<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-6198
FIRST AMERICAN CORPORATION
(Exact name of Registrant as specified in its charter)
TENNESSEE 62-0799975
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
FIRST AMERICAN CENTER, NASHVILLE, TENNESSEE 37237
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 615/748-2000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common shares outstanding: 30,127,167 as of April 30, 1996.
<PAGE> 2
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
INDEX
<TABLE>
Part I. Financial Information Page
- -------------------------------- ----
<S> <C>
Item 1 Financial Statements (unaudited)
Consolidated Income Statements for the Three
Months Ended March 31, 1996 and 1995 3
Consolidated Balance Sheets as of March 31, 1996,
March 31, 1995 and December 31, 1995 4
Consolidated Statements of Changes in Shareholders' Equity for
the Three Months Ended March 31, 1996
and March 31, 1995 5
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1996 and March 31, 1995 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
Part II. Other Information
- ----------------------------
Item 1 Legal Proceedings 18
Item 6 Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE> 3
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31
----------------------------
1996 1995
------------ ----------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $132,992 $108,494
Interest and dividends on securities 34,079 35,260
Interest on Federal funds sold and securities
purchased under agreements to resell 3,758 842
Interest on time deposits with other banks and other interest 501 388
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 171,330 144,984
- ---------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 3,880 4,204
Money market accounts 25,315 18,251
Regular savings 2,202 2,642
Certificates of deposit under $100,000 21,729 15,858
Certificates of deposit $100,000 and over 9,149 5,680
Other time and foreign 6,580 4,688
- ---------------------------------------------------------------------------------------------------------------------
Total interest on deposits 68,855 51,323
- ---------------------------------------------------------------------------------------------------------------------
Interest on short-term borrowings 12,211 11,312
Interest on long-term debt 6,446 4,686
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 87,512 67,321
- ---------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 83,818 77,663
PROVISION FOR LOAN LOSSES - 31
- ---------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 83,818 77,632
- ---------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 13,589 11,091
Commissions and fees on fiduciary activities 4,427 3,937
Investment services income 3,200 2,187
Trading account revenue 273 663
Merchant discount fees 769 693
Net realized gain (loss) on sales and write-downs of securities 1,401 17
Other income 8,350 5,812
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest income 32,009 24,400
- ---------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 38,867 35,714
Net occupancy expense 6,025 5,376
Equipment expense 4,080 3,556
Systems and processing expense 3,096 2,790
FDIC insurance expense 654 3,448
Marketing expense 3,531 2,118
Communication expense 2,793 2,497
Supplies expense 1,266 1,143
Foreclosed properties expense (income), net (186) (616)
Other expenses 7,562 6,329
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense 67,688 62,355
- ---------------------------------------------------------------------------------------------------------------------
Income before income tax expense 48,139 39,677
Income tax expense 18,339 14,414
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 29,800 $ 25,263
=====================================================================================================================
PER COMMON SHARE:
Net income $ 1.01 $ .88
Cash dividends 0.28 .25
=====================================================================================================================
Weighted average common shares outstanding 29,517 28,674
=====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
---------------------------- ------------
1996 1995 1995
----------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 448,183 $ 383,861 $ 494,496
Time deposits with other banks 8,689 31,922 26,733
Securities:
Held to maturity (market value $947,061, $1,545,955 and
$933,911, respectively) 946,131 1,590,002 931,084
Available for sale (amortized cost $1,438,308, $573,218
and $1,196,414, respectively) 1,431,853 563,249 1,202,493
- --------------------------------------------------------------------------------------------------------------------
Total securities 2,377,984 2,153,251 2,133,577
- --------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under
agreements to resell 167,101 74,164 291,042
Trading account securities 25,361 14,491 22,419
Loans:
Commercial 2,843,006 2,389,551 2,823,827
Consumer--amortizing mortgages 1,792,652 1,422,447 1,784,836
Consumer--other 1,319,478 1,061,123 1,281,921
Real estate--construction 198,543 151,255 186,655
Real estate--commercial mortgages and other 369,465 308,278 354,918
- --------------------------------------------------------------------------------------------------------------------
Total loans 6,523,144 5,332,654 6,432,157
Unearned discount and net deferred loan fees 7,218 7,427 6,181
- --------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net deferred
loan fees 6,515,926 5,325,227 6,425,976
Allowance for possible loan losses 132,381 129,377 132,415
- --------------------------------------------------------------------------------------------------------------------
Total net loans 6,383,545 5,195,850 6,293,561
- --------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 139,338 114,246 129,419
Foreclosed properties 9,682 10,061 10,683
Other assets 291,490 187,491 279,699
- --------------------------------------------------------------------------------------------------------------------
Total assets $9,851,373 $8,165,337 $9,681,629
====================================================================================================================
LIABILITIES
Deposits:
Demand (non-interest-bearing) $1,244,453 $1,095,456 $1,266,285
NOW accounts 806,483 822,807 811,862
Money market accounts 2,204,996 1,702,949 2,031,796
Regular savings 367,891 434,407 376,725
Certificates of deposit under $100,000 1,724,595 1,376,036 1,679,792
Certificates of deposit $100,000 and over 610,176 500,920 750,491
Other time 361,306 302,282 320,382
Foreign 122,105 78,067 144,961
- --------------------------------------------------------------------------------------------------------------------
Total deposits 7,442,005 6,312,924 7,382,294
- --------------------------------------------------------------------------------------------------------------------
Short-term borrowings 1,041,469 800,714 938,287
Long-term debt 367,841 270,516 421,791
Other liabilities 174,115 99,044 143,725
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 9,025,430 7,483,198 8,886,097
- --------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $5 par value; authorized 50,000,000
shares; issued: 30,008,414 shares at March 31, 1996;
28,424,385 shares at March 31, 1995; and 29,539,819
shares at December 31, 1995 150,042 142,122 147,699
Capital surplus 177,849 121,218 162,254
Retained earnings 505,623 428,090 483,973
Deferred compensation on restricted stock (2,800) (2,077) (1,263)
Employee stock ownership plan obligation (631) (751) (661)
- --------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 830,083 688,602 792,002
Net unrealized gains (losses) on securities available for
sale, net of tax (4,140) (6,463) 3,530
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 825,943 682,139 795,532
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $9,851,373 $8,165,337 $9,681,629
====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAINS
DEFERRED EMPLOYEE (LOSSES)
COMPENSATION STOCK ON
ON OWNERSHIP SECURITIES
THREE MONTHS ENDED MARCH 31, 1995, AND COMMON CAPITAL RETAINED RESTRICTED PLAN AVAILABLE
MARCH 31, 1996 STOCK SURPLUS EARNINGS STOCK OBLIGATION FOR SALE TOTAL
-------- --------- -------- ----------- ---------- -------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $143,625 $130,933 $409,638 $ (2,161) $(781) $(13,581) $ 667,673
Issuance of 87,416 common shares in
connection with Employee Benefit
Plan, net of discount on Dividend
Reinvestment Plan 437 1,381 - - - - 1,818
Issuance of 6,900 shares of restricted
common stock 35 171 - (206) - - -
Repurchase of 395,000 shares of common
stock (1,975) (11,267) - - - - (13,242)
Amortization of deferred compensation
on restricted stock - - - 290 - - 290
Reduction in employee stock ownership
plan obligation - - - - 30 - 30
Net income - - 25,263 - - - 25,263
Cash dividends declared ($.25 per
common share) - - (6,540) - - - (6,540)
Cash dividends declared by pooled
company - - (302) - - - (302)
Change in net unrealized gains and
losses on securities available for
sale, net of tax - - - - - 7,118 7,118
Other - - 31 - - - 31
- -------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1995 $142,122 $121,218 $428,090 $ (2,077) $(751) $ (6,463) $682,139
===============================================================================================================================
Balance, January 1, 1996 $147,699 $162,254 $483,973 $ (1,263) $(661) $ 3,530 $795,532
Issuance of 99,983 common shares in
connection with Employee Benefit
Plan and Dividend Reinvestment Plan,
net of discount 500 3,139 - - - - 3,639
Issuance of 38,700 shares of restricted
common stock 194 1,644 - (1,838) - - -
Repurchase of 731,172 shares of common
stock (3,656) (29,668) - - - - (33,324)
Issuance of 1,061,681 common shares for
purchase of First City Bancorp, Inc. 5,308 40,477 - - - - 45,785
Amortization of deferred compensation
on restricted stock - - - 301 - - 301
Reduction in employee stock ownership
plan obligation - - - - 30 - 30
Net income - - 29,800 - - - 29,800
Cash dividends declared ($.28 per
common share) - - (8,150) - - - (8,150)
Change in net unrealized gains and
losses on securities available
for sale, net of tax - - - - - (7,670) (7,670)
Other (3) 3 - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 $150,042 $177,849 $505,623 $ (2,800) $(631) $ (4,140) $825,943
===============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 29,800 $ 25,263
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses - 31
Depreciation of premises and equipment 3,558 3,372
Amortization of intangible assets 1,971 980
Other amortization (accretion), net 160 (2,534)
Deferred income tax expense 4,263 3,869
Net realized gain on sales of securities (1,401) (17)
Net loss on sales of premises and equipment 9 17
Change in assets and liabilities, net of effects from acquisition:
(Increase) decrease in accrued interest receivable 1,535 (396)
Increase (decrease) in accrued interest payable (7,925) 2,724
Increase in trading account securities (2,942) (5,874)
Decrease in other assets 26,561 30,884
Increase (decrease) in other liabilities 34,812 (5,907)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 90,401 52,412
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net (increase) decrease in time deposits with other banks 18,582 (28,067)
Proceeds from sales of securities available for sale 189,886 284,177
Proceeds from maturities of securities available for sale 81,172 4,300
Purchases of securities available for sale (381,070) (148,904)
Proceeds from maturities of securities held to maturity 47,491 86,477
Purchases of securities held to maturity (59,799) (31,714)
Net (increase) decrease in Federal funds sold and securities
purchased under agreements to resell 159,130 (46,030)
Net (increase) decrease in loans 74,555 (154,132)
Acquisition, net of cash acquired 12,376 -
Proceeds from sales of premises and equipment 3,011 43
Purchases of premises and equipment (9,973) (6,604)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 135,361 (40,454)
- ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (267,524) 5,145
Net increase (decrease) in short-term borrowings 88,739 (129,126)
Net repayment of Federal Home Loan Bank advances (55,485) (190)
Net proceeds from issuance of common stock 3,639 1,818
Cash dividends paid (8,150) (6,842)
Repurchase of common stock (33,324) (13,242)
Other 30 424
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (272,075) (142,013)
- ---------------------------------------------------------------------------------------------------------------------
Decrease in cash and due from banks (46,313) (130,055)
Cash and due from banks, January 1 494,496 513,916
- ---------------------------------------------------------------------------------------------------------------------
Cash and due from banks, March 31 $448,183 $383,861
=====================================================================================================================
Cash paid during the period for:
Interest expense $ 93,998 $ 64,601
Income taxes 1,606 1,049
Noncash investing activities:
Foreclosures 652 98
Stock issued for acquisition 45,785 -
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and general practices within the
banking industry.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
presented in the Corporation's 1995 Annual Report to Shareholders. The
quarterly consolidated financial statements reflect all adjustments which are,
in the opinion of management, necessary for a fair presentation of the results
for interim periods. All such adjustments are of a normal recurring nature.
Certain prior year amounts have been reclassified to conform with the current
year presentation. The results for interim periods are not necessarily
indicative of results to be expected for the complete fiscal year.
(2) NONPERFORMING ASSETS
Nonperforming assets were as follows:
<TABLE>
<CAPTION>
MARCH 31 December 31
- -------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans $ 17,161 $ 10,714 $ 18,670
Foreclosed properties 9,682 10,061 10,683
- -------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 26,843 $ 20,775 $ 29,353
=============================================================================================================
90 days or more past due on accrual $ 9,173 $ 7,329 $ 6,123
=============================================================================================================
Nonperforming assets as a percent of loans
and foreclosed properties (excluding
90 days or more past due on accrual) .41% .39% .46%
=============================================================================================================
</TABLE>
(3) ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
- -------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $132,415 $129,436
Provision (credited) charged to operating expenses - 31
Allowance of subsidiary purchased 2,088 -
- -------------------------------------------------------------------------------------------------------------
134,503 129,467
- -------------------------------------------------------------------------------------------------------------
Loans charged off 5,699 3,535
Recoveries of loans previously charged off 3,577 3,445
- -------------------------------------------------------------------------------------------------------------
Net charge-offs 2,122 90
- -------------------------------------------------------------------------------------------------------------
Balance, March 31 $132,381 $129,377
=============================================================================================================
</TABLE>
Allowance ratios were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
- -------------------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Allowance end of period to net loans outstanding 2.03% 2.43%
Net charge-offs to average loans (annualized) .13 .01
=============================================================================================================
</TABLE>
7
<PAGE> 8
(4) ACQUISITIONS
In March 1996, First American National Bank ("FANB"), a wholly-owned
subsidiary of the Corporation, entered into an agreement to purchase 96.2% of
the stock of INVEST Financial Corporation ("INVEST") for $26.0 million in cash.
Simultaneously, INVEST announced an agreement to acquire Investment Center
Group, Inc., the parent of Investment Centers of America, for approximately $5
million in cash. The acquisition of INVEST is subject to regulatory approval.
The transaction is expected to be accounted for as a purchase.
Effective March 29, 1996, FANB purchased 49% of the stock of The SSI
Group, Inc., a healthcare payments processing company, for $8.6 million. The
transaction was accounted for under the equity method of accounting.
Effective March 11, 1996, the Corporation acquired First City Bancorp,
Inc. ("First City") by exchanging approximately 1.1 million shares of First
American Corporation common stock for all of the outstanding shares of First
City. First City was a bank holding company headquartered in Murfreesboro,
Tennessee, and operated two Tennessee state chartered banks and a consumer
finance company. First City had $366 million in assets, 11 banking offices,
and nine consumer finance locations in the middle Tennessee area. The
transaction was accounted for as a purchase.
Effective December 1, 1995, First American Corporation acquired Charter
Federal Savings Bank ("Charter") by exchanging approximately 1.8 million shares
of First American Corporation common stock for all of the outstanding shares of
Charter, a federal savings bank headquartered in Bristol, Virginia, with $725
million of assets and 27 branches (eight in Knoxville, Tennessee, five in
Bristol, Tennessee and Bristol, Virginia; and 14 in other locations in
southwestern Virginia). The transaction was accounted for as a purchase.
Simultaneously with the acquisition, the name of Charter was changed to First
American Federal Savings Bank ("FAFSB"). The Virginia branches of the
Corporation are operated under this legal entity.
Effective November 1, 1995, First American Corporation acquired
Heritage Federal Bancshares, Inc. ("Heritage") by exchanging approximately 2.9
million shares of First American Corporation common stock for all of the
outstanding shares of Heritage. Heritage was merged with and into the
Corporation. Heritage was the holding company for Heritage Federal Bank for
Savings, a federal savings bank which was merged into FANB and which had $526
million of assets and 13 offices primarily in the east Tennessee areas of
Tri-Cities, Anderson County, and Roane County. The transaction was accounted
for as a pooling of interests, and accordingly, prior year information has been
restated reflecting the combination.
(5) ACCOUNTING MATTERS
During 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights--An Amendment of FASB Statement No. 65." SFAS No.
122 amends SFAS 65, "Accounting for Certain Mortgage Banking Activities," to
require that rights to service mortgage loans for others be recognized as
separate assets, however those servicing rights are acquired. An enterprise
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells or securitizes those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans (without the mortgage servicing
rights) based on their relative fair value. SFAS No. 122 also requires that
capitalized mortgage servicing rights be assessed for impairment based on the
fair value of those rights. SFAS No. 122 was adopted by the Corporation on
January 1, 1996, and applied prospectively to any transactions in which the
Corporation sells or securitizes mortgage loans with servicing rights retained
and to impairment evaluations of all amounts capitalized as mortgage servicing
rights, including those purchased before the adoption of SFAS No. 122.
Adoption of No. 122 did not have a material effect on the Corporation's
consolidated financial statements.
During 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes a new optional method of accounting
for stock-based compensation based on calculations of fair value at grant
date. Under this method, the fair value of a stock option is recognized as
compensation expense over the service period (generally the vesting period).
SFAS No. 123 requires that if a company continues to account for stock options
under APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion
25"), it must provide proforma net income and earnings per share
8
<PAGE> 9
information "as if" the new fair value approach had been adopted. The
recognition provisions of SFAS No. 123 may be adopted upon issuance. The
disclosure provisions are effective for years beginning after December 15,
1995; however, the proforma disclosures shall include the effects of all awards
granted in fiscal years beginning after December 15, 1994. The SFAS No. 123
disclosure provisions need not be applied to an interim report unless a
complete set of financial statements is presented for that period. The
Corporation will continue to account for stock-based compensation under Opinion
25.
(6) EARNINGS PER COMMON SHARE
Earnings per common share amounts are computed by dividing net income by
the weighted average number of common shares outstanding during each respective
period.
(7) COMMON STOCK
The Corporation purchased 731.2 thousand shares of First American
Corporation common stock in the open market during the first quarter of 1996 at
a total cost of $33.3 million. Under Tennessee law, such shares have been
recognized as authorized but unissued. Accordingly, the Corporation reduced the
par value and reflected the excess of the purchase price over par of such
repurchased shares as a reduction from capital surplus. As of March 31, 1996,
all repurchased shares had been used to fund the acquisitions of Charter and
First City.
(8) LEGAL AND REGULATORY MATTERS
The Savings Association Insurance Fund ("SAIF") is undercapitalized as a
result of losses sustained by the S&L industry during the late 1980's and early
1990's. To adequately capitalize the SAIF fund, Congress has proposed
legislation to levy a one-time assessment on SAIF deposits. While this proposed
legislation has not been enacted into law, various proposals generally would
require payment of up to 85 basis points on SAIF deposits. Under what is
believed to be the most widely accepted proposal, banks that obtained SAIF
deposits through acquisitions (where the FDIC premium is computed under the
"Oakar Amendment" to the Federal Deposit Insurance Act) would receive a 20%
discount to allow for deposit runoff that occurs subsequent to acquisitions. The
discount would apply to the SAIF deposits acquired by FANB. This proposal is
part of the 1996 Budget Reconciliation Act and as of March 31, 1996, had not
been signed into law. Should passage of such legislation occur, the Corporation
is expected to record a one-time charge estimated to be approximately $5.5
million, net of tax. In addition, the proposal would impose up to a 2.5 basis
point annual charge on all insured deposits of depository institutions in order
to pay interest on the debt incurred by the Financing Corporation. Should this
become effective, it will increase the Corporation's total Bank Insurance Fund
and SAIF premiums over the next 12 months over currently anticipated amounts by
$1.1 million, net of tax, based on deposits at March 31, 1996.
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 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, dismissing the remaining
claims. The plaintiffs appealed to the Tennessee Court of Appeals, which
affirmed the Circuit Court's dismissal of the action. The plaintiffs then
appealed to the Tennessee Supreme Court. Oral argument was heard before the
Tennessee Supreme Court on April 2, 1996, and the Corporation is awaiting the
Court's decision. In addition, a related antitrust lawsuit alleging a price
fixing conspiracy involving the same facts was 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 appealed to the Sixth Circuit Court of Appeals, which affirmed the
District Court's granting of summary judgement. The plaintiffs then sought
permission to appeal to the United States Supreme Court. In February 1996, the
United States Supreme Court denied the plaintiffs' request for permission to
appeal. Thus, the Federal action has been concluded. Management believes the
state suit is without merit and, based upon information currently known and on
advice of counsel, that it will not have a material adverse effect on the
Corporation's consolidated financial statements.
9
<PAGE> 10
Following the adoption of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), Charter (now FAFSB), brought an action
against the OTS and FDIC seeking injunctive and other relief, contending that
Congress' elimination of supervisory goodwill required rescission of certain
supervisory transactions. The Federal District Court found in Charter's favor,
but in 1992 the Fourth Circuit Court of Appeals reversed, and the U.S. Supreme
Court denied Charter's petition for certiorari. In 1995, the Federal Circuit
Court found in favor of another thrift institution in a similar case (Winstar
Corp. v. United States) in which the association sought damages for breach of
contract. Following this decision, Charter filed suit against the United
States Government ("Government") in the Court of Federal Claims based on breach
of contract. The Government sought Supreme Court review of the Winstar
decision and the Supreme Court granted the Government's petition. The
Government has agreed to stay FAFSB's action pending the Supreme Court's
decision in the Winstar case.
The value of FAFSB's claims against the Government, as well as their
ultimate outcome, are contingent upon a number of factors, some of which are
outside of FAFSB's control, and are highly uncertain as to substance, timing
and the dollar amount of any damages which might be awarded should FAFSB finally
prevail. Under the Agreement and Plan of Reorganization as amended by and
between FAFSB and the Corporation, in the event that FAFSB is successful in
this litigation, the FAFSB shareholders as of December 1, 1995 will be entitled
to receive additional consideration equal in value to 50% of any recovery, net
of all taxes and certain other expenses, including the costs and expenses of
such litigation, received on or before December 1, 2000 subject to certain
limitations in the case of certain business combinations. Such additional
consideration, if any, is payable in the common stock of the Corporation, based
on the average per share closing price on the date of receipt by FAFSB of the
last payment constituting a recovery from the Government.
Also, there are from time to time other legal proceedings pending against
the Corporation and its subsidiaries. In the opinion of management and
counsel, liabilities, if any, arising from such proceedings presently pending
would not have a material adverse effect on the consolidated financial
statements of the Corporation.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the
consolidated financial statements appearing within this report. Reference
should also be made to First American Corporation's 1995 Annual Report for a
complete discussion of factors that impact results of operations, liquidity, and
capital.
OVERVIEW
Net income for the first quarter of 1996 was $29.8 million, or $1.01 per
share compared with $25.3 million, or $.88 per share, for the first quarter of
1995. The $4.5 million increase in first quarter 1996 earnings compared to the
same time last year included a $6.2 million increase in net interest income, a
$7.6 million increase in non-interest income, and a $5.3 million increase in
non-interest expense. Return on average assets ("ROA") and return on average
equity ("ROE") were 1.26% and 15.08%, respectively, for the first quarter of
1996. ROA and ROE were 1.26% and 14.86%, respectively, in the first quarter of
1995.
On April 18, 1996, First American's Board of Directors increased the
quarterly cash dividend on its common stock from $.28 per share to $.31 per
share, an 11% increase, effective with the second quarter 1996 dividend payable
on May 31, 1996.
In March 1996, First American National Bank ("FANB"), a wholly-owned
subsidiary of First American, entered into an agreement to purchase 96.2% of the
stock of INVEST Financial Corporation ("INVEST") for $26.0 million in cash.
Simultaneously, INVEST announced an agreement to acquire Investment Center
Group, Inc., the parent of Investment Centers of America, for approximately $5
million in cash, which would make INVEST the nation's largest marketer of mutual
funds, annuities, and other investment products sold through financial
institutions. The acquisition of INVEST is subject to regulatory approval and
is expected to be accounted for as a purchase.
Effective March 29, 1996, FANB purchased 49% of the stock of The SSI
Group, Inc., a healthcare payments processing company, for $8.6 million. The
transaction was accounted for under the equity method of accounting.
Effective March 11, 1996, First American acquired First City Bancorp,
Inc. ("First City") by exchanging approximately 1.1 million shares of First
American Corporation common stock for all of the outstanding shares of First
City. First City was a bank holding company headquartered in Murfreesboro,
Tennessee, and operated two Tennessee state chartered banks and a consumer
finance company. First City had $366 million in assets, 11 banking offices, and
nine consumer finance locations in the middle Tennessee area. The transaction
was accounted for as a purchase.
Effective December 1, 1995, First American acquired Charter Federal
Savings Bank ("Charter") by exchanging approximately 1.8 million shares of First
American Corporation common stock for all of the outstanding shares of Charter,
a federal savings bank headquartered in Bristol, Virginia, with $725 million of
assets and 27 branches (eight in Knoxville, Tennessee, five in Bristol,
Tennessee and Bristol, Virginia; and 14 in other locations in southwestern
Virginia). The transaction was accounted for as a purchase. Simultaneously
with the acquisition, the name of Charter was changed to First American Federal
Savings Bank ("FAFSB"). The Virginia branches of First American are operated
under this legal entity.
Effective November 1, 1995, First American acquired Heritage Federal
Bancshares, Inc. ("Heritage") by exchanging approximately 2.9 million shares of
First American Corporation common stock for all of the outstanding shares of
Heritage. Heritage was merged with and into First American. Heritage was the
holding company for Heritage Federal Bank for Savings, a federal savings bank
which was merged into FANB and which had $526 million of assets and 13 offices
primarily in the east Tennessee areas of Tri-Cities, Anderson County, and Roane
County. The transaction was accounted for as a pooling of interests, and
accordingly, prior year information has been restated reflecting the
combination.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income on a taxable equivalent basis represented 73% of total
revenues in the first quarter of 1996 and 76% in the first quarter of 1995.
For purposes of this discussion, total revenues
11
<PAGE> 12
consist of the sum of net interest income and non-interest income. Net
interest income on a taxable equivalent basis in the first quarter of 1996 was
$84.7 million, up $6.2 million, or 8%, from $78.5 million in the first quarter
of 1995. Net interest income is the difference between total interest income
earned on earning assets such as loans and securities and total interest
expense incurred on interest-bearing liabilities such as deposits and other
interest-bearing liabilities. Net interest income is affected by the volume
and mix of earning assets and interest-bearing liabilities and the
corresponding interest yields and costs.
Total interest income on a taxable equivalent basis amounted to
$172.2 million for the first quarter of 1996, compared to $145.8 million for
the first quarter of 1995, an increase of $26.4 million, or 18%. Of the $26.4
million increase in total interest income, $26.7 million resulted from an
increase in the volume of earning assets (primarily loans) which was partially
offset by a $.3 million decrease which resulted from a decrease in average
yields. Average earning assets rose $1.37 billion, or 18%, to $8.84 billion.
Average loans increased $1.21 billion, or 23%, to $6.42 billion, average
securities declined $68.8 million to $2.10 billion, and average money market
investments increased $228.7 million to $317.3 million. Excluding the Charter
and First City acquisitions, average loans for the quarter ended March 31,
1996, increased 14% over the same period last year. The average yield on
earning assets decreased 8 basis points to 7.83% from 7.91%, reflecting a lower
interest rate environment in the first quarter of 1996 compared to the first
quarter of 1995. For example, the national prime lending rate and 5-year
treasury security yields averaged 8.33% and 5.57%, respectively, in the first
quarter of 1996 compared to 8.83% and 7.39%, respectively, in the first quarter
of 1995.
Total interest expense in the first quarter of 1996 increased
$20.2 million to $87.5 million from the first quarter of 1995. Of the
increase, $13.4 million resulted from an increase in the volume of
interest-bearing liabilities and $6.8 million was due to higher average
interest rates paid on interest-bearing funds. In the first quarter of 1996,
average interest-bearing liabilities grew $1.23 billion, or 20%, to $7.44
billion from $6.20 billion in the first quarter of 1995. Average
interest-bearing deposits increased $976.1 million, or 19%, to $6.06 billion,
average short- term borrowings rose $143.7 million, or 17%, to $991.3 million,
and average long-term debt increased $113.2 million, or 42%, to $383.7 million.
Excluding the Charter and First City acquisitions, total interest-bearing
deposits increased 8%. The average rate paid on interest-bearing liabilities
increased 33 basis points to 4.73% from 4.40%. The increase in rates paid on
interest-bearing liabilities during a period in which external interest rates
declined on average reflects the use of derivatives and the fact that First
American's fixed rate liabilities do not reprice immediately due to varying
maturities. Excluding the impact of derivatives, the average rates on
interest-bearing liabilities increased 13 basis points to 4.56% from 4.43%.
Net interest income increased primarily as a result of the increase in
the volume of earning assets partially offset by a lower net interest spread.
Net interest spread is the difference between the yield on earning assets and
the rate paid on interest-bearing liabilities. First American's net interest
spread declined 41 basis points to 3.10% during the first quarter of 1996 from
3.51% for the first quarter of 1995. This decline was due primarily to a 33
basis point increase in the rates paid on interest-bearing liabilities and an
eight basis point decrease in yields on earning assets.
As the net interest spread declined, the net interest margin, which is net
interest income expressed as a percentage of average earning assets, decreased
to 3.85% for the first quarter of 1996 as compared with 4.26% for the same
quarter a year earlier. The primary factor leading to the decline in net
interest margin was the change in the mix of deposits and other
interest-bearing liabilities away from demand deposits, NOW accounts, and
regular savings toward funding sources with higher interest rates. Average
non-interest bearing demand deposits represented 13.2% of average earning
assets during the first quarter of 1996 compared to 14.7% during the first
quarter of 1995. NOW accounts averaged 9.1% of average earning assets during
the three months ended March 31, 1996, versus 11.3% during the same time last
year and had average interest rates of 1.95% and 2.02%, respectively, during
the first quarters of 1996 and 1995. Regular savings averaged 4.2% of earning
assets during the first quarter of 1996 down from 6.0% during the previous
year's first quarter and had average interest rates of 2.40% and 2.38%,
respectively during the first quarters of 1996 and 1995. All other
interest-bearing liabilities averaged 70.9% of average earning assets during
the first quarter of 1996 compared to 65.7% during the same time last year and
had average interest rates of 5.22% during the three months ended March 31,
1996, and 5.00% during the same time in the previous year. In addition to the
other factors previously discussed, the competitive environment also put
downward pressure on the net interest margin.
12
<PAGE> 13
PROVISION FOR LOAN LOSSES
This topic is addressed under the caption "Allowance and Provision for
Possible Loan Losses."
NON-INTEREST INCOME
Total non-interest income was $32.0 million for the first quarter of 1996
compared with $24.4 million for the first quarter of 1995, an increase of $7.6
million, or 31% and included a $1.4 million increase in net realized gains on
sales of securities. Non-interest income represented 27% of total revenues in
the first quarter of 1996 and 24% during the same time last year. Non-interest
income, excluding net securities gains, totalled $30.6 million, an increase of
$6.2 million, or 26%, from $24.4 million in the first quarter of 1995. The
increase from the first quarter of 1995 includes a $2.5 million, or 23%,
increase in service charges on deposit accounts, a $1.0 million, or 46%,
increase in investment services income, and a $2.5 million, or 44%, increase in
other income. The increase in service charges on deposit accounts results
primarily from a greater number of deposit accounts and related activities for
commercial and retail deposits. The average number of retail deposit accounts
increased 17% and the average number of commercial deposit accounts increased
11% from first quarter 1995 to the current period. The improvement in
investment services income over the first quarter of 1995 resulted principally
from growth in retail brokerage commissions related to mutual funds sales and
institutional brokerage commissions on various types of securities
transactions. Other income in the first quarter of 1996 included a $.6 million
increase in income and fees related to selling residential mortgage loans, a
$.4 million increase in interchange fees from the Check Card, a $.4 million
increase in gains from sales of loans, and a $1.1 million net increase in the
various other classifications within other income. Excluding the Charter and
First City acquisitions, non-interest income increased 28% from the first
quarter of 1995 to the current quarter.
NON-INTEREST EXPENSE
Total non-interest expense increased $5.3 million, or 9%, to $67.7 million
for the first quarter of 1996 compared with $62.4 million for the same period
in 1995. Salaries and employee benefits increased $3.2 million, or 9%, from
the same period in 1995 due to additional employees resulting primarily from
acquisitions, merit increases and incentive compensation. From March 31, 1995,
to March 31, 1996, the number of full-time equivalent employees increased 8%,
of which approximately 4% of the increase related to the Charter acquisition on
December 1, 1995, with the remaining 4% of the increase related to the First
City acquisition effective March 11, 1996. Marketing expenses increased $1.4
million, or 67%, from the first quarter of 1995 to the first quarter of 1996
primarily due to a $1.2 million increase in advertising expenditures related
principally to the Company's "Loan by Phone" retail consumer loan programs and
"FAIR" money market account product. Net occupancy expense grew $.6 million,
or 12%, over the previous year's first quarter and equipment expense increased
$.5 million, or 15%, primarily due to increased expenses associated with growth
in premises and equipment over the prior year's first quarter. Other expenses
increased $1.2 million, or 19%, from the previous year's first quarter
primarily due to a $1.0 million increase in amortization of intangibles
primarily related to the Charter acquisition. The above increases in
non-interest expense were partially offset by a $2.8 million decrease in FDIC
insurance expense, which declined due to a reduction in the annual assessment
rate on the majority of the Company's deposits from $.23 per $100 of deposits
during the first quarter of 1995 to a rate of $.00 per $100 of deposits during
the first quarter of 1996. The Company's deposit liabilities, however, include
approximately $1.20 billion of deposits which were obtained through
acquisitions of various thrift institutions on which the annual assessment rate
remained $.23 per $100 of deposits. First American's operating efficiency
ratio (non-interest expense as a percentage of the sum of net interest income,
on a fully taxable basis, and non-interest income) improved to 58.00% in the
first quarter of 1996, compared to 60.59% the first quarter of 1995.
Non-interest expense excluding the Charter and First City acquisitions
increased 2%.
INCOME TAXES
During the first quarters of 1996 and 1995, First American's income tax
expense was $18.3 million and $14.4 million, respectively. The major factor
for the increase in income tax expense was the higher income before income
taxes.
13
<PAGE> 14
ASSET/LIABILITY MANAGEMENT
First American has utilized off-balance-sheet derivative products for a
number of years in managing its interest rate sensitivity. The use of
non-complex, non-leveraged derivative products has reduced the Company's
exposure to changes in the interest rate environment. By using derivative
products such as interest rate swaps and futures contracts to alter the nature
of (hedge) specific assets or liabilities on the balance sheet (for example to
change a variable to a fixed rate obligation), the derivative product offsets
fluctuations in net interest income from the otherwise unhedged position. In
other words, if net interest income from the otherwise unhedged position
changes (increases or decreases) by a given amount, the derivative product
should produce close to the opposite result, making the combined amount
(otherwise unhedged position impact plus the derivative product position
impact) essentially unchanged. Derivative products have enabled First American
to improve its balance between interest-sensitive assets and interest-sensitive
liabilities by managing interest rate sensitivity, while continuing to meet the
lending and deposit needs of its customers.
In conjunction with managing interest rate sensitivity, at March 31, 1996,
First American had derivatives with notional values totaling $1.20 billion.
These derivatives had a net negative fair value (unrealized net pre-tax loss)
of $42 thousand. Notional amounts are key elements of derivative financial
instrument agreements. However, notional amounts do not represent the amounts
exchanged by the parties to derivatives and do not measure First American's
exposure to credit or market risks. The amounts exchanged are based on the
notional amounts and the other terms of the underlying derivative agreements.
At March 31, 1995, First American had derivatives with notional values totaling
$1.84 billion. These derivatives had a net positive fair value of $4.7 million
at March 31, 1995. The instruments utilized are noted in the following table
along with their notional amounts and fair values at March 31, 1996 and 1995.
<TABLE>
<CAPTION>
Weighted
Average
Related Variable Weighted Average Rate Maturity
Rate Notional ------------------------- -------- Fair
(in thousands) Asset/Liability Amount Paid Received Years Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MARCH 31, 1996
Interest rate swaps Money market $ 900,000 5.90% (1) 5.35% (2) 1.6 $ 757
deposits
Interest rate swaps Long-term debt 100,000 6.32 (1) 5.28 (3) .4 (436)
Forward interest Money market 200,000 6.64 (4) 5.33 (4) .3 (363)
rate swaps deposits ---------- ----
$1,200,000 $ (42)
========================================================================================================================
March 31, 1995
Interest rate swaps Money market $ 450,000 5.85% (1) 6.39% (2) 1.4 $ 6,679
deposits
Interest rate swaps Long-term debt 200,000 7.11 (1) 6.27 (3) 1.6 (860)
Interest rate swaps Loans 200,000 6.45 (3) 7.39 (1) 4.2 1,888
Forward interest Money market 650,000 7.81 (5) N/A (5) 1.6 (3,422)
rate swaps deposits
Basis swaps Held to maturity 200,000 6.18 (6) 6.38 (3) .1 391
securities
Futures contracts Money market 140,000 N/A (7) N/A (7) 1.6 -
deposits ---------- -------
$1,840,000 $ 4,676
=======================================================================================================================
</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 began in June 1995. The rates paid are fixed and were
set at the inception of the contracts. Variable rates received are based
on 3-month LIBOR and reprice quarterly.
(5) Forward swap periods began in June 1995 for $200 million and December 1995
for $450 million. The rates to be paid were fixed and were set at the
inception of the contracts. Variable rates to be received were based on
3-month LIBOR but were unknown at March 31, 1995, since they were not
established until the affected periods began.
(6) Variable rate which reprices quarterly based on 5-year constant maturity
Treasury rate less a constant spread.
(7) Represents $140 million short position of Eurodollar futures contracts
which in aggregate simulates a $35 million 2-year interest rate swap.
As First American's individual derivative contracts approach maturity,
they may be terminated and replaced with derivatives with longer maturities
which offer more interest rate risk protection. At March 31, 1996, there were
$3.3 million of deferred net losses related to terminated derivatives
contracts, and there were $4.8 million of deferred net gains at March 31, 1995.
Deferred gains and losses on off-balance-sheet derivative activities are
recognized as interest income or interest expense over the original covered
periods.
14
<PAGE> 15
Net interest income for the quarter ended March 31, 1996, was
decreased by derivative products expense of $2.7 million. Net interest income
for the quarter ended March 31, 1995, was increased by $1.2 million derivative
products income.
Credit risk exposure due to off-balance-sheet hedging is closely
monitored, and counterparts to these contracts are selected on the basis of
their credit worthiness, as well as their market-making ability. As of March
31, 1996, all outstanding derivative transactions were with counterparts with
credit ratings of A-2 or better. Enforceable bilateral netting contracts
between First American and its counterparts allow for the netting of gains and
losses in determining net credit exposure. First American's net credit
exposure on outstanding derivatives was $1.5 million on March 31, 1996. Given
the credit standing of the counterparts to the derivative contracts, Management
believes that this credit exposure is reasonable in light of its objectives.
FINANCIAL CONDITION
ASSETS
Total assets of First American rose $1.69 billion, or 21%, to $9.85
billion at March 31, 1996, compared to $8.17 billion one year earlier. The
growth in total assets was primarily due to the $1.19 billion, or 22%, increase
in loans, net of unearned discount and net deferred loan fees, to $6.52 billion
at March 31, 1996, from $5.33 billion at March 31, 1995. Leading the growth in
loans were commercial loans, which increased $453.5 million, or 19%, over a
broad range of industry categories, consumer amortizing mortgages, which
increased $370.2 million, or 26%, and other consumer loans, which increased
$258.4 million, or 24%. The increase in loan volume reflects the positive
economic conditions in Tennessee and selected markets in adjacent states and
the success of First American's sales efforts and marketing programs.
Additionally, total assets increased due to a $224.7 million, or 10%, increase
in securities. Excluding the Charter and First City acquisitions, total assets
grew $595.0 million, or 7%, from March 31, 1995, to March 31, 1996.
Total assets increased $169.7 million from $9.68 billion at December
31, 1995, to $9.85 billion at March 31, 1996. The growth in total assets from
December 31, 1995, to March 31, 1996, was primarily due to the $90.0 million
increase in loans, net of unearned discount and net deferred loan fees, and the
$244.4 million increase in securities partially offset by the $124.0 million
decrease in Federal funds sold and securities purchased under agreements to
resell. Leading the growth in loans were other consumer loans, which increased
$37.6 million, commercial real estate loans, which increased $26.4 million, and
commercial loans, which increased $19.2 million. Excluding the First City
acquisition, total assets decreased $196.3 million from December 31, 1995, to
March 31, 1996.
ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSSES
Management's policy is to maintain the allowance for possible loan
losses at a level which is adequate to absorb estimated loan losses inherent in
the loan portfolio. The provision for loan losses is a charge (credit) to
earnings necessary, after loan charge-offs and recoveries, to maintain the
allowance at an appropriate level. Determining the appropriate level of the
allowance and the amount of the provision for loan losses involves
uncertainties and matters of judgment and therefore cannot be determined with
precision.
In order to maintain the allowance at an appropriate level,
First American's loan loss methodology produced no provision for loan losses
during the first quarter of 1996. The provision for loan losses of $31
thousand in the first quarter of 1995 was recorded by Heritage prior to its
merger with First American. The primary factors leading to no provision for
loan losses in the first quarter of 1996 were the continued favorable levels of
asset quality as discussed under the caption "Asset Quality" and relatively low
net loan charge-off experience. In the first quarters of 1996 and 1995, net
charge-offs were $2.1 million and $.1 million, respectively. Net charge-offs
as a percentage of average loans on an annualized basis amounted to .13% and
.01%, respectively, in the first quarters of 1996 and 1995. Activity in the
allowance for possible loan losses in the first quarter of 1996 also included a
$2.1 million increase due to the March 11, 1996, acquisition of First City.
The allowance for possible loan losses was $132.4 million at March 31,
1996, $129.4 million at March 31, 1995, and $132.4 million at December 31,
1995. The allowance for possible loan losses represented 2.03% and 2.43% of
net loans at March 31, 1996 and 1995, respectively, and 2.06% at December 31,
1995.
15
<PAGE> 16
ASSET QUALITY
First American's nonperforming assets (excluding loans 90 days past
due on accrual status) were $26.8 million at March 31, 1996, $20.8 million at
March 31, 1995, and $29.4 million at December 31, 1995. Nonperforming assets
(excluding loans 90 days past due on accrual status) at March 31, 1996,
represented .41% of total loans and foreclosed properties, compared to .39% at
March 31, 1995, and .46% at December 31, 1995. At March 31, 1996,
nonperforming assets were comprised of $17.1 million of non-accrual loans and
$9.7 million of foreclosed properties.
Other potential problem loans consist of loans that are currently not
considered nonperforming but on which information about possible credit
problems has caused Management to doubt the ability of the borrowers to comply
fully with present repayment terms. At March 31, 1996, loans totalling
approximately $80 million, while not considered nonperforming loans, were
classified in First American's internal loan grading system as substandard or
worse, compared with approximately $72 million of such loans at March 31, 1995,
and $67 million at December 31, 1995. Depending on the economy and other
factors, these loans and others, which may not be presently identified, could
become nonperforming assets in the future.
LIABILITIES
Total deposits were $7.44 billion at March 31, 1996, an increase of
$1.13 billion, or 18%, from $6.31 billion a year earlier. Excluding the
Charter and First City acquisitions, total deposits grew $288.0 million, or 5%,
from March 31, 1995, to March 31, 1996. Core deposits, which are defined as
total deposits excluding certificates of deposit $100,000 and over and foreign
deposits, totalled $6.71 billion at March 31, 1996, and $5.73 billion at March
31, 1995. Short-term borrowings increased $240.8 million, or 30%, to $1.04
billion at March 31, 1996, from $800.7 million at March 31, 1995. Long-term
debt increased $97.3 million from March 31, 1995, to $367.8 million at March
31, 1996, primarily due to the $144.2 million increase in long-term debt in the
fourth quarter of 1995 partially offset by the repayment of $55.5 million of
variable rate borrowings from the Federal Home Loan Bank ("FHLB") in the first
quarter of 1996.
Total deposits increased $59.7 million from December 31, 1995, to
March 31, 1996. Excluding the First City acquisition, total deposits decreased
$267.5 million, or 4%, during the same time frame. Core deposits increased
$222.9 million, short-term borrowings increased $103.2 million, and long-term
debt decreased $54.0 million from December 31, 1995, to March 31, 1996. The
decrease in long-term debt resulted principally from the repayment of $55.5
million of variable rate borrowings from the FHLB.
CAPITAL POSITION
Total shareholders' equity was $825.9 million, or 8.38% of total
assets at March 31, 1996, $682.1 million, or 8.35% of total assets, at March
31, 1995, and $795.5 million, or 8.22% of total assets at December 31, 1995.
Book value per share was $27.52 on March 31, 1996, $24.00 per share on March
31, 1995, and $26.93 per share on December 31, 1995.
Total shareholders' equity increased $30.4 million from December 31,
1995, principally from $21.7 million of earnings retention ($29.8 million of
net income less $8.1 million of dividends) and the net issuance of $16.1
million of common stock, which consisted of $45.8 million of common stock
issued in the acquisition of First City and the issuance of $3.6 million of
common stock in connection with employee benefit and dividend reinvestment
plans, less $33.3 million of common stock repurchased for the acquisitions of
Charter and First City. Partially offsetting the above increases in
shareholders' equity was the $7.7 million change in net unrealized gains and
losses on securities available for sale, net of tax.
In the first quarter of 1996, First American declared cash dividends
on its common stock of $.28 per share compared to $.25 per share in the first
quarter of 1995, a 12% increase. The dividend payout ratio was 28% in the
first quarter of 1996 compared to 28% in the first quarter of 1995. On April
18, 1996, the First American Board of Directors increased the quarterly cash
dividend on its common stock from $.28 per share to $.31 per share effective
with the second quarter 1996 dividend payable on May 31, 1996, to shareholders
of record on May 15, 1996.
The Federal Reserve Board and Office of the Comptroller of the
Currency (OCC) regulations require that bank holding companies and national
banks maintain minimum capital ratios. As of March 31, 1996, the Company and
its principal bank subsidiary, First American National Bank (FANB), had
16
<PAGE> 17
ratios which exceeded the regulatory requirements to be classified as "well
capitalized," the highest regulatory capital rating. At March 31, 1996, the
Company and FANB, respectively, had total risk-based capital ratios of 12.40%
and 11.38%, Tier I risk-based capital ratios of 9.82% and 10.12%, and Tier I
leverage capital ratios of 7.77% and 8.19%. In order to be considered well
capitalized, the total risk-based capital ratio must be a minimum of 10%, the
Tier I risk-based capital ratio must equal or exceed 6%, and the Tier I
leverage capital ratio must be 5% or greater.
FAFSB is subject to capital requirements adopted by the OTS, which are
similar but not identical to those issued by the Federal Reserve Board and the
OCC. As of March 31, 1996, FAFSB had ratios which exceeded the regulatory
requirements to be classified as "well capitalized".
LIQUIDITY
Liquidity management consists of maintaining sufficient cash levels to fund
operations and to meet the requirements of borrowers, depositors, and
creditors. Liquid assets, which include cash and cash equivalents (less
Federal Reserve Bank reserve requirements), money market instruments, and
securities that will mature within one year, amounted to $934.2 million and
$634.8 million at March 31, 1996 and 1995, respectively. The estimated average
maturity of securities was 4.2 years and 5.3 years at March 31, 1996 and 1995,
respectively. The average repricing life of the total securities portfolio was
1.7 years and 2.5 years at March 31, 1996 and 1995, respectively. The overall
liquidity position of First American is further enhanced by a high proportion
of core deposits, which provide a stable funding base. Core deposits comprised
90% of total deposits at March 31, 1996, versus 91% at March 31, 1995.
There were no revolving credit borrowings outstanding during the first
quarter of 1996 on First American's $70.0 million revolving credit agreement.
17
<PAGE> 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information called for by this item is incorporated by
reference to Item 3 of the Registrant's annual report on Form
10-K for the year ended December 31, 1995, and Note 8 to the
Corporation's Consolidated Financial Statements for the quarter
ended March 31, 1996 included herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -------------------------------------------------------------------------------
<S> <C>
11 Statement regarding computation of per share earnings is included in Note 6 to the
Consolidated Financial Statements for the quarter ended March 31, 1996. See Part 1,
Item 1.
15 Letter regarding unaudited interim financial information from KPMG Peat Marwick LLP,
dated April 18, 1996.
27 Financial Data Schedule for interim year-to-date period ended March 31, 1996. (For
SEC use only)
</TABLE>
(b) Reports on Form 8-K
A report on Form 8-K dated March 29, 1996, was voluntarily
filed under Item 5 disclosing that First American National Bank
("FANB"), a national banking association and wholly-owned
subsidiary of First American Corporation, entered into a Stock
Purchase Agreement dated March 27, 1996, under which FANB
agreed to purchase 96.2% of the stock of INVEST Financial
Corporation ("INVEST") from Zurich Kemper Investments, Inc.
("Kemper") for $26,000,000 in cash.
A report on Form 8-K dated February 5, 1996, was voluntarily
filed under Item 5 disclosing an Amendment dated as of February
2, 1996 to the Agreement and Plan of Merger by and between
First American Corporation and First City Bancorp, Inc. dated
July 5, 1995.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST AMERICAN CORPORATION
---------------------------
(Registrant)
/s/ Martin E. Simmons
-----------------------------------------------
Martin E. Simmons
Executive Vice President, General Counsel,
Secretary and Principal Financial Officer
Date: May 13, 1996
----------------------------------------
19
<PAGE> 1
Exhibit 15. Letter regarding unaudited interim financial information from KPMG
Peat Marwick LLP
The Board of Directors
First American Corporation:
We have reviewed the consolidated balance sheets of First American Corporation
and subsidiaries as of March 31, 1996 and 1995, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
three-month periods ended March 31, 1996 and 1995. These consolidated
financial statements are the responsibility of the Corporation's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of First American Corporation and
subsidiaries as of December 31, 1995; and the related consolidated statements
of income, changes in shareholders' equity and cash flows for the year then
ended (not presented herein); and in our report dated January 19, 1996, we
expressed an unqualified opinion on those consolidated financial statements.
Our report refers to changes in accounting principles related to the adoption
in 1993 of the provisions of the Financial Accounting Standards Board's
Statements of Financial Accounting Standards No. 109, Accounting for Income
Taxes; No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions; No. 112, Employers' Accounting for Postemployment Benefits; and No.
115, Accounting for Certain Investments in Debt and Equity Securities.
/s/ KPMG Peat Marwick LLP
- --------------------------
April 18, 1996
Nashville, Tennessee
20
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