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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996. Commission file number 0-6198.
FIRST AMERICAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-0799975
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
FIRST AMERICAN CENTER,
NASHVILLE, TENNESSEE 37237-0700
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 615/748-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $5 PER SHARE AND ASSOCIATED
SERIES A JUNIOR PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
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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 at least the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value (computed on the basis of the reported last
sale price on February 6, 1997) of shares of Common Stock, par value $5 per
share, held by non-affiliates of the Registrant was $1,599,945,649. The market
value calculation assumes (i) that all shares beneficially held by members of
the Board of Directors of the Registrant are shares owned by "affiliates," a
status which each of the directors individually disclaims, and (ii) that shares
beneficially owned by the Registrant's subsidiaries are owned by "affiliates".
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
Class February 6, 1997
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<S> <C>
Common Stock, $5 par value: 29,752,801
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENT FROM WHICH PORTIONS ARE PART OF FORM 10-K
INCORPORATED BY REFERENCE TO WHICH INCORPORATED
1. PROXY STATEMENT DATED MARCH 20, 1997 PART III
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TABLE OF CONTENTS
<TABLE>
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Page
PART I
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Items 1-2 Business and Properties....................................................................... 1
General............................................................................... 1
Statistical Information............................................................... 4
Supervision and Regulation............................................................ 5
Competition.......................................................................... 13
Employees............................................................................ 13
Item 3 Legal Proceedings............................................................................ 14
Item 4 Submission of Matters to a Vote of
Security Holders.................................................................... 14
PART II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters..................................................... 14
Item 6 Selected Financial Data...................................................................... 15
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................... 16
Item 8 Financial Statements and Supplementary Data................................................... 45
Item 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure................................................. 45
PART III
Item 10 Directors and Executive Officers of the Registrant........................................... 45
Item 11 Executive Compensation....................................................................... 48
Item 12 Security Ownership of Certain Beneficial Owners
and Management....................................................................... 48
Item 13 Certain Relationships and Related Transactions................................................ 49
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................................................. 50
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PART I
ITEMS 1-2: BUSINESS AND PROPERTIES
GENERAL
First American Corporation (the "Corporation"), a Tennessee
corporation, was incorporated in 1968 and is registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended ("BHCA"), and as
a savings and loan holding company under the Home Owner's Loan Act, as amended
("HOLA"). The Corporation owns all of the capital stock of First American
National Bank ("FANB"), a national banking association headquartered in
Nashville, Tennessee; First American Federal Savings Bank ("FAFSB"), a federal
savings bank headquartered in Roanoke, Virginia; First American National Bank of
Kentucky ("FANBKY"), a national banking association headquartered in Bowling
Green, Kentucky; and First American Enterprises, Inc. ("FAE"), a Tennessee
corporation headquartered in Nashville, Tennessee.
FANB owns 98.50% of the issued and outstanding capital stock of INVEST
Financial Corporation ("INVEST"), a Delaware corporation headquartered in Tampa,
Florida, which is engaged in the distribution of securities, other investment
products, and insurance, and 49% of the capital stock of The SSI Group, Inc.
("SSI"), a Florida corporation headquartered in Mobile, Alabama, which is
engaged in health care claims processing.
The Corporation coordinates the financial resources of the consolidated
enterprise and maintains systems of financial, operational and administrative
controls that allow coordination of selected policies and activities. The
Corporation derives its income from interest, dividends and management fees
received from its subsidiaries. The mailing address of the principal executive
offices of the Corporation is First American Center, Nashville, Tennessee
37237-0700, and the telephone number is (615) 748-2000.
As of December 31, 1996, the Corporation had total assets of
approximately $10.4 billion, total deposits of $7.8 billion, shareholders'
equity of approximately $868.7 million, and net income of $121.6 million. As of
December 31, 1996, FANB had total assets of approximately $9.79 billion, total
deposits of $7.33 billion, shareholders' equity of approximately $848.6 million,
and net income of $123.8 million for 1996. As of December 31, 1996, the
Corporation estimates that it ranked, on the basis of aggregate deposits in
Tennessee held by FANB, the Corporation's principal subsidiary, as the second
largest bank holding company headquartered in Tennessee.
The Corporation's subsidiary banks engage in lending in the following
areas: commercial, consumer -- amortizing mortgages, consumer -- other, real
estate-- construction, and real estate -commercial mortgages and other. The risk
involved to the Corporation and its subsidiary banks in making these loans
varies based on, among other things, the amount of the loan, the length of
amortization of the principal, the type of collateral, if any, used to secure
the loan, and characteristics of the borrower. For a further discussion of the
Corporation's and its subsidiary banks' lending activities, see the following
sections of Management's Discussion and Analysis of Financial Condition
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Results of Operations, included in this Report as Item 7: Loans, pages 23-35;
Allowance and Provision for Loan Losses, pages 25-26; and Asset Quality, page
27.
For a discussion of the Corporation's and its subsidiary banks'
investment activities, see the following sections of Management's Discussion and
Analysis of Financial Condition and Results of Operations, included in this
Report as Item 7: Securities, pages 22-23.
For a discussion of the Corporation's and its subsidiary banks' deposit
and other funding activities, see the following sections of Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in this Report as Item 7: Deposits, pages 27-28; Other Borrowed Funds,
page 28; and Liquidity, pages 31-35.
COMMERCIAL BANKING
Founded in 1883, FANB had banking offices in 33 Tennessee counties
containing approximately 68.5% of Tennessee's population at December 31, 1996.
On the basis of deposits at December 31, 1996, the Corporation estimates that
FANB was the second largest bank in Tennessee, and had the largest deposit base
in the Nashville-Davidson County, Tennessee market, the second largest deposit
base in the Tri-Cities (Sullivan and Washington Counties, Tennessee) market, the
second largest deposit base in the Knoxville (Knox County, Tennessee) market,
the sixth largest deposit base in the Memphis (Shelby County, Tennessee) market,
and the tenth largest deposit base in the Chattanooga (Hamilton County,
Tennessee) market.
At December 31, 1996, FANB had a total of 161 banking offices in
Tennessee, including nine offices of Tennessee Credit Corporation ("TCC"),
FANB's wholly owned consumer finance subsidiary, with banking offices in the 28
largest counties in Tennessee (measured by aggregate bank deposits of banks in
the county at June 30, 1996) and in each of the 15 most populous Tennessee
cities.
FANB offers the services generally performed by commercial banks of
like size and character. FANB also offers 24-hour banking service through
automated teller machines located at a majority of its banking offices and at
other locations. At December 31, 1996, FANB operated a total of 302 automated
teller machines. Of these, 187 were in banking offices, 35 were freestanding,
and 80 were cash dispensing machines.
FANB also provides individual and corporate trust services and
investment management services for customers of the Corporation's subsidiary
banks.
FANB also owns (i) First Amtenn Life Insurance Company, which
underwrites credit life and accident and health insurance on extensions of
credit made by FANB and (ii) First City Life Insurance Company, which
underwrites credit life and accident and health insurance on extensions of
credit made by TCC. For a discussion of the securities brokerage services
provided by FANB, please see "Investment Product Distribution; Broker/Dealer
Services" on pages 3-4 herein.
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On March 11, 1996, the Corporation completed its acquisition of First
City Bancorp, Inc., a Tennessee corporation headquartered in Murfreesboro,
Tennessee ("FCBI"),which owned First City Bank, a Tennessee chartered bank with
principal offices in Murfreesboro, Tennessee, and Citizens Bank, a Tennessee
chartered bank with principal offices located in Smithville, Tennessee, both of
which were merged with and into FANB. The Corporation acquired FCBI through a
tax-free exchange of stock valued at approximately $47 million in a transaction
accounted for as a purchase.
FAFSB offers the services generally performed by savings banks of like
size and character. At December 31, 1996, FAFSB had 16 branches in the
southwestern region of Virginia and offered 24-hour banking service through nine
automated teller machines located on the premises of the banking offices and
four freestanding machines. On the basis of deposits at December 31, 1996, the
Corporation estimates that FAFSB had the sixth largest deposit base in the
Bristol City/Washington County, Virginia market.
FANBKY, headquartered in Bowling Green, Kentucky, also offers the
services generally performed by commercial banks of like size and character. At
December 31, 1996, FANBKY had four banking offices in two Kentucky counties,
Warren and Simpson, which contained approximately 2.6% of Kentucky's population,
and offered 24-hour banking service through three automated teller machines
located on the premises of the banking offices and one freestanding machine. On
the basis of deposits at December 31, 1996, the Corporation estimates that
FANBKY had the second largest deposit base in the combined Warren and Simpson
Counties market.
FAE, formerly a division of the Corporation, was incorporated in 1995
for the purpose of developing sources of non-traditional financial services
income. FAE has, to date, concentrated its efforts in exploring the potential of
fee income generation in the areas of health care payment processing, insurance
company relational database services, and third-party marketing and securities
distribution. FAE manages the Corporation's investments in these areas,
including investments in INVEST and SSI.
INVESTMENT PRODUCT DISTRIBUTION; BROKER/DEALER SERVICES
Effective July 1, 1996, FANB acquired 96.2% of the capital stock of
INVEST for $26,000,000. FANB subsequently acquired an additional 2.06% of INVEST
for approximately $535,000, bringing its equity ownership to 98.26% as of
December 31, 1996. INVEST is a securities broker-dealer registered with the
NASD, and through its subsidiaries, is licensed to sell investment products in
all 50 states, the District of Columbia, and Puerto Rico.
Headquartered in Tampa, Florida, INVEST's primary business is selling
investment products through financial institutions for which it functions as a
third party marketer. Simultaneously with FANB's acquisition of INVEST, INVEST
acquired Investment Centers of America, a North Dakota corporation headquartered
in Bismarck, North Dakota ("ICA"). ICA is also a broker-dealer registered with
the NASD and a third-party marketer of investment products through financial
institutions. ICA primarily services community banks with assets of $500 million
or less. As of December 31, 1996, INVEST and ICA collectively service 689 banks
through approximately 1,200 licensed representatives in 1,015 investment centers
located throughout the United States.
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Effective February 1, 1997, AmeriStar Capital Markets, Inc., formerly a
wholly owned subsidiary of FANB and a broker-dealer registered with the NASD,
was merged with and into INVEST. As a result of this merger, FANB's equity
ownership in INVEST increased to 98.50%. Through its AmeriStar Investment
Products operating division, INVEST currently serves as the third-party marketer
of investment products for the Corporation's subsidiary banks.
HEALTH CARE CLAIMS PROCESSING
On April 1, 1996, FANB acquired 49% of SSI, a health care claims
processing company headquartered in Mobile, Alabama, for $8,575,000. SSI uses
automated data processing to assist hospitals and physicians in communicating
billing and payment-related information to medical benefits third-party payors,
including government agencies, health maintenance organizations, and insurance
carriers. SSI's medical claims processing services include determining the
amount owed to hospitals or physicians by both patients and third-party payors
and facilitating the method of payment. SSI provides these electronic financial
data processing services to more than 500 hospitals, clinics, and physicians in
24 states.
Effective January 1, 1997, SSI acquired CareWare Systems, Inc.
("CareWare"), a Tampa, Florida-headquartered developer of medical management
computer software for managed care organization, insurance carriers and health
maintenance organizations. CareWare's principal software product allows
preapproval or authorization of patient treatment, consistent with recognized
medical guidelines, and facilitates SSI's health care claims processing function
by helping control the selection, delivery, and cost of medical services. Under
the terms of the merger agreement, CareWare's shareholders received 5.1% of
SSI's common stock. Simultaneously, FANB exercised its option to maintain its
49% ownership of SSI, for an additional cost of $667,403. The balance of SSI is
owned, either directly or indirectly, by Celia A. Wallace, who was appointed to
the Corporation's Board of Directors in June 1996.
RECENT DEVELOPMENTS
On January 1, 1997, the Corporation completed its acquisition of
Hartsville Bancshares, Inc., a Tennessee bank holding company headquartered in
Hartsville, Tennessee ("HBI"), which owned CommunityFIRST Bank, a Tennessee
chartered bank with five branches in Sumner and Trousdale Counties, Tennessee,
which was simultaneously merged with and into FANB. The Corporation acquired HBI
through a tax-free exchange of stock valued at approximately $11.0 million in a
transaction accounted for as a purchase. As of December 31, 1996, HBI had total
consolidated assets of approximately $95 million and shareholders' equity of
approximately $6.0 million.
STATISTICAL INFORMATION
Management's Discussion and Analysis of Financial Condition and Results
of Operations and the Consolidated Year-End Balance Sheets, which discuss the
Corporation and its subsidiaries from a financial perspective, are contained in
Items 7 and 8 of this Report.
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SUPERVISION AND REGULATION
GENERAL
The Corporation is a bank holding company subject to the
supervision of the Federal Reserve Board under the BHCA and a savings and loan
holding company subject to the supervision of the Office of Thrift Supervision
("OTS") under HOLA. FANB and FANBKY are national banks and, as such, are subject
to the supervision of, and are regularly examined by, the Office of the
Comptroller of the Currency ("OCC"). FAFSB is a federal savings bank and, as
such, is subject to the supervision of, and is regularly examined by, the OTS.
Each of the Corporation's depository institution subsidiaries is also insured
by, and subject to the regulations of, the Federal Deposit Insurance Corporation
(the "FDIC"), and is also affected significantly by the actions of the Federal
Reserve Board by virtue of its role in regulating money supply and credit
availability, as well as by the U.S. economy in general. Areas subject to
regulation by federal authorities include loan loss reserves, investments,
loans, mergers, issuance of securities, payment of dividends, establishment and
closing of branches, product offering and other aspects of operations.
The Corporation's non-banking subsidiaries are subject to the
supervision of the Federal Reserve Board, and other non-banking subsidiaries may
be subject to the supervision of other regulatory agencies including the
Securities and Exchange Commission ("SEC"), the NASD and state securities and
insurance regulators.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by federal law
and regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in the
event the depository institution becomes in danger of default or is in default.
For example, under Federal Reserve Board policy, the Corporation is expected to
serve as a source of financial and managerial strength to each of its subsidiary
banks and to commit resources to support each of them. This support may be
required at times when the Corporation would not otherwise be inclined to
provide it.
Under the "cross guarantee" provisions of the Federal Deposit Insurance
Act ("FDIA"), any FDIC-insured subsidiary of the Corporation can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured subsidiary
or (ii) any assistance provided by the FDIC to any commonly controlled
FDIC-insured subsidiary "in danger of default." "Default" is defined generally
as the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"), or both. The FDIC's claim for damages is
superior to claims of shareholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
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The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or shareholder. This
provision would give depositors a preference over general and subordinated
creditors and shareholders in the event a receiver is appointed to distribute
the assets of any of the bank subsidiaries of the Corporation.
CAPITAL
The Federal Reserve Board and the OCC have adopted substantially
similar risk-based capital and leverage guidelines applicable to U.S. banking
organizations. The minimum guideline for the ratio of total capital ("Total
Capital") to risk-weighted assets (including certain off-balance-sheet
activities, such as standby letters of credit) is 8.00%. At least half of the
Total Capital must be composed of common shareholders' equity, and to the extent
applicable, minority interests in the equity accounts of consolidated
subsidiaries, non-cumulative perpetual preferred stock and a limited amount of
cumulative perpetual preferred stock, less disallowed intangibles ("Tier 1
Capital"). The remainder, which is "Tier 2 Capital", may consist of subordinated
debt (or certain other qualifying debt issued prior to March 12, 1988), other
preferred stock and a limited amount of loan loss reserves. In addition, each of
the federal bank regulatory agencies has established minimum leverage capital
ratio guidelines. These guidelines provide for a minimum Tier 1 leverage capital
ratio (Tier 1 Capital to total assets, less disallowed intangibles) of 3% for
banks and bank holding companies that meet certain specified criteria, including
that such financial institutions have the highest regulatory examination rating
and are not contemplating significant growth or expansion. All other
institutions are expected to maintain a leverage ratio of at least 100 to 200
basis points above the minimum.
FAFSB is subject to capital requirements adopted by the OTS, which are
similar, but not identical, to those issued by the Federal Reserve Board and the
OCC. Under the OTS' capital guidelines, a savings bank is required to maintain
tangible capital of at least 1.5% of tangible assets, core (leverage) capital of
at least 3% of the association's adjusted total assets and risk-based capital of
at least 8% of risk-weighted assets. For more information on these capital
ratios, please see Note 14 ("Legal and Regulatory Matters") to the Corporation's
Consolidated Financial Statements on pages 87-91 herein.
In 1991, each federal banking agency was required to revise its
risk-based capital standards to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk and the risks of
nontraditional activities. Each of the federal banking agencies subsequently
revised the risk-based capital guidelines to take account of concentration of
credit risk, risk of nontraditional activities, and a bank's exposure to
declines in the economic value of its capital due to changes in interest rates.
These guidelines do not codify a measurement framework for assessing the level
of a bank's interest rate exposure. On June 26, 1996, these agencies adopted a
joint policy statement requiring that banks adopt comprehensive policies and
procedures for managing interest rate risk, and this statement sets forth the
general standards that such policies and procedures must meet. Unlike an earlier
proposal, however, the statement does not contain a standardized measure or
explicit capital charge for interest rate risk. The Corporation does not believe
that these agency actions concerning the capital guidelines will materially
impact its operations.
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The OTS regulatory capital requirements which are applicable to FAFSB
already incorporate an interest rate risk component. Under the OTS regulation, a
savings institution's interest rate risk is measured by the decline in the net
portfolio value of its assets that would result from a hypothetical 200 basis
point increase or decrease in interest rates, divided by the estimated economic
value of the institution's assets. A savings institution whose interest rate
risk exposure exceeds 2% would be required to deduct an amount equal to one half
of the difference between the institution's interest rate risk and 2% multiplied
by the estimated economic value of the institution's assets. The OTS, however,
has postponed requiring any such deductions from capital until an appeals
process is developed for the measurement of an institution's interest rate risk.
ACQUISITION AND EXPANSION
The BHCA requires any bank holding company to obtain the prior approval
of the Federal Reserve Board before it may acquire all or substantially all of
the assets of any bank, or ownership or control of any voting shares of any
bank, if, after acquiring such shares, it would own or control, directly or
indirectly, more than 5% of the voting shares of such bank.
The BHCA currently permits bank holding companies from any state to
acquire banks and bank holding companies located in any other state, subject to
certain conditions, including certain nationwide and state imposed concentration
limits. Under these concentration limits, a bank holding company which controls
more than 10% of the total amount of deposits of insured depository institutions
in the United States is prohibited from further acquisitions; federal statewide
concentration limits prohibit an acquisition if, upon consummation of the
transaction, a bank holding company would control 30% or more of the total
amount of deposits of insured depository institutions in the state which is the
home state of the bank or bank holding company being acquired. The Corporation
estimates that, as of December 31, 1996, it held less than 13% of all such
deposits in Tennessee, less than 1.0% of all such deposits in Kentucky and less
than 1.0% of all such deposits in Virginia. Although individual state deposit
caps are not superseded by the legislation, the Tennessee General Assembly, in
its 1995 Session, adopted conforming legislation which adopts the deposit caps
enacted by Congress. The legislation also repeals, as of September 29, 1995, the
Tennessee laws previously applicable to acquisitions by bank holding companies,
and reenacts in modified form one of these laws, the Tennessee Bank Structure
Act (the "TBSA"). Under the TBSA, as reenacted, no bank holding company, whether
a Tennessee or out-of-state company, may acquire any bank in Tennessee that has
been in operation less than five years or organize a new bank in Tennessee
except in the case of certain interim bank mergers and acquisitions of banks in
financial difficulty. Under the Tennessee laws pertaining to bank mergers, which
(with the exception of a merger between a Tennessee bank and an out-of-state
bank) were not directly affected by the new legislation, banks in separate
counties in Tennessee which have been in operation at least five years may
merge. Banks with principal offices in the same county may merge, even if one or
both have been in operation less than five years. The effect of these provisions
is that the Corporation in the future may acquire banks in Tennessee which have
been in operation for over five years but may not form or acquire a new bank in
any Tennessee county other than Davidson County, in which the main office of
FANB is located.
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Under federal law, banks will be able to branch across state lines by
acquisition, merger or de novo, effective June 1, 1997 (unless state law would
permit such de novo interstate branching at an earlier date), provided certain
conditions are met, including that applicable state law must expressly permit
such de novo interstate branching. Tennessee has enacted a interstate branching
law in response to the federal law which is effective June 1, 1997. Tennessee
state law currently only allows interstate branching by acquisition or merger
and does not expressly permit de novo branching.
BANK REGULATION
Payment of Dividends. The Corporation is a legal entity separate and
distinct from its subsidiary banks and its nonbank subsidiaries. The
Corporation's revenues (on a parent company only basis) result, in part, from
dividends paid to the Corporation by its subsidiaries. The right of the
Corporation, and consequently the right of creditors and shareholders of the
Corporation, to participate in any distribution of the assets or earnings of any
subsidiary through the payment of such dividends or otherwise is necessarily
subject to the prior claims of creditors of the subsidiary (including
depositors, in the case of banking subsidiaries), except to the extent that
claims of the Corporation in its capacity as a creditor may be recognized. For
more information on "Payment of Dividends," please see Note 14 ("Legal and
Regulatory Matters") to the Corporation's Consolidated Financial Statements on
pages 88-90 herein. For a discussion on the impact of the Corporation's
long-term debt on its ability to pay dividends to shareholders, please see Note
9 ("Long-term Debt") to the Corporation's Consolidated Financial Statements on
pages 76-77 herein.
In addition to the foregoing, under the FDIA, insured depository
institutions are prohibited from making capital distributions, including the
payment of dividends, if, after making such distribution, the institutions would
become "undercapitalized" (as such term is used in the statute). Based on the
current financial condition of these institutions, the Corporation does not
expect that this provision will have any impact on its ability to obtain
dividends from its bank subsidiaries.
FDIC Insurance. The Corporation's subsidiary depository institutions
are subject to FDIC deposit insurance assessments. The FDIC has promulgated
risk-based deposit insurance assessment regulations which became effective in
1993. Under these regulations, insured institutions (whether members of BIF or
SAIF) are assigned assessment risk classifications based upon capital levels and
supervisory evaluations. Based on this system, the assessment rate for insured
institutions for 1996 ranged from 0.0% to 0.2475%, depending on the
institution's assessment risk classification. Under these regulations, FANB's
assigned assessment rate for its BIF deposits for 1996 was based on the legal
minimum amount of $2,000 per annum. FAFSB's assigned assessment rate for 1996
was 0.2475%. FANBKY's assigned assessment rate for 1996 was 0.1725%.
With the exception of deposits attributable to thrift acquisitions,
FANB pays its premiums at the BIF rate. As a former savings and loan
association, FANBKY pays its premiums at the SAIF rate. As a federal savings
bank, FAFSB pays its premiums at the SAIF rate. Thus, the Corporation's overall
deposit insurance premium expenses are affected by changes in both the BIF and
the SAIF assessment rate. The FDIC set the BIF assessment for the 1996 fiscal
year to the legal minimum of $2,000 a year
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for the best rated institutions and 0.27% of insured deposits for the worst
rated institutions because the BIF reserve ratio exceeds the 1.25% of insured
deposits required by federal law.
On September 30, 1996, President Clinton signed into law the Deposit
Insurance Funds Act of 1996, which (i) recapitalized the SAIF to 1.25% of
insured deposits by imposing a special one-time assessment on SAIF-insured
deposits; (ii) from January 1, 1997 until December 31, 1999, requires BIF
members to pay one-fifth of the assessment rate imposed upon thrifts to cover
the annual Financing Corporation ("FICO") bond payments, and from January 1,
2000 until the FICO bonds are retired, will require banks and thrifts to pay the
assessment on a pro rata basis; (iii) stipulates that the BIF and SAIF will be
merged on January 1, 1999 into the new Deposit Insurance Fund, contingent upon
there being no federally insured savings associations or thrifts in existence on
that date. The effect on the Corporation of this law was a special one-time
assessment on its third quarter 1996 earnings of approximately $8.1 million
(before taxes). For more information regarding FDIC assessment rates, please see
page 17 and pages 21-22 of Management's Discussion and Analysis of Financial
Condition and Results of Operations, included in this Report as Item 7, and also
see Note 14 ("Legal and Regulatory Matters") of the Corporation's Consolidated
Financial Statements on pages 88-91 herein.
Community Reinvestment Act. The Corporation's subsidiary depository
institutions also are subject to the requirements of the Community Reinvestment
Act of 1976 ("CRA"). The CRA imposes on financial institutions an affirmative
and ongoing obligation to meet the credit needs of their local communities,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of those institutions. Each financial institution's efforts in
meeting community credit needs currently are evaluated as part of the
examination process, as well as when an institution applies to undertake a
merger, acquisition or to open a branch facility. Recently enacted revisions to
the CRA regulations create a new evaluation system that rates institutions based
on their actual performance (rather than efforts) in meeting community credit
needs. Under these new regulations, each institution would be evaluated based on
the degree to which it is providing loans (the lending test), branches and other
services (the service test), and investments (the investment test) to low and
moderate income areas in the communities it serves, based on the communities'
demographics, characteristics and needs, the institution's capacity, product
offerings and business strategy. Institutions would continue to receive one of
four composite ratings: Outstanding, Satisfactory, Needs to Improve or
Substantial Noncompliance. The new rules went into effect in stages from July
1995 to January 1997. The Corporation does not believe that the new CRA
regulations will substantially change its programs and policies designed to meet
the needs of its communities.
Certain Transactions with Affiliates. Provisions of the Federal Reserve
Act impose restrictions on the type, quantity and quality of transactions
between affiliates of an insured bank (including the Corporation and its nonbank
subsidiaries) and the insured bank (or savings institution) itself. Under these
restrictions, an insured bank (or savings institution) and its subsidiaries are,
among other things, limited in engaging in "covered transactions" with any one
affiliate to no more than 10% of the capital stock and surplus of the insured
bank (or savings institution); and with all affiliates in the aggregate, to no
more than 20% of the capital stock and surplus of the bank (or savings
institution). "Covered transactions" are defined by statute to include a loan or
extension of credit, as well as a purchase of securities issued by an affiliate,
a purchase of assets (unless otherwise exempted by the
9
<PAGE> 12
Federal Reserve Board), the acceptance of securities issued by the affiliate as
collateral for a loan and the issuance of a guarantee, acceptance, or letter of
credit on behalf of an affiliate. In addition, any transaction with an
affiliate, including loans, contractual arrangements and purchases, must be on
terms and conditions that are substantially the same or at least as favorable to
the bank (or savings institution) as those prevailing at the time for comparable
transactions with non-affiliated companies. The purpose of these restrictions is
to prevent the misuse of the resources of the bank by its uninsured affiliates.
An exception to the quantitative restrictions is provided for transactions
between two insured banks or savings institutions that are within the same
holding company structure where the holding company owns 80% or more of each
institution.
Transactions with Insiders. Any loans made by the Corporation's
depository institution subsidiaries to their respective executive officers,
directors or 10% shareholders, as well as entities such persons control, are
required to be made on terms substantially the same as those offered to
unaffiliated individuals and to not involve more than the normal risk of
repayment, and are subject to individual and aggregate limits depending on the
person involved. Further, provisions of the BHCA prohibit a bank holding company
and its subsidiaries from engaging in certain tie-in arrangements in connection
with any extension of credit, lease or sale of property or furnishing of
services.
Other Safety and Soundness Regulations. The federal banking agencies
have broad powers under current federal law to take prompt corrective action to
resolve problems of insured depository institutions. The extent of these powers
depends upon whether the institutions in question are categorized as "well
capitalized", "adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized," as such terms are defined
under uniform regulations defining such capital levels issued by each of the
federal banking agencies.
In addition, FDIC regulations require that management report on its
institution's responsibility for preparing financial statements, and
establishing and maintaining an internal control structure and procedures for
financial reporting and compliance with designated laws and regulations
concerning safety and soundness. Under these rules, independent auditors must
attest to and report separately on assertions in management's report concerning
the effectiveness of the internal control structure over financial reporting,
using FDIC-approved audit procedures.
The FDIA also requires each of the federal banking agencies to develop
regulations addressing certain safety and soundness standards for insured
depository institutions, including operational and managerial standards, asset
quality, earnings and stock valuation standards, as well as compensation
standards (but not dollar levels of compensation). Each of the federal banking
agencies has issued regulations and interagency guidelines implementing these
standards. The regulations and guidelines set forth general operational and
managerial standards in the areas of internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth and compensation, fees and benefits. Recently proposed
rules would add asset quality and earnings standards to the guidelines. The
current rules contemplate that each federal agency would determine compliance
with these standards through the examination process, and if necessary to
correct weaknesses, require an institution to file a written safety and
soundness compliance plan.
10
<PAGE> 13
INTEREST RATE LIMITATIONS
The maximum permissible rates of interest on most commercial and
consumer loans made by FANB are governed by Tennessee's general usury law and
the Tennessee Industrial Loan and Thrift Companies Act ("Industrial Loan Act").
Most commercial and consumer loans made by FANBKY are governed by Kentucky's
general usury law. Under Virginia law, usury limits do not generally apply to
the type of loans most commonly made by savings institutions such as FAFSB.
Certain other usury laws affect limited classes of loans, but the laws
referenced above are by far the most significant. Tennessee's general usury law
authorizes a floating rate of 4% per annum over the average prime or base
commercial loan rate, as published by the Federal Reserve Board from time to
time, subject to an absolute 24% per annum limit. The Industrial Loan Act, which
also is generally applicable to most of the loans made by FANB in Tennessee,
authorizes an interest rate of 24% per annum and also allows certain loan
charges, generally on a more liberal basis than does the general usury law.
Kentucky's general usury law provides for a legal rate of interest of 8% or less
per annum; however, by written agreement, parties may agree for the payment of
interest at any rate under any written contract or other written obligation
where the original principal amount is in excess of $15,000. For loans where the
original principal amount is $15,000 or less, any rate allowed national banking
associations under federal law is permissible.
ENVIRONMENTAL REGULATION
As real estate lenders and as owners of real property, financial
institutions such as the Corporation and its subsidiary banks may become subject
to liability under various statutes and regulations applicable to property
owners, specifically including those which impose liability with respect to the
environmental condition of real property. The Corporation's primary exposure
under these statutes and regulations stems from the lending activities of its
subsidiary commercial banks, FANB, FANBKY, and FAFSB, which have adopted
policies and procedures to identify and monitor their exposure to avoid any
material loss or liability related to the environmental condition of mortgaged
property. Environmental liability can also result from mergers and acquisitions,
and the Corporation has implemented procedures to identify and avoid any
material loss or liability related to the acquisition of real property through
mergers and acquisitions.
RECENT BANKING LEGISLATION
Riegle-Neal Interstate Banking and Branching Efficiency Act
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("IBBEA") will significantly impact future bank acquisitions, mergers, and
interstate branching. Among other matters, the IBBEA permits, or will permit,
commercial bank holding companies to (1) as of September 29, 1995, acquire banks
nationwide, regardless of whether such acquisitions are authorized under the law
of the host state, one year after enactment of the legislation; (2) fully merge
or consolidate into a single, legal entity after June 1, 1997, subject to the
right of individual states to "opt in" or "opt out" of this authority before
that date; (3) establish new branches on an interstate basis provided that such
action is specifically authorized by the law of the host state; and (4) as of
September 29, 1995, engage in certain agency relationships (receive deposits,
renew time deposits, close loans, service loans and
11
<PAGE> 14
receive payments on loans and other obligations) as agent for any bank or thrift
affiliate, irrespective of whether the affiliate is located in the same State as
the agent bank. Overall, the IBBEA, which, with certain limited exceptions, is
the exclusive means by which bank holding companies can obtain interstate
branches, should encourage an increase in consolidation and competition and
promote geographic diversification in the banking industry.
Tennessee has enacted an interstate branching law in response to the
federal law which is effective June 1, 1997.
RIEGLE COMMUNITY DEVELOPMENT AND REGULATORY IMPROVEMENT ACT
The Riegle Community Development and Regulatory Improvement Act
("RCDRIA") is an effort to alleviate certain regulatory burdens imposed on the
banking industry by amending sections of FDICIA and other statutes pertaining to
the regulation of financial institutions and financial institution holding
companies. For example, as amended by the RCDRIA, FDICIA empowers each agency to
adopt its own standards for safety and soundness relating to quality, earnings,
and stock valuation as the agency deems appropriate.
The RCDRIA also contains various community development initiatives;
measures to promote the securitization of small business loans; changes to the
National Flood Insurance Program and changes to the Bank Secrecy Act in terms of
money laundering; protection against bank insolvency of the security interests
of public entities in bank assets pledged to secure the entities' deposits;
restrictions on certain high-rate, high-fee mortgages; and disclosure
requirements for reverse mortgages.
BROKER/DEALER REGULATION
The United States securities industry generally is subject to extensive
regulation under federal and state laws. The SEC is the federal agency charged
with administration of the federal securities laws. Much of the regulation of
broker/dealers, however, has been delegated to self-regulatory organizations,
principally the NASD and the national securities exchanges. These
self-regulatory organizations adopt rules (which are subject to approval by the
SEC) which govern the industry and conduct periodic examinations of member
broker/dealers. Securities firms are also subject to regulation by state
securities commissions in the states in which they are registered. INVEST is a
registered broker-dealer in securities under the Securities Exchange Act of
1934, as amended, and is a member of the NASD. INVEST is also an investment
adviser pursuant to the Investment Advisers Act of 1940, as amended, and is a
member of the Securities Investor Protection Corporation. INVEST is registered
as a broker-dealer in 50 states, the District of Columbia, and Puerto Rico. As a
third-party marketer of investment products, INVEST may, in certain instances,
be subject to regulation by those agencies having supervisory authority over
INVEST's financial institution clients, including, for example, the Federal
Reserve Board, the OCC, the OTS, the FDIC, and various state banking agencies.
The regulations to which broker/dealers are subject cover all aspects
of the securities business, including sales methods, trade practices among
broker/dealers, capital structure of securities firms,
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<PAGE> 15
uses and safekeeping of customers' funds and securities, recordkeeping, and the
conduct of directors, officers and employees. Additional legislation, changes in
rules promulgated by the SEC and by self-regulatory organizations, or changes in
interpretation or enforcement of existing laws and rules, often affect directly
the method of operation and profitability of broker/dealers. The SEC and the
self-regulatory organizations may conduct administrative proceedings which can
result in censure, fines, suspension or expulsion of a broker/dealer, its
officers or employees. The principal purpose of regulation and discipline of
broker/dealers is the protection of customer and the securities market rather
than the protection of creditors and stockholders of broker/dealers.
COMPETITION
The activities in which the Corporation engages are very competitive.
Generally, the lines of activity and markets served by the Corporation involve
competition with money market mutual funds, national and state banks, mutual
savings banks, savings and loan associations, finance companies, brokerage
firms, credit unions and other financial institutions located primarily in the
southeastern region of the United States. The principal methods of competition
center around such aspects as interest rates on loans and deposits, lending
limits, customer services, location of offices, provision of financial services,
and other service delivery systems. Some of the Corporation's competitors are
major corporations with substantially more assets and personnel than the
Corporation and its subsidiaries.
The Corporation's subsidiary banks actively compete for loans and
deposits with other commercial banks, savings and loan associations, and credit
unions. Consumer finance companies, department stores, factors, mortgage brokers
and insurance companies are also significant competitors for various types of
loans. FANB competes for various types of fiduciary and trust business from
other banks, trust and investment companies, investment advisory firms and
others.
Through INVEST, FANB competes with other third-party marketers of
investment products and other entities offering securities brokerage services.
EMPLOYEES
As of December 31, 1996, the Corporation and its subsidiaries employed
4,355 full-time equivalent officers and employees, compared with 3,591 at
December 31, 1995.
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<PAGE> 16
ITEM 3: LEGAL PROCEEDINGS
Note 14 to the Corporation's Consolidated Financial Statements,
included in this Report under Item 8, is hereby incorporated in this Item 3 by
reference.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Corporation's Common Stock is traded on the National Association of
Securities Dealers Automated Quotation National Market System (the "Nasdaq
National Market System") under the symbol "FATN." At the close of business on
February 6, 1997, there were approximately 10,123 holders of record of the
Corporation's Common Stock. The following table sets out the quarterly high and
low sales prices of the Corporation's Common Stock. The dividends declared
during each quarter for the last two years are also shown.
STOCK PRICES
<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW DECLARED
---- --- --------
1995
----
<S> <C> <C> <C>
First Quarter $34.375 $26.875 $.25
Second Quarter 36.000 33.250 .25
Third Quarter 44.250 35.875 .28
Fourth Quarter 50.250 42.125 .28
====== ====== ===
1996
----
First Quarter $48.500 $42.375 $.28
Second Quarter 45.625 42.125 .31
Third Quarter 48.250 40.750 .31
Fourth Quarter 58.750 47.750 .31
====== ====== ===
</TABLE>
See SUPERVISION AND REGULATION, PAYMENT OF DIVIDENDS. See also, Notes 9 and 14
to the Corporation's Consolidated Financial Statements, included in this Report
under Item 8, which are incorporated herein by reference.
14
<PAGE> 17
ITEM 6: SELECTED FINANCIAL DATA
The table "Selected Financial Data: 1992-1996" on page 16 hereof is
incorporated in this Item 6 by reference.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
15
<PAGE> 18
<TABLE>
<CAPTION>
TABLE 1: SELECTED FINANCIAL DATA: 1992-1996
====================================================================================================================================
Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONDENSED INCOME STATEMENTS (in thousands):
Net interest income, taxable equivalent basis* $ 353,298 $ 315,761 $ 301,689 $ 291,242 $ 272,357
Less taxable equivalent adjustment 3,600 3,451 3,447 4,042 4,160
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 349,698 312,310 298,242 287,200 268,197
Provision for loan losses - 83 (9,919) (41,405) 39,249
Noninterest income 180,533 108,487 85,715 88,379 77,325
Noninterest expense 334,455 252,448 239,270 248,227 240,099
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and
cumulative effect of changes in accounting
principles 195,776 168,266 154,606 168,757 66,174
Income tax expense 74,204 65,186 57,404 61,348 20,021
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in
accounting principles 121,572 103,080 97,202 107,409 46,153
Cumulative effect of changes in accounting principles,
net of tax - - - (84) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 121,572 $ 103,080 $ 97,202 $ 107,325 $ 46,153
===================================================================================================================================
Per common share:
Net income $ 4.11 $ 3.64 $ 3.39 $ 3.79 $ 1.76
Cash dividends declared and paid 1.21 1.06 .88 .55 .20
Book value (end of year) 29.32 26.93 23.24 22.34 17.86
Market price (end of year) 57.63 47.38 26.88 32.00 27.50
Market/book (end of year) 1.97 x 1.76 x 1.16 x 1.43 x 1.54 x
====================================================================================================================================
AVERAGES (in thousands):
Assets $ 9,723,937 $ 8,554,146 $ 7,785,831 $ 7,322,284 $ 6,986,807
Loans, net of unearned discount and net deferred
loan fees 6,508,716 5,592,273 4,851,386 4,214,138 4,044,470
Earning assets 8,977,115 7,898,742 7,119,433 6,672,027 6,387,123
Deposits 7,376,880 6,538,746 6,186,809 5,975,643 5,902,743
Long-term debt 356,768 292,455 109,031 60,134 17,890
Shareholders' equity 830,416 704,290 644,247 550,840 442,103
====================================================================================================================================
End of period (in thousands):
Assets $ 10,399,468 $ 9,681,629 $ 8,278,727 $ 7,707,781 $ 7,256,798
Loans, net of unearned discount and net deferred
loan fees 6,658,597 6,425,976 5,171,966 4,669,571 4,059,554
Earning assets 9,447,064 8,899,747 7,545,903 7,041,597 6,418,745
Deposits 7,792,977 7,382,294 6,307,779 6,150,551 6,018,768
Long-term debt 331,157 421,791 271,473 77,053 18,477
Shareholders' equity 868,707 795,532 667,673 623,562 503,899
====================================================================================================================================
Significant ratios:
Return on average assets 1.25% 1.21% 1.25% 1.47% .66%
Return on average equity 14.64 14.64 15.09 19.48 10.44
Dividends declared per share to net income per
share (dividend payout ratio) 29.44 29.12 25.96 14.51 11.36
Productivity ratio** 57.19 57.79 60.25 62.75 68.66
Average equity to average assets 8.54 8.23 8.27 7.52 6.33
Average loans to average deposits 88.23 85.53 78.41 70.52 68.52
Average core deposits to average total deposits 89.25 89.32 92.85 93.13 92.68
Allowance to net loans (end of year) 1.85 2.06 2.50 2.92 4.52
Nonperforming assets to loans and foreclosed
properties (end of year)*** .36 .46 .42 .91 2.24
Net interest margin 3.94 4.00 4.24 4.37 4.26
====================================================================================================================================
OTHER STATISTICS:
Number of common shareholders (end of year) 10,161 9,092 10,380 10,731 10,646
Average common shares outstanding (in thousands) 29,592 28,315 28,670 28,355 26,509
End of period common shares (in thousands) 29,631 29,540 28,725 27,915 28,213
Number of full-time equivalent employees
(end of year) 4,095 3,591 3,449 3,309 3,260
Number of banking offices 168 164 155 151 152
Number of automatic teller machines 302 224 181 150 139
====================================================================================================================================
</TABLE>
* Adjusted to a taxable equivalent basis based on the statutory
federal income tax rates, adjusted for applicable state income
taxes net of the related federal tax benefit.
** Ratio of operating expenses to taxable equivalent net interest
income plus noninterest income. For 1996, calculation excludes
$8.1 million special SAIF assessment and nonbank subsidiaries.
For 1995, calculation excludes $7.3 million of Heritage
merger-related expenses. For 1994, calculation excludes $9.7
million of losses in the fourth quarter on sales of securities
available for sale. For 1993, calculation excludes the $10.0
million Foundation contribution.
*** Excludes loans 90 days or more past due on accrual.
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's discussion and analysis is presented as a review of the major
trends affecting the performance of First American Corporation (the
"Corporation" or "First American") and its subsidiaries and to aid in
understanding the Corporation's consolidated income statements and balance
sheets. This discussion supplements the Corporation's consolidated financial
statements which begin on page 56 and should be read in conjunction therewith.
OVERVIEW
Net income during 1996 was $121.6 million, an $18.5 million, or 18%,
increase from the $103.1 million earned in 1995. Earnings per share also
increased during 1996 to $4.11, up 13% over the $3.64 for 1995. Return on
average assets ("ROA") improved to 1.25% for 1996 from 1.21% in 1995. Return on
average equity ("ROE") was 14.64% for both 1996 and 1995.
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 $5.0 million, net of tax ($.17 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%. In
addition, the Corporation's net income for 1995 was decreased by $7.5 million of
after tax merger expenses, (or $.26 per share), related to the November 1995
merger of Heritage Federal Bancshares, Inc. ("Heritage"). Exclusive of these
expenses, net income increased 14%, to $126.5 million in 1996, or $4.28 per
share, versus $110.6 million in 1995, or $3.90 per share. Also, excluding these
expenses, ROA was 1.30% in 1996 versus 1.29% in 1995 and ROE was 15.24% in 1996
versus 15.70% in 1995.
Net interest income on a taxable equivalent basis rose 12% during 1996 to
$353.3 million, compared with $315.8 million for 1995, primarily due to an
increase in the volume of earning assets.
Noninterest income rose $72.0 million, or 66%, to $180.5 million in 1996
from $108.5 million in 1995. Excluding the December 1995 acquisition of Charter
Federal Savings Bank (which was accounted for as a purchase) and the Heritage
merger-related expenses (the "1995 acquisitions"), as well as the 1996
acquisitions of First City Bancorp, Inc. and INVEST Financial Corporation (the
"1996 acquisitions"), noninterest income increased $17.8 million, or 16%, from
1995 to 1996.
Noninterest expense was $334.5 million during 1996, up $82.0 million, or
33%, from 1995. Excluding the special SAIF assessment of $8.1 million and the
effect of the 1995 acquisitions and the 1996 acquisitions, noninterest expense
increased $10.2 million, or 4%, from 1995 to 1996.
First American's productivity (operating efficiency) ratio, excluding the
special SAIF assessment and nonbank subsidiaries, was 57.19% in 1996. The
productivity ratio was 57.79% in 1995, excluding the $7.3 millon of Heritage
merger-related expenses.
17
<PAGE> 20
TABLE 1 presents selected financial data for First American for the past
five years. A more detailed discussion and analysis of the 1996 consolidated
income statements and balance sheets follows.
ACQUISITIONS
First American acquired First City Bancorp, Inc. ("First City") effective
March 11, 1996 by exchanging approximately 1.1 million shares of First American
Corporation common stock for all of the outstanding shares of First City. As a
bank holding company headquartered in Murfreesboro, Tennessee, First City
operated two Tennessee state chartered banks and a consumer finance company.
First City had $366 million in assets, eleven banking offices, and nine consumer
finance locations in the Middle Tennessee area. The transaction was accounted
for as a purchase.
Effective April 1, 1996, First American National Bank ("FANB"), a
wholly-owned subsidiary of the Corporation, purchased 49% of the stock of The
SSI Group, Inc. ("SSI"), a healthcare payments processing company located in
Mobile, Alabama, for $8.6 million. FANB's investment in SSI is being accounted
for under the equity method of accounting.
Effective July 1, 1996, FANB purchased 96.2% of the stock of INVEST
Financial Corporation ("INVEST") for $26.0 million in cash. During the third
quarter of 1996, FANB purchased an additional 2.1% of the stock of INVEST for
$.5 million in cash. INVEST, which is headquartered in Tampa, Florida, functions
as a third-party marketer of investment products to customers of subscribing
financial institutions located throughout the country. At December 31, 1996, a
total of 425 subscribing institutions operated 1,015 investment centers.
Simultaneous with the acquisition of INVEST by FANB, INVEST completed its
acquisition of Investment Center Group, Inc., the parent of Investment Centers
of America, in a transaction valued at $5.0 million, making 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.
Effective January 1, 1997, First American acquired Hartsville Bancshares
("Hartsville") in a transaction which is being accounted for as a purchase. All
of the 180,000 First American shares exchanged in the transaction were
repurchased in the open market during January 1997. Hartsville, which had five
branches in Middle Tennessee and operated under the name CommunityFirst, had
approximately $95 million in assets. Immediately following the merger of
Hartsville with and into First American, CommunityFirst was merged with and into
FANB.
INCOME STATEMENT REVIEW
NET INTEREST INCOME
Net interest income on a taxable equivalent basis was $353.3 million during
1996, up $37.5 million, or 12%, from $315.8 million in 1995 and was 66% of total
revenues in 1996 versus 74% in 1995. Throughout this discussion, interest income
has been adjusted to its taxable equivalent using a tax rate of 38.9%. The
increase in net interest income was primarily due to an increased volume of
earning assets (mainly loans). Average earning assets increased $131.5 million
more than average interest-bearing liabilities during 1996 while the net
interest spread (yield on interest-earning assets,
18
<PAGE> 21
less the rate paid on interest-bearing liabilities) declined five basis points.
Net interest margin (net interest income as a percentage of earning assets) also
declined six basis points from 1995 to 1996. However, the net interest margin
improved throughout the year from 3.82% in the fourth quarter of 1995 to 4.06%
for the fourth quarter of 1996.
Changes in the volume, mix, and rates of earning assets and
interest-bearing liabilities affect interest income, interest expense and the
resulting net interest income. TABLE 3 presents detailed average balance sheets,
taxable equivalent interest income, interest expense, and corresponding yields
and rates for the last five years. TABLE 2 highlights the effect that changes in
volume, mix and rates had on net interest income from 1995 to 1996 and from 1994
to 1995. Competitive factors, including the overall external interest rate
environment, impact the Corporation's average yield on earning assets and
average rates paid on interest-bearing liabilities. The declines in net interest
spread and net interest margin are also due, in part, to a lower overall average
interest rate environment in 1996 compared with 1995. For example, the daily
average federal funds rate was 5.30% in 1996 versus 5.83% in 1995 and the daily
average prime rate was 8.27% in 1996 compared with 8.83% for 1995.
During 1996 earning assets averaged $8.98 billion, an increase of $1.08
billion, or 14%, from $7.90 billion for 1995. Total interest income (interest
earned on earning assets) during 1996 was $710.6 million, an $87.5 million, or
14%, increase from the 1995 interest income of $623.2 million. Of the $87.5
million increase in interest income, $85.1 million was due to a higher volume of
earning assets and $2.4 million was due to an increase in average yield. The
increase in yield was primarily due to a shift in the mix of earning assets.
Average loans increased to 72.5% of average earning assets in 1996 versus 70.8%
in 1995 while average securities decreased to 25.3% of average earning assets in
1996 versus 27.7% for 1995. Total loans yielded 8.44% during 1996 compared with
a 6.61% yield on securities. As earning assets increased from 1995 to 1996 with
more earning assets in higher yielding loan balances than in securities, the mix
was more favorable and the overall yield improved.
Average interest-bearing liabilities increased $946.9 million, or 14%, to
$7.56 billion from $6.61 billion in 1995. Interest expense increased to $357.3
million in 1996, up $50.0 million, or 16%, from the $307.4 million of interest
expense incurred in 1995. Of the $50.0 million increase, $44.1 million was due
to an increased volume of interest-bearing liabilities and $5.9 million was due
to higher average rates paid during 1996. The increase in average rates paid was
partially due to a change in the mix of interest-bearing liabilities away from
lower costing NOW and savings accounts to more expensive sources of funding such
as certificates of deposit, federal funds purchased, and money market deposit
accounts. As the volume of interest-bearing liabilities increased, the mix of
interest-bearing liabilities consisted of a larger percentage of higher-costing
balances which caused an increase in both interest expense and the average rate
paid on interest-bearing liabilities.
Earning assets yielded 7.92% in 1996 versus 7.89% in 1995. The average cost
of interest-bearing liabilities was 4.73% in 1996 compared with 4.65% in 1995.
The result was an interest rate spread of 3.19% for 1996 versus 3.24% in 1995.
An important tool used by the Corporation in managing the effect of changes
in interest rates on net interest income is the earnings simulation model. The
model captures earning assets, interest-bearing liabilities, and
off-balance-sheet financial instruments and combines the various factors
19
<PAGE> 22
affecting interest rate sensitivity into an earnings projection that
incorporates Management's forecast of the most likely interest rate environment
for the next twelve months. The model is regularly updated.
TABLE 4 presents First American's interest rate sensitivity at December 31,
1996 and 1995. At December 31, 1996, the net of interest-earning assets,
interest-bearing liabilities and off-balance-sheet activities repricing in a
one-year period as a percent of earning assets was a cumulative net liability
sensitivity of 16.88%. In other words, based on the December 31, 1996, balance
sheet, the amount of liabilities net of off-balance-sheet activities repricing
in 1997 in excess of the amount of assets repricing in 1997, was $1,594.3
million, or 16.88%, of all earning assets. This compares with a cumulative
one-year repricing net liability sensitivity of $1,147.4 million, or 12.89%, at
year-end 1995. The Corporation classifies all regular savings, NOW and money
market deposit account balances as immediately interest rate sensitive. If
regular savings and NOW accounts, which in aggregate amounted to $1.13 billion
at December 31, 1996, were not considered interest-sensitive, the cumulative
one-year repricing difference at December 31, 1996 would have been $460.3
million net liability interest-sensitive, or 4.87% of earning assets.
Classifying these items as immediately rate-sensitive is, in the opinion of
Management, a conservative approach to measuring maximum interest rate
sensitivity since, based on past experience, rates paid on regular savings and
NOW balances have generally not been immediately interest rate sensitive.
Management currently anticipates that net interest income will increase in
1997 due to expected growth in earning assets (primarily loans) and to
improvements in the net interest margin and net interest spread. Net interest
margin and net interest spread should improve in 1997 due to a better mix of
interest-earning assets, as loan balances are expected to grow at a faster rate
than securities and other interest-earning assets. In addition, the rates on
interest-bearing liabilities are expected to decline slightly due to the
anticipated more favorable impact of interest rate swap agreements on net
interest income in 1997 as compared to 1996. Actual results may differ from
Management's expectations due to changes in the national economy or in the
markets in which the Corporation operates and to other uncertainties.
PROVISION FOR LOAN LOSSES
This topic is addressed under the caption "Allowance and Provision for Loan
Losses."
NONINTEREST INCOME
Noninterest income represented 34% of total revenues during 1996 compared
with 26% in 1995. Noninterest income of $180.5 million in 1996 was a $72.0
million, or 66%, increase from 1995. INVEST had $49.6 million of noninterest
income from its effective date of acquisition, July 1, 1996, through December
31, 1996, of which $48.3 million was investment services income. Excluding the
effects of INVEST, noninterest income was $130.9 million, a $22.4 million, or
21%, increase from 1995.
Increases in several categories contributed to the $22.4 million increase
in noninterest income, excluding INVEST. Approximately $2.3 million of the
increase was attributable to investment services income. Service charges on
deposit accounts increased $9.0 million, due mainly to a 13%
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increase in the number of retail deposit accounts from 1995 to 1996. Other
income increased $10.8 million. Included in the increase in other income was a
$2.3 million increase in income and fees related to selling and servicing
mortgage loans and a $1.0 million gain on the sale of mortgage loans in July
1996. Also, interchange fees from the Check Card increased $1.6 million and ATM
surcharges and network transaction fees increased $1.7 million. Various other
categories within other noninterest income increased a total of $4.2 million.
Excluding the effects of the 1995 acquisitions and 1996 acquisitions,
noninterest income was $17.8 million, or 16%, greater than in 1995.
Developing new sources of and generating more fee income are two key
objectives for the Corporation over the next several years. Management expects
noninterest income to increase in 1997. However, economic and other changes in
the markets in which First American operates could adversely affect noninterest
income in 1997.
NONINTEREST EXPENSE
Noninterest expense increased $82.0 million, or 32%, during 1996 to $334.5
million, up from $252.4 million for 1995. INVEST expenses were $48.8 million
from its date of acquisition, July 1, 1996, through December 31, 1996.
Subscribers' commissions made up $35.1 million of this amount and salaries and
benefits were $7.3 million. Subscribers' commissions are commissions on sales of
products marketed by INVEST and are paid to subscribing institutions. Other
general and administrative expenses made up the balance of INVEST's expenses.
Excluding the acquisition of INVEST, noninterest expense was $285.7 million, a
$33.2 million, or 13.2%, increase from 1995.
Excluding the effects of INVEST, several expense categories contributed to
the increase in noninterest expense. Salaries and employee benefits increased
$16.2 million, or 11%, from 1995 to 1996. The increase was primarily due to
increases in the number of employees as a result of the First City acquisition
and the 1995 acquisition of Charter Federal Savings Bank whose name was changed
to First American Federal Savings Bank ("Charter" or "FAFSB"). Merit increases
and expansion of incentive compensation eligibility also contributed to the
increase. Net occupancy expense grew $2.9 million due to additional rent and
other occupancy-related expenses from the First City and Charter acquisitions.
Marketing expense increased $4.6 million, or 51%, from 1995 to 1996. The
increase in marketing expense was the result of various media and direct mail
advertising in new and existing markets for the promotion of "Select Rewards" (a
program designed to encourage customers to increase the number of accounts, the
balances in those accounts, and their length of relationship with First
American), the Loan-by-Phone program, and home equity lines of credit. Systems
and processing expense increased $3.1 million over last year due to higher
processing volumes and various initiatives to enhance systems capabilities. FDIC
insurance expense for 1996 increased $2.4 million from 1995. Intangibles
amortization increased $4.9 million from 1995 to 1996 primarily related to the
Charter and First City acquisitions. The remaining expense categories decreased
$.9 million from 1995 to 1996.
The $2.4 million increase in FDIC insurance expense occurred due to the
$8.1 million special SAIF assessment discussed above, which was offset, in large
part, by the lower annual Bank Insurance Fund ("BIF") assessment rate during
1996 compared with 1995 ($.23 per $100 at January 1, 1995 versus $.04 per $100
at June 1, 1995 and $.00 per $100 at January 1, 1996, for well capitalized
institutions). Effective January 1, 1997, the normal SAIF deposit insurance rate
for well-
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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 BIF 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. For 1997, this
annual charge for First American is expected to be approximately $1.0 million,
net of tax, based on deposits at December 31, 1996. Starting in the year 2000
until the Financing 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.
Excluding the special SAIF assessment and the effects of the 1995
acquisitions and the 1996 acquisitions, noninterest expense was $255.4 million,
a $10.2 million, or 4%, increase from 1995.
The productivity ratio is the ratio of operating expenses to taxable
equivalent net interest income plus noninterest income. Excluding nonbank
subsidiaries and the $8.1 million special SAIF assessment, First American's 1996
productivity ratio improved 60 basis points to 57.19%, which is the equivalent
of spending $57.19 to earn $100 of revenues. The ratio was 57.79% in 1995
(excluding the impact of $7.3 million of Heritage merger-related expenses).
Management continues to emphasize expense control and revenue generation as a
means to improve efficiency and profitability. Management's near-term objective
is to improve the productivity ratio to less than 54% for 1998 for First
American's banking operations.
INCOME TAXES
Income tax expense in 1996 was $74.2 million, which resulted in an
effective tax rate of 37.9% of pretax income versus $65.2 million, or 38.7%, of
pretax income for 1995. The lower effective tax rate for 1996 was attributable
in part to a more favorable overall effective state income tax rate. Exclusive
of this item, income tax expense for 1996 resulted in an effective tax rate of
38.2%. For additional information on income taxes of the Corporation see note 11
to the consolidated financial statements.
BALANCE SHEET REVIEW
SECURITIES
First American's securities portfolio, which consists primarily of debt
securities issued by the U.S. Treasury and other federal agencies and
corporations, generated 21% of total taxable equivalent interest income for 1996
compared with 23% for 1995. Portfolio securities not only provide interest
income, but also satisfy pledging requirements on deposits and borrowings.
Additionally, portfolio securities are an important component of
asset/liability, interest rate sensitivity, and liquidity management, which are
discussed in more detail under the captions, "Net Interest Income" and
"Liquidity."
First American's total securities portfolio of $2.51 billion at December
31, 1996, consisted of $1.68 billion of securities available for sale and $834.5
million of securities held to maturity. This compares to a total securities
portfolio of $2.13 billion at December 31, 1995, which consisted of
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$1.20 billion of securities available for sale and $931.1 million of securities
held to maturity. Table 5 presents the estimated average maturity, average
repricing life, and weighted average yields for securities held to maturity and
securities available for sale at December 31, 1996.
Held to maturity securities averaged $894.8 million during 1996 compared
with $1,523.7 million for 1995. Available for sale securities averaged $1,377.2
million in 1996 compared with $663.7 million during 1995. The change in average
balances from 1995 to 1996 was primarily due to the fourth quarter 1995 transfer
of $694.0 million of securities classified as held to maturity to available for
sale. A more detailed discussion can be found in Note 4 to the Consolidated
Financial Statements.
The average estimated maturity of the total securities portfolio was 4.4
years at December 31, 1996 (1.9 years for securities held to maturity and 5.7
years for securities available for sale), compared with 4.0 years at year-end
1995 (1.9 years for securities held to maturity and 5.7 years for securities
available for sale). The expected maturity for non-amortizing securities is the
stated maturity, and the expected maturity for mortgage-backed securities is
based on current estimates of average maturities, which include prepayment
assumptions. Many of the Corporation's security holdings are floating rate,
repricing at intervals as short as monthly and as long as annually. The average
repricing life of the securities portfolio was 2.4 years at December 31, 1996
(1.7 years for securities held to maturity and 2.8 years for securities
available for sale) compared with 1.9 years at December 31, 1995 (1.7 for
securities held to maturity and 2.1 for securities available for sale).
On December 31, 1996, mortgage-backed security holdings included $365.0
million of floating rate mortgage-backed securities, of which $17.1 million were
classified as held to maturity and $347.9 million were classified as available
for sale. The majority of fixed rate mortgage-backed securities were
collateralized mortgage obligations which were purchased because of their high
credit quality and relatively certain average lives. At year-end 1996, over
99.9% of the Corporation's debt securities were investment grade with the
remaining .1% unrated. Of the securities which are rated, none are below
investment grade (BBB).
LOANS
Loans represent First American's largest component of earning assets,
providing 77% of interest income for the year ended December 31, 1996, compared
to 76% during 1995. During 1996, average loans increased $916.4 million, or 16%,
to $6.51 billion from $5.59 billion in 1995. Excluding the acquisitions of First
City and Charter, average loan volume was $395.8 million, or 7%, greater than in
1995. During 1996, approximately $180.0 million of mortgage loans were
securitized and sold, resulting in a gain of approximately $1.0 million.
Excluding the effects of loans sold during 1996 and the Charter and First City
acquisitions, average loan volume increased $521.8 million, or 9%, from 1995 to
1996.
The increase in average loan volume, in addition to increases from
acquisitions, was primarily a reflection of focused sales efforts, marketing,
and the favorable economic conditions in Tennessee and adjacent states. The U.S.
economy continued its expansion in 1996, as did the economies of First
American's primary areas of operation in Tennessee, Kentucky and Virginia.
Management currently
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expects loan growth, exclusive of acquisitions, to continue in 1997, although at
a slower pace than 1996.
TABLE 12 presents end of period loan balances by category for the past five
years. TABLE 6 presents the maturities of loans, exclusive of consumer loans,
outstanding at December 31, 1996.
Average commercial loans increased $348.9 million, or 14%, to $2.88 billion
during 1996 from $2.53 billion during 1995. During 1996 and 1995, commercial
loans averaged 44% and 45% of total loans, respectively.
The increase in average balances of commercial loans occurred over a broad
range of industry categories. First American's continued emphasis on a
concentrated, organized sales effort with effective administrative support and
responsive credit decisions contributed to the increase in average loans in 1996
over 1995. Also contributing were marketing campaigns tailored for specific
markets, such as the direct mail campaign coupled with branch-level advertising
promoting owner-occupied commercial mortgages for small businesses and the
television and direct mail campaigns promoting home equity lines of credit. The
positive economic conditions in the Corporation's primary markets also supported
First American's commercial loan growth. First American's commercial loan growth
in 1996 resulted in its continued market leadership in the state of Tennessee in
small business (revenues under $10 million) and middle market lending (revenues
of $10 million to $100 million).
Consumer loans, which consist of consumer amortizing mortgages and
consumer-other loans, averaged $3.09 billion during 1996, as compared with $2.59
billion during 1995, an increase of $497.2 million, or 19%. Total consumer loans
were 48% of total loans at December 31, 1996, compared with 46% at year-end
1995.
Average consumer amortizing mortgages, the principal component of which is
residential mortgages, increased $295.2 million, or 20%, to $1.77 billion during
1996 from $1.48 billion during 1995. Of the $295.2 million net increase,
approximately $83.2 million was from internal growth and $338.0 million was a
result of the First City and Charter acquisitions, while mortgage loans sales
during 1996 reduced average consumer amortizing mortgages by $126.0 million.
Average consumer amortizing mortgages comprised 27% of First American's total
loans during 1996 compared to 26% in 1995.
Average consumer-other loans increased $202.0 million, or 18%, to $1.31
billion during 1996 from $1.11 billion during 1995. The largest component of the
increase was in credit card loans, which the Corporation reintroduced in the
second quarter of 1995 in order to provide credit cards to current in-market
customers. FANB has entered into agreements with third-parties for the
marketing, management, and servicing of its credit card loans within guidelines
established by FANB. FANB owns the credit card receivables and is responsible
for credit losses. Credit card loans averaged $46.9 million during 1996 versus
$4.2 million in 1995, but, more significantly, credit card loans were $73.9
million at December 31, 1996. Increases also occurred in automobile installment
loans ($36.4 million), student loans ($10.4 million), consumer-other loans
secured by real estate ($35.6 million), and various other categories. Average
consumer-other loans were 20% of First American's total average loans for both
1996 and 1995.
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Commercial real estate loans, which include real estate construction and
real estate commercial mortgages, increased 15%, or $70.3 million, to average
$543.4 million during 1996 compared with an average of $473.1 million during
1995. Average total commercial real estate loans were 8% of total loans during
1996 and 1995.
First American's loans are predominantly to borrowers residing in or doing
business in Tennessee and selected markets in Virginia, Kentucky, and other
adjacent states. First American seeks to exercise prudent risk management in
lending, including diversification by loan category and by industry segment, as
well as by identification of credit risks. The Corporation's lending activities
are performed by relationship managers organized by broad industry
classification. Based on Standard Industrial Classification ("SIC") codes, there
were no industry concentrations within the commercial loan category in excess of
10% of total loans at December 31, 1996, or at December 31, 1995.
First American's ten largest outstanding loan relationships at December 31,
1996, amounted to $215.5 million, or 3%, of total loans compared to $238.3
million, or 4%, of total loans, at year-end 1995. At December 31, 1996, the
largest loan relationship had $28.7 million outstanding, which compared to the
regulatory legal lending limit for FANB of $133.6 million at December 31, 1996.
First American had $739 thousand of international loans outstanding at
December 31, 1996, and $1.6 million at December 31, 1995. During both years,
such loans were principally related to foreign entities with operations in
Tennessee. Note 13 to the consolidated financial statements discusses
off-balance-sheet loan commitments and risks.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
In the normal course of business First American must manage the risk that
borrowers may default on their obligations to the Corporation. The allowance for
loan losses (the "allowance") is a reserve established and maintained to protect
the Corporation against estimated losses inherent in the loan portfolio. The
allowance is increased by the provision for loan losses (which is an expense on
the income statement) and through recoveries of previously written-off loans and
is decreased by charged-off loans. Management reviews the allowance at least
quarterly to ensure the level is adequate to absorb estimated losses.
The allowance consists of two portions: an allocated portion and an
unallocated portion. The allocated portion is established separately by risk
group as follows: commercial and commercial real estate loans, consumer loans,
and off-balance sheet commitments (unfunded loan commitments and standby letters
of credit). The processes applied to each group are similar, but have been
tailored as appropriate for the nature of risk in each group. The assessment of
the allocated portion of the allowance is based on a detailed statistical
analysis of historical loan balances, net chargeoffs, and off-balance sheet loan
and letter of credit commitments. Specific reserves are allocated to individual
loans as considered necessary based upon periodic reviews of significant lending
relationships.
The unallocated portion of the allowance is for inherent losses which
probably exist as of the valuation date even though they may not have been
identified by the more objective processes used for the allocated portion of the
allowance. This is due to the risk of error and/or inherent imprecision
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in the process. This portion of the allowance is particularly subjective and
requires judgments based upon qualitative factors which do not lend themselves
to exact mathematical calculations. Some of the factors considered are changes
in credit concentrations, loan mix, historical loss experience, and the general
economic environment in First American's markets.
While the total allowance is described as consisting of an allocated and an
unallocated portion, these terms are primarily used to describe a process. Both
portions are available to support inherent losses in the loan portfolio.
Using the guidelines outlined above, no provision was recognized by First
American during 1996. The primary factors contributing to this decision were the
continued favorable levels of asset quality as discussed under the caption
"Asset Quality" and relatively low net loan charge-off experience, which is
discussed below.
The allowance for loan losses was $123.3 million at December 31, 1996,
versus $132.4 million at December 31, 1995, and was 1.85% and 2.06% of net
loans, respectively. During the years ended December 31, 1996 and 1995, total
gross loan charge-offs were $31.4 million and $18.8 million, respectively. Total
recoveries during this same period amounted to $20.1 million and $15.1 million,
respectively, resulting in net charge-offs of $11.3 million in 1996 and $3.7
million in 1995. The ratio of net charge-offs to average loans was .17% in 1996
versus .07% in 1995. The allowance was increased during 1996 by $2.1 million of
loan loss reserves which were acquired as part of the First City acquisition.
Management anticipates an increase in net charge-offs in 1997 compared to 1996
principally due to increasing consumer-other loan balances and related
delinquencies and fewer recoveries. However, changes in economic conditions in
the markets in which First American operates could impact future charge-offs and
recoveries.
Of the major loan categories, consumer-other (which consists primarily of
automobile installment loans, student loans and credit card loans) had the
highest net charge-offs in both 1996 and 1995 with net charge-offs of $12.1
million, or .92%, of average consumer-other loans, and $6.8 million, or .61%,
respectively. At December 31, 1996, past due consumer-other loans were 1.24% of
total consumer-other loans compared to .99% at December 31, 1995. First American
generally charges off consumer loans on which principal or interest is past due
more than 120 days. Additionally, the Corporation generally charges off the
entire loan balance of consumers who declare bankruptcy.
Future provisions for loan losses depend on such factors as asset quality,
net loan charge-offs, loan growth, and other criteria as discussed above. The
appropriate level of the allowance for loan losses and the corresponding
provision will continue to be determined quarterly based on the allowance
assessment methodology. Under its current methodology, Management anticipates
that there will be a provision for loan losses in 1997; however, the specific
amount cannot be determined at this time. Changes in circumstances affecting the
various factors of the Corporation's methodology could affect whether a
provision is warranted in 1997 and, if so, the amount.
TABLE 7 presents a five-year recap of the activity in the allowance for
loan losses. The table also contains the year-end allocation of the allowance
for loan losses among the various loan portfolios and the unallocated portion of
the allowance for each of the past five years.
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ASSET QUALITY
Nonperforming assets include nonaccrual and restructured loans and
foreclosed properties. The ratio of nonperforming assets to total loans and
foreclosed properties was .36% at December 31, 1996, down 10 basis points from
.46% at December 31, 1995. Nonperforming assets totalled $23.7 million at
December 31, 1996 and consisted of $16.3 million of nonaccrual loans and $7.4
million of foreclosed properties. This compared to $29.4 million of
nonperforming assets at December 31, 1995, which was comprised of $18.7 million
of nonaccrual loans and $10.7 million of foreclosed properties. There were no
restructured loans during 1996 or 1995.
TABLE 8 summarizes changes in nonperforming assets for each of the past
five years and presents the composition of the nonperforming assets balance at
the end of each year.
Total past due loans, excluding nonaccrual loans, were 1.0% of total loans
at December 31, 1996, versus .87% at December 31, 1995. Loans under 90 days past
due at December 31, 1996, excluding nonaccrual loans, were .82% of total loans
compared to .77% at December 31, 1995. The increase in total past due loans was
primarily attributable to increases in delinquencies in the loan categories of
consumer-other and consumer amortizing mortgages.
Management believes the relatively low level of nonperforming assets is a
result of First American's commitment to maintaining strong underwriting
standards, its disciplined loan servicing, its adherence to existing credit
policies and procedures, and the favorable economic environment in which the
Corporation operates.
The Corporation had $51.7 million of outstanding loans at December 31,
1996, versus $67.2 million at December 31, 1995, which were not considered
nonperforming, but whose borrowers, in Management's opinion, are experiencing
financial difficulties severe enough that serious doubt exists as to their
continued ability to comply with the present terms of these loans. These loans,
in the future, could become nonperforming assets should the borrowers become
unable to comply fully with the present repayment terms.
DEPOSITS
Total deposits, First American's largest source of funding, averaged $7.38
billion during 1996, compared with $6.54 billion during 1995, an increase of
$838.2 million, or 13%. Average deposits increased during 1996, in part due to
the continued popularity of First American's money market deposit account, the
First American Investment Reserve ("FAIR") account. This account combines many
features common among money market mutual funds including a minimum opening
balance requirement of $1,000 and a competitive rate. FAIR account balances
averaged $2.16 billion in 1996, up $399.7 million, or 23%, from 1995. The FAIR
account is important to marketing and liquidity strategies in that it satisfies
a known customer need while providing First American a stable core source of
funding at rates favorable to many alternative sources of funding. On December
31, 1996, FAIR account balances outstanding were $2.25 billion and the stated
interest rate paid was 4.30%, resulting in a 4.40% annual percentage yield to
the depositor. Average deposits also increased during 1996 due to the $274.9
million increase in average balances of certificates of deposit under $100,000
to $1.68 billion during 1996 from $1.41 billion in 1995. The $274.9 million
increase was due
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primarily to $159.0 million of certificates of deposit under $100,000 acquired
as a result of the Charter acquisition and approximately $96.0 million acquired
as part of the First City acquisition.
First American's core deposit base, which consists of total deposits, less
certificates of deposit $100,000 and over and foreign deposits, averaged $6.58
billion, compared with $5.84 billion in 1995, or 89%, of total deposits for both
1995 and 1996. Core deposits were 73% of average earning assets during 1996 and
74% during 1995. Excluding the First City and Charter acquisitions, average core
deposits increased 1%. Core deposits provide a stable, low-cost source of funds
for the Corporation.
TABLE 9 details maturities of certificates of deposits $100,000 and over at
December 31, 1996 and 1995.
OTHER BORROWED FUNDS
In addition to deposits, other sources of funding utilized by First
American include short-term borrowings and long-term debt. Total short-term
borrowings include federal funds purchased from correspondent banks, securities
sold under agreements to repurchase, and other short-term borrowings,
principally funds due to the U.S. Treasury Department in tax and loan accounts.
Federal funds purchased and securities sold under repurchase agreements
averaged $864.9 million during 1996, a $72.9 million, or 9%, increase over the
previous year and were up $151.2 million at December 31, 1996 compared with
December 31, 1995. The year-end and average balance increases in federal funds
purchased and securities sold under repurchase agreements are primarily due to
increased balances of sweep repurchase agreements, in which customer demand
deposit account balances are swept into overnight interest-earning accounts.
Other short-term borrowings averaged $150.6 million during 1996 compared with
$100.0 million during 1995 and were $64.7 million greater at December 31, 1996,
than at December 31, 1995. The increase in average other short-term borrowings
was primarily from $54.0 million of Federal Home Loan Bank ("FHLB") borrowings
which were assumed as part of the Charter acquisition. The increase in the
period end balance was due to the reclassification of $37.0 million of FHLB
borrowings from long- to short-term and increases in demand notes due to the
U.S. Treasury.
Long-term debt averaged $356.8 million during 1996 compared to $292.4
million during 1995. The $64.4 million year-to-year average increase is due
mainly to $50.0 million of subordinated notes which were issued on December 18,
1995. Long-term debt decreased $90.6 million to $331.2 million as of December
31, 1996, from $421.8 million on December 31, 1995. Most of the decrease was due
to the repayment of $55.5 million of variable rate and $25.9 million of fixed
rate borrowings from the FHLB during 1996. At December 31, 1996, First
American's variable rate borrowings totalled $208.5 million with a weighted
average interest rate of 5.53%, and total fixed rate borrowings were $121.2
million with a weighted average interest rate of 6.46%.
OFF BALANCE SHEET 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
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use of noncomplex, non-leveraged derivative products has reduced the
Corporation's exposure to changes in the interest rate environment. By using
derivatives, 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 rate obligation to a fixed rate obligation), the
derivative products offset 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 its interest rate sensitivity while
continuing to meet the credit and deposit needs of customers.
In aggregate, many of First American's securities and loans with fixed
rates may be funded with variable rate money market deposits. Consequently, net
interest income can be negatively affected if short-term interest rates rise. To
reduce this exposure, the Corporation has entered into interest rate swaps on
which the Corporation pays a fixed rate and receives a variable rate tied to
three-month LIBOR. Thus, these swaps act to "fix" the rates paid on a portion of
the money market account balances for the period of time covered by the swaps,
which in turn reduces the potential negative impact on net interest income of
rising interest rates. Occasionally First American also utilizes short positions
in exchange-traded Eurodollar futures contracts that are the economic equivalent
of fixed-pay interest rate swaps. Note 13 to the consolidated financial
statements presents the derivative financial instruments outstanding at December
31, 1996 and 1995.
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 of payments exchanged are based on the
notional amounts and the other terms of the underlying derivative agreements. At
December 31, 1996, First American had interest rate swaps with notional values
totaling $1.00 billion and no outstanding futures contracts. At December 31,
1996, these derivatives had net positive fair values (unrealized net pretax
gains) of $3.3 million. At December 31, 1995, the Corporation had interest rate
swaps with notional values totaling $1.40 billion and futures contracts with
notional values of $140 million, with a total of $14.1 million of net negative
fair values (unrealized net pretax losses). For estimated fair value information
related to all financial instruments, see note 15 to the consolidated financial
statements.
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. NOTE 13 to the consolidated financial
statements presents the net deferred gain related to terminated derivative
contracts. The net deferred gain totalled $3.6 million at December 31, 1996, and
$.5 million at December 31, 1995. Deferred gains and losses on terminated
off-balance-sheet derivative contracts are recognized as interest income or
interest expense over the original covered periods. Of the $3.6 million of net
deferred gain at December 31, 1996, $1.0 million will increase net interest
income during 1997 and $2.6 million will be recognized in the years from 1998 to
2001.
Net interest income for the year ended December 31, 1996, included
derivative products net expense of $11.9 million, consisting of $3.8 million in
additional interest income on loans, $.2 million
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reduction in interest income on securities, $12.4 million additional interest
expense on money market deposits, and $3.1 million in additional interest
expense on long-term debt. This compares to $3.6 million of derivatives products
net pretax income in 1995. The change in derivative products net pretax income
in 1995 to net expense in 1996 was primarily due to the amortization of deferred
losses on terminated derivatives contracts.
All derivatives activity is conducted under close Management and Board of
Directors supervision and according to detailed policies and procedures
governing these activities. Policy prohibits the use of leveraged and complex
derivatives. The Board also sets interim limitations on the total notional
amount of derivatives contracts that may be outstanding at any time.
Off-balance-sheet derivative activities give rise to credit risk when
interest rate changes move in the Corporation's favor. In such cases, First
American relies on the ability of the contract counterparts to make contractual
payments over the remaining lives of the contracts. Credit risk exposure due to
off-balance-sheet derivative activities 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 December 31, 1996, all outstanding
derivative transactions were with counterparts with credit ratings of A-2 or
better. Enforceable bilateral netting contracts between First American and its
counterparts allow for the netting of gains and losses in determining net credit
exposure to that counterpart. First American's net credit exposure on
outstanding interest rate swaps was $4.8 million on December 31, 1996.
CAPITAL POSITION
Total shareholders' equity amounted to $868.7 million, or 8.35%, of total
assets at December 31, 1996, compared with $795.5 million, or 8.22%, of total
assets at December 31, 1995. The tangible equity ratio, which adjusts capital
for the impact of intangibles acquired through acquisitions, was 7.35% at
December 31, 1996 compared to 7.57% at December 31, 1995. Management's 1997
objective is to maintain the tangible equity ratio at or above 7%.
During 1996, shareholders' equity was increased by $85.9 million of
earnings retention ($121.6 million of net income less $35.7 million of
dividends), $12.6 million of common stock issued for employee benefit and
dividend reinvestment plans, and $46.3 million of common stock issued for the
acquisition of First City. Shareholders' equity was reduced by the $8.1 million
change in net unrealized gains and losses on securities available for sale, net
of tax, and by the repurchase of $67.6 million of common stock. In July 1996 the
First American Board of Directors authorized the repurchase of up to 1.5 million
shares of common stock to fund various employee benefit plans, the dividend
reinvestment plan, and potential future acquisitions. Since the authorization,
165,005 shares of common stock were repurchased through December 31, 1996.
THE CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY details the
changes in shareholders' equity during 1996, and NOTES 1 AND 4 to the
consolidated financial statements provide further information regarding
unrealized gains and losses on available for sale securities.
30
<PAGE> 33
During 1996, First American paid dividends at the rate of $1.21 per share,
up 14% from $1.06 per share during 1995. The dividend payout ratio (calculated
by dividing the dividend rate per share by net income per share) was 29% for
both 1996 and 1995.
The Federal Reserve Board and the Office of the Comptroller of the Currency
("OCC") promulgate risk-based capital guidelines and regulations for bank
holding companies and national banks which require minimum levels of capital
based upon calculations which apply various risk ratings to defined categories
of assets and to certain off-balance-sheet items. Under the risk-based capital
requirements, total capital consists of Tier I capital (essentially realized
common equity less disallowed intangible assets) plus Tier II capital
(essentially qualifying long-term debt and a portion of the allowance for loan
losses). Assets by type, or category, are assigned risk-weights of 0% to 100%,
depending on regulatory assigned levels of credit risk associated with such
assets. Off-balance-sheet items are considered in the calculation of
risk-adjusted assets through conversion factors established by regulatory
agencies. These items are assigned risk-weightings and are included in total
risk-adjusted assets.
These regulations require bank holding companies and national banks to
maintain certain minimum capital ratios. As of December 31, 1996, the
Corporation, its principal subsidiary, FANB, and First American National Bank of
Kentucky ("FANBKY") had ratios which exceeded the regulatory requirements to be
classified as "well capitalized," the highest regulatory capital rating. Table
10 summarizes the risk-based capital and related ratios for the Corporation and
FANB.
FAFSB is subject to capital requirements adopted by the Office of Thrift
Supervision ("OTS") which are similar but not identical to those issued by the
Federal Reserve Board and the OCC. As of December 31, 1996, FAFSB had ratios
which exceeded the regulatory requirements to be classified as "well
capitalized."
All of the First American shares exchanged in the Hartsville transaction
were repurchased during January 1997 in the open market. Following these
purchases, the Corporation continued to exceed all applicable regulatory capital
requirements.
LIQUIDITY
First American's goal in liquidity management is to ensure that sufficient
funds are available to meet the demands of depositors, borrowers and creditors.
Liquid assets, which include cash and cash equivalents (less Federal Reserve
Bank reserve requirements), money market instruments, and securities that mature
within one year, amounted to $1.22 billion, or 13%, of earning assets at
December 31, 1996 versus $1.09 billion, or 12%, of earning assets at December
31, 1995. In addition, securities available for sale maturing after one year,
which can be sold to meet liquidity needs, had a balance of $1.57 billion at
December 31, 1996. Since held to maturity securities are purchased with the
intent to hold them to maturity, such securities are generally a source of
liquidity only to the extent interest and principal payments are received
thereon. Notes 1 and 4 to the consolidated financial statements discuss
accounting for securities in further detail. Maturity of securities is also
discussed under the caption "Securities."
31
<PAGE> 34
The Corporation's primary sources of liquidity are core deposits (total
deposits, excluding certificates of deposit $100,000 and over and foreign
deposits), short- and long-term borrowings, and cash flow from operations. First
American's strategy is to fund assets to the maximum extent possible with core
deposits, which provide a sizable source of relatively stable and low-cost
funds. Core deposits totalled $6.80 billion, or 65%, of total assets at December
31, 1996, compared with $6.49 billion, or 67%, of total assets at December 31,
1995. Loans as a percentage of core deposits were 98% at December 31, 1996,
versus 99% at December 31, 1995.
Short-term funding needs can arise from declines in deposits or other
funding sources, drawdowns of loan commitments, and requests for new loans.
Relationships with a stable and growing customer base and a current network of
approximately 275 downstream correspondent banks routinely supply some of these
funds. Additional funds, if needed, can be raised from regional, national, and
international money markets. Short-term funding sources, comprised of non-core
deposits and short-term borrowings, totalled $2.15 billion, or 21%, of total
assets at December 31, 1996, compared with $1.83 billion, or 19%, at December
31, 1995. The increase of $311.7 million is primarily due to a $193.1 million
increase in securities sold under agreements to repurchase. An analysis of the
changes in short- and long-term borrowings can be found under the caption "Other
Borrowed Funds."
Shareholders' equity and long-term debt also contribute to liquidity by
reducing the need to continually rely on short-term purchased funds. At December
31, 1996, the ratio of equity to assets was 8.35% compared with 8.22% at
December 31, 1995. At the end of 1996, long-term debt totalled 3% of total
assets versus 4% of total assets at December 31, 1995.
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 1996.
The CONSOLIDATED STATEMENTS OF CASH FLOWS show net cash provided or used by
operating, investing, and financing activities and the net effect of those
activities on cash and cash equivalents. As such, it is a tool in analyzing
liquidity. During 1996, cash provided by operating activities was $261.6 million
compared to $111.6 million of cash provided by operations in 1995. The largest
component of cash provided by operating activities in both years was net income.
Investing activities utilized $257.1 million of cash in 1996 and $656.3 million
in 1995. The largest component of cash used in investing activities in 1996 was
purchases of securities available for sale, which utilized $1,460.2 million, and
the largest component in 1995 was loan growth, which utilized $851.0 million.
Financing activities provided $104.4 million in net cash in 1996 and $525.3
million in 1995. During 1996, financing activities included increases in
deposits of $83.4 million and short-term borrowings of $173.5 million and
reductions in advances from Federal Home Loan Bank of $64.2 million, as well as
cash utilized to purchase First American common stock.
Management believes that the Corporation has adequate liquidity to meet all
known commitments, including common stock repurchases, loan commitments,
dividend payments, debt service, and reasonable borrower, depositor and creditor
requirements over the next twelve months.
32
<PAGE> 35
IMPACT OF INFLATION
First American's asset and liability structure is substantially different
from that of an industrial company in that most of its assets and liabilities
are monetary in nature. Management believes the impact of inflation on financial
results depends upon the Corporation's ability to respond to changes in interest
rates and, by such response, reduce the inflationary impact on performance.
Interest rates do not necessarily move in the same direction, or at the same
magnitude, as the prices of other goods and services. As discussed previously,
Management seeks to manage the relationship between interest-sensitive assets
and liabilities in order to protect against wide interest rate fluctuations,
including those resulting from inflation.
EARNINGS PERFORMANCE FOR 1995 VERSUS 1994
Net income for 1995 was $103.1 million, or $3.64 per share, compared with
$97.2 million, or $3.39 per share, for 1994. ROA was 1.21% in 1995 and 1.25% in
1994, and ROE was 14.64% for 1995 and 15.09% for 1994. Net income for 1995 was
decreased by $7.5 million of acquisition expenses, net of tax, related to the
Heritage merger, or $.26 per share. Net income for 1994 was increased by a $6.1
million negative provision for loan losses, net of tax, or $.22 per share, and
reduced by $5.9 million of losses, net of tax, or $.21 per share, in the fourth
quarter on sales of securities available for sale. With these transactions
excluded in both years, net income increased 14% to $110.6 million in 1995, or
$3.90 per share, versus $97.0 million in 1994, or $3.38 per share; ROA was 1.29%
in 1995 versus 1.25% in 1994; ROE was 15.70% in 1995 and 15.06% during 1994.
Taxable equivalent net interest income increased $14.1 million, or 5%, to
$315.8 million in 1995 from $301.7 million in 1994. Total interest income on a
taxable equivalent basis amounted to $623.2 million for 1995 compared to $510.5
million in 1994, an increase of $112.7 million, or 22%. Of the $112.7 million
increase, $55.9 million was from a higher volume of earning assets (primarily
loans) and $56.8 million was due to an increase in average yields. Average
earning assets increased $779.3 million, or 11%, to $7.90 billion in 1995 from
$7.12 billion in 1994, while the average yield on earning assets increased 72
basis points during 1995 to 7.89% from 7.17% during 1994. Average loans
increased $741.0 million, or 15%, to $5.59 billion and average securities
increased $29.2 million, or 1%, to $2.19 billion.
Total interest expense for 1995 increased $98.6 million, or 47%, to $307.4
million from $208.8 million in 1994. Of the increase, $71.9 million resulted
from an increase in average interest rates paid on interest-bearing funds and
$26.7 million was due to an increase in the volume of interest-bearing
liabilities. Average interest-bearing liabilities increased $748.7 million, or
13%, to $6.61 billion in 1995 from $5.86 billion during 1994. Average
interest-bearing deposits increased $413.7 million, or 8%, to $5.43 billion;
average short-term borrowings increased $151.6 million, or 20%, to $892.0
million; and average long-term debt increased $183.4 million, or 168%, to $292.4
million. The average rate paid on interest-bearing liabilities increased 109
basis points to 4.65% in 1995 from 3.56% in 1994.
Net interest income in 1995 increased primarily as a result of the increase
in the volume of earning assets partially offset by a lower net interest spread.
The net interest spread decreased to 3.24% in 1995 from 3.61% in 1994. This 37
basis point rate decline reflects the 109 basis point
33
<PAGE> 36
increase in the rates paid on interest-bearing liabilities, which exceeded the
72 basis point increase in yields on earning assets.
The 1995 provision for loan losses of $83 thousand was recorded by Heritage
prior to its merger with First American. Aside from this provision, First
American recognized no provision for loan losses in 1995. The primary
contributing factors for this provision level in 1995 were the continued
favorable levels of asset quality and relatively low net loan charge-off
experience discussed below. During 1994, the allowance assessment process
produced a $9.9 million negative provision.
During the years ended December 31, 1995 and 1994, total loan charge-offs
were $18.8 million and $15.9 million, respectively, while total recoveries
amounted to $15.1 million and $18.0 million, respectively, resulting in net
charge-offs of $3.7 million in 1995 and net recoveries of $2.1 million in 1994.
The ratio of charge-offs to average loans was .07% in 1995 and the ratio of net
recoveries to average loans was .04% in 1994.
The allowance for loan losses was $132.4 million at December 31, 1995,
compared to $129.4 million at December 31, 1994. The $3.0 million increase in
the allowance during 1995 reflects a $.1 million provision for loan losses, $3.7
million of net loan charge-offs, and $6.6 million of allowance for loan losses
on Charter's financial statements as of the date of acquisition. The total
allowance for loan losses represented 2.06% of net loans at December 31, 1995,
compared to 2.50% at December 31, 1994. The ratio of nonperforming assets to
total loans and foreclosed properties was .46% at December 31, 1995, up slightly
from .42% at December 31, 1994.
Noninterest income of $108.5 million in 1995 increased $22.8 million, or
27%, from 1994. Noninterest income represented 26% of total revenues during 1995
compared to 22% in 1994. The increase in noninterest income in 1995 over 1994
was due in large part to losses on sales of securities available for sale during
the fourth quarter of 1994 when $85 million of securities available for sale
were sold at a $9.7 million loss in order to improve the Corporation's overall
interest sensitivity by reinvesting the proceeds of these depreciated securities
in higher yielding securities with shorter maturities. Also contributing to the
1995 increase in noninterest income were a $3.0 million gain on the sale of two
branches during 1995 and a $4.9 million, or 11%, increase in service charges on
deposit accounts. The increase in service charges on deposit accounts was
primarily due to 12% growth in the number of retail deposit accounts.
Noninterest expenses increased $13.1 million, or 5%, during 1995 to $252.4
million from $239.3 million in 1994. A significant portion of the increase was
due to $7.3 million of Heritage merger-related expenses. Also contributing to
the increase were salaries and employee benefits, which were up $8.3 million, or
6%, in 1995 primarily due to merit increases and higher incentive compensation.
FDIC insurance expense decreased $5.6 million to $8.0 million in 1995, down from
$13.6 million in 1994 due to a reduction in the assessment rate on a majority of
deposits for well-capitalized institutions.
Exclusive of the impact of $7.3 million of merger-related expenses on
noninterest expense, First American's 1995 productivity ratio improved to 57.79%
in 1995 versus 60.25% in 1994 (excluding the impact on noninterest income of the
$9.7 million of losses on securities available for sale realized in the fourth
quarter of 1994).
34
<PAGE> 37
Income tax expense in 1995 was $65.2 million which resulted in a 38.7%
effective tax rate. Income tax expense for 1994 was $57.4 million, for an
effective tax rate of 37.1% of pretax income. The lower effective tax rate for
1994 was attributable to a decrease of $1.3 million related to the net change in
the valuation allowance determined under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." The effective tax
rate for 1994 without regard to this item was 38.0% of pretax income.
35
<PAGE> 38
Table 2: Rate-Volume Recap
<TABLE>
<CAPTION>
================================================================================================================================
1996 from 1995 1995 from 1994
-------------------------------------- --------------------------------------
Increase (Decrease)* Increase (Decrease)*
Total Due to Total Due to
Increase -------------------- Increase -------------------
(in millions) (Decrease) Volume Rate (Decrease) Volume Rate
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Change in interest income:
Securities:
Taxable
Held to maturity $ (41.9) $ (41.9) $ - $ 12.9 $ 3.1 $ 9.8
Available for sale 47.5 47.1 .4 .8 (1.5) 2.3
Tax-exempt
Held to maturity .8 .8 - .1 .1 -
Available for sale - - - - - -
------------ -------
Total securities 6.4 5.6 .8 13.8 1.8 12.0
------------ -------
Loans 77.2 77.4 (.2) 96.2 57.4 38.8
Federal funds sold and securities purchased
under agreements to resell 2.7 3.6 (.9) 1.7 .1 1.6
Time deposits with other banks .1 (.1) .2 .2 .1 .1
Other 1.1 1.4 (.3) .8 .2 .6
------------ -------
Total change in interest income 87.5 85.1 2.4 112.7 55.9 56.8
------------ -------
Change in interest expense:
NOW, money market, and savings accounts 22.3 11.9 10.4 21.1 3.4 17.7
Certificates of deposit 17.7 19.1 (1.4) 38.4 10.6 27.8
Other interest-bearing deposits 4.1 4.1 - 6.0 1.6 4.4
Short-term borrowings .9 6.8 (5.9) 20.3 5.8 14.5
Long-term debt 5.0 4.4 .6 12.8 11.9 .9
------------ -------
Total change in interest expense 50.0 44.1 5.9 98.6 26.7 71.9
------------ -------
Change in net interest income $ 37.5 $ 41.0 $ (3.5) $ 14.1 $ 33.0 $(18.9)
===================================================================================================================================
</TABLE>
* Amounts are adjusted to a fully taxable basis, based on the statutory
federal income tax rates, adjusted for applicable state income taxes net of
the related federal tax benefit. The effect of volume change is computed by
multiplying the change in volume by the prior year rate. The effect of rate
change is computed by multiplying the change in rate by the prior year
volume. Rate/volume change is computed by multiplying the change in volume
by the change in rate and included in the rate change.
36
<PAGE> 39
Table 3: Consolidated Average Balance Sheets and Taxable Equivalent
Income/Expense and Yields/Rates
<TABLE>
<CAPTION>
========================================================================================================================
1996 1995
--------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Average
Average Income/ Yield/ Average Income/ Yield/
(dollars in millions) Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:*
Taxable securities:
Held to maturity $ 862.6 $ 56.6 6.56% $1,502.8 $ 98.5 6.55%
Available for sale 1,376.4 91.2 6.63 663.1 43.8 6.61
Tax-exempt securities
Held to maturity 32.2 2.4 7.34 20.9 1.5 7.18
Available for sale .8 - 5.32 .6 - 5.72
- ------------------------------------------------------------------------------------------------------------------------
Total securities 2,272.0 150.2 6.61 2,187.4 143.8 6.58
- ------------------------------------------------------------------------------------------------------------------------
Federal funds sold and repurchase agreements 139.4 7.5 5.41 79.9 4.8 6.02
Loans, net of unearned discount and net
deferred loan fees:
Commercial 2,876.2 240.4 8.36 2,527.3 213.0 8.43
Consumer-amortizing mortgages 1,774.3 140.4 7.91 1,479.1 117.0 7.91
Consumer-other 1,314.8 119.0 9.05 1,112.8 99.0 8.89
Real estate-construction 186.4 16.0 8.60 163.9 15.3 9.36
Real estate-commercial mortgages
and other 357.0 33.7 9.45 309.2 28.0 9.06
- ------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and
net deferred loan fees 6,508.7 549.5 8.44 5,592.3 472.3 8.45
- ------------------------------------------------------------------------------------------------------------------------
Other 57.0 3.4 5.90 39.1 2.3 5.64
- ------------------------------------------------------------------------------------------------------------------------
Total earning assets* 8,977.1 $710.6 7.92% 7,898.7 $623.2 7.89%
- ------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (131.4) (129.7)
Cash and due from banks 449.2 460.1
Other assets 429.0 325.0
- ------------------------------------------------------------------------------------------------------------------------
Total assets $9,723.9 $8,554.1
=====================================================================================================================
Deposits and borrowed funds:
Demand deposits $1,192.1 $1,112.9
Interest-bearing deposits:
NOW accounts 806.4 $ 15.9 1.97% 806.4 $ 16.1 2.00%
Money market accounts 2,201.9 106.9 4.86 1,805.8 82.7 4.58
Regular savings 339.3 7.9 2.32 404.5 9.6 2.38
Certificates of deposit under $100,000 1,681.8 87.4 5.20 1,406.9 72.8 5.17
Certificates of deposit $100,000 and over 687.6 38.3 5.58 607.0 35.3 5.82
Other time 362.0 20.6 5.69 303.8 16.9 5.57
Foreign 105.8 5.7 5.36 91.4 5.3 5.75
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,184.8 282.7 4.57 5,425.8 238.7 4.40
- ------------------------------------------------------------------------------------------------------------------------
Total deposits 7,376.9 6,538.7
Federal funds purchased and repurchase
agreements 864.9 41.5 4.80 792.0 42.6 5.38
Other short-term borrowings 150.6 8.1 5.36 100.0 6.2 6.18
Long-term debt 356.8 25.0 7.01 292.4 19.9 6.83
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits and
borrowed funds 7,557.1 $357.3 4.73% 6,610.2 $307.4 4.65%
- ------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowed funds 8,749.2 7,723.1
Other liabilities 144.3 126.7
Shareholders' equity 830.4 704.3
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $9,723.9 $8,554.1
=====================================================================================================================
Net interest income* $353.3 $315.8
Provision for loan losses - .1
Noninterest income 180.5 108.5
Noninterest expense 334.4 252.4
- ------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and
cumulative effect of changes in
accounting principles 199.4 171.8
Income tax expense 77.8 68.7
- ------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes
in accounting principles 121.6 103.1
Cumulative effect of changes in accounting
principles, net of tax - -
- ------------------------------------------------------------------------------------------------------------------------
Net income $121.6 $103.1
=====================================================================================================================
Net interest spread 3.19% 3.24%
Benefit of interest-free funding .75 .76
- ------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.94% 4.00%
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
===========================
1994
---------------------------
Average
Average Income/ Yield/
Balance Expense Rate
---------------------------
<S> <C> <C> <C>
(dollars in millions)
Interest-earning assets:*
Taxable securities:
Held to maturity $1,449.9 $ 85.6 5.90%
Available for sale 688.1 43.0 6.26
Tax-exempt securities
Held to maturity 19.8 1.4 7.07
Available for sale .4 - 5.63
- --------------------------------------------------------------------------------------
Total securities 2,158.2 130.0 6.02
- --------------------------------------------------------------------------------------
Federal funds sold and repurchase agreements 78.6 3.1 3.99
Loans, net of unearned discount and net
deferred loan fees:
Commercial 2,038.0 151.4 7.42
Consumer-amortizing mortgages 1,326.6 102.5 7.73
Consumer-other 1,028.4 84.4 8.21
Real estate-construction 113.6 9.1 8.00
Real estate-commercial mortgages 8.33
and other 344.7 28.7
- --------------------------------------------------------------------------------------
Loans, net of unearned discount and 7.75
net deferred loan fees 4,851.3 376.1
- --------------------------------------------------------------------------------------
Other 31.3 1.3 4.05
- --------------------------------------------------------------------------------------
Total earning assets* 7,119.4 $510.5 7.17%
- --------------------------------------------------------------------------------------
Allowance for loan losses (139.9)
Cash and due from banks 494.5
Other assets 311.8
- --------------------------------------------------------------------------------------
Total assets $7,785.8
======================================================================================
Deposits and borrowed funds:
Demand deposits $1,174.7
Interest-bearing deposits:
NOW accounts 877.9 $ 17.5 1.99%
Money market accounts 1,516.1 57.7 3.81
Regular savings 510.5 12.1 2.38
Certificates of deposit under $100,000 1,347.2 52.8 3.92
Certificates of deposit $100,000 and over 401.5 16.9 4.22
Other time 317.9 14.5 4.56
Foreign 41.0 1.7 4.04
- --------------------------------------------------------------------------------------
Total interest-bearing deposits 5,012.1 173.2 3.46
- --------------------------------------------------------------------------------------
Total deposits 6,186.8
Federal funds purchased and repurchase 3.80
agreements 681.2 25.8
Other short-term borrowings 59.2 2.7 4.51
Long-term debt 109.0 7.1 6.48
- --------------------------------------------------------------------------------------
Total interest-bearing deposits and
borrowed funds 5,861.5 $208.8 3.56%
- --------------------------------------------------------------------------------------
Total deposits and borrowed funds 7,036.2
Other liabilities 105.4
Shareholders' equity 644.2
- --------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $7,785.8
======================================================================================
Net interest income* $301.7
Provision for loan losses (9.9)
Noninterest income 85.7
Noninterest expense 239.3
- --------------------------------------------------------------------------------------
Income before income tax expense and
cumulative effect of changes in
accounting principles 158.0
Income tax expense 60.8
- --------------------------------------------------------------------------------------
Income before cumulative effect of changes
in accounting principles 97.2
Cumulative effect of changes in accounting
principles, net of tax -
- --------------------------------------------------------------------------------------
Net income $ 97.2
======================================================================================
Net interest spread 3.61%
Benefit of interest-free funding .63
- --------------------------------------------------------------------------------------
Net interest margin 4.24%
======================================================================================
</TABLE>
* Loan fees and amortization of net deferred loan fees (costs), which are
considered an integral part of the lending function and are included in yields
and related interest categories, amounted to $8.6 million in 1996, $6.3 million
in 1995, $4.8 million in 1994, $2.3 million in 1993, and $(.8) million in 1992.
Yields/rates and income/expense amounts are presented on a fully taxable
equivalent basis based on the statutory federal income tax rates, adjusted for
applicable state income taxes net of the related Federal tax benefit; related
interest income includes taxable equivalent adjustments of $3.6 million in 1996,
$3.5 million in 1995, $3.4 million in 1994, $4.0 million in
37
<PAGE> 40
<TABLE>
<CAPTION>
============================================================================================================================
1993 1992 Average Balance Income/Expense
5-Year 5-Year
Annual Annual
Average Average Compound Compound
Average Income/ Yield/ Average Income/ Yield/ % Change Growth Rate % Change Growth Rate
Balance Expense Rate Balance Expense Rate 1996/1995 1996/1991 1996/1995 1996/1991
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1,341.5 $ 82.7 6.16% $1,747.5 $130.5 7.47% (42.60)% (9.94)% (42.54)% (13.31)%
899.2 62.3 6.93 148.8 10.0 6.72 107.57 - 108.22 -
11.1 .8 7.21 6.5 .5 7.69 54.07 9.13 60.00 5.92
- - - - - - 33.33 - - -
- ----------------------------------------------------------------------------------------------------------------------------
2,251.8 145.8 6.47 1,902.8 141.0 7.41 3.87 8.99 4.45 5.05
- ----------------------------------------------------------------------------------------------------------------------------
152.1 4.9 3.24 261.7 10.0 3.82 74.47 (8.47) 56.25 (10.83)
1,773.6 120.6 6.81 1,739.5 121.0 6.95 13.81 8.72 12.86 7.60
1,059.4 88.7 8.37 847.8 81.2 9.58 19.96 16.70 20.00 9.87
936.3 80.7 8.62 914.3 86.9 9.50 18.15 6.20 20.20 2.81
110.3 8.8 7.99 158.4 12.7 8.03 13.73 (3.75) 4.58 (4.65)
334.5 27.0 8.06 384.5 33.2 8.65 15.46 (2.90) 20.36 (3.94)
- ----------------------------------------------------------------------------------------------------------------------------
4,214.1 325.8 7.73 4,044.5 335.0 8.28 16.39 8.51 16.35 5.55
- ----------------------------------------------------------------------------------------------------------------------------
54.0 1.8 3.32 178.1 7.0 3.91 45.78 (12.00) 47.83 (12.42)
- ----------------------------------------------------------------------------------------------------------------------------
6,672.0 $478.3 7.17% 6,387.1 $493.0 7.72% 13.65 7.94 14.02% 5.00%
- ----------------------------------------------------------------------------------------------------------------------------
(175.3) (188.7) 1.31 (7.22)
491.0 467.1 (2.37) 1.82
334.6 321.3 32.00 4.07
- ----------------------------------------------------------------------------------------------------------------------------
$7,322.3 $6,986.8 13.68% 7.74%
============================================================================================================================
$1,137.8 $1,049.7 7.12% 6.12%
793.5 $ 16.5 2.08% 682.4 $ 18.7 2.73% - 6.59 (1.24)% (7.90)%
1,411.7 47.2 3.35 1,429.9 48.3 3.38 21.93 8.74 29.26 6.02
487.1 12.9 2.65 416.6 14.3 3.43 (16.12) (.77) (17.71) (15.37)
1,397.4 56.8 4.06 1,525.5 78.7 5.16 19.54 (.25) 20.05 (5.80)
384.6 14.9 3.86 412.6 20.3 4.92 13.28 11.29 8.50 6.47
337.7 16.7 4.96 366.7 21.2 5.78 19.16 1.75 21.89 (2.85)
25.8 .7 2.74 19.3 .7 3.61 15.75 52.80 7.55 52.11
- ----------------------------------------------------------------------------------------------------------------------------
4,837.8 165.7 3.43 4,853.0 202.2 4.17 13.99 5.04 18.43 (.67)
- ----------------------------------------------------------------------------------------------------------------------------
5,975.6 5,902.7 12.82 5.21
587.1 15.5 2.64 519.5 16.3 3.14 9.20 13.59 (2.58) 10.58
49.8 1.6 3.19 20.2 .7 3.82 50.60 45.87 30.65 42.06
60.1 4.3 7.13 17.9 1.4 7.69 22.02 81.73 25.63 77.98
- ----------------------------------------------------------------------------------------------------------------------------
5,534.8 $187.1 3.38% 5,410.6 $220.6 4.08% 14.32 7.21 16.23% 2.22%
- ----------------------------------------------------------------------------------------------------------------------------
6,672.6 6,460.3 13.29 7.06
98.8 84.4 13.89 11.22
550.9 442.1 17.90 16.17
- ----------------------------------------------------------------------------------------------------------------------------
$7,322.3 $6,986.8 13.68% 7.74%
============================================================================================================================
$291.2 $272.4 11.87% 8.35%
(41.4) 39.2 (100.00) (100.00)
88.4 77.3 66.36 16.84
248.2 240.1 32.49 7.51
- ----------------------------------------------------------------------------------------------------------------------------
172.8 70.4 16.07 42.78
65.4 24.2 13.25 37.90
- ----------------------------------------------------------------------------------------------------------------------------
107.4 46.2 17.94 46.53
(.1) - - -
$107.3 $ 46.2 17.94% 46.53%
============================================================================================================================
3.79% 3.64%
.58 .62
- ----------------------------------------------------------------------------------------------------------------------------
4.37% 4.26%
============================================================================================================================
</TABLE>
1993, and $4.2 million in 1992. Nonaccrual and restructured loans are included
in average loans and average earning assets. Consequently, yields on these items
are lower than they would have been if these loans had earned at their
contractual rates of interest. For purposes of this schedule, average investment
securities prior to December 31, 1992 and related income have been classified as
held to maturity. Yields on all securities are computed based on carrying value.
38
<PAGE> 41
TABLE 4: INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
=============================================================================================================
Interest-Sensitive Periods
-------------------------------------------------------
Months
--------------------------------
Over Over
Three Six Total
Within Through Through One 1-5
(dollars in millions) Three Six Twelve Year Years
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
Earning assets:
Securities:
Available for sale $ 420.3 $ 77.5 $ 154.4 $ 652.2 $ 883.0
Held to maturity 156.2 51.1 106.3 313.6 441.9
- -------------------------------------------------------------------------------------------------------------
Total securities 576.5 128.6 260.7 965.8 1,324.9
Loans 2,711.9 398.8 647.6 3,758.3 2,439.4
Other earning assets 275.7 - - 275.7 -
- -------------------------------------------------------------------------------------------------------------
Total earning assets $ 3,564.1 $ 527.4 $ 908.3 $ 4,999.8 $3,764.3
=============================================================================================================
Interest-bearing liabilities:
Interest-bearing deposits:
NOW, money market, and savings accounts $ 3,429.1 $ - $ - $ 3,429.1 $ -
Certificates of deposit 909.1 553.5 554.1 2,016.7 534.7
Other interest-bearing deposits 233.6 34.0 46.2 313.8 116.9
- -------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 4,571.8 587.5 600.3 5,759.6 651.6
Other borrowed funds 1,249.1 19.6 65.8 1,334.5 42.0
- -------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,820.9 607.1 666.1 7,094.1 693.6
Net effect of swaps (100.0) - (400.0) (500.0) 500.0
- -------------------------------------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 5,720.9 $ 607.1 $ 266.1 $ 6,594.1 $1,193.6
=============================================================================================================
Interest-sensitivity gap:
For the indicated period $(2,156.8) $ (79.7) $ 642.2 $(1,594.3) $2,570.7
Cumulative (2,156.8) (2,236.5) (1,594.3) (1,594.3) 976.4
Cumulative, as a percent of total earning assets (22.83)% (23.67)% (16.88)% (16.88)% 10.33%
=============================================================================================================
DECEMBER 31, 1995
Earning assets:
Securities:
Available for sale $ 483.5 $ 34.8 $ 69.7 $ 588.0 $ 545.4
Held to maturity 158.8 66.3 180.5 405.6 446.1
- -------------------------------------------------------------------------------------------------------------
Total securities 642.3 101.1 250.2 993.6 991.5
Loans 2,456.9 312.1 547.9 3,316.9 2,305.7
Other earning assets 340.2 - - 340.2 -
- -------------------------------------------------------------------------------------------------------------
Total earning assets $ 3,439.4 $ 413.2 $ 798.1 $ 4,650.7 $3,297.2
=============================================================================================================
Interest-bearing liabilities:
Interest-bearing deposits:
NOW, money market, and savings accounts $ 3,220.4 $ - $ - $ 3,220.4 $ -
Certificates of deposit 841.2 567.4 518.3 1,926.9 501.7
Other interest-bearing deposits 221.7 28.5 58.1 308.3 157.0
- -------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 4,283.3 595.9 576.4 5,455.6 658.7
Other borrowed funds 1,177.5 - - 1,177.5 24.8
- -------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,460.8 595.9 576.4 6,633.1 683.5
Net effect of swaps (1,435.0) 200.0 400.0 (835.0) 835.0
- -------------------------------------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 4,025.8 $ 795.9 $ 976.4 $ 5,798.1 $1,518.5
=============================================================================================================
Interest-sensitivity gap:
For the indicated period $ (586.4) $ (382.7) $ (178.3) $(1,147.4) $1,778.7
Cumulative (586.4) (969.1) (1,147.4) (1,147.4) 631.3
Cumulative, as a percent of total earning assets (6.59)% (10.89)% (12.89)% (12.89)% 7.09%
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
==================================================================================
Interest-Sensitive
Periods
-----------------------
Over 5
(dollars in millions) Years Total
- ---------------------------------------------------------------------------
<S> <C> <C>
DECEMBER 31, 1996
Earning assets:
Securities:
Available for sale $ 143.1 $ 1,678.3
Held to maturity 79.0 834.5
- ---------------------------------------------------------------------------
Total securities 222.1 2,512.8
Loans 460.9 6,658.6
Other earning assets - 275.7
- ---------------------------------------------------------------------------
Total earning assets $ 683.0 $ 9,447.1
===========================================================================
Interest-bearing liabilities:
Interest-bearing deposits:
NOW, money market, and savings accounts $ - $ 3,429.1
Certificates of deposit 8.1 2,559.5
Other interest-bearing deposits .1 430.8
- ---------------------------------------------------------------------------
Total interest-bearing deposits 8.2 6,419.4
Other borrowed funds 108.0 1,484.5
- ---------------------------------------------------------------------------
Total interest-bearing liabilities 116.2 7,903.9
Net effect of swaps - -
- ---------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 116.2 $ 7,903.9
===========================================================================
Interest-sensitivity gap:
For the indicated period $ 566.8 $ 1,543.2
Cumulative 1,543.2 1,543.2
Cumulative, as a percent of total earning asset 16.33% 16.33%
===========================================================================
DECEMBER 31, 1995
Earning assets:
Securities:
Available for sale $ 69.1 $ 1,202.5
Held to maturity 79.3 931.0
- ---------------------------------------------------------------------------
Total securities 148.4 2,133.5
Loans 803.4 6,426.0
Other earning assets - 340.2
- ---------------------------------------------------------------------------
Total earning assets $ 951.8 $ 8,899.7
===========================================================================
Interest-bearing liabilities:
Interest-bearing deposits:
NOW, money market, and savings accounts $ - $3,220.4
Certificates of deposit 1.7 2,430.3
Other interest-bearing deposits - 465.3
- ---------------------------------------------------------------------------
Total interest-bearing deposits 1.7 6,116.0
Other borrowed funds 157.8 1,360.1
- ---------------------------------------------------------------------------
Total interest-bearing liabilities 159.5 7,476.1
Net effect of swaps - -
- ---------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 159.5 $ 7,476.1
===========================================================================
Interest-sensitivity gap:
For the indicated period $ 792.3 $ 1,423.6
Cumulative 1,423.6 1,423.6
Cumulative, as a percent of total earning asset 16.00% 16.00%
===========================================================================
</TABLE>
Each column includes earning assets and interest-bearing liabilities that are
estimated to mature or reprice within the respective time frame. All floating
rate balance sheet items are included as "within three months" regardless of
maturity. Non-earning assets (cash and due from banks, premises and equipment,
foreclosed properties, and other assets), noninterest-bearing liabilities
(demand deposits and other liabilities) and shareholders' equity are considered
to be noninterest-sensitive for purposes of this presentation and thus are not
included in the above table.
In the table, all NOW, money market, and savings accounts are reflected as
interest-sensitive within three months. NOW accounts, savings, and certain money
market accounts are not totally interest-sensitive in all interest rate
environments. If NOW and regular savings accounts were not considered
interest-sensitive, the one year cumulative net liability interest-sensitive gap
position and percent of earning assets would be $460.3 million and 4.87%,
respectively, for 1996, as compared to a net asset interest-sensitive gap
position and percent of earning assets of $41.2 million and .46%, respectively,
for 1995.
39
<PAGE> 42
TABLE 5: SECURITY PORTFOLIO ANALYSIS
<TABLE>
<CAPTION>
==========================================================================================================================
Estimated Maturity at December 31, 1996
-----------------------------------------------------------------------------------------
Total
Within 1 Year 1-5 Years 5-10 Years After 10 Years Amortized Cost
-----------------------------------------------------------------------------------------
(dollars in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:(1)
U.S. Treasury $ .1 5.25% $ .2 4.75% $ - - % $ - - % $ .3 4.92%
U.S. Gov. agencies and
corporations:
Mortgage-backed 255.5 6.68 297.8 6.96 1.5 6.39 .9 7.39 555.7 6.83
Other 80.9 4.97 18.1 5.38 - - - - 99.0 5.05
Obligations of state and
political subdivisions(2) 1.1 6.45 11.9 5.65 6.2 5.51 20.1 5.48 39.3 5.56
Other debt securities:
Mortgage-backed 40.6 6.67 98.4 6.84 - - - - 139.0 6.79
Other - - 1.2 8.38 - - - - 1.2 8.38
- --------------------------------------------------------------------------------------------------------------------------
Total debt securities
held to maturity $ 378.2 6.31% $ 427.6 6.83% $ 7.7 5.68% $ 21.0 5.56% $ 834.5(3) 6.55%
==========================================================================================================================
Securities available for sale(1)
U.S. Treasury $ 3.0 5.12% $ 248.9 6.01% $ - - % $ - - % $ 251.9 6.00%
U.S. Gov. agencies and
corporations:
Mortgage-backed 12.2 6.93 689.9 7.00 200.4 6.84 277.2 6.72 1,179.7 6.91
Other 51.4 5.36 11.2 5.49 5.0 6.34 - - 67.6 5.45
Other debt securities:
Mortgage-backed - - 135.9 6.70 - - - - 135.9 6.70
- --------------------------------------------------------------------------------------------------------------------------
Total debt securities
available for sale $ 66.6 5.64% $1,085.9 6.72% $205.4 6.83% $ 277.2 6.72% 1,635.1 6.69%
======================================================================================================== ==========
Total equity securities 50.6
--------
Total securities $1,685.7
available for sale ========
TOTAL SECURITIES:
Total debt securities $ 444.8 6.21% $1,513.5 6.75% $213.1 6.79% $298.2 6.64% $2,469.6 6.64%
======================================================================================================== ==========
Total equity securities 50.6
--------
Total securities $2,520.2
==========================================================================================================================
</TABLE>
<TABLE>
========================================================================
Estimated Maturity at December 31, 1996
---------------------------------------
Market Average Average
Value Maturity Repricing
-----------------------------
(dollars in millions) Amount Years Years
- -------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES HELD TO MATURITY:
U.S. Treasury $ .3 1.4 1.4
U.S. Gov. agencies and
corporations:
Mortgage-backed 556.4 1.4 1.4
Other 99.0 1.1 .3
Obligations of state and
political subdivisions 39.3 10.1 10.1
Other debt securities:
Mortgage-backed 139.0 1.9 1.9
Other 1.2 2.0 2.0
- -------------------------------------------------------------------
Total debt securities
held to maturity $ 835.2 1.9 1.7
===================================================================
Securities available for sale(1)
U.S. Treasury $ 250.6 4.7 4.7
U.S. Gov. agencies and
corporations:
Mortgage-backed 1,176.8 6.5 2.7
Other 67.4 1.0 1.0
Other debt securities:
Mortgage-backed 132.8 2.9 2.9
- -------------------------------------------------------------------
Total debt securities
available for sale $1,627.6 5.7 2.8
====================================== =====================
Total equity securities 50.6
--------
Total securities $1,678.2(3)
available for sale ========
TOTAL SECURITIES:
Total debt securities
$2,462.8 4.4 2.4
====================================== =====================
Total equity securities 50.6
--------
Total securities $2,513.4
===================================================================
</TABLE>
1 Yields on all securities were computed based on carrying value.
2 Yields presented on a taxable equivalent basis, based on the statutory
federal income tax rate, adjusted for applicable state income taxes net of
the related federal tax benefit.
3 Securities held to maturity were reported on the consolidated balance sheet
at amortized cost and securities available for sale were reported on the
consolidated balance sheet at fair value for a combined total of $2,512.8
million.
TABLE 6: MATURITIES OF LOANS, EXCLUSIVE OF CONSUMER LOANS
<TABLE>
<CAPTION>
Maturities at December 31, 1996
--------------------------------------------------------------
Within 1-5 After
(dollars in millions) 1 Year Years 5 Years Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial loans $1,158.2 $1,479.9 $ 372.0 $3,010.1
Real estate--construction loans 89.0 69.3 32.4 190.7
Real estate--commercial mortgages
and other 58.1 182.3 105.1 345.5
- --------------------------------------------------------------------------------------------------------
Total $1,305.3 $1,731.5 $ 509.5 $3,546.3
========================================================================================================
For maturities over one year:
Loans with fixed interest rates $1,029.9 $ 195.5 $1,225.4
Loans with floating interest rates 701.6 314.0 1,015.6
- --------------------------------------------------------------------------------------------------------
Total $1,731.5 $ 509.5 $2,241.0
========================================================================================================
</TABLE>
40
<PAGE> 43
TABLE 7: ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
===============================================================================================================================
Year Ended December 31
---------------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, January 1 $132,415 $129,436 $136,512 $183,446 $182,957
Loans charged off:
Commercial 8,822 3,070 3,933 10,509 28,147
Consumer--amortizing mortgages 730 313 401 1,365 3,283
Consumer--other 21,783 14,787 10,644 13,375 17,000
Real estate--construction - 555 - 594 2,462
Real estate--commercial mortgages and other 95 23 939 1,332 3,364
- -----------------------------------------------------------------------------------------------------------------------------
Total charge-offs 31,430 18,748 15,917 27,175 54,256
- -----------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 9,423 5,390 7,776 10,432 7,860
Consumer--amortizing mortgages 575 767 694 1,470 451
Consumer--other 9,685 8,032 8,611 7,611 6,789
Real estate--construction 5 380 143 128 198
Real estate--commercial mortgages and other 466 502 802 709 198
- -----------------------------------------------------------------------------------------------------------------------------
Total recoveries 20,154 15,071 18,026 20,350 15,496
- -----------------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 11,276 3,677 (2,109) 6,825 38,760
- -----------------------------------------------------------------------------------------------------------------------------
Change in allowance due to subsidiaries purchased 2,126 6,573 323 1,296 -
Provision charged (credited) to operating expenses - 83 (9,919) (41,405) 39,249
Adjustment for change in fiscal year of pooled company - - 411 - -
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $123,265 $132,415 $129,436 $136,512 $183,446
=============================================================================================================================
Allocation of allowance for loan losses, end of year:
Commercial $ 40,263 $ 41,604 $ 38,596 $ 35,366 $ 74,013
Consumer loans 22,738 18,621 21,420 32,649 44,425
Real estate 5,451 6,478 11,579 16,095 22,636
Unallocated/general 54,813 65,712 57,841 52,402 42,372
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $123,265 $132,415 $129,436 $136,512 $183,446
=============================================================================================================================
Net charge-offs (recoveries) as a percent of average loans, net .17 % .07 % (.04)% .16 % .96 %
Allowance to net loans (end of year) 1.85 % 2.06 % 2.50 % 2.92 % 4.52 %
=============================================================================================================================
Percent of total year-end loans:
Commercial 45.2 % 43.9 % 44.2 % 41.9 % 42.9 %
Consumer--amortizing mortgages 26.7 27.8 26.7 27.7 23.1
Consumer--other 20.0 19.9 20.4 21.0 22.4
Real estate--construction 2.9 2.9 2.6 2.4 2.8
Real estate--commercial mortgages and other 5.2 5.5 6.1 7.0 8.8
- -----------------------------------------------------------------------------------------------------------------------------
100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
=============================================================================================================================
</TABLE>
TABLE 8: NONPERFORMING ASSET ACTIVITY
<TABLE>
<CAPTION>
=============================================================================================================================
Year Ended December 31
--------------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1 $ 29,353 $ 21,765 $ 42,450 $ 91,686 $145,923
Transfers in and new foreclosed properties 16,112 21,294 14,676 40,658 79,204
Change in nonperforming assets due to subsidiaries purchased 39 3,091 208 199 -
Payments received (11,605) (11,549) (15,592) (58,107) (59,136)
Sales of foreclosed properties (3,129) (3,605) (9,379) (15,767) (29,030)
Charge-offs and writedowns (5,889) (1,133) (2,300) (9,834) (37,773)
Return to earning status (1,187) (510) (7,150) (6,644) (7,916)
Other - - (969) 259 414
Adjustment for change in fiscal year for pooled company - - (179) - -
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $ 23,694 $ 29,353 $ 21,765 $ 42,450 $ 91,686
=============================================================================================================================
-------------------------------------------------------------
December 31
-------------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $ 16,331 $ 18,670 $ 11,674 $ 22,944 $ 61,085
Restructured loans - - - - 455
- -----------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 16,331 18,670 11,674 22,944 61,540
Foreclosed properties 7,363 10,683 10,091 19,506 30,146
- -----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 23,694 $ 29,353 $ 21,765 $ 42,450 $ 91,686
=============================================================================================================================
Nonperforming assets to total loans plus foreclosed properties* .36 % .46 % .42 % .91 % 2.24 %
=============================================================================================================================
90 days or more past due on accrual $ 11,711 $ 6,123 $ 4,530 $ 4,764 $ 7,434
=============================================================================================================================
</TABLE>
* Excludes loans 90 days or more past due on accrual.
41
<PAGE> 44
TABLE 9: CERTIFICATES OF DEPOSIT $100,000 AND OVER
<TABLE>
<CAPTION>
======================================================================================================
Maturities at December 31
--------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
3 months or less $516,211 $383,531
Over 3 through 6 months 165,261 177,934
Over 6 through 12 months 141,535 121,149
Over 12 months 70,787 67,877
- ------------------------------------------------------------------------------------------------------
Total $893,794 $750,491
======================================================================================================
</TABLE>
TABLE 10: RISK-BASED CAPITAL AND RELATED RATIOS
<TABLE>
<CAPTION>
===================================================================================================================================
"Well Capitalized" First American National
Minimum Corporation Bank
--------------------------- ----------------------------
December 31 (dollars in thousands) Regulatory Ratio 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CAPITAL COMPONENTS
Tier I capital:
Realized shareholders' common equity $ 873,292 $ 792,002 $ 853,386 $ 720,904
Less disallowed intangibles (107,223) (62,842) (82,370) (36,701)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Tier I capital 766,069 729,160 771,016 684,203
- -----------------------------------------------------------------------------------------------------------------------------------
Tier II capital:
Allowable allowance for loan losses 98,825 91,882 94,557 87,821
Unsecured holding company debt 99,361 99,280 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total Tier II capital 198,186 191,162 94,557 87,821
- -----------------------------------------------------------------------------------------------------------------------------------
Total capital $ 964,255 $ 920,322 $ 865,573 $ 772,024
===================================================================================================================================
Risk-adjusted assets $7,881,542 $7,310,022 $7,538,564 $6,984,533
Quarterly average assets 9,720,114 9,018,365 9,189,499 8,672,790
===================================================================================================================================
CAPITAL RATIOS *
Tier I risk-based capital ratio 6.00 % 9.72 % 9.97 % 10.23 % 9.80 %
Total risk-based capital ratio 10.00 12.23 12.59 11.48 11.05
Tier I leverage ratio 5.00 7.88 8.09 8.39 7.89
===================================================================================================================================
</TABLE>
* Risk-based capital ratios were computed using realized equity (total
shareholders' equity exclusive of net unrealized gains (losses) on
securities available for sale, net of tax).
42
<PAGE> 45
TABLE 11: QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
===========================================================================================================================
Three Months Ended
------------------------------------------------------------------
(dollars in thousands except per share amounts) December 31 September 30 June 30 March 31
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996
Net interest income $91,362 $ 89,291 $85,227 $83,818
Net interest income, taxable equivalent basis* 92,258 90,223 86,131 84,686
Provision for loan losses - - - -
Noninterest income 59,349 57,719 31,456 32,009
Noninterest expense 97,169 103,177 66,421 67,688
Net income 33,464 27,419 30,889 29,800
- ---------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Net income $ 1.13 $ .93 $ 1.04 $ 1.01
Cash dividends paid .31 .31 .31 .28
Common stock price
High 58.75 48.25 45.63 48.50
Low 47.75 40.75 42.13 42.38
Last trade 57.63 48.00 42.13 44.50
- ---------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS:
Return on average assets (annualized) 1.35 % 1.11 % 1.28 % 1.26 %
Return on average equity (annualized) 15.48 12.97 15.05 15.08
Net interest margin 4.06 3.96 3.87 3.85
===========================================================================================================================
1995
Net interest income $79,812 $ 77,410 $77,425 $77,663
Net interest income, taxable equivalent basis* 80,692 78,288 78,276 78,505
Provision for loan losses - 24 28 31
Noninterest income 31,919 26,606 25,562 24,400
Noninterest expense 68,190 60,174 61,729 62,355
Net income 24,336 27,713 25,768 25,263
- ---------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Net income $ .86 $ .99 $ .91 .88
Cash dividends paid .28 .28 .25 .25
Common stock price
High 50.25 44.25 36.00 34.38
Low 42.13 35.88 33.25 26.88
Last trade 47.38 43.13 35.88 33.50
- ---------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS:
Return on average assets (annualized) 1.06 % 1.27 % 1.24 % 1.26 %
Return on average equity (annualized) 13.12 15.79 14.88 14.86
Net interest margin 3.82 3.87 4.07 4.26
===========================================================================================================================
</TABLE>
* Adjusted to a taxable equivalent basis based on the statutory federal
income tax rates, adjusted for applicable state income taxes net of the
related federal tax benefit.
43
<PAGE> 46
TABLE 12: CONSOLIDATED YEAR-END BALANCE SHEETS
<TABLE>
<CAPTION>
=======================================================================================================================
December 31
--------------------------------------------------------------------
(in thousands) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 603,456 $ 494,496 $ 513,916 $ 515,122 $ 694,460
Securities:
U.S. Treasury and other U.S. Government
agencies and corporations 2,149,813 1,813,782 2,116,371 2,144,726 2,044,919
Obligations of states and political
subdivisions 39,303 32,788 21,730 21,573 9,552
Other 323,663 287,007 195,230 37,409 46,040
- -----------------------------------------------------------------------------------------------------------------------
Total securities 2,512,779 2,133,577 2,333,331 2,203,708 2,100,511
- -----------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 161,677 291,042 28,134 153,860 123,450
Loans:
Commercial
Commercial and industrial 2,263,070 2,157,164 1,734,783 1,446,781 1,286,503
For purchasing or carrying securities 59,463 57,386 32,921 41,098 43,128
Financial institutions 61,315 68,106 77,113 98,462 92,353
Other domestic loans 625,538 539,559 444,112 373,716 326,622
International 739 1,612 623 - 170
- -----------------------------------------------------------------------------------------------------------------------
Total commercial loans 3,010,125 2,823,827 2,289,552 1,960,057 1,748,776
- -----------------------------------------------------------------------------------------------------------------------
Consumer
Amortizing mortgages 1,782,630 1,784,836 1,385,081 1,295,307 941,594
Installment 999,118 1,046,615 870,451 801,820 718,101
Single payment 18,432 14,272 17,185 21,747 30,711
Open end 317,200 221,034 168,307 159,900 163,437
- -----------------------------------------------------------------------------------------------------------------------
Total consumer loans 3,117,380 3,066,757 2,441,024 2,278,774 1,853,843
- -----------------------------------------------------------------------------------------------------------------------
Real estate
Construction 190,673 186,655 134,513 112,353 116,459
Commercial mortgages and other 345,466 354,918 316,242 330,983 361,419
- -----------------------------------------------------------------------------------------------------------------------
Total real estate loans 536,139 541,573 450,755 443,336 477,878
- -----------------------------------------------------------------------------------------------------------------------
Total loans 6,663,644 6,432,157 5,181,331 4,682,167 4,080,497
Unearned discount and net deferred loan fees 5,047 6,181 9,365 12,596 20,943
- -----------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net
deferred loan fees 6,658,597 6,425,976 5,171,966 4,669,571 4,059,554
Allowance for loan losses 123,265 132,415 129,436 136,512 183,446
- -----------------------------------------------------------------------------------------------------------------------
Total net loans 6,535,332 6,293,561 5,042,530 4,533,059 3,876,108
- -----------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 162,257 129,419 111,075 109,320 110,228
Foreclosed properties 7,363 10,683 10,091 19,506 30,146
Other assets 416,604 328,851 239,650 173,206 321,895
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,399,468 $ 9,681,629 $ 8,278,727 $ 7,707,781 $ 7,256,798
=======================================================================================================================
LIABILITIES
Deposits:
Demand (noninterest-bearing) $ 1,374,528 $ 1,266,285 $ 1,252,136 $ 1,240,543 $ 1,133,321
Time, NOW, savings, money market 6,321,192 5,971,048 4,995,343 4,878,033 4,850,846
Foreign 97,257 144,961 60,300 31,975 34,601
- -----------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 7,792,977 7,382,294 6,307,779 6,150,551 6,018,768
- -----------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold
under agreements to repurchase 939,740 788,569 855,618 664,826 588,950
Other short-term borrowings 214,632 149,718 74,222 91,937 19,629
Long-term debt 331,157 421,791 271,473 77,053 18,477
Other liabilities 252,255 143,725 101,962 99,852 107,075
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 9,530,761 8,886,097 7,611,054 7,084,219 6,752,899
- -----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock 148,158 147,699 143,625 139,574 134,998
Capital surplus 157,792 162,254 130,933 128,195 124,331
Retained earnings 569,851 483,973 409,638 336,648 246,816
Deferred compensation on restricted stock (2,066) (1,263) (2,161) (1,851) (1,073)
Employee Stock Ownership Plan (443) (661) (781) (1,053) (1,173)
Net unrealized gains (losses) on securities
available for sale, net of tax (4,585) 3,530 (13,581) 22,049 -
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 868,707 795,532 667,673 623,562 503,899
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,399,468 $ 9,681,629 $ 8,278,727 $ 7,707,781 $ 7,256,798
=======================================================================================================================
</TABLE>
44
<PAGE> 47
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in Item 14(a)(1) and (2) are included in
this Report beginning on page 56 and are incorporated in this Item 8 by
reference. The table "Quarterly Financial Data" on page 43 hereof,
"Consolidated Year-End Balance Sheets" on page 44 hereof, and "Consolidated
Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates"
on pages 37-38 hereof are incorporated in this Item 8 by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers of the Registrant
The following is a list of the Corporation's executive officers, their
ages and their positions and offices during the last five years (listed
alphabetically).
<TABLE>
<CAPTION>
Officer Age Business Experience - Past 5 years
- ------- --- ----------------------------------
<S> <C> <C>
Dennis C. Bottorff 52 Mr. Bottorff serves as Chairman, President and
Chief Executive Officer of the Corporation and as
Chairman and Chief Executive Officer of FANB. From
November 1991 until January 1994, Mr. Bottorff also
served as President of FANB. Mr. Bottorff also
serves as a director of SSI.
Melissa J. Buffington 39 Since August 1996, Ms. Buffington has served as
Executive Vice President and Director of Human
Resources of the Corporation and FANB. From June
1985 through June 1992, she was a Financial Analyst
for NationsBank and certain of its predecessors.
From June 1992 though June 1993, she served as
Assistant Director of Strategic Planning for FANB.
From June 1993 through August 1996, she served as
the Corporation's Director of Quality Management,
which included a supervisory role over Employee
Relations.
R. Booth Chapman 56 Since September 1991, Mr. Chapman has served as
Executive Vice President - Independent Loan Review
of FANB.
</TABLE>
45
<PAGE> 48
<TABLE>
<S> <C> <C>
Brian L. Cooper 38 Mr. Cooper is Executive Vice President - Marketing
of FANB and has served in such capacity since
September 1995. From August 1985 until March 1992,
he was a First Vice President of Security Pacific
Bank. From March 1992 through August 1995, he
served as Senior Vice President -- Marketing &
Electronic Banking of Banc One Corporation (Western
Region).
Emery F. Hill 53 Mr. Hill is Executive Vice President - Operations
and Technology of FANB and has served in this
position since March 1992. He served as Group
Executive Officer of Information Management with
NationsBank from September 1991 until March 1992.
Carroll E. Kimball 34 Ms. Kimball is Executive Vice President - Director
of Investor Relations of the Corporation and
Executive Vice President - Strategic Planning,
Asset Liability Management, and Investor Relations
of FANB and has served in such capacity since March
1995. From January 1991 until January 1992, she
served in the Finance Department of C&S/Sovran
Corporation. Since January 1992, she has served in
Strategic Planning and Investor Relations areas of
FANB.
Rufus B. King 51 Mr. King is Executive Vice President and Chief
Credit Officer of FANB and has served in such
position since July 1989.
Michael Kruklinski 31 Mr. Kruklinski is Senior Vice President and
Director of Business Process Innovations of FANB
and has served in such position since August 1996.
From 1993 through 1995, he served, at various
times, as Manager of Internal Auditing and Manager
of Strategic Planning as Siemens AG. From 1995
until August 1996, he served as a Senior
Consultant/Project Manager at Siemens Corporation.
John W. Logan 54 Mr. Logan is Executive Vice President -
Investments of the Corporation and FANB and has
served in such position since 1991.
Robert A. McCabe, Jr. 46 Mr. McCabe is President - FAE and Vice Chairman of
the Board of Directors of the Corporation and
FANB. From January 1992 until January 1994, he
served as President, General Bank of FANB. From
March 1991 until January
</TABLE>
46
<PAGE> 49
<TABLE>
<S> <C> <C>
1992 he served as President, Corporate Bank of
FANB. Mr. McCabe serves as a director of SSI and
INVEST.
Dale W. Polley 47 Mr. Polley serves as Vice Chairman of the Board of
Directors of the Corporation and also serves as
President of FANB. From November 1992 through 1994, he
also served as Principal Financial Officer of the
Corporation and FANB. From December 1991 until January
1994, he served as Vice Chairman and Chief
Administrative Officer of the Corporation and FANB and,
from November 1992 through 1994, also served as
Principal Financial Officer of the Corporation and
FANB.
Mary Neil Price 36 Ms. Price is Executive Vice President and Deputy
General Counsel of the Corporation and FANB and has
served in such capacity since July 1996. From January
1992 though November 1992, she was a partner with the
Nashville law firm of Dearborn & Ewing. From November
1992 through October 1993, she was Associate General
Counsel and Vice President of FANB. From October 1993
through February 1995, she served as Associate General
Counsel and Senior Vice President of FANB. From
February 1995 through July 1996, she served as Senior
Vice President and Senior Counsel of FANB. She is also
Assistant Corporate Secretary of the Corporation and
FANB and the corporate secretary and a director of
INVEST.
Martin E. Simmons 57 Mr. Simmons is Executive Vice President -
Administration, Secretary, Principal Financial Officer,
Corporate Secretary, and General Counsel of the
Corporation and FANB. From August 1992 until January
1994, he served as Executive Vice President, Secretary
and General Counsel of the Corporation and FANB. From
1973 to August 1992, Mr. Simmons was a partner with the
Nashville law firm of Dearborn & Ewing. Mr. Simmons
also serves as a director of INVEST.
Terry S. Spencer 40 Mr. Spencer serves as Executive Vice President and
Treasurer of the Corporation and as Executive
Vice President of FANB. From September 1993 until
March 1995, he served as Executive Vice
President-Development of FANB. From December 1991
until September 1993, he served as Senior Vice
President-Director of Strategic Planning of FANB.
</TABLE>
47
<PAGE> 50
<TABLE>
<S> <C> <C>
Claire W. Tucker 44 Ms. Tucker is President, Corporate Bank of FANB
and has served in such capacity since January
1997. From August 1991 through January 1995,
she served as Manager of FANB's Health Care and
Manufacturers Divisions and Senior Vice
President. From January 1995 through January
1997, she served as the Manager of FANB's
Specialized Lending Group and was appointed
Executive Vice President in April 1995.
M. Terry Turner 42 Mr. Turner serves as President - General Bank of
FANB and has served in this position since
January 1994. He served as Executive Vice
President - Business and Professional Banking of
FANB from January 1991 until January 1994.
Marvin J. Vannatta, Jr. 53 Mr. Vannatta serves as Executive Vice President
and Principal Accounting Officer of the
Corporation and FANB and as Cashier of FANB.
From April 1994 until March 1995, he served as
Senior Vice President, Principal Accounting
Officer and Treasurer of the Corporation. From
January 1994 until March 1995, Mr. Vannatta
served as Senior Vice President and as the
Cashier of FANB. From 1981 until January 1994,
he served in various capacities, including
Senior Vice President, Controller and Cashier
of FANB.
</TABLE>
The additional information required by Item 405 of Regulation S-K is
contained in the Corporation's Notice of 1997 Annual Meeting of Shareholders
and Proxy Statement (the "1997 Proxy Statement") filed with the Securities and
Exchange Commission within 120 days of the Corporation's year-end pursuant to
Regulation 14A. Such information appears in the sections entitled "Election of
Directors" and "Reports of Beneficial Ownership" in the 1997 Proxy Statement
and is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
This information appears in the sections entitled "Executive
Compensation", "Human Resources Committee Interlocks and Insider
Participation", "Compensation of Directors" and "Retirement Plans" in the 1997
Proxy Statement, and is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information appears in the section entitled "Security Ownership of
Management" in the 1997 Proxy Statement, and is incorporated herein by
reference.
48
<PAGE> 51
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information appears in the sections entitled "Certain Transactions"
and "Human Resources Committee Interlocks and Insider Participation" in the
1997 Proxy Statement, and is incorporated herein by reference.
49
<PAGE> 52
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
The Report of KPMG Peat Marwick LLP, Independent
Certified Public Accountants
Consolidated Income Statements of First American Corporation
and Subsidiaries for the three years ended December 31, 1996,
1995, and 1994
Consolidated Balance Sheets of First American Corporation and
Subsidiaries at December 31, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity of
First American Corporation and Subsidiaries for the three
years ended December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows of First American
Corporation and Subsidiaries for the three years ended
December 31,1996, 1995, and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial
Statements or the notes thereto.
The following reports and consents are submitted herewith:
Accountants' Consent by
KPMG Peat Marwick LLP -- Exhibit 23
50
<PAGE> 53
<TABLE>
3. Exhibits
<S> <C>
Exhibit
Number Description
------- --------------
3.1 Restated Charter of the Corporation effective January
13, 1997, included herein.
3.2 By-Laws of the Corporation currently in effect as
amended January 16, 1997, included herein.
4.1 The Corporation agrees to provide the Securities and
Exchange Commission, upon request, copies of instruments
defining the rights of holders of long-term debt of the
Corporation, and all of its subsidiaries for which
consolidated or unconsolidated financial statements are
required to be filed with the Securities and Exchange
Commission.
4.2 Rights Agreement, dated December 14, 1988, between
First American Corporation and First American Trust
Company, N.A. (previously filed as Exhibit 1 to a Current
Report on Form 8-K dated December 14, 1988, and
incorporated herein by reference).
4.3(a) Indenture, dated as of April 22, 1993, between First
American Corporation and Chemical Bank, as Trustee
(previously filed as Exhibit 4.1 to Registration
Statement No. 33-59844 and incorporated herein by
reference).
4.3(b) Supplemental Indenture, dated as of April 22, 1993, between
First American Corporation and Chemical Bank, as
Trustee (previously filed as Exhibit 4.2 to Registration
Statement No. 33-59844 and incorporated herein by
reference).
10.3(a) First American STAR Award Plan (previously
filed as Exhibit 10.03(b) to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1986
and incorporated herein by reference).
10.3(b) First American Corporation 1991 Employee
Stock Incentive Plan (previously filed as part of the
Corporation's Notice of Annual Meeting and Proxy Statement
dated March 18, 1991 for the annual meeting of
shareholders held April 18, 1991, and amended as of April
21, 1994, and incorporated herein by reference).
</TABLE>
51
<PAGE> 54
<TABLE>
<S> <C>
10.3(c) 1993 Non-Employee Director Stock Option Plan
(previously filed as part of the Corporation's Notice
of Annual Meeting and Proxy Statement dated March 18, 1993
for the annual meeting of shareholders held April 15, 1993
and incorporated herein by reference).
10.3(d) First American Corporation 1992 Executive
Early Retirement Program (previously filed as Exhibit
10.4(a) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated
herein by reference).
10.3(e) First American Corporation Directors'
Deferred Compensation Plan as amended on October 18,
1996, included herein.
10.3(f) First American Corporation Supplemental Executive
Retirement Program dated as of January 1, 1989
(previously filed as Exhibit 19.2 to the Corporation's
Annual Report on Form 10-K for the year ended December 31,
1992 and incorporated herein by reference).
10.3(g) Form of Deferred Compensation Agreement approved by the
Human Resources Committee of the Board of Directors of
the Corporation on December 19, 1996, included herein and
entered into by the Corporation and Dennis C. Bottorff and
Brian L. Cooper.
10.3(h) Restated and Amended First American Corporation First
Incentive Reward Savings Thrift Plan (previously filed
as Exhibit 4 to Registration Statement No. 33-57385 filed
January 20, 1995 and incorporated herein by reference).
10.3(i) Form of Key Employee Change in Control Agreement
by and between the Corporation and certain of its
Executive Officers (previously filed as Exhibit 10.3(j)
to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by
reference).
11 Calculation of earnings per share is included in Note
1 to the consolidated financial statements contained
herein on page 60 and incorporated herein by reference.
13 First American Corporation's Annual Report to
Shareholders for the fiscal year ended December 31,
1996. Such report, except for the portions included
herein, is furnished for the information of the
</TABLE>
52
<PAGE> 55
Securities and Exchange Commission and is not "filed" as
part of this Report.
21 List of Subsidiaries included herein.
23 Consent of KPMG Peat Marwick LLP, independent auditors
included herein.
27 Financial Data Schedule included herein (for SEC use only).
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
(b) No reports on Form 8-K were filed during the last quarter of 1996.
53
<PAGE> 56
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 55
Financial Statements:
Consolidated Income Statements of First American Corporation
and Subsidiaries for the three years ended December 31, 1996,
1995, and 1994 56
Consolidated Balance Sheets of First American Corporation and
Subsidiaries at December 31, 1996 and 1995 57
Consolidated Statements of Changes in Shareholders' Equity of
First American Corporation and Subsidiaries for the three
years ended December 31,1996, 1995, and 1994 58
Consolidated Statements of Cash Flows of First American
Corporation and Subsidiaries for the three years ended
December 1996, 1995, and 1994 59
Notes to Consolidated Financial Statements 60
Supplemental Data:
Consolidated Average Balance Sheets and Taxable Equivalent
Income/Expense and Yields/Rates for the five years ended
December 31, 1996, 1995, 1994, 1993 and 1992 37
Consolidated Year-End Balance Sheets of First American
Corporation and Subsidiaries at December 31, 1996, 1995, 1994,
1993 and 1992 44
</TABLE>
54
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
First American Corporation:
We have audited the accompanying consolidated balance sheets of First
American Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated income statements, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
American Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
-------------------------------------------
KPMG Peat Marwick LLP
Nashville, Tennessee
January 16, 1997
55
<PAGE> 58
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED INCOME STATEMENTS
First American Corporation and Subsidiaries
- -------------------------------------------
Year Ended December 31
-----------------------------------------
(dollars in thousands except per share amounts) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 546,803 $ 469,449 $ 373,163
Interest and dividends on securities 149,426 143,299 129,510
Interest on federal funds sold and securities purchased under
agreements to resell 7,536 4,811 3,108
Interest on time deposits with other banks and other interest 3,284 2,140 1,255
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 707,049 619,699 507,036
- ----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 15,885 16,128 17,477
Money market accounts 106,961 82,648 57,695
Regular savings 7,865 9,624 12,126
Certificates of deposit under $100,000 87,422 72,742 52,817
Certificates of deposit $100,000 and over 38,348 35,329 16,943
Other time and foreign 26,260 22,196 16,147
- ----------------------------------------------------------------------------------------------------------------------
Total interest on deposits 282,741 238,667 173,205
- ----------------------------------------------------------------------------------------------------------------------
Interest on short-term borrowings (note 8) 49,617 48,751 28,529
Interest on long-term debt (note 9) 24,993 19,971 7,060
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 357,351 307,389 208,794
- ----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 349,698 312,310 298,242
PROVISION FOR LOAN LOSSES (NOTE 5) -- 83 (9,919)
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 349,698 312,227 308,161
- ----------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 57,586 48,545 43,605
Commissions and fees on fiduciary activities 17,899 16,571 16,252
Investment services income (note 1) 60,948 10,358 9,490
Merchant discount fees 3,616 3,279 2,834
Trading account revenue (loss) 1,576 373 (327)
Net realized gain (loss) on sales and writedowns of securities (note 4) 2,467 737 (9,997)
Gain on sales of branches (note 2) -- 3,000 --
Other income 36,441 25,624 23,858
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest income 180,533 108,487 85,715
- ----------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits (note 10) 167,376 143,909 135,616
Net occupancy expense (note 6) 25,933 21,874 21,556
Equipment expense 17,452 15,686 15,094
FDIC insurance expense (note 14) 10,389 7,974 13,607
Systems and processing expense (note 6) 14,755 11,389 9,856
Communication expense 12,183 9,863 8,557
Marketing expense 13,133 9,153 8,363
Supplies expense 5,402 4,471 3,749
Foreclosed properties expense (income), net (4,401) (6,070) (5,732)
Merger-related expenses (note 2) -- 7,269 --
Subscribers' commissions (note 1) 35,075 -- --
Other expenses 37,158 26,930 28,604
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 334,455 252,448 239,270
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 195,776 168,266 154,606
Income tax expense (note 11) 74,204 65,186 57,404
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 121,572 $ 103,080 $ 97,202
======================================================================================================================
PER COMMON SHARE:
Net income $ 4.11 $ 3.64 $ 3.39
Dividends declared 1.21 1.06 .88
======================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 29,592 28,315 28,670
======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
56
<PAGE> 59
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
First American Corporation and Subsidiaries
December 31
---------------------------
(dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks (note 3) $ 603,456 $ 494,496
Time deposits with other banks 53,801 26,733
Securities (note 4):
Held to maturity (market value $835,192 and $933,911, respectively) 834,547 931,084
Available for sale (amortized cost $1,685,743 and $1,196,414, respectively) 1,678,232 1,202,493
- ----------------------------------------------------------------------------------------------------------------
Total securities 2,512,779 2,133,577
- ----------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under agreements to resell 161,677 291,042
Trading account securities 60,210 22,419
Loans (note 5):
Commercial 3,010,125 2,823,827
Consumer--amortizing mortgages 1,782,630 1,784,836
Consumer--other 1,334,750 1,281,921
Real estate--construction 190,673 186,655
Real estate--commercial mortgages and other 345,466 354,918
- ----------------------------------------------------------------------------------------------------------------
Total loans 6,663,644 6,432,157
Unearned discount and net deferred loan fees 5,047 6,181
- ----------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net deferred loan fees 6,658,597 6,425,976
Allowance for loan losses 123,265 132,415
- ----------------------------------------------------------------------------------------------------------------
Total net loans 6,535,332 6,293,561
- ----------------------------------------------------------------------------------------------------------------
Premises and equipment, net (note 6) 162,257 129,419
Foreclosed properties 7,363 10,683
Other assets (notes 7, 10, and 11) 302,593 279,699
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 10,399,468 $ 9,681,629
================================================================================================================
LIABILITIES
Deposits:
Demand (noninterest-bearing) $ 1,374,528 $ 1,266,285
NOW accounts 830,269 811,862
Money market accounts 2,295,112 2,031,796
Regular savings 303,691 376,725
Certificates of deposit under $100,000 1,665,675 1,679,792
Certificates of deposit $100,000 and over 893,794 750,491
Other time 332,651 320,382
Foreign 97,257 144,961
- ----------------------------------------------------------------------------------------------------------------
Total deposits 7,792,977 7,382,294
================================================================================================================
Short-term borrowings (note 8) 1,154,372 938,287
Long-term debt (note 9) 331,157 421,791
Other liabilities (note 10) 252,255 143,725
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 9,530,761 8,886,097
- ----------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 6, 10, 13, and 14)
SHAREHOLDERS' EQUITY (NOTES 2, 4, 9, 10, 12, AND 14)
Preferred stock, without par value; authorized 2,500,000 shares -- --
Common stock, $5 par value; authorized 50,000,000 shares; issued:
29,631,499 shares at December 31,1996; 29,539,819 shares at
December 31, 1995 148,158 147,699
Capital surplus 157,792 162,254
Retained earnings 569,851 483,973
Deferred compensation on restricted stock (2,066) (1,263)
Employee stock ownership plan obligation (443) (661)
- ----------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 873,292 792,002
Net unrealized gains (losses) on securities available for sale, net of tax (4,585) 3,530
================================================================================================================
TOTAL SHAREHOLDERS' EQUITY 868,707 795,532
================================================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,399,468 $ 9,681,629
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE> 60
<TABLE>
<CAPTION>
===============================================================================================================
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
First American Corporation and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------
Deferred
Compensation
on
Common Capital Retained Restricted
(dollars in thousands except per share amounts) Stock Surplus Earnings Stock
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $ 139,574 $ 128,195 $ 336,648 $(1,851)
Issuance of 112,582 common shares in connection with
Employee Benefit Plan, net of discount on Dividend
Reinvestment Plan (note 10) 562 1,338 -- --
Issuance of 48,289 shares of restricted common stock
(note 10) 241 1,272 -- (1,425)
Amortization of deferred compensation on restricted stock -- -- -- 1,014
Reduction in employee stock ownership plan obligation
(note 10) -- -- -- --
Four-for-three stock split of pooled company 3,224 (2) (3,222) --
Net income -- -- 97,202 --
Cash dividends declared ($.88 per common share) -- -- (22,968) --
Cash dividends declared by pooled company -- -- (1,129) --
Change in net unrealized gains (losses) on securities
available for sale, net of tax (note 4) -- -- -- --
Adjustment for change in fiscal year of pooled company
(note 2) 24 74 3,107 101
Tax benefit from stock option and award plans -- 56 -- --
==========================================================================================================
BALANCE, DECEMBER 31, 1994 143,625 130,933 409,638 (2,161)
==========================================================================================================
Issuance of 678,578 common shares in connection with
Employee Benefit Plan, net of discount on Dividend
Reinvestment Plan (note 10) 3,393 10,302 -- --
Issuance of 16,095 shares of restricted common stock
(note 10) 81 498 -- (492)
Repurchase of 1,645,158 shares of common stock (note 12) (8,226) (54,121) -- --
Issuance of 1,765,235 common shares for purchase of
Charter Federal (note 2) 8,826 71,547 -- --
Amortization of deferred compensation on restricted stock -- -- -- 1,390
Reduction in employee stock ownership plan obligation
(note 10) -- -- -- --
Net income -- -- 103,080 --
Cash dividends declared ($1.06 per common share) -- -- (27,883) --
Cash dividends declared by pooled company -- -- (908) --
Change in net unrealized gains (losses) on securities
available for sale, net of tax (note 4) -- -- -- --
Tax benefit from stock option and award plans -- 3,095 -- --
Other -- -- 46 --
==========================================================================================================
BALANCE, DECEMBER 31, 1995 147,699 162,254 483,973 (1,263)
==========================================================================================================
Issuance of 452,366 common shares in connection with
Employee Benefit Plan, net of discount on Dividend
Reinvestment Plan (note 10) 2,262 10,293 -- --
Issuance of 46,488 shares of restricted common stock
(note 10) 232 1,958 -- (2,190)
Repurchase of 1,480,336 shares of common stock (note 12) (7,402) (60,200) -- --
Issuance of 1,073,759 common shares for purchase of
First City Bancorp, Inc. (note 2) 5,369 40,937 -- --
Amortization of deferred compensation on restricted stock -- -- -- 1,387
Reduction in employee stock ownership plan obligation
(note 10) -- -- -- --
Net income -- -- 121,572 --
Cash dividends declared ($1.21 per common share) -- -- (35,694) --
Change in net unrealized gains (losses) on securities
available for sale, net of tax (note 4) -- -- -- --
Tax benefit from stock option and award plans -- 2,568 -- --
Other (2) (18) -- --
==========================================================================================================
BALANCE, DECEMBER 31, 1996 $ 148,158 $ 157,792 $ 569,851 $(2,066)
==========================================================================================================
<CAPTION>
Net
Unrealized
Employee Gains
Stock (Losses) on
Ownership Securities
Plan Available
(dollars in thousands except per share amounts) Obligation for Sale Total
============================================================================================
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $(1,053) $ 22,049 $ 623,562
Issuance of 112,582 common shares in connection with
Employee Benefit Plan, net of discount on Dividend
Reinvestment Plan (note 10) -- -- 1,900
Issuance of 48,289 shares of restricted common stock
(note 10) -- -- 88
Amortization of deferred compensation on restricted stock -- -- 1,014
Reduction in employee stock ownership plan obligation
(note 10) 212 -- 212
Four-for-three stock split of pooled company -- -- --
Net income -- -- 97,202
Cash dividends declared ($.88 per common share) -- -- (22,968)
Cash dividends declared by pooled company -- -- (1,129)
Change in net unrealized gains (losses) on securities
available for sale, net of tax (note 4) -- (35,630) (35,630)
Adjustment for change in fiscal year of pooled company
(note 2) 60 -- 3,366
Tax benefit from stock option and award plans -- -- 56
============================================================================================
BALANCE, DECEMBER 31, 1994 (781) (13,581) 667,673
============================================================================================
Issuance of 678,578 common shares in connection with
Employee Benefit Plan, net of discount on Dividend
Reinvestment Plan (note 10) -- -- 13,695
Issuance of 16,095 shares of restricted common stock
(note 10) -- -- 87
Repurchase of 1,645,158 shares of common stock (note 12) -- -- (62,347)
Issuance of 1,765,235 common shares for purchase of
Charter Federal (note 2) -- -- 80,373
Amortization of deferred compensation on restricted stock -- -- 1,390
Reduction in employee stock ownership plan obligation
(note 10) 120 -- 120
Net income -- -- 103,080
Cash dividends declared ($1.06 per common share) -- -- (27,883)
Cash dividends declared by pooled company -- -- (980)
Change in net unrealized gains (losses) on securities
available for sale, net of tax (note 4) -- 17,111 17,111
Tax benefit from stock option and award plans -- -- 3,095
Other -- -- 46
============================================================================================
BALANCE, DECEMBER 31, 1995 (661) 3,530 795,532
============================================================================================
Issuance of 452,366 common shares in connection with
Employee Benefit Plan, net of discount on Dividend
Reinvestment Plan (note 10) -- -- 12,555
Issuance of 46,488 shares of restricted common stock
(note 10) -- -- --
Repurchase of 1,480,336 shares of common stock (note 12) -- -- (67,602)
Issuance of 1,073,759 common shares for purchase of
First City Bancorp, Inc. (note 2) -- -- 46,306
Amortization of deferred compensation on restricted stock -- -- 1,387
Reduction in employee stock ownership plan obligation
(note 10) 218 -- 218
Net income -- -- 121,572
Cash dividends declared ($1.21 per common share) -- -- (35,694)
Change in net unrealized gains (losses) on securities
available for sale, net of tax (note 4) -- (8,115) (8,115)
Tax benefit from stock option and award plans -- -- 2,568
Other -- -- (20)
============================================================================================
BALANCE, DECEMBER 31, 1996 $ (443) $ (4,585) $ 868,707
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
<CAPTION>
===============================================================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
First American Corporation and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
-----------------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 121,572 $ 103,080 $ 97,202
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses -- 83 (9,919)
Write-downs on foreclosed properties 114 239 70
Depreciation and amortization of premises and equipment 16,044 14,538 14,606
Amortization of intangible assets 9,577 4,152 3,937
Other amortization (accretion), net 750 (4,218) (874)
Deferred income tax expense 23,082 18,005 10,366
Net realized (gain) loss on sales and write-downs of securities (2,467) (737) 9,997
Net (gain) loss on sales and write-downs of premises and equipment 118 (287) (262)
Gain on sales of branches -- (3,000) --
Change in assets and liabilities, net of effects from acquisitions and
sales of branches:
(Increase) decrease in accrued interest receivable 8,242 (25,116) (6,895)
Increase (decrease) in accrued interest payable (8,507) 20,591 10,637
(Increase) decrease in trading account securities (29,772) (13,802) 3,646
(Increase) decrease in other assets 23,298 (4,160) (39,964)
Increase (decrease) in other liabilities 99,530 2,199 (6,579)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 261,581 111,567 85,968
- -------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net increase in time deposits with other banks (26,530) (18,925) (1,660)
Proceeds from sales of securities available for sale 733,054 1,108,411 1,418,380
Proceeds from maturities of securities available for sale 373,150 187,449 164,085
Purchases of securities available for sale (1,460,227) (839,869) (1,106,865)
Proceeds from maturities of securities held to maturity 215,373 273,922 214,211
Purchases of securities held to maturity (116,107) (203,729) (842,053)
Net (increase) decrease in federal funds sold and securities purchased
under agreements to resell 164,554 (262,908) 119,726
Acquisitions, net of cash acquired (21,036) 2,979 (1,784)
Sales of branches, net of cash sold -- (24,451) --
Increase in loans, net of repayments and sales (75,806) (850,998) (481,656)
Proceeds from sales of premises and equipment 5,434 1,413 6,411
Purchases of premises and equipment (48,920) (29,567) (21,518)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (257,061) (656,273) (532,723)
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 83,436 599,568 101,811
Net increase (decrease) in short-term borrowings 173,469 (101,142) 173,077
Proceeds from issuance of long-term debt -- 49,513 --
Advances from (repayments to) Federal Home Loan Bank (64,166) 52,724 208,061
Net repayment of other long-term debt (126) (1,116) (14,076)
Other -- -- 36
Issuance of common shares under Employee Benefit and Dividend
Reinvestment Plans 12,555 13,782 1,988
Repurchase of common stock (67,602) (62,347) --
Tax benefit related to stock options 2,568 3,095 56
Cash dividends paid (35,694) (28,791) (24,097)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 104,440 525,286 446,856
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and due from banks 108,960 (19,420) 101
Adjustment for change in fiscal year of pooled company -- -- (1,307)
Cash and due from banks, beginning of year 494,496 513,916 515,122
- -------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of year $ 603,456 $ 494,496 $ 513,916
===============================================================================================================================
Cash paid during the year for:
Interest expense $ 367,297 $ 286,798 $ 198,002
Income taxes 51,041 37,129 56,619
Non-cash investing activities:
Foreclosures 1,548 4,133 2,008
Reclassification of investment securities (note 4) -- 693,968 203,764
Stock issued for acquisitions (note 2) 46,306 80,373 --
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF OPERATIONS
First American Corporation ("Corporation") is the Nashville-based parent
company of First American National Bank ("FANB"), First American National Bank
of Kentucky ("FANBKY"), First American Federal Savings Bank ("FAFSB"), and
First American Enterprises, Inc. The Corporation's bank and thrift
subsidiaries operate 168 offices and make commercial, consumer, and real estate
loans and provide various banking and mortgage-related services to its
customers located within the Corporation's market, which consists primarily of
Tennessee and selected markets in Virginia, Kentucky and other adjacent states.
FANB owns 98.3% of the issued and outstanding capital stock of INVEST
Financial Corporation ("INVEST"), headquartered in Tampa, Florida, which is
engaged in the distribution of securities and investment products to customers
of subscribing financial institutions located throughout the country.
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements of the Corporation have been
prepared in conformity with generally accepted accounting principles including
general practices of the banking industry.
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries more than 50 percent owned. Subsidiaries not
more than 50 percent owned are recorded under the equity method. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Prior period financial statements have been restated for the
effect of acquisitions accounted for as a pooling-of-interests. The
consolidated financial statements for prior periods also reflect certain
reclassifications to conform to current presentation.
SECURITIES
The Corporation classifies investments in equity securities that have a
readily determinable fair value and investments in debt securities into three
categories: held to maturity debt securities, trading securities, and
securities available for sale.
Classification of a debt security as held to maturity is based on the
Corporation's positive intent and ability to hold such security to maturity.
Securities held to maturity are stated at cost adjusted for amortization of
premiums and accretion of discounts, unless there is a decline in value which
is considered to be other than temporary, in which case the cost basis of such
security is written down to fair value and the amount of the write-down is
included in earnings.
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Securities that are bought and held principally for the purpose of selling
them in the near term are classified as trading account securities, which are
valued at fair value with unrealized gains and losses included in earnings.
Gains or losses on sales and adjustments to fair value of trading account
securities are included in noninterest income in the consolidated income
statements.
Securities classified as available for sale, which are reported at fair
value with unrealized gains and losses excluded from earnings and reported, net
of tax, in a separate component of shareholders' equity, include all securities
not classified as trading account securities or securities held to maturity.
These include securities used as part of the Corporation's asset/liability
strategy which may be sold in response to changes in interest rates, prepayment
risk, the need or desire to increase capital, and other similar factors. Gains
or losses on sale of securities available for sale are recognized at the time
of sale (trade date), based upon specific identification of the security sold,
and are included in noninterest income in the consolidated income statements.
Declines in value that are considered other than temporary are recorded in
noninterest income as a loss on investment securities.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation enters into interest rate swap, forward interest rate
swap, and basis swap transactions (swaps), as well as futures contracts, in
connection with its asset/liability management program in managing interest
rate exposure arising out of non-trading assets and liabilities. The impact of
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 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.
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.
LOANS
Loans are stated at the principal amount outstanding. Unearned discount,
deferred loan fees net of loan acquisition costs, and the allowance for loan
losses are shown as reductions of loans. Loan origination and commitment fees
and certain loan-related costs are being deferred and the net amount amortized
as an adjustment of the related loan's yield over the contractual life of the
loan. Unearned discount represents the unamortized amount of finance charges,
principally related to
61
<PAGE> 64
certain installment loans. Interest income on most loans is accrued based on
the principal amount outstanding. Interest income on installment loans which
have unearned discounts is recognized primarily by the sum-of-the-month's
digits method.
The Corporation adopted, on a prospective basis effective January 1, 1995,
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures." These
pronouncements apply to impaired loans except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment including credit card, residential mortgage, and consumer
installment loans. The adoption of the pronouncements had no material impact
on the Corporation's consolidated financial statements.
A loan is impaired when it is probable that the Corporation will be unable
to collect the scheduled payments of principal and interest due under the
contractual terms of the loan agreement. Impaired loans are measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than the recorded investment in the loan, the Corporation shall
recognize an impairment by creating a valuation allowance with a corresponding
charge to the provision for loan losses or by adjusting an existing valuation
allowance for the impaired loan with a corresponding charge or credit to the
provision for loan losses.
The Corporation's consumer loans are divided into various groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment and, thus, not subject to the provisions of SFAS Nos. 114 and 118.
Substantially all other loans of the Corporation are evaluated for impairment
under the provisions of SFAS Nos. 114 and 118.
The Corporation considers all loans on nonaccrual status to be impaired.
Commercial loans are placed on nonaccrual status when doubt as to timely
collection of principal or interest exists, or when principal or interest is
past due 90 days or more unless such loans are well-secured and in the process
of collection. Delays or shortfalls in loan payments are evaluated along with
various other factors to determine if a loan is impaired. Generally,
delinquencies under 90 days are considered insignificant unless certain other
factors are present which indicate impairment is probable. The decision to
place a loan on nonaccrual status is also based on an evaluation of the
borrower's financial condition, collateral, liquidation value, and other
factors that affect the borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status, all interest
accrued and uncollected on the loan in the current fiscal year is reversed from
income, and all interest accrued and uncollected from the prior year is charged
off against the allowance for loan losses. Thereafter, interest on nonaccrual
loans is recognized as interest income only to the extent that cash is received
and future collection of principal is not in doubt. If the collectibility of
outstanding principal is doubtful, such interest received is applied as a
reduction of principal. A nonaccrual loan may be restored to an accruing status
when principal and interest are no longer past due and unpaid and future
collection of principal and interest on a timely basis is not in doubt.
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<PAGE> 65
Loans not on nonaccrual status are classified as impaired in certain cases
when there is inadequate protection by the current net worth and financial
capacity of the borrower or of the collateral pledged, if any. In those cases,
such loans have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt, and if such deficiencies are not corrected, there is a
probability that the Corporation will sustain some loss. In such cases,
interest income continues to accrue as long as the loan does not meet the
Corporation's criteria for nonaccrual status.
Generally, the Corporation also classifies as impaired any loans the terms
of which have been modified in a troubled debt restructuring after January 1,
1995. Interest is generally accrued on such loans that continue to meet the
modified terms of their loan agreements.
The Corporation's charge-off policy for impaired loans is similar to its
charge-off policy for all loans in that loans are charged off in the month when
they are considered uncollectible. Consumer loans on which interest or
principal is past due more than 120 days are charged off.
ALLOWANCE FOR LOAN LOSSES
The provision for loan losses represents a charge (credit) to earnings
necessary, after loan charge-offs and recoveries, to maintain the allowance for
loan losses at an appropriate level which is adequate to absorb estimated
losses inherent in the loan portfolio. Such estimated losses arise primarily
from the loan portfolio but may also be derived from other sources, including
commitments to extend credit and standby letters of credit. The level of the
allowance for loan losses is determined on a quarterly basis using procedures
which include: (1) categorizing commercial and commercial real estate loans
into risk categories to estimate loss probabilities based primarily on the
historical loss experience of those risk categories; (2) analyzing significant
commercial and commercial real estate credits and calculating specific reserves
as necessary; (3) assessing various homogeneous consumer loan categories to
estimate loss probabilities based primarily on historical loss experience; (4)
reviewing unfunded commitments; and (5) considering various other factors, such
as changes in credit concentrations, loan mix, and economic conditions which
may not be specifically quantified in the loan analysis process.
The allowance for loan losses consists of an allocated portion and an
unallocated, or general, portion. The allocated portion is maintained to cover
estimated losses applicable to specific segments of the loan portfolio. The
unallocated portion is maintained to absorb losses which probably exist as of
the evaluation date but are not identified by the more objective processes used
for the allocated portion of the allowance for loan losses due to risk of error
or imprecision. While the total allowance consists of an allocated portion and
an unallocated portion, these terms are primarily used to describe a process.
Both portions of the allowance are available to provide for inherent loss in
the entire portfolio.
The allowance for loan losses is increased (decreased) by provisions for
loan losses charged (credited) to expense and is reduced (increased) by loans
charged off net of recoveries on loans previously charged off. The provision
for loan losses is based on management's determination of the amount of the
allowance necessary to provide for estimated loan losses based on its
evaluation of the loan portfolio. Determining the appropriate level of the
allowance and the amount of the provision
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<PAGE> 66
for loan losses involves uncertainties and matters of judgment and therefore
cannot be determined with precision.
FORECLOSED PROPERTIES
Foreclosed properties include property acquired in situations in which the
Corporation has physical possession of a debtor's assets (collateral)
regardless of whether formal foreclosure proceedings have taken place.
Foreclosed properties are valued at the lower of cost or fair value minus
estimated costs to sell. The fair value of the assets is the amount that the
Corporation could reasonably expect to receive for them in a current sale
between a willing buyer and a willing seller, that is, other than in a forced
or liquidation sale. Cost includes loan principal, foreclosure expense, and
expenditures for subsequent improvements. The excess of cost over fair value
minus estimated costs to sell at the time of foreclosure is charged to the
allowance for loan losses. Subsequent write-downs to fair value minus
estimated costs to sell are included in foreclosed properties expense.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization, which is computed principally on the straight-line method
based on the estimated useful lives or the lease terms, whichever is shorter.
LONG-LIVED ASSETS
On January 1, 1996, the Corporation adopted SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
of." SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by the Corporation be reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. Measurement of an impairment loss for long-lived
assets and identifiable intangibles that an entity expects to hold and use is
based on the fair market value of the asset. The statement requires that the
majority of long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of carrying amount or fair value less cost
to sell. The adoption of this statement had no effect on the consolidated
financial statements.
INTANGIBLES
For acquisitions accounted for as purchases, the net assets have been
adjusted to their estimated fair values as of the respective acquisition dates.
The value of core deposit rights and the excess of the purchase price of
subsidiaries over net assets acquired (goodwill) are being amortized on a
straight-line basis over periods ranging from ten to twenty years. Core
deposit rights and the excess of the purchase price of subsidiaries over net
assets acquired, net of amounts amortized, are included in other assets in the
consolidated balance sheets.
The carrying value of the excess of the purchase price of subsidiaries
over net assets acquired will be reviewed if the facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill will
not be recoverable, as determined based on the undiscounted cash flows
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<PAGE> 67
of an entity acquired over the remaining amortization period, the Corporation's
carrying value of the goodwill will be reduced by the estimated shortfall
discounted of cash flows.
The Corporation adopted, on a prospective basis January 1, 1996, SFAS No.
122, "Accounting for Mortgage Servicing Rights, an Amendment of FASB Statement
No. 65." SFAS No. 122 requires a mortgage banking enterprise to recognize as
separate assets the rights to service mortgage loans for others regardless of
how those servicing rights are acquired (as part of purchased or originated
loans). The total cost of the mortgage loan is allocated between the loan and
the servicing right based on their relative fair value. The carrying values of
mortgage servicing rights and the amortization thereon are periodically
evaluated in relation to estimated future net servicing revenues. Impairment
of mortgage servicing rights is recorded through a valuation allowance. The
adoption of SFAS No. 122 had no material effect on net income.
EMPLOYEE BENEFIT PLANS
The Corporation provides a variety of benefit plans to eligible employees.
Retirement plan expense is accrued each year and plan funding represents at
least the minimum amount required by the Employee Retirement Income Security
Act of 1974, as amended. Differences between expense and funded amounts are
carried in other assets or other liabilities. The Corporation recognizes
postretirement benefits other than pensions on an accrual basis and other
postemployment benefits are also recognized on an accrual basis. The
Corporation also makes contributions to an employee thrift and profit-sharing
plan based on employee contributions and performance levels of the Corporation.
SFAS No. 123, "Accounting for Stock-Based Compensation," issued in 1995,
provides an optional method of accounting for stock-based compensation based on
calculations of fair value at grant date. The Corporation will continue to
account for all stock-based compensation plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Compensation cost for fixed and
variable stock-based awards is measured by the excess, if any, of the fair
market price of the underlying stock over the amount the individual is required
to pay (the intrinsic value). Compensation cost for fixed awards is measured
at the grant date, while compensation cost for variable awards is estimated
until both the number of shares an individual is entitled to receive and the
exercise or purchase price are known (measurement date).
INCOME TAXES
The Corporation files a consolidated federal income tax return, with the
exception of its two credit life insurance subsidiaries, which file separate
returns. The provision for income tax expense is determined under the
liability method. Under this method, deferred tax assets and liabilities are
determined based on the differences between financial reporting and tax bases
of assets and liabilities, and are measured using enacted tax rates and laws
expected to apply to taxable income in the years in which these temporary
differences are expected to be recovered or settled.
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EARNINGS PER COMMON SHARE
Earnings per common share amounts are computed by dividing net income by
the weighted-average number of common shares outstanding during each year.
COMMON STOCK
Under Tennessee law, when a corporation purchases its common stock in the
open market, such repurchased shares become authorized but unissued.
Accordingly, the Corporation reduces the par value and reflects the excess of
the purchase price over par of any such repurchased shares as a reduction from
capital surplus.
REVENUE RECOGNITION (INVEST)
Commission revenues and subscribers' commissions are recorded as of the
trade date of the transactions. Certain revenues and subscribers' commissions,
such as trailer fee commissions earned from mutual funds, are estimated based
upon historical experience.
Subscribers' commissions are commissions on sales of products marketed by
INVEST and are paid to subscribing institutions. These commissions are accrued
monthly based upon a percentage of gross commissions after deduction of certain
contractual charges, and paid to subscribing institutions in the month
following settlement of the transactions.
USES OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of related revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ACCOUNTING PRONOUNCEMENTS
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," will be 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 is not expected to have a material impact on the consolidated
financial statements.
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NOTE 2: ACQUISITIONS AND SALES
Effective January 1, 1997, the Corporation completed its acquisition of
Hartsville Bancshares, Inc. ("Hartsville"), a $95 million bank holding company,
by exchanging approximately 180,000 shares of the Corporation's common stock
for all of the outstanding shares of Hartsville. The acquisition was accounted
for as a purchase. Hartsville was the parent of CommunityFirst Bank which
operated five branches in Middle Tennessee. CommunityFirst Bank was
simultaneously merged with and into FANB.
On July 1, 1996, FANB 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 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 and,
accordingly, the results of operations of INVEST are included in the
consolidated financial statements since the date of acquisition. 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 $17.7 million which is recognized as goodwill and is being
amortized on a straight-line basis over 15 years. Proforma results of
operations for 1996 and 1995 as if the Corporation and INVEST had combined at
the beginning of 1995 are not presented because the effect was not material.
Effective April 1, 1996, FANB purchased 49% of the stock of the SSI Group,
Inc. ("SSI") a healthcare payments processing company for $8.6 million. The
transaction is being accounted for under the equity method of accounting. The
Corporation's investment in SSI at December 31, 1996 was $9.0 million and
exceeded the underlying equity in net assets by $6.5 million, which will be
amortized over a period of 15 years.
Effective March 11, 1996, the Corporation acquired First City Bancorp,
Inc. ("First City") by exchanging approximately 1.1 million shares of First
American Corporation common stock for all of the outstanding shares of First
City. The acquisition was accomplished by the merger of First City with and
into the Corporation with the Corporation as the surviving entity. First City
was the holding company for First City Bank and Citizens Bank, both of which
were merged with and into FANB. First City was also the parent of Tennessee
Credit Corporation and First City Life Insurance, both of which became
subsidiaries of FANB. At March 11, 1996, 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 and the
operating results of First City has been included in the consolidated financial
statements since the date of acquisition. The purchase price in excess of the
fair value of net assets acquired was $32.2 million and has been recorded as
goodwill, which is being amortized on a straight-line basis over 15 years.
Effective November 1, 1995, the Corporation acquired Heritage Federal
Bancshares, Inc. ("Heritage") by exchanging approximately 2.9 million shares of
First American Corporation common stock for all of the outstanding shares of
Heritage. Heritage was merged with and into the Corporation with the
Corporation as the surviving entity. Heritage was the holding company for
Heritage Federal Bank for Savings, a federal savings bank which was merged into
FANB, and had approximately $526 million in assets and 13 offices primarily in
the east Tennessee areas of Tri-Cities,
67
<PAGE> 70
Anderson County, and Roane County. The transaction was accounted for as a
pooling-of-interests and accordingly, the accompanying consolidated financial
statements have been restated to include the accounts and operations of
Heritage for all periods presented. Prior to the combination, Heritage's
fiscal year ended June 30. In recording the pooling-of-interests combination,
Heritage's financial statements for the 12 months ended December 31, 1994, were
combined with the Corporation's financial statements for the same period and
Heritage's financial statements for the years ended June 30, 1993 and 1992 were
combined with the Corporation's financial statements for the years ended
December 31, 1993 and 1992, respectively. An adjustment has been made to
shareholders' equity as of December 31, 1994, to include Heritage's results of
operations for the six months ended December 31, 1993. After-tax merger
expenses related to the acquisition totalled approximately $7.5 million,
comprised primarily of payments for severance, systems conversions, and
investment banking and other professional fees and recapture of tax bad debt
reserve, and were recognized in 1995.
On December 1, 1995, the Corporation exchanged approximately 1.8 million
shares of First American Corporation common stock for all outstanding shares of
Charter Federal Savings Bank ("Charter"), a federal savings bank headquartered
in Bristol, Virginia with 27 branches (eight in Knoxville, Tennessee; five in
Bristol, Tennessee and Bristol, Virginia; and 14 in other locations in
southwestern Virginia). This transaction was accounted for as a purchase, and
accordingly, the results of operations of Charter are included in the
Corporation's consolidated income statements beginning December 1, 1995. The
name of Charter was changed to First American Federal Savings Bank and the
Virginia branches of the Corporation are operated under this legal entity. The
excess of the purchase price over the fair value of the net identifiable assets
acquired of $40 million has been recorded as goodwill and is being amortized on
a straight-line basis over 15 years. The purchase agreement also provides that
Charter's shareholders may receive additional consideration consisting of
shares of First American Corporation's stock with a value equal to 50% of any
goodwill litigation recovery, net of certain related expenses, received within
five years of the merger. See Note 14.
The following unaudited proforma financial information presents the
combined results of operations of the Corporation, Charter, and First City as
if the acquisitions had occurred as of the beginning of 1994 for Charter and
1995 for First City, after giving effect to certain adjustments, including
amortization of goodwill. The proforma financial information does not
necessarily reflect the results of operations that would have occurred had the
Corporation, Charter, and First City constituted a single entity during such
periods.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
(in thousands, except per share amounts) 1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $351,545 $345,284 $321,261
Net income 120,733 100,521 99,875
Earnings per share 3.91 3.30 3.48
======================================================================
</TABLE>
During the year ended December 31, 1995, the Corporation consummated the
sale of two branches with deposits of approximately $39.6 million. The
transaction resulted in a $3.0 million gain.
68
<PAGE> 71
NOTE 3: CASH AND DUE FROM BANKS
The Corporation's bank subsidiaries are required to maintain reserves, in
the form of cash and balances with the Federal Reserve Bank, against its
deposit liabilities. Approximately $101.1 and $95.3 million of the cash and
due from banks balance at December 31, 1996 and 1995, respectively, represented
reserves maintained in order to meet Federal Reserve requirements.
NOTE 4: SECURITIES
SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gains, gross unrealized losses, and
approximate fair values of securities held to maturity at December 31, 1996 and
1995, are presented in the following table:
<TABLE>
<CAPTION>
Unrealized
Amortized ------------------- Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
U.S. Treasury and other U.S. Government agencies and corporations $654,979 $2,939 $2,243 $655,675
Obligations of states and political subdivisions 39,303 262 261 39,304
Other debt securities (primarily mortgage-backed securities) 140,265 541 593 140,213
- ---------------------------------------------------------------------------------------------------------------
Total securities held to maturity $834,547 $3,742 $3,097 $835,192
===============================================================================================================
DECEMBER 31, 1995
U.S. Treasury and other U.S. Government agencies and corporations $807,591 $4,687 $2,095 $810,183
Obligations of states and political subdivisions 29,683 156 257 29,582
Other debt securities (primarily mortgage-backed securities) 93,810 684 348 94,146
- ---------------------------------------------------------------------------------------------------------------
Total securities held to maturity $931,084 $5,527 $2,700 $933,911
===============================================================================================================
</TABLE>
Included in U.S. Treasury and other U.S. Government agencies and
corporations securities held to maturity were agency-issued mortgage-backed
securities amounting to $555.7 million ($556.4 million fair value) at December
31, 1996 and $706.5 million ($709.3 million fair value) at December 31, 1995.
Mortgage-backed securities included in other debt securities amounted to $139.0
million ($139.0 million fair value) at December 31, 1996.
69
<PAGE> 72
SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains, gross unrealized losses, and
approximate fair values of securities available for sale at December 31, 1996
and 1995, are presented in the following table:
<TABLE>
<CAPTION>
Unrealized
Amortized ------------------------- Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
U.S. Treasury and other U.S. Government
agencies and corporations $ 1,499,160 $ 4,489 $ 8,815 $ 1,494,834
Other debt securities 135,955 498 3,683 132,770
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 1,635,115 4,987 12,498 1,627,604
Equity securities (essentially Federal Reserve
Bank and Federal Home Loan Bank stock) 50,628 -- -- 50,628
- ---------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 1,685,743 $ 4,987 $ 12,498 $ 1,678,232
===========================================================================================================================
DECEMBER 31, 1995
U.S. Treasury and other U.S. Government
agencies and corporations $ 999,004 $ 9,431 $ 2,244 $ 1,006,191
Obligations of states and political subdivisions 3,105 -- -- 3,105
Other debt securities 150,445 742 1,850 149,337
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 1,152,554 10,173 4,094 1,158,633
Equity securities (essentially Federal Reserve
Bank and Federal Home Loan Bank stock) 43,860 -- -- 43,860
- ---------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 1,196,414 $ 10,173 $ 4,094 $ 1,202,493
===========================================================================================================================
</TABLE>
Included in U.S. Treasury and other U.S. Government agencies and
corporations securities available for sale were agency-issued mortgage-backed
securities amounting to $1,179.6 million ($1,176.9 million fair value) at
December 31, 1996 and $789.5 million ($796.5 million fair value) at December
31, 1995. Mortgage-backed securities included in other debt securities
amounted to $135.9 million ($132.8 million fair value) and $150.4 million
($149.3 million fair value) at December 31, 1996 and 1995, respectively.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
a Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." The FASB permitted a
one-time opportunity to reassess the appropriateness of the designation of all
securities held upon the initial application of the Special Report. The
Corporation reviewed its current designation of all securities in conjunction
with liquidity needs and management of interest rate risk and transferred
$532.4 million of securities from held to maturity to available for sale. At
the time of transfer, such securities had an unrealized gain of $1.2 million
($.7 million net of tax).
In conjunction with the 1995 Heritage merger, the Corporation transferred
$161.6 million of securities previously classified as held to maturity by
Heritage to securities available for sale in order to maintain the
Corporation's existing interest rate risk position. At the time of transfer,
such securities had an unrealized loss of $.5 million ($.3 million net of tax).
In response to a regulatory revision, in 1994 the Corporation transferred
$203.8 million of securities classified as available for sale into the held to
maturity classification. Prior to this regulatory revision, these securities
had been classified as available for sale due to regulatory restrictions even
though the Corporation had the intent and ability to hold such securities to
maturity.
70
<PAGE> 73
At the time of transfer, the securities had an unrealized loss of $1.0 million
($.6 million net of taxes). In accordance with SFAS No. 115, such unrealized
loss was retained as a component of shareholders' equity and is being amortized
over the remaining lives of the securities.
The sale of securities available for sale resulted in net realized gains
of $2.5 million and $2.0 million in 1996 and 1995, respectively, and a net
realized loss during 1994 of $10.0 million. Gross realized gains and losses on
such sales were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------
1996 1995 1994
---------------- ------------------ ------------------
(in thousands) Gross Gross Gross Gross Gross Gross
Realized Realized Realized Realized Realized Realized
Gains Losses Gains Losses Gains Losses
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and
corporations $3,546 $1,130 $5,887 $3,929 $8,799 $18,796
Other debt securities 51 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------
Total securities available
for sale $3,597 $1,130 $5,887 $3,929 $8,799 $18,796
=====================================================================================================
</TABLE>
TOTAL SECURITIES
The amortized cost and approximate fair values of debt securities at
December 31, 1996, by average estimated maturity are shown below. The expected
maturity for governmental and corporate securities is the stated maturity, and
the expected maturity for mortgage-backed securities and other asset-backed
securities is based on current estimates of average maturities, which include
prepayment assumptions.
<TABLE>
<CAPTION>
Securities Held to Maturity Securities Available for Sale
-------------------------- ----------------------------
Amortized Fair Amortized Fair
(in thousands) Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $378,132 $376,666 $ 66,657 $ 66,573
Due after one year through five years 427,649 421,843 1,085,876 1,078,362
Due after five years through ten years 7,716 15,659 205,389 205,012
Due after ten years 21,050 21,024 277,193 277,657
- ------------------------------------------------------------------------------------------------------------
Total debt securities 834,547 835,192 1,635,115 1,627,604
Equity securities -- -- 50,628 50,628
- ------------------------------------------------------------------------------------------------------------
Total securities $834,547 $835,192 $1,685,743 $1,678,232
============================================================================================================
</TABLE>
At December 31, 1996 and 1995, the Corporation held securities with
amortized cost amounting to $831.9 million and $705.7 million, respectively,
which were issued or guaranteed by the Federal National Mortgage Association
and $875.1 million and $763.7 million, respectively, which were issued or
guaranteed by the Federal Home Loan Mortgage Corporation.
Securities carried in the consolidated balance sheets at approximately
$1,836.6 million and $1,570.8 million at December 31, 1996 and 1995,
respectively, were pledged to secure public and trust deposits, repurchase
transactions, and for other purposes as required or permitted by law.
NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES
The Corporation's bank and thrift subsidiaries make commercial, consumer,
and real estate loans to its customers, located within the Corporation's
market, which consists primarily of Tennessee
71
<PAGE> 74
and selected markets in Virginia, Kentucky and other adjacent states. Although
the bank and thrift subsidiaries have a diversified loan portfolio, a
substantial portion of their debtors' ability to honor their contracts is
dependent upon economic conditions in the Corporation's markets.
Loans are either secured or unsecured based on the type of loan and the
financial condition of the borrower. The loans are generally expected to be
repaid from cash flow or proceeds from the sale of selected assets of the
borrower; however, the Corporation is exposed to risk of loss on loans due to
the borrower's difficulties, which may arise from any number of factors
including problems within the respective industry or economic conditions,
including those within the Corporation's market.
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $ 132,415 $ 129,436 $ 136,512
Provision (credited) charged to operating expenses -- 83 (9,919)
Allowance of subsidiaries purchased (note 2) 2,126 6,573 323
- -------------------------------------------------------------------------------------------------------------------------------
Subtotal 134,541 136,092 126,916
- -------------------------------------------------------------------------------------------------------------------------------
Loans charged off 31,430 18,748 15,917
Recoveries of loans previously charged off (20,154) (15,071) (18,026)
- -------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 11,276 3,677 (2,109)
- -------------------------------------------------------------------------------------------------------------------------------
Adjustment for change in fiscal year of pooled company -- -- 411
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $ 123,265 $ 132,415 $ 129,436
================================================================================================================================
</TABLE>
Net charge-offs (recoveries) by major loan categories were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial $ (601) $ (2,320) $ (3,843)
Consumer--amortizing mortgages 155 (454) (293)
Consumer--other 12,098 6,755 2,033
Real estate--construction (5) 175 (143)
Real estate--commercial mortgages and other (371) (479) 137
- -------------------------------------------------------------------------------------------------------------------------------
Total net charge-offs (recoveries) $ 11,276 $ 3,677 $ (2,109)
===============================================================================================================================
</TABLE>
At December 31, 1996 and 1995, loans on a nonaccrual status amounted to
$16.3 million and $18.7 million, respectively. Interest income not recognized
on nonaccrual loans was approximately $1.5 million in 1996, $1.5 million in
1995, and $1.3 million in 1994. Interest income recognized on a cash basis on
nonaccrual loans was $4.8 million, $6.3 million, and $2.4 million for the same
respective periods.
Directors and executive officers (and their associates, including
companies in which they hold ten percent or more ownership) of the Corporation
and its significant subsidiary, FANB, had loans outstanding with the
Corporation and its subsidiaries of $45.3 million and $55.7 million at December
31, 1996 and 1995, respectively. During 1996, $4,131.0 million of new loans or
advances on existing loans were made to such related persons, repayments from
such persons totalled $4,141.5 million, and $.097 million of loans were to
newly elected executive officers. The Corporation believes that such loans
were made on substantially the same terms, including interest and collateral,
as those prevailing at the time for comparable transactions with other
borrowers and did not involve more than
72
<PAGE> 75
the normal risk of collectibility or present other unfavorable features at the
time such loans were made.
Impaired loans and related loan loss reserve amounts at December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------
1996 1995
---------------------- ----------------------
Recorded Loan Loss Recorded Loan Loss
(in thousands) Investment Reserve Investment Reserve
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Impaired loans with loan loss reserves $ 8,939 $2,375 $18,506 $4,157
Impaired loans with no loan loss reserves 11,381 -- 16,092 --
- ----------------------------------------------------------------------------------------------
Total $20,320 $2,375 $34,598 $4,157
==============================================================================================
</TABLE>
The average recorded investment in impaired loans for the twelve months
ended December 31, 1996 and 1995 was $29 million and $28 million, respectively.
The related total amount of interest income recognized on the accrual and cash
basis for the period that such loans were impaired was $798 thousand and $147
thousand, respectively, for the twelve months ended December 31, 1996 and $982
thousand and $188 thousand, respectively, for the twelve months ended December
31, 1995.
NOTE 6: PREMISES AND EQUIPMENT AND LEASE COMMITMENTS
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31
---------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 22,781 $ 22,319
Buildings 108,044 102,191
Furniture and equipment 150,021 114,791
Leasehold improvements 35,759 32,794
Premises leased under capital leases 3,008 169
- --------------------------------------------------------------------------------------
Subtotal 319,613 272,264
Accumulated depreciation and amortization (157,356) (142,845)
- --------------------------------------------------------------------------------------
Net book value $ 162,257 $ 129,419
======================================================================================
</TABLE>
Depreciation and amortization expense of premises and equipment for 1996,
1995, and 1994 was $16.0 million, $14.5 million, and $14.6 million,
respectively.
Rent expense, net of rental income, on bank premises for 1996, 1995, and
1994 was $7.3 million, $5.1 million, and $4.1 million, respectively. Rental
income on bank premises for 1996, 1995, and 1994 was $4.1 million, $3.8
million, and $4.2 million, respectively.
73
<PAGE> 76
At December 31, 1996, the future minimum lease payments under operating
and capital leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
(in thousands) Total Leases Leases
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $ 10,975 $ 10,734 $ 241
1998 10,284 10,048 236
1999 9,978 9,742 236
2000 8,737 8,514 223
2001 8,384 8,161 223
Thereafter 71,555 69,939 1,616
- ---------------------------------------------------------------------------------------
Total $119,913 $117,138 2,775
- ---------------------------------------------------------------------------------------
PURCHASE OPTION 110
- ---------------------------------------------------------------------------------------
Amounts representing interest (1,337)
Total capitalized lease obligations 1,548
Amounts included in short-term borrowings (131)
- ---------------------------------------------------------------------------------------
Capitalized lease obligations included in long-term debt $ 1,417
=======================================================================================
</TABLE>
The Corporation has a data processing outsourcing agreement expiring in
2001 that has an average annual base expense, as amended in 1994, of $8.5
million. Total annual fees vary with cost of living adjustments and changes in
services provided by the vendor, which services depend upon the Corporation's
volume of business and system needs. The related expense is included in
systems and processing expense in the consolidated income statements.
NOTE 7: INTANGIBLE ASSETS
Following is a summary of intangible assets included in other assets on
the consolidated balance sheets including related amortization.
<TABLE>
<CAPTION>
Mortgage Total
Servicing Other Intangible
(in thousands) Goodwill Rights Intangibles Assets
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ 20,553 $ -- $ 6,008 $ 26,561
Additions 40,207 259 5,236 45,702
Less: Amortization 3,109 10 1,033 4,152
- ----------------------------------------------------------------------------------------------
Balance, December 31, 1995 57,651 249 10,211 68,111
Additions 50,120 752 2,696 53,568
Less: Amortization 7,687 152 1,738 9,577
- ----------------------------------------------------------------------------------------------
Balance, December 31, 1996 $100,084 $ 849 $ 11,169 $112,102
==============================================================================================
</TABLE>
The Corporation services mortgage loans and at December 31, 1996 the loan
servicing portfolio approximated $416.5 million.
The estimated fair value of the capitalized mortgage servicing rights was
$978.7 thousand at December 31, 1996. The related valuation allowance
established during 1996, with a charge to operations, was $7.4 thousand.
74
<PAGE> 77
NOTE 8: SHORT-TERM BORROWINGS
Short-term borrowings are issued on normal banking terms and consisted of
the following:
<TABLE>
<CAPTION>
December 31
----------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased and securities sold under agreements to repurchase $ 939,740 $788,569
Other short-term borrowings 214,632 149,718
- --------------------------------------------------------------------------------------------------
Total short-term borrowings $1,154,372 $938,287
==================================================================================================
</TABLE>
Other short-term borrowings included U.S. Treasury tax and loan accounts
of $111.5 million and $68.6 million in 1996 and 1995, respectively. In
addition, December 31, 1996 included borrowings from the Federal Home Loan Bank
("FHLB") of $19 million (due within three months), $36 million (due within six
months), $27 million (due within nine months), and $9 million (due within one
year).
The following table presents information regarding federal funds purchased
and securities sold under agreements to repurchase:
<TABLE>
<CAPTION>
December 31
-----------------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and securities sold under agreements
to repurchase:
Amount outstanding at December 31 $ 939,740 $ 788,569 $ 855,618
Average rate at December 31 4.59% 4.79% 4.96%
Average amount outstanding during the year $ 864,853 $ 791,975 $ 681,170
Average rate paid for the year 4.80% 5.38% 3.80%
Maximum amount outstanding at any month-end $ 939,740 $ 910,653 $ 855,618
===============================================================================================================================
</TABLE>
NOTE 9: LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
----------------------------
(in thousands) 1996 1995
----------- -----------
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances $ 230,378 $ 321,544
6 7/8% noncallable subordinated notes (effective rate of 6.965%) due 2003,
interest payable semiannually (less unamortized discount of $201 in
1996 and $233 in 1995) 49,799 49,767
6 5/8% noncallable subordinated notes (effective rate of 6.761%) due 2005,
interest payable semiannually (less unamortized discount of $437 in 1996
and $486 in 1995) 49,563 49,514
Capitalized lease obligations (note 6) 1,417 119
Other -- 847
- --------------------------------------------------------------------------------------------------------------
Total long-term debt $ 331,157 $ 421,791
==============================================================================================================
</TABLE>
At December 31, 1996, the $230.4 million of advances from the FHLB
consisted of $208.5 million of advances with interest rates tied to one month
LIBOR and $21.9 million of advances with fixed interest rates. Included in
these amounts are advances of $222.6 million maturing in 1998, $3.7 million
maturing in 2003 and $4.1 million maturing after 2003. The Corporation's FHLB
advances are collateralized by a blanket pledge of 1-4 family mortgage loans.
75
<PAGE> 78
The Corporation entered into an unsecured revolving credit agreement in
1994. As amended in 1995, the agreement provides for loans up to $70.0
million. Under the terms of the agreement, which expires in March 1998, the
Corporation pays a fee for the availability of these funds computed at the rate
of 3/16 of 1% per annum on the commitment. Interest to be paid on the
outstanding balances will be computed based on the prime interest rate of the
lending banks, Eurodollar rates, or adjusted certificate of deposit rates, as
selected by the Corporation. The Corporation had no revolving credit
borrowings outstanding at December 31, 1996 or 1995.
The terms of these agreements provide for, among other things,
restrictions on payment of cash dividends and purchases, redemptions, and
retirement of capital shares. Under the Corporation's most restrictive debt
covenant, approximately $90.3 million of retained earnings was available to pay
dividends as of December 31, 1996.
NOTE 10: EMPLOYEE BENEFITS
RETIREMENT PLAN
The Corporation and its subsidiaries participate in a non-contributory
retirement plan with death and disability benefits covering substantially all
employees (except the employees of INVEST) with one or more years of service.
The benefits are based on years of service and average monthly earnings of a
participant for the 60 consecutive months which produce the highest average
earnings.
The following table sets forth the plan's funded status and amounts
recognized in the Corporation's consolidated balance sheets at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Plan assets at fair value, primarily U.S. bonds and listed stocks $ 116,873 $ 108,278
- -------------------------------------------------------------------------------------------------------------
Actuarial present value of benefits for service rendered to date:
Accumulated benefit obligation, including vested benefits of $89,849 and
$87,212, respectively 93,714 91,354
Additional benefits based on projected future compensation 14,198 15,692
- -------------------------------------------------------------------------------------------------------------
Projected benefit obligation 107,912 107,046
- -------------------------------------------------------------------------------------------------------------
Plan assets in excess of accumulated benefit obligation 23,159 16,924
- -------------------------------------------------------------------------------------------------------------
Plan assets greater (less) than projected benefit obligation 8,961 1,232
Unrecognized net loss from past experience different from that assumed and
effects of changes in assumptions 1,327 8,550
Unrecognized net transition asset (1,203) (1,504)
Unrecognized prior service cost 602 778
- -------------------------------------------------------------------------------------------------------------
Prepaid pension cost $ 9,687 $ 9,056
=============================================================================================================
</TABLE>
76
<PAGE> 79
Net pension expense included the following components:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during the period $ 3,594 $ 2,784 $ 2,882
Interest cost on projected benefit obligation 7,705 6,900 6,639
Actual return on plan assets (13,366) (20,708) 997
Net amortization and deferral 3,372 13,097 (9,047)
- -------------------------------------------------------------------------------------------------------------------------------
Net periodic pension expense $ 1,305 $ 2,073 $ 1,471
===============================================================================================================================
</TABLE>
As of January 1, 1994, the Corporation elected to change its method of
measuring the market-related value of plan assets from utilizing a calculation
based on 50% book value plus 50% fair market value to utilization of 100% fair
market value. The change had the effect of decreasing 1994 net periodic
pension expense by $1.6 million.
The following table presents assumptions used in determining the actuarial
present value of the projected benefit obligation for the pension plan:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
Weighted average discount rate 7.75% 7.25%
Rate of increase in future compensation level 4.5-8.5 4.5-8.5
Expected long-term rate of return on plan assets 9.0 9.0
===================================================================================
</TABLE>
SUPPLEMENTAL RETIREMENT PLAN
The Corporation has a supplemental retirement plan which provides
supplemental retirement benefits to certain executives of the Corporation. The
expense was $.3 million in 1996, $.2 million in 1995, and $.2 million in 1994.
Benefit payments from the plan are made from general assets of the Corporation.
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation in 1996 were 7.75% and 4.5%, respectively, and in 1995 were 7.25%
and 4.5%, respectively.
OTHER POSTRETIREMENT BENEFITS
In addition to pension benefits, the Corporation and its subsidiaries have
defined postretirement benefit plans that provide medical insurance and death
benefits for retirees and eligible dependents (except the retirees of INVEST).
Because the death benefit plan is not significant, it is combined with the
healthcare plan for disclosure purposes.
77
<PAGE> 80
The status of the plans at December 31, 1996 and 1995, was as follows:
<TABLE>
<CAPTION>
December 31
----------------------------
<S> <C> <C>
(in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 12,608 $ 12,841
Fully eligible, active plan participants 877 1,067
Other active plan participants 3,141 3,576
- --------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 16,626 17,484
Plan assets at market value -- --
- --------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess of plan assets 16,626 17,484
Unrecognized net gain (loss) from past experience different from that
assumed and effects of changes in assumptions 1,308 1,540
- --------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 17,934 $ 19,024
=======================================================================================================
</TABLE>
The components of net periodic expense for postretirement benefits were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 303 $ 291 $ 362
Interest cost on accumulated postretirement benefit obligation 1,205 1,230 1,292
Amortization of net (gain) loss (1,382) -- --
- -------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit expense 126 $ 1,521 $ 1,654
=======================================================================================================
</TABLE>
The Corporation continues to fund medical and death benefit costs
principally on a pay-as-you-go basis.
For measurement purposes, a 9.50% annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 1996, declining
gradually to 5.5% per year by 2011 and remaining at that level thereafter. The
discount rate used to determine the accumulated postretirement benefit
obligation was 7.75% in 1996, 7.25% in 1995, and 8.0% in 1994, and the assumed
long-term rate of compensation increase was 4.5% in 1996, 1995, and 1994.
The healthcare cost trend rate assumption has a significant effect on the
accumulated postretirement benefit obligation and net periodic benefit costs.
A 1% increase in the trend rate for healthcare costs would have increased the
accumulated postretirement benefit obligation by $1.2 million as of December
31, 1996, and the net periodic expense (service cost and interest cost) would
have increased by $.1 million for 1996.
INVEST provides medical and life insurance benefits to its retired
employees. The medical plan provides for medical insurance benefits at
retirement, with eligibility based upon age and the participant's number of
years of participation attained at retirement. Postretirement life insurance
benefits are limited to $10,000 per participant. The discount rate used in
determining the postretirement benefit obligation was 7.5% during 1996. The
status of the plan at December 31, 1996 was as follows:
78
<PAGE> 81
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees and beneficiaries $ 39,000
Fully eligible plan participants 101,000
Other active plan participants 583,000
- -------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 723,000
Plan assets at market value --
- -------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess of plan assets 723,000
Unrecognized loss from actuarial experience (22,000)
- -------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $701,000
=================================================================================================
</TABLE>
A one percentage point increase in the assessed healthcare cost trend rate
for each year would increase INVEST's accumulated postretirement benefit
obligation as of December 31, 1996 by $181,000.
OTHER EMPLOYEE BENEFITS
The Corporation has a combination savings thrift and profit-sharing plan
("FIRST Plan") available to all employees (except the employees of INVEST and
hourly paid and special exempt-salaried employees). The plan is funded by
employee and employer contributions. The Corporation's annual contribution to
the plan is based upon the amount of basic contributions of participants,
participants' compensation, and the achievement of certain corporate
performance standards and may be made in the form of cash or the Corporation's
common stock with a market value equal to the cash contribution amount. Total
plan expense in 1996 was $4.3 million and $3.5 million in both 1995 and 1994.
During 1996, 1995 and 1994 the Corporation matched employees' qualifying
contributions at 100%.
In 1983, INVEST formed the Salary Savings Retirement Plan. INVEST has
also established a profit sharing plan covering certain employees.
Contributions to both plans totalled approximately $202,000.
Heritage, which merged with the Corporation effective November 1, 1995,
maintained an Employee Stock Ownership Plan ("ESOP"). The ESOP, which remains
in existence, covers substantially all former Heritage employees who qualified
as to age and length of service. Annual contributions to the ESOP are equal to
the required principal and interest payments related to the ESOP loan.
Dividends paid on shares held by the ESOP are used to reduce the outstanding
debt. The consolidated financial statements for each of the years ended
December 31, 1995 and 1994 include related compensation expense of
approximately $.1 million.
During 1995, the ESOP refinanced its notes payable with borrowings from
the Corporation. The new loan, which has essentially the same terms as the
prior borrowings, is payable in quarterly principal payments of approximately
$30 thousand plus interest at the lender's base rate through March 30, 2002.
At December 31, 1996, the note payable bore interest at 8.5% and had a balance
of $.4 million.
79
<PAGE> 82
STOCK-BASED COMPENSATION
The Corporation has stock-based compensation plans covering certain
officers and other key employees of the Corporation. The plans provide for
restricted stock incentives based on the attainment of annual and long-term
performance goals. Stock-based compensation plans also include stock option
programs, which provide for the granting of statutory incentive stock options
and non-statutory options to key employees. Additionally, the Corporation has
a stock option plan for nonemployee directors. As of December 31, 1996, the
Corporation had 3.3 million shares of common stock reserved for issuance under
these plans.
From 1991 through 1996, the Corporation issued approximately 287 thousand
shares of restricted common stock to certain executive officers. The
restrictions lapse within 15 years of issuance; however, if certain performance
criteria are met, restrictions will lapse earlier. The amount recorded for the
restricted stock issued is based on the market value of the Corporation's
common stock on the award dates and is shown as deferred compensation in
shareholders' equity. Such compensation expense is recognized over a three- to
fifteen-year period. The amount of compensation expense recognized from awards
of restricted stock in the Corporation's consolidated financial statements for
1996, 1995, and 1994 was $1.4 million and $1.4 million, and $1.0 million,
respectively.
The following table summarizes the Corporation's restricted stock grants,
and the weighted average fair value of those grants, for the years ended
December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Restricted stock granted during the year 46,488 16,095 48,289
Weighted average fair value of restricted stock granted during the year $ 47.09 $ 33.32 $ 29.39
========================================================================================================================
</TABLE>
As discussed under Note 1, the Corporation has chosen to follow APB
Opinion No. 25 and related interpretations in accounting for employee stock
options, and accordingly, no compensation expense has been recognized for
options granted during 1994, 1995 and 1996. Had the compensation cost for the
Corporation's stock-based compensation plans been determined consistent with
the provisions of SFAS No. 123, which establishes a new, optional method of
accounting for stock-based compensation based on fair value at grant date, net
income and earnings per share for 1996 and 1995, on a proforma basis, would be
$120.1 million, or $4.06 per share, and $102.7 million, or $3.62 per share,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995, respectively;
dividend yield of 2.75% for all years; expected volatility of 22.51% and
24.24%, risk-free interest rates of 5.38% and 7.64%, an expected life of 6.1
years was used for all years. The effects of applying SFAS No. 123, for either
recognizing or disclosing compensation cost under such pronouncement, may not
be representative of the effects on reported net income in future years.
80
<PAGE> 83
A summary of the Corporation's stock option plans as of December 31, 1996,
1995, and 1994, and changes during the years ended on those dates is presented
below:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- ---------------------
Total Weighted Total Weighted Total Weighted
Option Average Option Average Option Average
Shares Exercise Shares Exercise Shares Exercise
Outstanding Price Outstanding Price Outstanding Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year 1,664,548 $25.49 1,999,581 $23.02 1,638,682 $19.06
Options granted 465,250 46.38 315,872 28.51 547,617 28.21
Options exercised (283,477) 19.04 (604,902) 15.15 (116,339) 18.76
Options cancelled (30,525) 34.60 (46,003) 23.80 (135,937) 15.24
Options expired - - -
Adjustment for change in fiscal year of
pooled company - - 65,558 7.08
- -----------------------------------------------------------------------------------------------------------------
Options outstanding at end of year 1,815,796 $31.68 1,664,548 $25.49 1,999,581 $23.02
Options exercisable at year-end 820,733 $24.18 806,567 $21.23 1,079,869 $17.27
Weighted average fair value of options
granted during the year $ 11.24 $ 8.88 -
=================================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------- -----------------------
Weighted
Options Average Weighted Options Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Life Exercise at Exercise
Prices 12/31/96 (years) Price 12/31/96 Price
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$8.785-$12.500 14,777 5.01 $10.46 14,777 $10.46
$14.620-$18.716 206,781 4.82 15.51 206,781 15.51
$20.875-$29.500 709,887 5.53 25.65 418,867 24.30
$30.375-$40.000 419,101 7.14 34.38 175,008 34.65
$42.750-$49.250 465,250 9.08 46.31 5,300 45.23
- -----------------------------------------------------------------------------------------
$8.785-$49.250 1,815,796 6.73 31.68 820,733 24.18
=========================================================================================
</TABLE>
81
<PAGE> 84
NOTE 11: INCOME TAXES
The components of the income tax provision are presented below:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense from operations:
Current federal income taxes $ 43,572 $ 39,814 $ 39,834
Current state income taxes 7,550 7,367 7,204
Deferred federal income tax expense 19,456 15,226 9,964
Deferred state income tax expense (benefit) 3,626 2,779 402
- ------------------------------------------------------------------------------------------------------------------------
Total income tax expense from operations 74,204 65,186 57,404
- ------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) reported in
stockholders' equity related to:
Securities available for sale (5,162) 10,907 (22,690)
Employee stock option and award plans (2,568) (3,095) (56)
- ------------------------------------------------------------------------------------------------------------------------
Total income tax expense (benefit) reported in
stockholders' equity (7,730) 7,812 (22,746)
- ------------------------------------------------------------------------------------------------------------------------
Total income taxes $ 66,474 $ 72,998 $ 34,658
========================================================================================================================
</TABLE>
The following table presents a reconciliation of the provision for income
taxes as shown in the consolidated income statements with that which would be
computed by applying the statutory federal income tax rate of 35% to income
before income tax expense.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rates $ 68,522 $ 58,893 $ 54,112
Increase (decrease) in taxes resulting from:
Tax-exempt interest (2,444) (2,276) (2,214)
Goodwill amortization 2,690 1,088 1,026
State income taxes, net of federal income tax benefit 7,265 6,595 4,945
Other, net (1,829) 886 (465)
- ------------------------------------------------------------------------------------------------------------------------
Total income tax expense from operations $ 74,204 $ 65,186 $ 57,404
========================================================================================================================
</TABLE>
82
<PAGE> 85
The net deferred tax asset is included in other assets on the
consolidated balance sheet. Management believes that it is more likely than
not that the deferred tax asset will be realized. The tax effects of
temporary differences that give rise to a significant portion of the deferred
tax asset and deferred tax liability at December 31, 1996 and 1995, are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
(in thousands) 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 43,572 $ 45,747
Postretirement benefit obligation 7,697 8,027
Unrealized loss on securities available for sale 2,907 --
Other 12,350 13,389
- -------------------------------------------------------------------------------------
Total deferred tax asset $ 66,526 $ 67,163
- -------------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant, and equipment 4,981 4,811
Direct lease financing 42,984 29,346
FHLB stock 3,418 2,536
Unrealized gain on securities available for sale -- 2,256
Purchase accounting 5,446 5,075
Pension 3,201 2,102
Other 2,911 1,869
- -------------------------------------------------------------------------------------
Total deferred tax liability 62,941 47,995
- -------------------------------------------------------------------------------------
Net deferred tax asset $ 3,585 $ 19,168
=====================================================================================
</TABLE>
At December 31, 1996, INVEST had approximately $5,206,000 in pretax net
operating losses for federal income tax purposes which are available to offset
future taxable income of INVEST. Of this amount, $3,297,000 was generated in
the fiscal year ended on June 30, 1985 and will expire on December 31, 1997 and
$1,909,000 was generated in the fiscal year ended June 30, 1988 and will expire
on December 31, 2000. All of the net operating loss carryforward amounts
resulted from operations prior to the date of the Corporation's acquisition of
INVEST, and as such, their utilization is dependent upon future income of
INVEST. In addition, these carryforward amounts are further limited by Section
382 of the Internal Revenue Code which applies to changes in ownership. Based
upon a projection of anticipated future taxable income, the Corporation
believes that it is more likely than not that sufficient levels of taxable
income will be generated by INVEST in appropriate taxable periods prior to
December 31, 2000, and as such, has recorded a net deferred tax asset related
to the net operating losses in the accompanying consolidated balance sheets.
Management's assessment of anticipated future taxable income is based upon
numerous factors including, but not limited to, projected interest rates,
economics in the securities industry and certain other cost saving strategies.
Retained earnings at December 31, 1996 includes approximately $4.1 million
of income that has not been subject to tax because of deductions for bad debts
allowed for federal income tax purposes. Deferred income taxes have not been
provided on such bad debt deductions since it is not intended to use the
accumulated bad debt deductions for purposes other than to absorb loan losses.
The tax liability would have been $1.6 million at December 31, 1996 if this
portion of retained earnings were used for purposes other than as described.
During 1994, the Corporation and the Internal Revenue Service ("IRS")
reached a settlement agreement related to the IRS's examination of the
Corporation's 1989 and 1990 consolidated federal income tax returns. Such
settlement had no material impact on the Corporation's consolidated financial
statements.
83
<PAGE> 86
NOTE 12: COMMON STOCK
In December 1994, the Board of Directors authorized the purchase of up to
800,000 shares of the Corporation's common stock. Stock purchases would be
made in the open market or in privately negotiated transactions from time to
time subject to market conditions and regulatory guidelines. Purchased shares
would be used to fund the Corporation's various employee benefit plans and
potential future acquisitions.
In addition to the 1994 authorization, in 1995, the Board authorized the
Corporation to purchase the number of remaining shares necessary to consummate
the Charter acquisition and to purchase up to 100% of the shares required to
consummate the First City transaction.
During 1995, the Corporation purchased 1.6 million shares in the open
market at a total cost of $62.3 million. As of December 31, 1995, all
purchased shares had been used to fund various employee benefit plans and the
acquisition of Charter. The Corporation purchased 1.3 million shares in early
1996 to complete 100% funding of the 1.8 million shares required for the
Charter acquisition and the funding for 82% of the 1.1 million shares required
for the First City acquisition.
Later in 1996, the Board of Directors authorized the purchase of 1.5
million shares to fund various stock option, incentive, and dividend
reinvestment plans and potentially to fund future acquisitions. Pursuant to
this authorization, the Corporation purchased 165,005 through December 31,
1996.
The total cost of shares purchased in 1996 was $67.6 million. All of the
First American shares exchanged in the Hartsville transaction were repurchased
during January 1997 in the open market.
NOTE 13: OFF-BALANCE-SHEET AND DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Corporation is a party to financial
transactions which have off-balance-sheet risk. Such transactions arise in
meeting customers' financing needs and from the Corporation's activities in
reducing its own exposure to fluctuations in interest rates. Off-balance-sheet
items involving customers consist primarily of commitments to extend credit and
letters of credit, which generally have fixed expiration dates. These
instruments may involve, to varying degrees, elements of credit and interest
rate risk. To evaluate credit risk, the Corporation uses the same credit
policies in making commitments and conditional obligations on these instruments
as it does for instruments reflected on the balance sheet. Collateral
obtained, if any, varies but may include deposits held in financial
institutions; U.S. Treasury securities or other marketable securities;
income-producing commercial properties; accounts receivable; property, plant,
and equipment; and inventory. The Corporation's exposure to credit risk under
commitments to extend credit and letters of credit is the contractual
(notional) amount of the instruments. Interest rate swap transactions and
futures contracts may have credit and interest rate risk significantly less
than the contractual amount.
COMMITMENTS
Commitments to extend secured or unsecured credit are contractual
agreements to lend money providing there is no violation of any condition.
Commitments may require payment of a fee.
84
<PAGE> 87
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. At year-end 1996 and 1995, respectively, the Corporation had
$2.7 billion and $2.2 billion of unfunded commitments to extend credit. Of
these amounts, unfunded commitments for borrowers with loans on nonaccrual
status were $3.0 million at December 31, 1996, and $1.1 million at December 31,
1995.
Standby letters of credit are commitments issued by the Corporation to
guarantee the performance of a customer to a third party. As of December 31,
1996 and 1995, the Corporation had standby letters of credit issued amounting
to approximately $243.5 million and $221.3 million, respectively. The
Corporation also had commercial letters of credit of $38.1 million and $32.0
million at December 31, 1996 and 1995, respectively. Commercial letters of
credit are conditional commitments issued by the Corporation to facilitate
trade for corporate customers. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers.
The Corporation contracts to buy and sell foreign exchange primarily to
meet the financing needs of its customers and to hedge its own exposure against
market risk. At December 31, 1996 and 1995, the Corporation had $23.2 million
and $31.9 million, respectively, of foreign exchange forward contracts, which
is the sum of customers' contracts with the Corporation and the Corporation's
offsetting contracts to minimize its exposure.
DERIVATIVES
The Corporation's principal objective in holding or issuing derivative
financial instruments is the management of interest rate exposure arising out
of nontrading assets and liabilities. The Corporation's earnings are subject
to risk of interest rate fluctuations to the extent that interest-earning
assets and interest-bearing liabilities mature or reprice at different times or
in differing amounts. Asset/liability management activities are aimed at
maximizing net interest income within liquidity, capital and interest rate risk
constraints established by management. The Corporation's objective is to
manage the interest sensitivity position so that net income will not be
impacted more than 5% for interest rates varying up to 150 basis points from
the Corporation's most likely interest rate forecast over the next 12 months.
To achieve its risk management objective, the Corporation uses a
combination of derivative financial instruments, particularly interest rate
swaps and futures contracts. The instruments utilized are noted in the
following table along with their notional amounts and fair values at year-end
1996 and 1995:
85
<PAGE> 88
<TABLE>
<CAPTION>
Weighted
Average
Related Variable Rate Notional Weighted Average Rate Maturity Fair
-------------------------- --------
(in thousands) Asset/Liability Amount Paid Received Years Value
- -------------- ----------------------------- ---------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996
Interest rate swaps Money market deposits $ 300,000 5.70% (1) 5.54%(2) 2.0 $ 1,717
Interest rate swaps Loans 200,000 5.50 (3) 6.75 (1) 4.4 3,782
Forward interest rate swaps Money market deposits 400,000 6.27 (4) N/A (4) 1.8 (327)
Forward interest rate swaps Available for sale securities 100,000 7.02 (4) N/A (4) 3.5 (1,853)
---------- ---------
$1,000,000 $ 3,319
==========================================================================================================================
DECEMBER 31, 1995
Interest rate swaps Money market deposits $ 900,000 5.90% (1) 5.87%(2) 1.9 $ (7,295)
Interest rate swaps Long-term debt 200,000 7.11 (1) 5.85 (3) .8 (2,935)
Forward interest rate swaps Money market deposits 300,000 7.21 (5) 5.81 (5) .7 (2,854)
Futures contracts (6) Money market deposits 140,000 N/A N/A .9 (967)
---------- ---------
$1,540,000 $ (14,051)
===========================================================================================================================
</TABLE>
(1) Fixed rate.
(2) Variable rate which reprices quarterly based on 3-month LIBOR except for
$25 million which reprices every 6 months based on 6-month LIBOR.
(3) Variable rate which reprices quarterly based on 3-month LIBOR.
(4) Forward swap periods begin at various dates during 1997. The rates paid
are fixed and were set at the inception of the contracts. Variable rates
are based on 3-month LIBOR and reprice quarterly.
(5) Forward swap periods began at various dates during 1995. The rates paid
are fixed and were set at the inception of the contracts. Variable rates
are based on 3-month LIBOR and reprice quarterly.
(6) Represents $140 million short position of Eurodollar futures contracts
which in aggregate simulates a $35 million 2-year interest rate swap.
Notional amounts are key elements of derivative financial instrument
agreements. However, notional amounts do not represent the amounts exchanged
by the parties to derivatives and do not measure the Corporation's exposure to
credit or market risks. The amounts exchanged are based on the notional
amounts and the other terms of the underlying derivative agreements. The
Corporation's credit exposure at the reporting date from derivative financial
instruments is represented by the fair value of instruments with a positive
fair value at that date and is presented above along with the notional amounts
of the instruments. Credit risk disclosures, however, relate to losses that
would be recognized if counterparts failed completely to perform their
obligations.
The risk that counterparts to derivative financial instruments might
default on their obligations is monitored on an ongoing basis. To manage the
level of credit risk, the Corporation reviews the credit standing of its
counterparts and enters into master netting agreements whenever possible, and
when appropriate, obtains collateral. Master netting agreements incorporate
rights of setoff that provide for the net settlement of subject contracts with
the same counterparts in the event of default.
Interest rate swap contracts are primarily used to convert certain
deposits and long-term debt to fixed interest rates or to convert certain
groups of customer loans to fixed rates. The Corporation's net credit exposure
with interest rate swap counterparts totalled $4.8 million at December 31,
1996, and $.2 million at December 31, 1995.
The table below summarizes, by notional amounts, the activity for each
major category of derivative financial instruments.
86
<PAGE> 89
<TABLE>
<CAPTION>
Forward
Interest Rate Swaps Swaps
---------------------- ----------
Pay Receive Pay Futures
(in thousands) Fixed Fixed Fixed Basis Swaps Contracts
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 650,000 $ 200,000 $ 650,000 $ 200,000 $ -
Additions 750,000 - - - 140,000
Maturities/terminations (300,000) (200,000) (350,000) (200,000) -
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,100,000 - 300,000 - 140,000
Additions - 300,000 700,000 - -
Maturities/terminations (800,000) (100,000) (500,000) - (140,000)
- ------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ 300,000 $ 200,000 $ 500,000 $ - $ -
================================================================================================
</TABLE>
The table below presents the net deferred gains (losses) related to
terminated derivative financial instruments at December 31, 1996 and 1995.
Deferred gains of $7.0 million and deferred losses of $3.4 million are included
in other liabilities and other assets, respectively, on the consolidated
balance sheet at December 31, 1996. Deferred gains of $8.7 million and deferred
losses of $8.2 million are included in other liabilities and other assets,
respectively, on the consolidated balance sheet at December 31, 1995.
<TABLE>
<CAPTION>
=================================================================
December 31,
----------------------
(in thousands) 1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
Interest rate swaps $ 3,711 $ (990)
Futures contracts (113) 1,516
- -----------------------------------------------------------------
Total net deferred gains $ 3,598(1) $ 526(2)
</TABLE>
(1) $1.0 million of net deferred gains to be recognized during 1997 and $2.6
million of net deferred gains to be recognized during 1998 through 2001.
(2) $4.5 million of net deferred losses recognized during 1996 and $5.0
million of net deferred gains to be recognized during 1997 through 1999.
NOTE 14: LEGAL AND REGULATORY MATTERS
The federal banking agencies have broad powers under current federal law
to take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are categorized as "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," as such terms are defined under uniform regulations defining
such capital levels issued by each of the federal banking agencies.
The Federal Reserve Board and the Office of the Comptroller of the
Currency ("OCC") have adopted substantially similar risk-based capital and
leverage guidelines applicable to U.S. banking organizations. The minimum
guideline for the ratio of total capital ("total capital") to risk-weighted
assets (including certain off-balance-sheet activities, such as standby letters
of credit) is 8.00%. At least half of the total capital must be composed of
common shareholders' equity, and to the extent applicable, minority interests
in the equity accounts of consolidated subsidiaries, non-cumulative perpetual
preferred stock and a limited amount of cumulative perpetual preferred stock,
less disallowed intangibles ("Tier I capital"). The remainder, which is Tier
II capital, may consist of subordinated debt (or certain other qualifying debt
issued prior to March 12, 1988), other preferred stock and a limited amount of
loan loss reserves. In addition, each of the federal bank regulatory agencies
has established minimum leverage capital ratio guidelines. These guidelines
provide for a
87
<PAGE> 90
minimum Tier I leverage capital ratio (Tier I capital to total assets, less
disallowed intangibles) of 3% for banks and bank holding companies that meet
certain specified criteria, including that such financial institutions have the
highest regulatory examination rating and are not contemplating significant
growth or expansion. All other institutions are expected to maintain a
leverage ratio of at least 100 to 200 basis points above the minimum. At
December 31, 1996, First American's Tier I risk-based capital and total
risk-based capital ratios were 9.72% and 12.23%, respectively, and its Tier I
leverage capital ratio at December 31, 1996 was 7.88%, each of which exceeded
the minimum ratios established by the Federal Reserve Board. At December 31,
1996, FANB's Tier I risk-based, total risk-based and Tier I leverage capital
ratios were 10.23%, 11.48% and 8.39%, respectively and FANBKY's were 15.84%,
16.47% and 10.09%, respectively, all of which exceeded the minimum ratios
established by the OCC.
FAFSB is subject to capital requirements adopted by the Office of Thrift
Supervision ("OTS"), which are similar but not identical to those issued by the
Federal Reserve Board and the OCC. Under the OTS' capital guidelines, a
savings bank is required to maintain tangible capital of at least 1.5% of
tangible assets, core (leverage) capital of at least 3% of the association's
adjusted total assets and risk-based capital of at least 8% of risk-weighted
assets. At December 31, 1996, FAFSB's tangible ratio was 7.65%, its core
(leverage) capital ratio was 7.65%, Tier I capital ratio was 16.06% of
risk-weighted assets and its total risk-based capital ratio was 16.96%, all of
which exceeded the minimum ratios established by the OTS.
The extent to which dividends may be paid to the Corporation from its
subsidiaries is governed by applicable laws and regulations. For the
Corporation's national bank subsidiaries, the approval of the OCC is required
if dividends declared in any year exceed net profits for that year (as defined
under the National Bank Act) combined with the retained net profits of the two
preceding years. In addition, a national bank may not pay a dividend, make any
other capital distribution, or pay management fees if such payment would cause
it to fail to satisfy certain minimum capital requirements.
Under these regulations of the OTS, a savings association that exceeds its
fully phased-in capital requirements both immediately prior to and on a
proforma basis after giving effect to a proposed capital distribution is
generally permitted without prior approval of the OTS to make a capital
distribution during a calendar year equal to the greater of (i) 100% of net
earnings to date during the calendar year, plus the amount that would reduce by
one-half its "surplus capital ratio" (i.e., the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year; or (ii)
75% of its net income for the previous four quarters. In accordance with the
most restrictive regulations, at December 31, 1996, the above subsidiaries had
$199.9 million available for distribution as dividends to the Corporation.
The Savings Association Insurance Fund ("SAIF"), which insures deposits of
thrift institutions, has been undercapitalized as a result of losses sustained
by the S&L industry during the late 1980's and early 1990's. On September 30,
1996, legislation was enacted which required a special one-time assessment at
the rate of 65.7 basis points per $100 of deposits on SAIF deposits held as of
March 31, 1995, to recapitalize the thrift fund up to the statutorily
prescribed 1.25%. In addition, effective January 1, 1997, the SAIF deposit
insurance rate for well-capitalized institutions dropped to 0 basis points per
$100 of deposits. The Corporation accrued a one-time charge of
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<PAGE> 91
approximately $8.1 million ($5.0 million, net of tax) in the third quarter of
1996 for this special assessment. In addition, beginning January 1, 1997, the
legislation imposes a 1.3 basis point annual charge through 1999 on Bank
Insurance Fund ("BIF") deposits and a 6.4 basis point annual charge on SAIF
deposits in order to pay interest on the 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. For 1997, this annual charge is
expected to be approximately $1.0 million, net of tax, based on deposits at
September 30, 1996. From 2000 until 2019 when the 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 for each institution's insured deposit base.
The Corporation and seven other financial institutions were defendants in
a class action lawsuit brought in the Circuit Court of Shelby County,
Tennessee. The lawsuit alleged antitrust, unconscionability, usury, and
contract claims arising out of the defendants' returned check charges. The
asserted plaintiff class consisted of depositors who had been charged returned
check, or overdraft, fees. The plaintiffs requested compensatory and punitive
damages of $25.0 million against each defendant. All of the claims were
dismissed. The plaintiffs appealed to the Tennessee Court of Appeals, which
affirmed the Circuit Court's dismissal of the action. The plaintiffs then
appealed to the Tennessee Supreme Court. On November 4, 1996, the Tennessee
Supreme Court affirmed the lower court's dismissal of the action. The
plaintiffs filed a petition to rehear. On January 27, 1997, the Tennessee
Supreme Court denied the plaintiffs' petition to rehear, concluding the matter
without liability to any of the defendant banks.
Following the adoption of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), Charter (now FAFSB), brought an action
against the OTS and the FDIC seeking injunctive and other relief, contending
that Congress' elimination of supervisory goodwill required rescission of
certain supervisory transactions. The Federal District Court found in
Charter's favor, but in 1992 the Fourth Circuit Court of Appeals reversed, and
the U.S. Supreme Court denied Charter's petition for certiorari. In 1995, the
Federal Circuit Court found in favor of another thrift institution in a similar
case (Winstar Corp. v. United States) in which the association sought damages
for breach of contract. Charter also filed suit against the United States
Government ("Government") in the Court of Federal Claims based on breach of
contract. The Government sought Supreme Court review of the Winstar decision
and the Supreme Court granted the Government's petition. FAFSB's action was
stayed pending the Supreme Court's decision in the Winstar case. On July 1,
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 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
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<PAGE> 92
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 rom such proceedings presently pending
would not have a material adverse effect on the consolidated financial
statements of the Corporation.
NOTE 15: FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments for
both on- and off-balance-sheet assets and liabilities for which it is
practicable to estimate fair value. The techniques used for this valuation are
significantly affected by the assumptions used, including the amount and timing
of future cash flows and the discount rate. Such estimates involve
uncertainties and matters of judgment and therefore cannot be determined with
precision. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets. Accordingly, the aggregate
fair value amounts presented are not meant to represent the underlying value of
the Corporation.
<TABLE>
<CAPTION>
December 31
----------------------------------------------------
1996 1995
------------------------- -------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial instruments (assets):
Cash and short-term investments $ 657,257 $ 657,257 $ 521,229 $ 521,229
Securities held to maturity 834,547 835,192 931,084 933,911
Securities available for sale 1,678,232 1,678,232 1,202,493 1,202,493
Federal funds sold and securities purchased
under agreements to resell 161,677 161,677 291,042 291,042
Trading account securities 60,210 60,210 22,419 22,419
Loans, net of unearned discount and net
deferred loan fees 6,658,597 6,527,191 6,425,976 6,321,584
Financial instruments (liabilities):
Noninterest bearing deposits $1,374,528 $1,374,528 $1,266,285 $1,266,285
Interest-bearing deposits 6,418,449 6,433,897 6,116,009 6,133,450
Short-term borrowings 1,154,372 1,154,372 938,287 938,287
Long-term debt 331,157 328,545 421,791 419,816
=============================================================================================================
</TABLE>
The estimated fair values for the Corporation's off-balance-sheet
financial instruments are summarized as follows:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------
1996 1995
------------------------------- --------------------------------
Contractual Estimated Contractual Estimated
or Notional Fair or Notional Fair
(in thousands) Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to extend credit $2,698,585 $ 542 $2,220,500 $ 616
Standby letters of credit 243,517 1,109 221,341 1,050
Commercial letters of credit 38,135 95 32,032 80
Interest rate swaps 500,000 5,499 1,100,000 (10,230)
Forward interest rate swaps 500,000 (2,180) 300,000 (2,854)
Futures contracts - - 140,000 (967)
=============================================================================================================
</TABLE>
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<PAGE> 93
The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments:
Short-term financial instruments -- The carrying amounts of
short-term financial instruments, including cash, federal funds sold and
purchased and resell and repurchase agreements approximate fair value.
These instruments expose the Corporation to limited credit risk and have
no stated maturity or mature within one year or less and carry interest
rates which approximate market.
Securities held to maturity, securities available for sale, and
trading account securities -- Fair values are based on quoted market
prices or dealer quotes. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Loans -- For variable-rate loans that reprice frequently, fair values
are based on carrying values. The fair values for certain homogeneous
categories of loans, such as residential mortgages, are estimated using
quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair values for other performing
loans are estimated by discounting estimated future cash flows using the
current rates at which similar loans would be made to borrowers with
similar credit risk and for similar maturities. Included within financial
assets are certain nonperforming assets, consisting primarily of
nonperforming loans, the fair values of which are based principally on the
lower of the amount due from customers or the fair value of the loans'
collateral, which is the amount the Corporation could reasonably expect to
receive in a current sale between a willing buyer and seller other than in
a forced or liquidation sale.
Deposits -- The fair value of deposits with no stated maturity, such
as demand deposits, NOW accounts, money market accounts, and regular
savings accounts, is equal to the amount payable on demand at the
reporting date. The fair value of certificates of deposits and other
fixed maturity time deposits is estimated using the rates currently
offered for deposits of similar remaining maturities. Any foreign
deposits are valued at the carrying value due to the frequency with which
rates for such deposits are adjusted to a market rate.
Short-term borrowings -- Fair value is estimated to equal the
carrying amount since these instruments have a relatively short maturity.
Long-term debt -- Rates for long-term debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
Off-balance-sheet instruments -- The fair value of commitments to
extend credit is based on unamortized deferred loan fees and costs. For
letters of credit, fair value is estimated using fees currently charged to
enter into similar agreements with similar maturities. The fair value of
the Corporation's outstanding futures contracts is based on quoted market
prices, and the estimated fair value of interest rate swaps and forward
interest rate swaps is based on estimated costs to settle the obligations
with the counterparts at the reporting date.
NOTE 16: PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for First American Corporation (Parent
Company only) was as follows:
CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from subsidiaries:
Banks $ 45,904 $ 27,836 $46,955
Fees from subsidiaries 3,392 2,722 2,714
Interest from subsidiaries 1,771 3,076 2,102
Interest on time deposits with other banks and other income 40 589 262
- -----------------------------------------------------------------------------------------------------------------
Total income 51,107 34,223 52,033
- -----------------------------------------------------------------------------------------------------------------
Expenses
Interest expense on long-term debt 6,934 3,639 3,595
Other expenses 4,254 5,731 4,270
- -----------------------------------------------------------------------------------------------------------------
Total expenses 11,188 9,370 7,865
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 39,919 24,853 44,168
Reduction to consolidated income taxes arising from parent
company loss 2,838 1,204 1,058
- -----------------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of subsidiaries 42,757 26,057 45,226
- -----------------------------------------------------------------------------------------------------------------
Equity in undistributed earnings of subsidiaries
Banks 78,815 77,023 51,976
- -----------------------------------------------------------------------------------------------------------------
Net income $121,572 $103,080 $97,202
=================================================================================================================
</TABLE>
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<PAGE> 94
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
---------------------------------
(in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 83 $ 41
Securities available for sale 540 540
Short-term investments with subsidiary 25,569 80,185
Employee stock ownership plan loan 443 661
Investment in subsidiaries, at cost adjusted for equity in earnings and
net unrealized gains (losses) on securities available for sale 934,046 809,076
Other equity investments 6,167 5,064
Other assets 4,422 4,942
- -------------------------------------------------------------------------------------------------------------------
Total assets $971,270 $900,509
===================================================================================================================
Liabilities and shareholders' equity
Long-term debt $ 99,361 $ 99,280
Other liabilities 3,202 5,697
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 102,563 104,977
- -------------------------------------------------------------------------------------------------------------------
Preferred stock, without par value - -
Common stock, $5 par value 148,158 147,699
Capital surplus 157,792 162,254
Retained earnings 569,851 483,973
Deferred compensation on restricted stock (2,066) (1,263)
Employee stock ownership plan obligation (443) (661)
- -------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 873,292 792,002
Net unrealized gains (losses) on securities available for sale, net of tax (4,585) 3,530
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 868,707 795,532
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $971,270 $900,509
===================================================================================================================
</TABLE>
92
<PAGE> 95
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
(in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $121,572 $103,080 $ 97,202
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed income of subsidiaries (78,815) (77,023) (51,976)
Amortization 81 34 32
Deferred income tax expense 54 12 284
Change in assets and liabilities:
Increase (decrease) in accrued interest payable - 118 (56)
(Increase) decrease in other assets (2,030) (4,696) 706
Increase (decrease) in other liabilities (2,341) 4,037 (1,656)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 38,521 25,562 44,536
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net (increase) decrease in short-term securities with subsidiary 54,616 (8,719) (1,399)
Proceeds from maturity of securities held to maturity - - 174
Purchases of securities available for sale - - (540)
Net (increase) decrease in employee stock ownership plan loan 218 (661) -
Acquisitions, net of cash (1,303) - (6,476)
Investment in other equity investments (1,103) (587) (100)
Net decrease in investment in subsidiary - 7,500 -
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 52,428 (2,467) (8,341)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt - 49,513 -
Repayment of long-term debt (2,734) (782) (13,593)
Issuance of common shares for Employee Benefit and Dividend
Reinvestment Plans 12,555 13,782 1,988
Repurchase of common stock (67,602) (62,347) -
Tax benefit-related to stock options 2,568 3,095 56
Cash dividends paid (35,694) (28,791) (24,097)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (90,907) (25,530) (35,646)
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 42 (2,435) 549
Adjustment for change in fiscal year of pooled company - - 1,600
Cash, beginning of year 41 2,476 327
- ----------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 83 $ 41 $ 2,476
======================================================================================================================
Cash paid during the year for:
Interest expense $ 6,934 $ 3,521 $ 3,651
Income taxes 53,626 36,861 51,373
Noncash investing activities:
Stock issued for acquisition (note 2) 46,306 80,373 -
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
93
<PAGE> 96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
BY: /s/ Dennis C. Bottorff
-------------------------------------
DENNIS C. BOTTORFF,
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date: March 20, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Dennis C. Bottorff /s/ Martin E. Simmons
- --------------------------------------- -------------------------------
Dennis C. Bottorff Martin E. Simmons
Chairman, President and Chief Executive Executive Vice President,
Officer and Director General Counsel, Secretary, and
Dated: March 20, 1997 Principal Financial Officer
Dated: March 20, 1997
/s/ Marvin J. Vannatta, Jr.
-------------------------------
Marvin J. Vannatta, Jr.
Executive Vice President and
Principal Accounting Officer
Dated: March 20, 1997
94
<PAGE> 97
<TABLE>
<S> <C>
/s/ Samuel H. Anderson, Jr. /s/ Robert A. McCabe, Jr.
- ----------------------------- ----------------------------------
SAMUEL H. ANDERSON, JR. ROBERT A. MCCABE, JR.
Director Director
Dated: March 20, 1997 Dated: March 20, 1997
/s/ Dennis C. Bottorff /s/ Dale W. Polley
- ----------------------------- ---------------------------------
DENNIS C. BOTTORFF DALE W. POLLEY
Director Director
Dated: March 20, 1997 Dated: March 20, 1997
/s/ Earnest W. Deavenport, Jr. /s/ Dr. Roscoe R. Robinson
- ------------------------------ ----------------------------------
EARNEST W. DEAVENPORT, JR. DR. ROSCOE R. ROBINSON
Director Director
Dated: March 20, 1997 Dated: March 20, 1997
/s/ Reginald D. Dickson /s/ James F. Smith, Jr.
- ----------------------------- ----------------------------------
REGINALD D. DICKSON JAMES F. SMITH, JR.
Director Director
Dated: March 20, 1997 Dated: March 20, 1997
/s/ T. Scott Fillebrown, Jr. /s/ Cal Turner, Jr.
- ----------------------------- ----------------------------------
T. SCOTT FILLEBROWN, JR. CAL TURNER, JR.
Director Director
Dated: March 20, 1997 Dated: March 20, 1997
/s/ James A. Haslam, II /s/ Celia A. Wallace
- ----------------------------- ----------------------------------
JAMES A. HASLAM, II CELIA A. WALLACE
Director Director
Dated: March 20, 1997 Dated: March 20, 1997
/s/ Martha R. Ingram /s/ Ted H. Welch
- ----------------------------- ----------------------------------
MARTHA R. INGRAM TED H. WELCH
Director Director
Dated: March 20, 1997 Dated: March 20, 1997
/s/ Walter G. Knestrick /s/ David K. Wilson
- ----------------------------- ----------------------------------
WALTER G. KNESTRICK DAVID K. WILSON
Director Director
Dated: March 20, 1997 Dated: March 20, 1997
/s/ Gene C. Koonce
- ----------------------------- ----------------------------------
GENE C. KOONCE TOBY S. WILT
Director Director
Dated: March 20, 1997 Dated: March __, 1997
/s/ James R. Martin /s/ William S. Wire
- ----------------------------- ----------------------------------
JAMES R. MARTIN WILLIAM S. WIRE
Director Director
Dated: March 20, 1997 Dated: March 20, 1997
</TABLE>
95
<PAGE> 98
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER NAME PAGE
- ------ ---- ----
<S> <C> <C>
Exhibit 3.1 Charter of the Corporation 97
Exhibit 3.2 By-laws of the Corporation 121
Exhibit 10.3(e) First American Corporation's
Director's Deferred Compensation
Plan 149
Exhibit 10.3(g) Form of Salary Deferral Agreement for
Executive Officers 158
Exhibit 21 List of Subsidiaries 170
Exhibit 23 Accountants' Consent 172
Exhibit 27 Financial Data Schedule (for SEC use only) 173
</TABLE>
96
<PAGE> 1
EXHIBIT 3.1
RESTATED CHARTER
OF
FIRST AMERICAN CORPORATION
97
<PAGE> 2
EXHIBIT 3.1
RESTATED CHARTER
OF
FIRST AMERICAN CORPORATION
(herein sometimes the "Corporation")
AS RESTATED ON JANUARY 13, 1997
Pursuant to the provisions of Section 48-20-107 of the Tennessee Business
Corporation Act, the undersigned corporation adopts the following restated
charter (hereinafter the "Charter"):
ARTICLE I
The name of the corporation is First American Corporation.
ARTICLE II
The duration of the Corporation is perpetual.
ARTICLE III
The address of the principal office of the Corporation in the State of
Tennessee shall be First American Center, Nashville, Tennessee 37237, County of
Davidson.
ARTICLE IV
The Corporation is for profit.
ARTICLE V
A. The purpose for which the Corporation is organized is to transact the
business of a holding company with all of the powers granted generally to
corporations for profit by the Statutes of Tennessee, and without limiting in
any manner the scope and generality of the foregoing, the Corporation shall have
the following purposes and powers:
1. To acquire by purchase, subscription, or otherwise, and to receive,
hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge, or
otherwise dispose of or deal in and with any and all securities, as such term is
hereinafter defined, issued or created by any corporation, firm, organization,
association or other entity, public or private, whether formed under the laws of
the United States of America or of any state, commonwealth, territory,
dependency or possession thereof, or of any foreign country or of any political
subdivision, territory, dependency, possession or municipality thereof, or
issued or created by the United States of America or any state or commonwealth
thereof of any foreign country, or by any agency, subdivision, territory,
dependency,
98
<PAGE> 3
possession or municipality of any of the foregoing, and as owner thereof to
possess and exercise all the rights, powers and privileges of ownership,
including the right to execute consents and vote thereon.
The term "securities" as used in this Charter shall mean any and
all notes, stocks, treasury stocks, bonds, debentures, evidences of
indebtedness, certificates of interest or participation in any profit-sharing
agreement, collateral-trust certificates, preorganization certificates or
subscriptions, transferable shares, investment contracts, voting trust
certificates, certificates of deposit for a security, fraction undivided
interests in oil, gas, or other mineral rights, or, in general, any interests or
instruments commonly known as "securities," or any and all certificates of
interest or participation in, temporary or interim certificates for, receipts
for, guaranties of, or warrants or rights to subscribe to or purchase, any of
the foregoing.
2. To make, establish and maintain investments in securities, and to
supervise and manage such investments.
3. To cause to be organized under the laws of the United States of
America or of any state, commonwealth, territory, dependency or possession
thereof, or of any foreign country or of any political subdivision, territory,
dependency, possession or municipality thereof, one or more corporations, firms,
organizations, associations or other entities and to cause the same to be
dissolved, wound up, liquidated, merged or consolidated.
4. To acquire by purchase or exchange, or by transfer to or by merger
or consolidation with the Corporation or any corporation, firm, organization,
association or other entity owned or controlled, directly or indirectly, by the
Corporation, or to otherwise acquire, the whole or any part of the business,
good will, rights, or other assets of any corporation, firm, organization,
association or other entity, to operate and/or carry on the business of same,
and to undertake or assume in connection therewith the whole or any part of the
liabilities and obligations thereof, to effect any such acquisition in whole or
in part by delivery of cash or other property, including securities issued by
the Corporation, or by any other lawful means.
5. To make loans and give other forms of credit, with or without
security, and to negotiate and make contracts and agreements in connection
therewith.
6. To aid by loan, subsidy, guaranty or in any other lawful manner any
corporation, firm, organization, association or other entity of which any
securities are in any manner directly or indirectly held by the Corporation or
in which the Corporation or any such corporation, firm, organization,
association or entity may be or become otherwise interested; to guarantee the
payment of dividends on any stock issued by any such corporation, firm,
organization, association or entity; to guarantee or, with or without recourse
against any such corporation, firm, organization, association or entity, to
assume the payment of the principal of, or the interest on, any obligations
issued or incurred by such corporation, firm, organization, association or
entity; to do any and all other acts and things for the enhancement, protection
or preservation of any securities which are in
99
<PAGE> 4
any manner, directly or indirectly, held, guaranteed or assumed by the
Corporation, and to do any and all acts and things designed to accomplish any
such purpose.
7. To borrow money for any business, object or purpose of the
Corporation from time to time, without limit as to amount; to issue any kind of
indebtedness, whether or not in connection with borrowing money, including
evidences of indebtedness convertible into stock of the Corporation, to secure
the payment of any evidence of indebtedness by the creation of any interest in
any of the property or rights of the Corporation, whether at that time owned or
thereafter acquired.
8. To render service, assistance, counsel and advice to, and to act as
representative or agent in any capacity (whether managing, operating, financial,
purchasing, selling, advertising or otherwise) of, any corporation, firm,
organization, association, or other entity.
B. The Corporation shall possess and may exercise all powers and privileges
necessary or convenient to effect any or all of the foregoing purposes, or to
further any or all of the foregoing powers, and the enumeration herein of any
specific purposes or powers shall not be held to limit or restrict in any manner
the exercise by the Corporation of the general powers now or hereafter conferred
by the laws of the State of Tennessee upon corporations formed under the General
Corporation Act of Tennessee.
ARTICLE VI
A. Authorized Shares. The maximum number of shares which the Corporation
shall have authority to issue is FIFTY MILLION (50,000,000) shares of common
stock with a par value of FIVE dollars ($5.00) per share and TWO MILLION FIVE
HUNDRED THOUSAND (2,500,000) shares of preferred stock without par value.
B. No Preemptive Rights. No shareholder of any class of stock of the
Corporation shall, because of his ownership of stock, have a preemptive or other
right to purchase, subscribe for, or take any part of any stock or any part of
the notes, debentures, bonds or other securities convertible into or carrying
options or warrants to purchase stock of the Corporation issued, optioned, or
sold by it after its incorporation. Any part of the capital stock and any part
of the notes, debentures, bonds, or other securities convertible into or
carrying options or warrants to purchase stock of the Corporation authorized by
this Charter or by an amendment thereto duly filed, may at any time be issued,
optioned for sale, and sold or disposed of by the Corporation pursuant to
resolution of its Board of Directors to such persons and upon such terms as may
to such Board seem proper without first offering such stock or securities or any
part thereof to existing shareholders.
C. Issuance of Preferred Stock in Series. The Board of Directors is
expressly authorized at any time, and from time to time, to provide for the
issuance of shares of preferred stock in one or more series, with such voting
powers, full or limited but not to exceed one vote per share, or without voting
powers and with such designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue thereof adopted by the Board of Directors,
and
100
<PAGE> 5
as are not stated and expressed in this Charter or any amendment thereto,
including (but without limiting the generality of the foregoing) the following:
(i) The designation of such series.
(ii) The dividend rate of such series, the conditions and dates upon
which such dividends shall be payable, the preference or relation which such
dividends shall bear to the dividends payable on any other class or classes or
of any other series of capital stock, and whether such dividends shall be
cumulative or noncumulative.
(iii) Whether the shares of such series shall be subject to redemption
by the Corporation, and, if made subject to such redemption, the times, prices
and other terms and conditions of such redemption.
(iv) The terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such series.
(v) Whether or not the shares of such series shall be convertible into
or exchangeable for shares of any other class or classes or of any other series
of any other class or classes of capital stock of the Corporation, and, if
provision be made for conversion or exchange, the times, prices, rates,
adjustments, and other terms and conditions of such conversion or exchange.
(vi) The extent, if any, to which the holders of the shares of such
series shall be entitled to vote as a class or otherwise with respect to the
election of the directors or otherwise; provided, however, that in no event
shall any holder of any series of preferred stock be entitled to more than one
vote for each share of such preferred stock held by him.
(vii) The restrictions, if any, on the issue or reissue of any
additional preferred stock.
(viii) The rights of the holders of the shares of such series upon the
dissolution of, or upon the distribution of assets of, the Corporation.
D. $2.375 Cumulative Preferred Stock
1. Designation. The initial series of preferred stock without par value
shall be known and designated as $2.375 Cumulative Preferred Stock (hereinafter
referred to as the "Cumulative Preferred Stock"), and shall consist of THREE
HUNDRED THOUSAND (300,000) shares without par value and shall have the rights,
preferences and characteristics set forth below.
2. Dividends.
(a) The holders of shares of Cumulative Preferred Stock shall be
entitled to receive dividends at the rate of $2.375 per share per annum, when,
as and if declared by the Board of
101
<PAGE> 6
Directors out of funds legally available therefor. Dividends shall accrue from
the date of original issue and shall be payable on the first days of October,
January, April and July, commencing October 1, 1978. The record dates for
determining holders entitled to receive such dividends shall be such dates as
may be fixed by the Board of Directors.
(b) Dividends on the Cumulative Preferred Stock shall be
cumulative from the date of original issue. If such dividends shall not have
been paid, or declared and set apart for payment upon all outstanding shares of
Cumulative Preferred Stock, the deficiency shall be fully paid, or declared and
set apart for payment, before any dividends are paid or declared upon any shares
of Common stock or any class or series of stock ranking as to dividends or
assets junior to the Cumulative Preferred Stock. Whenever full cumulative
dividends on all outstanding shares of Cumulative Preferred Stock shall have
been paid, or declared and set apart for payment, the Board of Directors may
declare dividends upon the Common Stock or any other class or series of stock
junior to the Cumulative Preferred Stock, payable then or thereafter, and no
holder of Cumulative Preferred Stock shall be entitled to share therein by
virtue of such holding.
3. Liquidation. Upon any dissolution, liquidation or winding up of
the Corporation, whether voluntary or involuntary, the holders of the Cumulative
Preferred Stock shall be entitled to be paid from the assets (whether capital or
surplus) of the Corporation the following amounts:
(i) upon involuntary dissolution, liquidation or winding up, $25
per share;
(ii) upon voluntary dissolution, liquidation or winding up, an
amount per share equal to the optional redemption price prevailing on the date
on which such dissolution shall have become legally effective or such
liquidation or winding up shall have been authorized, or if such date shall be
prior to June 1, 1980, $26.75 per share;
plus, in every case, an amount equal to all accumulated and unpaid
dividends accrued to the date fixed for final distribution to such holders,
whether or not earned or declared, before any payment or distribution shall be
made to the holders of the Common Stock or any class or series ranking junior as
to dissolution, liquidation or winding up to the Cumulative Preferred Stock.
After payment in full of such amounts to the holders of the Cumulative Preferred
Stock, the holders of the Cumulative Preferred Stock, as such, shall have no
right or claim to any of the remaining assets of the Corporation, and the same
shall be distributed to the holders of the Common Stock and any other class or
series of stock junior as to dissolution, liquidation or winding up to the
Cumulative Preferred Stock in accordance with their respective rights.
4. Optional Redemption
(a) Subject to the provisions of this subsection D4, the
Corporation may redeem, on or after June 1, 1980, the Cumulative Preferred
Stock, or any part thereof, at the option of the Board of Directors, at the then
applicable optional redemption price plus an amount equal to all accumulated and
unpaid dividends accrued to the redemption date of the shares redeemed, whether
or not earned
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or declared, provided, however, that not less than (30) days nor more than (60)
days prior to the date fixed for redemption, (the "Redemption Date"), a notice
specifying the time and place of redemption and the redemption price shall be
given to the holders of record of the shares to be redeemed by publication of
such notice in one newspaper published and of general circulation in the City of
Nashville, Tennessee, and in one newspaper published and of general circulation
in the Borough of Manhattan, The City of New York and by mailing such notice to
such holders at their addresses, as the same appear upon the stock registry
books; provided, however, that if all shares of Cumulative Preferred Stock are
to be redeemed, no failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity of such redemption.
(b) The optional redemption price of shares of Cumulative
Preferred Stock redeemed at the option of the Board of Directors shall be as
follows:
$26.75 if redeemed on or after June 1, 1980 and prior to June 1, 1981;
$26.50 if redeemed on or after June 1, 1981 and prior to June 1, 1982;
$26.25 if redeemed on or after June 1, 1982 and prior to June 1, 1983;
$26.00 if redeemed on or after June 1, 1983 and prior to June 1, 1984;
$25.75 if redeemed on or after June 1, 1984 and prior to June 1, 1985;
$25.50 if redeemed on or after June 1, 1985 and prior to June 1, 1986;
$25.25 if redeemed on or after June 1, 1986 and prior to June 1, 1987;
$25.00 if redeemed on or after June 1, 1987 or thereafter.
The optional redemption price, plus dividends accrued and unpaid to the
Redemption Date, shall be paid on the Redemption Date.
(c) If less than all outstanding shares of Cumulative Preferred
Stock are to be redeemed, and except as otherwise hereinafter required by the
provisions of this subjection D4, such redemption shall be pro rata from each
holder of record, provided that the Corporation shall not redeem a fraction of a
share. If, on a strictly pro rata basis, a record holder would otherwise be
entitled to have redeemed whole shares and a fractional share, only the whole
shares shall be redeemed; however, if, on a strictly pro rata basis, a record
holder would otherwise be entitled to have redeemed only a fractional share (and
no whole shares), one full share shall be redeemed from such record holder.
In the event of any such partial redemption, the notice of
redemption mailed as aforesaid shall inform each holder of record of shares
called for redemption of the total number or proportion of shares registered in
his name that have been called for redemption, but the notice of
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redemption to be published as aforesaid need not contain such information.
(d) From and after the Redemption Date, unless default is made in
the payment of the optional redemption price when due, the shares so called for
redemption shall cease to be outstanding, and the holders thereof shall cease to
be shareholders with respect to such shares and shall have no interest in or
claim against the Corporation with respect to such shares, other than to receive
the optional redemption price on and after the date fixed for redemption without
interest thereon, upon surrender of their certificates with endorsement thereof
if required.
(e) At any time after notice of optional redemption shall have
been given as hereinabove provided, the Corporation may deposit, or cause to be
deposited in trust, to be applied to the redemption of the shares of Cumulative
Preferred Stock so called for redemption, with First American National Bank of
Nashville, Nashville, Tennessee, or with some other bank or trust company
organized and doing business under the laws of the United States of America or
the State of Tennessee and having capital surplus and undivided profits
aggregating at least ten million dollars ($10,000,000), the aggregate amount to
be paid on optional redemption to the holders of the shares so to be redeemed
upon surrender of the certificates for such shares. In case any holder of shares
of Cumulative Preferred Stock which shall have been called for redemption shall
not, within six years after such deposit, have claimed the amount deposited with
respect to the redemption thereof, such bank or trust company, upon demand,
shall pay over to the Corporation such unclaimed amount and shall thereupon be
relieved of all responsibility in respect thereof to such holder, and such
holder shall look only to the Corporation for the payment thereof. Any interest
accrued on funds so deposited shall be paid to the Corporation from time to
time.
(f) Notwithstanding the foregoing optional redemption provisions,
if at any time the Corporation shall have failed to declare or pay dividends in
full on all shares of Cumulative Preferred Stock outstanding, then and until all
arrearages of such dividends shall have been paid, or declared and set apart for
payment, the Corporation shall not purchase or redeem or otherwise acquire for
value (nor may moneys be paid or made available to any sinking fund for the
redemption of) any shares of Cumulative Preferred Stock or any shares of Common
Stock or any shares of any class or series of stock ranking as to dividends or
assets equally with or junior to the Cumulative Preferred Stock except in the
case of (i) a redemption of all outstanding shares of Cumulative Preferred Stock
at the redemption price determined in accordance with subsections D4(a) and
D4(b) above; or (ii) a purchase or other acquisition for value of shares of
Cumulative Preferred Stock pursuant to and in accordance with a purchase or
exchange of or made by the Corporation to all holders of record of the
Cumulative Preferred Stock.
5. Voting Rights
(a) Except as set forth in this subjection D5 or in any applicable
statute, the holders of Cumulative Preferred Stock shall have no voting powers,
nor shall they be entitled to notice of any meeting of the shareholders of the
Corporation.
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(b) If any time the Corporation shall be arrears in dividends on
any shares of Cumulative Preferred Stock in an amount equal to six full
quarterly dividends thereon, then, until all arrearages of dividends accumulated
on all shares of Cumulative Preferred Stock shall have been paid or declared and
set apart for payment, the holders of the Cumulative Preferred Stock, voting
separately as a class, shall have the sole right, to the exclusion of any other
class of stock, at all annual or special meetings of the shareholders of the
Corporation at which directors are to be elected, to vote for and elect TWO (2)
directors. At all annual or special meetings for election of directors so long
as such right to elect directors shall continue, the holders of the Cumulative
Preferred Stock, voting separately as a class, shall vote for and elect the
directors which they are entitled to elect as aforesaid, and thereafter the
holders of the Common stock and of any other stock of the Corporation having
voting powers, in accordance with their respective rights, shall vote for and
elect the remaining directors. At any meeting of the shareholders at which the
holders of the Cumulative Preferred Stock shall have the right to vote, they
shall have one vote for each share of Cumulative Preferred Stock registered on
the record date for such meeting in their name on the stock registry books. The
holders of the Cumulative Preferred Stock shall be entitled to notice of any
meeting of the shareholders called for the election of directors at which such
holders shall be entitled to vote as provided in this subsection D5(b), and at
any such election the holders of one-third of the shares of Cumulative Preferred
Stock outstanding shall constitute a quorum for the election of the directors
whom the holders of shares of Cumulative Preferred Stock are entitled to elect,
and a plurality of all votes of the Cumulative Preferred Stock represented at
the meeting shall be sufficient to elect such directors.
Whenever all arrearages of dividends on the Cumulative
Preferred Stock as aforesaid shall have been paid or declared and set apart for
payment, all powers of the holders of the Cumulative Preferred Stock to vote for
directors shall terminate, the term of office of all directors elected by them
shall forthwith automatically come to an end, and the number of directors shall
be the number elected by the other shareholders of the Corporation.
If the date upon which such right of the holders of the
Cumulative Preferred Stock shall become vested shall be more than one hundred
fifty days preceding the date of the next ensuing annual meeting of shareholders
as fixed by the By-Laws of the Corporation or by the Board of Directors pursuant
to the By-Laws, the size of the Board of Directors shall automatically be
increased by two members, and the President of the Corporation shall call a
special meeting of the holders of the Cumulative Preferred Stock, to be held
within sixty (60) days after such right became vested or as promptly thereafter
as possible, for the purpose of electing two persons to the Board of Directors
to serve until the next annual meeting and until their successors shall be
elected and shall qualify. Notice of such meeting shall be mailed to each holder
of record of Cumulative Preferred Stock not less than ten (10) days prior to the
date of such meeting.
Whenever the holders of Cumulative Preferred Stock shall be
entitled to elect two directors, any holder of such Cumulative Preferred Stock
shall have the right, during regular business hours, in person or by duly
authorized representative, to examine and to make transcripts of the stock
records of the Corporation for the Cumulative Preferred Stock for the purpose of
communicating with other holders of such Cumulative Preferred Stock with respect
to the exercise of such right of
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election.
If, during any interval between annual meetings of
shareholders for the election of directors and while the holders of the
Cumulative Preferred Stock shall be entitled to elect two directors, the number
of directors in office who have been so elected by the holders of the Cumulative
Preferred Stock or who succeeded a director so elected shall, by reason of
resignation, death or removal, be less than two, such vacancy shall be filled by
vote of the remaining director then in office who was elected by vote of the
holders of the Cumulative Preferred Stock or succeeded a director so elected or,
if there be no such remaining director then in office or if such vacancy or
vacancies be not so filled within forty (40) days after the creation thereof,
the President of the Corporation shall promptly call a special meeting of the
holders of the Cumulative Preferred Stock and such vacancy or vacancies shall be
filled by vote at such special meeting.
Any director elected by the holders of the Cumulative
Preferred Stock or who succeeded a director so elected may be removed from
office by vote of the holders of a majority of the shares of such stock. A
special meeting of the holders of shares of such stock may be called by a
majority vote of the Board of Directors for the purpose of removing such a
director. The President of the Corporation shall, as promptly as practicable
after delivery to the Corporation at its principal office of a request to such
effect signed by the holders of at least ten per cent (10%) of the outstanding
shares of Cumulative Preferred Stock, call a special meeting of the holders of
such stock for such purpose to be held within SIXTY (60) days or as soon
thereafter as possible after the delivery of such request.
(c) So long as any Cumulative Preferred Stock shall be
outstanding, the Corporation shall not without the affirmative vote of the
holders of at least sixty-six and two-thirds per cent (66 2/3%) of all shares of
Cumulative Preferred Stock at the time outstanding (but may do so with such vote
when so authorized by its Board of Directors and also by vote of the holders of
any other class or series of stock which may then be required) (i) authorize or
create or increase the authorized amount of any stock ranking as to dividends or
assets prior to the Cumulative Preferred Stock or any security convertible into
or exchangeable for or carrying rights to purchase any such prior stock; (ii)
otherwise alter, change or cancel any of the provisions, preferences, rights or
powers of any shares of Cumulative Preferred Stock in any manner which will
adversely affect any shares of Cumulative Preferred Stock then outstanding;
(iii) sell, transfer or lease (otherwise than as security) its property and
assets as an entirety or substantially as an entirety, provided that this
restriction shall not apply to such a sale, transfer or lease if none of the
provisions, preferences, rights or powers of the Cumulative Preferred Stock will
be adversely affected; or (iv) merge or consolidate with or into any other
corporation, provided, however, that this restriction shall not apply to, nor
shall it operate to prevent, the consolidation of merger of the Corporation with
or into another corporation if none of the provisions, preferences, rights or
powers of the Cumulative Preferred Stock or the holders thereof will be
adversely affected thereby.
(d) So long as any Cumulative Preferred Stock shall be
outstanding, the Corporation shall not without the affirmative vote of the
holders of at least a majority of the shares of Cumulative
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Preferred Stock present in person or by proxy at a meeting at which holders of
at least a majority of the outstanding shares of Cumulative Preferred Stock are
so present (but may do so with such vote when so authorized by its Board of
Directors and also by vote of the holders of any other class or series of stock
which may then be required: (i) authorize or create or increase the authorized
amount of any other class or series of stock ranking as to dividends or assets
equally with the Cumulative Preferred Stock or of any security convertible into
or exchangeable for or carrying rights to purchase any such pari passu stock, or
(ii) increase the authorized amount of Cumulative Preferred Stock.
(e) Notwithstanding the provisions of subsections D5(b), D5(c) or
D5(d) hereof, the holders of the Cumulative Preferred Stock shall not have any
rights under the provisions of this subsection D5 to vote on any matter
specified therein if, in connection with the accomplishment of such matter,
provision is to be made for the redemption of all the Cumulative Preferred Stock
at the time outstanding.
6. Redemption in the Event of Owner's Death.
(a) Subject to the limitations set forth in this subsection D6,
from and after January 1, 1979, the Corporation, upon the death of any owner of
any shares of Cumulative Preferred Stock, shall redeem within sixty (60) days
following receipt by the Corporation of written notice therefor from such
owner's personal representative(s) or surviving joint tenant(s), and of such
deceased owner's shares as shall be specified in such notice at a redemption
price of $25.00 per share plus accrued and unpaid dividends. The maximum number
of shares of Cumulative Preferred Stock which the Corporation shall be required
to redeem in any calendar year pursuant to this subjection D6 shall be 7,500
shares, and such shares will be redeemed in order of their tender to the
Corporation for redemption. The Corporation may, but shall not be obligated to,
redeem shares prior to January 1, 1979 and redeem in any calendar year shares of
Cumulative Preferred Stock in excess of the 7,500 share maximum. If shares in
excess of the 7,500 share maximum are tendered in a calendar year by the
personal representative(s) or surviving joint tenant(s)of a deceased owner, such
excess shares will be held by the Corporation and will be redeemed (up to the
7,500 maximum) as soon as possible in the next calendar year, unless the tender
for redemption is withdrawn by the personal representative(s) or surviving joint
tenants(s) by written notice received by the Secretary of the Corporation prior
to payment of the redemption price therefor. Shares tendered pursuant to this
subsection D6 must be accompanied by (1) a written request for redemption signed
by the personal representative(s) or surviving joint tenant(s), (2) appropriate
evidence of ownership and authority, (3) the certificates for the shares to be
redeemed, and (4) such waivers by taxing authorities and other documents as may
be required by counsel to the Corporation.
The Corporation shall not be required to redeem any shares
pursuant to this subsection D6, if such redemption would be prohibited by
subsection D4(f) hereof or the provisions of any law or statute, or the
provisions of any loan agreement or indenture to which the Corporation or any of
its subsidiaries is now or may hereafter be bound; provided, however neither the
Corporation nor any of its subsidiaries will enter into any loan agreement or
indenture which would immediately upon its execution or effectiveness prohibit
such redemption by its express terms or by the operation of any
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formula contained herein.
E. Series A Junior Preferred Stock. Pursuant to the authority vested in the
Board of Directors in accordance with the provisions of this Article VI of the
Charter, the Board of Directors does hereby create, authorize and provide for
the issuance of Series A Junior Preferred Stock out of the class of 2,500,000
shares of preferred stock, no par value (the "Preferred Stock"), having the
voting powers, designation, relative, participating, optional and other special
rights, preferences, and qualifications, limitations and restrictions thereof
that are set forth as follows:
1. Designation and Amount. The shares of such series shall be
designated as Series A Junior Preferred Stock ("Series A Preferred Stock") and
the number of shares constituting such series shall be 250,000. Such number of
shares may be adjusted by appropriate action of the Board of Directors.
2. Dividends and Distributions.
(a) Subject to the prior and superior rights of the holders of any
shares of any other series of Preferred Stock or any other shares of preferred
stock of the Corporation ranking prior and superior to the shares of Series A
Preferred Stock with respect to dividends, each holder of one one-hundredth
(1/100) of a share (a "Unit") of Series A Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available for that purpose,
(i) quarterly dividends payable in cash on the 1st day of
January, April, July and October in each year (each such date being a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of such Unit of Series A Preferred Stock, in an amount
per Unit (rounded to the nearest cent) equal to the greater of (x) $.01 or (y)
subject to the provision for adjustment hereinafter set forth, the aggregate per
share amount of all cash dividends declared on shares of the common stock of the
Corporation, par value $5.00 per share, (the "Common Stock") since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of a Unit of
Series A Preferred Stock, and (ii) subject to the provision for adjustment
hereinafter set forth, quarterly distributions (payable in kind) on each
Quarterly Dividend Payment Date in an amount per Unit equal to the aggregate per
share amount of all non-cash dividends or other distributions (other than a
dividend payable in shares of Common Stock or a subdivision of the outstanding
shares of Common Stock, by reclassification or otherwise) declared on shares of
Common Stock since the immediately preceding Quarterly Dividend Payment Date, or
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of a Unit of Series A Preferred Stock. In the event that the
Corporation shall at any time after December 27, 1988 (the "Rights Declaration
Date") (i) declare or pay any dividend on outstanding shares of Common Stock
payable in shares of Common Stock, or (ii) subdivide outstanding shares of
Common Stock or (iii) combine outstanding shares of Common Stock into a smaller
number of shares, then in each such case the amount to which the holder of a
Unit of Series A Preferred Stock was entitled immediately prior to such event
pursuant to the preceding sentence shall be adjusted by multiplying such amount
by a fraction the numerator of which shall be the number of shares of Common
Stock that were outstanding immediately prior to such
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event.
(b) The Corporation shall declare a dividend or distribution on
Units of Series A Preferred Stock as provided in paragraph (a) above immediately
after it declares a dividend or distribution on the shares of Common Stock
(other than a dividend payable in shares of Common Stock); provided, however,
that, in the event no dividend or distribution shall have been declared on the
Common Stock during the period between any Quarterly Dividend Payment Date and
the next subsequent Quarterly Dividend Payment Date, a dividend of $.01 per Unit
on the Series A Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and shall be cumulative on
each outstanding Unit of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issuance of such Unit of Series A
Preferred Stock, unless the date of issuance of such Unit is prior to the record
date for the first Quarterly Dividend Payment Date, in which case, dividends on
such Unit shall begin to accrue from the date of issuance of such Unit, or
unless the date of issuance is a Quarterly Dividend Payment Date or is a date
after the record date for the determination of holders of Units of Series A
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on Units of
Series A Preferred Stock in an amount less than the aggregate amount of all such
dividends at the time accrued and payable on such Units shall be allocated pro
rata on a unit-by-unit basis among all Units of Series A Preferred Stock at the
time outstanding. The Board of Directors may fix a record date for the
determination of holders of Units of Series A Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be no more than 30 days prior to the date fixed for the payment
thereof.
3. Voting Rights. The holders of Units of Series A Preferred Stock
shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth,
each Unit of Series A Preferred Stock shall entitle the holder thereof to one
vote on all matters submitted to a vote of the shareholders of the Corporation.
In the event the Corporation shall at any time after the Rights Declaration Date
(i) declare any dividend on outstanding shares of Common Stock payable in shares
of Common Stock, (ii) subdivide outstanding shares of Common Stock or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the number of votes per Unit to which holders of Units of
Series A Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction the numerator of which shall
be the number of shares of Common Stock outstanding immediately after such event
and the denominator of which shall be the number of shares of Common Stock that
were outstanding immediately prior to such event.
(b) Except as otherwise provided herein or by law, the holders of
Units of Series A Preferred Stock and the holders of shares of Common Stock
shall vote together as one class on all
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matters submitted to a vote of shareholders of the Corporation.
(c)(i) If at any time dividends on any Units of Series A
Preferred Stock shall be in arrears in an amount equal to six quarterly
dividends thereon, then during the period (a "default period") from the
occurrence of such event until such time as all accrued and unpaid dividends for
all previous quarterly dividend periods and for the current quarterly dividend
period on all Units of Series A Preferred Stock then outstanding shall have been
declared and paid or set apart for payment, all holders of Units of Series A
Preferred Stock voting separately as a class, shall have the right, at the next
meeting of shareholders called for the election of directors (the "Next
Meeting"), to elect two directors (the "New Directors" or individually, "New
Director"), which directors shall be in addition to the number previously set by
the Board of Directors pursuant to Article III of the By-Laws. One of the New
Directors shall serve as a member of the class of directors being elected for a
three-year term and the other New Director shall serve as a member of the class
of directors whose remaining term at the Next Meeting is two years and until
their successors are elected by such holders and qualified or their earlier
resignation, removal or incapacity or until such earlier time as all accrued and
unpaid dividends upon the outstanding Units of Series A Preferred Stock shall
have been paid (or set aside for payment) in full. The New Directors may be
removed and replaced by such holders, and vacancies in such directorships may be
filled only by such holders (or the remaining directors elected by such holders
if there be one) in the manner permitted by law. After the holders of Units of
Series A Preferred Stock have exercised their right to elect directors during
any default period, the number of directors shall not be increased or decreased
except as approved by a vote of the holders of Units of Series A Preferred Stock
as herein provided or pursuant to the rights of any equity securities ranking
senior to the Series A Preferred Stock.
(ii)Immediately upon the expiration of a default period (x)
the right of holders of Units of Series A Preferred Stock as a separate class to
elect directors shall cease, (y) the term of any directors elected by the
holders of Units of Series A Preferred Stock as a separate class shall
terminate, and (z) the number of directors shall be such number as may be
provided for prior to any increase made pursuant to the provisions of paragraph
3(c)(i) of this paragraph 3 (such number being subject, however, to change
thereafter in any manner provided by law or in the Charter or By-Laws). Any
vacancies in the Board of Directors effected by the provisions of clauses (y)
and (z) in the preceding sentence may be filled by a majority of the remaining
directors.
(iii) The provisions of this paragraph (c) shall govern the
election of directors by holders of Units of Series A Preferred Stock during any
default period notwithstanding any provisions of the Charter to the contrary.
(d) Except as set forth herein or required by law, holders of
Units of Series A Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of shares of Common Stock as set forth herein) for the taking of
any corporate action.
4. Certain Restrictions.
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(a) Whenever quarterly dividends or other dividends or
distributions payable on Units of Series A Preferred Stock as provided in
paragraph 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on outstanding Units of
Series A Preferred Stock shall have been paid (or set aside for payment) in
full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior to the Series A Preferred Stock;
(ii)declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity as to dividends with
the Series A Preferred Stock, except for dividends paid ratably on Units of
Series A Preferred Stock and shares of all such parity stock on which dividends
are payable or in arrears in proportion to the total amounts to which the
holders of such Units and all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A Preferred Stock,
provided, however, that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such parity stock in exchange for shares of any
stock ranking junior (both as to dividends and upon liquidation, dissolution or
winding up) to the Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any Units
of Series A Preferred Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to all
holders of such Units.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (a) of
this paragraph 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any Units of Series A Preferred Stock purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such Units
shall, upon their cancellation, become authorized but unissued Units of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
6. Liquidation, Dissolution or Winding Up.
(a) Upon any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, no distribution shall be made,
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(i) to the holders of shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless the holders of Units of Series A Preferred Stock shall
have received, subject to adjustment as hereinafter provided in paragraph (b),
the greater of either (y) $80.00 per Unit plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not earned or declared,
to the date of such payment, or (z) the amount equal to the aggregate per share
amount to be distributed to holders of shares of Common Stock, or (ii) to the
holders of shares of stock ranking on a parity upon liquidation, dissolution or
winding up with the Series A Preferred Stock, unless simultaneously therewith
distributions are made ratably on Units of Series A Preferred Stock and all
other shares of such parity stock in proportion to the total amounts to which
the holders of Units of Series A Preferred Stock are entitled under clause
(i)(y) of this sentence and to which the holders of shares of such parity stock
are entitled, in each case upon such liquidation, dissolution or winding up.
(b) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on outstanding shares of Common
Stock payable in shares of Common Stock, or (ii) subdivide outstanding shares of
Common Stock, or (iii) combine outstanding shares of Common Stock into a smaller
number of shares, then in each such case the aggregate amount to which holders
of Units of Series A Preferred Stock were entitled immediately prior to such
event pursuant to clause (i)(z) of paragraph (a) of this paragraph 6 shall be
adjusted by multiplying such amount by a fraction the numerator of which shall
be the number of shares of Common Stock that are outstanding immediately after
such event and the denominator of which shall be the number of shares of Common
Stock that were outstanding immediately prior to such event.
7. Share Exchange, Merger, Etc. In case the Corporation shall enter
into any share exchange, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or converted into other stock or
securities, cash and/or any other property, then in any such case Units of
Series A Preferred Stock shall at the same time be similarly exchanged for or
converted into an amount per Unit (subject to the provision for adjustment
hereinafter set forth) equal to the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is converted or exchanged. In the event the
Corporation shall at any time after the Rights Declaration Date (i) declare any
dividend on outstanding shares of Common Stock payable in shares of Common
Stock, or (ii) subdivide outstanding shares of Common Stock, or (iii) combine
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the immediately preceding sentence with respect to the
exchange or conversion of shares of Series A Preferred Stock shall be adjusted
by multiplying such amount by a fraction the numerator of which shall be the
number of shares of Common Stock that are outstanding immediately after such
event and the denominator of which shall be the number of shares of Common Stock
that were outstanding immediately prior to such event.
8. Redemption. The Units of Series A Preferred Stock shall not be
redeemable at the option of the Corporation or any holder thereof.
Notwithstanding the foregoing sentence of this Section, the Corporation may
acquire Units of Series A Preferred Stock in any other manner permitted by law
and the Charter or by-laws of the Corporation.
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9. Ranking. The Units of Series A Preferred Stock shall rank junior to
all other series of the Preferred Stock and to any other class of preferred
stock that hereafter may be issued by the Corporation as to the payment of
dividends and the distribution of assets, unless the terms of any such series or
class shall provide otherwise.
10. Amendment. The Charter, including without limitation the provisions
hereof, shall not hereafter be amended, either directly or indirectly, or
through merger or share exchange with another corporation, in any manner that
would alter or change the powers, preferences or special rights of the Series A
Preferred Stock so as to affect the holders thereof adversely without the
affirmative vote of the holders of a majority or more of the outstanding Units
of Series A Preferred Stock, voting separately as a class.
11. Fractional Shares. The Series A Preferred Stock may be issued in
Units or other fractions of a share, which Units or fractions shall entitle the
holder, in proportion to such holder's fractional shares, to exercise voting
rights, receive dividends, participate in distributions and to have the benefit
of all other rights of holders of Series A Preferred Stock.
ARTICLE VII
The amount of capital with which this Corporation will begin business shall
be (not less than one thousand) One Thousand ($1,000.00) Dollars; and when such
amount so fixed shall have been subscribed for, all subscriptions of the stock
of this Corporation shall be enforceable and it may proceed to do business in
the same manner and as fully as though the maximum number of shares authorized
under the provisions of the preceding section hereof shall have been subscribed
for.
ARTICLE VIII
A. Bylaws. The Bylaws of the Corporation may be made, altered, amended
or repealed by the Board of Directors.
B. Indemnification. Indemnification for directors, officers, employees
and agents of the Corporation may be provided either directly or through the
purchase of insurance, by the Corporation from time to time to the fullest
extent and in the manner permitted by law.
To the full extent from time to time permitted by law, including
without limitation the Tennessee Business Corporation Act, as currently in
effect or as it may be amended from time to time, no director of the corporation
shall be personally liable to the corporation or its shareholders for monetary
damages for breach of any fiduciary duty as a director. Neither the amendment or
repeal of this Article VIII (B), nor the adoption of any provision of this
Charter inconsistent with this Article VIII (B), shall reduce or eliminate the
protection afforded by this Article VIII (B) to a director in respect of any
matter which occurred, or any cause of action or claim which but for this
Article VIII (B) would have accrued or arisen, prior to such amendment, repeal
or adoption.
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C. Issuance of Bonds, Debentures or Obligations. Authority is hereby
expressly vested in the board of directors to issue bonds, debentures or
obligations of this Corporation and to fix all of the terms thereof including
without limitation the interest to be paid thereon, the convertibility or non-
convertibility thereof and other provisions with regard thereto.
ARTICLE IX
The Board of Directors may take without a meeting on written consent any
action which they are required or permitted to take by the Charter, by-laws or
statutes provided such consent sets forth the action taken and is signed by all
the directors.
ARTICLE X
A. Voting Requirement. In addition to any affirmative vote required by law
or any other Article of this Charter, and except as otherwise expressly provided
in Section B of this Article, any Business Combination shall require an
affirmative vote of (i) seventy-five percent (75%) of the votes entitled to be
cast by all holders of Voting Stock (as defined herein) voting together as a
single class at a meeting of shareholders called for such purpose and, in
addition thereto, (ii) a majority of the votes entitled to be cast by all
holders of Voting Stock, other than shares of Voting Stock which are
Beneficially Owned (as defined herein) by the Interested Shareholder (as defined
herein), voting together as a single class at a meeting of shareholders called
for such purpose. Such affirmative vote shall be required notwithstanding the
fact that a vote would not otherwise be required, or that a lesser percentage
may be specified by law or in any agreement with any national securities
exchange or otherwise.
B. When Voting Requirement Not Applicable. The provisions of Section A of
this Article shall not be applicable to any Business Combination which shall
have been approved by a majority of the Disinterested Directors or as to which
all of the conditions specified in subsections B(1), B(2) and B(3) shall have
been met:
1. Fair Prices. The aggregate amount per share of the cash and the Fair
Market Value (as defined herein), as of the Announcement Date, of the
consideration other than cash to be received in such Business Combination by
holders of shares of the respective classes and series of outstanding capital
stock of the Corporation shall be at least equal to the highest of the
following:
(a) if applicable, the highest per share price (adjusted for any
subsequent stock dividends, splits, combinations, recapitalizations,
reclassifications or other such reorganizations) paid to acquire any shares of
such respective classes and series Beneficially Owned by the Interested
Shareholder during the Pre-announcement period (as defined herein);
(b) The highest per share price (adjusted for any subsequent stock
dividends, splits, combinations, recapitalizations, reclassifications or other
such reorganizations) paid to acquire any shares of such respective classes and
series Beneficially Owned by the Interested Shareholder in the
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transaction in which the Interested Shareholder became an Interested
Shareholder;
(c) The Fair Market Value per share of such respective classes
and series on the Announcement Date (as defined herein);
(d) The Fair Market Value per share of such respective classes
and series on the Determination Date (as defined herein); or
(e) The amount per share of any preferential payment to which
shares of such respective classes and series are entitled in the event of a
liquidation, dissolution or winding up of the Corporation.
2. Form of Consideration. The consideration to be received by holders
of each particular class and series of outstanding capital stock of the
Corporation in a Business Combination shall be: (i) cash or (ii) if the majority
of the shares of any particular class or series of the capital stock of the
Corporation Beneficially Owned by the Interested Shareholder shall have been
acquired for a consideration in a form other than cash, the same form of
consideration used to acquire the largest number of shares of such class or
series previously acquired and Beneficially Owned by the Interested Shareholder.
3. Other Requirements. After such Interested Shareholder has become
an Interested Shareholder and piror to the consummation of such Business
Combination, except as approved by a majority of the Disinterested Directors,
there shall have been:
(a) No failure to declare and pay in full, when and as due, any
dividends on any class or series of Preferred Stock (as defined herein) (whether
cumulative or not), except on any class or series of Preferred Stock as to which
dividends were in arrears on the Determination Date;
(b) No reduction in the quarterly rate of dividends on the
Corporation's Common Stock below the dividends paid during the dividend quarter
of the Corporation ended immediately prior to the Determination Date, except any
reduction in dividends necessary to fairly reflect any stock dividend, split,
recapitalization, reclassification or other such reorganization;
(c) No failure to increase the quarterly rate of any dividends per
share paid on the Corporation's Common Stock to fairly reflect any stock
combination, recapitalization, reclassification or other such reorganization
which has the effect of reducing the number of outstanding shares of Common
Stock;
(d) No increase in the number of shares of the capital stock of
the Corporation Beneficially Owned by the Interested Shareholder, except: (i) as
a part of the transaction that resulted in the Interested Shareholder becoming
an Interested Shareholder or (ii) to consummate the Business Combination in
compliance with the provisions of this Article.
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(e) No loans, advances, guarantees, pledges or other financial
assistance or tax credits or other tax advantages provided by the Corporation or
its subsidiaries for the benefit, directly or indirectly, of the Interested
Shareholder, whether in anticipation of or in connection with such Business
Combination or otherwise;
(f) No material change in the Corporation's business or capital
structure or the business or capital structure of any subsidiary of the
Corporation effected, directly or indirectly, by or for the benefit of the
Interested Shareholder; and
(g) A proxy or information statement mailed at least thirty (30)
days prior to the completion of the Business Combination to all the holders of
Voting Stock (whether or not shareholder approval of the Business Combination is
required) which proxy or information statement shall (i) describe the Business
Combination, (ii) include in a prominent place the recommendations, if any, of a
majority of the Disinterested Directors as to the advisability or inadvisability
of the Business Combination; (iii) if deemed advisable by a majority of the
Disinterested Directors, include an opinion of a reputable investment banking
firm or other expert as to the fairness or unfairness of the terms of the
Business Combination from the point of view of the shareholders other than the
Interested Shareholder (such investment banking firm to be selected by a
majority of the Disinterested Directors and to be paid a resonable fee for their
services by the Corporation upon receipt of such opinion) and (iv) be responsive
to the pertinent provisions of the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder, or any laws supplementing or
superseding such Act, rules and regulations, whether or not such proxy or
information statement is required by law to be furnished to any holders of
Voting Stock.
C. Definitions. As as used in Articles X, XI, and XII:
1. "Business Combination" means any of the transaction described
below:
(a) Any merger or consolidation of the Corporation or any
Subsidiary (as defined herein) with: (i) any Interested Shareholder or (ii) any
corporation (whether or not itself an Interested Shareholder) which is, or after
such merger or consolidation would be, an Affiliate (as defined herein) of an
Interested Shareholder;
(b) Any sale, lease, exchange, mortgage, pledge, transfer or other
disposition, in one transaction or a series of transactions: (i) to or with any
Interested Shareholder or Affiliate of any Interested Shareholder of any assets
(including securities) of the Corporation or any Subsidiary having an aggregate
Fair Market Value of $1,000,000 or more or (ii) to or with the Corporation or
any Subsidiary of any assets (including securities) of any Interested
Shareholder or any Affiliate of an Interested Shareholder having an aggregate
Fair Market Value of $1,000,000 or more;
(c) The issuance or transfer by the Corporation or any Subsidiary
in one transaction or a series of transactions, of any securities of the
Corporation or any Subsidiary to any Interested Shareholder or an Affiliate of
any Interested Shareholder in exchange for cash, securities or other
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property, or a combination thereof, having an aggregate Fair Market Value of
$1,000,000 or more;
(d) Te adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Shareholder or any Affiliate of any Interested Shareholder;
(e) Any reclassification of securities (including any reverse
stock split) or any recapitalization or reorganization of the Corporation, or
any merger or consolidation of the Corporation with any of its Subsidiaries or
any other transaction (whether or not with or into or otherwise involving an
Interested Shareholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any class of
equity securities of the Corporation or any Subsidiary (including securities
convertible into equity securities) which is directly or indirectly owned by any
Interested Shareholder or any Affiliate of any Interested Shareholder; or
(f) Any other transaction or series of transactions that is
similar in purpose or effect to those referred to in (a) through (e) of this
subsection C(1).
2. "Voting Stock" means the Common Stock and those classes of
Preferred Stock which would then be entitled to vote in the election of
directors.
3. "Beneficially Owned," with respect to any securities, means the
right or power (directly or indirectly through any contract, understanding or
relationship) (i) vote or direct the voting of such securities (ii) to dispose
or direct the disposition of such Securities, or (iii) toacquire such voting or
investment power, whether such right or power is exercisable immediately or only
after the passage of time.
4. "Interested Shareholder" means any Person (as defined herein) or
member of a Group of Persons (as defined herein) who or which, together with any
Affiliate or Associate (as defined herein) of such Person or member,
Beneficially Owns (within the meaning of subsection C(3) above ten percent or
more of the outstanding Voting Stock of the Corporation.
5. "Person" means any individual, firm, corporation, partnership,
joint venture or other entity.
6. "Group of Persons" means any two or more Persons who or which are
acting or have agreed to act together for the purpose of acquiring, holding,
voting or disposing of any Voting Stock of the Corporation.
7. "Disinterested Director" means any member of the board of directors
of the Corporation who is not an Interested Shareholder or an Affiliate or
Associate of an Interested Shareholder and who (i) was a member of the board of
directors prior to the time the Interested Sharehder became an Interested
Shareholder or (ii) was elected or recommended to succeed a Disinterested
Director by a majority of the Disinterested Directors then on the board of
directors.
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8. "Fair Market Value" means: (i) in the case of stock, the highest
sale price during the 30 day period immediately preceding the date in question
of a share of such stock on the NASDAQ National Market System, or if such stock
is listed on an exchange registered under the Securities Exchange of Act 1934,
on the prinicipal exchange on which such stock is listed, or if no such
quotations are available, the fair market value on the date in question of a
share of such stock as determined by a majority of the Disinterested Directors
in good faith; and (ii) in the case of property other than cash or stock, the
fair market value of such property on the date in question as determined by a
majority of the Disinterested Directors in good faith.
9. "Pre-announcement Period" means the two-year period ending at
11:59 p.m., Nashville time, on the Announcement Date.
10. "Announcement Date" means the date of the first public
announcement of the proposal of the Business Combination.
11. "Determination Date" means the date on which the Interested
Shareholder becomes an Interested Shareholder.
12. "Subisidiary" means any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by the Corporation.
13. "Affiliate," used to indicate a relationship with a specified
Person, means another Person that directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
such specified Person.
14. "Associate," used to indicate a relationship with a specified
Person, means (i) any corporation or other similar organization (other then the
Corporation or a Subsidiary) of which such specified Person is an officer or
partner or is, directly or indirectly, the beneficial owner of ten percent or
more of any class of equity securities, (ii) any trust or estate in which such
specified Person has a substantial beneficial intererest or as to which such
specified Person serves as trustee or in a similar fiduciary capacity, (iii) any
relative or spouse of such specified Person, or any relative of such spouse who
has the same home as such Person and (iv) any other Person or Affiliate of a
Person who directly or indirectly has received more than $50,000 for services or
property from the specified Person or from an Affiliate of the specified Person
during any year of the preceding five calendar years or who can reasonbly be
expected to receive more than such amount in the current calendar year under any
exising agreement or agreements or understandings with such specified Person or
an Affiliate of such specified Person.
15. "Preferred Stock" means all classes or series of the Corporation's
capital stock other than Common Stock.
D. Powers of Disinterested Directors. A majority of the Disinterested
Directors of the Corporation shall have the power and duty to determine, on the
basis of information known to them
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after reasonable inquiry, all facts necessary to determine compliance with this
Article, including without limitation (i) whether a Person is an Interested
Shareholder, (ii) the number of shares of Voting Stock beneifically owned by any
Person, (iii) whether a Person is an Affiliate or Associate of another, (iv)
whether the requirements of Section B, have been met with respect to any
Business Combination, and (v) whether the assets which are the subject of any
Business Combination have, or the consideration to be received for the issuance
or transfer of securities by the Corporation or any Subsidiary in any Business
Combination has an aggregate Fair Market Value of $1,000,000 or more. The good
faith determination of a majority of the Disinterested Directors on such matters
shall be conclusive and binding for all purposes of this Article.
E. No Effect on Preferential Rights. The provisions of this Article shall
not affect in any way the amount or form of consideration that any holder of
shares of the Corporation's capital stock is entitled to receive upon the
liquiditoin or dissolution of the Corporaiton or any other preferential rights
of the holders of such shares.
F. No Effect on Fiduciary Obligations of Interested Shareholders.
Nothing contained in this Article shall be construed to relieve any Interested
Shareholder from any fiduciary obligation imposed by law.
G. Amendment or Repeal. In addition to any affirmative vote required by
law, an affirmative vote at least equal to the vote of seventy-five percent
(75%) of the votes entitled to be cast by all holders of Voting Stock voting
together as a single class, and addition thereto and (ii) a majority of the
votes entitled to be cast by all holders of Voting Stock, other than shares of
Voting Stock which are Beneficially Owned by an Interested Shareholder, voting
together as a single class, shall be required to amend or repeal, or adopt any
charter provisions inconsistent with this Article. Such affirmative vote shall
be required notwithstanding the fact that no vote may be required, or that a
lesser percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
ARTICLE XI
A. The Board of Directors shall consist of not less than nine (9) nor more
than twenty-seven (27), the exact number of directors to be established from
time to time exclusively by the Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized directors (whether or
not there exist any vacancies in previously authorized directorships at the time
any such resolution is presented to the Board for adoption). At the annual
meeting of shareholders held in 1985, the directors shall be divided into three
classes, as nearly equal in number as possible with a one year term of office
for the first class, a two year term of office for the second class and a three
year term of office for the third class. At each annual meeting of shareholders
following such initial classification and election, directors elected to succeed
those directors whose terms expire shall be elected for a three year term of
office. Each director shall hold office for the term for which that person was
elected and until his or her successor shall have been elected or qualified.
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B. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause shall be filled only by a majority vote of the directors
then in office, though less than a quorum, and directors so chosen shall hold
office for the unexpired term of his or her predecessor, or if there is no such
predecessor, until the next annual meeting of shareholders. No decrease in the
number of authorized directors constituting the entire Board of Directors shall
shorten the term of any incumbent director.
C. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, any director, or the entire Board of Directors, may be removed
(but only for cause as defined in the Tennessee General Corporation Act) from
office at any time by the affirmative vote of seventy-five percent (75%) of the
votes entitled to be cast by all holders of voting stock, voting together as a
single class at a meeting called for such purpose. If the holders of any series
of Preferred Stock then outstanding are entitled to elect one or more directors,
the provision of the foregoing sentence shall not apply, in respect of the
removal of a director or directors so elected, to the vote of the holders of the
outstanding shares of that series and the rights of the holders of such shares
shall be as set forth in this Charter and in the certificate of designation
establishing such series.
D. Notwithstanding any other provision of this Charter or any provision of
applicable law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of holders of any particular class or series of
the capital stock of the Corporaiton entitled to vote by applicable law or by
the terms of such class or series, this Article may not be altered, amended or
repealed except upon the affirmative vote of the holders of seventy-five percent
(75%) of the votes entitled to be cast by all holders of Voting Stock, voting
together as a single class at a meeting called for such purpose, and, in
addition thereto (ii) a majority of the votes entitled to be cast by all holders
of voting stock, other than shares of voting stock which are Beneficially Owned
by an Interested Shareholder, voting together as a single class.
ARTICLE XII
The Board of Directors of the Corporation, when evaluating any offer of a
Person, other than the Corporation itself, to (a) make a tender or exchange
offer for any equity security of the Corporation or any other security of the
Corporation convertible into an equity security, (b) merge or consolidate the
Corporation with another Person or purchase or (c) otherwise acquire all or
substantially all of the properties and assets of the Corporation (an
"Acquisition Proposal"), shall consider all relevant factors, including without
limitation, the consideration being offered in the Acquisition Proposal in
relation to the then-current market price, in relation to the then-current value
of the Corporation in a freely negotiated transaction, and in relation to the
Board of Directors' then estimate of the future value of the Corporation as an
independent entity, the social and economic effects on the employees, customer,
suppliers and other constitutients of the Corporation and its subsidiaries and
on the communities in which the Corporation and its subsidiaries operate or are
located and the desirability of maintaining the Corporation's independence from
other entities.
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EXHIBIT 3.2
BY-LAWS
OF
FIRST AMERICAN CORPORATION
(herein sometimes the "Corporation")
AS AMENDED JANUARY 16, 1997
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EXHIBIT 3.2
BY-LAWS
OF
FIRST AMERICAN CORPORATION
ARTICLE I
GENERAL
SECTION 1.1. PRINCIPAL OFFICE. The principal office of the Corporation
shall be in First American Center, Nashville, Tennessee, and the Corporation
shall have such other offices at such other places as the Board of Directors
(herein sometimes the "Board") may from time to time appoint, or the business of
the Corporation may require.
SECTION 1.2. GENDER. When used herein, the masculine gender shall
include the feminine.
ARTICLE II
SHAREHOLDERS
SECTION 2.1. ANNUAL MEETING. The annual meeting of the shareholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting each year shall be held on such day and at such
time as the Board of Directors shall determine.
SECTION 2.2 SPECIAL MEETINGS. Special meetings of shareholders, unless
otherwise provided by law, may be called at any time by the Board, the Chairman
of the Board, the Vice Chairman of the Board, or the President. The Chairman of
the Board, the Vice Chairman or the President shall also call a special meeting
of shareholders, to be held no sooner than seventy-five (75) and no later than
ninety (90) days (as shall be determined in the sole discretion of the officer
calling the same) after the receipt of a written demand for such a meeting from
shareholders owning of record ten percent (10%) or more of the entire capital
stock of the Corporation issued and outstanding and entitled to vote at such
meeting, together with a certified check for fifty thousand dollars ($50,000)
payable to the Corporation to cover the Corporation's expenses in connection
with such meeting, including the preparation of proxy materials and the mailing
of notices and proxy materials to shareholders. Such written demand must state
the purpose or purposes for which the meeting is called, the names of the
shareholder or shareholders calling the meeting, the number of shares owned of
record by each
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such shareholder, and any other information specified in Schedule 14A, Rule
14a-3 or Rule 14a-11 of the Rules and Regulations of the Securities and Exchange
Commission.
SECTION 2.3. PLACE OF MEETING. The Board may designate any place, either
within or without the State of Tennessee, as the place of meeting for any annual
meeting or for any special meeting which is called by the Board. If no place is
designated by the Board, or if a special meeting is held pursuant to shareholder
demand, the place of meeting shall be the principal office of the Corporation as
provided in these By-Laws.
SECTION 2.4. NOTICE OF SHAREHOLDER MEETINGS; WAIVER.
(a) ANNUAL MEETINGS. Written notice stating the place, date and hour of the
annual meeting of shareholders shall be given in person or by mail to each
shareholder of record entitled to vote at such meeting. If mailed, such notice
shall be mailed not less than ten (10) days nor more than sixty (60) days before
the meeting. Mailed notice shall be deemed to be given when deposited, with
postage prepaid, in the United States mail addressed to the shareholder at his
address as it appears on the records of the Corporation at the close of business
on the record date established for such meeting, or to such other address as the
shareholder shall have designated in writing to the Secretary. If delivered
personally, such notice shall be delivered not less than ten (10) days nor more
than sixty (60) days before the date of the meeting and shall be deemed
delivered when actually received by the shareholder.
(b) SPECIAL MEETINGS. Written notice of every special meeting of
shareholders shall be given by the Corporation in person or by mail to each
shareholder of record entitled to vote at such meeting. Such notice shall state
the place, date, hour, purpose or purposes for which the meeting is called, and
the person or persons calling the meeting. In the case of a meeting called
pursuant to the request of shareholders owning ten percent (10%) or more of the
entire capital stock of the Corporation issued and outstanding and entitled to
vote at such meeting, such notice shall be given, in person or by mail, not less
than forty-five (45) days nor more than sixty (60) days before the meeting.
Otherwise, if mailed, such notice shall be given not less than ten (10) days nor
more than sixty (60) days before the meeting, and if delivered personally, such
notice shall be delivered not less than ten (10) days nor more than sixty (60)
days before the date of the meeting. Mailed notice shall be deemed to be given
when deposited, with postage prepaid, in the United States mail addressed to the
shareholder at his address as it appears on the records of the Corporation at
the close of business on the record date established for such meeting, or to
such other address as the shareholder
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shall have designated in writing to the Secretary, and shall be deemed delivered
personally when actually received by the shareholder.
(c) WAIVER. Notice of any meeting need not be given to any shareholder who
signs a waiver of notice, either before or after such meeting, or who attends
the meeting in person or by proxy, and does not object at the beginning of the
meeting to the lack of notice or to the fact that the meeting was not otherwise
lawfully called or convened. Attendance at a meeting for the express purpose of
objecting to the lack of notice or to the fact that the meeting was otherwise
not lawfully called or convened shall not, however, constitute a waiver of
notice.
SECTION 2.5. NOTICE OF NOMINATIONS. Nominations for the election of
directors may be made by the Board of Directors or a committee appointed by the
Board of Directors authorized to make such nominations or by any shareholder
entitled to vote in the election of directors generally. However, any such
shareholder nomination may be made only if written notice of the intent to make
such nomination has been given, either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the Corporation not later than (i)
with respect to an election to be held at an annual meeting of shareholders, two
hundred ten (210) days in advance of such meeting, and (ii) with respect to an
election to be held at a special meeting of shareholders for the election of
directors, the close of business on the 10th day following the date on which
notice of such meeting is first given to shareholders. In the case of any
nomination by the Board of Directors or a committee appointed by the Board of
Directors authorized to make such nominations, compliance with the proxy rules
of the Securities and Exchange Commission shall constitute compliance with the
notice provisions of the preceding sentence.
In the case of any nomination by a shareholder, each such notice shall set
forth: (a) as to each person whom the shareholder proposes to nominate for
election or re-election as a director, (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the class and number of shares of the Corporation which are
beneficially owned by such person, and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies with
respect to nominees for election as directors, pursuant to Regulation 14A under
the Securities and Exchange Act of 1934, as amended (including without
limitation such person's written consent to being named in the proxy statement
as a nominee and to serving as a director, if elected); and (b) as to the
shareholder giving the notice (i) the name and address, as they appear on the
Corporation's books, of such shareholder and (ii) the class and number of shares
of the Corporation which are beneficially owned by such shareholder; and (c) a
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description of all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
shareholder. The chairman of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedure.
SECTION 2.6. NOTICE OF NEW BUSINESS. At an annual meeting of shareholders
only such new business shall be conducted, and only such proposals shall be
acted upon, as shall have been properly brought before the meeting. To be
properly brought before the annual meeting such new business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (b) otherwise properly brought before
the meeting by or at the direction of the Board of Directors, or (c) otherwise
properly brought before the meeting by a shareholder. For a proposal to be
properly brought before an annual meeting by a shareholder, the shareholder must
have given timely notice thereof in writing to the Secretary of the Corporation
and the proposal must comply with SEC Rule 14a-8 under the Securities Exchange
Act of 1934. To be timely, a shareholder's proposal to be presented at an annual
meeting shall be received by the General Counsel at the principal executive
offices of the Corporation not less than 120 calendar days in advance of the
date of the Corporation's proxy statement released to security-holders in
connection with the previous year's annual meeting of security-holders.
A shareholder's notice to the Secretary shall set forth as to each matter
the shareholder proposes to bring before the annual meeting (a) a brief
description of the proposal desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the Corporation's books, of the shareholder proposing
such business, (c) the class and number of shares of the Corporation which are
beneficially owned by the shareholder, and (d) any financial interest of the
shareholder in such proposal.
Notwithstanding anything in the By-Laws to the contrary, no business shall
be conducted at an annual meeting except in accordance with the procedures set
forth in this Section. The Chairman of an annual meeting shall, if the facts
warrant, determine and declare to the meeting that new business or any
shareholder proposal was not properly brought before the meeting in accordance
with the provisions of this Section, and if he should so determine, he shall so
declare to the meeting and any such business or proposal not properly brought
before the meeting shall not be acted upon at the meeting. This provision shall
not prevent the consideration and approval or disapproval at the annual meeting
of reports of officers, directors and committees, but in connection with such
reports
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no new business shall be acted upon at such annual meeting unless stated and
filed as herein provided.
SECTION 2.7. RECORD DATE. The Board shall fix as the record date for any
determination of shareholders entitled to vote at any meeting of shareholders or
any adjournment thereof, to demand a special meeting, to receive notice of a
shareholders meeting, to receive payment of any dividend, or for any other
proper purpose, a date not more than seventy (70) days prior to the date on
which the particular action requiring such determination of shareholders is to
be taken. If no record date is fixed by the Board, as provided above, and if the
Charter does not otherwise provide for a record date, then the date on which the
resolution of the Board declaring such dividend is adopted, or the day before
the date on which notice of the meeting is mailed, shall be the record date for
such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made, as provided herein, such determination shall apply
to any adjournment of such meeting unless the Board of Directors fixes a new
record date, which it must do if the meeting is adjourned to a date more than
four (4) months after the date fixed for the original meeting.
SECTION 2.8. LIST OF SHAREHOLDERS. After the record date for a meeting has
been fixed, the Corporation shall prepare an alphabetical list of names of all
shareholders who are entitled to notice of a shareholders' meeting. Such list
will be arranged by voting group (and within each voting group by class or
series of shares) and will show the address of and number of shares held by each
shareholder. The shareholders' list will be available for inspection in
accordance with the Tennessee Business Corporation Act (the "Act"), beginning
two (2) business days after notice of the meeting is given for which the list
was prepared and continuing through the meeting, at the Corporation's principal
office or at a place identified in the meeting notice in the city where the
meeting will be held. A shareholder or his agent or attorney is entitled on
written demand to inspect and, subject to the requirements of the Act, to copy
the list, during regular business hours and at his expense, during the period it
is available for inspection.
SECTION 2.9. VOTING GROUPS; QUORUM; ADJOURNMENT. All shares entitled to
vote and be counted together collectively on a matter at a meeting of
shareholders shall be a "voting group". Shares entitled to vote as a separate
voting group may take action on a matter at a meeting only if a quorum of those
shares exists with respect to that matter. Except as otherwise required by the
Act or provided in the Charter, a majority of the votes entitled to be cast on a
matter by a voting group constitutes a quorum of that voting group for action on
that matter. Once a share
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is represented for any purpose at a meeting, it is deemed present for quorum
purposes for the remainder of the meeting and for any adjournment of that
meeting unless a new record date is or must be set for that adjourned meeting.
If a quorum of a voting group shall not be present or represented at any
meeting, the shares entitled to vote thereat shall have power, by majority vote,
to adjourn the meeting to a different date, time or place without notice other
than announcement at the meeting of the new time, date or place to which the
meeting is adjourned. At any adjourned meeting at which a quorum of any voting
group shall be present or represented, any business may be transacted by such
voting group which might have been transacted at the meeting as originally
called.
SECTION 2.10 PROXIES. At all meetings of shareholders, a shareholder may
vote in person or by proxy executed in writing by such shareholder or his duly
authorized attorney-in-fact. Such proxy shall be filed with the Secretary of the
Corporation or other officer or agent authorized to tabulate votes before or at
the time of the meeting. No proxy shall be valid after eleven (11) months from
its date, unless otherwise provided in the proxy. A proxy is revocable by the
shareholder unless the form of proxy conspicuously states that it is irrevocable
and the proxy is coupled with an interest.
SECTION 2.11. ACCEPTANCE OF SHAREHOLDER DOCUMENTS. If the name signed on a
shareholder document (a vote, consent, waiver, or proxy appointment) corresponds
to the name of a shareholder, the Corporation, if acting in good faith, is
entitled to accept such shareholder document and give it effect as the act of
the shareholder. If the name signed on such shareholder document does not
correspond to the name of a shareholder, the Corporation, if acting in good
faith, is nevertheless entitled to accept such shareholder document and to give
it effect as the act of the shareholder if:
(i) the shareholder is an entity and the name signed purports to be that
of an officer or agent of the entity;
(ii) the name signed purports to be that of a fiduciary representing the
shareholder and, if the Corporation requests, evidence of fiduciary status
acceptable to the Corporation has been presented with respect to such
shareholder document;
(iii) the name signed purports to be that of a receiver or trustee in
bankruptcy of the shareholder and, if the Corporation requests, evidence of this
status acceptable to the Corporation has been presented with respect to the
shareholder document;
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(iv) the name signed purports to be that of a pledgee, beneficial owner or
attorney-in-fact of the shareholder and, if the Corporation requests, evidence
acceptable to the Corporation of the signatory's authority to sign for the
shareholder has been presented with respect to such shareholder document; or
(v) two or more persons are the shareholder as cotenants or fiduciaries and
the name signed purports to be the name of at least one (1) of the co-owners and
the person signing appears to be acting on behalf of all the co-owners.
The Corporation is entitled to reject a shareholder document if the
Secretary or other officer or agent authorized to tabulate votes, acting in good
faith, has a reasonable basis for doubt about the validity of the signature on
such shareholder document or about the signatory's authority to sign for the
shareholder.
SECTION 2.12. VOTING OF SHARES.
(a) SHAREHOLDERS ENTITLED TO VOTE. Unless otherwise provided by the Act or
the Charter, every shareholder of the Corporation shall be entitled, at each
meeting of the shareholders and upon each proposal presented at such meeting, to
one vote for each share registered in his name on the books of the Corporation
on the record date. Shares owned of record or beneficially as fiduciary by a
subsidiary bank of the Corporation shall be entitled to be voted at such
meeting, and shall be voted in accordance with the directions in the instrument
establishing such fiduciary relationship or other governing instrument, or in
the absence of such direction, in accordance with applicable fiduciary
principles, and the Corporation, as such, shall not control the voting of such
shares.
(b) VOTE REQUIRED. Unless the Act, the Corporation's Charter or these
By-Laws specifically require a greater number of affirmative votes, if a quorum
exists, approval of action on a matter (other than election of directors) by a
voting group entitled to vote thereon is received if the votes cast within the
voting group favoring the action exceeds the votes cast disapproving the action.
Except as otherwise provided in the Charter, directors shall be elected by the
affirmative vote of a plurality of the votes cast by the shares entitled to vote
in the election at a meeting at which a quorum is present. If a shareholder
shall abstain, such shareholder shall be deemed to have not voted. At each
election of directors, every shareholder shall have the right to vote the number
of shares which he is entitled to vote at such meeting for as many persons as
there are directors to be elected at said meeting, but cumulative voting for
nominees shall not be permitted. Except as specified in Article X of the
Corporation's Charter, any Business Combination (as therein defined) shall
require in addition to any affirmative vote required by the Act an affirmative
vote of (i) seventy-five percent (75%) of the
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votes entitled to be cast by all holders of Voting Stock (as defined in such
Article X), voting together as a voting group at a meeting of shareholders
called for such purpose, and in addition thereto, (ii) a majority of the votes
entitled to be cast by all holders of Voting Stock, other than shares of Voting
Stock which are Beneficially Owned (as defined in Article X) by an Interested
Shareholder (as defined in Article X), voting together as a voting group at a
meeting of shareholders called for such purpose.
SECTION 2.13. ORGANIZATION. At every meeting of shareholders, the Chief
Executive Officer shall preside as Chairman of the meeting and the Secretary or
other officer shall act as secretary. In the Chief Executive Officer's absence,
inability or unwillingness to serve, the Chairman of the Board or the President
(and in his absence, inability or unwillingness to serve, the Vice Chairman of
the Board) shall preside as Chairman of the meeting. A full record of each
meeting shall be made by its secretary and such minutes shall be retained in the
records of the Corporation. At every annual meeting, the Chief Executive
Officer, or other appropriate officer, shall report on the operations of the
Corporation during the preceding year.
SECTION 2.14. JUDGES OF THE ELECTION. The Board of Directors or the officer
presiding at the annual meeting shall appoint one or more judges of election as
such appointing authority shall deem necessary to assure the proper holding of
the election of directors; and the judge or judges so appointed shall, after the
election has been held, certify the results thereof, giving the names of
directors. In the event the judge or judges of election shall be appointed by
the Board in advance of the annual meeting and shall for any reason fail or be
unable to serve, a substitute judge may be appointed at any time prior to the
election by either the Board or the officer presiding at the annual meeting.
SECTION 2.15. CONDUCT OF MEETINGS.
Meetings of shareholders generally shall follow accepted rules of
parliamentary procedure subject to the following:
(a) The chairman of the meeting shall have absolute authority over the
matters of procedure, and there shall be no appeal from the ruling of the
chairman. If, in his absolute discretion, the chairman deems it advisable to
dispense with the rules of parliamentary procedure as to any meeting of
shareholders or part thereof, he shall so state and shall clearly state the
rules under which the meeting or appropriate part thereof shall be conducted.
(b) If disorder should arise which prevents the continuation of the
legitimate business of the meeting, the chairman may quit the chair and announce
the
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adjournment of the meeting; and upon his so doing, the meeting is immediately
adjourned.
(c) The chairman may ask or require that anyone not a bona fide shareholder
or proxy leave the meeting.
(d) A resolution or motion shall be considered for vote only if proposed by
a shareholder or a duly authorized proxy and seconded by a shareholder or duly
authorized proxy other than the individual who proposed the resolution or
motion.
(e) Except as the chairman may permit, no matter shall be presented to the
meeting which has not been submitted for inclusion in the agenda at least thirty
(30) days prior to the meeting.
SECTION 2.16. ACTION ON WRITTEN CONSENT OF SHAREHOLDERS. Action required or
permitted by the Act to be taken at a shareholders' meeting may be taken without
a meeting. If all shareholders entitled to vote on the action consent to taking
such action without a meeting, the affirmative vote of the number of shares that
would be necessary to authorize or take such action at a meeting is the act of
the shareholders.
The action must be evidenced by one (1) or more written consents describing
the action taken, at least one of which is signed by each shareholder entitled
to vote on the action in one (1) or more counterparts, indicating such signing
shareholder's vote or abstention on the action and delivered to the Corporation
for inclusion in the minutes or for filing with the corporate records.
If the Act or the Charter requires that notice of a proposed action be
given to nonvoting shareholders and the action is to be taken by consent of the
voting shareholders, then the Corporation shall give its nonvoting shareholders
written notice of the proposed action at least ten (10) days before such action
is taken. Such notice shall contain or be accompanied by the same material that
would have been required to be sent to nonvoting shareholders in a notice of a
meeting at which the proposed action would have been submitted to the
shareholders for action.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1. GENERAL POWERS. All corporate powers shall be exercised by
or under the authority of and the business and affairs of the Corporation shall
be managed
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under the direction of the Board of Directors.
SECTION 3.2. NUMBER, ELECTION AND TENURE OF DIRECTORS. The Board shall
consist of not less than nine (9) nor more than twenty-seven (27), the exact
number within such minimum and maximum to be fixed and determined from time to
time by resolution of a majority of the Board or by resolution of the
shareholders at any meeting thereof. The directors shall be divided into three
classes as equal in number as practicable. At each annual meeting of
shareholders following the initial classification and election, directors
elected to succeed those directors whose terms expire shall be elected for a
three-year term of office. Each director shall hold office for the term for
which the person was elected and until his successor has been elected and
qualified. No decrease in the number of authorized directors constituting the
entire Board of Directors shall shorten the term of any incumbent director.
SECTION 3.3. VACANCIES. Unless the Charter otherwise provides, newly
created directorships resulting from any increase in the authorized number of
directors, or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification or removal (with or without cause)
shall be filled only by a majority vote of the directors then in office, though
less than a quorum, and each director so chosen shall hold office for the
unexpired term of his or her predecessor, or, if there is no such predecessor,
until the next annual meeting of shareholders. No decrease in the number of
authorized directors constituting the entire Board of Directors shall shorten
the term of any incumbent director. If the vacant office was held by a director
elected by a voting group of shareholders, only the holders of shares of that
voting group shall be entitled to vote to fill the vacancy if it is filled by
the shareholders.
SECTION 3.4. REMOVAL OF DIRECTORS. At a meeting of shareholders called
expressly for that purpose, any director may be removed, but only for cause as
defined by the laws of Tennessee, by the affirmative vote of the shareholders
holding seventy-five percent (75%) of the shares entitled to vote at such
meeting. If any voting group (other than shares of common stock) is entitled to
elect one or more directors, the provisions of the foregoing sentence shall not
apply in respect of the removal of the director or directors so elected, and the
vote of the holders of that voting group and the rights of the holders of such
shares shall be as set forth in the Charter.
SECTION 3.5. REGULAR MEETINGS. A regular meeting of the Board shall be held
immediately after the annual meeting of shareholders. A majority of the entire
Board may provide, by resolution, the time and place for the holding of
additional regular meetings. Such regular meetings may be held without notice of
the time, place and purpose thereof.
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SECTION 3.6. SPECIAL MEETINGS. Special meetings of the Board may be called
by the Chairman of the Board, the Vice Chairman of the Board, the President or
any three directors. Notice of the time and place of each special meeting shall
be given to each director at either his business or residence address, as shown
by the records of the Secretary, at least forty-eight (48) hours previously
thereto if mailed and twelve (12) hours previously thereto if delivered or given
by telegram or telephone. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail so addressed, with postage prepaid
thereon. If notice be given by telegram, such notice shall be deemed to be
delivered when the telegram, so addressed, is delivered to the telegraph
company. Any directors may waive notice of any meeting before, at or after such
meeting, and except as provided in the next sentence, the waiver must be in
writing, signed by the director and filed with the minutes or corporate records.
The attendance of a director at a meeting shall constitute a waiver of notice of
such meeting except where a director attends for the express purpose of
objecting to the transaction of business thereat on the ground that the meeting
is not lawfully called or convened.
SECTION 3.7. QUORUM. A majority of the entire Board shall constitute a
quorum at any meeting; but a less number may adjourn any meeting from time to
time, and the meeting may be held, as adjourned, without further notice. Subject
to the rights of the holders of any series of Preferred Stock then outstanding,
newly created directorships resulting from any increase in the authorized number
of directors, or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or other cause,
shall be filled only by a majority vote of the directors then in office, though
less than a quorum, and each director so chosen shall hold office for the
unexpired term of his or her predecessor, or if there is no predecessor, until
the next annual meeting of shareholders.
SECTION 3.8. MANNER OF ACTING. The act of the majority of the directors
present at a meeting at which a quorum is present shall, unless the Charter or
these By-Laws require the vote of a greater (or different) number of directors,
be the act of the Board. Directors may participate in any meetings, or the
meeting may be conducted by means of communications equipment whereby all
persons participating can simultaneously hear each other. A director
participating in a meeting by this means is deemed to be present in person at
the meeting. Any action required or permitted by the Act to be taken at a Board
of Directors' meeting may be taken without a meeting. If all directors consent
to taking such action without a meeting, the affirmative vote of the number of
directors that would be necessary to authorize or take such action at a meeting
is the act of the Board of Directors. Such action must be evidenced by one or
more written consents describing the action taken, at least one of which is
signed by each director, indicating the director's vote or abstention on the
action, which consents shall be included in the minutes or filed with the
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corporate records reflecting the action taken. Action taken by consent is
effective when the last director signs the consent, unless the consent specifies
a different effective date.
SECTION 3.9. COMPENSATION. Directors and members of any committee created
by the Board of Directors shall be entitled to such reasonable compensation for
their services as directors and members of such committee as shall be fixed from
time to time by the Board, and shall also be entitled to reimbursement for any
reasonable expenses incurred in attending meetings of the Board or of any such
committee meetings. Any director receiving such compensation shall not be barred
from serving the Corporation in any other capacity and receiving reasonable
compensation for such other services; provided, however, that no director who is
also an officer (other than are holding an honorary position) shall be
compensated for service as a director.
SECTION 3.10. PRESUMPTION OF ASSENT. A director of the Corporation who is
present at a meeting of the Board at which action on any Corporation matter is
taken shall be presumed to have assented to the action taken unless his dissent
shall be entered in the minutes of the meeting, or unless:
(i) he objects at the beginning of the meeting (or promptly upon his
arrival) to holding the meeting or transacting business at the meeting;
(ii) his dissent or abstention from the action taken is entered in the
minutes of the meeting; or
(iii) he delivers written notice of his dissent or abstention to the
presiding officer of the meeting before its adjournment or to the Corporation
immediately after adjournment of the meeting. The right of dissent or abstention
is not available to a director who votes in favor of the action taken.
SECTION 3.11. DIRECTOR AGE QUALIFICATION. No person shall be elected or
re-elected a director of the Corporation after attaining age 70; provided,
however, if deemed by the Board to be in the best interest of the Corporation, a
person may be elected or re-elected for a single term after attaining age 70;
and provided further, a person who owns, directly or indirectly, in excess of 1%
of the issued and outstanding shares of the Corporation may be re-elected
without regard to age.
ARTICLE IV
COMMITTEES
SECTION 4.1. EXECUTIVE COMMITTEE. There may be an Executive Committee of
the Board consisting of the Chief Executive Officer (or in his absence the
President or
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Chairman of the Board) and not less than three other Directors who shall be
elected by the Board. Except as set forth below, the Executive Committee shall
have all the powers of the Board in the management and conduct of the business
and affairs of the Corporation in the intervals between meetings of the Board,
and shall report its actions to the Board at its regular meetings. The Executive
Committee may not:
a. Except according to a formula or method prescribed by the Board,
authorize dividends (in cash, debt or property other than shares of the
Corporation) purchases, redemptions or other acquisitions of shares of
the Corporation or the incurrence of indebtedness (directly or
indirectly, including through a guaranty) by the Corporation to or for
the benefit of its shareholders in respect of any of its shares;
b. Approve or propose to shareholders action that the Act requires be
approved by shareholders;
c. Fill vacancies on the Board or any of its Committees;
d. Amend the Charter pursuant to T.C.A. ss.48-20-102;
e. Adopt, amend or repeal these bylaws;
f. Approve a plan of merger not requiring shareholder approval;
g. Authorize or approve reacquisition of shares, except according to a
formula or method prescribed by the Board; or
h. Authorize or approve the issuance or sale or contract for sale of
shares, or determine the designation and relative rights, preferences
and limitations of a class or series of shares, except that the Board
may authorize the Executive Committee (or any senior executive officer
of the Corporation) to do so within limits specifically prescribed by
the Board of Directors.
Vacancies in the membership of the Executive Committee may be filled at any
meeting of the Board. Meetings of the Executive Committee shall be held subject
to call by the Chairman of the Committee or the Chief Executive Officer.
SECTION 4.2. AUDIT COMMITTEE. There shall be an Audit Committee composed of
at least three directors elected by the Board, none of whom shall be officers
employed on a regular full-time basis by the Corporation or any of its
affiliates. The Board shall appoint from among the members of the committee a
chairman thereof, who shall preside at meetings of the committee and shall
direct its work.
The Audit Committee shall determine that the affairs and operations of the
Corporation and its affiliates are subject to appropriate audits and control
procedures, shall report regularly to the Board, at least annually, in
connection with the activities, findings and reports of both internal and
independent audits of the Corporation and its affiliates, and shall provide
guidance and assistance to such auditors, as appropriate under the
circumstances, including providing that such auditors shall exercise their
function independently of management, wherever appropriate. If
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requested to do so by the Board or the Executive Committee, the Audit Committee
shall review any transaction with the Corporation in which a director or officer
of the Corporation has a direct or indirect interest.
SECTION 4.3. HUMAN RESOURCES COMMITTEE. There may be a Human Resources
Committee composed of at least three directors elected by the Board, at least
two of whom shall not be employed on a regular full-time basis by the
Corporation or any of its affiliates. The Board shall appoint from among the
members of the committee a chairman thereof, who shall preside at meetings of
the committee and shall direct its work.
The Committee shall exercise general oversight over all personnel practices
and procedures for all officers and employees of the Corporation and all its
affiliates, including but not limited to all benefit programs, and to act on
behalf of the Board with regard to salary administration. The committee shall
review all actions of management as to the aggregate expenditures for salaries
and shall review specific salaries of all officers of the Corporation and
employees of the Corporation whose current salaries exceed such amount per year
as shall be determined from time to time by the committee or whose salary would
exceed such amount per year if the recommended increase were granted. Salaries
of officers of the Corporation who are also Directors of the Corporation shall
be recommended by the Human Resources Committee for approval by the full Board
of Directors. The committee shall serve as the administrative committee for the
Corporation's FIRST Plan, the Star Award Plan and the KEEP plan and shall
perform such other functions as may be assigned to it by the Board.
SECTION 4.4 COMMUNITY AFFAIRS COMMITTEE. There shall be a Community Affairs
Committee composed of at least three Directors elected by the Board, at least
two of whom shall not be employed on a regular full-time basis by the
Corporation or any of its affiliates. The Board shall appoint from among the
members of the Committee a chairman thereof, who shall preside at meetings of
the Committee and shall direct its work.
It shall be the duty of the Committee to advise and counsel management in
matters of community activities, contributions, image issues, government
affairs, and compliance with the Community Reinvestment Act and other laws or
regulations of a similar purpose; and to perform such other functions as may be
assigned to it by the Board.
SECTION 4.5 DEVELOPMENT COMMITTEE. There shall be a Development
Committee of the Board consisting of not less than three directors elected by
the Board. The Board shall appoint from among the members of the Committee a
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Chairman thereof, who shall preside at meetings of the Committee and shall
direct its work.
It shall be the duty of the Committee to oversee and to advise and cousel
management as to the investigation, development and implementation of
non-traditional banking products or services offered through the Corporation or
its affiliates. The Committee shall also provide general oversight to First
American National Bank's corporate and personal trust services as well as
services offered incidentally thereto, such as investment management. The
Committee shall also review preliminary reports and recommendations concerning
strategic growth through mergers and acquisitions. The Committee shall ensure
that all such activities are undertaken and conducted in accordance with
applicable laws and regulations, corporate policy and sound financial planning.
The Committee shall also perform such other functions as may be assigned to it
by the Board.
SECTION 4.6 ASSET POLICY COMMITTEE. There shall be an Asset Policy
Committee composed of not less than five directors elected by the Board, at
least four of whom shall not be employed on a regular full-time basis by the
Corporation or any of its affiliates. The Board shall appoint from among the
members of the Committee a Chairman thereof, who shall preside at meetings of
the Committee and shall direct its work.
The Committee shall have responsibility for all credit related matters,
including approval of credit policies and procedures, monitoring the loan
portfolio, review of significant transactions, review of credit examinations,
compliance with regulatory requirements and applicable laws and regulations,
review of internal and external audits, review of the allowance for loan losses,
and review of regulatory examinations. The Asset Policy Committee shall also
regularly review asset/liability policies and procedures, asset quality reports,
and the policies and procedures of the Capital Markets Group. The Asset Policy
Committee shall perform such other duties as may be assigned to it from time to
time by the Board.
SECTION 4.7 THE COMMITTEE ON DIRECTORS. There may be a Committee on
Directors composed of at least three directors elected by the Board, none of
whom shall be officers employed on a regular full-time basis by the Corporation
or any of its affiliates. The Board shall appoint from among the members of the
committee a Chairman thereof, who shall preside at meetings of the committee and
shall direct its work.
The Committee on Directors shall establish criteria for the evaluation of
members of the board, shall evaluate members of the Board and recommend to the
Board of Directors whether those members should be re-elected. The committee
shall evaluate
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the size and composition of the Board and shall establish criteria for director
nomination. They shall identify and recommend to the Board of Directors nominees
for membership on the Board. In keeping with all of the foregoing, the Committee
on Directors shall administer the Corporate Governance Program of the
Corporation, as may be approved from time to time by the Directors.
The Committee may receive recommendations for membership on the Board
submitted by shareholders of the Corporation if written notice of the
recommendation is submitted to the Chief Executive Officer of the corporation
within 60 days prior to the meeting of the committee. Such written notice shall
contain the following information to the extent known by the nominating
shareholder: the name and address of each proposed nominee; the principal
occupation of each proposed nominee; the name and residential address of the
notifying shareholder; and the number of shares owned by the notifying
shareholder.
SECTION 4.8. OTHER COMMITTEES. The Board may create such other committees
as it may determine will be helpful in discharging its responsibilities for the
management and administration of the Corporation. Each committee shall perform
such functions as may be assigned to it by the Board. All members of committees
of the Board which exercise powers of the Board must be members of, and serve at
the pleasure of, the Board.
SECTION 4.9. COMPENSATION. The chairman and members of all committees
(except those who are also officers of the Corporation or any subsidiary of the
Corporation) shall receive such compensation for their services as may be fixed
by the Board.
SECTION 4.10. MEETINGS. Regular meetings of any standing or special
committee may be held without call or notice at such times and places as such
committee from time to time may fix. Other meetings of any such committee may be
called by the Chairman of the Board, the Vice Chairman of the Board, the
President, the chairman of such committee, or any two members of such committee,
upon giving notice of the time and place of each such meeting to each member at
either his business or residence address, as shown by the records of the
Secretary, at least forty-eight (48) hours previously thereto if mailed, and
twelve (12) hours previously thereto if delivered in person, or given orally, or
by telephone or by telegraph. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail, so addressed, with postage
prepaid thereon. If notice be given by telegram, such notice shall be deemed to
be delivered when the telegram, so addressed, is delivered to the telegraph
company. Any member may waive notice of any meeting before, at or after such
meeting and except as provided in the next sentence, the waiver must be in
writing, signed by the director and filed with the minutes or corporate records.
The
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attendance of a member at a meeting shall constitute a waiver of notice of such
meeting except where a member attends for the express purpose of objecting to
the transaction of business thereat on the grounds that the meeting is not
lawfully called or convened.
SECTION 4.11. QUORUM. At any meeting of any standing or special committee,
a majority of the members shall constitute a quorum and any action of such
committee to be effective must be authorized by the affirmative vote of a
majority of the members thereof present at the meeting.
SECTION 4.12. MANNER OF ACTING. Committees are authorized to act in any
manner by which the Board is authorized to act as provided in Section 3.8 of
these By-Laws.
ARTICLE V
OFFICERS AND EMPLOYEES
SECTION 5.1. NUMBER. The officers of the Corporation shall be a Chairman of
the Board, a Vice Chairman of the Board, a President, one or more Vice
Presidents, a Secretary, a Treasurer, and such other officers, with such titles
and descriptions, as the Board, the Human Resources Committee, or the Chief
Executive Officer, from time to time, may deem appropriate. The Chairman of the
Board, the Vice Chairman of the Board and the President shall be members of the
Board. Any two or more offices may be held by the same person except the offices
of the President and the Secretary may not be combined.
SECTION 5.2. APPOINTMENT AND TERM OF OFFICE. The officers of the
Corporation shall be appointed annually by the Board at its first meeting held
after the annual meeting of shareholders, or as soon thereafter as is
convenient. Each officer shall serve at the pleasure of the Board of Directors
until his successor shall have been duly appointed or until his death,
resignation or removal.
SECTION 5.3. REMOVAL. Any officer or agent elected or appointed by the
Board may be removed by the Board at any time, with or without cause, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed. Appointment of an officer or agent shall not of itself create
contract rights.
SECTION 5.4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise may be filled by the Board
or the Human Resources Committee for the unexpired portion of the term.
SECTION 5.5. CHAIRMAN OF THE BOARD AND/OR EXECUTIVE COMMITTEE The Board
may elect one of its members, who may be the same person, to be Chairman of the
Board
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and/or Chairman of the Executive Committee. He shall preside at all meetings of
the Board and/or the Executive Committee and shall perform such duties and
exercise such powers as reasonably may be assigned by the Board. In the absence
of the Chairman, the Chief Executive Officer shall preside at meetings of the
Board or the Executive Committee.
SECTION 5.6. VICE CHAIRMAN. The Board may elect one or more Vice Chairmen,
who need not be Board members, with such duties and powers as may be assigned by
the Board, the Chairman of the Board or the Chief Executive Officer.
SECTION 5.7. PRESIDENT. The Board shall elect one of its members to be
President. The President shall have such powers and duties as may be assigned to
him by the Board or the Chief Executive Officer of the Corporation. In the
absence of the Chairman of the Board, the President shall preside at meetings of
the Board. In the absence of the Chairman of the Executive Committee, the
President shall preside at meetings of the Committee. In the absence of the
President, or upon his inability to act, or if said office shall become vacant,
his duties shall be performed by such person or persons as shall be so
designated by the Board. He shall perform such other duties as the Board of
Directors may prescribe.
SECTION 5.8 CHIEF EXECUTIVE OFFICER. The Board shall elect one of its
members to be Chief Executive Officer. He may exercise all of the powers
customarily exercised by the chief executive officer of a corporation and shall
have general supervision of all policies and operations of the Corporation. All
officers of the Corporation shall report to him to the extent he may at any time
require.
SECTION 5.9. EXECUTIVE AND SENIOR VICE PRESIDENTS. The Board or the Human
Resources Committee shall appoint one or more Executive or Senior Vice
Presidents, except that those designated as Regulation O executive officers
based upon their roles in First American Corporation or First American National
Bank shall be appointed solely by the Board. Each Executive or Senior Vice
President shall have such powers and duties as may be assigned to him by the
Board, the Human Resources Committee, or the Chief Executive Officer of the
Corporation.
SECTION 5.10. SECRETARY. The Secretary of the Corporation shall be
exofficio Secretary of the Board, the Executive Committee, and of all other
standing committees of the Board (unless another person is so designated by such
committee). He shall keep the minutes of all meetings of the shareholders, the
Board, the Executive Committee, and when required, of all other standing
committees and meetings of which he shall be assigned secretary; and attend to
serving and giving all notices of the Corporation. He shall have charge of the
corporate seal, the stock certificate records and such other books, records, and
papers as the Board and the
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Executive Committee may direct; keep a stock record containing the names of all
persons who are shareholders of the Corporation, showing their place of
residence, the number of shares of stock held by them respectively; the dates
they became owners thereof; and shall perform such other duties as may be
incident to his office or as prescribed by the Board or the Chief Executive
Officer. If the Board so prescribes, the stock records may be kept by a stock
transfer agent selected by the Board.
SECTION 5.11. TREASURER. The Treasurer shall keep or cause to be kept full
and accurate accounts of all receipts and disbursements in books belonging to
the Corporation, and shall have the care and custody of all funds and securities
of the Corporation and he shall disburse the funds of the Corporation as
required in the ordinary course of business or as may be ordered by the Board,
the Executive Committee, or the Chief Executive Officer. He shall perform such
other duties as may be incident to his office or as prescribed by the Board or
the Chief Executive Officer.
SECTION 5.12. VICE PRESIDENTS AND OTHER OFFICERS. The Board, the Human
Resources Committee, the Chief Executive Officer or the President may elect or
appoint Vice Presidents and such other officers and attorneys-in-fact, not
specifically provided for by these By-Laws, with such titles and descriptions,
as from time to time may appear to the Board, the Human Resources Committee, the
Chief Executive Officer or the President to be required or desirable to transact
the business of the Corporation. Such officers shall respectively exercise such
powers and perform such duties as pertain to their several offices, or as may be
conferred upon, or assigned to them by the Board, the Human Resources Committee,
the Chief Executive Officer or the President of the Corporation.
SECTION 5.13. DELEGATION. In case of the absence of any officer of the
Corporation, or for any other reason that the Board may deem sufficient, the
Board may delegate for the time being the powers or duties, or any of them, of
such officers to any other officer, or to any Director, provided a majority of
the entire Board concur therein.
SECTION 5.14. RETIREMENT OF OFFICERS AND EMPLOYEES. Any officer or salaried
employee of the Corporation shall retire at the end of the month in which he
reaches age sixty-five (65) or, if mandatory retirement at such age shall be
prohibited by law, at such next older age as shall be legally permissible.
Provided, however, that the Board by specific action may delay for not more than
(1) year beyond the mandatory retirement age set forth in the preceding
sentence, the retirement of any officer or salaried employee who is performing
such services for the Corporation that continuation in active employment is
deemed by the Board to be in the best interest of the Corporation. Provided,
further, that if deemed in the best interest of the
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Corporation, the Board, by specific action and as an alternative to extension of
the retirement age of such officer or salaried employee, may employ him in a
consulting capacity beyond his mandatory retirement age.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
SECTION 6.1. APPLICATION. Unless contrary to court order, the Corporation
shall indemnify any person who was or is a party or who is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding or
investigation, whether civil, criminal or administrative by reason of the fact
that he is or was a director (or counsel to the Board) advisory director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, trustee or agent of another corporation,
partnership, joint venture, trust or other enterprise, and in each case, the
heirs, executors or administrators of any such person (all such persons, heirs,
executors or administrators being referred to hereafter as "Official") against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorney fees actually and reasonably incurred as a result of such proceeding,
including any appeal therein, provided he acted in good faith and in a manner
which he reasonably believed to be in, or not opposed to, the best interest of
the Corporation and with respect to any criminal proceeding, had no reasonable
cause to believe that his conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction or upon a plea of
nolo contendere or its equivalent, shall not of itself, create a presumption
that the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any general proceeding, that he had reasonable cause to believe
his conduct was unlawful.
SECTION 6.2. WILLFUL MISCONDUCT. No indemnification shall be made to or
on behalf of any Official:
(a) if a judgment or other final adjudication adverse to the Official
establishes his liability for intentional misconduct or knowing
violation of the law or under T.C.A. ss.48-18-304 for unlawful
distributions;
(b) if a judgment or other final adjudication adverse to the Official
for breach of the Official's duty of loyalty to the Corporation is
based upon such Official gaining in fact personal profit or
advantage to which he was not entitled;
(c) in a proceeding by or in the right of the Corporation (i) for any
amounts if the Official is adjudged liable to the Corporation, or
(ii) for any amounts paid
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to the Corporation in settlement of such a proceeding by such
Official; or
(d) in a proceeding by the Corporation directly (and not derivatively)
for expenses, unless such proceeding shall be brought after a
change in control of the Corporation.
SECTION 6.3. DETERMINATION OF NO INDEMNIFICATION. Unless contrary to court
order, the Corporation shall provide the indemnification pursuant to Section
6.1, unless a determination that the Official did not meet the standard of
conduct therein specified is reasonably and promptly made:
(a) by the Board of Directors acting by a quorum consisting of
disinterested directors,
(b) by independent legal counsel if such a quorum is not obtainable,
or even if obtainable the majority of a quorum of disinterested
directors so directs; or
(c) by the shareholders.
SECTION 6.4. INDEMNIFICATION AGAINST EXPENSES OF SUCCESSFUL PARTY. Except
in the case of a proceeding brought by the Corporation directly (and not
derivatively) which does not follow a change in control of the Corporation, to
the extent that an Official has been successful on the merits or otherwise,
including the dismissal of an action without prejudice or the settlement of an
action without admission of liability, in defense of any proceeding or in
defense of any claim, issue or matter therein, such Official shall be
indemnified against all expenses incurred in connection therewith.
SECTION 6.5. ADVANCES OF EXPENSES. Except as limited by Section 6.6 of this
Article, expenses reasonably incurred in any action, suit, proceeding or
investigation (other than an action, suit or proceeding brought by the
Corporation directly (and not derivatively) which does not follow a change in
control of the Corporation) shall be paid by the Corporation in advance of the
final disposition of such matter, if the Official shall undertake to repay such
amount in the event that it is ultimately determined, as provided herein, that
such person is not entitled to indemnification. Notwithstanding the foregoing,
no advance shall be made by the Corporation if a determination is reasonably and
promptly made by the board of directors by a majority vote of a quorum of
disinterested directors, or (if such a quorum is not obtainable, and a majority
of disinterested directors so directs) by independent legal counsel in a written
opinion, that based upon the facts known to the board or counsel at the time
such determination is made, the Official acted in bad faith, or in a manner that
the Official did not believe to be in or not opposed to the best interest of the
Corporation, or, with respect to any criminal proceeding, that the Official
believed or
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had reasonable cause to believe his conduct was unlawful. In no event shall any
advance be made in instances where the board or independent legal counsel
reasonably determines that the Official deliberately breached his duty to the
Corporation or its shareholders.
SECTION 6.6. RIGHT OF OFFICIAL TO INDEMNIFICATION UPON APPLICATION;
PROCEDURE UPON APPLICATION. Any indemnification under Sections 6.1, 6.3 or 6.4,
or advance under Section 6.5 of this Article, shall be made promptly, and in any
event within ninety (90) days, upon the written request of the Official, unless
with respect to applications under Sections 6.1, 6.3, 6.4, or 6.5, a
determination is reasonably and promptly made by the Board of Directors by a
majority vote of a quorum of disinterested directors that such Official acted in
a manner set forth in such Sections as to justify the Corporation's not
indemnifying or making an advance to the Official. In the event no quorum of
disinterested directors is obtainable, the board of directors shall promptly
direct that independent legal counsel shall decide whether the Official acted in
the manner set forth in such Sections as to justify the Corporation's not
indemnifying or making an advance to the Official. The right to indemnification
or advances as granted by this Article shall be enforceable by the Official in
any court of competent jurisdiction, if the board or independent legal counsel
denies the claim, in whole or in part, or if no disposition of such claim is
made within ninety days. The Official's expenses incurred in connection with
successfully establishing his right to indemnification, in whole or in part, in
any such proceeding shall also be indemnified by the Corporation.
SECTION 6.7. OTHER RIGHTS AND REMEDIES. It is the intent of this Article to
grant to Officials the broadest indemnity rights legally permissable. Therefore
the provisions of this Article shall be deemed additional and supplemental to
but not in limitation of any other rights to which an Official seeking
indemnification may be entitled under the common law, any statute, provision of
the charter, these Bylaws, agreement, insurance policy, resolution adopted by
stockholders or directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be an Official and shall inure
to the benefit of the heirs, executors and administrators of such a person. All
rights to indemnification under this Article shall be deemed to be provided by a
contract between the Corporation and the Official who serves in such capacity at
any time while these bylaws and other relevant provisions of the Act and other
applicable law, if any, are in effect. Any repeal or modification thereof shall
not affect any rights or obligations then existing.
SECTION 6.8. CONSTITUENT CORPORATIONS. For the purposes of this Article,
references to "the Corporation" include all constituent corporations absorbed in
a consolidation or merger as well as the resulting or surviving corporation, so
that any person who is or was a director, officer, trustee or agent of such a
constituent
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corporation or is or was serving at the request of such constituent corporation
as a director, officer, trustee or agent of another corporation, partnership,
joint venture, trust or other enterprise shall stand in the same position under
the provisions of this Article with respect to the resulting or surviving
corporation as he would if he had served the resulting or surviving corporation
in the same capacity.
SECTION 6.9. OTHER ENTERPRISES, FINES, AND SERVING AT CORPORATION'S
REQUEST. For purposes of this Article, references to "other enterprises" in
Section 1 and 9 shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on a person with respect to any employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, advisory director, officer, trustee or
agent of the Corporation which imposes duties on, or involves services by, such
director, advisory director, officer or agent with respect to any employee
benefit plan, its participants, or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of any employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the Corporation" as
referred to in this Article.
SECTION 6.10. INDEMNIFICATION OF EMPLOYEES AND AGENTS. The Corporation may
indemnify and advance expenses to any employee or agent of the Corporation who
is not a director or officer (and his heirs, executors and administrators) to
the same extent as to a director or officer, if the Board of Directors
determines that to do so is in the best interests of the Corporation.
SECTION 6.11. SAVINGS CLAUSE. If this Article or any portion thereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Official as to expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement with respect
to any action, suit, proceeding or investigation, whether civil, criminal or
administrative, and whether internal or external, including a grand jury
proceeding and an action or suit brought by or in the right of the Corporation,
to the full extent permitted by any applicable portion of this Article that
shall not have been invalidated, or by any other applicable law.
SECTION 6.12. INSURANCE. The Corporation may purchase insurance coverage
for the purpose of indemnifying the Corporation and its subsidiaries and the
directors, officers, and employees of the Corporation and its subsidiaries. Said
insurance shall be for such coverage, (whether or not broader than the
permissable indemnity provided in this Article) and in such amounts as may be
approved by the Board from time to time.
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ARTICLE VII
CONTRACTS, AND OTHER INSTRUMENTS, LOANS, CHECKS AND DEPOSITS
SECTION 7.1. CONTRACTS AND OTHER INSTRUMENTS; VOTING SECURITIES HELD BY THE
CORPORATION. The Chairman of the Board, the Vice Chairman of the Board, the
President, any Executive Vice President, any Senior Vice President or any Vice
President may execute, sign, acknowledge, verify, deliver or accept on behalf of
the Corporation, all contracts, agreements, transfers, certificates,
declarations, receipts, discharges, releases, satisfactions, settlements,
petitions, schedules, accounts, affidavits, bonds, undertaking and other
instruments on behalf of and in the name of the Corporation and any such
instrument so signed may be attested and the corporate seal affixed by the
Secretary or an Assistant Secretary. The Board may authorize any other officer
or officers, agent or agents to enter into any contract or execute any
instrument in the name of and on behalf of the Corporation, and such authority
may be general or confined to specific instances. Unless otherwise required by
the Board of Directors, the Chairman of the Board, Vice Chairman of the Board or
the President shall have full power and authority on behalf of the Corporation
to attend any meeting of security holders, or to take action on written consent
as a security holder, of other corporations in which the Corporation may hold
securities. In connection therewith the Chairman of the Board, Vice Chairman of
the Board or the President shall possess and may exercise any and all rights and
powers incident to the ownership of such securities which the Corporation
possesses. The Board of Directors may, from time to time, confer like powers
upon any other person or persons.
SECTION 7.2. LOANS. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the Chief Executive Officer or the Board. Such authority may be
general or confined to specific instances.
SECTION 7.3. CHECKS, DRAFTS, ETC. All checks, drafts, bills of exchange and
other negotiable instruments of the Corporation shall be signed by either the
Chairman of the Board, the Vice Chairman of the Board, the President, or, by
such other officer or agent of the Corporation as may be authorized so to do by
the Board. Such authority may be general or confined to specific business, and,
if so directed by the Board, the signatures of two or more such officers may be
required.
SECTION 7.4. DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks or other depositories as the Board may authorize.
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ARTICLE VIII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 8.1. SHARES WITH OR WITHOUT CERTIFICATES. The Board of Directors
may authorize that some or all of the shares of any or all of the Corporation's
classes or series of stock be evidenced by a certificate or certificates of
stock. The Board of Directors may also authorize the issue of some or all of the
shares of any or all of the Corporation's classes or series of stock without
certificates. The rights and obligations of shareholders with the same class
and/or series of stock shall be identical whether or not their shares are
represented by certificates.
(a) SHARES WITH CERTIFICATES. If the Board of Directors chooses to issue
shares of stock evidenced by a certificate or certificates, each individual
certificate shall include the following on its face: (i) the Corporation's name,
(ii) the fact that the Corporation is organized under the laws of the State of
Tennessee, (iii) the name of the person to whom the certificate is issued, (iv)
the number of shares represented thereby, (v) the class of shares and the
designation of the series, if any, which the certificate represents, and (vi)
such other information as applicable law may require or as may be lawful.
If the Corporation is authorized to issue different classes of shares or
different series within a class, the designations, relative rights, preferences
and limitations determined for each series (and the authority of the Board of
Directors to determine variations for future series) shall be summarized on the
front or back of each certificate. Alternatively, each certificate shall state
on its front or back that the Corporation will furnish the shareholder this
information in writing, without charge, upon request.
Each certificate of stock issued by the Corporation shall be signed (either
manually or if countersigned by a transfer agent or registered by a registrar in
facsimile) by the Chairman of the Board, the Vice Chairman of the Board or the
President, and by the Secretary, an Assistant Secretary, the Treasurer or an
Assistant Treasurer or any other officer authorized by the Board. If the person
who signed or whose facsimile signature has been placed upon a certificate no
longer holds office when the certificate is issued, the certificate is
nonetheless valid.
(b) SHARES WITHOUT CERTIFICATES. If the Board of Directors chooses to
issue shares of stock without certificates, the Corporation, if required by the
Act, shall, within a reasonable time after the issue or transfer of shares
without certificates, send the shareholder a written statement of the
information required on certificates by Section 6.1(a) of these Bylaws and any
other information required by the Act.
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8.2 SUBSCRIPTIONS FOR SHARES. Subscriptions for shares of the Corporation
shall be valid only if they are in writing. Unless the subscription agreement
provides otherwise, subscriptions for shares, regardless of the time when they
are made, shall be paid in full at such time, or in such installments and at
such periods, as shall be determined by the Board of Directors. All calls for
payment on subscriptions shall be uniform as to all shares of the same class or
of the same series, unless the subscription agreement specifies otherwise.
8.3 TRANSFERS. Transfers of shares of the capital stock of the Corporation
shall be made only on the books of the Corporation by (i) the holder of record
thereof, (ii) by his legal representative, who, upon request of the Corporation,
shall furnish proper evidence of authority to transfer, or (iii) his attorney,
authorized by a power of attorney duly executed and filed with the Secretary of
the Corporation or a duly appointed transfer agent. Such transfers shall be made
only upon surrender, if applicable, of the certificate or certificates for such
shares properly endorsed and with all taxes thereon paid.
8.4 LOST, DESTROYED OR STOLEN CERTIFICATES. No certificate for shares of
stock of the Corporation shall be issued in place of any certificate alleged to
have been lost, destroyed or stolen except on production of evidence,
satisfactory to the Board of Directors, of such loss, destruction or theft, and,
if the Board of Directors so requires, upon the furnishing of an indemnity bond
in such amount and with such terms and such surety as the Board of Directors may
in its discretion require.
ARTICLE IX
CORPORATE SEAL
SECTION 9.1. CORPORATE SEAL. The Chairman of the Board, a Vice Chairman,
the President, the Secretary, or any Vice President, or Assistant Secretary or
any other officer designated thereunto by the Board shall have authority to
affix the corporate seal to any document requiring such seal, and to attest the
same. Such seal shall be substantially in the following form:
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ARTICLE X
FISCAL YEAR
SECTION 10.1. FISCAL YEAR. The fiscal year of the Corporation shall begin on
the first day of January and end on the thirty-first day of December in each
year.
ARTICLE XI
DIVIDENDS
SECTION 11.1. DIVIDENDS. The Board may from time to time declare, and the
Corporation may pay, dividends on its outstanding shares in the manner and upon
terms and conditions provided by law.
ARTICLE XII
AMENDMENTS
SECTION 12.1. AMENDMENT TO BY-LAWS. These By-Laws may be altered, amended,
or repealed, or new By-Laws may be adopted, by the Board. Except as provided in
Articles X and XI of the Charter, By-Laws made by the Board may be repealed or
changed and new By-Laws made, by the shareholders upon the affirmative vote of a
majority of the votes entitled to be cast by all holders of voting stock of the
Corporation voting together as a single class at a meeting called for such
purpose. The shareholders may prescribe that any By-Law made by them shall not
be altered, amended or repealed by the Board.
ARTICLE XIII
CONTROL SHARE ACQUISITIONS
SECTION 13.1 APPLICABILITY OF CONTROL SHARE ACQUISITION ACT. The Tennessee
Control Share Acquisition Act shall be applicable with respect to shares of the
Corporation.
SECTION 13.2 REDEMPTION OF CONTROL SHARES IN CERTAIN EVENTS. In accordance
with Section 15 of the Tennessee Control Share Acquisition Act, The Corporation
may redeem, at its option, all but not less than all control shares acquired in
a control share acquisition at any time during the period ending sixty (60) days
after the last acquisition of control shares by an acquiring person, from the
acquiring person for the fair value (as defined in such Section 15) of such
shares if: (i) no control acquisition statement has been filed; or (ii) a
control acquisition statement has been filed and the shares are not accorded
voting rights by the shareholders pursuant to Section 14 of the Tennessee
Control Share Acquisition Act.
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EXHIBIT 10.3(E)
FIRST AMERICAN CORPORATION'S
DIRECTOR'S DEFERRED COMPENSATION PLAN
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EXHIBIT 10.3(e)
FIRST AMERICAN CORPORATION'S
DIRECTOR'S DEFERRED COMPENSATION PLAN
ARTICLE I
Purpose
The purpose of the Plan is to provide each eligible Director of First
American Corporation and each eligible Director of each subsidiary of First
American Corporation with the opportunity of deferring his or her compensation
as a Director until after termination of services as a Director. The Plan is
intended to establish a method of paying Directors' compensation which will aid
First American Corporation and its subsidiaries in attracting and retaining as
members of their respective Boards the persons whose abilities, experience and
judgment can contribute to the continued progress of the Corporation.
ARTICLE II
Definitions
When used in the Plan, the following words and phrases have the indicated
meanings, except where the contrary is expressly stated:
2.1 "Board" means one or more of the Boards of Directors of the
Corporation and its subsidiaries.
2.2 "Committee" means the Human Resources Committee of the Board of
Directors of First American Corporation which shall administer the Plan as
provided in Section 6.2 hereof.
2.3 "Common Stock" means the $5.00 par value common stock of First
American Corporation.
2.4 "Corporation" means First American Corporation or a subsidiary of
First American Corporation.
2.5 "Deferrable Compensation" means all fees payable to a Director for
services on a Board, including Board fees, committee fees, retainers and
compensation payable for services rendered as a Director of a Corporation.
2.6 "Deferred Compensation" means compensation deferred pursuant to
this Plan.
2.7 "Deferred Compensation Account" means the account established by
the Corporation for each Participant for compensation deferred pursuant to this
Plan which bears interest as described in Section 4.2. (a) below. The
maintenance of individual Deferred Compensation Accounts is for
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bookkeeping purposes only.
2.8 "Deferred Compensation Election Form" means the form by which eligible
Directors elect to become Participants.
2.9 "Director" or "Directors" means a member or members of a Board of a
Corporation, or committee of a Board of a Corporation, including any "senior
director" or "advisory director".
2.10 "Former Participant" means a Participant who, having terminated
participation in the Plan by giving written notice thereof to the Committee,
ceases to participate in the Plan as of the last day of the calendar year in
which notice is given.
2.11 "Market Value" means the closing price of the shares of Common Stock
on the National Association of Securities Dealers Automated Quotation System
(NASDAQ) on the day on which such value is to be determined or, if no such
shares where traded on such day, on the next preceding day on which such shares
were traded; provided, however, that if at any relevant time the shares of
Common Stock are not traded on the NASDAQ, then "Market Value" shall be
determined by reference to the closing "asked" price of the shares in the
over-the-counter market as reported by any other national exchange or quotation
service.
2.12 "Participant" means an eligible Director who has elected to
participate in the Plan and to defer compensation on the terms and conditions
set forth herein.
2.13 "Plan" means the Directors' Deferred Compensation Plan as described
herein and as amended from time to time.
2.14 "Stock Account" means the account established by the Corporation for
each Participant, the performance of which shall be measured by reference to the
Market Value of Common Stock. The maintenance of individual Stock Accounts is
for bookkeeping purposes only.
2.15 "Terminated Participant" means a Participant whose tenure as a
Director has terminated because of resignation, removal, retirement, permanent
disability or death.
2.16 "Valuation Date" means each business day.
ARTICLE III
Eligibility
3.1 Eligible Directors. Each Director who receives Deferrable
Compensation shall be eligible to participate in the Plan. Participation in the
Plan shall be entirely voluntary.
3.2 Election to participate. In order to participate in the Plan for a
particular calendar year, an eligible Director must make a valid election by
executing and filing with the committee a Deferred Compensation Election Form.
The Deferred Compensation Election Form shall contain:
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(a) a statement that the Director elects to defer all or a stated
percentage (in any 5% increment) of his or her Deferrable
Compensation for such calendar year;
(b) a statement that the election applies to such calendar year and to
each succeeding calendar year during all or part of which the
Director remains eligible or until the calendar year following the
year in which the Director files with the Committee a revised
Deferred Compensation Election Form or a written revocation of his
or her election to participate;
(c) a statement that the election is irrevocable after the
commencement of such calendar year; and
(d) the portion of the Deferrable Compensation to be credited to the
Participant's Deferred Compensation Account and Stock Account,
respectively.
3.3 Commencement of Participation. An Eligible Director who has filed a
Deferred Compensation Election Form shall be admitted to the Plan effective on
the January 1 of the year following the year in which he has made the election,
except as follows:
(a) Incumbent Directors. A Director incumbent on the date of the
adoption of the Plan shall be admitted to the Plan as of the
effective date of the adoption of the Plan if a valid election is
made prior to or coincident with the effective date of the Plan;
(b) New Directors. A newly elected Director shall be admitted to the
Plan as of the first day of his or her term in office, provided
the election is made before commencement of such term of office.
3.4 Termination of Participation and Readmission. A Participant may
terminate participation in the Plan during his or her continued tenure in office
at any time by giving written notice thereof to the Committee. Such notice shall
be effective to terminate participation as of the last day of the calendar year
in which notice is given, and such Participant shall thereupon become a Former
Participant. Any Former Participant may again become a Participant in the Plan
by executing a new Deferred Compensation Election Form as provided in Section
3.2.
ARTICLE IV
Deferral of Payment of Compensation and
Establishment of Deferred Compensation Account and/or Stock Account
4.1 Deferral of Compensation. Upon the Committee's receipt of a Director's
valid election, the Committee shall notify the Corporation for which the
Director serves and such Corporation shall defer payment of the Deferrable
Compensation earned by the Director following the effective date of his or her
participation in the Plan until said Deferred Compensation becomes payable under
the terms of this Plan. The Corporation shall establish an unfunded individual
Deferred Compensation
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Account and/or Stock Account, as applicable, for such Director and shall credit
to the Deferred Compensation which would otherwise have been payable to such
Director for the calendar year to which the election applies. Deferred
Compensation shall be credited as of the first day of the month following the
month in which the Director has earned such compensation.
4.2 Hypothetical Investments.
(a) Deferred Compensation Account. The amount of each Director's
Deferred Compensation Account shall accrue interest, compounded
monthly (on a 30 day month, 360 day year basis), from the day the
Deferred Compensation is credited to the Deferred Compensation
Account to the date payment is made at an annual rate equal to the
simple interest bond equivalent yield reported on the most
recently auctioned one -year treasury bills of the U.S. Government
as of the close of business of the first business day of each
year.
(b) Stock Account. Amounts in a Participant's Stock Account are
hypothetically invested in units of Common Stock. Amounts deferred
into a Stock Account are recorded as units of Common Stock, and
fractions thereof, with one unit equating to a single share of
Common Stock. Thus, the value of one unit shall be the Market
Value of a single share of Common Stock. The use of units is
merely a bookkeeping convenience; the units are not actual shares
of Common Stock. The Corporation will not reserve or otherwise set
aside any Common Stock for or to any Stock Account.
4.3 Communication of Account Balances. As of each December 31, the
Committee shall communicate in writing to each Participant, Former Participant
and Terminated Participant the value of his or her Deferred Compensation Account
and/or Stock Account.
ARTICLE V
Investments in the Stock Account
5.1. Election Into the Stock Account. If a Participant elects to defer
compensation into his or her Stock Account, his or her Stock Account shall be
credited, as of the date described in Section 5.2, with that number of units of
Common Stock, and fractions thereof, obtained by dividing the dollar amount to
be deferred into the Stock Account by the Market Value of the Common Stock as of
such date.
5.2 Dividend Equivalents. Effective as of the payment date for each
cash dividend on the Common Stock, the Stock Account of each Participant who had
a balance in his or her Stock Account on the record date for such dividend shall
be credited with a number of units of Common Stock, and fractions thereof,
obtained by dividing (i) the aggregate dollar amount of such cash dividend
payable in respect of such Participant's Stock Account (determined by
multiplying the dollar value of the dividend paid upon a single share of Common
Stock by the number of units of Common Stock held in the Participant's Stock
Account on the record date for such dividend); by (ii) the Market Value of the
Common Stock on the payment date for such cash dividend.
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5.3 Stock Dividends. Effective as of the payment date for each stock
dividend on the Common Stock, additional units of Common Stock shall be credited
to the Stock Account of each Participant who had a balance in his or her Stock
Account on the record date for such dividend. The number of units that shall be
credited to the Stock Account of such a Participant shall equal the number of
shares of Common Stock, and fractions thereof, which the Participant would have
received as stock dividends had he or she been the owner on the record date for
such stock dividend of the number of shares of Common Stock equal to the number
of units credited to his or her Stock Account on such record date.
5.4 Adjustment. If, as a result of a reclassification, recapitalization,
merger, reorganization, or other change in the Corporation's structure affecting
the Common Stock, the outstanding shares of Common Stock shall be changed into a
greater number or smaller number of shares, the number of units credited to a
Participant's Stock Account shall be appropriately adjusted on the same basis.
5.5 Distributions. Amounts in respect of units of Common Stock shall be
distributed in cash. The number of units to be distributed from a Participant's
Stock Account shall be valued by multiplying the number of such units by the
Market Value of the Common Stock as of the Valuation Date immediately preceding
the date such distribution is to occur.
5.6 Responsibility for Investment Choices. Each Participant is solely
responsible for any decision to defer compensation into his or her Stock Account
and accepts all investment risks entailed by such decision, including the risk
of loss and a decrease in the value of the amounts he or she elects to defer
into his or her Stock Account.
5.7 Liquidation of Stock Account. Upon the date that a Participant ceases
to serve on the Board, the entire balance, if any, of the Participant's Stock
Account shall automatically be transferred to his or her Deferred Compensation
Account. For purposes of valuing the units of Common Stock subject to such a
transfer, the approach described in Section 5.5 shall be used.
ARTICLE VI
Distribution of Deferred Compensation
6.1 Time of Payment of Deferred Compensation. The Deferred Compensation
Account of any Former Participant or Terminated Participant shall become payable
as of the first day of the calendar year following the termination of the tenure
of the Former Participant or Terminated Participant as a Director by reason of
resignation, removal, permanent disability, death, retirement or any other
cause. The amount payable under the Plan shall be determined by the Committee
promptly after such disability, death, retirement or other termination is
communicated to the Committee by the Board of the Corporation for which the
Director served. The Committee shall, upon receiving notification and
certification of such termination of tenure as a Director, report to the
Corporation for which the Former Participant or Terminated Participant served as
a Director the value of the Deferred Compensation Account of such Former
Participant or Terminated Participant as of the last day of the calendar year
for which he serves as a Director. Such Corporation shall thereupon pay to the
Former Participant or Terminated Participant the value of his or her Deferred
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Compensation Account beginning on the first business day of the calendar year
next following the termination of his or her tenure as a director in the form
determined pursuant to Section 6.2. Notwithstanding the foregoing, the Committee
may, in its discretion, determine to accelerate the payment of any balance in a
Deferred Compensation Account of any Former Participant which is less than
$10,000, provided that no such payment shall be made prior to the termination of
the tenure of the Director for whose benefit the account is established.
6.2 Form of Payment of Deferred Compensation. The distribution of the
Deferred Compensation Account balance of a Former Participant or Terminated
Participant shall, unless otherwise determined by the Committee pursuant to this
Section 6.2, by payable in equal installments over a period of ten years.
Notwithstanding the foregoing, the Committee may in its sole discretion make
such payments in one of the following forms:
(a) in one lump-sum payment;
(b) in installments over a period of five years;
(c) if elected by the Participant in his or her Deferred Compensation
Election Form and if the tenure of the Participant or Former
participant as a Director terminates before he attains age
sixty-five, installments or in a lump-sum (as determined by the
Committee) beginning as of the first business day of the calendar
year following the year in which the Former Participant or
Terminated Participant attains age sixty-five.
6.3 Preference of Former Participant or Terminated Participant. In
exercising its discretion under Section 6.2, the Committee shall consider, but
shall not be bound by, any preference as to the form of payment expressed by a
Former Participant or Terminated Participant. [Distributions may be made in cash
or securities as the Committee shall determine.] Any undistributed balance in a
Deferred Compensation Account during the payment of benefits hereunder shall be
credited with interest as provided in Section 4.2.
ARTICLE VII
Miscellaneous Provisions
7.1 Participants' Rights Unsecured: No Duty to Invest. The rights of a
Participant, Former Participant or Terminated Participant to receive any
distribution hereunder shall be an unfunded and unsecured claim against the
general assets of the Corporation for which the Director served. The Corporation
shall have no obligation whatsoever to purchase or maintain any contract,
policy, trust or other asset to fund or provide the benefits under this Plan and
no such assets shall be subject to any prior claim by a Director or his or her
beneficiary under this Plan. Neither the Committee nor any Corporation shall
have any duty whatsoever to fund the obligations to make payment under the Plan
or to invest any amounts credited to any Deferred Compensation Account or Stock
Account established under the Plan.
7.2 Administration of the Plan. The Plan shall be administered by
the Human Resources
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Committee of the Board of Directors of First American Corporation. The Committee
shall act by vote or written consent of a majority of its members.
7.3 Amendment, Modification or Termination of Plan. The Plan may be
amended or modified by the Committee or may be terminated by the Board of each
Corporation with respect to its own Directors except that no action shall,
without the consent of the affected Participant, or if appropriate a
Participant's beneficiary, distributee or personal representative, reduce the
amount credited to a Participant, Former Participant or Terminated Participant's
Deferred Compensation Account or Stock Account or extend the time for payment of
such account to the extent of the balance of such account as of the date of such
amendment, modification or termination. In the event the Plan is terminated, the
Board may, in its discretion, cause the immediate distribution of the balance of
any Deferred Compensation Accounts or Stock Accounts pursuant to the terms of
Section 6.2.
7.4 Governing Law. The Plan shall be governed, construed, administered
and regulated in all respects by and under the laws of the State of Tennessee.
7.5 Severability. If any of the provisions of the Plan shall be for any
reason invalid or unenforceable, the remaining provisions shall nevertheless
remain in full force and effect.
7.6 Provisions of the Plan to Control. In the event of any conflict
between the terms of the Plan as set forth in this instrument and any
description of the Plan which may be furnished to the Participants or others,
the Plan set forth herein shall control.
7.7 Payment for Benefit of Incompetent. Payments of benefits under this
Plan may be made to any incompetent who is entitled to receive payments
hereunder by making the same to the legal representative, guardian or
conservator of such incompetent.
7.8 Account to be Charged Upon Payment. When any distribution or other
payment is made to or for the benefit or on behalf of any party entitled to
receive payments hereunder, the account held for benefit of such party shall be
charged accordingly.
7.9 Titles and Captions. The titles and captions to the Articles, Sections
and subsections in the Plan are placed herein for convenience of reference only,
and in case of any conflict, the text of this instrument, rather than such
titles, shall control.
7.10 Restrictions on Alienation of Assignment. No amount, the payment of
which has been deferred under this Plan, shall be subject in any manner to
anticipation, aberration, sale, transfer, assignment, pledge, encumbrance, levy
or charge, and any attempt to so aberrate, sell, transfer, assign, pledge,
encumber, levy or charge the same shall be void; nor shall any such amount be in
any manner liable for or subject to the debts, contracts, liabilities,
engagements, or torts of the person entitled to such benefit. The restraints in
this Section 7.10 shall not apply to a Participant's personal representative.
7.11 Withholding. There shall be deducted from all payments under
this Plan the amount of any taxes required to be withhold by any federal, state
or local government. The Participants and
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their beneficiaries, distributes and personal representatives shall bear any and
all federal, foreign, state, local or other income or other taxes imposed on
amounts paid under this Plan.
7.12 Consent. By electing to become a Participant, each Director shall be
deemed conclusively to have accepted and consented to all terms of the Plan and
all actions or decisions made by the Corporation, the Board, or the Committee
with regard to the Plan. Such terms and consent shall also apply to and be
binding upon the beneficiaries, distributes and personal representatives and
other successors in interest of each Participant.
7.13 Distribution Upon Emergency. If a Participant or any member of his or
her immediate family has sustained a serious illness or accident or requires
funds for any emergency purpose, such Participant may submit a request to the
Committee for a distribution from the Plan of such amount as may be necessary
for such emergency purpose. The Committee shall have the right in its sole
discretion to approve or disapprove (in whole or part) any such request. Any
distribution to a Participant pursuant to this section shall be charged against
such Participant's Deferred Compensation Account.
7.14 Designation of Beneficiary. Each Participant may designate one or more
beneficiaries and contingent beneficiaries to receive benefits in the event of
the Participant's death by delivering a written designation thereof over such
Participant's signature to the Committee. Such designation may be delivered at
the time such Participant commences participation in the Plan, or thereafter.
Upon the death of a Participant, the Participant's beneficiaries shall be
entitled to payment of benefits in an amount and in the manner provided by the
Plan. A Participant may designate different beneficiaries at any time by
delivering a new written designation over the Participant's signature to the
Committee. Any such designation shall become effective only upon its receipt by
the Committee. The last effective designation received by the Committee shall
supersede all prior designations. A designation of a beneficiary shall be
effective only if the designated beneficiary survives the Participant. If an
Participant fails to designate a beneficiary, or if no designated beneficiary
survives the Participant, distribution shall be made to the Participant's
estate. Whenever the rights of a Participant are stated or limited in the Plan,
the Participant's beneficiaries shall be bound thereby.
7.15 Transfer from Predecessor Plan. The account balances credited to the
Deferred Compensation Accounts in the Directors' Deferred Compensation Plans of
First American National Bank of Knoxville, and First American National
Bank-Eastern may be transferred to and become a part of this Plan. In this
event, the amounts so transferred shall immediately become subject to all the
provisions of this Plan as though they had been originally deferred hereunder.
IN WITNESS WHEREOF, First America Corporation has caused this instrument to
be executed this ____________ day of ____________________________, 1996.
FIRST AMERICAN CORPORATION
By:
-----------------------
ATTEST:
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EXHIBIT 10.3(g)
FORM
OF
SALARY DEFERRAL AGREEMENT BY AND BETWEEN
THE CORPORATION AND ITS EXECUTIVE OFFICERS
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EXHIBIT 10.3(g)
FORM
OF
SALARY DEFERRAL AGREEMENT BY AND BETWEEN
THE CORPORATION AND ITS EXECUTIVE OFFICERS
SALARY DEFERRAL AGREEMENT
THIS AGREEMENT, dated as of ____, 1996, between First American Corporation
(the "Company") and __________, (the "Executive").
WITNESSETH:
WHEREAS, the Executive is serving as an executive of the Company at an
annual rate of $_____ as of December 31 1996; and
WHEREAS, the Executive and the Company desire to enter into an agreement
with respect to the deferred payment of a portion of the Executive's salary upon
the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and benefits set
forth herein, the Company and the Executive hereby agree as follows:
ARTICLE I.
DEFINITIONS
When used in this Agreement, the following words and phrases have the
indicated meanings:
1.1 "Common Stock" means the $5.00 par value common stock of First
American Corporation.
1.2 "Deferrable Compensation" means all compensation payable to Executive
for services.
1.3 "Deferred Compensation Account" means the account established by the
Company for each Executive for compensation deferred pursuant to this
Agreement which bears interest as described in Article 3 below. The
maintenance of individual Deferred Compensation Accounts is for
bookkeeping purposes only.
1.4 "Deferred Compensation Election Form" means the form by which eligible
Executives elect to have a portion of their salary deferred pursuant to
this Agreement.
1.5 "Market Value" means the closing price of the shares of Common Stock on
the National Association of Securities Dealers Automated Quotation
System (NASDAQ) on the day on
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which such value is to be determined or, if no such shares were traded
on such day, on the next preceding day on which such shares were
traded; provided, however, that if at any relevant time the shares of
Common Stock are not traded on the NASDAQ, then "Market Value" shall be
determined by reference to the closing "asked" price of the shares in
the over-the-counter market as reported by any other national exchange
or quotation service.
1.6 "Stock Account" means the account established by the Company for each
Executive, the performance of which shall be measured by reference to
the Market Value of Common Stock. The maintenance of individual Stock
Accounts is for bookkeeping purposes only.
1.7 "Valuation Date" means each business day.
ARTICLE II.
AMOUNT OF DEFERRAL
$_____ of the Executive's 1997 annual salary will be deferred by the
Company, in equal installments, from the semi-monthly salary payments paid to
the Executive during such year. The deferred salary is subject to FICA tax at
the time the salary payments are made. However, the Executive and the Company
agree that the FICA tax will be paid out of the remaining non-deferred balance,
if any, of the Executive's semi-monthly salary payments or, if the remaining
non-deferred balance is not sufficient to pay the FICA tax, by the Executive's
personal check payable to the Company and delivered to the Payroll Department of
the Company. Such deferred salary plus interest computed and accrued as set
forth in Articles 3 and 4 hereof, (the "Deferred Compensation") will be payable
to the Executive, the Executive's designated beneficiary, or the Executive's
estate as set forth in Articles 5, 7, and 8 of this Agreement.
ARTICLE III.
ELECTION FORM AND HYPOTHETICAL INVESTMENTS
3.1 Election Form. Executive must make a valid election by executing and
filing with the Human Resources Committee a Deferred Compensation
Election Form stating the amount of the Deferable Compensation to be
credited to the Executive's Deferred Compensation Account and Stock
Account, respectively.
3.2 Deferred Compensation Account. Interest will be credited to the
Executive's Deferred Compensation Account on December 31 of each year.
Interest will accrue at a rate equal to that earned on one-year
treasury notes of the U. S. Government determined as of the prior
December 31. Interest will accrue on the average daily balance of the
Executive's account beginning with the date on which the deferred
compensation or accrued interest is credited to the Executive's account
and ending with the date on which the deferred compensation or accrued
interest is actually paid. The Executive may elect payment of the
account balance either in installments or in a lump sum. Installment
payments will be computed by dividing the combined total of deferred
compensation and credited interest, as of the prior year-end, by the
number of installments remaining. Lump-sum and final installment
payments will include principal and interest credited to the
Executive's account as of the prior year-end and
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all interest accrued subsequently in the year of payment.
3.3 Stock Account. Amounts in an Executive's Stock Account are
hypothetically invested in units of Common Stock. Amounts deferred into
a Stock Account are recorded as units of Common Stock, and fractions
thereof, with one unit equating to a single share of Common Stock.
Thus, the value of one unit shall be the Market Value of a single share
of Common Stock. The use of units is merely a bookkeeping convenience;
the units are not actual shares of Common Stock. The Company will not
reserve or otherwise set aside any Common Stock for or to any Stock
Account.
ARTICLE IV
INVESTMENTS IN THE STOCK ACCOUNT
4.1 Election Into the Stock Account. If an an Executive elects to defer
compensation into his or her Stock Account, the amount so deferred
shall be credited to his or her Stock Account, as of the date such
amounts are otherwise payable. Executive's Stock Account shall be
credited with that number of units of Common Stock, and fractions
thereof, obtained by dividing the dollar amount to be deferred into the
Stock Account by the Market Value of the Common Stock as of such date.
4.2 Dividend Equivalents. Effective as of the payment date for each cash
dividend on the Common Stock, the Stock Account of each Executive who
had a balance in his or her Stock Account on the record date for such
dividend shall be credited with a number of units of Common Stock, and
fractions thereof, obtained by dividing (i) the aggregate dollar amount
of such cash dividend payable in respect of such Executive's Stock
Account (determined by multiplying the dollar value of the dividend
paid upon a single share of Common Stock by the number of units of
Common Stock held in the Executive's Stock Account on the record date
for such dividend) by (ii) the Market Value of the Common Stock on the
payment date for such cash dividend.
4.3 Stock Dividends. Effective as of the payment date for each stock
dividend on the Common Stock, additional units of Common Stock shall be
credited to the Stock Account of each Executive who had a balance in
his or her Stock Account on the record date for such dividend. The
number of units that shall be credited to the Stock Account of such an
Executive shall equal the number of shares of Common Stock, and
fractions thereof, which the Executive would have received as stock
dividends had he or she been the owner on the record date for such
stock dividend of the number of shares of Common Stock equal to the
number of units credited to his or her Stock Account on such record
date.
4.4 Adjustment. If, as a result of a reclassification, recapitalization,
merger, reorganization, or other change in the Company's structure
affecting the Common Stock, the outstanding shares of Common Stock
shall be changed into a greater number or smaller number of shares, the
number of units credited to an Executive's Stock Account shall be
appropriately adjusted on the same basis.
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4.5 Distributions. Amounts in respect of units of Common Stock shall be
distributed in cash. The number of units to be distributed from an
Executive's Stock Account shall be valued by multiplying the number of
such units by the Market Value of the Common Stock as of the Valuation
Date immediately preceding the date such distribution is to occur.
4.6 Responsibility for Investment Choices. Each Executive is solely
responsible for any decision to defer compensation into his or her
Stock Account and accepts all investment risks entailed by such
decision, including the risk of loss and a decrease in the value of the
amounts he or she elects to defer into his or her Stock Account.
4.7 Liquidation of Stock Account. Upon the date that an Executive's Stock
Account is terminated pursuant to Section 5 hereof, the entire balance,
if any, of the Executive's Stock Account shall automatically be
transferred to his or her Deferred Compensation Account. For purposes
of valuing the units of Common Stock subject to such a transfer, the
approach described in Section 4.5 shall be used.
ARTICLE V
PAYMENT OF DEFERRED COMPENSATION
5.1 Payment. Deferred Compensation will be paid to the Executive following
the first to occur of the listed events and in accordance with the
method of payment and commencement date selected by the Executive on
the attached Exhibit A which is made a part of this Agreement.
5.2 Change in Control. Notwithstanding the foregoing, the Company will pay
the Executive the Deferred Compensation in a lump sum as soon as
practicable but within 30 days after termination of employment if there
is a Change in Control or Potential Change in Control of the Company as
defined in the 1991 Employee Stock Incentive Plan and, within two (2)
years after such Change in Control or Potential Change in Control has
occurred, the Executive's employment is terminated:
(a) involuntarily, other than an involuntary termination for cause or
other than occurring as the result of death or disability, or
(b) voluntarily, following:
(i) any reduction in the Executive's (a) base salary from the level
immediately preceding the Change in Control or Potential Change in
Control, or (b) annual bonus opportunity available immediately
preceding the Change in Control or Potential Change in Control, or
(ii) any relocation to which the Executive has not agreed to an office
of the Company more than thirty-five (35) miles from the office
where Executive was located at the time of any Change in Control
or Potential Change in Control or any increase in Executive's
required travel amounting to a constructive relocation, or
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(iii) any material reduction in the level of responsibility,
position (including status, office, title, reporting
relationships or working conditions), authority or duties of
Executive in existence immediately preceding the Change in
Control or Potential Change in Control or any assignment to
Executive of duties inconsistent in any material respect with
the highest level of Executive's position, authority,
responsibilities or status as in effect during the six (6)
months immediately preceding the Change in Control or
Potential Change in Control without the prior written consent
of Executive, or
(iv) any material reduction in the aggregate fringe benefits and
perquisites available to Executive immediately preceding the
Change in Control or Potential Change in Control not offset by
salary or annual bonus increases, or
(c) voluntarily if, following a Change in Control or Potential Change in
Control, any successor or acquiror of Company either announces that it
will not honor or cause the Company to honor the terms of this
Agreement or, at any time, fails to confirm in writing to the Executive
within fifteen (15) business days of a request by Executive that it
will honor and will cause the Company to honor the terms of this
Agreement.
5.3 Termination for Cause. For purposes hereof, a termination will be
considered to be "for cause" if it occurs in conjunction with a
determination by the Company that Employee has committed an act of
gross negligence or willful misconduct materially injurious to the
Company, gross dereliction of duties after notice to Employee and
failure to correct the deficiencies within a period of thirty (30)
days, or fraud in his or her capacity as an employee of the Company or
a subsidiary thereof. For purposes of this Agreement, disability will
be considered to have the same meaning as that provided in the
Company's long-term disability plan for provision of long-term
disability benefits. In the event that the Company takes the position
that a termination has occurred "for cause," it will so notify Employee
in writing at the time of such termination.
5.4 Effective Date; Continuous Employment. The Executive should notify
Human Resources immediately upon the occurrence of the triggering event
to ensure timely payment. For purposes of Exhibit A, the term
"effective date" means the Executive's last day of employment.
For purposes of this Article 5, the Executive will be deemed to be
continuously employed by the Company or any affiliate of the Company if the
Executive is re-employed by the Company or an affiliate of the Company
within four weeks of the date the Executive's employment first ceased.
ARTICLE VI
BENEFICIARY
The Executive will have the right to designate a beneficiary who, in the
event of the Executive's death prior to the payment of any or all of the
Deferred Compensation pursuant to this Agreement, will receive the unpaid
Deferred Compensation. Such designation will be made by the Executive on the
form attached hereto. The Executive may, at any time, change or revoke such
designation by
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written notice to the Director, Compensation and Benefits.
ARTICLE VII
DEATH OF EXECUTIVE
7.1 30 day payment period. If the Executive dies prior to the receipt of any or
all of the Deferred Compensation, no Deferred Compensation will be paid for
a period of thirty days from the date the Director, Compensation and
Benefits, receives written notice of the Executive's death. As soon as
practical following such thirty-day period, the unpaid Deferred
Compensation will be paid to the designated beneficiary in a lump sum.
7.2 Payment to Contingent Beneficiary.If the designated beneficiary predeceases
the Executive, the unpaid Deferred Compensation will be paid to the
contingent beneficiary, if living, or the Executive's estate in a lump sum
as soon as practical.If the designated beneficiary dies after the Executive
but prior to the payment of the Deferred Compensation and has not elected
to receive such Deferred Compensation, no Deferred Compensation will be
paid for a period of thirty days from the date the Director, Compensation
and Benefits receives written notice of the death of the designated
beneficiary. The Deferred Compensation plus accrued interest will then be
paid to the contingent beneficiary or, if the contingent beneficiary does
not survive the Executive, the estate of the designated beneficiary in a
lump sum as soon as practical.
ARTICLE VIII
PAYMENT UPON HARDSHIP
The Company will pay to the Executive during the term of the Executive's
employment that portion of the Deferred Compensation that will be necessary to
meet a financial hardship arising from an unforeseen emergency. For purposes of
this Article 8, such emergency payment will be made only in instances of
hardship arising from an unanticipated emergency that is caused by an event
beyond the control of the Executive and that would result in severe financial
hardship to the Executive if early withdrawal were not permitted. Any early
withdrawal approved by the Human Resources Committee is limited to the amount
necessary to meet the emergency. The circumstances that will constitute an
unforeseeable emergency will depend upon the facts of each case, but, in any
case, payment may not be made to the extent that such hardship is or may be
relieved:
(a) through reimbursement or compensation by insurance or otherwise,
(b) by liquidation of the Executive's assets, to the extent the
liquidation of such assets would not itself cause severe financial
hardship, or
(c) by cessation of deferrals under this Agreement.
Examples of what are not considered to be unforeseeable emergencies include the
need to send an Executive's child to college or the desire to purchase a home.
The Executive will apply to the Human Resources Committee for any emergency
payment under this Article 8 and will furnish to the Human Resources Committee
such information as the Executive deems appropriate and as the Company and
164
<PAGE> 8
counsel for the Company deem necessary and appropriate to make such
determination. The determination of the Human Resources Committee as to whether
a payment is warranted under this Article 8, and the amount of such payment,
will be conclusive and binding on the Executive and Company.
ARTICLE IX
CREDITORS
9.1 No Set Aside of Funds. The Deferred Compensation will be paid out of
the general funds of the Company and no funds will be set aside
therefor. The Deferred Compensation will be subject to the claims of
the Company's general creditors. The Executive will have the status of
a general unsecured creditor of the Company and this Agreement
constitutes a mere promise by the Company to make Deferred Compensation
payments in the future. It is the intention of the parties that this
Agreement is to be unfunded for tax purposes and for purposes of Title
I of ERISA.
9.2 No Assignment. Any right under this Agreement to receive Deferred
Compensation will not be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment
or garnishment by creditors of the Executive or the Executive's
beneficiary. Any attempted assignment will be null and void.
ARTICLE X
OTHER PLANS
Any amount of salary deferred pursuant to this Agreement will be included
in the Executive's compensation base for purposes of determining entitlements
under the First American Corporation Supplemental Executive Retirement Program,
the Life Insurance Plan and Short and Long Term Disability Plans. Salary
deferred under this Agreement will not be eligible for deferral under the FIRST
Plan.
ARTICLE XI
MISCELLANEOUS
11.1 Not an Employment Agreement. The Executive and the Company acknowledge
that this Agreement is not an employment agreement between the
Executive and the Company, and the Company and the Executive each have
the right to terminate the Executive's employment at any time for any
reason, unless there is a written employment agreement to the contrary.
11.2. Binding Effect. This Agreement will be binding upon any successor to
the Company by merger, consolidation, purchase or otherwise.
11.3. Entire Agreement. This Agreement, together with the Executive's
beneficiary designation, constitutes the entire agreement between the
Company and the Executive regarding the Deferred Compensation and will
not be modified except upon the written agreement of the Company and
the Executive.
165
<PAGE> 9
11.4. Governance. This Agreement will be governed in accordance with the
laws of the State of Tennessee.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
- ---------------------------
Executive
- ---------------------------
Social Security Number
FIRST AMERICAN CORPORATION
By:
--------------------------------------------
Martin E. Simmons
Executive Vice President-Administration,
General Counsel, and Corporate Secretary
166
<PAGE> 10
EXHIBIT A
TO SALARY DEFERRAL AGREEMENT
DATED AS OF _______, 1996
INSTRUCTIONS: Select one (1) Method of Payment and one (1) Commencement date for
each event listed and then initial the Exhibit where indicated. The "FIXED DATE"
event is optional and should not be completed unless some form of distribution
is desired prior to retirement or termination.
<TABLE>
<CAPTION>
EVENT TRIGGERING PAYMENT
------------------------
Early Retirement
----------------
- ---------------------------------------------------------------------------------------------------------------
METHOD OF PAYMENT COMMENCEMENT DATE
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
[ ] Lump Sum = deferred amount plus accrued [ ] February 1 of the year following effective
interest. date of early retirement.
[ ] Annual Installments [ ] February 1 of the year following a fixed date
Select 2-10: = after early retirement. Insert year:
account balance plus interest credited
thereto divided by number of installments
outstanding.
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
Normal Retirement
-----------------
- ---------------------------------------------------------------------------------------------------------------
METHOD OF PAYMENT COMMENCEMENT DATE
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
[ ] Lump Sum = deferred amount plus accrued [ ] February 1 of the year following effective
interest. date of normal retirement.
[ ] Annual Installments [ ] February 1 of the year following a fixed date
Select 2-10: = after normal retirement. Insert year:
account balance plus interest credited
thereto divided by number of installments
outstanding.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Executive's Initials
167
<PAGE> 11
<TABLE>
<CAPTION>
EVENT TRIGGERING PAYMENT
------------------------
Voluntary or Involuntary Termination
------------------------------------
- ---------------------------------------------------------------------------------------------------------------
METHOD OF PAYMENT COMMENCEMENT DATE
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
[ ] Lump Sum = deferred amount plus accrued [ ] February 1 of the year following effective
interest. date of voluntary or involuntary termination.
[ ] Annual Installments [ ] February 1 of the year following a fixed date
Select 2-10: = after voluntary or involuntary termination.
account balance plus interest credited Insert year:
thereto divided by number of installments
outstanding.
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
Disability Termination
----------------------
- ---------------------------------------------------------------------------------------------------------------
METHOD OF PAYMENT COMMENCEMENT DATE
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
[ ] Lump Sum = deferred amount plus accrued [ ] February 1 of the year following effective
interest. date of disability termination.
[ ] Annual Installments [ ] February 1 of the year following a fixed date
Select 2-10: = after disability termination. Insert year:
account balance plus interest credited
thereto divided by number of installments
outstanding.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Executive's Initials
THE TERM "EFFECTIVE DATE" MEANS THE EXECUTIVE'S LAST DAY OF EMPLOYMENT.
168
<PAGE> 12
<TABLE>
<CAPTION>
EVENT TRIGGERING PAYMENT
------------------------
Fixed Date
----------
Full Payment (Optional)
- ---------------------------------------------------------------------------------------------------------------
METHOD OF PAYMENT COMMENCEMENT DATE
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
[ ] Lump Sum = deferred amount plus accrued [ ] February 1 following fixed date. Insert year:
interest. 2001
[ ] Annual Installments
Select 2-10:5=
account balance plus interest credited thereto divided by number of
installments outstanding.
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
Fixed Date
----------
Partial Payment (Optional)
- ---------------------------------------------------------------------------------------------------------------
METHOD OF PAYMENT COMMENCEMENT DATE
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
[ ] Lump Sum = partial payment amount with [ ] February 1 following fixed date. Insert year:
the remainder to be paid as indicated by the
first appropriate event triggering payment.
Amount: $ or %
[ ] Annual Installments
Select 2-10: = payment amount divided by number of installments
outstanding with the remainder to be paid as indicated by the first
appropriate event triggering payment.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Executive's Initials
169
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES OF REGISTRANT
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
NAME STATE OR JURISDICTION
OF INCORPORATION
<S> <C>
- -First American National Bank U.S.A.
-Ameristar Capital Markets, Inc. Tennessee (1)
-Guaranty Title Company Tennessee
-First Amtenn Life Insurance Co. Arizona
-First Charlotte Corp. Tennessee
-First Deaderick Corp. Tennessee
-Citizens Financial Corporation Tennessee
-First American Network, Inc. Tennessee
-First City Life Insurance Company Arizona
-Tennessee Credit Corporation Tennessee
-INVEST Financial Corporation Delaware
-Investment Centers of America, Inc. North Dakota
-Trust Center of America North Dakota
-First Dakota, Inc. North Dakota
-Farwest Advisory Services, Inc. North Dakota (2)
-First Dakota of Montana, Inc. Montana
-First Dakota of Texas, Inc.* Texas
-First Dakota of New Mexico, Inc. New Mexico
-First Dakota of Wyoming, Inc. Wyoming
-INVEST Financial Corporation Insurance Agency, Inc. Of Delaware**
-INVEST Financial Corporation Insurance Agency, Inc. Of Alabama
-INVEST Financial Corporation Insurance Agency, Inc. Of Connecticut
-INVEST Financial Corporation Insurance Agency, Inc. Of Georgia
-INVEST Financial Corporation Insurance Agency, Inc. Of Illinois
-INVEST Financial Corporation Insurance Agency, Inc. Of Maryland
-INVEST Financial Corporation Insurance Agency, Inc. Of Massachusetts
-INVEST Financial Corporation Insurance Agency, Inc. Of Mississippi*
-INVEST Financial Corporation Insurance Agency, Inc. Of Montana
-INVEST Financial Corporation Insurance Agency, Inc. Of Nevada
-INVEST Financial Corporation Insurance Agency, Inc. Of New Mexico
-INVEST Financial Corporation Insurance Agency, Inc. Of Ohio
</TABLE>
170
<PAGE> 2
<TABLE>
<S> <C> <C>
-INVEST Financial Corporation Insurance Agency, Inc. Of Oklahoma*
-INVEST Financial Corporation Insurance Agency, Inc. Of South Carolina
-INVEST Financial Corporation Insurance Agency, Inc. Of Texas*
-INVEST Financial Corporation Insurance Agency, Inc. Of Wyoming
- -First American National Bank of Kentucky U.S.A.
- -First American Federal Savings Bank U.S.A.
-Highland Service Corporation Virginia
-Charter Financial Services Corporation Virginia
- -First American Enterprises, Inc. Tennessee
<CAPTION>
NON-PROFIT CORPORATIONS
NAME STATE OR JURISDICTION
OF INCORPORATION
<S> <C>
- -First American Community Development Corporation Tennessee
- -First American Foundation Tennessee
</TABLE>
(1) Merged with and into INVEST Financial Corporation effective February 1,
1997.
(2) Merged with and into Investment Centers of America, Inc., effective January
31, 1997.
"*" indicates that corporation is held by nominee for the benefit of INVEST
Financial Corporation.
"**" indicates that the state of incorporation for the indicated subsidiary of
INVEST Financial Corporation Insurance Agency, Inc. of Delaware is contained in
its corporate name.
171
<PAGE> 1
EXHIBIT 23
ACCOUNTANTS' CONSENT
The Board of Directors
First American Corporation:
We consent to incorporation by reference in the Registration Statements No.
33-57387 and No. 33-59844 each on Form S-3 and No. 33-53269, No. 33-57385, No.
33-44286, No. 2-81920, No. 2-81685, No. 33-44775, No. 33-63188, No. 33-64161,
and No. 333-19577 each on Form S-8 of First American Corporation, of our report
dated January 16, 1997, relating to the consolidated balance sheets of First
American Corporation and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated income statements, changes in shareholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1996, which report appears in the December 31, 1996 Annual Report on Form
10-K of First American Corporation.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Nashville, Tennessee
March 24, 1997
172
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FIRST AMERICAN CORPORATION FOR THE YEAR ENDED DECEMBER
31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 603,456
<INT-BEARING-DEPOSITS> 53,801
<FED-FUNDS-SOLD> 161,677
<TRADING-ASSETS> 60,210
<INVESTMENTS-HELD-FOR-SALE> 1,678,232
<INVESTMENTS-CARRYING> 834,547
<INVESTMENTS-MARKET> 835,192
<LOANS> 6,658,597
<ALLOWANCE> 123,265
<TOTAL-ASSETS> 10,399,468
<DEPOSITS> 7,792,977
<SHORT-TERM> 1,154,372
<LIABILITIES-OTHER> 252,255
<LONG-TERM> 331,157
0
0
<COMMON> 148,158
<OTHER-SE> 720,549
<TOTAL-LIABILITIES-AND-EQUITY> 10,399,468
<INTEREST-LOAN> 546,803
<INTEREST-INVEST> 149,426
<INTEREST-OTHER> 10,820
<INTEREST-TOTAL> 707,049
<INTEREST-DEPOSIT> 282,741
<INTEREST-EXPENSE> 357,351
<INTEREST-INCOME-NET> 349,698
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 2,467
<EXPENSE-OTHER> 334,455
<INCOME-PRETAX> 195,776
<INCOME-PRE-EXTRAORDINARY> 195,776
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 121,572
<EPS-PRIMARY> 4.11
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.90
<LOANS-NON> 16,331
<LOANS-PAST> 11,711
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 51,700
<ALLOWANCE-OPEN> 132,415
<CHARGE-OFFS> 31,430
<RECOVERIES> 20,154
<ALLOWANCE-CLOSE> 123,265
<ALLOWANCE-DOMESTIC> 68,452
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 54,813
</TABLE>
