<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 September 30, 1997
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: 58,402,763 as of October 31, 1997.
<PAGE> 2
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1 Financial Statements (unaudited)
Consolidated Income Statements for the Three and Nine
Months Ended September 30, 1997 and 1996 3
Consolidated Balance Sheets as of September 30, 1997 and
1996 and December 31, 1996 4
Consolidated Statements of Changes in Shareholders'
Equity for the Nine Months Ended September 30, 1997
and September 30, 1996 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and September 30, 1996 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. Other Information
Item 1 Legal Proceedings 22
Item 6 Exhibits and Reports on Form 8-K 22
</TABLE>
2
<PAGE> 3
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
------------------------- -----------------------
(dollars in thousands, except per share amounts) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $150,134 $138,286 $430,797 $406,537
Interest and dividends on securities 37,739 39,384 118,079 111,203
Interest on federal funds sold and securities purchased under
agreements to resell 905 845 2,502 5,564
Interest on time deposits with other banks and other interest 1,246 1,487 3,582 2,651
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 190,024 180,002 554,960 525,955
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 5,195 3,962 14,511 11,798
Money market accounts 27,324 26,970 79,284 79,616
Regular savings 1,628 1,878 5,143 6,077
Certificates of deposit under $100,000 21,504 21,976 65,004 65,569
Certificates of deposit $100,000 and over 11,200 9,736 31,768 27,779
Other time and foreign 6,512 6,518 19,220 19,775
- ---------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 73,363 71,040 214,930 210,614
- ---------------------------------------------------------------------------------------------------------------------------
Interest on short-term borrowings 15,882 13,510 42,817 37,829
Interest on long-term debt 4,883 6,161 14,834 19,176
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 94,128 90,711 272,581 267,619
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 95,896 89,291 282,379 258,336
PROVISION FOR LOAN LOSSES - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 95,896 89,291 282,379 258,336
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 16,495 14,436 47,730 42,665
Commissions and fees on fiduciary activities 4,922 4,644 14,356 13,400
Investment services income 29,377 26,685 87,669 33,552
Trading account (loss) income (292) 686 365 970
Merchant discount fees 967 1,021 2,687 2,646
Net realized gain on sales of securities 641 15 1,407 1,522
Gain on sale of subsidiaries 2,105 - 2,105 -
Other income 10,035 10,232 32,521 26,429
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 64,250 57,719 188,840 121,184
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 47,860 44,022 141,789 121,946
Net occupancy expense 6,905 7,008 20,589 18,698
Equipment expense 5,749 4,322 16,086 12,557
Systems and processing expense 3,852 3,885 11,728 10,518
FDIC insurance expense 238 8,910 831 10,286
Marketing expense 3,329 3,805 9,500 10,785
Communication expense 3,461 3,155 10,423 8,916
Supplies expense 1,322 1,370 4,441 3,745
Foreclosed properties expense (income), net (2,171) (1,098) (4,399) (3,750)
Subscribers' commissions 18,165 17,449 53,126 17,449
Other expenses 11,221 10,349 34,395 26,136
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 99,931 103,177 298,509 237,286
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 60,215 43,833 172,710 142,234
Income tax expense 22,982 16,414 66,106 54,126
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 37,233 $ 27,419 $106,604 $ 88,108
===========================================================================================================================
PER COMMON SHARE: (RESTATED FOR 2-FOR-1 STOCK SPLIT ON MAY 9, 1997)
Net income $ .63 $ .47 $1.81 $1.49
Dividends declared .20 .155 .555 .45
===========================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 58,411 59,101 58,776 59,178
===========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31
--------------------------- -------------
(dollars in thousands, except share amounts) 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 508,953 $ 521,296 $ 603,456
Time deposits with other banks 9,557 8,592 53,801
Securities:
Held to maturity (market value $655,162, $887,798, and $835,192,
respectively) 653,277 888,462 834,547
Available for sale (amortized cost $1,740,588, $1,513,172, and
$1,685,743, respectively) 1,737,776 1,495,760 1,678,232
- ---------------------------------------------------------------------------------------------------------------------------
Total securities 2,391,053 2,384,222 2,512,779
- ---------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under agreements to resell 58,291 110,781 161,677
Trading account securities 71,348 95,647 60,210
Loans:
Commercial 3,235,454 2,952,130 3,010,125
Consumer--amortizing mortgages 1,736,011 1,771,531 1,782,630
Consumer--other 1,601,270 1,325,130 1,334,750
Real estate--construction 202,823 182,993 190,673
Real estate--commercial mortgages and other 376,694 354,490 345,466
- ---------------------------------------------------------------------------------------------------------------------------
Total loans 7,152,252 6,586,274 6,663,644
Unearned discount and net deferred loan fees 527 5,505 5,047
- ---------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net deferred loan fees 7,151,725 6,580,769 6,658,597
Allowance for loan losses 115,297 128,225 123,265
- ---------------------------------------------------------------------------------------------------------------------------
Total net loans 7,036,428 6,452,544 6,535,332
- ---------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 189,004 149,833 162,257
Foreclosed properties 3,700 7,944 7,363
Other assets 293,648 297,506 302,593
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $10,561,982 $10,028,365 $10,399,468
===========================================================================================================================
LIABILITIES
Deposits:
Demand (noninterest-bearing) $ 1,290,652 $ 1,319,074 $ 1,374,528
NOW accounts 869,287 786,077 830,269
Money market accounts 2,406,476 2,242,885 2,295,112
Regular savings 273,383 318,248 303,691
Certificates of deposit under $100,000 1,611,545 1,673,629 1,665,675
Certificates of deposit $100,000 and over 772,940 714,741 893,794
Other time 362,612 396,299 332,651
Foreign 114,510 100,712 97,257
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 7,701,405 7,551,665 7,792,977
- ---------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 1,485,278 1,153,294 1,154,372
Long-term debt 210,056 340,497 331,157
Other liabilities 275,973 144,918 252,255
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 9,672,712 9,190,374 9,530,761
- ---------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; authorized 100,000,000 shares; issued:
58,379,132 shares at September 30, 1997; 59,113,218 shares at
September 30, 1996 and 59,262,998 shares at December 31, 1996 145,948 147,783 148,158
Capital surplus 116,114 158,229 157,792
Retained earnings 643,745 545,564 569,851
Deferred compensation on restricted stock (14,645) (2,333) (2,066)
Employee stock ownership plan obligation (224) (567) (443)
- ---------------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 890,938 848,676 873,292
Net unrealized losses on securities available for sale, net of tax (1,668) (10,685) (4,585)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 889,270 837,991 868,707
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,561,982 $10,028,365 $10,399,468
===========================================================================================================================
</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
NINE MONTHS ENDED SEPTEMBER 30, COMMON DEFERRED EMPLOYEE (LOSSES)
1996 AND SEPTEMBER 30, 1997 SHARES COMPENSATION STOCK ON
ISSUED ON OWNERSHIP SECURITIES
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AND COMMON CAPITAL RETAINED RESTRICTED PLAN AVAILABLE
AMOUNTS) OUTSTANDING STOCK SURPLUS EARNINGS STOCK OBLIGATION FOR SALE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 59,079,638 $147,699 $162,254 $483,973 $ (1,263) $ (661) $ 3,530 $795,532
Issuance of common shares in
connection with Employee Benefit
Plan, net of discount on Dividend
Reinvestment Plan 578,942 1,447 8,966 - - - - 10,413
Issuance of shares of restricted
common stock 88,976 223 1,868 - (2,091) - -
Repurchase of shares of common
stock (2,780,662) (6,952) (55,780) - - - - (62,732)
Issuance of common shares for
purchase of First City Bancorp, Inc. 2,147,518 5,369 40,937 - - - - 46,306
Amortization of deferred
compensation on restricted stock - - - - 1,021 - - 1,021
Reduction in employee stock
ownership plan obligation - - - - - 94 - 94
Net income - - - 88,108 - - - 88,108
Cash dividends declared ($.45 per
common share) - - - (26,517) - - - (26,517)
Change in net unrealized gains/losses
on securities available for sale, -
net of tax - - - - - (14,215) (14,215)
Other (1,194) (3) (16) - - - - (19)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 59,113,218 $147,783 $158,229 $545,564 $ (2,333) $ (567) $(10,685) $837,991
==================================================================================================================================
Balance, January 1, 1997 59,262,998 $148,158 $157,792 $569,851 $ (2,066) $ (443) $ (4,585) $868,707
Issuance of common shares in
connection with Employee Benefit
Plan, net of discount on Dividend
Reinvestment Plan 866,961 2,167 14,263 - - - - 16,430
Issuance of shares of restricted
common stock 459,674 1,149 14,002 - (15,151) - -
Repurchase of shares of common
stock (2,561,111) (6,403) (81,691) - - - - (88,094)
Issuance of shares for purchase of
Hartsville Bancshares, Inc. 350,522 876 9,223 - - - - 10,099
Amortization of deferred
compensation on restricted stock - - - - 2,572 - - 2,572
Reduction in employee stock
ownership plan obligation - - - - - 219 - 219
Net income - - - 106,604 - - - 106,604
Cash dividends declared ($.555 per
common share) - - - (32,710) - - - (32,710)
Change in net unrealized gains/losses
on securities available for sale, net -
of tax - - - - - 2,917 2,917
Tax benefit from stock option and
award plans - - 2,522 - - - - 2,522
Other 88 1 3 - - - - 4
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 58,379,132 $145,948 $116,114 $643,745 $(14,645) $ (224) $ (1,668) $ 889,270
==================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
FIRST AMERICAN CORPORATION
and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $106,604 $ 88,108
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment 14,577 11,432
Amortization of intangible assets 8,417 6,952
Other amortization, net 2,790 103
Deferred income tax expense 9,804 11,149
Net gain on sales and writedowns of foreclosed property (4,642) (3,681)
Net realized gain on sales of securities (1,378) (1,522)
Net gain on sales and writedowns of premises and equipment (171) (57)
Gain on sale of subsidiary (2,105) -
Change in assets and liabilities, net of effects from acquisitions:
(Increase) decrease in accrued interest receivable (11,337) 8,476
Increase (decrease) in accrued interest payable 5,012 (10,730)
Increase in trading account securities (11,138) (65,238)
Decrease in other assets 4,106 39,307
Increase (decrease) in other liabilities 18,627 (5,551)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 139,166 78,748
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net decrease in time deposits with other banks 44,150 19,905
Proceeds from sales of securities available for sale 787,353 437,770
Proceeds from maturities of securities available for sale 240,367 287,925
Purchases of securities available for sale (1,057,059) (909,413)
Proceeds from maturities of securities held to maturity 285,187 161,271
Purchases of securities held to maturity (104,150) (115,961)
Net decrease in federal funds sold and securities purchased under
agreements to resell 103,386 215,450
Net (increase) decrease in loans, net of repayments and sales (454,900) 6,764
Proceeds from sales of foreclosed property 10,720 6,685
Acquisitions, net of cash acquired 3,369 (19,216)
Proceeds from sale of subsidiary, net of cash disposed of 2,007 -
Proceeds from sales of premises and equipment 4,071 5,737
Purchases of premises and equipment (44,079) (29,746)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (179,578) 67,171
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in deposits (173,165) (157,877)
Net increase in other short-term borrowings 87,542 200,564
Advances from (repayment to) Federal Home Loan Bank 133,516 (82,106)
Net repayment of other long-term debt (136) (939)
Issuance of common shares under Employee Benefit and Dividend
Reinvestment Plans 16,430 10,413
Cash dividends paid (32,710) (26,517)
Repurchase of common stock (88,094) (62,732)
Tax benefit related to stock options 2,522 -
Other 4 75
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (54,091) (119,119)
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in cash and due from banks (94,503) 26,800
Cash and due from banks, January 1 603,456 494,496
- ---------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, September 30 $508,953 $521,296
===========================================================================================================================
Cash paid during the year for:
Interest expense $267,077 $276,910
Income taxes 41,851 43,964
Non-cash investing activities:
Foreclosures 2,461 1,051
Stock issued for acquisitions 10,099 46,306
===========================================================================================================================
</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 First American Corporation's (the "Corporation" or "First
American") 1996 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.
On April 7, 1997, the Board of Directors authorized a 2-for-1 stock split
of First American's common stock payable on May 9, 1997. Accordingly, the
consolidated financial statements for all periods presented have been restated
to reflect the impact of the stock split.
(2) ACCOUNTING POLICIES FOR DERIVATIVE INSTRUMENTS
The Corporation enters into interest rate swap and forward interest rate
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. There must be correlation of interest
rate movements between these derivative instruments and the underlying assets or
liabilities. The impact of a swap is accrued over the life of the agreement
based on expected settlement payments and is recorded as an adjustment to
interest income or expense in the period in which it accrues and in the category
appropriate to the related asset or liability. The related amount receivable
from or payable to the swap counterpart is included as accrued interest in other
assets or liabilities in the 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 or rate of the related assets or liabilities over the
remaining covered period. At such time that there is no longer correlation of
interest rate movements between the derivative instrument and the underlying
asset or liability, or if all of the underlying assets or liabilities
specifically related to a derivative instrument mature, are sold, or terminated,
then the related derivative instrument would be closed out or marked to market
as an element of noninterest income on an ongoing basis.
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.
7
<PAGE> 8
(3) NONPERFORMING ASSETS
Nonperforming assets were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30 December 31
-----------------------------------------------
(in thousands) 1997 1996 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans $ 18,771 $ 14,064 $ 16,331
Foreclosed properties 3,700 7,944 7,363
- -------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 22,471 $ 22,008 $ 23,694
=========================================================================================================================
90 days or more past due on accrual $ 11,679 $ 8,335 $ 11,711
=========================================================================================================================
Nonperforming assets as a percent of loans
and foreclosed properties (excluding
90 days or more past due on accrual) .31% .33% .36%
=========================================================================================================================
</TABLE>
(4) ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $123,265 $132,415
Provision charged to operating expenses - -
Allowance of subsidiary purchased 711 2,126
Allowance of subsidiary sold (252) -
- -----------------------------------------------------------------------------------------------------------------------
123,724 134,541
- -----------------------------------------------------------------------------------------------------------------------
Loans charged off 21,132 21,784
Recoveries of loans previously charged off 12,705 15,468
- -----------------------------------------------------------------------------------------------------------------------
Net charge-offs 8,427 6,316
- -----------------------------------------------------------------------------------------------------------------------
Balance, September 30 $115,297 $128,225
=======================================================================================================================
</TABLE>
Allowance ratios were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance end of period to net loans outstanding 1.61% 1.95%
Net charge-offs to average loans (annualized) .16 .13
=======================================================================================================================
</TABLE>
(5) ACQUISITIONS
On January 1, 1997, the Corporation completed its acquisition of
Hartsville Bancshares, Inc. ("Hartsville"), an $89.5 million bank holding
company, by exchanging approximately 350,000 shares of the Corporation's common
stock (adjusted for the 2-for-1 split) for all of the outstanding shares of
Hartsville. The acquisition was accounted for as a purchase. The purchase price
in excess of the fair value of net assets acquired was $6 million and was
recorded as goodwill. Hartsville was the parent of CommunityFirst Bank, which
operated five branches in Middle Tennessee. CommunityFirst was simultaneously
merged with and into First American National Bank ("FANB"), a wholly-owned
subsidiary of the Corporation.
On July 1, 1996, FANB purchased 96.2% of the stock of INVEST Financial
Corporation ("INVEST") for $26.0 million in cash. Simultaneously, INVEST
completed its acquisition of Investment Center Group, Inc., the parent of
Investment Centers of America, in a transaction valued at approximately $5.0
million. INVEST is a national marketer of mutual funds, annuities and other
investment products sold through financial institutions. Both transactions were
accounted for as purchases. During the third quarter of 1996, FANB purchased an
additional 2.1% of the stock of INVEST. The purchase price in excess of the fair
value of net assets acquired was an aggregate of $17.7 million which is recorded
as goodwill. Effective February 1, 1997, AmeriStar Capital Markets, Inc.,
formerly a wholly-owned subsidiary of FANB and a
8
<PAGE> 9
broker-dealer registered with the National Association of Securities Dealers,
was merged with and into INVEST. As a result of this merger, FANB's equity
ownership in INVEST increased to 98.5%.
Effective April 1, 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 2.2 million shares of First
American Corporation common stock (adjusted for the 2-for-1 stock split) 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. The purchase
price in excess of the fair value of net assets acquired (goodwill) was $32.2
million.
(6) ACCOUNTING MATTERS
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," was adopted prospectively by the Corporation on January 1, 1997
with the exception of certain transactions that are deferred by the provisions
of SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." SFAS No. 125 provides accounting and reporting standards for
sales, securitizations, and servicing of receivables and other financial assets,
secured borrowing and collateral transactions, and extinguishments of
liabilities. The adoption of this statement had no material impact on the
consolidated financial statements.
SFAS No. 128, "Earnings Per Share," establishes standards for computing
and presenting earnings per share ("EPS") and applies to entities with publicly
held common stock. The statement simplifies the standards for computing EPS and
provides a more compatible computation with EPS standards of other countries. It
replaces the presentation of primary EPS with a presentation of basic EPS and
requires dual presentation of basic and diluted EPS on the face of the income
statement. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. Restatement of all prior period EPS data presented is
required. The following presents the Corporation's EPS under the current and new
requirements.
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- ------------------------
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AS REPORTED
Primary EPS $.63 $.47 $1.81 $1.49
PRO FORMA
Basic EPS .63 .47 1.81 1.49
Diluted EPS .62 .45 1.76 1.46
=========================================================================================================================
</TABLE>
SFAS No. 129, "Disclosure of Information about Capital Structure," requires
disclosure of information about an entity's capital structure that has issued
securities. This statement requires no change in the Corporation's previous
disclosure requirements under Accounting Principles Board Opinion No. 15 and, as
such, will have no material impact on the consolidated financial statements.
SFAS No. 129 is effective for financial statements issued for periods ending
after December 15, 1997.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements and requires that all components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The presentation of
comprehensive income for earlier periods is required. Adoption of SFAS No. 130
does not affect recognition or measurement of comprehensive
9
<PAGE> 10
income and its components and as such will only affect the reporting and display
in the consolidated financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to
shareholders. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Adoption of SFAS No. 131 will expand disclosures related
to the consolidated financial statements.
(7) EARNINGS PER COMMON SHARE
Earnings per common share amounts are computed by dividing net income by the
weighted average number of common shares outstanding during each respective
period.
(8) COMMON STOCK
The Corporation purchased 2.6 million shares of First American Corporation
common stock (adjusted for the 2-for-1 stock split) in the open market during
the first nine months of 1997 at a total cost of $88.1 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.
All of the First American shares exchanged in the Hartsville transaction
were repurchased during January 1997 in the open market.
(9) LEGAL AND REGULATORY MATTERS
On September 30, 1996, special legislation was enacted which required many
financial institutions to pay a special one-time assessment on deposits insured
by the Savings Association Insurance Fund ("SAIF") at the rate of $.657 per $100
of deposits held as of March 31, 1995. The Corporation's special assessment was
$8.1 million or $4.949 million, net of tax ($.08 per share), and was accrued by
First American in September 1996. The purpose of the legislation was to
recapitalize the thrift fund up to the statutorily prescribed 1.25%. Effective
January 1, 1997, the normal SAIF deposit insurance rate for well-capitalized
institutions dropped to 0 basis points per $100 of deposits. Beginning January
1, 1997, a separate 1.3 basis point annual charge will be assessed through 1999
on Bank Insurance Fund deposits and a 6.4 basis point annual charge will be
assessed on SAIF deposits in order to service debt incurred by the Financing
Corporation, a corporation established by the Federal Housing Finance Board to
issue stock and debt principally to assist in funding the Federal Savings and
Loan Insurance Corporation Resolution Fund. Starting in the year 2000 until the
Financial Corporation debt is retired, banks and thrifts will pay such
assessment on a pro rata basis, which is estimated to run approximately 2.5
basis points.
Following the adoption of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), Charter Federal Savings Bank ("Charter" or
now "FAFSB"), brought an action against the Office of Thrift Supervision and the
Federal Deposit Insurance Corporation seeking injunctive and other relief,
contending that Congress' elimination of supervisory goodwill required
rescission of certain supervisory transactions. The Federal District Court found
in Charter's favor, but in 1992 the Fourth Circuit Court of Appeals reversed,
and the U.S. Supreme Court denied Charter's petition for certiorari. In 1995,
the Federal Circuit Court found in favor of another thrift institution in a
similar case (Winstar Corp. v. United States) in which the association sought
damages for breach of contract. Charter also filed suit against the United
States Government ("Government") in the Court of Federal Claims based on breach
of contract. Pending the Supreme Court's review of the Winstar decision, FAFSB's
action was stayed. In July 1996, the Supreme Court affirmed the lower court's
decision in Winstar. The stay was automatically lifted and FAFSB's suit is now
proceeding. The Government, however, has filed a motion to dismiss the suit
based on the prior Fourth Circuit decision. This motion has not yet been decided
by the Federal Claims Court.
10
<PAGE> 11
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.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the consolidated
financial statements appearing within this report and by reference to First
American Corporation's 1996 Annual Report.
OVERVIEW
On April 17, 1997, the Board of Directors authorized a 2-for-1 stock split
of First American Corporation common stock which was made on May 9, 1997. The
par value of the common stock was reduced from $5.00 to $2.50 per share. All
financial data included has been restated to reflect the impact of the stock
split.
Net income for the nine months ended September 30, 1997, was $106.6 million,
an $18.5 million or 21.0% increase from the $88.1 million earned during the same
time last year. Earnings per share also increased during the nine months ended
September 30, 1997 to $1.81 per share, up 21.8% over the $1.49 for the same
period in 1996. Return on average assets ("ROA") and return on average equity
("ROE") improved to 1.41% and 16.26%, respectively, for the nine months ended
September 30, 1997 from 1.21% and 14.34%, respectively, for the same time in
1996.
During 1996, special legislation was enacted which required many financial
institutions to pay a special one-time assessment on deposits insured by the
Savings Association Insurance Fund ("SAIF") at the rate of $.657 per $100 of
deposits held as of March 31, 1995. The Corporation's special assessment was
$8.1 million or $5.0 million, net of tax ($.08 per share), and was accrued by
First American in September 1996. The purpose of the legislation was to
recapitalize the thrift fund up to the statutorily prescribed 1.25%. Excluding
the one-time SAIF assessment, net income increased 15.0%, from $93.1 million in
the first nine months of 1996, or $1.57 per share. Also, excluding these
expenses, ROA was 1.28% and ROE was 15.15%.
During 1997, First American has taken steps to further align the goals of
management with the strategic and financial goals of First American. The Board
of Directors approved a new program under the terms of the 1991 Employee Stock
Incentive Plan to compensate management based on the Corporation's overall
achievement of its goals. Executive and senior management were given the choice
of receiving part, or all, of their annual incentive compensation (20%-50% of
total compensation) in restricted common stock, rather than cash, with the
opportunity to have it matched by the Corporation. First American's matching
contribution will vest if the Corporation achieves a price-to-book multiple
greater than or equal to the median of a defined high performing peer group by
the end of the year 2000. The composition of the peer group and the
Corporation's goals are subject to change by the Human Resources Committee in
order to ensure that they remain reflective of the most high performing, highly
valued companies in the industry.
On July 17, 1997, First American National Bank ("FANB") completed its sale
of Tennessee Credit Corporation and First City Life Insurance Company, with
total assets of $13.6 million, to Norwest Financial Tennessee, Inc. The
transaction resulted in a net gain of $2.1 million.
Effective January 1, 1997, First American acquired Hartsville Bancshares,
Inc. ("Hartsville"), an $89.5 million bank holding company, by exchanging
approximately 350,000 shares (adjusted for the 2-for-1 stock split) of the
Corporation's common stock for all of the outstanding shares of Hartsville. All
of the First American shares exchanged in the transaction were repurchased in
the open market during January 1997. Hartsville had five branches in Middle
Tennessee and operated under the name CommunityFirst. Immediately following the
merger of Hartsville with and into First American, CommunityFirst was merged
with and into FANB. The acquisition was accounted for as a purchase.
Effective July 1, 1996, FANB, a wholly-owned subsidiary of First American,
purchased 96.2% of the stock of INVEST for $26.0 million in cash.
Simultaneously, INVEST completed its acquisition of Investment Center Group,
Inc., the parent of Investment Centers of America, in a transaction valued at
$5.0 million, which makes INVEST the nation's largest marketer of mutual funds,
annuities, and other investment products sold through financial institutions.
Both transactions were accounted for as purchases. During the third quarter of
1996, FANB purchased an additional 2.1% of the stock of INVEST. Effective
February 1, 1997, AmeriStar Capital Markets, Inc., formerly a wholly-owned
subsidiary of FANB and a
12
<PAGE> 13
broker-dealer registered with the National Association of Securities Dealers,
was merged with and into INVEST. As a result of the merger, FANB's equity
ownership in INVEST increased to 98.5%.
Effective April 1, 1996, FANB purchased 49% of the stock of The SSI Group,
Inc., a health care payments processing company, for $8.6 million. The
transaction is being accounted for under the equity method of accounting.
Effective March 11, 1996, First American acquired First City by exchanging
approximately 2.2 million shares (adjusted for the 2-for-1 stock split) 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.
On October 22, 1997, FANB entered into a definitive agreement with the Bank
of New York to purchase FANB's corporate trust business. FANB intends to
transfer to the Bank of New York approximately 550 bond trustee and agency
relationships representing $5 billion in outstanding securities for
municipalities and corporations located primarily in Tennessee. The transaction
is expected to be completed in the first quarter of 1998.
13
<PAGE> 14
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income on a taxable equivalent basis represented 60% of total
revenues in the third quarter of 1997 and 61% in the third quarter of 1996. For
purposes of this discussion, total revenues consist of the sum of net interest
income and noninterest income. Net interest income on a taxable equivalent basis
in the third quarter of 1997 was $97.0 million, up $6.8 million, or 7.5%, from
$90.2 million in the third quarter of 1996. 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. Net interest income is affected by the volume and
mix of earning assets and interest-bearing liabilities and the corresponding
interest yields and costs.
Net interest income on a taxable equivalent basis represented 60% of total
revenues in the first nine months of 1997 and 68% of total revenues during the
same period last year. Net interest income on a taxable equivalent basis in the
nine months ended September 30, 1997 was $285.2 million, up $24.2 million, or
9.3% from the $261.0 million during the same period last year.
Total interest income on a taxable equivalent basis amounted to $191.1
million for the third quarter of 1997, compared to $180.9 million for the third
quarter of 1996, an increase of $10.2 million, or 5.6%. Of the $10.2 million
increase in total interest income, $8.1 million resulted from an increase in the
volume of earning assets (primarily loans) and $2.1 million resulted from an
increase in average yields. Average earning assets rose $386.8 million, or 4.3%,
to $9.45 billion. Of the total increase, average loans increased $553.5 million,
or 8.5%, to $7.07 billion, average federal funds sold and securities purchased
under agreements to resell increased $2.1 million to $63.8 million, while
average securities decreased $159.0 million, or 6.6%, to $2.24 billion. The
average yield on earning assets increased 8 basis points to 8.02% from 7.94%,
due to a shift in the mix of earning assets. Average loans increased to 75% of
average earning assets in the third quarter of 1997 versus 72% in the same
period for 1996 while average securities decreased to 24% of average earning
assets in the third quarter of 1997 versus 26% in the third quarter of 1996. As
average earning assets increased from the third quarter of 1996 to the third
quarter of 1997 with more earning assets in higher yielding loan balances than
in securities, the mix was more favorable and the overall yield improved.
Total interest income on a taxable equivalent basis amounted to $557.8
million for the nine months ended September 30, 1997, compared to $528.7 million
for the same period last year, an increase of $29.1 million, or 5.5%. Of the
$29.1 million increase in total interest income, $22.2 million resulted from an
increase in the volume of earning assets (primarily loans) and $6.9 million
resulted from an increase in average yields. Average earning assets rose $385.2
million, or 4.3%, to $9.34 billion. Of the total increase, average loans
increased $356.2 million, or 5.5%, to $6.84 billion, average securities
increased $88.0 million, or 3.9%, to $2.36 billion, while average federal funds
sold and securities purchased under agreements to resell decreased $77.1 million
to $60.8 million. The average yield on earning assets increased 9 basis points
to 7.98% from 7.89%, reflecting a generally higher interest rate environment in
the first nine months of 1997 compared to the same time last year. Short-term
and long-term external interest rates were generally higher in the first nine
months of 1997, compared to the first nine months of 1996. For example, the
average prime rate for the nine months ended September 30, 1997 was 8.42%,
compared to 8.28% for the same period last year. Also, 1-year and 5-year
treasury securities yielded 5.64% and 6.35% on average, respectively, in the
first nine months of 1997 compared to 5.52% and 6.19%, respectively, in the
first nine months of 1996.
Total interest expense in the third quarter of 1997 increased $3.4 million,
or 3.8%, to $94.1 million from the third quarter of 1996. Of the increase, $4.4
million resulted from an increase in the volume of interest-bearing liabilities
offset by a $1.0 million decrease due to lower average interest rates paid on
interest-bearing funds. In the third quarter of 1997, average interest-bearing
liabilities grew $349.9 million, or 4.6%, to $8.0 billion from $7.65 billion in
the third quarter of 1996. Of the total increase, average interest-bearing
deposits increased $232.5 million, or 3.7%, to $6.45 billion, average short-term
borrowings rose $139.1 million, or 74.9%, to $324.8 million, and average
long-term debt decreased $30.9 million, or 8.9%, to $315.5 million. Excluding
the effects of the Hartsville acquisition, total average interest-bearing
deposits increased 2.5%. The average rate paid on interest-bearing liabilities
decreased 4 basis points to 4.67% from 4.71% due to a more favorable mix of
interest-bearing liabilities (higher NOW account and money market account
balances as a percentage of interest-bearing liabilities), more favorable
average
14
<PAGE> 15
interest rates paid on interest-bearing liabilities in 1997 versus 1996, and a
decrease in the expense involved in hedging the rates paid on these liabilities.
Total interest expense in the nine months ended September 30, 1997,
increased $5.0 million, or 1.9%, to $272.6 million from the same time last year.
Of the total increase, $12.0 million resulted from an increase in the volume of
interest-bearing liabilities offset by a $7.0 million decrease due to lower
average interest rates paid on interest-bearing funds. In the first nine months
of 1997, average interest-bearing liabilities grew $345.4 million, or 4.6%, to
$7.89 billion from $7.55 billion in the first nine months of 1996. Of the total
increase, average interest-bearing deposits increased $270.9 million, or 4.4%,
to $6.42 billion, average short-term borrowings rose $96.2 million, or 62.6%, to
$250.1 million, and average long-term debt decreased $44.0 million, or 12.1%, to
$319.9 million. Excluding the Hartsville and First City acquisitions, total
average interest-bearing deposits increased 2.0%. The average rate paid on
interest-bearing liabilities decreased 12 basis points to 4.62% from 4.74%, due
to a more favorable mix of interest-bearing liabilities (higher NOW account and
money market account balances as a percentage of interest-bearing liabilities),
more favorable average interest rates paid on interest-bearing liabilities in
1997 versus 1996, and a decrease in the expense involved in hedging the rates
paid on these liabilities.
Net interest income in the third quarter of 1997 increased largely as a
result of the increase in the volume of earning assets and an improved 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 improved 12 basis points to 3.35% during the
third quarter of 1997 from 3.23% for the third quarter of 1996.
As the net interest spread improved, the net interest margin, which is net
interest income expressed as a percentage of average earning assets, increased
to 4.07% for the third quarter of 1997 as compared with 3.96% for the same
quarter a year earlier. The primary factors leading to the improvement in the
net interest margin were the increase in the volume of earning assets and the
improvement in net interest spread.
Net interest income in the nine months ended September 30, 1997, increased
largely as a result of the increase in the volume of earning assets and an
improved net interest spread. First American's net interest spread improved 21
basis points to 3.36% during the first nine months of 1997 from 3.15% for the
same time last year.
As the net interest spread improved, the net interest margin increased to
4.08% for the nine months ended September 30, 1997, as compared with 3.89% for
the same period a year earlier. The primary factors leading to the improvement
in the net interest margin were the increase in the volume of earning assets and
the improvement in net interest spread.
PROVISION FOR LOAN LOSSES
This topic is addressed under the caption "Allowance and Provision for Loan
Losses."
NONINTEREST INCOME
Total noninterest income was $64.3 million for the third quarter of 1997
compared with $57.7 million for the third quarter of 1996, an increase of $6.5
million, or 11.3%. Noninterest income represented 40% of total revenues in the
third quarter of 1997 and 39% during the same time last year. Noninterest
income, excluding net realized securities gains, totaled $63.6 million, an
increase of $5.9 million, or 10.2% from $57.7 million in the third quarter of
1996. The increase in noninterest income from the third quarter of 1996 included
a $2.7 million increase in investment services income, a $2.1 million gain on
the sale of Tennessee Credit Corporation, and a $2.1 million, or 14.3%, increase
in service charges on deposit accounts offset by a $1.0 million decrease in
trading account revenue. The $2.7 million improvement in investment services
income over the third quarter of 1996 resulted from an increased growth in
retail brokerage commissions related to mutual funds and annuities sales and
institutional brokerage commissions on various types of securities transactions
associated with the operations of INVEST. The $2.1 million increase in service
charges on deposit accounts can be attributed to an increase in related
activities for commercial and retail deposits, although there was a slight
decrease in the average number of retail deposit accounts. The average number of
retail deposit accounts decreased .3% and the average number of commercial
deposit accounts increased .2% from third quarter 1996 to the current quarter.
The $2.1
15
<PAGE> 16
million gain on the sale of Tennessee Credit Corporation occurred on July 17,
1997. The $1.0 million decrease in trading account revenue was primarily due to
a change in market conditions during the quarter. Excluding INVEST, noninterest
income increased $3.8 million, or 11.2%.
Total noninterest income was $188.8 million for the first nine months of
1997 compared with $121.2 million for the same time last year, an increase of
$67.8 million, or 55.8%. Noninterest income represented 40% of total revenues in
the first nine months of 1997 and 32% during the same time last year.
Noninterest income, excluding net realized securities gains, totaled $187.4
million, an increase of $67.8 million, or 56.6%, from $119.7 million in the nine
months ended September 30, 1996. The increase from the first nine months of 1996
included a $54.1 million increase in investment services income, a $6.1 million
or 23.0% increase in other income, a $5.1 million, or 11.9%, increase in service
charges on deposit accounts, a $2.1 million gain on the sale of Tennessee Credit
Corporation, and a $1.0 million increase in commissions and fees on fiduciary
activities. Of the total $54.1 million improvement in investment services income
over the year-to-date 1996, $45.6 million can be attributed to the acquisition
of INVEST, and the remainder resulted primarily from growth in retail brokerage
commissions related to mutual funds and annuities sales and institutional
brokerage commissions on various types of securities transactions. The $6.1
million increase in other income resulted largely from a $2.7 million increase
in ATM surcharge and network transaction fee items due substantially to fees
generated by the introduction of new ATM services such as stamps,
mini-statements, and ATM use by non-First American customers, a $1.1 million
increase in income from Financial Insurance Retention Group ("FIRG") due
primarily to the fact that FIRG changed its reserve methodology and subsequently
took a portion of its reserves back into income, and a $1.0 million increase in
open-end, non-loan fees due to interchange fees generated by the "CheckCard"
product. Other income in the first nine months of 1997 also included a $1.0
million increase in income related mainly to the acquisition of INVEST which
consists of fees collected from clients related to account activity, and a $.5
million increase in collection expense and related bank fees due primarily to
increases in agency fees and fund transfer fees. The increases in other income
were offset by $.9 million decrease in gains on the sale of mortgage loans. The
$5.1 million increase in service charges on deposit accounts can be attributed
to a greater number of deposit accounts and related activities for commercial
and retail deposits. The average number of retail deposit accounts increased
1.0% and the average number of commercial deposit accounts increased 1.5% from
nine months ended September 30, 1996 to the current period. The $1.0 million
increase in commission and fees on fiduciary activities resulted principally
from favorable market conditions, as well as increased trust activity due to
improved marketing efforts. Excluding INVEST, noninterest income increased $14.1
million, or 14.8%, from the nine months ended September 30, 1996.
NONINTEREST EXPENSE
Total noninterest expense decreased $3.2 million, or 3.1%, to $99.9 million
for the third quarter of 1997 compared with $103.2 million for the same period
in 1996. The decrease in noninterest expense included a $3.8 million increase in
salaries and employee benefits, a $1.4 million increase in equipment expense, a
$.9 million increase in other expenses, a $.7 million increase in subscribers'
commissions related to INVEST's brokerage activities, offset by an $8.7 million
decrease in FDIC insurance expense, a $1.1 million decrease in foreclosed
property expense, and a $.5 million decrease in marketing expense.
Salaries and employee benefits increased $3.8 million, or 8.7%, from the
same period in 1996 principally due to merit increases and higher incentive
compensation. Equipment expense increased $1.4 million over last year's third
quarter due to higher depreciation expense resulting from the addition of
furniture and fixtures at various branches and enhancements and housing for the
ATMs. Additional equipment expense was also incurred due to the opening of a
branch during the third quarter of 1997. Other expenses increased $.9 million,
or 8.4%, mainly due to a $.6 million increase in professional fee expense
related largely to an increase in various consulting projects during the third
quarter of 1997, a $.3 million increase in software expense related to software
upgrades throughout the company, a $.2 million increase in travel expenses, a
$.2 million increase in security clearing fees primarily associated with INVEST,
and an increase in amortization of intangibles of $.2 million due to the
Hartsville acquisitions and mortgage servicing rights. The increases in other
expenses were offset by a $.9 million increase in deferred loan expense due to
an increased volume of consumer and mortgage loans in the third quarter of 1997,
as compared to the third quarter of 1996. The decrease in FDIC insurance expense
relates to the
16
<PAGE> 17
$8.1 million one-time assessment on SAIF deposits held as of March 31, 1995,
which was accrued during the third quarter of 1996. Foreclosed property expense
decreased by $1.0 million due to more sales of foreclosed property during the
third quarter of 1997. The decrease in marketing expense of $.5 million occurred
primarily because certain statewide advertising projects are planned for late
1997. Excluding INVEST, noninterest expense decreased $4.8 million, or 6.0%.
Total noninterest expense increased $61.2 million, or 25.8%, to $298.5
million for the nine months ended September 30, 1997, compared with $237.3
million for the same period in 1996. The increase in noninterest expense
included a $35.7 million increase in subscribers' commissions related to
INVEST's brokerage activities, a $19.8 million increase in salaries and employee
benefits, a $8.3 million increase in other expenses, a $3.5 million increase in
equipment expense, a $1.9 million increase in net occupancy expense, a $1.5
million increase in communications expense, and a $1.2 million increase in
systems and processing expense. The increases in noninterest expense were offset
by a $9.5 million decrease in FDIC insurance expense and a $1.3 million decrease
in marketing expense.
Salaries and employee benefits increased $19.8 million, or 16.3%, from the
same period in 1996 principally due to merit increases and additional employees
resulting predominantly from acquisitions. Other expenses increased $8.3
million, or 31.6% from the prior year mainly due to a $1.5 million increase in
security clearing fees, a $1.1 million increase in travel expense, and a $.5
million increase in convention and group meeting expense, all of which can be
attributed to the acquisition of INVEST. Other expenses also included a $1.4
million increase in the amortization of intangibles related to the Hartsville,
First City and INVEST acquisitions and mortgage servicing rights, an increase of
$1.2 million in professional fee expense related to additional consulting fees
generated by various projects during the third quarter of 1997, a $.5 million
increase in software expense due to software upgrades throughout the company,
and a $.5 million increase in other non-interest deposit expense which can be
attributed to higher losses because of forgery and check card fraud. Equipment
expense increased $3.5 million compared to the nine months ended September 30,
1996, largely due to higher depreciation expense resulting from the addition of
furniture and fixtures at various branches, the addition of new image scanning
equipment, and enhancements and housing for the ATMs. Expense was also incurred
due to an increased usage of computer maintenance contracts and the addition
and/or renovation of branches during the year. Net occupancy expense grew $1.9
million essentially from higher rent and other occupancy-related expenses
related to the Hartsville, First City, and INVEST acquisitions. Communication
expenses increased $1.5 million, mainly because of higher expenditures for
telecommunications, postage, and air courier services. Systems and processing
expense increased $1.2 million due to higher processing volumes related to the
recent acquisitions and various projects to enhance systems. The $9.5 million
decrease in FDIC insurance expense related to the $8.1 million one-time
assessment on SAIF deposits held as of March 31, 1995, which was accrued during
the third quarter of 1996. The $1.3 million decrease in marketing expense
occurred primarily because certain statewide advertising projects are planned
for late 1997. Excluding INVEST, noninterest expense increased $9.3 million, or
4.3%.
First American's operating efficiency ratio from the traditional banking
business improved to 54.81% in the third quarter of 1997 compared to 57.24%
(excluding the SAIF assessment) for the third quarter of 1996, while the
operating efficiency ratio for the first nine months of 1997 improved to 55.90%
compared to 57.02% (excluding the SAIF assessment) for the same period in 1996.
INCOME TAXES
During the third quarters of 1997 and 1996, income tax expense was $23.0
million and $16.4 million, respectively. During the nine months ended September
30, 1997 and September 30, 1996, income tax expense was $66.1 million and $54.1
million, respectively. The major factor for the 22.1% increase in year-to-date
income tax expense was the higher income before income taxes.
17
<PAGE> 18
BALANCE SHEET REVIEW
ASSETS
Total assets of First American rose $533.6 million, or 5.3%, to $10.56
billion at September 30, 1997, compared to $10.03 billion one year earlier. The
growth in total assets was due to a $571.0 million, or 8.7%, increase in loans,
net of unearned discount and net deferred loan fees, to $7.15 billion at
September 30, 1997, from $6.58 billion at September 30, 1996, partially offset
by a $52.5 million decrease in federal funds sold and securities purchased under
agreements to resell, a $24.3 million decrease in trading securities, and a
$12.3 million decrease in cash. Leading the growth in loans were commercial
loans, which increased $283.3 million, or 9.6%, over a broad range of industry
categories, consumer loans, which increased $276.1 million, or 20.8%, primarily
due to the purchase of $200.0 million of loans, with recourse, from the
Tennessee Valley Authority on June 30, 1997, and commercial mortgage loans,
which increased $22.2 million, or 6.3%, partially offset by a decrease in
consumer residential mortgages of $35.5 million. The increase in loan volume was
generally a reflection of positive economic conditions in Tennessee and adjacent
states, and the success of First American's sales efforts and marketing
programs. An increase of $6.8 million in investment securities also contributed
to the growth in total assets.
Total assets increased $162.5 million from $10.40 billion at December 31,
1996, to $10.56 billion at September 30, 1997. The increase in total assets from
December 31, 1996, to September 30, 1997, was due to a $493.1 million increase
in loans, net of unearned discount and net deferred loan fees, partially offset
by a $121.7 million decrease in investment securities, a $103.4 million decrease
in Federal funds sold and securities purchased under agreements to resell, and
by the $94.5 million decrease in cash. Leading the growth in loans for the nine
months ended September 30, 1997, were consumer installment loans which increased
$266.5 million, or 20.0%, and commercial loans $225.3 million, a 7.5% increase.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
Management's policy is to maintain the allowance for loan losses at a level
which is adequate to absorb estimated loan losses inherent in the loan
portfolio. The provision for loan losses is a charge to earnings necessary,
after loan charge-offs and recoveries, to maintain the allowance at an
appropriate level. Determining the appropriate level of the allowance and the
amount of the provision for loan losses involves uncertainties and matters of
judgment and therefore cannot be determined with precision.
In order to maintain the allowance at an appropriate level, First American's
loan loss methodology produced no provision for loan losses during the third
quarter of 1997 nor during the third quarter of 1996. The primary factors
leading to no provision for loan losses in the third quarters of 1997 and 1996,
were the continued favorable levels of asset quality as discussed under the
caption "Asset Quality" and the relatively low net loan charge-off experience.
In the third quarter of 1997 there were net charge-offs of $3.1 million which
compared to net charge-offs of $5.3 million in the third quarter of 1996. Net
charge-offs as a percentage of average loans on an annualized basis amounted to
.18% and .33%, respectively, in the third quarters of 1997 and 1996. Activity in
the allowance for loan losses in the first nine months of 1997 also included a
$.7 million increase due to the January 1, 1997 acquisition of Hartsville and a
$.2 million decrease due to the July 17, 1997 sale of Tennessee Credit
Corporation. For the nine months ended September 30, 1997 and September 30,
1996, net charge-offs were $8.4 million and $6.3 million, respectively, and net
charge-offs as a percentage of average loans on an annualized basis amounted to
.16% and .13%, respectively.
The allowance for loan losses was $115.3 million at September 30, 1997,
$128.2 million at September 30, 1996, and $123.3 million at December 31, 1996.
The allowance for loan losses represented 1.61% and 1.95% of net loans at
September 30, 1997 and 1996, respectively, and 1.85% at December 31, 1996.
ASSET QUALITY
First American's nonperforming assets (excluding loans 90 days past due on
accrual status) were $22.5 million at September 30, 1997, $22.0 million at
September 30, 1996, and $23.7 million at December 31, 1996. Nonperforming assets
(excluding loans 90 days past due on accrual status) at September 30, 1997,
represented .31% of total loans and foreclosed properties, compared to .33% at
September 30, 1996, and .36% at December 31, 1996. At September 30, 1997,
nonperforming assets were comprised of $18.8 million of non-accrual loans and
$3.7 million of foreclosed properties.
18
<PAGE> 19
Other potential problem loans consist of loans that are currently not
considered nonperforming but on which information about possible credit problems
has caused Management to doubt the ability of the borrowers to comply fully with
present repayment terms. At September 30, 1997, such loans totaled approximately
$67 million compared with approximately $76 million of such loans at September
30, 1996, and $52 million at December 31, 1996. 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 $7.70 billion at September 30, 1997, an increase of
$149.7 million, or 2.0%, from $7.55 billion a year earlier. Core deposits, which
are defined as total deposits excluding certificates of deposit $100,000 and
over and foreign deposits, totaled $6.81 billion at September 30, 1997, and
$6.74 billion at September 30, 1996. Short-term borrowings increased $332.0
million, or 28.8%, to $1.49 billion at September 30, 1997, from $1.15 billion at
September 30, 1996. Long-term debt decreased $130.4 million from September 30,
1996, to $210.1 million at September 30, 1997, essentially due to the
reclassification of $141.0 million of Federal Home Loan Bank ("FHLB") borrowing
from long- to short-term.
Total deposits decreased $91.6 million from $7.79 billion at December 31,
1996, to $7.70 billion at September 30, 1997. Core deposits increased $12.0
million, short-term borrowings increased $330.9 million, and long-term debt
decreased $121.1 million from December 31, 1996, to September 30, 1997. The
decrease in long-term debt resulted primarily from the reclassification of
$123.0 million of FHLB borrowings from long- to short-term.
DERIVATIVE INSTRUMENTS
First American has utilized off balance sheet derivative products for a
number of years in managing its interest rate sensitivity. Generally, a
derivative transaction is a payments exchange agreement whose value derives from
an underlying asset or underlying reference rate or index. The use of
non-complex, non-leveraged derivative products has reduced the Company's
exposure to changes in the interest rate environment. By using derivative
products such as interest rate swaps and futures contracts to 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 September 30,
1997, First American had derivatives with notional values totaling $2.02
billion. These derivatives had a net positive fair value (unrealized net pre-tax
gain) of $10.9 million. Notional amounts are key elements of derivative
financial instrument agreements. However, notional amounts do not represent the
amounts exchanged by the parties to derivatives and do not measure First
American's exposure to credit or market risks. The amounts exchanged are based
on the notional amounts and the other terms of the underlying derivative
agreements. At September 30, 1996, First American had derivatives with notional
values totaling $1.3 billion. These derivatives had a net positive fair value
(unrealized pre-tax gain) of $5.6 million at September 30, 1996. The instruments
utilized are noted in the following table along with their notional amounts and
fair values at September 30, 1997 and 1996.
19
<PAGE> 20
<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>
SEPTEMBER 30, 1997
Interest rate swaps Money market deposits $ 250,000 5.80% (1) 5.74% (2) 1.8 $ 1,012
Interest rate swaps Loans 675,000 5.73 (3) 6.66 (1) 4.5 11,821
Forward interest rate Available for sale
swaps securities 250,000 6.53 (4) N/A (4) 3.0 (919)
Forward interest rate
swaps Money market deposits 850,000 6.36 (5) 5.73 (5) 1.4 (1,018)
----------- ------
$2,025,000 $ 10,896
================================================================================================================ =================
September 30, 1996
Interest rate swaps Money market deposits $ 600,000 5.77% (1) 5.58% (2) 1.5 $ 4,013
Interest rate swaps Loans 300,000 5.59 (3) 6.80 (1) 4.8 3,644
Forward interest rate Available for sale
swaps securities 200,000 7.11 (6) N/A (6) 3.8 (2,025)
Forward interest rate
swaps Money market deposits 200,000 6.54 (7) N/A (7) 1.8 (63)
----------- ---
$1,300,000 $ 5,569
====================================================================================================================================
</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 will begin in September 1998. The rates to be paid are
fixed and were set at the inception of the contracts. Variable rates to be
received are based on 3-month LIBOR, repricing quarterly, but were unknown
at September 30, 1997, since the related forward swap period had not yet
begun.
(5) Forward swap periods have become effective for $200 million and will begin
in November 1997 for $200 million, June 1998 for $350 million, and July 1998
for $100 million. The rates to be paid are fixed and were set at the
inception of the contracts. Variable rates to be received are based on
3-month LIBOR, repricing quarterly, but were unknown for $650 million of
forward swaps at September 30, 1997, since the related forward swap periods
had not yet begun.
(6) Forward swap periods began in May 1997 for $50 million, June 1997 for $50
million, and July 1997 for $100 million. The rates to be paid are fixed and
were set at the inception of the contracts. Variable rates to be received
are based on 3-month LIBOR, repricing quarterly, but were unknown at
September 30, 1996, since the forward swap periods had not yet begun.
(7) Forward swap periods began in May 1997 for $100 million and September 1997
for $100 million. The rates to be paid are fixed and were set at the
inception of the contracts. Variable rates to be received are based on
3-month LIBOR, repricing quarterly, but were unknown at September 30, 1996,
since the forward swap periods had not yet begun.
As First American's individual derivative contracts approach maturity,
they may be terminated and replaced with derivatives with longer maturities
which offer more interest rate risk protection. At September 30, 1997, there
were $1.7 million of deferred net gains related to terminated derivatives
contracts, and there were $1.4 million of deferred net gains at September 30,
1996. Deferred gains and losses on off balance sheet derivative activities are
recognized as interest income or interest expense over the original covered
periods.
Net interest income for the quarter ended September 30, 1997, was
increased by derivative products income of $.8 million. Net interest income for
the quarter ended September 30, 1996, was decreased by $2.5 million derivative
products expense. Net interest income for the nine months ended September 30,
1997, was increased by derivative products income of $2.4 million. Net interest
income for the nine months ended September 30, 1996, was decreased by derivative
products expense of $9.3 million. The change from derivative products net
expense for year-to-date 1996 to net pretax income for year-to-date 1997 was
primarily due to the reduced amortization of deferred losses on terminated
derivative contracts and changes in the interest rate environment.
Credit risk exposure due to off-balance-sheet hedging is closely
monitored, and counterparts to these contracts are selected on the basis of
their credit worthiness, as well as their market-making ability. As of September
30, 1997, 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 $11.4 million on September 30, 1997. Given the
credit standing of the
20
<PAGE> 21
counterparts to the derivative contracts, Management believes that this credit
exposure is reasonable in light of its objectives.
CAPITAL POSITION
Total shareholders' equity was $889.3 million, or 8.42% of total assets
at September 30, 1997, $838.0 million, or 8.36% of total assets, at September
30, 1996, and $868.7 million, or 8.35% of total assets at December 31, 1996.
Book value per share was $15.23 on September 30, 1997, $14.18 per share on
September 30, 1996, and $14.66 per share on December 31, 1996.
Total shareholders' equity increased $20.6 million from December 31,
1996, principally from increases of $73.9 million of earnings retention ($106.6
million of net income less $32.7 million of dividends), $16.4 million of common
stock issued for employee benefit and dividend reinvestment plans, and $10.1
million of common stock issued for the acquisition of Hartsville. These
increases were reduced by the repurchase of $88.1 million of common stock. All
of the First American shares exchanged in the Hartsville transaction were
repurchased during January 1997 in the open market.
On April 17, 1997, the Board of Directors authorized a 2-for-1 stock
split and a 29% increase in the quarterly cash dividend. All financial data has
been restated to reflect the impact of the stock split. In the third quarter of
1997, First American declared cash dividends on its common stock of $.20 per
share compared to $.155 per share in the third quarter of 1996. Cash dividends
for the first nine months of 1997 were $.555 per share versus $.45 per share in
the first nine months of 1996, an increase of 23%. The dividend payout ratio was
32% in the third quarter of 1997 compared to 33% in the third quarter of 1996.
The dividend payout ratio for the nine months ended September 30, 1997 and 1996
was 31% and 30%, respectively.
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 September 30, 1997, the Corporation and
FANB had ratios which exceeded the regulatory requirements to be classified as
"well capitalized," the highest regulatory capital rating. At September 30,
1997, the Corporation and FANB had total risk-based capital ratios of 11.46% and
11.16%, respectively, Tier I risk-based capital ratios of 9.06% and 9.91%,
respectively, and Tier I leverage capital ratios of 7.71% and 8.57%,
respectively. 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.
First American Federal Savings Bank ("FAFSB") is subject to capital
requirements adopted by the Office of Thrift Supervision ("OTS"), which are
similar to those issued by the Federal Reserve Board and the OCC. At September
30, 1997, FAFSB's total risk-based capital ratio was 16.95%, its Tier I capital
ratio was 15.98% of risk based weighted assets, and its core (leverage) capital
ratio was 7.26%, all of which exceeded the minimum ratios established by the
OTS.
On July 17, 1997, the Board of Directors authorized the repurchase of up to
4.0 million additional shares of the Corporation's common stock to fund its
various employee benefit plans, dividend reinvestment plans and potential future
acquisitions.
LIQUIDITY
Liquidity management consists of maintaining sufficient cash levels to
fund operations and to meet the requirements of borrowers, depositors, and
creditors. Liquid assets, which include cash and cash equivalents (less Federal
Reserve Bank reserve requirements), money market instruments, and securities
that will mature within one year, amounted to $751.4 million and $943.0 million
at September 30, 1997 and 1996, respectively. The estimated average maturity of
securities was 3.5 years and 5.3 years at September 30, 1997 and 1996,
respectively. The average repricing life of the total securities portfolio was
3.1 years and 2.2 years at September 30, 1997 and 1996, 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 88% of total deposits at September 30, 1997, versus 89% at September
30, 1996.
An additional source of liquidity is the Corporation's three year $70
million revolving credit agreement which will expire March 31, 1998. First
American had no borrowings under this agreement during 1997 or 1996.
21
<PAGE> 22
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, 1996, and Note 9 to the Corporation's Consolidated
Financial Statements for the quarter ended September 30, 1997 included
herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ ----------------------------------------------------------------
<S> <C>
3.1 Restated Charter of the Registrant currently in effect as
amended and corrected is incorporated herein by
reference to Exhibit 3.1 of the Registrant's Form
10-Q for the period ended March 31, 1997.
3.2 By-laws of the Registrant currently in effect as amended January
16, 1997, are incorporated herein by reference to Exhibit 3.2 of
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
10 Employment Agreement made on the first day of August, 1997 by and
between First American Corporation and Martin E. Simmons.
11 Statement regarding computation of per share earnings is
included in Note 7 to the Consolidated Financial Statements for
the quarter ended September 30, 1997. See Part 1, Item 1.
15 Letter regarding unaudited interim financial information from
KPMG Peat Marwick LLP, dated October 16, 1997.
27 Financial Data Schedule for interim year-to-date period ended
September 30, 1997. (For SEC use only)
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1997.
22
<PAGE> 23
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/ Dale W. Polley
-----------------------------------------
Dale W. Polley
President and Principal Financial Officer
Date: November 13, 1997
-----------------------------------
23
<PAGE> 1
EXHIBIT 10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") made as of the 1st day of
August, 1997, by and between FIRST AMERICAN CORPORATION, a Tennessee
corporation (hereinafter referred to as the "Company"), and MARTIN E. SIMMONS
(hereinafter referred to as the "Executive").
W I T N E S S E T H :
WHEREAS, Executive is currently employed by Company as its Executive
Vice President - Administration, General Counsel, Principal Financial Officer
and Corporate Secretary; and
WHEREAS, Company and Executive wish to establish a new position for
Executive with Company to the end that Executive will continue to serve in the
Company's employ for and upon the terms and conditions hereinafter provided.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. Definitions. For purposes of this Agreement, capitalized terms
shall have the meanings set forth in Exhibit A.
2. Employment. Company hereby agrees to continue to employ
Executive, and Executive hereby agrees to remain in the employ of Company upon
the terms and conditions herein provided.
3. Position and Responsibility. Effective August 1, 1997,
Executive hereby resigns his current Company offices of Executive Vice President
- -Administration, General Counsel, Principal Financial Officer and Corporate
Secretary, and on and after that date, Executive shall be employed as Senior
Counsel to Company. In the position of Senior Counsel, Executive shall be
responsible for providing legal and other services to Company pursuant to a
business plan to be developed with and approved by Company's Chairman and Chief
Executive Officer or his designee as soon as reasonably possible but in no event
later than January 1, 1998. The Chairman and Chief Executive Officer's designee
shall be selected from Company's General Counsel and Company's officers who
report directly to the Chairman and Chief Executive Officer. The business plan
shall be subject to revision in the same manner from time to time, as
appropriate, and shall be updated at least annually on or before January 1 of
each calendar year. Executive shall report to Company's Chairman and Chief
Executive Officer or his designee.
Pursuant to this Agreement, Executive is scheduled to work at least
twenty (20) hours per week in his position as Senior Counsel. Company shall make
reasonable good faith efforts to make work available to Executive at an annual
rate of at least 1,250 Billable Hours. Executive shall have reasonable
discretion, consistent with reasonable business practices, to determine the
scheduling and location for the performance of his work under this Agreement.
Subject to Executive's fulfillment of his responsibilities under this Agreement,
Executive may engage in the practice of law for his own account and personally
represent clients other than Company as a sole practitioner and/or in
affiliation with a third party law firm. Notwithstanding the foregoing,
Executive shall not, without the prior written consent of Company's Chief
Executive Officer, which shall not be withheld unreasonably, personally
represent any bank, thrift holding company
-1-
<PAGE> 2
or other financial institution other than Company and its affiliates. The
consent of Company's Chief Executive Officer to any such representation shall
constitute a waiver by Company of the application, if any, of Section 14 to that
specific representation. In its sole discretion, Company may refer legal work to
a law firm with whom Executive is affiliated and may approve the referred work
for joint performance by Executive and the law firm. In the case of any such
referral, Executive's services in the performance of the referred work shall
constitute services under this Agreement for which the Executive is compensated
under the terms hereof and shall not be charged to Company. Executive may serve
or continue to serve on the boards of directors of, and hold any other offices
or positions in, other companies or organizations, if such service does not
adversely affect the performance of Executive's duties pursuant to this
Agreement. Executive may have other business investments and participate in
other ventures and in civic or charitable activities which may require his
attention from time to time but which shall not interfere or be inconsistent
with his duties hereunder. No activities referred to in this paragraph may be
undertaken that would violate any other term of this Agreement.
During a transition period until December 31, 1997, Company will
provide Executive with suitable office space and secretarial support for the
performance of his responsibilities under this Agreement. Thereafter, Executive
shall relocate to offices outside Company and shall be responsible for providing
his own secretarial and other office requirements. Company shall reimburse
Executive for travel, meeting attendance and other expenses reasonably and
necessarily incurred by Executive in the performance of his duties pursuant to
this Agreement to the extent that the expenses would be reimbursed or paid by
Company under its policies for full time management employees. Company shall
provide Executive either with subscriptions to or copies of reference
publications reasonably required by Executive for the performance of his duties,
and Company shall also provide Executive with remote access to its computer
network in order that Executive may communicate pursuant to Company's e-mail
system and access the information services of the American Bankers Association
on the Internet.
4. Term. Executive's employment under this Agreement shall
commence as of August 1, 1997 and, shall continue until July 31, 2002, subject,
however, (a) to earlier termination in the manner provided in this Agreement;
and (b) to continuation until December 31, 2002, if required in order for
Executive to complete ten (10) years of service for purposes of the Master
Retirement Plan.
5. Compensation.
During the term of this Agreement, Executive shall be
compensated for services hereunder as follows:
(a) Base Salary. Executive shall be paid a base salary at
the rate of Three Hundred Fifteen Thousand Dollars ($315,000.00) per Employment
Year.
(b) Annual Bonus.
(i) Calendar Year 1997. Prior to September 1,
1997, Executive shall elect irrevocably either the opportunity to earn the bonus
described in Section 5(b)(i)(A) or the opportunity to earn the bonus described
in Section 5(b)(i)(B).
(A) If Executive elects this 1997 bonus
opportunity, he shall continue to participate in Company's Annual Management
Incentive Program (with its performance-accelerated restricted stock election
remaining in effect) with respect to the 1997 annual incentive increment only,
and Executive's entitlement to any 1997 bonus, including the
-2-
<PAGE> 3
terms of payment thereof, shall be determined solely in accordance with the
terms of the Annual Management Incentive Program as applicable to the 1997
annual incentive award increment.
(B) If Executive elects this 1997 bonus
opportunity, and if the Tier 1 target performance level under Company's Annual
Management Incentive Program is attained with respect to Company's 1997 fiscal
year, Executive shall receive a bonus in the amount of $157,500, which shall be
paid in cash on or before March 31, 1998. No additional bonus shall be payable
if the Tier 1 target performance level is exceeded for 1997. If for 1997 the
Tier 1 target performance level is not attained, but the Tier 1 threshold
performance level is attained, Executive shall receive a bonus in an amount
equal to the product of $157,500 multiplied by the percentage of Tier 1 target
performance payout that is payable for 1997. Executive shall not participate in
Company's Annual Management Incentive Program for 1997 or any subsequent year.
(ii) Calendar Years 1998, 1999 and 2000. During each of
calendar years 1998, 1999 and 2000, Executive shall have the opportunity to earn
a bonus in the amount of $157,500. At the beginning of each such calendar year,
in conjunction with the development or revision and approval of Executive's
business plan pursuant to Section 3, Company's Chief Executive Officer or his
designee will establish Executive's goals and objectives for purposes of bonus
attainment during the applicable year. After the conclusion of the applicable
year, Company's Chief Executive Officer or his designee will measure Executive's
performance during the year against the goals and objectives established for
that year, and in his sole discretion, will determine the percentage, if any, of
bonus earned by Executive with respect to the applicable year. As a prerequisite
to earning the full amount of bonus with respect to any such calendar year,
Executive must work at least 1,250 Billable Hours; and as a prerequisite to
earning any bonus with respect to any such calendar year, Executive must work at
least 1,000 Billable Hours. If Company, in its sole discretion, refers legal
work to a law firm with whom Executive is affiliated, and as a result, Executive
is compensated by the law firm, any bonus payable hereunder with respect to a
calendar year shall be reduced by 75% of the compensation that is paid to
Executive by the law firm for referred Company work with respect to the
applicable calendar year. If Executive is compensated for referred Company work
performed during a calendar year, any bonus payable with respect to the calendar
year in which the work is performed shall be reduced under the preceding
sentence without regard to when Executive receives the compensation; and if the
compensation is received after a bonus has already been paid with respect to a
calendar year, Company shall reduce Executive's future compensation by the
amount of the appropriate reduction. Any bonus earned by Executive with respect
to a calendar year shall be paid to Executive in cash on or before March 31 of
the following calendar year.
(c) Stock Compensation. Executive shall not be entitled
to receive any further grants of stock compensation awards, such as stock option
and restricted stock, under the First American Corporation 1991 Employee Stock
Incentive Plan or otherwise. If Executive elects the 1997 bonus opportunity
under Section 5(b)(i)(B), the 1997 grants of restricted stock to Executive in
connection with the Company's Annual Management Incentive Program shall
terminate and be of no further effect, and Executive shall have no rights
thereunder. All other grants of restricted stock and stock options previously
made to Executive under the First American Corporation 1991 Employee Stock
Incentive Plan shall remain in effect, subject to the terms and conditions of
the grants and other governing instruments. Exhibit B-1 describes Executive's
stock compensation
-3-
<PAGE> 4
awards that shall be outstanding as of August 1, 1997 (except for the 1997
grants of restricted stock in connection with the Company's Annual Management
Incentive Program).
6. Participation in Benefit Plans and Fringe Benefits.
Executive's compensation under Section 5 is in addition to any benefits to which
Executive may be or may become entitled under any Employee Benefit Programs of
Company in which Executive is participating currently; and Executive shall be
eligible to receive, during the period of his employment under this Agreement,
all benefits and emoluments for which members of Company's management are
eligible under any such program to the extent permissible under the terms and
provisions of the program and in accordance with the provisions thereof. Company
shall continue to provide Executive with Employee Benefit Programs providing
benefits and levels of benefits at least equal to those presently provided to
Executive by Company, except that Company shall provide a substantially
equivalent form of benefit with respect to any Employee Benefit Program as to
which Executive becomes ineligible to participate during the term of this
Agreement (such as Company's Short Term Disability (STD) Plan), and in any
event, this Agreement shall not preclude a reduction in level of benefits
provided to Executive resulting from a curtailment by Company of an Employee
Benefit Program affecting all members of Company's management as a group.
Company shall provide Executive with the benefits of its Executive Officers Tax
Preparation Policy through Executive's taxable year ending December 31, 1998.
7. Vacation. Executive shall be entitled to four (4) weeks of
annual paid vacation per Employment Year. With respect to any Partial Employment
Year, vacation shall be prorated by multiplying the annual vacation as stated
above by a fraction, the numerator of which is the number of complete months in
such Partial Employment Year and the denominator of which is twelve (12).
Executive shall not be entitled to accumulate unused paid vacation time from one
Employment Year to the next Employment Year or to receive additional
compensation from Company in lieu of unused vacation time with respect to any
Employment Year or Partial Employment Year or upon termination of this
Agreement.
8. Termination of Employment Other than for Cause or due to Death
or Following Disability or Change of Control. This Section shall apply to
termination of Executive's employment (a) other than for Cause or due to death
or Disability; or (b) following a Change of Control.
(a) Right to Terminate. Company shall have the right, in
its sole discretion, to terminate Executive's employment, without cause, at any
time during the term of this Agreement. Executive shall have the right, in his
sole discretion, to terminate his employment, without cause, at any time during
the term of this Agreement. Termination of this Agreement pursuant to this
Section shall be effected by either party's giving written notice of intent to
terminate to the other party at least thirty (30) days prior to the effective
date of termination.
(b) Termination Before February 1, 1998. In the event
that Executive's employment is terminated by Company pursuant to Section 8(a)
before February 1, 1998, Executive shall be entitled to receive the compensation
and benefits that he would receive if this Agreement continued in effect through
January 31, 1998, and also to receive the compensation and benefits provided
under Section 8(c) as if this Agreement had terminated pursuant to Section 8(a)
on February 1, 1998. In the event that Executive terminates his employment
pursuant to Section 8(a) before February 1, 1998, Executive shall be entitled to
receive the compensation and benefits that would be provided under Section 8(c)
if this Agreement terminated pursuant to
-4-
<PAGE> 5
Section 8(a) on February 1, 1998 but determined as of and commencing upon
Executive's termination of employment.
(c) Termination After January 31, 1998 and Before August
1, 1998. In the event that Executive's employment is terminated pursuant to
Section 8(a) after January 31, 1998 and before August 1, 1998, Executive shall
be entitled to receive, and Company shall be obligated to provide, the following
compensation and benefits:
(i) For the next twenty four (24) months, the
Executive shall be entitled to receive periodic payments on dates corresponding
to Company's regular payroll days for salaried employees at an annual rate equal
to $315,000.
(ii) If termination occurs in calendar year 1997,
Executive shall be entitled to receive in 1998 the Calendar Year 1997 bonus
specified in Section 5(b)(i) upon satisfaction of the requirements of that
Section and subject to its other terms.
(iii) If the Tier 1 target performance level under
Company's Annual Management Incentive Program is attained with respect to
Company's 1998 fiscal year, Executive shall be entitled to receive a payment in
the amount of $157,500, which shall be paid in cash on or before March 31, 1999,
and shall be subject to the other terms and conditions that apply to the
Calendar Year 1997 bonus under Section 5(b)(1).
(iv) On the date of Executive's termination,
Executive shall vest and be entitled to all shares of restricted stock included
in his Executive Stock Ownership Restricted Stock Grants. Executive shall also
be entitled to any shares of restricted stock issuable pursuant to
Performance-Based Restricted Stock Grants that have been fully earned by
satisfaction of all performance criteria as of the December 31 coincident with
or next preceding the date of Executive's termination. All unearned restricted
stock awards shall be forfeited. All of Executive's previously granted stock
options that are outstanding but not yet exercisable shall become exercisable in
full on the date of Executive's termination and shall remain exercisable for the
period that would apply under the Company's 1991 Employee Stock Incentive Plan
in the case of Executive's retirement. Exhibit B-2 contains an example of the
operation of this provision.
(v) Executive shall elect COBRA continuation
coverage under Company's group health plan, and during the period of Executive's
COBRA continuation coverage, Company shall pay the same portion of Executive's
cost of health coverage as Company pays with respect to active employees. After
the COBRA continuation coverage period ends, Company shall provide medical
benefits to Executive that are equivalent to Company's program of medical
benefits for retiring employees as in effect from time to time thereafter.
(vi) Beginning immediately after the end of the
twenty-four (24) month period of payments pursuant to Section 8(c)(i), Company
shall pay to Executive a monthly supplemental retirement benefit, which shall be
an amount equal to the retirement benefits to which the Executive would be
entitled under the Master Retirement Plan and SERP if (A) Executive had
completed the years of age and service that he would have completed if he
remained employed under this Agreement through the end of its full term (that
is, until July 31, 2002, or if applicable, December 31, 2002); (B) Executive's
compensation used to calculate his retirement benefits included his actual
compensation from Company until the end of the twenty-four (24) month payment
period in Section 8(c)(i); and (C) Executive had begun receiving early
retirement benefits under the Master Retirement Plan and SERP on August 1, 2002.
As of Executive's normal retirement date of August 1, 2004 under the Master
Retirement Plan, the
-5-
<PAGE> 6
monthly supplemental benefit shall be reduced by the amount of Executive's
monthly accrued benefit then payable under the Master Retirement Plan, with the
amount of reduction to be adjusted actuarially to reflect any difference in the
forms of payment in effect for the early retirement benefit and the normal
retirement benefit under the Master Retirement Plan. Executive shall have the
opportunity to elect that the monthly supplemental retirement benefit be paid in
any form available for the payment of an early retirement benefit under the
Master Retirement Plan, and the amount of his monthly supplemental retirement
benefit shall be computed in accordance with the form elected. If Executive dies
while payments are in effect under this Section 8(c)(vi), but before Executive's
normal retirement date of August 1, 2004, and a form of payment is in effect
that provides for survivor benefits, the amount of any such survivor benefits
shall be reduced actuarially to reflect any survivor benefits payable under the
Master Retirement Plan. Exhibit C contains an example of the operation of the
provisions of this Section 8(c)(vi).
(d) Termination After July 31, 1998. In the event that
Executive's employment is terminated pursuant to Section 8(a) after July 31,
1998, Executive shall be entitled to receive, and Company shall be obligated to
provide, the following compensation and benefits:
(i) During the period ending July 31, 2002, the
Executive shall be entitled to receive periodic payments on dates corresponding
to Company's regular payroll days for salary employees at an annual rate equal
to $315,000.
(ii) If termination occurs in either calendar
year 1998, 1999 or 2000, Executive shall have the opportunity to receive payment
with respect to the calendar year of termination a prorated bonus in an amount
equal to the product of $157,500 multiplied by a fraction, the numerator of
which is number of months of employment completed by Executive during the
calendar year of termination and the denominator of which is twelve (12).
Executive's entitlement to any such bonus shall be determined under Section
5(b)(ii) but with Executive's performance to be evaluated based upon his
performance to his date of termination and his Billable Hours prerequisites to
be prorated to the date of termination in the same manner as the bonus
opportunity amount. Any bonus so earned by Executive shall be paid to Executive
in cash on or before March 31 of the following calendar year.
(iii) Section 8(c)(iv) shall govern Executive's
stock compensation grants.
(iv) Section 8(c)(v) shall govern Executive's
health coverage.
(v) Beginning August 1, 2002, Company shall pay
to Executive a monthly supplemental retirement benefit which shall be an amount
equal to the retirement benefits to which the Executive would be entitled under
the Master Retirement Plan and SERP if (A) Executive had completed the years of
age and service that he would have completed if he remained employed under this
Agreement through the end of its full term (that is, until July 31, 2002, or if
applicable, December 31, 2002); (B) Executive's compensation used to calculate
his retirement benefits included his actual compensation from Company until July
31, 2002, and (C) Executive were eligible to begin receiving early retirement
benefits under the Master Retirement Plan and SERP on August 1, 2002. As of
Executive's normal retirement date of August 1, 2004 under the Master Retirement
Plan, the monthly supplemental benefit shall be reduced by the amount of
Executive's monthly accrued benefit then payable under the Master Retirement
Plan, with the amount of reduction to be adjusted actuarially to reflect any
difference in the forms of payment in effect for the early retirement benefit
and the normal retirement benefit under the Master Retirement Plan. Executive
shall have the opportunity to elect that the monthly
-6-
<PAGE> 7
supplemental retirement benefit be paid in any form available for the payment of
an early retirement benefit under the Master Retirement Plan, and the amount of
his monthly supplemental retirement benefit shall be computed in accordance with
the form elected. If Executive dies while payments are in effect under this
Section 8(d)(v), but before Executive's normal retirement date of August 1,
2004, and a form of payment is in effect that provides for survivor benefits,
the amount of any such survivor benefits shall be reduced actuarially to reflect
any survivor benefits payable under the Master Retirement Plan. Exhibit C
contains an example of the operation of the provisions of this Section 8(d)(v).
(e) Release Required. Notwithstanding anything herein to
the contrary, Executive's entitlement to any compensation and benefits under
this Section shall be conditioned further upon Executive's duly releasing
Company from all claims pursuant to Executive's execution, not later than thirty
(30) days after the date of termination, of a legally binding release
substantially in the form of Exhibit D hereto, which is not revoked by Executive
within seven (7) days after Executive's execution thereof.
(f) Consulting Agreement. Notwithstanding anything herein
to the contrary, Executive's entitlement to any compensation and benefits under
this Section shall be conditioned upon Executive's undertaking to provide his
personal advice and counsel to Company during any period in which compensation
and benefits are continued pursuant to Section 8(b) and during the twenty-four
(24) month payment period in Section 8(c)(i) or the payment period in Section
8(d)(i) ending August 1, 2002, whichever is applicable, Executive agrees to be
available to Company during the applicable period, upon reasonable notice, to
consult with Company's Chief Executive Officer and his designees regarding the
types of matters with respect to which Executive has been providing Company with
legal and other services. Executive's consulting duties and obligations shall
not be either exclusive or full time, and it is understood that Executive will
not be required to maintain regular hours during which he will be available for
consultation purposes but that the consultation services will be rendered as
requested during reasonable business hours upon reasonable notice.
(g) Death. Except as provided in this Section 8(g), in
the event that Executive dies after termination of employment pursuant to
Section 8(a), Company shall have no further obligation for additional
compensation and benefits to Executive or his personal representative, spouse,
heirs and beneficiaries under this Agreement other than for any compensation and
benefits earned and accrued under this Agreement but unpaid as of the date of
death. Upon Executive's death after termination of employment pursuant to
Section 8(a), (i) Executive's outstanding stock options shall remain exercisable
for the period that would apply under Company's 1991 Employee Stock Incentive
Plan in the case of a retired participant's death; (ii) in the event Executive
is survived by his spouse, Executive's spouse shall be entitled to elect COBRA
continuation coverage under Company's group health plan, and after the COBRA
continuation coverage period ends, to be provided by Company with medical
benefits that are equivalent to those provided in the case of surviving spouses
of retired employees pursuant to Company's program of medical benefits for
retiring employees as in effect from time to time thereafter; and (iii) in the
event Executive dies after his monthly supplemental retirement benefit commences
under Section 8(c)(vi) or 8(d)(v), as applicable, and a survivor form of benefit
is payable, benefits shall be paid to his survivor pursuant to the form of
payment in effect for his supplemental retirement benefit.
9. Termination for Cause. Company shall have the right to
terminate Executive's employment under this Agreement at any time, effective
immediately, for Cause. In the event that
-7-
<PAGE> 8
Executive's employment under this Agreement is terminated for Cause, Company
shall pay to Executive any Base Salary due to Executive as of the effective date
of termination, all of Company's obligations to Executive under this Agreement
shall terminate, and Executive shall have no right to receive compensation or
other benefits under this Agreement for any period after the effective date of
the termination.
10. Termination Due to Death or Disability. Executive's employment
under this Agreement shall terminate upon his death or Disability. Executive's
Base Salary shall be paid through the end of the month in which death or
Disability occurs, and Company shall pay any other compensation and benefits
earned and accrued under this Agreement but unpaid as of the date of death or
Disability. Thereafter, except as provided in the final sentence of this Section
10, Company shall have no further obligation for additional compensation and
benefits to Executive or his personal representative, spouse, heirs and
beneficiaries under this Agreement, and Executive, his personal representative,
spouse, heirs and beneficiaries shall be entitled to such compensation and
benefits, if any, as are provided under the First American Corporation 1991
Employee Stock Incentive Plan and any applicable Employee Benefit Programs in
which Executive is participating at the time of death or Disability. If
Executive's employment under this Agreement terminates due to his death and
Executive is survived by his spouse, Executive's spouse shall be entitled to
elect COBRA continuation coverage under Company's group health plan, and after
the COBRA continuation coverage period ends, to be provided by Company with
medical benefits that are equivalent to those provided in the case of surviving
spouses of retired employees pursuant to Company's program of medical benefits
for retiring employees as in effect from time to time thereafter.
11. Termination After Change of Control. After a Change of
Control, Company and Executive shall have the same respective rights to
terminate Executive's employment as are set forth in Section 8(a). After a
Change of Control, Executive shall be eligible for any general employee change
in control benefits and any favorable treatment with respect to stock grants
under the First American Corporation 1991 Employee Stock Incentive Plan that may
be applicable, but he shall not be eligible for compensation or benefits
pursuant to any Key Employee Change in Control Agreement or similar change in
control contract that may apply to other Company executives. Further, if Company
terminates Executive's employment, without Cause, or if Executive's Constructive
Termination occurs and Executive terminates his employment voluntarily, in
either case within two (2) years after a Change of Control that occurs before
August 1, 2000, Executive shall be entitled to receive, and Company shall be
obligated to provide, the following compensation and benefits:
(a) As soon as practicable and in no event more than
thirty (30) days after Executive's termination, Company shall pay to Executive
in cash a lump sum equal to the sum of the following amounts:
(i) The total amount of Base Salary that would
have been payable to Executive through July 31, 2002 if this Agreement had
remained in effect through July 31, 2002.
(ii) The total amount of bonuses that Executive
could have received pursuant to Section 5(b) if this Agreement had remained in
effect through December 31, 2000, and Executive had satisfied all requirements
for full payment of the bonus amounts.
(iii) The Additional Amount plus an amount equal
to all excise taxes and federal, state and local income taxes incurred by
Executive with respect to receipt of the Additional Amount. All determinations
required to be made under this Section 11(a)(iii),
-8-
<PAGE> 9
including whether an Additional Amount is required and the amount of any
Additional Amount, shall be made by the Accounting Firm, which will provide
detailed supporting calculations to Company and Executive. In computing taxes,
the Accounting Firm shall use the highest marginal federal, state and local
income tax rates applicable to Executive and shall assume the full deductibility
of state and local income taxes for purposes of computing federal income tax
liability, unless Executive demonstrates that he will not in fact be entitled to
such a deduction for the year of payment. Notwithstanding the preceding
sentences of this Section 11(a)(iii), the Additional Amount shall not be paid to
Executive if Company, at the same time as the payments pursuant to Sections
11(a)(i) and (ii) are made, provides Executive with an opinion of the Accounting
Firm that Executive will not incur an excise tax on part or all of the
Separation Payments. Any such opinion shall be based upon the applicable
regulations under Code Sections 280G and 4999 (or any successor provision
thereof) or substantial authority within the meaning of Code Section 6662. If
such opinion applies only to part of the Separation Payments, Company shall pay
Executive the Additional Amount with respect to that part of the Separation
Payments not covered by the opinion.
(b) The provisions of the First American Corporation 1991
Employee Stock Incentive Plan shall govern Executive's stock compensation
grants.
(c) Section 8(c)(5) and if Executive dies, Section 8(g)
shall govern Executive's health coverage.
(d) Section 8(d)(5) shall govern Executive's supplemental
retirement benefits.
12. Mitigation. Company shall be relieved of any obligation to
provide employee benefits to Executive to the extent and for such period that
such benefits are duplicative of benefits provided to Executive by another
employer after a termination of this Agreement. Any compensation received by
Executive from alternative employment obtained by Executive after termination
shall not serve to reduce any payments due from Company under this Agreement.
13. Post Termination Obligations.
(a) Confidentiality of Information. For so long as
Executive is employed by Company and thereafter for a period of twenty four (24)
months, except as otherwise required by law or compelled by legal process,
Executive shall keep confidential and shall not disclose to any entity (other
than Company and its affiliates or to any person who is authorized by Company to
have access to such information or to any advisor of Executive to whom such
disclosure is made in connection with obtaining advice with regards to
Executive's rights or duties under this Agreement if Executive obtains the
agreement of such advisor to maintain the confidentiality thereof), nor shall he
use for his own benefit, any information known to him constituting a trade
secret or confidential proprietary information.
(b) Remedies. In addition to any other remedies that may
be available at law or in equity, the damage which may result from any
threatened or actual breach of the restrictions set forth in this Section 13 and
in Section 14 are incapable of accurate measurement and are beyond the abilities
of Executive to respond to by payment of a judgment. Therefore, Company shall be
entitled to a decree of specific performance or an injunction against the breach
of the restrictions set forth in this Section 13 and 14 without the necessity of
showing irreparable, special or imminent damages or the posting of any bond. If
Company institutes any proceedings to enforce this Section 13 or Section 14, the
substantially prevailing party shall be entitled to recover attorneys' fees
reasonably incurred therein. Should any provision of this Section 13 or Section
14 be held to be unenforceable, all other parts and provisions shall be given
effect
-9-
<PAGE> 10
separately therefrom and shall not be affected thereby, and the terms and
provisions of this Section 13 and Section 14 shall be enforced in their present
form or as may be modified by a court of competent jurisdiction, which
modification is hereby expressly authorized, as may be necessary so as not to
exceed the time, geographic or occupational limitations permitted by applicable
laws, and the terms and provisions hereof shall be reformed to the maximum time,
geographic or occupational limitation permitted by such laws.
14. Nonsolicitation/Noncompetition Agreement. During the term of
this Agreement, during any period in which compensation and benefits are
continued pursuant to Section 8(b), and during the twenty-four (24) month
payment period in Section 8(c)(i) or the payment period in Section 8(d)(i)
ending August 1, 2002, if applicable, Executive shall not, without the prior
written consent of Company's Chief Executive Officer, directly or indirectly,
hire any employee of Company or its affiliates or participate or be actively
involved in, own, manage, operate, control or participate in the ownership,
management, operation or control of, or be connected as an officer, employee,
partner, director or otherwise with, or have any financial interest in, or aid
or assist anyone else in the conduct of, any business (collectively,
"affiliations") conducted by any bank or thrift holding company which is in
competition with Company, or any subsidiary of either Company, in Tennessee or
in the SMSA's of Bowling Green, KY or Bristol or Roanoke, VA; provided, that
affiliations with bank or thrift holding companies having less than $500 million
in deposits in such areas and ownership of one percent (1%) or less of the
voting stock of any publicly held corporation shall not constitute violations
hereof. After the term of this Agreement, (a) the foregoing deposit level
criteria will increase to 7 1/2% of the total deposits of Company; and (b)
Executive may hire, directly or indirectly, employees of Company or its
affiliates.
15. Tax Withholding. Company may withhold from any compensation
and benefits payable under this Agreement all Federal and State or other taxes
as shall be required pursuant to any law or governmental regulation or ruling.
16. General Provisions.
(a) Non-Assignability. Neither this Agreement nor any
right or interest hereunder shall be assignable by Executive, his beneficiaries
or legal representatives without Company's prior written consent; provided,
however, that nothing in this paragraph shall preclude
(i) Executive from designating a beneficiary to
receive any benefit payable hereunder on his death, or
(ii) The executors, administrators, or other
legal representatives of Executive, or his estate from assigning any rights
hereunder to any person or persons entitled thereto.
(b) Binding Agreement. This Agreement shall be binding
upon, and shall inure to the benefit of Executive, his personal representative,
Company and their respective successors and permitted assigns.
(c) Severability. If for any reason, any provision of
this Agreement is held invalid, such invalidity shall not affect any other
provision of this Agreement, not held so invalid, and each such other provision
shall to the full extent consistent with law continue in full force and effect.
If any provision of this Agreement shall be held invalid in part, such
invalidity shall in no way affect the rest of such provision not held so
invalid, and the rest of such provision, together with all other provisions of
this Agreement shall, to the full extent consistent with law, continue in full
force and effect.
-10-
<PAGE> 11
(d) Arbitration. Except as provided in Section 13(b), any
controversy or claim between or among Executive and Company, including but not
limited to those arising out of or relating to this Agreement, the Release of
any related plans, programs, agreements or other arrangements, including any
claim based on or arising from an alleged tort, shall be determined by binding
arbitration. All arbitrations pursuant to this Agreement shall be determined in
accordance with the rules of the American Arbitration Association then in
effect, by a single arbitrator if the parties shall agree upon one, or otherwise
by three (3) arbitrators, one appointed by each party, and a third arbitrator
appointed by the two arbitrators selected by the parties, with all arbitrators
to be selected from a panel proposed by the American Arbitration Association. If
any party shall fail to appoint an arbitrator within thirty (30) days after it
is notified to do so, then the arbitration shall be accomplished by a single
arbitrator. Unless otherwise agreed by the parties hereto, all arbitration
proceedings shall be held in Nashville, Tennessee. Each party agrees to comply
with any award made in such proceeding, which shall be final, and to the entry
of judgment in accordance with applicable law in any jurisdiction upon any such
award. The decision of the arbitrator(s) shall be tendered within sixty (60)
days of final submission of the parties in writing or any hearing before the
arbitrator(s) and in the case of multiple arbitrations, shall include their
individual votes.
(e) Governing Law. This Agreement has been executed and
delivered in the State of Tennessee and its validity, interpretation,
performance and enforcement shall be governed by the laws of Tennessee. In the
case of any suit, action or proceeding to enforce an arbitration award made
pursuant to Section 15(d), each party hereto irrevocably consents and submits to
the exclusive jurisdiction of the courts of the State of Tennessee, irrevocably
waives any objection that it may have at any time to the laying of venue of any
suit, action or proceeding to enforce any such arbitration award brought in any
such court, irrevocably waives any claim that any such suit, action or
proceeding brought in any such court has been brought in an inconvenient forum,
and further irrevocably waives the right to object, with respect to such claim,
suit, action or proceeding brought in any such court, that such court does not
have jurisdiction over such party. A final judgment in any such suit, action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law.
(f) Notices. All notices under this Agreement shall be in
writing and shall be deemed effective when delivered in person to the party due
to receive the notice or when mailed by registered or certified mail, postage
prepaid, return receipt requested, to the party due to receive the notice at the
address specified below or at such other address as may be specified by such
person by the giving of a proper notice:
If to Executive:
Martin E. Simmons
1202 Chickering Road
Nashville, TN 37215
-11-
<PAGE> 12
If to Company:
First American Corporation
615 First American Center
Nashville, Tennessee 37237
Attention: Chief Executive Officer
(g) Headings Not Binding. The section and sub-section
headings herein are for convenience only and shall not affect the construction
hereof.
(h) Entire Agreement. This Agreement constitutes the
entire agreement of the parties hereto with respect to the employment of
Executive.
(i) Attorney's Fees. In the event that either party
incurs costs and fees, including attorney's fees, in enforcing its rights under
this Agreement, the party substantially prevailing in such suit or action
including any appeal shall be entitled to recover from the other such costs and
reasonable attorney's fees.
(j) Waiver and Amendment. Waiver of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by any party. No waiver, amendment or modification of this
Agreement shall be effective unless executed in writing by the parties hereto.
(k) Other Severance Benefits. Except as otherwise
provided in this Agreement, Executive shall not be entitled to any form of
severance benefits, including benefits payable under the Company's Severance
Program or any other policy or practice, regardless of the circumstances of
Executive's termination of employment.
(l) Survival. If and to the extent applicable, the
provisions of Sections 8(c)(v), 8(c)(vi), 8(d)(iv), and 8(d)(v) shall survive
the termination of this Agreement in the event of Executive's termination of
employment pursuant to Section 8(a).
17. Release. The effectiveness of this Agreement is conditioned
upon Executive's legally binding execution of the Release in the form of Exhibit
D on or before August 10, 1997, in consideration of the Company's obligations
under this Agreement, and if Executive revokes the Release within seven (7) days
after executing it, this Agreement shall be null and void from its inception.
IN WITNESS WHEREOF, First American Corporation has caused this
Agreement to be executed by its duly authorized officer and Executive has signed
this Agreement under SEAL, all as of the day and year first above written.
FIRST AMERICAN CORPORATION
By:/s/ Dennis C. Bottorff (SEAL)
----------------------------
Attest:/s/ Sue H. Nichols Dennis C. Bottorff
-------------------- Chairman and Chief Executive Officer
Attest:/s/ Pamela R. Welch /s/ Martin E. Simmons (SEAL)
-------------------- -------------------------------
Martin E. Simmons
-12-
<PAGE> 13
EXHIBIT A
DEFINITIONS
For the purpose of this Employment Agreement, the following terms shall
have the meanings set forth in this Exhibit A unless a different meaning is
required by the context or unless the term is defined by reference to another
document or to a plan, program or arrangement maintained by Company.
Accounting Firm. The independent auditors engaged by Company
immediately prior to a Change of Control.
Additional Amount. An amount equal to the excise tax under the Code, if
any, incurred by Executive by reason of the Separation Payments constituting
excess parachute payments pursuant to Code Section 280G (or any successor
provision there). The Additional Amount shall be computed assuming that all of
the Separation Payments constitute excess parachute payments as defined in Code
Section 280G (or any successor provision there), unless Company provides
Executive with the opinion of the Accounting Firm described in Section
11(a)(iii).
Agreement. This Employment Agreement dated as of August 1, 1997, by and
between Company and Executive.
Base Salary. Executive's Base Salary payable at the rate of Three
Hundred Fifteen Thousand Dollars ($315,000) per Employment Year pursuant to
Section 5(a).
Billable Hours. Documented hours completed in the performance of legal
and other services to Company that are approved or requested by Company's Chief
Executive Officer or his designee, which may include Company's General Counsel
and Company's officers who report directly to the Chairman and Chief Executive
Officer, as commensurate with the services of a partner in a private law firm
employing more than fifty (50) lawyers and in the case of hours for travel,
meeting and attendance and other similar matter, are in accordance with
Company's policies governing payment of outside legal counsel. If Company, in
its sole discretion, refers legal work to a law firm with whom Executive is
affiliated and approves the referred work for joint performance by Executive and
the law firm, Executive's services in the performance of the referred work shall
constitute Billable Hours to the extent that the hours meet the standards of the
preceding sentence. Billable Hours shall not include vacation hours.
Cause. Executive's loss or suspension of his license to practice law in
the State of Tennessee; act of gross negligence or willful misconduct (including
"gross misconduct" as defined in Company's policies and procedures) materially
injurious to Company; gross dereliction of duties after notice to Executive and
failure to correct the deficiencies within a period of thirty (30) days; fraud
in his capacity as an employee of Company; breach of a fiduciary duty to Company
involving personal profit; or misappropriation of Company's assets.
Change of Control. A "Change in Control" or "Potential Change in
Control," as defined in the First American Corporation 1991 Employee Stock
Incentive Plan, as presently in effect.
Code. The Internal Revenue Code of 1986, as amended.
Company. First American Corporation.
Constructive Termination. Reduction in the level of Executive's duties,
responsibilities or working conditions below that of a partner in a private law
firm employing more than 50 lawyers;
-1-
<PAGE> 14
reduction in work available to Executive below a rate of 1,250 Billable Hours
per calendar year during calendar years 1998, 1999 and 2000; and material breach
of this Agreement by Company.
Disability. Entitlement to benefits under Company's long term
disability plan.
Employee Benefit Programs. Company's programs, plans and other
arrangements that shall include group health, dental care and disability plans;
life insurance or other death benefit plans; travel or accident insurance; tax
qualified retirement plans; elective nonqualified deferred compensation plan;
and nonqualified supplemental retirement plan; and that shall exclude any bonus,
stock or other incentive compensation plan.
Employment Year. Each period from August 1 of a calendar year through
July 31 of the following calendar year during the term of this Agreement.
Executive. Martin E. Simmons.
Master Retirement Plan. The First American Corporation Master
Retirement Plan, as amended.
Partial Employment Year. If the Executive's employment under this
Agreement terminates on a date other than July 31 of any Employment Year, the
period preceding the date of termination.
Release. The Release in the form of Exhibit D to be executed pursuant
to Section 16, and if applicable, Section 8(e).
Separation Payments. Payments made to Executive under this Agreement
and any other plan, agreement or understanding between Executive and Company or
its parent, subsidiaries or affiliates.
SERP. The First American Corporation Supplemental Executive Retirement
Program, as amended.
-2-
<PAGE> 15
Exhibit B.1
Martin Simmons
<TABLE>
<CAPTION>
Outstanding
Date Type of Option Date of Available Value @
of Grant Grant Granted Outstanding Price Expir. Options Vested For Exercise $40.00
-------- ----- ------- ----------- ----- ------ -------------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
8/1/92 ISO 20,400 13,200 $10.4375 8/1/2 9,120 (Current) 9,120
4,080 on 8/1/97 $120,615
1/21/93 ISO 8,000 8,000 $13.8750 1/21/3 6,400 (Current) 6,400
1,600 on 1/21/98 $41,800
1/20/94 ISO 8,200 8,200 $15.1875 1/20/4 4,920 (Current) 4,920
1,640 on 1/20/98 $40,693
1,640 on 1/20/99 $40,693
1/20/94 Performance
Accel Restricted 6,000 3,000 0 (Current)
3,000 on 12/31/97 $120,000
1/21/94 Non-Qualified
Options 7,974 7,974 $20.0000 1/21/4 7,578 (Current)
396 on 1/21/98 $7,920
1/21/94 ISO 7,226 7,226 $20.0000 1/21/4 1,542 (Current) 1,542
2,644 on 1/21/98 $52,880
3,040 on 1/21/99 $60,800
1/19/95 Performance
Accel Restricted 2,000 1,000 1,000 (Current) 1,000
1/18/96 Non-Qualified
Options 11,986 11,986 $23.2500 1/18/6 4,200 (Current) 4,200
4,200 on 1/18/98 $70,350
3,586 on 1/18/99 $60,066
1/18/96 ISO 9,014 9,014 $23.2500 1/18/6 0 (Current) 0
614 on 1/18/99 $10,285
4,200 on 1/18/00 $70,350
4,200 on 1/18/01 $70,350
1/18/96 Performance
Accel Restricted 7,000 7,000 0 (Current) 0
7,000 on 12/31/98 $280,000
</TABLE>
<PAGE> 16
Martin Simmons
<TABLE>
<CAPTION>
Outstanding
Date Type of Option Date of Available Value @
of Grant Grant Granted Outstanding Price Expir. Options Vested For Exercise $40.00
-------- ----- ------- ----------- ----- ------ -------------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1/16/97 Non-Qualified
Options 23,262 23,262 $29.5625 1/16/7 0 (Current) 0
5,360 on 1/16/98 $55,945
5,360 on 1/16/99 $55,945
5,360 on 1/16/00 $55,945
5,282 on 1/16/01 $55,131
1,978 on 1/16/02 $20,645
1/16/97 ISO 3,538 3,538 $29.5625 1/16/7 0 (Current) 0
78 on 1/16/00 $814
78 on 1/16/01 $814
3,382 on 1/16/02 $35,300
1/16/97 Performance
Accel Restricted 9,400 9,400 0 (Current) 0
9,400 on 1/16/00 $376,000
4/17/97 Ownership Program
Shares 3,460 3,460 0 (Current) 0
864 on 12/31/97 $34,560
864 on 12/31/98 $34,560
864 on 12/31/99 $34,560
864 on 12/31/00 $34,560
Total Non Qual $381,947
Total ISO $464,007
--------
Subtotal Options $845,954
--------
Total Restricted Stock $776,000
Total Ownership $138,240
</TABLE>
<PAGE> 17
EXHIBIT B-2
SECTION 8(C)(IV) EXAMPLE
TERMINATION DATE 1/1/2000
All outstanding ISO's and Non-Qualified Options are exercisable and
remain exercisable for the period applicable to retirees under 1991 Employee
Stock Incentive Plan.
All Ownership Program Shares (3,460) of restricted stock are vested.
All shares (9,400) of 1/16/97 Performance Accelerated Restricted Stock
are forfeited.
All shares of Performance Accelerated Restricted Stock granted prior
to 1/16/97 are vested (assuming previous full satisfaction of performance
criteria).
<PAGE> 18
EXHIBIT C
TERMINATION DATE 2/1/1998 (AGE 58 YEARS, 6 MONTHS)
<TABLE>
<CAPTION>
Monthly Benefit
Payable at Normal
Monthly Benefit Payable at Retirement Date
Plan Early Retirement Date (8/1/2002) (8/1/2004)
- ------------------- -------------------------------- ---------------
Pre 65 Post 65
--------------------------------
<S> <C> <C> <C>
MRP $ 0.00 $ 938.66 $ 938.66
SERP 0.00 1,398.59 1,398.59
Other Nonqualified 4,349.78 2,012.53 2,290.18
--------- --------- ---------
Total $4,349.78 $4,349.78 $4,627.43
</TABLE>
TERMINATION DATE 7/1/2000 (AGE 60 YEARS, 11 MONTHS)
<TABLE>
<CAPTION>
Monthly Benefit
Payable at Normal
Monthly Benefit Payable at Retirement Date
Plan Early Retirement Date (8/1/2002) (8/1/2004)
- ------------------- -------------------------------- ---------------
Pre 65 Post 65
--------------- ---------------
<S> <C> <C> <C>
MRP $ 0.00 $1,393.28 $1,393.28
SERP 0.00 2,919.53 2,919.53
Other Nonqualified 5,067.56 754.75 1,078.21
--------- --------- ---------
Total $5,067.56 $5,067.56 $5,391.02
</TABLE>
TERMINATION DATE 7/31/2002 (AGE 63)
<TABLE>
<CAPTION>
Monthly Benefit Payable at Monthly Benefit Payable at
Early Retirement Date Normal Retirement Date
Plan (8/1/2002) (8/1/2004)
- ------------------- -------------------------- -------------------------
<S> <C> <C>
MRP $1,669.28 $1,775.83
SERP 3,700.45 3,936.65
Other Nonqualified 0.00 0.00
--------- ---------
Total $5,369.73 $5,712.48
</TABLE>
<PAGE> 19
DEATH PRIOR TO 8/1/2004 AFTER RETIREMENT ON 7/1/2000
<TABLE>
<CAPTION>
Monthly Joint & 100%
While Living
Plan Beginning 7/1/2000 After Death
- --------------------- -------------------- ------------------
<S> <C> <C>
MRP $ 0.00 $ 576.55
SERP 0.00 0.00
Other Nonqualified 4,117.09 3,540.54
--------- ---------
Total $4,117.09 $4,117.09
</TABLE>
Assumptions include:
1. Except for the death example, all monthly benefits are payable for
lifetime only.
2. All future possible bonuses in the amount of $157,500 are assumed
earned and paid in the following year.
<PAGE> 20
<TABLE>
<S> <C> <C> <C>
NAME Simmons, Martin E BS* @ Age 63: 10.00000 *BS uses completed months (DTIM2)
SSN: ###-##-#### BS* @ Age 61.92: 10.00000
SEX: M BS* @ Age 58.5: 10.00000
DOB: 7/25/39 CC @ Age 63: 42,000.00
DOH: 8/1/92 CC @ Age 60.92 42,000.00
NRD: 8/1/04 CC @ Age 58.5: 42,000.00
DOT(1): 7/31/02 63 ERD1 factor: 0.94 (3% reduction for each year
DOT(2): 7/1/00 60.91666667 ERD26factor: 0.94 ERD precedes NRD if >age 55)
DOT(3): 2/1/98 58.5 ERD3 factor: 0.94
Age @ 9/1/96: 57.11 SS NRA: 66
Earnings projection: 0% 415 red. @ age 65: 0.93333
401(a)17 proj.: 0% 415 red. @ age 62: 0.75
Covered comp proj.: 0%
415 limit proj: 0%
</TABLE>
<TABLE>
<CAPTION>
Projected Projected Projected Rounded to Projected
YEAR Earnings 401(a)17 limit Truncated Limited Comp covered comp 3,000 415 limits
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1991 - 150,000 150,000 -
1992 93,916.70 150,000 150,000 93,916.70
1993 185,250.00 150,000 150,000 150,000.00
1994 251,425.02 150,000 150,000 150,000.00
1995 312,875.16 150,000 150,000 150,000.00 61,200 42,000
1996 405,000.00 150,000 150,000 150,000.00 62,700 42,000 120,000
1997 474,500.00 160,000 160,000 160,000.00 62,700 42,000 125,000
1998 472,500.00 160,000 160,000 160,000.00 62,700 42,000 120,000
1999 472,500.00 160,000 160,000 160,000.00 62,700 42,000 120,000
2000 472,500.00 160,000 160,000 160,000.00 62,700 42,000 120,000
2001 472,500.00 160,000 160,000 160,000.00 62,700 42,000 120,000
2002 341,250.00 160,000 160,000 160,000.00 62,700 42,000 120,000
2003 - -
2004 - -
2005 - -
2006 - -
2007 - -
2008 - -
2009 - -
</TABLE>
<PAGE> 21
<TABLE>
<S> <C>
BENEFIT @ AGE 63
BS: 10.00000 CC0@ Age 63: 3,500 /month 415 @ NRD: 9,333.30
BS >15<35: - 415 lim: 10,000.00 /month 415 @ DOT(1): 9,333.30
Actual Months Used limited comp Used
FAE: 2002 341,250.00 7 341,250.00 160,000.00 93,333.33
2001 472,500.00 12 472,500.00 160,000.00 160,000.00
2000 472,500.00 12 472,500.00 160,000.00 160,000.00
1999 472,500.00 12 472,500.00 160,000.00 160,000.00
1998 472,500.00 12 472,500.00 160,000.00 160,000.00
1997 474,500.00 5 197,708.33 160,000.00 66,666.67
60 2,428,958.33 800,000.00
FAE /MONTH: UNLIMITED 40,482.64 LIMITED: 13,333.33
Monthly Acbft DOTerm @ Age 63: Unlimited Limited
=.01*FAE*BS 4,048.26 1,333.33
+ .0033*(BS35-15)*FAE - -
+.0045*(FAE-cc)*BS35 1,664.22 442.50
5,712.48 1,775.83
BENEFIT @ AGE 60 & 11 MOS
BS: 10.000000 CC @ Age 60.92 3,500 /month 415 @ NRD: 9,333.30
BS >15<35: - 415 lim: 10,000.00 /month 415 @ DOT(2): 6,840.25
Actual Months Used limited comp Used
FAE: 2000 315,000.00 7 315,000.00 160,000.00 93,333.33
1999 472,500.00 12 472,500.00 160,000.00 160,000.00
1998 472,500.00 12 472,500.00 160,000.00 160,000.00
1997 474,500.00 12 474,500.00 160,000.00 160,000.00
1996 405,000.00 12 405,000.00 150,000.00 150,000.00
1995 312,875.16 5 130,364.65 150,000.00 62,500.00
60 2,269,864.65 785,833.33
FAE /MONTH: UNLIMITED 37,831.08 LIMITED: 13,097.22
Monthly Acbft DOTerm @ Age 62: Unlimited Limited (8 years of Ben Service)
=.01*FAE*BS 3,783.11 1,047.78
+ .0033*(BS35-15)*FAE - -
+.0045*(FAE-cc)*BS35 1,544.90 345.50
5,328.01 1,393.28
BENEFIT @ AGE 58 & 6 MOS
BS: 10.00000 CC0 @ Age 58.5: 3,500 /month 415 @ NRD: 9,333.30
BS >15<35: - 415 lim: 10,000.00 /month 415 @ DOT(3): 5,618.95
Actual Months Used limited comp Used
FAE: 2000 26,250.00 1 26,250.00
1999 315,000.00 12 315,000.00
1998 472,500.00 12 472,500.00 160,000.00 13,333.33
1997 474,500.00 12 474,500.00 160,000.00 160,000.00
1996 405,000.00 12 405,000.00 150,000.00 150,000.00
1995 312,875.16 11 286,802.23 150,000.00 150,000.00
1994 251,425.02 0 - 150,000.00 150,000.00
1993 185,250.00 0 - 150,000.00 137,500.00
60 1,980,052.23 760,833.33
FAE /MONTH: UNLIMITED 33,000.87 LIMITED: 12,680.56
Monthly Acbft DOTerm @ Age 60: Unlimited Limited (5.5833 yrs Ben Service)
=.01*FAE*BS 3,300.09 708.00
+ .0033*(BS35-15)*FAE - -
+.0045*(FAE-cc)*BS35 1,327.54 230.66
4,627.63 938.66
</TABLE>
<PAGE> 22
EXHIBIT D
RELEASE
1. General Release.
In consideration of the obligations of First American
Corporation ("Employer") under the Employment Agreement with Martin E. Simmons
effective August 1, 1997 ("Employment Agreement"), Martin E. Simmons ("Simmons")
agrees, for himself and his heirs, representatives, successors and assigns, that
he waives, releases and forever discharges Employer and all related entities,
their directors, officers, employees and agents, from any and all claims, known
or unknown, that he has or may have relating to or arising out of his employment
with Employer, including but not limited to any claims of wrongful discharge,
breach of express or implied contract, fraud, misrepresentation, defamation,
liability in tort, claims of any kind that may be brought in any court or
administrative agency, any claims under Title VII of the Civil Rights Act of
1964, as amended, the Age Discrimination in Employment Act, the Employee
Retirement Income Security Act of 1974, as amended, the Fair Labor Standards
Act, or any other federal, state or local law relating to employment, employee
benefits or the termination of employment, or any other claim arising out of or
relating to Simmons' employment, excepting only the provisions of the Employment
Agreement (including the provisions for compensation and benefits under the
employer plans and programs referred to therein).
2. Special Waiver and Release Notification.
The General Release in paragraph 1 includes a waiver and
release of all claims under the Age Discrimination in Employment Act ("ADEA")
and, therefore, pursuant to the requirements of the ADEA, Simmons acknowledges
that he has been advised that this waiver and release includes, but is not
limited to, all claims under the ADEA arising up to and including the date of
execution of this waiver and release; to consult with an attorney and/or other
advisor of his choosing concerning his rights and obligations under this waiver
and release; to fully consider this release before executing it and that he has
been offered ample time and opportunity, in excess of 21 days, to do so; that he
has 7 days following the execution of this Release to revoke it by sending
written notice to Dennis C. Bottorff, Chairman and Chief Executive Officer, at
Employer's offices at 615 First American Center, Nashville, Tennessee 37237, and
that this Release shall not become effective and enforceable until the
revocation period has expired.
3. Entire Agreement.
Simmons understands and agrees that all terms of this Release
are contractual and are not a mere recital, and represents and warrants that he
is competent to covenant and agree as herein provided. Simmons understands,
agrees, and represents that the releases herein executed may affect rights and
liabilities of substantial extent and agrees that the releases provided herein
are in his best interest. Simmons represents and warrants that, in negotiating
and executing this Release, he has had an adequate opportunity to consult with
competent counsel or other representatives of his choosing concerning the
meaning and effect of each term and provision hereof, and that there are no
representations, promises or agreements other than those expressly set forth in
writing herein. Simmons has carefully read this Release in its entirety; fully
understands and agrees to its terms and provisions; and intends and agrees that
it is final and binding.
-1-
<PAGE> 23
IN WITNESS WHEREOF, and intending to be legally bound, the undersigned
Martin E. Simmons has executed the foregoing Release this 25th day of July,
1997.
/s/ Martin E. Simmons (SEAL)
-------------------------------
Martin E. Simmons
STATE OF TENNESSEE
CITY OF NASHVILLE
The foregoing instrument was acknowledged and signed before me by
Martin E. Simmons this 25th day of July, 1997.
/s/ Pamela Rucker Welch
------------------------------
Notary Public
My Commission Expires:
1/24/98
- ---------------------
-2-
<PAGE> 1
Exhibit 15. Letter regarding unaudited interim financial information from
KPMG Peat Marwick LLP
Independent Auditors' Review Report
The Board of Directors and Shareholders
First American Corporation:
We have reviewed the consolidated balance sheets of First American Corporation
and subsidiaries as of September 30, 1997 and 1996, and the related consolidated
income statements, changes in shareholders' equity and cash flows for the
three-month and nine-month periods ended September 30, 1997 and 1996. 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, 1996; and the related consolidated income
statements, changes in shareholders' equity and cash flows for the year then
ended (not presented herein); and in our report dated January 16, 1997, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1996, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP
- --------------------------------
October 16, 1997
Nashville, Tennessee
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 508,953
<INT-BEARING-DEPOSITS> 9,557
<FED-FUNDS-SOLD> 58,291
<TRADING-ASSETS> 71,348
<INVESTMENTS-HELD-FOR-SALE> 1,737,776
<INVESTMENTS-CARRYING> 653,277
<INVESTMENTS-MARKET> 655,162
<LOANS> 7,151,725
<ALLOWANCE> 115,297
<TOTAL-ASSETS> 10,561,982
<DEPOSITS> 7,701,405
<SHORT-TERM> 1,485,278
<LIABILITIES-OTHER> 275,973
<LONG-TERM> 210,056
0
0
<COMMON> 145,948
<OTHER-SE> 743,322
<TOTAL-LIABILITIES-AND-EQUITY> 10,561,982
<INTEREST-LOAN> 430,797
<INTEREST-INVEST> 118,097
<INTEREST-OTHER> 6,084
<INTEREST-TOTAL> 554,960
<INTEREST-DEPOSIT> 214,930
<INTEREST-EXPENSE> 272,581
<INTEREST-INCOME-NET> 282,379
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 1,407
<EXPENSE-OTHER> 298,509
<INCOME-PRETAX> 172,710
<INCOME-PRE-EXTRAORDINARY> 172,710
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106,604
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.02
<LOANS-NON> 18,771
<LOANS-PAST> 11,679
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 66,795
<ALLOWANCE-OPEN> 123,265
<CHARGE-OFFS> 21,132
<RECOVERIES> 12,705
<ALLOWANCE-CLOSE> 115,297
<ALLOWANCE-DOMESTIC> 72,235
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 43,062
</TABLE>
