,439
Foreign 106,047 67,112 60,300
--------------------------------------------------------------------------------------------------------------------
Total deposits 6,158,336 5,701,442 5,861,061
--------------------------------------------------------------------------------------------------------------------
Short-term borrowings 819,993 807,958 929,840
Long-term debt 251,637 52,382 252,067
Other liabilities 203,124 84,843 97,517
--------------------------------------------------------------------------------------------------------------------
Total liabilities 7,433,090 6,646,625 7,140,485
--------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $5 par value; authorized 50,000,000
shares; issued: 25,426,355 shares at June 30, 1995;
26,094,370 shares at June 30, 1994 and 26,144,846
shares at December 31, 1994 127,132 130,472 130,724
Capital surplus 96,223 118,890 119,549
Retained earnings 416,898 346,698 381,408
Deferred compensation on restricted stock (1,696) (1,963) (1,629)
--------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 638,557 594,097 630,052
Net unrealized gains (losses) on securities available
for sale, net of tax (501) (13,039) (13,356)
--------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 638,056 581,058 616,696
--------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $8,071,146 $7,227,683 $7,757,181
====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
DEFERRED GAINS
COMPENSATION (LOSSES)
ON ON SECURITIES
SIX MONTHS ENDED JUNE 30, 1994, AND COMMON CAPITAL RETAINED RESTRICTED AVAILABLE
JUNE 30, 1995 STOCK SURPLUS EARNINGS STOCK FOR SALE TOTAL
--------- --------- -------- ----------- --------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $129,941 $117,015 $313,644 $ (940) $ 22,049 $581,709
Issuance of 60,969 common shares in
connection with Employee Benefit Plan, net
of discount on Dividend Reinvestment Plan 305 728 - - - 1,033
Issuance of 45,200 shares of restricted common
stock 226 1,147 - (1,373) - -
Amortization of deferred compensation on
restricted stock - - - 350 - 350
Net income - - 44,000 - - 44,000
Cash dividends declared ($.42 per common
share) - - (10,946) - - (10,946)
Change in net unrealized gains and losses on
securities available for sale, net of taxes - - - - (35,088) (35,088)
--------------------------------------------------------------------------------------------------------------------
Balance June 30, 1994 $130,472 $118,890 $346,698 $ (1,963) $(13,039) $581,058
====================================================================================================================
Balance, January 1, 1995 $130,724 $119,549 $381,408 $ (1,629) $(13,356) $616,696
Issuance of 185,432 common shares in
connection with Employee Benefit Plan, net
of discount on Dividend Reinvestment Plan 927 3,049 - - - 3,976
Issuance of 15,077 shares of restricted common
stock 76 414 - (490) - -
Repurchase of 919,000 shares of common stock (4,595) (26,789) - - - (31,384)
Amortization of deferred compensation on
restricted stock - - - 423 - 423
Net income - - 48,484 - - 48,484
Cash dividends declared ($.50 per common
share) - - (12,994) - - (12,994)
Change in net unrealized gains and losses on
securities available for sale, net of taxes - - - - 12,855 12,855
--------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 $127,132 $ 96,223 $416,898 $ (1,696) $ (501) $638,056
====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Operating Activities
Net income $ 48,484 $ 44,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses - -
Depreciation of premises and equipment 6,522 6,786
Amortization of intangible assets 1,715 1,659
Other amortization (accretion), net (3,905) (107)
Deferred income tax expense (benefit) 4,966 (1,329)
Net realized (gain) loss and write down on securities (354) 286
Net (gain) loss on sales of premises and equipment (12) (172)
Change in assets and liabilities, net of effects from purchase
of bank subsidiary:
(Increase) decrease in accrued interest receivable (4,807) (2,819)
Increase (decrease) in accrued interest payable 4,903 5,736
(Increase) decrease in trading account securities (20,607) 3,294
(Increase) decrease in other assets (14,813) (29,559)
Increase (decrease) in other liabilities 100,703 (14,509)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 122,795 13,266
---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net increase in time deposits with other banks (22,429) (589)
Proceeds from sales of securities available for sale 489,921 1,304,215
Proceeds from maturities of securities available for sale 8,859 118,526
Purchases of securities available for sale (368,379) (681,178)
Proceeds from maturities of securities held to maturity 110,186 91,112
Purchases of securities held to maturity (85,408) (774,363)
Net increase in Federal funds sold and securities
purchased under agreements to resell (57,171) (45,785)
Net (increase) decrease in loans (417,543) (140,332)
Purchase of bank subsidiary, net of cash acquired - (1,784)
Proceeds from sales of premises and equipment 137 784
Purchases of premises and equipment (12,589) (8,755)
---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (354,416) (138,149)
---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 297,275 (34,129)
Net increase (decrease) in short-term borrowings (109,847) 51,195
Redemption of 7 5/8% debentures at 101.22% - (13,759)
Net repayment of long-term debt (446) -
Net proceeds from issuance of common stock 3,976 1,033
Cash dividends paid (12,994) (10,946)
Repurchase of common stock (31,384) -
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 146,580 (6,606)
---------------------------------------------------------------------------------------------------------------------
Decrease in cash and due from banks (85,041) (131,489)
Cash and due from banks, January 1 498,273 500,119
---------------------------------------------------------------------------------------------------------------------
Cash and due from banks, June 30 $ 413,232 $ 368,630
=====================================================================================================================
Cash paid during the period for:
Interest expense $ 128,568 $ 81,157
Income taxes 13,416 31,453
Noncash investing activities:
Foreclosures 713 1,053
Securities transferred to held to maturity from
available for sale - 203,764
---------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and general practices within the
banking industry.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
presented in the Corporation's 1994 Annual Report to Shareholders. The
quarterly consolidated financial statements reflect all adjustments which are,
in the opinion of management, necessary for a fair presentation of the results
for interim periods. All such adjustments are of a normal recurring nature.
Certain prior year amounts have been reclassified to conform with current year
presentation. The results for interim periods are not necessarily indicative
of results to be expected for the complete fiscal year.
(2) NONPERFORMING ASSETS
Nonperforming assets were as follows:
<TABLE>
<CAPTION>
JUNE 30 December 31
-------------------------------------------------------------------------------------------------------------
(in thousands) 1995 1994 1994
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans $15,045 $15,185 $11,510
Foreclosed properties 9,256 15,953 9,607
-------------------------------------------------------------------------------------------------------------
Total nonperforming assets $24,301 $31,138 $21,117
=============================================================================================================
90 days or more past due
on accrual $6,567 $ 2,658 $ 4,530
=============================================================================================================
Nonperforming assets as a percent of
loans and foreclosed properties .46% .69% .43%
=============================================================================================================
</TABLE>
(3) ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------------------------------------------------------------------------------------------------
(in thousands) 1995 1994
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $127,148 $134,124
Provision (credited) charged to operating expenses - -
Allowance of subsidiary purchased - 323
-------------------------------------------------------------------------------------------------------------
127,148 134,447
-------------------------------------------------------------------------------------------------------------
Loans charged off 7,517 7,105
Recoveries of loans previously charged off (6,944) (9,403)
-------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 573 (2,298)
-------------------------------------------------------------------------------------------------------------
Balance, June 30 $126,575 $136,745
=============================================================================================================
</TABLE>
Allowance ratios were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------------------------------------------------------------------------------------------
1995 1994
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance end of period to net loans outstanding 2.40% 3.03%
Net charge-offs (recoveries) to average loans (annualized) .02 (.11)
==========================================================================================================
</TABLE>
7
<PAGE> 8
(4) LONG-TERM DEBT
On January 31, 1994, the Corporation redeemed the remaining balance of
approximately $13.6 million of its 7 5/8% debentures due in 2002, at a price of
101.22%.
The Corporation borrowed $100 million from the Federal Home Loan Bank on
August 2, 1994, and $100 million on December 29, 1994. Each advance has a
maturity of three years and interest which is payable and reprices monthly
based on LIBOR. At June 30, 1995, the average interest rate on the $200
million was 6.11%.
(5) ACQUISITIONS
In May 1995, the Corporation signed a definitive merger agreement under
which all of the outstanding shares of Charter Federal Savings Bank (Charter)
will be exchanged for approximately 2.0 million shares of First American
Corporation common stock. Of the total Corporation shares to be exchanged in
the transaction, up to 100% will be repurchased in the open market. Charter is
a federal savings bank headquartered in Bristol, Virginia with $744.1 million
in assets at March 31, 1995, and 27 branches (eight in Knoxville, Tennessee;
five in Bristol, Tennessee and Bristol, Virginia; and 14 in other locations in
southwestern Virginia). The merger is expected to be completed during the
fourth quarter of 1995, subject to approval by regulatory authorities and a
vote of Charter's shareholders. The transaction is anticipated to be accounted
for as a purchase.
In February 1995, the Corporation signed a definitive merger agreement
under which all of the outstanding shares of Heritage Federal Bancshares, Inc.
(Heritage) will be exchanged for approximately 2.6 million shares of First
American Corporation common stock. Heritage is the holding company for
Heritage Federal Bank for Savings, a federal savings bank with $518.3 million
in assets at March 31, 1995, and 13 offices primarily in the East Tennessee
areas of Tri-Cities, Anderson County, and Roane County. The merger is expected
to be completed during the fourth quarter of 1995, subject to approval by
regulatory authorities and a vote of Heritage's shareholders. The transaction
is expected to be accounted for as a pooling of interests.
On April 1, 1994, the Corporation consummated its purchase of all of the
outstanding shares of Fidelity Crossville Corp. (FCC), the parent company of
First Fidelity Savings Bank, F.S.B. (First Fidelity) located in Crossville,
Tennessee, for $6.5 million. First Fidelity was a federal stock savings bank
with offices in Crossville and Fairfield Glade, Tennessee with total assets of
$48.7 million on March 31, 1994. In conjunction with the acquisition, First
Fidelity was merged into First American National Bank and First Fidelity's two
offices became branches of First American National Bank. The transaction was
accounted for as a purchase.
(6) ACCOUNTING MATTERS
During 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114 was amended in 1994 by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition
and Disclosures." These pronouncements apply to all loans except for large
groups of smaller-balance homogeneous loans that are collectively evaluated for
impairment including credit card, residential mortgage, and consumer
installment loans. The Statements also do not apply to loans that are measured
at fair value or the lower of cost or fair value, leases, and debt securities
as defined by SFAS No. 115.
A loan is impaired when it is probable that the Corporation will be unable
to collect the scheduled payments of principal and interest due under the
contractual terms of the loan agreement. Generally, impaired loans must be
measured at the present value of expected future cash flows discounted at the
loan's effective interest rate, at the loan's observable market price, or the
fair value of the collateral if the loan is collateral dependent. If the
measure of the impaired loan is less than the recorded investment in the loan,
a creditor shall recognize an impairment by creating a valuation allowance with
a corresponding charge to the provision for loan losses or by adjusting an
existing valuation allowance for the impaired loan with a corresponding charge
or credit to the provision for loan losses.
The Corporation adopted SFAS Nos. 114 and 118 effective January 1, 1995,
on a prospective basis. The adoption of the pronouncements had no material
impact on the Corporation's consolidated financial statements. The impact to
historical and current amounts related to in-substance foreclosures was not
material, and accordingly, historical amounts have not been restated.
8
<PAGE> 9
The Corporation's consumer loans are currently divided into various groups
of smaller-balance homogeneous loans that are collectively evaluated for
impairment and, thus, not subject to the provisions of SFAS Nos. 114 and 118.
Substantially all other loans of the Corporation are evaluated for impairment
under the provisions of SFAS Nos. 114 and 118. Most of the Corporation's
impaired loans are measured on a loan-by-loan basis.
The Corporation considers all loans on non-accrual status to be impaired.
Commercial loans are placed on non-accrual status when doubt as to timely
collection of principal or interest exists, or when principal or interest is
past due 90 days or more unless such loans are well-secured and in the process
of collection. Delays or shortfalls in loan payments are evaluated along with
various other factors to determine if a loan is impaired. Generally,
delinquencies under 90 days are considered insignificant unless certain other
factors are present which indicate impairment is probable. The decision to
place a loan on non-accrual status is also based on an evaluation of the
borrower's financial condition, collateral, liquidation value, and other
factors that affect the borrower's ability to pay.
Generally, at the time a loan is placed on non-accrual status, all
interest accrued and uncollected on the loan in the current fiscal year is
reversed from income, and all interest accrued and uncollected from the prior
year is charged off against the allowance for possible loan losses.
Thereafter, interest on non-accrual loans is recognized as interest income only
to the extent that cash is received and future collection of principal is not
in doubt. If the collectibility of outstanding principal is doubtful, such
interest received is applied as a reduction of principal. A non-accrual loan
may be restored to an accruing status when principal and interest are no longer
past due and unpaid and future collection of principal and interest on a timely
basis is not in doubt.
Loans not on non-accrual status are classified as impaired in certain
cases when there is inadequate protection by the current net worth and
financial capacity of the borrower or of the collateral pledged, if any. In
those cases, such loans have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt, and if such deficiencies are not
corrected, there is a probability that the Corporation will sustain some loss.
In such cases, interest income continues to accrue as long as the loan does not
meet the Corporation's criteria for non-accrual status.
Generally, the Corporation also classifies as impaired any loans whose
terms have been modified in a troubled debt restructuring after January 1,
1995. Interest is generally accrued on such loans that continue to meet the
modified terms of their loan agreements.
The Corporation's charge-off policy for impaired loans is similar to its
charge-off policy for all loans in that loans are charged off in the month when
they are considered uncollectible.
The impaired loans and related loan loss reserve amounts at June 30, 1995
follow:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1995
-------------------------------------------------------------------------------------------------------------
RECORDED
INVESTMENT
IN IMPAIRED LOAN LOSS
(in thousands) LOANS RESERVE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans with loan loss reserves $ 16,365 $ 4,199
Impaired loans with no loan loss reserves 15,352 -
-------------------------------------------------------------------------------------------------------------
Total $ 31,717 $ 4,199
=============================================================================================================
</TABLE>
The above loan loss reserves were primarily determined using the fair
value of the loans' collateral.
9
<PAGE> 10
The following details the average recorded investment in impaired loans
for the quarter and six months ended June 30, 1995, and the related total
amount of interest income recognized on the accrual and cash basis during those
periods that such loans were impaired.
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED
JUNE 30, 1995
-------------------------------------------------------------------------------------------------------------
SIX
(in thousands) QUARTER MONTHS
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Average recorded investment in impaired loans $ 25,957 $ 25,548
=============================================================================================================
Interest income recognized on impaired loans
Accrual basis $ 324 $ 490
Cash basis 44 93
-------------------------------------------------------------------------------------------------------------
Total $ 368 $ 583
=============================================================================================================
</TABLE>
During March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of,"
which must be adopted by the Corporation by January 1, 1996. SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. At this time the Corporation is evaluating when and how it
will adopt SFAS No. 121. Adoption of SFAS No. 121 is not expected to have a
material effect on the Corporation's consolidated financial statements.
During May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights--An Amendment of FASB Statement No. 65." SFAS No. 122 amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," to require
that rights to service mortgage loans for others be recognized as separate
assets, however those servicing rights are acquired. An enterprise that
acquires mortgage servicing rights through either the purchase or origination
of mortgage loans and sells or securitizes those loans with servicing rights
retained should allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values. SFAS No. 122 also requires that capitalized
mortgage servicing rights be assessed for impairment based on the fair value of
those rights. SFAS No. 122 must be adopted by the Corporation by January 1,
1996, and applies prospectively to transactions in which an enterprise sells or
securitizes mortgage loans with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing rights, including
those purchased before the adoption of SFAS 122. At this time the Corporation
is evaluating when and how it will adopt SFAS No. 122, as well as the possible
financial impact of the statement on the Corporation's consolidated financial
statements.
(7) EARNINGS PER COMMON SHARE
Earnings per common share amounts are computed by dividing net income by
the weighted average number of common shares outstanding during each respective
period.
(8) COMMON STOCK
The Corporation purchased 919,000 shares of First American Corporation
stock in the open market during the first six months of 1995 at a total cost of
$31.4 million. Under Tennessee law, such shares have been recognized as
authorized but unissued. Accordingly, the excess of the purchase price over
par has been reflected as a reduction from capital surplus.
10
<PAGE> 11
PART I. FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR QUARTER ENDED JUNE 30, 1995
This section has been amended to provide additional disclosures in the section
entitled FINANCIAL CONDITION.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the
consolidated financial statements appearing within this report. Reference
should also be made to First American Corporation's 1994 Annual Report for a
complete discussion of factors that impact results of operations, liquidity,
and capital.
OVERVIEW
Net income for the second quarter of 1995 was $24.6 million, or $.95 per
share compared with $22.1 million, or $.85 per share, for the second quarter of
1994. The $2.5 million increase in second quarter 1995 earnings compared to
the same time last year included a $3.6 million increase in net interest
income, a $1.4 million increase in non-interest income, and a $1.5 million
increase in non-interest expense. Return on average assets (ROA) and return on
average equity (ROE) were 1.26% and 15.36%, respectively.
Net income for the six months ended June 30, 1995, was $48.5 million, or
$1.87 per share compared with $44.0 million, or $1.69 per share, for the first
six months of 1994. The $4.5 million increase in earnings for the first six
months ended June 30, 1995, compared to the same time last year included a $7.5
million increase in net interest income, a $2.0 million increase in
non-interest income, and a $4.2 million increase in non-interest expense. ROA
and ROE were 1.27% and 15.29%, respectively.
In July 1995, First American signed a definitive merger agreement for
First City Bancorp, Inc. (First City) to merge with First American in a
transaction valued at approximately $51 million. Of the total First American
shares to be exchanged in the transaction, at least 80% are anticipated to be
repurchased in the open market. First City is a bank holding company which
operates First City Bank and Citizens Bank, both Tennessee state chartered
banks, and Tennessee Credit Corporation, a consumer finance company. As of
March 31, 1995, First City had $340 million in assets, 11 banking offices, and
nine consumer finance locations in the middle Tennessee area. The merger is
expected to be completed during the first quarter of 1996, subject to approval
by regulatory authorities and a vote of First City's shareholders. The
transaction is expected to be accounted for as a purchase.
In May 1995, First American signed a definitive merger agreement under
which all of the outstanding shares of Charter Federal Savings Bank (Charter)
will be exchanged for approximately 2.0 million shares of First American common
stock. Of the total First American shares to be exchanged in the transaction,
up to 100% are expected to be repurchased in the open market. Charter is a
federal savings bank headquartered in Bristol, Virginia with $744 million in
assets at March 31, 1995, and 27 branches (eight in Knoxville, Tennessee; five
in Bristol, Tennessee and Bristol, Virginia; and 14 in other locations in
southwestern Virginia). The merger is expected to be completed during the
fourth quarter of 1995, subject to approval by regulatory authorities and a
vote of Charter's shareholders. The transaction is anticipated to be accounted
for as a purchase.
In February 1995, First American signed a definitive merger agreement
under which all of the outstanding shares of Heritage Federal Bancshares, Inc.
(Heritage) will be exchanged for approximately 2.6 million shares of First
American common stock. Heritage is the holding company for Heritage Federal
Bank for Savings, a federal savings bank with $518 million in assets at March
31, 1995, and 13 offices primarily in the East Tennessee areas of Tri-Cities,
Anderson County, and Roane County. The merger is expected to be completed
during the fourth quarter of 1995, subject to approval by regulatory
authorities and a vote of Heritage's shareholders. The transaction is expected
to be accounted for as a pooling of interests.
On April 1, 1994, First American consummated its purchase of all of the
outstanding shares of Fidelity Crossville Corp. (FCC), the parent company of
First Fidelity Savings Bank, F.S.B.(First Fidelity) located in Crossville,
Tennessee, for $6.5 million. First Fidelity was a Federal stock savings bank
with offices in Crossville and Fairfield Glade, Tennessee, with total assets of
$48.7 million on March 31, 1994. In conjunction with the acquisition, First
Fidelity was merged into First American National Bank and First Fidelity's two
offices became branches of First American National Bank. The transaction was
accounted for as a purchase.
12
<PAGE> 13
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is First American's largest source of income and was
$73.9 million in the second quarter of 1995 on a taxable equivalent basis.
This was up $3.6 million, or 5%, from $70.3 million in the second quarter of
1994. For the six months ended June 30, 1995, net interest income on a taxable
equivalent basis increased $7.5 million, or 5%, to $147.8 million from $140.3
million in the first six months of 1994. Net interest income is the difference
between total interest income earned on loans, securities, and other earning
assets and total interest expense incurred on deposits and other
interest-bearing liabilities. Net interest income is affected by the volume
and mix of earning assets and interest-bearing liabilities and the
corresponding interest yields and costs.
Total interest income on a taxable equivalent basis amounted to $144.5
million for the second quarter of 1995, compared to $115.9 million for the
second quarter of 1994, an increase of $28.6 million, or 25%. Of the $28.6
million increase, $17.5 million resulted from an increase in average yields and
$11.1 million was due to a higher volume of earning assets (primarily loans).
The average yield on earning assets increased 98 basis points to 8.05% from
7.07%, primarily due to a higher interest rate environment in short-term
financial instruments in the second quarter of 1995 compared to the second
quarter of 1994. For example, the national prime lending rate and 1-year
treasury security yields averaged 9.00% and 5.97%, respectively, in the second
quarter of 1995 compared to 6.90% and 5.13%, respectively, in the second
quarter of 1994. Average earning assets rose $625.2 million, or 10%, to $7.20
billion. Average loans increased $654.1 million, or 15%, to $5.14 billion,
average securities declined $23.1 million to $1.97 billion, and average money
market investments dropped $5.8 million to $84.4 million.
Total interest income on a taxable equivalent basis amounted to $281.3
million for the six months ended June 30, 1995, compared to $227.4 million for
the comparable period in 1994, an increase of $53.9 million, or 24%. Of the
$53.9 million increase, $34.4 million resulted from an increase in average
yields and $19.5 million was due to a higher volume of earning assets
(primarily loans). The average yield on earning assets increased 98 basis
points to 8.00% from 7.02%, primarily due to a higher average interest rate
environment in the first six months of 1995 compared to the first six months of
1994. For example, the national prime lending rate and 5-year treasury
security yields averaged 8.92% and 6.90%, respectively, in the first six months
of 1995 compared to 6.46% and 6.08%, respectively, in the first six months of
1994. Average earning assets rose $559.2 million, or 9%, to $7.09 billion.
Average loans increased $625.6 million, or 14%, to $5.02 billion, average
securities declined $12.6 million to $1.98 billion, and average money market
investments dropped $53.7 million to $82.3 million.
Total interest expense in the second quarter of 1995 increased $25.0
million to $70.6 million from the second quarter of 1994. Of the increase,
$19.6 million was due to higher average interest rates paid on interest-bearing
funds and $5.4 million resulted from an increase in the volume of
interest-bearing liabilities. The average rate paid on interest-bearing
liabilities increased 131 basis points to 4.72% from 3.41%, reflecting a higher
interest rate environment for short-term financial instruments. For example,
the Federal funds rate averaged 6.02% in the second quarter of 1995 versus
3.94% in the second quarter of 1994. In the second quarter of 1995, average
interest-bearing liabilities grew $633.5 million, or 12%, to $6.01 billion from
$5.37 billion in the second quarter of 1994. Average interest-bearing deposits
increased $328.5 million, or 7%, to $4.90 billion, average short-term
borrowings rose $105.6 million, or 14%, to $855.9 million, and average
long-term debt increased $199.4 million, or 381%, to $251.7 million.
Total interest expense in the six months ended June 30, 1995, increased
$46.4 million to $133.5 million from the first six months of 1994. Of the
increase, $37.2 million was due to higher average interest rates paid on
interest-bearing funds and $9.2 million resulted from an increase in the
volume of interest-bearing liabilities. The average rate paid on
interest-bearing liabilities increased 128 basis points to 4.58% from 3.30%,
reflecting a higher average interest rate environment for the six months ended
June 30, 1995, compared to the first six months of 1994. For example, the
Federal funds rate averaged 5.92% in the first six months of 1995 versus 3.58%
in the six months ended June 30, 1994. In the first six months of 1995,
average interest-bearing liabilities grew $561.6 million, or 11%, to $5.88
billion from $5.32 billion in the first six months of 1994. Average
interest-bearing deposits increased $249.9 million, or 6%, to $4.78 billion,
average short-term borrowings rose $114.5 million, or 16%, to $851.8 million,
and average long-term debt increased $197.3 million, or 361%, to $251.9
million.
Net interest income in the second quarter of 1995 increased primarily as a
result of the increase in the volume of earning assets partially offset by a
lower net interest spread. Net interest spread is the difference between the
yield on earning assets and the rate paid on interest-bearing liabilities. For
the
13
<PAGE> 14
second quarter of 1995, First American's net interest spread declined 33 basis
points to 3.33% from 3.66% for the second quarter of 1994. This decline was
due primarily to a 131 basis point increase in the rates paid on
interest-bearing liabilities which exceeded the 98 basis point increase in
yields on earning assets. As the net interest spread declined, the net
interest margin, which is net interest income expressed as a percentage of
average earning assets, decreased to 4.12% for the second quarter of 1995 as
compared with 4.29% for the same quarter a year earlier.
Net interest income in the six months ended June 30, 1995, increased
primarily as a result of the increase in the volume of earning assets partially
offset by a lower net interest spread. For the first six months of 1995, First
American's net interest spread declined 30 basis points to 3.42% from 3.72% for
the six months ended June 30, 1994. This decline was due primarily to a 128
basis point increase in the rates paid on interest-bearing liabilities which
exceeded the 98 basis point increase in yields on earning assets. As the net
interest spread declined, the net interest margin, decreased to 4.20% for the
first six months of 1995 as compared with 4.33% for the same period a year
earlier.
PROVISION FOR LOAN LOSSES
This topic is addressed under the caption "Allowance and Provision for
Possible Loan Losses."
NON-INTEREST INCOME
Total non-interest income was $25.5 million for the second quarter of 1995
compared with $24.1 million for the second quarter of 1994, an increase of $1.4
million, or 6%. Non-interest income, excluding net gain (loss) and write-down
on securities, totalled $25.2 million in the second quarter of 1995, an
increase of $1.2 million, or 5%, from $24.0 million in the second quarter of
1994. The increase from the second quarter of 1994 is primarily due to a $1.2
million, or 12%, increase in service charges on deposit accounts resulting
principally from a 12% increase in the average number of retail deposit
accounts over the second quarter of 1994.
Total non-interest income was $49.7 million for the first six months of
1995 compared with $47.7 million for the six months ended June 30, 1994, an
increase of $2.0 million, or 4%. Non-interest income, excluding net gain
(loss) and write-down on securities, totalled $49.3 million, an increase of
$1.3 million, or 3%, from $48.0 million in the first six months of 1994. The
increase from the six months ended June 30, 1994, is primarily due to a $2.5
million, or 13%, increase in service charges on deposit accounts resulting
principally from an 11% increase in the average number of retail deposit
accounts and a $.9 million, or 7%, decline in other income.
NON-INTEREST EXPENSE
Total non-interest expense increased $1.5 million, or 3%, to $59.4 million
for the second quarter of 1995 compared with $58.0 million for the same period
in 1994. The increase is primarily attributable to higher salaries and
employee benefits ($2.1 million, a 7% increase) due to merit increases and
higher incentive compensation, increased marketing expense ($.6 million, a 31%
increase) due to several direct mail campaigns, and increases in several other
non-interest expense categories of under $.5 million each. These increases in
non-interest expense were partially offset by a $2.4 million increase in net
foreclosed properties income due principally to higher gains on the sales of
foreclosed properties. First American's operating efficiency ratio
(non-interest expense as a percentage of the sum of net interest income, on a
fully taxable basis, and non-interest income) equaled 59.8% in the second
quarter of 1995, down from 61.4% in the second quarter of 1994.
Total non-interest expense increased $4.2 million, or 4%, to $119.1
million for the first six months of 1995 compared with $114.9 million for the
same period in 1994. The increase is primarily attributable to higher salaries
and employee benefits ($4.6 million, a 7% increase), marketing expense ($.9
million, a 26% increase), and communication expense ($.7 million, an 18%
increase). These increases in non-interest expense were partially offset by
the increase in net foreclosed properties income ($2.3 million) and a decline
in systems and processing expense ($.6 million, a 10% decrease). Salaries and
employee benefits increased due to merit increases, incentive compensation, and
additional employees resulting from the March 1994 transfer of certain computer
programming functions to the Company and the April 1, 1994, acquisition of
First Fidelity. Marketing and communication expenses increased during the
first six months of 1995 primarily due to several direct mail campaigns
promoting the Company's new check card, a new consumer bank service called
"Loan by Phone," and several existing money market and checking account
products. Net foreclosed properties income increased principally due to higher
gains on the sales of
14
<PAGE> 15
foreclosed properties. Systems and processing expense declined due to
amendments in March 1994 to First American's agreement with an outside vendor
that provides data processing and telecommunication services. The agreement
was amended to transfer certain software programming functions to First
American which has resulted in cost reductions in systems and processing
expense and increases in other non-interest expense categories, such as
salaries and benefits. First American's operating efficiency ratio equaled
60.3% in the first six months of 1995 compared to 61.1% in the six months ended
June 30, 1994.
INCOME TAXES
During the second quarters of 1995 and 1994, First American's income tax
expense was $14.6 million and $13.5 million, respectively. The major factor
for the increase in income tax expense was the higher income before income
taxes.
During the first six months of 1995 and 1994, income tax expense totalled
$28.2 million and $27.4 million, respectively. The primary factor for the
increase in income tax expense was the increase in income before income taxes.
ASSET/LIABILITY MANAGEMENT
First American has utilized off-balance-sheet derivative products for a
number of years in managing its interest rate sensitivity. The use of
non-complex, non-leveraged derivative products has reduced the Company's
exposure to changes in the interest rate environment. By using derivative
products such as interest rate swaps and futures contracts to alter the nature
of (hedge) specific assets or liabilities on the balance sheet (for example to
change a variable to a fixed rate obligation), the derivative product offsets
fluctuations in net interest income from the otherwise unhedged position. In
other words, if net interest income from the otherwise unhedged position
changes (increases or decreases) by a given amount, the derivative product
should produce close to the opposite result, making the combined amount
(otherwise unhedged position impact plus the derivative product position
impact) essentially unchanged. Derivative products have enabled First American
to improve its balance between interest-sensitive assets and interest-sensitive
liabilities by managing interest rate sensitivity, while continuing to meet the
lending and deposit needs of its customers.
In conjunction with managing interest rate sensitivity, at June 30, 1995,
First American had derivatives with notional values totaling $1.84 billion.
These derivatives had a net negative fair value (unrealized net pre-tax loss)
of $3.9 million. Notional amounts are key elements of derivative financial
instrument agreements. However, notional amounts do not represent the amounts
exchanged by the parties to derivatives and do not measure First American's
exposure to credit or market risks. The amounts exchanged are based on the
notional amounts and the other terms of the underlying derivative agreements.
At June 30, 1994, First American had derivatives with notional values totaling
$1.7 billion. These derivatives had a net positive fair value (unrealized net
pre-tax gain) of $8.8 million at June 30, 1994. The instruments utilized are
noted in the following table along with their notional amounts and fair values
at June 30, 1995 and 1994.
<TABLE>
<CAPTION>
Weighted
Average
Weighted Average Rate Maturity
Related Variable Rate Notional --------------------- -------- Fair
(in thousands) Asset/Liability Amount Paid Receive Years Value
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JUNE 30, 1995
Interest rate swaps Money market deposits $ 650,000 5.91% (1) 6.19% (2) 1.4 $ 494
Interest rate swaps Long-term debt 200,000 7.11 (1) 6.11 (3) 1.3 (3,222)
Interest rate swaps Loans 200,000 6.22 (3) 7.39 (1) 3.9 9,133
Forward interest rate
swaps Money market deposits 650,000 7.81 (4) N/A (4) 1.4 (4) (9,549)
Futures contracts (5) Money market deposits 140,000 N/A N/A 1.4 (5) (727)
---------- -------
$1,840,000 $(3,871)
=======================================================================================================================
June 30, 1994
Interest rate swaps Money market deposits $ 800,000 4.97% (1) 4.24% (2) 1.2 $ 8,124
Interest rate swaps Loans 100,000 5.09 (3) 6.90 (1) 4.4 (239)
Basis swaps Held to maturity 200,000 5.06 (6) 4.25 (3) .8 (893)
securities
Forward interest rate
swaps Money market deposits 200,000 6.64 (7) N/A (7) 2.0 (7) 839
Futures contracts (8) Money market deposits 400,000 N/A N/A 1.9 (8) 967
---------- -------
$1,700,000 $ 8,798
=======================================================================================================================
</TABLE>
(1) Fixed rate.
15
<PAGE> 16
(2) Variable rate which reprices quarterly based on 3-month LIBOR except
for $25 million which reprices every 6 months based on 6-month LIBOR.
(3) Variable rate which reprices quarterly based on 3-month LIBOR.
(4) Forward swap periods began in June 1995 for $200 million and will
begin December 1995 for $450 million. The rates paid are fixed and
were set at the inception of the contracts. Variable rates are based
on 3-month LIBOR and were 5.95% for the contracts which began in June
1995, but are currently unknown on the contracts which begin in
December 1995 since they will not be established until the affected
periods begin.
(5) Represents $140 million short position of Eurodollar futures contracts
which in aggregate simulates a $35 million 2-year interest rate swap.
(6) Variable rate which reprices quarterly based on 5-year constant
meturity Treasury rate less a constant spread.
(7) Forward swap periods begin in June 1995. The rates to be paid are
fixed and were set at the inception of the contracts. Variable rates
are based on 3-month LIBOR but are currently unknown since they will
not be established until the affected periods begin.
(8) Represents $400 million short position of Eurodollar futures contracts
which in aggregate simulates a $100 million 2-year interest rate
swap.
Net interest income for the quarter ended June 30, 1995, was increased by
derivative products income of $1.3 million. Net interest income for the
quarter ended June 30, 1994, was decreased by $2.3 million derivative products
expense. Net interest income for the six months ended June 30, 1995, was
increased by derivative products income of $2.5 million. Net interest income
for the first six months of 1994 was decreased by $4.9 million of derivative
products expense.
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. Deferred gains related to
terminated derivatives contracts amounted to $3.5 million at June 30, 1995, and
$3.1 million at June 30, 1994. Deferred gains and losses on off-balance-sheet
derivative activities are recognized as interest income or interest expense
over the original covered periods.
Credit risk exposure due to off-balance-sheet hedging is closely
monitored, and counterparts to these contracts are selected on the basis of
their credit worthiness, as well as their market-making ability. As of June
30, 1995, all outstanding derivative transactions were with counterparts with
credit ratings of A-2 or better. Enforceable bilateral netting contracts
between First American and its counterparts allow for the netting of gains and
losses in determining net credit exposure. First American's net credit
exposure on outstanding derivatives was $6.8 million on June 30, 1995. Given
the credit standing of the counterparts to the derivative contracts, Management
believes that this credit exposure is reasonable in light of its objectives.
FINANCIAL CONDITION
ASSETS
Total assets of First American rose $843.5 million, or 12%, to $8.07
billion at June 30, 1995, compared to $7.22 billion one year earlier. The
growth in total assets is primarily due to the $762.6 million, or 17%, increase
in loans, net of unearned discount and net deferred loan fees, to $5.28 billion
at June 30, 1995, from $4.52 billion at June 30, 1994. Leading the growth in
loans were commercial loans, which increased $517.1 million, or 26%, over a
broad range of industry categories and consumer amortizing mortgages, which
increased $117.7 million, or 11%. Total assets at June 30, 1995, were $314.0
million, or 4%, higher than total assets of $7.76 billion at December 31, 1994.
The increase in total assets resulted primarily from a $417.0 million, or 9%,
increase in loans, net of unearned discount and net deferred loan fees, from
$4.86 billion of loans at December 31, 1994. The growth in loans was led by a
$249.1 million, or 11%, increase in commercial loans over a variety of industry
categories and consumer amortizing loans, which rose $69.1 million, or 6%, from
December 31, 1994. The increase in loan volume from June 30, 1994, to June 30,
1995, as well as from December 31, 1994, to June 30, 1995, reflects the
positive economic conditions in Tennessee and selected markets in adjacent
states and the success of First American's marketing programs.
ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSSES
Management's policy is to maintain the allowance for possible loan losses
at a level which is adequate to absorb estimated loan losses inherent in the
loan portfolio. The provision for loan losses is a charge (credit) to earnings
necessary, after loan charge-offs and recoveries, to maintain the allowance at
an appropriate level. Determining the appropriate level of the allowance and
the amount of the provision for loan losses involves uncertainties and matters
of judgment and therefore cannot be determined with precision.
16
<PAGE> 17
In order to maintain the allowance at an appropriate level, First
American's loan loss methodology produced no provision for loan losses during
the second quarters of 1995 and 1994 nor during the six month periods ended
June 30, 1995 and 1994. The primary factors leading to no provision for loan
losses in the second quarter and six months ended June 30, 1995, were favorable
net loan charge-off experience and a continuation of favorable asset quality
indicators discussed under the caption "Asset Quality." In the second quarters
of 1995 and 1994, gross charge-offs were $4.0 million and $4.6 million while
recoveries totalled $3.5 million and $3.9 million, respectively. Net
charge-offs were $.5 million in the second quarter of 1995 as compared to $.7
million in the second quarter of 1994. In the first six months of 1995 and
1994, gross charge-offs were $7.5 million and $7.1 million while recoveries
totalled $6.9 million and $9.4 million, respectively. Net charge-offs were $.6
million in the six months ended June 30, 1995, as compared to $2.3 million of
net recoveries in the six months ended June 30, 1994.
The allowance for possible loan losses was $126.6 million at June 30,
1995, compared with $136.7 million at June 30, 1994, and $127.1 million at
December 31, 1994. The allowance for possible loan losses represented 2.40%
and 3.03% of net loans at June 30, 1995 and 1994, respectively, and 2.61% at
December 31, 1994.
Effective January 1, 1995, First American adopted prospectively Statement
of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosure." These pronouncements
require that impaired loans be measured at the present value of expected future
cash flows discounted at the loan's effective interest rate, at the loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. First American's financial position and results of
operations were not materially impacted by the adoption of SFAS No. 114 and
SFAS No. 118.
ASSET QUALITY
First American's nonperforming assets were $24.3 million at June 30, 1995,
compared with $31.1 million at June 30, 1994, a decrease of 22%. Nonperforming
assets at June 30, 1995, were $3.2 million, or 15%, higher than the December
31, 1994 nonperforming asset balance of $21.1 million. Nonperforming assets
at June 30, 1995, represented .46% of total loans and foreclosed properties,
compared to .69% at June 30, 1994, and .43% at December 31, 1994. At June 30,
1995, nonperforming assets were comprised of $15.0 million of non-accrual loans
and $9.3 million of foreclosed properties.
Other potential problem loans consist of loans that are currently not
considered nonperforming but on which information about possible credit
problems has caused Management to doubt the ability of the borrowers to comply
fully with present repayment terms. At June 30, 1995, loans totalling
approximately $63 million, while not considered nonperforming loans, were
classified in First American's internal loan grading system as substandard or
worse, compared with approximately $80 million of such loans at June 30, 1994,
and approximately $75 million at December 31, 1994. Depending on the economy
and other factors, these loans and others, which may not be presently
identified, could become nonperforming assets in the future.
LIABILITIES
Total deposits were $6.16 billion at June 30, 1995, an increase of $456.9
million, or 8%, from $5.70 billion a year earlier. Core deposits, which are
defined as total deposits excluding certificates of deposit $100,000 and over
and foreign deposits, totalled $5.42 billion at June 30, 1995, and $5.26
billion at June 30, 1994, a 3% increase. Long-term debt increased $199.3
million from June 30, 1994, to a balance of $251.6 million at June 30, 1995,
due to two separate $100.0 million advances from the Federal Home Loan Bank
occurring on December 29, 1994, and August 2, 1994.
Total deposits at June 30, 1995, were $297.3 million, or 5%, higher than
total deposits of $5.86 billion at December 31, 1994. Core deposits at June
30, 1995, were $25.7 million lower than total core deposits of $5.45 billion at
December 31, 1994, while certificates of deposits of $100,000 and over
increased $277.2 million from $355.2 million at December 31, 1994, to $632.5
million at June 30, 1995.
CAPITAL POSITION
Total shareholders' equity was $638.1 million, or 7.91%, of total assets
at June 30, 1995, $581.1 million, or 8.04%, of total assets at June 30, 1994,
and $616.7 million, or 7.95% of total assets at
17
<PAGE> 18
December 31, 1994. Book value per share was $25.09 on June 30, 1995, $22.27 at
June 30, 1994, and $23.59 at December 31, 1994.
Total shareholders' equity increased $21.4 million from December 31, 1994,
principally from $35.5 million of earnings retention ($48.5 million of net
income less $13.0 million of dividends), a $12.9 million decrease in the net
unrealized losses on securities available for sale, and the repurchase of $31.4
million of common stock.
In the second quarter of 1995, First American declared cash dividends on
its common stock of $.25 per share compared to $.21 per share in the second
quarter of 1994, a 19% increase. The dividend payout ratio was 26% in the
second quarter of 1995 compared to 25% in the second quarter of 1994. Cash
dividends for the first six months of 1995 were $.50 versus $.42 in the first
six months of 1994, a 19% increase. In July 1995, the Board of Directors voted
to increase the quarterly cash dividend from $.25 per share to $.28 per share
based on First American's capital position and financial performance.
First American repurchased 919,000 shares of First American Corporation
stock in the open market during the first six months of 1995 at an average
price of $34.15 per share. Under Tennessee law, such shares have been
recognized as authorized but unissued. Accordingly, the excess of the purchase
price over par has been reflected as a reduction from capital surplus.
The Federal Reserve Board and Office of the Comptroller of the Currency
(OCC) regulations require that bank holding companies and national banks
maintain minimum capital ratios. As of June 30, 1995, the Company and its
principal subsidiary, First American National Bank (FANB), had ratios which
exceeded the regulatory requirements to be classified as "well capitalized,"
the highest regulatory capital rating. At June 30, 1995, the Company and FANB,
respectively, had total risk-based capital ratios of 12.04% and 10.90%, Tier I
risk-based capital ratios of 9.98% and 9.64%, and Tier I leverage capital
ratios of 7.93% and 7.70%. In order to be considered well capitalized, the
total risk-based capital ratio must be a minimum of 10%, the Tier I risk-based
capital ratio must equal or exceed 6%, and the Tier I leverage capital ratio
must be 5% or greater.
LIQUIDITY
Liquidity management consists of maintaining sufficient cash levels to
fund operations and to meet the requirements of borrowers, depositors, and
creditors. Liquid assets, which include cash and cash equivalents (less
Federal Reserve Bank reserve requirements), money market instruments, and
securities that will mature within one year, amounted to $751.6 million and
$635.3 million at June 30, 1995 and 1994, respectively, and $832.5 million at
December 31, 1994. The estimated average maturity of securities was 3.7 years
and 4.3 years at June 30, 1995 and 1994, respectively, and 4.2 years at
December 31, 1994. The average repricing life of the total securities
portfolio was 1.7 years and 2.9 years at June 30, 1995 and 1994, respectively,
and 2.3 years at December 31, 1994. The overall liquidity position of First
American is further enhanced by a high proportion of core deposits, which
provide a stable funding base. Core deposits comprised 88% of total deposits
at June 30, 1995, versus 92% at June 30, 1994, and 93% at December 31, 1994.
Effective March 31, 1995, the total commitment on First American's
revolving credit agreement was increased to $70 million from $50 million and
the termination date of the agreement was extended to March 31, 1998 from March
31, 1997. There were no revolving credit borrowings outstanding during the
first six months of 1995.
18
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation and seven (7) other financial institutions are
defendants in two companion lawsuits, one filed in the U.S.
District Court for the Western District of Tennessee and the other
filed in the Circuit Court for Shelby County, Tennessee. The
federal court action seeks unspecified damages and alleges a
conspiracy or combination among the defendant banks to fix the
amount of overdraft and insufficient funds charges. The state
court action seeks compensatory and punitive damages in the amount
of $25 million under state law theories, including implied contract
and unconscionability, based on the imposition of overdraft and
insufficient funds charges unrelated to cost. Summary judgment was
granted in favor of the defendant banks in the federal action. The
Plaintiffs appealed, but the Sixth Circuit Court of Appeals
affirmed the District Court's granting of summary judgment and
denied the Plaintiff's subsequent petition for rehearing. As for
the state court action, it was dismissed as a result of motions
filed by the defendant banks. An appeal was filed by the
Plaintiffs. The Tennessee Court of Appeals affirmed the trial
court's dismissal of the lawsuit. The Plaintiffs then appealed to
the Tennessee Supreme Court, which denied the Plaintiff's request
for permission to appeal. A petition to rehear the Supreme Court's
denial of permission to appeal has been filed and is pending.
Also, a motion has been filed and is pending with the Tennessee
Court of Appeals to set aside its decision due to an alleged
conflict of interest on the part of one of the judges. Management
believes these suits are without merit and, based upon information
currently known and on advice of counsel, that they will not have a
material adverse effect on the Corporation's consolidated financial
statements.
There are from time to time other legal proceedings pending against
the Corporation and its subsidiaries. In the opinion of management
and counsel, liabilities, if any, arising from such proceedings
presently pending would not have a material adverse effect on the
consolidated financial statements of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of shareholders was held on April 20, 1995.
(b) At the annual meeting, the shareholders voted on the election of
directors. The name of each director elected, including a
tabulation of votes, is as follows:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
Reginald D. Dickson 21,626,519 43,393 34,124
T. Scott Fillebrown, Jr. 21,646,095 25,167 32,774
Gene C. Koonce 21,648,399 21,563 34,073
Dale W. Polley 21,654,868 15,095 34,073
James F. Smith, Jr. 21,652,860 17,103 34,109
Cal Turner, Jr. 21,653,944 15,968 34,124
Ted H. Welch 21,632,981 36,931 34,124
David K. Wilson 21,644,959 25,004 34,073
</TABLE>
19
<PAGE> 20
The name of each other director whose term of office as a director
continued after the annual meeting is as follows: (until 1996
meeting) Samuel E. Beall, III, Earnest W. Deavenport, Jr., Martha R.
Ingram, James R. Martin, Roscoe R. Robinson, and William S. Wire II;
(until 1997 meeting) Dennis C. Bottorff, James A. Haslam II, Walter
G. Knestrick, Robert A. McCabe, Jr., William O. McCoy, and Toby S.
Wilt.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -------------------------------------------------------------------------------------------
<S> <C>
11 Statement regarding computation of per share earnings is included in Note 7 to the
Consolidated Financial Statements for the Quarter Ended June 30, 1995. See Part 1, Item 1.
15 Letter regarding unaudited interim financial information from KPMG Peat Marwick LLP, dated
July 20, 1995, except for Note 6, as to which the date is September 22, 1995.
27 Financial Data Schedule for interim year-to-date period ended June 30, 1995.
</TABLE>
(b) Reports on Form 8-K
A report on Form 8-K dated May 22, 1995, was voluntarily filed under
item 5 disclosing that First American Corporation entered into a
definitive merger agreement under which all of the outstanding
shares of Charter Federal Savings Bank will, subject to certain
terms and conditions, be exchanged for First American Corporation
common stock.
20
<PAGE> 21
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/ Martin E. Simmons
--------------------------------------------
Martin E. Simmons
Executive Vice President, General Counsel,
Secretary and Principal Financial Officer
Amended Date: September 22, 1995
----------------------------
21
<PAGE> 22
FIRST AMERICAN CORPORATION
QUARTERLY STATEMENT ON FORM
10-Q
FOR QUARTER ENDED JUNE 30, 1995
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ ---------------------------------------------------------------------------------------------------
<S> <C>
15 Letter regarding unaudited interim financial information from KPMG Peat Marwick LLP, dated July 20,
1995, except for Note 6, as to which the date is September 22, 1995.
27 Financial Data Schedule for interim year-to-date period ended June 30, 1995. Previously Filed.
(For SEC use only)
</TABLE>
22
<PAGE> 1
Exhibit 15. Letter regarding unaudited interim financial information from KPMG
Peat Marwick LLP
The Board of Directors
First American Corporation:
We have reviewed the consolidated balance sheets of First American Corporation
and subsidiaries as of June 30, 1995 and 1994, the related consolidated
statements of income for the three-month and six-month periods ended June 30,
1995 and 1994, and the related consolidated statements of changes in
shareholders' equity and cash flows for the six-month periods ended June 30,
1995 and 1994. These consolidated financial statements are the responsibility
of the Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of First American Corporation and
subsidiaries as of December 31, 1994; and the related consolidated statements
of income, changes in shareholders' equity and cash flows for the year then
ended (not presented herein); and in our report dated January 20, 1995, we
expressed an unqualified opinion on those consolidated financial statements.
Our report refers to changes in accounting principles related to the adoption
in 1993 of the provisions of the Financial Accounting Standards Board's
Statements of Financial Accounting Standards No. 109, Accounting for Income
Taxes; No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions; No. 112, Employers' Accounting for Postemployment Benefits; and No.
115, Accounting for Certain Investments in Debt and Equity Securities.
/s/ KPMG Peat Marwick LLP
-----------------------------
July 20, 1995, except for Note 6, as to which the date is September 22, 1995
Nashville, Tennessee
23
