<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8K
CURRENT REPORT
Current Report Pursuant
to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: December 6, 1995
Date of earliest
event reported: December 6, 1995
FIRST AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
TENNESSEE
(State or other jurisdiction of incorporation)
<TABLE>
<S> <C>
0-6198 62-0799975
(Commission File Number) (I.R.S. Employer
Identification No.)
FIRST AMERICAN CENTER, NASHVILLE, TENNESSEE 37237-0700
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (615) 748-2000
<PAGE> 2
Item 5. Other Events
Included herein as Exhibit 99 are the audited supplemental
consolidated financial statements of First American
Corporation and Subsidiaries which give retroactive effect to
the merger of Heritage Federal Bancshares, Inc. into First
American Corporation on November 1, 1995 in a transaction
accounted for as a pooling of interest:
Supplemental Consolidated Balance Sheets as of
December 31, 1994 and 1993
Supplemental Consolidated Statements of Income for
the years ended December 31, 1994, 1993, and
1992
Supplemental Consolidated Statements of Changes in
Shareholders' Equity for the Years ended
December 31, 1994, 1993, and 1992
Supplemental Consolidated Statements of Cash Flows
for the years ended December 31, 1994, 1993
and 1992
Notes to the Supplemental Consolidated Financial
Statements
Independent Auditors' Report
Exhibit No. Description
23. Accountants' Consent
99. Supplemental Consolidated Balance Sheets as of
December 31, 1994 and 1993
Supplemental Consolidated Statements of Income for
the years ended December 31, 1994, 1993, and
1992
Supplemental Consolidated Statements of Changes in
Shareholders' Equity for the Years ended
December 31, 1994, 1993, and 1992
Supplemental Consolidated Statements of Cash Flows
for the years ended December 31, 1994, 1993
and 1992
Notes to the Supplemental Consolidated Financial
Statements
Independent Auditors' Report
2
<PAGE> 3
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)
Date: December 6, 1995 /s/ Mary Neil Price
--------------------------------
Name: Mary Neil Price
Title: Senior Vice President and
Assistant Secretary
3
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No: Description
- ---------- -----------
<S> <C>
23. Accountants' Consent
99. Supplemental Consolidated Balance Sheets as of December 31, 1994 and 1993
Supplemental Consolidated Statements of Income for the years ended December 31,
1994, 1993, and 1992
Supplemental Consolidated Statements of Changes in Shareholders' Equity for the
Years ended December 31, 1994, 1993, and 1992
Supplemental Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992
Notes to the Supplemental Consolidated Financial Statements
Independent Auditors' Report
</TABLE>
4
<PAGE> 1
Exhibit 23
ACCOUNTANTS' CONSENT
--------------------
The Board of Directors
First American Corporation:
We consent to incorporation by reference in the registration statements (No.
33-53269) on Form S-8, (No. 33-57387) on Form S-3, (No. 33-57385) on Form S-8,
(No. 33-44286) on Form S-8 as amended, (No. 33-59844) on Form S-3, (No.
2-81920) on Form S-8, (No 2-81685) on Form S-8 as amended, (No. 33-44775) on
Form S-8, (No. 33-63188) on Form S-8, and (No. 33-64161) on Form S-8 of First
American Corporation of our report dated December 4, 1995, relating to the
supplemental consolidated balance sheets of First American Corporation and
subsidiaries as of December 31, 1994 and 1993, and the related supplemental
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1994,
which report appears in the current report on Form 8-K of First American
Corporation filed on December 6, 1995.
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
-------------------------
KPMG Peat Marwick LLP
Nashville, Tennessee
December 6, 1995
<PAGE> 1
Exhibit 99
SUPPLEMENTAL CONSOLIDATED INCOME STATEMENTS
First American Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
(dollars in thousands except per share amounts) 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $373,163 $322,151 $331,077
Interest and dividends on securities 129,510 145,486 140,837
Interest on Federal funds sold and securities purchased
under agreements to resell 3,108 4,904 9,998
Interest on time deposits with other banks and other
interest 1,255 1,791 6,925
- ------------------------------------------------------------------------------------------------------------------
Total interest income 507,036 474,332 488,837
- ------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 17,477 16,476 18,657
Money market accounts 57,695 47,249 48,327
Regular savings 12,126 12,897 14,283
Certificates of deposit under $100,000 52,817 56,801 78,714
Certificates of deposit $100,000 and over 16,943 14,864 20,302
Other time and foreign 16,147 17,460 21,898
- ------------------------------------------------------------------------------------------------------------------
Total interest on deposits 173,205 165,747 202,181
- ------------------------------------------------------------------------------------------------------------------
Interest on short-term borrowings 28,529 17,100 17,083
Interest on long-term debt (note 9) 7,060 4,285 1,376
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 208,794 187,132 220,640
- ------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 298,242 287,200 268,197
Provision for loan losses (note 5) (9,919) (41,405) 39,249
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 308,161 328,605 228,948
NON-INTEREST INCOME
Service charges on deposit accounts 43,605 40,250 37,973
Commissions and fees on fiduciary activities 16,252 15,364 14,793
Investment services income 6,962 7,667 1,569
Merchant discount fees 2,834 2,321 2,191
Trading account revenue 2,201 2,493 2,435
Net loss on sales of securities available for
sale (note 4) (9,997) (2,028) (2,722)
Other income 25,741 22,861 21,086
- ------------------------------------------------------------------------------------------------------------------
Total non-interest income 87,598 88,928 77,325
- ------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 135,616 123,061 114,177
Net occupancy expense (note 6) 21,556 22,930 21,980
Equipment expense 15,094 14,679 12,896
FDIC insurance expense 13,607 13,921 12,948
Systems and processing expense (note 6) 9,856 14,959 14,532
Contribution to First American Foundation (note 11) - 10,000 -
Communication expense 8,557 7,418 7,607
Marketing expense 8,363 6,856 4,878
Supplies expense 5,632 4,704 5,540
Foreclosed properties expense (income), net (5,732) (2,211) 10,987
Other expenses 28,604 32,459 34,554
- ------------------------------------------------------------------------------------------------------------------
Total non-interest expense 241,153 248,776 240,099
- ------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE AND CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES 154,606 168,757 66,174
Income tax expense (note 12) 57,404 61,348 20,021
- ------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES 97,202 107,409 46,153
Cumulative effect of changes in accounting principles,
net of tax (note 13) - (84) -
- ------------------------------------------------------------------------------------------------------------------
NET INCOME $ 97,202 $107,325 $ 46,153
==================================================================================================================
PER COMMON SHARE:
Income before cumulative effect of changes in
accounting principles and net income (note 1) $ 3.39 $ 3.79 $ 1.76
Dividends declared .88 .55 .20
==================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 28,670 28,355 26,509
==================================================================================================================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
99-1
<PAGE> 2
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
First American Corporation and Subsidiaries
<TABLE>
<CAPTION>
December 31
--------------------------------
(dollars in thousands) 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks (note 3) $ 513,916 $ 515,122
Time deposits with other banks 3,855 2,195
Securities (note 4):
Held to maturity (market value $1,559,241 and $823,492, respectively) 1,643,867 807,096
Available for sale (amortized cost $710,960 and $1,360,524,
respectively) 689,464 1,396,612
- ------------------------------------------------------------------------------------------------------------------
Total securities 2,333,331 2,203,708
- ------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under agreements to resell 28,134 153,860
Trading account securities 8,617 12,263
Loans (note 5):
Commercial 2,289,552 1,960,057
Consumer--amortizing mortgages 1,385,081 1,295,307
Consumer--other 1,055,943 983,467
Real estate--construction 134,513 112,353
Real estate--commercial mortgages and other 316,242 330,983
- ------------------------------------------------------------------------------------------------------------------
Total loans 5,181,331 4,682,167
Unearned discount and net deferred loan fees 9,365 12,596
- ------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net deferred loan fees 5,171,966 4,669,571
Allowance for possible loan losses 129,436 136,512
- ------------------------------------------------------------------------------------------------------------------
Total net loans 5,042,530 4,533,059
- ------------------------------------------------------------------------------------------------------------------
Premises and equipment, net (note 6) 111,075 109,320
Foreclosed properties 10,091 19,506
Other assets (notes 7 and 12) 227,178 158,748
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $8,278,727 $7,707,781
==================================================================================================================
LIABILITIES
Deposits:
Demand (non-interest-bearing) $1,252,136 $1,240,543
NOW accounts 868,000 873,711
Money market accounts 1,611,794 1,462,839
Regular savings 472,188 511,059
Certificates of deposit under $100,000 1,342,621 1,372,941
Certificates of deposit $100,000 and over 393,301 330,252
Other time 307,439 327,231
Foreign 60,300 31,975
- ------------------------------------------------------------------------------------------------------------------
Total deposits 6,307,779 6,150,551
- ------------------------------------------------------------------------------------------------------------------
Short-term borrowings (note 8) 929,840 756,763
Long-term debt (note 9) 271,473 77,053
Other liabilities (note 10) 101,962 99,852
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 7,611,054 7,084,219
- ------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (notes 6, 10, 15, and 16)
SHAREHOLDERS' EQUITY (NOTES 4, 9, 10, 14, AND 16)
Preferred stock, without par value; authorized 2,500,000 shares - -
Common stock, $5 par value; authorized 50,000,000 shares; issued:
28,725,069 shares at December 31, 1994; 27,914,514 shares at
December 31, 1993 143,625 139,574
Capital surplus 130,933 128,195
Retained earnings 409,638 336,648
Deferred compensation on restricted stock (2,161) (1,851)
Employee stock ownership plan obligation (781) (1,053)
- ------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 681,254 601,513
Net unrealized gains (losses) on securities available for sale, net of tax
(note 4) (13,581) 22,049
- ------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 667,673 623,562
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,278,727 $7,707,781
==================================================================================================================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
99-2
<PAGE> 3
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
First American Corporation and Subsidiaries
<TABLE>
<CAPTION>
Net
Unrealized
Gains
(Losses)
Deferred Employee on
Compensation Stock Securities
on Ownership Available
(dollars in thousands except per share Common Capital Retained Restricted Plan for
amounts) Stock Surplus Earnings Stock Obligation Other Sale Total
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1991 $116,976 $ 79,907 $205,602 $ (653) $ - $ (185) $ - $401,647
Issuance of 3,225,842 common shares in
connection with public stock
offerings (note 14) 16,130 40,719 - - - - - 56,849
Issuance of 342,945 common shares in
connection with Employee Benefit and
Dividend Reinvestment Plans (note 10) 1,714 3,073 - - - - - 4,787
Issuance of 35,600 shares of restricted
common stock (note 10) 178 632 - (810) - - - -
Amortization of deferred compensation on
restricted stock (note 10) - - - 390 - - - 390
Employee Stock Ownership Plan obligation
(note 10) - - - - (1,173) - - (1,173)
Net income, 1992 - - 46,153 - - - - 46,153
Cash dividends declared ($.20 per common
share) - - (4,939) - - - - (4,939)
Other - - - - - 185 - 185
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 134,998 124,331 246,816 (1,073) (1,173) - - 503,899
- ----------------------------------------------------------------------------------------------------------------------------
Issuance of 225,863 common shares in
connection with Employee Benefit
Plan, net of discount on Dividend
Reinvestment Plan (note 10) 1,130 2,740 - - - - 3,870
Issuance of 47,000 shares of restricted
common stock (note 10) 235 984 - (1,219) - - - -
Amortization of deferred compensation on
restricted stock (note 10) - - - 581 - - - 581
Reduction in Employee Stock Ownership Plan
obligation (note 10) - - - - 120 - - 120
Three-for-two stock split of pooled
company 3,211 - (3,211) - - - - -
Net income, 1993 - - 107,325 - - - - 107,325
Cash dividends declared ($.55 per common
share) - - (14,282) - - - - (14,282)
Net unrealized gains on securities
available for sale, net of tax
(note 4) - - - - - - 22,049 22,049
Other - 140 - (140) - - - -
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 139,574 128,195 336,648 (1,851) (1,053) - 22,049 623,562
- ----------------------------------------------------------------------------------------------------------------------------
Issuance of 112,582 common shares in
connection with
Employee Benefit Plan, net of discount
on Dividend Reinvestment Plan (note
10) 562 1,338 - - - - - 1,900
Issuance of 48,289 shares of restricted
common stock (note 10) 241 1,272 - (1,425) - - - 88
Amortization of deferred compensation on
restricted stock (note 10) - - - 1,014 - - - 1,014
Reduction in Employee Stock Ownership Plan
obligation (note 10) - - - - 212 - - 212
Four-for-three stock split of pooled
company 3,224 (2) (3,222) - - - - -
Net income, 1994 - - 97,202 - - - - 97,202
Cash dividends declared ($.88 per common
share) - - (22,968) - - - - (22,968)
Cash dividends declared by pooled company - - (1,129) - - - - (1,129)
Change in net unrealized gains (losses) on
securities available for sale, net of
tax (note 4) - - - - - - (35,630) (35,630)
Adjustment for change in fiscal year of
pooled company (note 13) 24 74 3,107 101 60 - - 3,366
Other - 56 - - - - - 56
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 $143,625 $130,933 $409,638 $ (2,161) $ (781)$ - $(13,581) $667,673
============================================================================================================================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
99-3
<PAGE> 4
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
First American Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
(in thousands) 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 97,202 $ 107,325 $ 46,153
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses (9,919) (41,405) 39,249
Write-downs on foreclosed properties 70 1,503 10,428
Depreciation of premises and equipment 14,606 14,389 13,112
Cumulative effect of changes in accounting principles, net of tax - 84 -
Amortization of intangible assets 3,937 3,848 3,235
Other amortization (accretion), net (874) 3,829 (631)
Deferred income tax expense (benefit) 10,366 11,348 (6,276)
Net loss on sales of securities available for sale 9,997 2,028 2,722
Net (gain) loss on sales or write-downs of premises and equipment (262) 525 2,319
Gain on sales of branch offices - (1,000) (607)
Change in assets and liabilities, net of effects from acquisitions
and sales of branch office:
(Increase) decrease in accrued interest receivable (6,895) 6,414 6,258
Increase (decrease) in accrued interest payable 10,637 (3,751) (13,607)
(Increase) decrease in trading account securities 3,646 (4,382) 8,718
(Increase) decrease in other assets (39,964) 41,276 (22,318)
Decrease in other liabilities (6,523) (28,401) (228)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 86,024 113,630 88,527
- -------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net (increase) decrease in time deposits with other banks (1,660) 115,104 (40,095)
Proceeds from sales of securities available for sale 1,418,380 858,609 503,452
Proceeds from maturities of securities available for sale 164,085 348,476 2,327
Purchases of securities available for sale (1,106,865) (1,593,558) (589,055)
Proceeds from maturities of securities held to maturity 214,211 908,784 660,742
Purchases of securities held to maturity (842,053) (555,370) (934,246)
Net (increase) decrease in Federal funds sold and securities purchased
under agreements to resell 119,726 (28,660) 60,568
Acquisitions, net of cash acquired (1,784) (25,572) -
Sales of branch offices, net of cash sold - (51,318) (10,642)
Net (increase) decrease in loans (481,656) (452,392) 63,775
Proceeds from sales of premises and equipment 6,411 656 1,098
Purchases of premises and equipment (21,518) (14,525) (9,104)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (532,723) (489,766) (291,180)
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 101,811 1,059 213,560
Net increase in short-term borrowings 173,077 148,184 87,801
Proceeds from issuance of long-term debt - 49,680 -
Advances from Federal Home Loan Bank 208,061 9,748 (3)
Net repayment of other long-term debt (14,076) (1,804) (425)
Other 36 (582) 119
Issuance of common shares:
Public stock offerings - - 56,849
Employee Benefit and Dividend Reinvestment Plans 1,988 4,795 4,787
Cash dividends paid (24,097) (14,282) (4,939)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 446,800 196,798 357,749
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and due from banks 101 (179,338) 155,096
Adjustment for change in fiscal year of pooled company (1,307) - -
Cash and due from banks, beginning of year 515,122 694,460 539,364
- -------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of year $ 513,916 $ 515,122 $ 694,460
===============================================================================================================================
Cash paid during the year for:
Interest expense $ 198,002 $ 182,291 $ 234,291
Income taxes 56,619 51,162 18,722
Non-cash investing activities:
Foreclosures 2,008 16,226 22,677
Reclassification of investment securities (note 4) 203,764 368,638 -
===============================================================================================================================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
99-4
<PAGE> 5
________________________________________________________________________________
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the more significant accounting policies
of the Corporation.
CONSOLIDATION AND BASIS OF PRESENTATION
The supplemental consolidated financial statements include the
accounts of the Corporation and its wholly-owned subsidiaries, including its
principal subsidiary First American National Bank, as well as First American
National Bank of Kentucky and First American Trust Company, N.A. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
These supplemental consolidated financial statements give retroactive
effect to the merger with Heritage Federal Bancshares, Inc., (Heritage) on
November 1, 1995, in a transaction accounted for as a pooling-of-interests.
The supplemental consolidated financial statements have been restated for all
periods presented as if Heritage and the Corporation had always been combined.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for as a pooling-of-interests in
financial statements that do not include the date of consummation. These
financial statements do not extend through the date of consummation; however,
they will become the historical financial statements of the Corporation upon
issuance of the financial statements for the period that includes the date of
the transaction.
Prior to the combination, Heritage's fiscal year ended June 30. In
recording the pooling-of-interests combination, Heritage's financial statements
for the 12 months ended December 31, 1994, were combined with the Corporation's
financial statements for the same period and Heritage's financial statements
for the years ended June 30, 1993 and 1992 were combined with the Corporation's
financial statements for the years ended December 31, 1993 and 1992,
respectively. An adjustment has been made to shareholders' equity as of
December 31, 1994, to include Heritage's results of operations for the six
months ended December 31, 1993.
SECURITIES
Effective December 31, 1993, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires investments
in equity securities that have a readily determinable fair value and
investments in debt securities to be classified into three categories, as
follows: held to maturity debt securities, trading securities, and securities
available for sale.
99-5
<PAGE> 6
Under SFAS No. 115, classification of a debt security as held to
maturity is based on the Corporation's positive intent and ability to hold such
security to maturity. Securities held to maturity are stated at cost adjusted
for amortization of premiums and accretion of discounts, unless there is a
decline in value which is considered to be other than temporary, in which case
the cost basis of such security is written down to market and the amount of the
write-down is included in earnings.
Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading account securities,
which are valued at market with unrealized gains and losses included in
earnings. Gains or losses on sales and adjustments to market value of trading
account securities are included in non-interest income in the supplemental
consolidated income statements.
Securities classified as available for sale, which are reported at
market value with unrealized gains and losses excluded from earnings and
reported, net of tax, in a separate component of shareholders' equity, include
all securities not classified as trading account securities or securities held
to maturity. These include securities used as part of the Corporation's
asset/liability strategy which may be sold in response to changes in interest
rates, prepayment risk, the need or desire to increase capital, and other
similar factors. Gains or losses on sale of securities available for sale are
recognized at the time of sale, based upon specific identification of the
security sold, and are included in non-interest income in the supplemental
consolidated income statements.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation enters into interest rate swap, forward interest rate
swap, and basis swap transactions (swaps), as well as futures contracts, in
connection with its asset/liability management program in managing interest
rate exposure arising out of non-trading assets and liabilities. The impact of
swaps is accrued based on expected settlement payments and is recorded as an
adjustment to interest income and expense, in the period in which it accrues
and in the category appropriate to the related asset or liability, over the
life of the related agreements. The related amount receivable from or payable
to the swap counterpart is included in other liabilities or assets in the
supplemental consolidated balance sheets. Realized and unrealized gains and
losses on futures contracts which are designated as effective hedges of
interest rate exposure arising out of non-trading assets and liabilities are
deferred and recognized as interest income or interest expense, in the category
appropriate to the related asset or liability, over the covered periods or
lives of the hedged assets or liabilities. Gains or losses on early
terminations of derivative financial instruments that modify the underlying
characteristics of specified assets or liabilities are deferred and amortized
as an adjustment to the yield of the related assets or liabilities over the
remaining covered period.
On a limited basis, the Corporation also enters into interest rate
swap agreements, as well as interest rate cap and floor agreements, with
customers desiring protection from possible adverse future fluctuations in
interest rates. As an intermediary, the Corporation generally maintains a
portfolio of matched offsetting interest rate contract agreements. At the
inception of such agreements, the portion of the compensation related to credit
risk and ongoing servicing, if any, is deferred and taken into income over the
term of the agreements.
99-6
<PAGE> 7
LOANS
Loans are stated at the principal amount outstanding. Unearned
discount, deferred loan fees net of loan acquisition costs, and the allowance
for possible loan losses are shown as reductions of loans. Loan origination
and commitment fees and certain loan related costs are being deferred and the
net amount amortized as an adjustment of the related loan's yield over the
contractual life of the loan. Unearned discount represents the unamortized
amount of finance charges, principally related to certain installment loans.
Interest income on loans is generally computed on the outstanding loan balance.
Interest income on installment loans which have unearned discounts is
recognized primarily by the sum-of-the-month's digits method.
Interest income is generally accrued on all loans. 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.
The decision to place a loan on non-accrual status is 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 a 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 in 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.
Generally, consumer loans on which interest or principal is past due more than
120 days are charged off.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The provision for loan losses represents a charge (credit) to earnings
necessary, after loan charge-offs and recoveries, to maintain the allowance for
possible loan losses at an appropriate level which is adequate to absorb
estimated losses inherent in the loan portfolio. Such estimated losses arise
primarily from the loan portfolio but may also be derived from other sources,
including commitments to extend credit and standby letters of credit. The
level of the allowance for possible loan losses is determined on a quarterly
basis using procedures which include: (1) an evaluation of individual
criticized and classified credits as determined by internal reviews, of other
significant credits, and of non-criticized/classified commercial and commercial
real estate credits, to determine estimates of loss probability; (2) an
evaluation of various consumer loan categories to determine an estimation of
loss on such loans based primarily on historical loss experience of the
category; (3) a review of unfunded commitments; and (4) an assessment of
various other factors, such as changes in credit concentrations, loan mix, and
economic conditions which may not be specifically quantified in the loan
analysis process.
99-7
<PAGE> 8
The allowance for possible loan losses consists of an allocated
portion and an unallocated, or general, portion. The allocated portion is
maintained to cover estimated losses applicable to specific segments of the
loan portfolio. The unallocated portion is maintained to absorb losses which
probably exist as of the evaluation date but are not identified by the more
objective processes used for the allocated portion of the allowance for loan
losses due to risk of error or imprecision. While the total allowance consists
of an allocated portion and an unallocated portion, these terms are primarily
used to describe a process. Both portions of the allowance are available to
provide for inherent loss in the entire portfolio.
The allowance for possible loan losses is increased (decreased) by
provisions for loan losses charged (credited) to expense and is reduced
(increased) by loans charged off net of recoveries on loans previously charged
off. The provision for loan losses is based on management's determination of
the amount of the allowance necessary to provide for estimated loan losses
based on its evaluation of the loan portfolio. Determining the appropriate
level of the allowance and the amount of the provision for loan losses involves
uncertainties and matters of judgment and therefore cannot be determined with
precision.
FORECLOSED PROPERTIES
Foreclosed properties include property acquired through foreclosure
and in-substance foreclosures. In-substance foreclosed properties are those
properties where the borrower retains title but has little or no remaining
equity in the property considering its fair value; where repayment can only be
expected to come from the operation or sale of the property; and where the
borrower has effectively abandoned control of the property or it is doubtful
that the borrower will be able to rebuild equity in the property. Foreclosed
properties are valued at the lower of cost or fair value minus estimated costs
to sell. The fair value of the assets is the amount that the Corporation could
reasonably expect to receive for them in a current sale between a willing buyer
and a willing seller, that is, other than in a forced or liquidation sale.
Cost includes loan principal, accrued interest, foreclosure expense, and
expenditures for subsequent improvements. The excess of cost over fair value
minus estimated costs to sell at the time of foreclosure is charged to the
allowance for possible loan losses. Subsequent write-downs to fair value minus
estimated costs to sell are included in foreclosed properties expense.
DEPRECIATION AND AMORTIZATION
Premises and equipment is stated at cost less accumulated depreciation
and amortization, which is computed principally on the straight-line method
based on the estimated useful lives of the respective assets.
For acquisitions accounted for as purchases, the net assets have been
adjusted to their fair values as of the respective acquisition dates. The
value of core deposit rights and the excess of the purchase price of
subsidiaries over net assets acquired are being amortized on a straight-line
basis over periods ranging from ten to twenty years. Core deposit rights and
the excess of the purchase price of subsidiaries over net assets acquired, net
of amounts amortized, are included in other assets in the supplemental
consolidated balance sheets.
99-8
<PAGE> 9
The carrying value of the excess of the purchase price of subsidiaries
over net assets acquired (goodwill) will be reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of an entity acquired over the remaining amortization period, the
Corporation's carrying value of the goodwill will be reduced by the estimated
shortfall of cash flows.
EMPLOYEE BENEFIT PLANS
The Corporation provides a variety of benefit plans to eligible
employees. Retirement plan expense is accrued each year, and plan funding
represents at least the minimum amount required by the Employee Retirement
Income Security Act of 1974, as amended. Differences between expense and
funded amounts are carried in other assets or other liabilities. Beginning in
1993, the Corporation recognizes postretirement benefits other than pensions on
an accrual basis, and effective December 31, 1993, other postemployment
benefits are also recognized on an accrual basis. The Corporation also makes
contributions to an employee thrift and profit-sharing plan based on employee
contributions and performance levels of the Corporation.
INCOME TAXES
The Corporation files a consolidated Federal income tax return, except
for its credit life insurance subsidiary, which files a separate return.
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
requires a change from the deferred method of accounting under Accounting
Principles Bulletin No. 11 to the asset and liability method of accounting for
income taxes. Under SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets are reduced by a valuation
allowance, if necessary, to an amount that more likely than not will be
realized.
EARNINGS PER COMMON SHARE
Earnings per common share amounts are computed by dividing net income
by the weighted average number of common shares outstanding during each year.
Earnings per common share for the year ended December 31, 1992, is computed by
dividing (the sum of the Corporation's net income for 1992 of $42.0 million and
net income of Heritage from the date of conversion from a mutual savings bank
to a capital stock savings bank on March 30, 1992, to the end of its fiscal
year on June 30, 1992, of $1.4 million) by (the sum of the Corporation's
weighted average number of shares outstanding during 1992 of 24.1 million
shares and Heritage's weighted average number of shares outstanding from March
30, 1992 to June 30, 1992 (adjusted for the number of days such shares were
outstanding during fiscal year 1992 (.6 million shares).
99-9
<PAGE> 10
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with
current year presentation.
NOTE 2: ACQUISITIONS AND SALES
Effective November 1, 1995, the Corporation completed the merger with
Heritage by exchanging approximately 2.9 million shares of First American
Corporation common stock for all of the outstanding shares of Heritage.
Heritage was the holding company for Heritage Federal Bank for Savings, a
federal savings bank with approximately $524.5 million in assets and 13 offices
primarily in the East Tennessee areas of Tri-Cities, Anderson County, and Roane
County. In conjunction with the acquisition, Heritage Federal Bank for Savings
was merged into First American National Bank. The transaction is accounted for
as a pooling-of-interests and, accordingly, the accompanying supplemental
consolidated financial statements have been restated to include the results of
Heritage for all periods presented. After-tax merger expenses related to the
acquisition totalled approximately $7.0 million, comprised primarily of
severance, systems conversions, investment banking and other professional fees,
and recapture of tax bad debt reserve, and were recognized in 1995.
Net interest income and net income of the Corporation and Heritage as
originally reported for the years ended December 31, 1994, 1993, and 1992 are
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
(in thousands) 1994 1993 1992
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income
First American Corporation $279,626 $267,439 $251,688
Heritage 18,616 19,761 16,509
- -----------------------------------------------------------------------------------------------------------
First American Corporation, restated $298,242 $287,200 $268,197
===========================================================================================================
Net income
First American Corporation $ 90,732 $101,813 $ 41,972
Heritage 6,470 5,512 4,181
- -----------------------------------------------------------------------------------------------------------
First American Corporation, restated $ 97,202 $107,325 $ 46,153
===========================================================================================================
</TABLE>
On April 1, 1994, the Corporation consummated its purchase of all of
the outstanding shares of Fidelity Crossville Corporation (FCC), the parent
company of First Fidelity Savings Bank, F.S.B. (First Fidelity) located in
Crossville, Tennessee, for $6.5 million. First Fidelity was a Federal stock
savings bank with offices in Crossville and Fairfield Glade, Tennessee with
total assets of $48.7 million on March 31, 1994. In conjunction with the
acquisition, First Fidelity was merged into First American National Bank and
First Fidelity's two offices became branches of First American National Bank.
The acquisition was accounted for using the purchase method. Accordingly, the
purchase price was allocated to assets acquired and liabilities assumed based
on their estimated fair values. The purchase price in excess of the fair value
of net assets acquired of $3.1 million is being amortized on a straight-line
basis over 10 years. First Fidelity's results of operations have been included
in the Corporation's consolidated income statement since the date of
acquisition.
99-10
<PAGE> 11
On October 1, 1993, the Corporation acquired all of the outstanding
shares of First American National Bank of Kentucky (FANBKY), formerly known as
First Federal Savings and Loan Association of Bowling Green, a $219.0 million
national bank headquartered in Bowling Green, Kentucky, for $27.5 million.
This transaction was accounted for as a purchase. All financial data after the
acquisition date has been adjusted to reflect the purchase and, consistent with
the purchase method of accounting, the results of operations of FANBKY are
included in the Corporation's consolidated income statement beginning October
1, 1993. Total fair value of net assets of FANBKY on the acquisition date was
approximately $19.1 million. The excess of the purchase price over the fair
value of the net assets acquired was $8.4 million at the acquisition date and
is being amortized over 10 years. FANBKY operates three branches in Warren and
Simpson Counties in southern Kentucky.
Included within results of operations during the year ended December
31, 1993, was the sale by Heritage of certain branches. The buyer assumed
approximately $54.8 million of deposits and received approximately $51.3
million in cash and $2.5 million in premises, equipment and other assets.
Heritage reported a gain on sale of $1.0 million.
During the year ended December 31, 1992, the Corporation consummated
the sale of one branch office with deposits of approximately $11.3 million.
The transaction resulted in a $.6 million gain.
NOTE 3: CASH AND DUE FROM BANKS
The Corporation's bank subsidiaries are required to maintain reserves,
in the form of cash and balances with the Federal Reserve Bank, against its
deposit liabilities. Approximately $166.7 million and $176.3 million of the
cash and due from banks balance at December 31, 1994 and 1993, respectively,
represented reserves maintained in order to meet Federal Reserve requirements.
NOTE 4: SECURITIES
SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gains, gross unrealized losses,
and approximate market values of securities held to maturity at December 31,
1994 and 1993, are presented in the following table:
<TABLE>
<CAPTION>
Unrealized
Amortized ------------------------ Market
(in thousands) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
U.S. Treasury and other U.S. Government
agencies and corporations $1,463,285 $ 780 $73,477 $1,390,588
Obligations of states and political
subdivisions 21,730 31 1,459 20,302
Other debt securities (primarily
mortgage-backed
securities) 158,852 15 10,516 148,351
---------------------------------------------------------------------------------------------------------
Total securities held to maturity $1,643,867 $ 826 $85,452 $1,559,241
=========================================================================================================
DECEMBER 31, 1993
U.S. Treasury and other U.S. Government
agencies and corporations $ 776,243 $16,333 $ 322 $ 792,254
Obligations of states and political
subdivisions 21,573 211 211 21,573
Other debt securities 9,280 385 - 9,665
---------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 807,096 $16,929 $ 533 $ 823,492
=========================================================================================================
</TABLE>
99-11
<PAGE> 12
Included in U.S. Treasury and other U.S. Government agencies and
corporations securities held to maturity were agency-issued mortgage-backed
securities amounting to $1,112.8 million ($1,064.6 million market value) at
December 31, 1994 and $540.6 million ($553.6 million market value) at December
31, 1993. Mortgage-backed securities included in other debt securities
amounted to $156.2 million ($145.6 million market value) at December 31, 1994
and $6.9 million ($7.2 million market value) at December 31, 1993.
SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains, gross unrealized losses,
and approximate market values of securities available for sale at December 31,
1994 and 1993, are presented in the following table:
<TABLE>
<CAPTION>
Unrealized
Amortized -------------------------- Market
(in thousands) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
U.S. Treasury and other U.S. Government
agencies and corporations $ 674,582 $ 48 $21,544 $ 653,086
Other debt securities 2,165 - - 2,165
---------------------------------------------------------------------------------------------------------
Total debt securities 676,747 48 21,544 655,251
Equity securities (essentially Federal
Reserve Bank and Federal Home Loan
Bank stock) 34,213 - - 34,213
---------------------------------------------------------------------------------------------------------
Total securities available for sale $ 710,960 $ 48 $21,544 $ 689,464
=========================================================================================================
DECEMBER 31, 1993
U.S. Treasury and other U.S. Government
agencies and corporations $1,332,536 $37,397 $ 1,450 $1,368,483
Other debt securities (mortgage-backed
securities) 15,593 141 - 15,734
---------------------------------------------------------------------------------------------------------
Total debt securities 1,348,129 37,538 1,450 1,384,217
Equity securities (essentially Federal
Reserve Bank and Federal Home Loan Bank
stock) 12,395 - - 12,395
---------------------------------------------------------------------------------------------------------
Total securities available for sale $1,360,524 $37,538 $ 1,450 $1,396,612
=========================================================================================================
</TABLE>
Included in U.S. Treasury and other U.S. Government agencies and
corporations securities available for sale were agency-issued mortgage-backed
securities amounting to $326.8 million ($306.3 million market value) at
December 31, 1994 and $992.7 million ($1,016.8 million market value) at
December 31, 1993.
Effective December 31, 1993, the Corporation adopted SFAS No. 115
which requires investments in equity securities that have a readily
determinable fair value and investments in debt securities to be classified
into three categories, as follows: held to maturity debt securities, trading
securities, and available for sale securities. In conjunction with the
adoption of SFAS No. 115 on December 31, 1993, the Corporation reclassified
$368.6 million of securities to the available for sale classification from the
former investment, now held to maturity, category. At that date, unrealized
appreciation on total securities available for sale amounted to $36.1 million,
resulting in an increase in shareholders' equity of $22.0 million, net of
taxes. There was no impact on the Corporation's supplemental consolidated net
income as a result of the adoption of SFAS No. 115.
Heritage adopted SFAS No. 115 effective July 1, 1994. Investment
securities other than Federal Home Loan Bank stock held by Heritage prior to
adoption of SFAS No. 115
99-12
<PAGE> 13
are classified as securities held to maturity in the accompanying supplemental
consolidated balance sheets.
Included within total securities classified as available for sale at
December 31, 1993, were $203.8 million of securities classified as such due to
regulatory restrictions even though the Corporation had the intent and ability
to hold such securities to maturity. Upon a regulatory revision in 1994, which
allowed those securities to be classified as held to maturity, the Corporation
transferred such securities from available for sale to held to maturity. At
the time of transfer, the securities had an unrealized loss of $1.0 million
($.6 million net of taxes). In accordance with SFAS No. 115, such unrealized
loss was retained as a component of shareholders' equity and is being amortized
over the remaining lives of the securities.
Net realized losses from the sale of securities available for sale for
the years ended December 31, 1994, 1993, and 1992, amounted to $10.0 million,
$2.0 million, and $2.7 million, respectively. Gross realized gains and losses
on such sales were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------
1994 1993 1992
-------------------- ------------------- -------------------
Gross Gross Gross Gross Gross Gross
Realized Realized Realized Realized Realized Realized
(in thousands) Gains Losses Gains Losses Gains Losses
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and corporations $ 8,799 $18,796 $1,680 $3,708 $3,640 $6,296
Other debt securities - - - - - 66
- -------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 8,799 $ 18,796 $1,680 $3,708 $3,640 $6,362
=============================================================================================================
</TABLE>
TOTAL SECURITIES
The amortized cost and approximate market values of debt securities at
December 31, 1994, by average estimated maturity are shown below. The expected
maturity for governmental and corporate securities is the stated maturity, and
the expected maturity for mortgage-backed securities and other asset-backed
securities is based on current estimates of average maturities.
<TABLE>
<CAPTION>
Securities Held to Maturity Securities Available for Sale
--------------------------- -----------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 158,332 $ 156,867 $ 309,430 $ 308,789
Due after one year through five years 1,055,206 1,003,337 123,476 116,701
Due after five years through ten years 293,370 271,529 120,548 111,250
Due after ten years 136,959 127,508 123,293 118,511
- -----------------------------------------------------------------------------------------------------------
Total debt securities 1,643,867 1,559,241 676,747 655,251
Equity securities - - 34,213 34,213
- -----------------------------------------------------------------------------------------------------------
Total securities $1,643,867 $1,559,241 $ 710,960 $ 689,464
===========================================================================================================
</TABLE>
At December 31, 1994 and 1993, the Corporation held securities with
amortized cost amounting to $527.9 million and $533.8 million, respectively,
which were issued or guaranteed by the Federal National Mortgage Association
and $756.3 million and $884.8 million, respectively, which were issued or
guaranteed by the Federal Home Loan Mortgage Corporation.
99-13
<PAGE> 14
Securities carried in the supplemental consolidated balance sheets at
approximately $1,648.2 million and $1,332.3 million at December 31, 1994 and
1993, respectively, were pledged to secure public and trust deposits and for
other purposes as required or permitted by law.
NOTE 5: LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Corporation's bank subsidiaries make commercial, consumer, and
real estate loans to its customers, located principally within the
Corporation's primary market, which consists of Tennessee and selected markets
in adjacent states. Although the bank subsidiaries have a diversified loan
portfolio, a substantial portion of their debtors' ability to honor their
contracts is dependent upon economic conditions in the Corporation's primary
market.
Loans are either secured or unsecured based on the type of loan and
the financial condition of the borrower. The loans are generally expected to
be repaid from cash flow or proceeds from the sale of selected assets of the
borrower; however, the Corporation is exposed to risk of loss on loans due to
the borrower's difficulties, which may arise from any number of factors
including problems within the respective industry or economic conditions,
including those within the Corporation's primary market.
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
(in thousands) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $136,512 $183,446 $182,957
Provision (credited) charged to operating expenses (9,919) (41,405) 39,249
Allowance of subsidiaries purchased (note 2) 323 1,296 -
- -----------------------------------------------------------------------------------------------------------
Subtotal 126,916 143,337 222,206
- -----------------------------------------------------------------------------------------------------------
Loans charged off 15,917 27,175 54,256
Recoveries of loans previously charged off (18,026) (20,350) (15,496)
- -----------------------------------------------------------------------------------------------------------
Net charge-off (recoveries) (2,109) 6,825 38,760
- -----------------------------------------------------------------------------------------------------------
Net increase in allowance of Heritage for the
period July 1, 1993 to December 31, 1993 411
- -----------------------------------------------------------------------------------------------------------
Balance, December 31 $129,436 $136,512 $183,446
===========================================================================================================
</TABLE>
Net charge-offs (recoveries) by major loan categories were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
(in thousands) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial $(3,843) $ 77 $20,287
Consumer--amortizing mortgages (293) (105) 2,832
Consumer--other 2,033 5,764 10,211
Real estate--construction (143) 466 2,264
Real estate--commercial mortgages and other 137 623 3,166
- -----------------------------------------------------------------------------------------------------------
Total net charge-offs (recoveries) $(2,109) $ 6,825 $38,760
===========================================================================================================
</TABLE>
At December 31, 1994 and 1993, loans on a non-accrual status amounted
to $11.7 million and $23.0 million, respectively. Interest income not
recognized on non-accrual loans was approximately $.3 million in 1994, $1.2
million in 1993, and $3.8 million in 1992.
99-14
<PAGE> 15
Interest income recognized on a cash basis on non-accrual loans was $.8
million, $1.2 million, and $1.0 million for the same respective periods.
Directors and executive officers (and their associates, including
companies in which they hold ten percent or more ownership) of the Corporation
and its significant subsidiary, First American National Bank, had loans
outstanding with the Corporation and its subsidiaries of $13.6 million and $7.5
million at December 31, 1994 and 1993, respectively. During 1994, $40.1
million of new loans or advances on existing loans were made to such related
persons and repayments from such persons totalled $34.0 million. The
Corporation believes that such loans were made on substantially the same terms,
including interest and collateral, as those prevailing at the time for
comparable transactions with other borrowers and did not involve more than the
normal risk of collectibility or present other unfavorable features at the time
such loans were made.
During 1993, the Financial Accounting Standards Board issued 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, which will
be adopted prospectively by the Corporation on January 1, 1995, 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. The Corporation's financial position and results of operations will
not be materially impacted upon the adoption of SFAS No. 114 and No. 118.
NOTE 6: PREMISES AND EQUIPMENT AND LEASE COMMITMENTS
Premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31
------------------------
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 21,007 $ 20,763
Buildings 98,554 101,048
Furniture and equipment 101,193 96,680
Leasehold improvements 18,421 16,804
- -----------------------------------------------------------------------------------------------------------
Subtotal 239,175 235,295
Accumulated depreciation and amortization (128,100) (125,975)
- -----------------------------------------------------------------------------------------------------------
Total premises and equipment $111,075 $109,320
===========================================================================================================
</TABLE>
Depreciation and amortization expense of premises and equipment for
1994, 1993, and 1992 was $14.6 million, $14.4 million and $13.1 million,
respectively.
Non-cancelable minimum operating lease commitments for real property
amount to $8.8 million for 1995; $8.6 million for 1996; $8.2 million for 1997;
$7.7 million for 1998; $7.4 million for 1999; and $38.5 million thereafter. In
the normal course of business, management expects that leases will be renewed
or replaced by other leases. Rent expense, net of rental income on bank
premises, for 1994, 1993, and 1992 was $4.1 million, $3.2 million, and $3.7
million, respectively. Rental income on bank premises for 1994, 1993, and 1992
was $4.2 million, $4.3 million, and $4.2 million, respectively.
The Corporation has a data processing outsourcing agreement expiring
in 2001 that has an average annual base expense, as amended in 1994, of $8.5
million. Total annual fees
99-15
<PAGE> 16
vary with cost of living adjustments and changes in services provided by the
vendor, which services depend upon the Corporation's volume of business and
system needs. The related expense is included in systems and processing
expense in the supplemental consolidated income statements.
NOTE 7: INTANGIBLE ASSETS
Total intangible assets representing core deposit rights and excess of
purchase price of subsidiaries over net assets acquired amounted to $26.6
million and $27.9 million at December 31, 1994 and 1993, respectively, and are
included in other assets on the consolidated balance sheets. Amortization
expense of intangible assets was $3.9 million, $3.8 million, and $3.3 million,
in 1994, 1993, and 1992, respectively.
NOTE 8: SHORT-TERM BORROWINGS
Short-term borrowings are issued on normal banking terms and consisted
of the following:
<TABLE>
<CAPTION>
December 31
-------------------------
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased and securities sold under agreements to repurchase $855,618 $664,826
Other short-term borrowings 74,222 91,937
- -----------------------------------------------------------------------------------------------------------
Total short-term borrowings $929,840 $756,763
===========================================================================================================
</TABLE>
At December 31, 1994 and 1993, Federal funds purchased and securities
sold under agreements to repurchase included Federal funds purchases of $25.0
million (due within three months) and $55.0 million (due within five months),
respectively. Other short-term borrowings is essentially composed of U.S.
Treasury tax and loan accounts.
The following table presents information regarding Federal funds
purchased and securities sold under agreements to repurchase.
<TABLE>
<CAPTION>
December 31
------------------------------------------
(in thousands) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and securities sold under agreements
to repurchase:
Amount outstanding at December 31 $855,618 $664,826 $588,950
Average rate at December 31 4.96 % 2.75 % 2.71 %
Average amount outstanding during the year $681,170 $587,059 $519,521
Average rate paid for the year 3.80 % 2.64 % 3.14 %
Maximum amount outstanding at any month-end $855,618 $672,614 $588,950
===========================================================================================================
</TABLE>
NOTE 9: LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------------
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Bank advances $219,655 $ 10,984
6 7/8% subordinated notes (effective rate of 6.965%) due 2003, interest
payable semiannually (less unamortized discount of $265 in 1994
and $297 in 1993) 49,735 49,703
7 5/8% debentures due December 15, 2002, interest payable semiannually - 13,593
Other 1,302 1,720
Employee stock ownership plan obligation 781 1,053
- -----------------------------------------------------------------------------------------------------------
Total long-term debt $271,473 $77,053
===========================================================================================================
</TABLE>
99-16
<PAGE> 17
At December 31, 1994, advances from the Federal Home Loan Bank (FHLB)
were $219.7 million, which consisted of $200.5 million maturing in 1997 and
$10.0 million maturing in 2004 with interest rates tied to one-month LIBOR and
$9.2 million at various fixed interest rates and maturities. The Corporation's
FHLB advances are collateralized by a blanket pledge of 1-4 family mortgage
loans.
During the first quarter of 1993, the Corporation filed a shelf
registration statement with the Securities and Exchange Commission to issue
$100.0 million of subordinated debt securities. The Corporation issued $50.0
million of subordinated notes under the shelf registration statement during
second quarter 1993. The notes are non-callable.
On January 31, 1994, the Corporation redeemed the remaining balance of
approximately $13.6 million of its 7 5/8% debentures due in 2002, at a price of
101.22% of par.
The Corporation owns a parking garage which was financed through an
Industrial Revenue Bond due April 1, 1997. Indebtedness at December 31, 1994
and 1993, totalled $1.1 million and $1.4 million, respectively. Sinking fund
requirements of this debt amount to $.3 million for 1995 and $.4 million for
1996; the balance of $.4 million is due in 1997. The interest rate on these
bonds is 5.9% for the remaining life of the bonds.
See note 10 for discussion of the employee stock ownership plan obligation.
During 1994, the Corporation entered into a three-year unsecured
revolving credit agreement which provides for loans up to $50.0 million. Under
the terms of the agreement, which expires in March 1997, the Corporation pays a
fee for the availability of these funds computed at the rate of 1/4 of 1% per
annum on the commitment. Interest to be paid on the outstanding balances will
be computed based on the prime interest rate of the lending banks, Eurodollar
rates, or adjusted certificate of deposit rates, as selected by the
Corporation. The Corporation had no revolving credit borrowings outstanding at
December 31, 1994 or 1993.
The terms of these agreements provide for, among other things,
restrictions on payment of cash dividends and purchases, redemptions, and
retirement of capital shares. Under the Corporation's most restrictive debt
covenant, approximately $88.6 million of retained earnings was available to pay
dividends as of December 31, 1994.
NOTE 10: EMPLOYEE BENEFITS
RETIREMENT PLAN
The Corporation and its subsidiaries participate in a non-contributory
retirement plan with death and disability benefits covering substantially all
employees with one or more years of service. The benefits are based on years
of service and average monthly earnings of a participant for the 60 consecutive
months which produce the highest average earnings.
99-17
<PAGE> 18
The following table sets forth the plan's funded status and amounts
recognized in the Corporation's supplemental consolidated balance sheets at
December 31, 1994 and 1993:
<TABLE>
<CAPTION>
(in thousands) 1994 1993
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Plan assets at fair value, primarily U.S. bonds and listed stocks $86,868 $87,315
----------------------------------------------------------------------------------------------------------
Actuarial present value of benefits for service rendered to date:
Accumulated benefit obligation, including vested benefits of $74,630 and
$73,037, respectively 78,481 76,314
Additional benefits based on projected future compensation 12,099 12,750
----------------------------------------------------------------------------------------------------------
Projected benefit obligation 90,580 89,064
----------------------------------------------------------------------------------------------------------
Plan assets in excess of accumulated benefit obligation 8,387 11,001
----------------------------------------------------------------------------------------------------------
Plan assets greater (less) than projected benefit obligation (3,712) (1,749)
Unrecognized net loss from past experience different from that assumed and
effects of changes in assumptions 11,411 6,364
Unrecognized net transition asset (2,069) (2,401)
Unrecognized prior service cost 582 806
----------------------------------------------------------------------------------------------------------
Prepaid pension cost $ 6,212 $ 3,020
===========================================================================================================
</TABLE>
Net pension expense included the following components:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
(in thousands) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during the period $2,882 $2,600 $2,498
Interest cost on projected benefit obligation 6,639 6,276 5,771
Actual return on plan assets 997 (7,022) (4,270)
Net amortization and deferral (9,047) 704 (1,823)
- ----------------------------------------------------------------------------------------------------------
Net periodic pension expense $1,471 $2,558 $2,176
==========================================================================================================
</TABLE>
As of January 1, 1994, the Corporation elected to change its method of
measuring the market-related value of plan assets from utilizing a calculation
based on 50% book value plus 50% fair market value to utilization of 100% fair
market value. The change had the effect of decreasing 1994 net periodic
pension expense by $1.6 million.
The following table presents assumptions used in determining the
actuarial present value of the projected benefit obligation for the pension
plan:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1994 1993
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Weighted average discount rate 8.0% 7.5%
Rate of increase in future compensation level 4.5 4.5
Expected long-term rate of return on plan assets 9.0 9.0
==========================================================================================================
</TABLE>
SUPPLEMENTAL RETIREMENT PLAN
The Corporation has a supplemental retirement plan which provides
supplemental retirement benefits to certain executives of the Corporation. The
expense was $.2 million in 1994, $.1 million in 1993, and $.7 million in 1992.
The higher level of expense in 1992 was due to early retirements. Benefit
payments from the plan are made from general assets of the Corporation. The
weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation in 1994 were 8.0% and 4.5%, respectively, and in 1993 were 7.5% and
4.5%, respectively.
99-18
<PAGE> 19
OTHER POSTRETIREMENT BENEFITS
In addition to pension benefits, the Corporation and its subsidiaries
have defined postretirement benefit plans that provide medical insurance and
death benefits for retirees and eligible dependents. Because the death benefit
plan is not significant, it is combined with the health care plan for
disclosure purposes.
Effective January 1, 1993, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," which requires the cost of
postretirement benefits other than pensions to be recognized on an accrual
basis as employees perform services to earn such benefits. The Corporation's
previous practice, like most companies, was to expense such costs on a
pay-as-you-go basis. The Corporation recognized this change during 1993 as a
cumulative effect of a change in accounting principle, resulting in a one-time
non-cash charge of $17.5 million before taxes ($11.6 million after taxes).
This charge represents the discounted present value of expected future retiree
medical and death benefits attributed to employees' service rendered prior to
1993. See note 13.
The status of the plans at December 31, 1994 and 1993, was as follows:
<TABLE>
<CAPTION>
December 31
------------------------
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $11,903 $12,699
Fully eligible, active plan participants 1,555 1,358
Other active plan participants 3,964 4,176
- -----------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 17,422 18,233
Plan assets at market value - -
- -----------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess of plan assets 17,422 18,233
Unrecognized net gain (loss) from past experience different from that
assumed and effects of changes in assumptions 912 (510)
- -----------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $18,334 $17,723
===========================================================================================================
</TABLE>
The components of net periodic expense for postretirement benefits in
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
December 31
------------------------
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service cost - benefits earned during the year $ 362 $ 314
Interest cost on accumulated postretirement benefit obligation 1,292 1,355
- -----------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit expense $ 1,654 $ 1,669
===========================================================================================================
</TABLE>
The Corporation continues to fund medical and death benefit costs
principally on a pay-as-you-go basis. Postretirement benefit expense for 1992,
which was recorded on a cash basis, has not been restated and was $.6 million.
For measurement purposes, an 11.0% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1994, declining
gradually to 5.5% per year by 2011 and remaining at that level thereafter. The
discount rate used to determine the accumulated postretirement benefit
obligation was 8.0% in 1994 and 7.5% in 1993, and the assumed long-term rate of
compensation increase was 4.5% in 1994 and 1993.
99-19
<PAGE> 20
The health care cost trend rate assumption has a significant effect on
the accumulated postretirement benefit obligation and net periodic benefit
costs. A 1% increase in the trend rate for health care costs would have
increased the accumulated postretirement benefit obligation by $1.5 million as
of December 31, 1994, and the net periodic expense (service cost and interest
cost) would have increased by $.1 million for 1994.
POSTEMPLOYMENT BENEFITS
Effective December 31, 1993, the Corporation adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," which requires employers
to recognize a liability for postemployment benefits under certain
circumstances. The Corporation's short-term and long-term disability benefits,
survivor income benefits, and certain other benefits are governed by this
statement. The Corporation recognized this item during the fourth quarter of
1993 as a cumulative effect of a change in accounting principle, resulting in a
one-time non-cash charge of $2.0 million before taxes ($1.3 million after
taxes). Prior to this date, postemployment benefit expenses were recognized on
a pay-as-you-go basis. See note 13.
OTHER EMPLOYEE BENEFITS
The Corporation has executive incentive compensation plans covering
certain officers and other key employees of the Corporation. The plans provide
for incentives based on the attainment of annual and long-term performance
goals. Executive incentive compensation plans also include stock option
programs, which provide for the granting of statutory incentive stock options
and non-statutory options to key employees. Additionally, the Corporation has
a stock option plan for non-employee directors. As of December 31, 1994, the
Corporation had 3.6 million shares of common stock reserved for issuance under
these plans.
During 1991 through 1994, the Corporation issued approximately 213
thousand shares of restricted common stock to certain executive officers. The
restrictions lapse within 15 years; however, if certain performance criteria
are met, restrictions will lapse earlier. The amount recorded for the
restricted stock issued is based on the market value of the Corporation's
common stock on the award dates and is shown as deferred compensation in the
supplemental consolidated statements of changes in shareholders' equity. Such
compensation expense is recognized over a 3- to 15-year period.
Stock options granted under option programs have been at 85% to 133%
of the market price on the day of grant. Each stock option is for one share of
common stock. Some options are exercisable immediately, while some options are
exercisable over a period of time and may be exercisable earlier if certain
performance criteria are met. All options expire within a ten-year period from
the date of grant. The market price of the Corporation's stock was $26.88 at
December 31, 1994.
99-20
<PAGE> 21
The following table presents a summary of stock option and restricted
stock activity:
<TABLE>
<CAPTION>
Total Exercisable Exercise
Available Option Shares Option Shares Price
for Grant Outstanding Outstanding Per Share
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPTIONS OUTSTANDING, DECEMBER 31, 1991 767,432 1,441,588 805,417 $8.875 - $27.375
Shares reserved 776,353 - - N/A
Options granted (691,967) 691,967 142,005 7.085 - 22.875
Restricted stock incentive awards (35,600) - - N/A
Options which became exercisable - - 546,926 8.875 - 26.875
Options exercised - (279,417) (279,417) 8.875 - 23.50
Options cancelled or expired 227,681 (227,681) (214,181) 8.875 - 27.375
Expiration of shares available for
grant (280,141) - - N/A
- -------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING, DECEMBER 31, 1992 763,758 1,626,457 1,000,750 7.085 - 27.375
Shares reserved 200,000 - - N/A
Options granted (234,500) 234,500 - 25.50 - 33.125
Restricted stock incentive awards (83,400) - - N/A
Options which became exercisable - - 106,440 14.75 - 22.875
Options exercised - (202,544) (202,544) 7.085 - 27.375
Options cancelled or expired 4,250 (19,731) (16,181) 21.125 - 27.375
- -------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING, DECEMBER 31, 1993 650,108 1,638,682 888,465 7.085 - 33.125
Shares reserved 1,515,393 - - N/A
Options granted (547,617) 547,617 91,167 10.74 - 40.00
Restricted stock incentive awards (49,317) - - N/A
Options which became exercisable - - 196,937 7.085 - 29.50
Options exercised - (116,339) (116,339) 7.085 - 27.750
Options cancelled or expired 129,642 (135,937) (94,437) 8.785 - 40.00
Adjustment for change in fiscal
year of pooled company (72,381) 65,558 114,076 7.085 - 17.56
- -------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING, DECEMBER 31, 1994 1,625,828 1,999,581 1,079,869 $7.085 - $40.00
=============================================================================================================
</TABLE>
The Corporation has a combination savings thrift and profit-sharing
plan ("FIRST Plan") available to substantially all full-time employees. In
connection with the plan, 1,285,000 shares of the Corporation's common stock
have been reserved for issuance. At year-end 1994, 1,279,000 of these shares
had been issued. During 1994, 1993, and 1992, 149,360 shares, 94,193 shares,
and 3,538 shares, respectively, were purchased in the open market for the FIRST
Plan. During 1992, 62,961 shares were issued by the Corporation in connection
with the FIRST Plan (none in 1994 or 1993). The plan is funded by employee and
employer contributions. The Corporation's annual contribution to the plan is
based upon the amount of basic contributions of participants, participants'
compensation, and the achievement of certain corporate performance standards
and may be made in the form of cash or the Corporation's common stock with a
market value equal to the cash contribution amount. Total plan expense in
1994, 1993, and 1992 was $3.5 million, $3.0 million, and $1.3 million,
respectively. During 1994, 1993, and 1992, the Corporation matched
participating employees' qualifying contributions by 100%, 100%, and 50%,
respectively.
Heritage, which merged with the Corporation effective November 1,
1995, maintained an employee stock ownership plan (ESOP). The ESOP, which
remained in existence subsequent to the merger, covers substantially all
Heritage employees who qualified as to age and length of service. The
supplemental consolidated financial statements for each of the years ended
December 31, 1994, 1993, and 1992, include compensation expense of
approximately $.1 million.
The ESOP has a note payable guaranteed by Heritage which is payable in
quarterly principal payments of approximately $30 thousand plus interest at the
lender's base rate
99-21
<PAGE> 22
through March 30, 2002. At December 31, 1994, the note payable bore interest
at 8.5% and had a balance of $.8 million.
NOTE 11: FIRST AMERICAN FOUNDATION
The Corporation's non-interest expenses for 1993 included a $10.0
million charitable contribution to First American Foundation, a not-for-profit
private foundation formed in 1993 to facilitate the Corporation's charitable
contributions.
NOTE 12: INCOME TAXES
The components of income tax expense (benefit) for the years ended
December 31 were:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
(in thousands) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense:
Federal $39,834 $42,476 $21,478
State 7,204 7,524 4,819
- ----------------------------------------------------------------------------------------------------------
Total current income tax expense 47,038 50,000 26,297
- ----------------------------------------------------------------------------------------------------------
Deferred income tax expense (benefit):
Federal 9,964 12,724 (6,270)
State 402 (1,376) (6)
- ----------------------------------------------------------------------------------------------------------
Total deferred income tax expense (benefit) from operations 10,366 11,348 (6,276)
- ----------------------------------------------------------------------------------------------------------
Total income tax expense from operations $57,404 $61,348 $20,021
==========================================================================================================
</TABLE>
The 1992 total income tax expense for financial reporting purposes
included the benefit from utilization of tax credit carryforwards amounting to
$5.6 million (general business credit carryforwards of $4.9 million and
alternative minimum tax credits of $.7 million).
Current Federal income tax expense includes the utilization of
alternative minimum tax credits amounting to $3.4 million in 1992.
The following table presents a reconciliation of the provision for
income taxes as shown in the supplemental consolidated income statements with
that which would be computed by applying the statutory Federal income tax rates
of 35% for 1994 and 1993, and 34% for 1992 to income before income tax expense
and the cumulative effect of changes in accounting principles.
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
(in thousands) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rates $54,112 $59,065 $22,499
Increase (decrease) in taxes resulting from:
Tax-exempt interest (2,214) (2,413) (2,815)
State income taxes, net of Federal income tax benefit 4,945 4,004 3,174
Federal income tax rate change adjustment of deferred
taxes - (1,783) 158
Provision for audits in process - - 1,000
Utilization of tax credits - - (5,623)
Other, net 561 2,475 1,628
- ----------------------------------------------------------------------------------------------------------
Actual tax expense from operations $57,404 $61,348 $20,021
==========================================================================================================
</TABLE>
99-22
<PAGE> 23
Effective January 1, 1993, the Corporation prospectively adopted SFAS
No. 109, which required a change from the deferred method (an income statement
approach) of accounting for income taxes under Accounting Principles Bulletin
No. 11 to the asset and liability method of accounting for income taxes.
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. The cumulative effect of the adoption of
SFAS No. 109 was a $12.8 million benefit. See Note 13.
Heritage adopted SFAS No. 109 on a prospective basis for its fiscal
year beginning July 1, 1993. This adoption resulted in an increase in the
Corporation's deferred tax asset of $764 thousand, which is included in the
adjustment for change in fiscal year of the pooled company in the accompanying
supplemental consolidated statement of changes in shareholders' equity.
SFAS No. 109 requires that the tax benefit of deductible temporary
differences be recorded as an asset to the extent that management assesses the
utilization of such temporary differences to be "more likely than not." In
accordance with SFAS No. 109, the realization of tax benefits of deductible
temporary differences depends on whether the Corporation has sufficient taxable
income within the carryback and carryforward period permitted by the tax law to
allow for utilization of the deductible amounts. As of January 1, 1993, the
Corporation had net deductible temporary differences of $165.5 million. For
state purposes, Tennessee law does not permit carrybacks and thus a valuation
allowance was established for the portion of the net deductible temporary
differences for which realization was uncertain. A valuation allowance of $3.9
million was established (as of January 1, 1993).
The net change in the valuation allowance for 1994 was a decrease of
$1.3 million. In 1993, the net change in the valuation allowance was a
decrease of $2.6 million; consisting of an increase related to the adoption of
SFAS No. 106 (accounting for postretirement benefits) of $1.1 million, an
increase related to the adoption of SFAS 112 (accounting for postemployment
benefits) of $.1 million, and a decrease of $3.8 million related to continuing
operations.
Accumulated deferred taxes aggregated net assets of $51.6 million at
December 31, 1994 and $39.0 million at December 31, 1993, and are included in
other assets on the supplemental consolidated balance sheets. Management
believes that it is more likely than not that the deferred tax assets, net of
the valuation allowance (if any), will be realized.
99-23
<PAGE> 24
The tax effects of temporary differences that give rise to the significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1994 and 1993, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
(in thousands) 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $48,028 $49,952
Postretirement benefit obligation 7,975 7,391
Deferred directors' compensation 2,398 2,170
Deferred loan fees 1,645 2,229
Unrealized loss on securities available for sale 8,694 -
Other 8,542 9,534
- ------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 77,282 71,276
Less valuation allowance - (1,346)
- ------------------------------------------------------------------------------------------------------------
Net deferred tax assets, net of valuation allowance 77,282 69,930
- ------------------------------------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant, and equipment 5,369 6,319
Direct lease financing 13,931 5,000
Unrealized gain on securities available for sale - 14,039
Core deposit intangibles 2,402 2,475
Other 3,990 3,138
- ------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 25,692 30,971
- ------------------------------------------------------------------------------------------------------------
Net deferred tax assets $51,590 $38,959
============================================================================================================
</TABLE>
The tax effects of timing differences that give rise to significant
portions of deferred tax expense (benefit) for the year ended December 31, 1992
are as follows:
<TABLE>
<CAPTION>
Year Ended
(in thousands) December 31, 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Provision for loan losses $ (29)
Leasing operations (1,100)
Accelerated depreciation (1,793)
Deferred loan fees (1,342)
Pension expense 343
Write-down on foreclosed properties (398)
Accreted discount 114
Directors' deferred compensation (111)
Legal contingency 133
Charitable contributions 61
Other, net (445)
- -------------------------------------------------------------------------------------------------------------
Total deferred income tax benefit available (4,567)
Deferred tax assets recognized (1,709)
- -------------------------------------------------------------------------------------------------------------
Total deferred income tax benefit $(6,276)
=============================================================================================================
</TABLE>
During 1994, the Corporation and the Internal Revenue Service (IRS)
reached a settlement agreement related to the IRS's examination of the
Corporation's 1989 and 1990 consolidated Federal income tax returns. Such
settlement had no material impact on the Corporation's supplemental
consolidated financial statements.
99-24
<PAGE> 25
NOTE 13: CHANGES IN ACCOUNTING PRINCIPLES
The cumulative effect of changes in accounting principles reflected in
the 1993 supplemental consolidated income statement relates to the
Corporation's 1993 adoption of Statements of Financial Accounting Standards
(SFAS), as follows:
<TABLE>
<CAPTION>
Year Ended
(in thousands) December 31, 1993
-----------------------------------------------------------------------------------------------------------
<S> <C>
SFAS No. 106 regarding postretirement benefits, net of tax $(11,550)
SFAS No. 109 regarding income taxes 12,766
SFAS No. 112 regarding postemployment benefits, net of tax (1,300)
-----------------------------------------------------------------------------------------------------------
Total $ (84)
============================================================================================================
</TABLE>
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," and No. 112, "Employers' Accounting for Postemployment
Benefits," are discussed in note 10 (employee benefits), and SFAS No. 109,
"Accounting for Income Taxes," is addressed in note 12 (income taxes). See
note 4 for a discussion regarding the impact to the 1993 supplemental
consolidated financial statements resulting from the December 31, 1993,
adoption of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
NOTE 14: COMMON STOCK
In December 1994, the Board of Directors authorized the repurchase of
up to 800,000 shares of the Corporation's common stock. It is anticipated that
stock repurchases will be made in the open market or in privately negotiated
transactions from time to time during 1995, subject to market conditions and
regulatory guidelines. Following these purchases, the Corporation expects to
continue to exceed all applicable regulatory capital requirements. It is
anticipated that the repurchased shares will be used to fund the Corporation's
various employee benefit plans and potential future acquisitions.
On September 30, 1992, the Corporation completed an underwritten
public offering of its common stock at $21.25 per share, resulting in the
issuance of 2,012,500 shares. A $40.8 million addition to shareholders' equity
in 1992 resulted from the offering.
On March 30, 1992, Heritage Federal Bank for Savings converted from a
mutual savings bank to a capital stock savings bank. It issued all of its
outstanding capital stock to Heritage, a holding company for Heritage Federal
Bank for Savings. Heritage consummated a public offering of 2,426,684 shares
after stock splits (1,213,342 shares before stock splits) which generated net
proceeds of $16.0 million after conversion costs of $1.1 million.
NOTE 15: OFF-BALANCE-SHEET AND DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Corporation is a party to
financial transactions which have off-balance-sheet risk. Such transactions
arise in meeting customers' financing needs and from the Corporation's
activities in reducing its own exposure to fluctuations in interest rates.
Off-balance-sheet items involving customers consist primarily of commitments to
extend credit and letters of credit, which generally have fixed expiration
dates. These
99-25
<PAGE> 26
instruments may involve, to varying degrees, elements of credit and interest
rate risk. To evaluate credit risk, the Corporation uses the same credit
policies in making commitments and conditional obligations on these instruments
as it does for instruments reflected on the balance sheet. Collateral
obtained, if any, varies but may include deposits held in financial
institutions; U.S. Treasury securities or other marketable securities;
income-producing commercial properties; accounts receivable; property, plant,
and equipment; and inventory. The Corporation's exposure to credit risk under
commitments to extend credit and letters of credit is the contractual
(notional) amount of the instruments. Interest rate swap transactions and
futures contracts may have credit and interest rate risk significantly less
than the contractual amount.
COMMITMENTS
Commitments to extend secured or unsecured credit are contractual
agreements to lend money providing there is no violation of any condition.
Commitments may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. At year-end 1994 and 1993,
respectively, the Corporation had $1.9 billion and $1.3 billion of unfunded
commitments to extend credit. Of these amounts, unfunded commitments for
borrowers with loans on non-accrual status were $.5 million at December 31,
1994, and $5.3 million at December 31, 1993.
Standby letters of credit are commitments issued by the Corporation to
guarantee the performance of a customer to a third party. As of December 31,
1994 and 1993, the Corporation had standby letters of credit issued amounting
to approximately $188.8 million and $135.4 million, respectively. The
Corporation also had commercial letters of credit of $54.7 million and $56.3
million at December 31, 1994 and 1993, respectively. Commercial letters of
credit are conditional commitments issued by the Corporation to facilitate
trade for corporate customers. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers.
The Corporation contracts to buy and sell foreign exchange in order to
meet the financing needs of its customers and to hedge its own exposure against
market risk. At December 31, 1994 and 1993, the Corporation had $26.2 million
and $12.7 million, respectively, of foreign exchange forward contracts, which
is the sum of customers' contracts with the Corporation and the Corporation's
offsetting contracts to minimize its exposure.
DERIVATIVES
The Corporation's principal objective in holding or issuing derivative
financial instruments for purposes other than trading is the management of
interest rate exposure arising out of nontrading assets and liabilities. The
Corporation's earnings are subject to risk of interest rate fluctuations to the
extent that interest-earning assets and interest-bearing liabilities mature or
reprice at different times or in differing amounts. Asset/liability management
activities are aimed at maximizing net interest income within liquidity,
capital and interest rate risk constraints established by management. The
Corporation's objective is that net income will not be impacted more than 5%
from results simulated for the interest
99-26
<PAGE> 27
rate environment that the Corporation considers most likely, assuming that
interest rates do not vary more than 150 basis points from the most likely
scenario within the next 12 months.
To achieve its risk management objective, the Corporation uses a
combination of derivative financial instruments, particularly interest rate
swaps and futures contracts. The instruments utilized are noted in the
following table along with their notional amounts and fair values at year-end
1994 and 1993.
<TABLE>
<CAPTION>
Weighted
Weighted Average Rate Average
Related Variable Rate Notional --------------------- Maturity Fair
(in thousands) Asset/Liability Amount Paid Received Years Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1994
Interest rate
swaps Money market deposits $ 450,000 5.85% (1) 5.71% (2) 1.7 $13,426
Interest rate
swaps Long-term debt 200,000 7.11 (1) 6.06 (3) 1.8 2,477
Interest rate
swaps Loans 200,000 5.90 (3) 7.39 (1) 4.4 (4,273)
Forward interest
rate swaps Money market deposits 650,000 7.81 (4) N/A (4) 1.9 (4) 5,946
Basis swaps Held to maturity
securities 200,000 5.72 (5) 5.56 (2) .3 286
---------- -------
$1,700,000 $17,862
==================================================================================================================
DECEMBER 31, 1993
Interest rate
swaps Money market deposits $ 900,000 4.49% (1) 3.43% (2) 1.2 $(2,391)
Basis swaps Held to maturity 200,000 3.04 (5) 3.38 (2) 1.3 (615)
securities
Futures contracts
(6) Money market deposits 300,000 N/A N/A 1.5 (6) 31
---------- -------
$1,400,000 $(2,975)
==================================================================================================================
</TABLE>
(1) Fixed rate.
(2) Variable rate which reprices quarterly based on 3-month LIBOR except for
$25 million which reprices every 6 months based on 6-month LIBOR.
(3) Variable rate which reprices quarterly based on 3-month LIBOR.
(4) Forward swap periods begin in June 1995 for $200 million and December 1995
for $450 million. The rates to be paid are fixed and were set at the
inception of the contracts. Variable rates are based on 3-month LIBOR but
are currently unknown since they will not be established until the affected
periods begin.
(5) Variable rate which reprices quarterly based on 5-year constant maturity
Treasury rate less a constant spread.
(6) Represents $300 million short position of Eurodollar futures contracts
which in aggregate simulated a $100 million 9-month interest rate swap.
Notional amounts are key elements of derivative financial instrument
agreements. However, notional amounts do not represent the amounts exchanged
by the parties to derivatives and do not measure the Corporation's exposure to
credit or market risks. The amounts exchanged are based on the notional
amounts and the other terms of the underlying derivative agreements. The
Corporation's credit exposure at the reporting date from derivative financial
instruments is represented by the fair value of instruments with a positive
fair value at that date and is presented above along with the notional amounts
of the instruments. Credit risk disclosures, however, relate to accounting
losses that would be recognized if counterparts failed completely to perform
their obligations.
The risk that counterparts to derivative financial instruments might
default on their obligations is monitored on an ongoing basis. To manage the
level of credit risk, the Corporation reviews the credit standing of its
counterparts and enters into master netting agreements whenever possible, and
when appropriate, obtains collateral. Master netting agreements incorporate
rights of setoff that provide for the net settlement of subject contracts with
the same counterparts in the event of default.
99-27
<PAGE> 28
Interest rate swap contracts are primarily used to convert certain
deposits and long-term debt to fixed interest rates or to convert certain
groups of customer loans to fixed rates. The Corporation's net credit exposure
with interest rate swap counterparts totalled $18.3 million at December 31,
1994, and $.5 million at December 31, 1993.
The table below summarizes, by notional amounts, the activity for each
major category of derivative financial instruments.
<TABLE>
<CAPTION>
Forward
Interest Rate Swaps Swaps
---------------------- ------------ Interest
Pay Receive Pay Futures Rate
(in thousands) Fixed Fixed Fixed Basis Swaps Contracts Floor
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $ 550,000 $ - $ - $ - $ - $ 200,000
Additions 450,000 - - 200,000 400,000 -
Maturities/terminations (100,000) - - - (100,000) (200,000)
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 900,000 - - 200,000 300,000 -
Additions 600,000 200,000 650,000 - 475,000 -
Maturities/terminations (850,000) - - - (775,000) -
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ 650,000 $ 200,000 $ 650,000 $ 200,000 $ - $ -
===========================================================================================================
</TABLE>
The table below presents the deferred gains, included in other
liabilities on the supplemental consolidated balance sheets, related to
terminated derivative financial instruments at December 31, 1994 and 1993.
<TABLE>
<CAPTION>
December 31,
--------------------------------
(in thousands) 1994 1993
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate swaps $2,792 $ -
Futures contracts 3,369 79
----------------------------------------------------------------------------------------------------------
Total deferred gains $6,161 (1) $ 79 (2)
==========================================================================================================
</TABLE>
(1) $4,645 will be amortized into income during 1995 and $1,516 will be
amortized during 1996.
(2) Amortized into income during 1994.
NOTE 16: LEGAL AND REGULATORY MATTERS
The extent to which dividends may be paid to the Corporation from its
subsidiaries is governed by applicable laws and regulations. For the
Corporation's national bank subsidiaries, the approval of the OCC is required
if dividends declared in any year exceed net profits for that year (as defined
under the National Bank Act) combined with the retained net profits of the two
preceding years. In addition, a national bank may not pay a dividend, make any
other capital distribution, or pay management fees if such payment would cause
it to fail to satisfy certain minimum capital requirements. In accordance with
the most restrictive of these restrictions, at December 31, 1994, FANB and
FANBKY had $167.6 million and $1.3 million, respectively, available for
distribution as dividends to the Corporation. For the trust company bank
subsidiary, approximately $1.4 million was available for distribution as
dividends to the Corporation as of December 31, 1994.
The Corporation and seven other financial institutions are defendants
in a class action lawsuit brought in the Circuit Court of Shelby County,
Tennessee. The lawsuit alleges antitrust, unconscionability, usury, and
contract claims arising out of the defendant's returned check charges. The
asserted plaintiff class consists of depositors who have been
99-28
<PAGE> 29
charged returned check or overdraft fees. The plaintiffs are requesting
compensatory and punitive damages of $25.0 million against each defendant. The
antitrust, unconscionability, and usury claims were previously dismissed, and
in December 1993, the Circuit Court granted the defendants' motion for summary
judgment and dismissed the remaining claim. The plaintiffs have appealed. In
addition, an antitrust lawsuit alleging a price fixing conspiracy has been
filed by the plaintiffs against the Corporation and eight other financial
institutions in the U.S. District Court for the Western District of Tennessee.
In March 1994, the District Court granted the defendants' motion for summary
judgment dismissing the action. The plaintiffs have also appealed in this
lawsuit. 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.
Also, there are from time to time other legal proceedings pending
against the Corporation and its subsidiaries. In the opinion of management and
counsel, liabilities, if any, arising from such proceedings presently pending
would not have a material adverse effect on the consolidated financial
statements of the Corporation.
NOTE 17: FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures about Fair Value of Financial Instruments," requires disclosure of
fair value information about financial instruments for both on- and
off-balance- sheet assets and liabilities for which it is practicable to
estimate fair value. The techniques used for this valuation are significantly
affected by the assumptions used, including the amount and timing of future
cash flows and the discount rate. Such estimates involve uncertainties and
matters of judgment and therefore cannot be determined with precision. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets. Accordingly, the aggregate fair value amounts
presented are not meant to represent the underlying value of the Corporation.
99-29
<PAGE> 30
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------
1994 1993
------------------------- ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial instruments (assets):
Cash and short-term investments $ 517,771 $ 517,771 $ 517,317 $ 517,317
Securities held to maturity 1,643,867 1,559,241 807,096 823,492
Securities available for sale 689,464 689,464 1,396,612 1,396,612
Federal funds sold and securities purchased
under agreement to resell 28,134 28,134 153,860 153,860
Trading account securities 8,617 8,617 12,263 12,263
Loans, net of unearned discount and net
deferred loan fees 5,171,966 4,964,536 4,669,571 4,632,121
Financial instruments (liabilities):
Non-interest bearing deposits $1,252,136 $1,252,136 $1,240,543 $1,240,543
Interest bearing deposits 5,055,643 4,927,289 4,910,008 4,922,732
------------------------------------------------------------------------------------------------------------
Total deposits 6,307,779 6,179,425 6,150,551 6,163,275
Short-term borrowings 929,840 929,840 756,763 756,763
Long-term debt 271,473 264,466 77,053 77,766
============================================================================================================
</TABLE>
The estimated fair values for the Corporation's off-balance-sheet
financial instruments are summarized as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------
1994 1993
------------------------- --------------------------
Contractual Estimated Contractual Estimated
or Notional Fair or Notional Fair
(in thousands) Amount Value Amount Value
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to extend credit $1,888,789 $ 2,501 $1,349,044 $ 2,608
Standby letters of credit 188,833 953 135,402 718
Commercial letters of credit 54,706 141 56,282 142
Interest rate swaps 850,000 11,630 900,000 (2,391)
Forward interest rate swaps 650,000 5,946 - -
Basis swaps 200,000 286 200,000 (615)
Futures contracts - - 300,000 31
============================================================================================================
</TABLE>
The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments.
Cash and short-term investments -- The carrying amounts reported in the
balance sheet approximate fair values since such instruments mature within
90 days or less and present no anticipated credit concerns.
Securities held to maturity, securities available for sale, and trading
account securities -- Fair values are based on quoted market prices or
dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans -- For variable loans that reprice frequently, fair values are based
on carrying values. The fair values for certain homogeneous categories of
loans, such as residential mortgages, are estimated using quoted market
prices for securities backed by similar loans, adjusted for differences in
loan characteristics. The fair values for other performing loans are
estimated by discounting estimated future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
risk and for similar maturities. Included within financial assets are
certain nonperforming assets, consisting primarily of nonperforming loans,
the fair values of which are based principally on the lower of the amount
due from customers or the fair value of the loans' collateral, which is the
amount the Corporation could reasonably expect to receive in a current sale
between a willing buyer and seller other than in a forced or liquidation
sale.
Deposits -- The fair value of deposits with no stated maturity, such as
demand deposits, NOW accounts, money market accounts, and regular savings
accounts, is equal to the amount payable on demand at the reporting date.
The fair value of certificates of deposits and other fixed maturity time
deposits is estimated using the rates currently offered for deposits of
similar remaining maturities. Any foreign deposits are valued at the
carrying value due to the frequency with which rates for such deposits are
adjusted to a market rate.
99-30
<PAGE> 31
Short-term borrowings -- Fair value is estimated to equal the carrying
amount since these instruments have a relatively short maturity.
Long-term debt -- Rates for long-term debt with similar terms and remaining
maturities are used to estimate fair value of existing debt.
Off-balance-sheet instruments -- The fair value of commitments to extend
credit is based on unamortized deferred loan fees and costs. For letters of
credit, fair value is estimated using fees currently charged to enter into
similar agreements with similar maturities. The fair value of the
Corporation's outstanding futures contracts is based on quoted market
prices, and the estimated fair value of interest rate swaps is based on
estimated costs to settle the obligations with the counterparts at the
reporting date.
NOTE 18: SUPPLEMENTAL PARENT COMPANY FINANCIAL INFORMATION
Supplemental Condensed financial information for First American
Corporation (Parent Company only) was as follows:
SUPPLEMENTAL CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-------------------------
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 2,476 $ 327
Securities held to maturity - 174
Securities available for sale 540 -
Short-term investments with subsidiary 71,466 70,067
Investment in subsidiaries, at cost adjusted for equity in earnings and
net unrealized gains (losses) on securities available for sale 620,068 595,188
Other assets 7,310 7,187
- -----------------------------------------------------------------------------------------------------------
Total assets $701,860 $672,943
===========================================================================================================
Liabilities and shareholders' equity
Long-term debt $ 50,515 $ 64,349
Other liabilities 2,930 4,290
- -----------------------------------------------------------------------------------------------------------
Total liabilities 53,445 68,639
- -----------------------------------------------------------------------------------------------------------
Preferred stock, without par value - -
Common stock, $5 par value 143,625 139,574
Capital surplus 130,933 128,195
Retained earnings 390,380 317,390
Deferred compensation on restricted stock (2,161) (1,851)
Employee stock ownership plan obligation (781) (1,053)
- -----------------------------------------------------------------------------------------------------------
Realized shareholders' equity 661,996 582,255
Net unrealized gains (losses) on securities available for sale, net of
tax (13,581) 22,049
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 648,415 604,304
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $701,860 $672,943
===========================================================================================================
</TABLE>
99-31
<PAGE> 32
SUPPLEMENTAL CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
(in thousands) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from subsidiaries:
Banks $ 44,037 $ 11,763 $ 4,481
Trust Company 2,918 2,491 750
Fees from subsidiaries 2,714 - 866
Interest from subsidiaries 2,102 1,359 912
Interest on time deposits with other banks and other
income 262 1,131 311
- ----------------------------------------------------------------------------------------------------------
Total income 52,033 16,744 7,320
- ----------------------------------------------------------------------------------------------------------
Expenses
Interest expense on long-term debt 3,595 3,751 1,191
Other expenses 4,270 2,100 1,072
- ----------------------------------------------------------------------------------------------------------
Total expenses 7,865 5,851 2,263
- ----------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of changes
in accounting principles 44,168 10,893 5,057
Reduction to consolidated income taxes arising from parent
company loss 1,058 1,295 60
- ----------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings (loss) of
subsidiaries and cumulative effect of changes in accounting
principles 45,226 12,188 5,117
- ----------------------------------------------------------------------------------------------------------
Equity in undistributed earnings (loss) of subsidiaries
before cumulative effect of changes in
accounting principles:
Banks 52,094 95,369 36,607
Trust Company (118) (148) 1,693
- ----------------------------------------------------------------------------------------------------------
Total equity in undistributed earnings of subsidiaries 51,976 95,221 38,300
- ----------------------------------------------------------------------------------------------------------
Net income before cumulative effect of changes in accounting
principles 97,202 107,409 43,417
Cumulative effect of changes in accounting principles, net
of tax - (84) -
- ----------------------------------------------------------------------------------------------------------
Net income $ 97,202 $107,325 $ 43,417
==========================================================================================================
</TABLE>
99-32
<PAGE> 33
SUPPLEMENTAL CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
(in thousands) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 97,202 $107,325 $43,417
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed income of subsidiaries (51,976) (95,221) (38,300)
Cumulative effect of changes in accounting principles,
net of tax - 84 -
Amortization 32 735 -
Deferred income tax expense 284 44 219
Change in assets and liabilities:
Increase (decrease) in accrued interest payable (56) 724 (16)
(Increase) decrease in other assets 662 (500) 1,633
Increase (decrease) in other liabilities (1,656) 1,416 (2,417)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 44,492 14,607 4,536
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net increase in short-term securities with subsidiary (1,399) (19,128) (30,268)
Proceeds from maturity of securities held to maturity 174 50,070 85
Purchases of securities held to maturity - (50,691) -
Purchases of securities available for sale (540) - -
Acquisitions (6,476) (27,500) -
Capital contributions to bank subsidiary - (5,925) (30,888)
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,241) (53,174) (61,071)
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt - 49,680 -
Repayment of long-term debt (13,593) (1,501) -
Issuance of common shares:
Public stock offering - - 56,849
Employee benefit and dividend reinvestment plans 1,988 4,795 4,787
Cash dividends paid (24,097) (14,282) (4,939)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (35,702) 38,692 56,697
- ----------------------------------------------------------------------------------------------------------
Increase in cash 549 125 162
Net increase in cash of Heritage for the period July 1, 1993
to December 31, 1993 1,600 - -
Cash, beginning of period 327 202 40
- ----------------------------------------------------------------------------------------------------------
Cash, end of period $ 2,476 $ 327 $ 202
==========================================================================================================
Cash paid during the year for:
Interest expense $ 3,651 $ 3,027 $ 1,207
Income taxes 51,373 43,363 16,466
- ----------------------------------------------------------------------------------------------------------
</TABLE>
99-33
<PAGE> 34
Independent Auditors' Report
The Board of Directors and Shareholders
First American Corporation:
We have audited the accompanying supplemental consolidated balance sheets of
First American Corporation and subsidiaries as of December 31, 1994 and 1993,
and the related supplemental consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1994. These supplemental consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of First American Corporation and Heritage Federal Bancshares, Inc.
on November 1, 1995, which has been accounted for as a pooling of interests as
described in Note 2 to the supplemental consolidated financial statements.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation.
However, they will become the historical consolidated financial statements of
First American Corporation and subsidiaries after financial statements covering
the date of consummation of the business combination are issued.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
First American Corporation and subsidiaries as of December 31, 1994 and 1993,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles applicable after financial statements are issued
for a period which includes the date of consummation of the business
combination.
As discussed in note 13 to the supplemental consolidated financial
statements, the Corporation adopted in 1993 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
----------------------------------
KPMG Peat Marwick LLP
Nashville, Tennessee
December 4, 1995
99-34
