<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-6198
FIRST AMERICAN CORPORATION
(Exact name of Registrant as specified in its charter)
TENNESSEE 62-0799975
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
FIRST AMERICAN CENTER, NASHVILLE, TENNESSEE 37237
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 615/748-2000
Indicate by check mark whether the Registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common shares outstanding: 110,067,071 as of October 31, 1998.
<PAGE> 2
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C>
Part I. Financial Information Page
- -------------------------------- ----
Item 1 Financial Statements (unaudited)
Consolidated Income Statements for the Three and Nine
Months Ended September 30, 1998 and September 30, 1997 3
Consolidated Balance Sheets as of September 30, 1998 and
1997 and December 31, 1997 4
Consolidated Statements of Changes in Shareholders'
Equity for the Nine Months Ended September 30, 1998
and September 30, 1997 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and September 30, 1997 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3 Quantitative and Qualitative Disclosures about Market Risk 24
Part II. Other Information
- -----------------------------
Item 1 Legal Proceedings 25
Item 6 Exhibits and Reports on Form 8-K 25
</TABLE>
2
<PAGE> 3
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -----------------------
(in thousands, except per share amounts) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $226,550 $244,200 $706,394 $704,685
Interest and dividends on securities 97,720 64,026 249,321 200,591
Interest on federal funds sold and securities purchased under
agreements to resell 1,253 1,332 3,847 4,317
Interest on time deposits with other banks and other interest 1,408 1,351 3,843 3,819
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 326,931 310,909 963,405 913,412
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 10,508 10,436 30,161 30,873
Money market accounts 27,569 30,532 87,141 89,988
Regular savings 4,714 5,496 14,331 16,489
Certificates of deposit under $100,000 35,527 39,893 109,811 119,486
Certificates of deposit $100,000 and over 20,326 16,322 57,359 46,455
Other time and foreign 11,928 11,720 34,692 34,712
- ---------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 110,572 114,399 333,495 338,003
- ---------------------------------------------------------------------------------------------------------------------------
Interest on short-term borrowings 32,224 23,642 84,758 64,205
Interest on long-term debt 12,813 7,121 31,343 20,175
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 155,609 145,162 449,596 422,383
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 171,322 165,747 513,809 491,029
PROVISION FOR LOAN LOSSES 7,000 1,875 18,000 5,625
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 164,322 163,872 495,809 485,404
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Investment services income 37,832 31,108 115,867 92,819
Service charges on deposit accounts 33,454 28,721 93,083 82,497
Mortgage banking 11,021 8,048 35,870 25,730
Commissions and fees on fiduciary activities 10,669 9,874 31,153 28,687
Merchant discount fees 1,162 985 2,926 2,775
Net realized gain on sales of securities 2,154 1,479 5,297 2,871
Trading account revenue 2,751 744 6,810 3,264
Other income 26,445 19,126 62,693 49,948
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 125,488 100,085 353,699 288,591
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 78,895 82,802 248,750 247,168
Subscribers' commissions 22,444 18,165 69,421 53,126
Net occupancy expense 12,411 11,940 37,033 35,239
Equipment expense 10,803 10,993 33,370 31,632
Systems and processing expense 3,864 3,980 11,160 12,104
Communication expense 6,791 6,310 20,602 18,890
Marketing expense 4,353 5,515 14,576 15,598
Supplies expense 2,527 3,726 8,498 11,207
Goodwill amortization 4,124 4,252 12,572 12,061
Merger and integration costs 37,159 - 109,202 -
Other expenses 21,042 20,638 66,415 61,619
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 204,413 168,321 631,599 498,644
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 85,397 95,636 217,909 275,351
Income tax expense 30,473 35,140 81,881 100,942
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 54,924 $ 60,496 $136,028 $174,409
===========================================================================================================================
PER COMMON SHARE:
Net income:
Basic $ .52 $ .57 $1.29 $1.63
Diluted .51 .56 1.26 1.60
Dividends declared .25 .20 .70 .555
===========================================================================================================================
Average common shares outstanding:
Basic 105,839 106,190 105,465 106,946
Diluted 107,801 108,393 107,698 109,222
===========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31
--------------------------- -------------
(dollars in thousands, except share amounts) 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 855,815 $ 948,261 $ 987,520
Time deposits with other banks 18,114 13,186 13,463
Securities:
Held to maturity (fair value $1,845,928, $810,481, and $723,228,
respectively) 1,830,530 805,915 715,027
Available for sale (amortized cost $4,588,508, $3,108,019, and
$3,392,894, respectively) 4,610,754 3,111,159 3,395,494
- ---------------------------------------------------------------------------------------------------------------------------
Total securities 6,441,284 3,917,074 4,110,521
- ---------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under agreements to resell 35,542 110,351 189,542
Trading account securities 48,698 72,559 64,469
Loans:
Commercial 4,684,429 4,447,835 4,570,941
Consumer--amortizing mortgages 1,570,368 2,783,776 2,783,097
Consumer--other 2,504,770 2,543,184 2,524,577
Real estate--construction 511,584 403,649 400,557
Real estate--commercial mortgages and other 1,252,583 1,330,943 1,374,661
- ---------------------------------------------------------------------------------------------------------------------------
Total loans 10,523,734 11,509,387 11,653,833
Unearned discount (11,180) (11,067) (12,101)
- ---------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount 10,512,554 11,498,320 11,641,732
Allowance for loan losses (180,137) (180,362) (180,043)
- ---------------------------------------------------------------------------------------------------------------------------
Total net loans 10,332,417 11,317,958 11,461,689
- ---------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 343,443 354,251 362,047
Other assets 788,259 694,309 645,185
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $18,863,572 $17,427,949 $17,834,436
===========================================================================================================================
LIABILITIES
Deposits:
Demand (noninterest-bearing) $ 2,642,565 $ 2,579,572 $ 2,647,765
NOW accounts 2,154,669 1,777,547 1,879,520
Money market accounts 2,613,471 2,796,889 2,875,958
Regular savings 792,211 864,432 859,690
Certificates of deposit under $100,000 2,672,579 2,987,590 2,929,845
Certificates of deposit $100,000 and over 1,358,211 1,173,245 1,390,148
Other time 723,781 732,177 718,349
Foreign 248,489 114,510 104,182
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 13,205,976 13,025,962 13,405,457
- ---------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,445,675 2,099,847 1,969,639
Long-term debt 1,252,068 386,500 596,218
Other liabilities 363,958 402,284 319,145
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 17,267,677 15,914,593 16,290,459
- ---------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; authorized 200,000,000 shares; issued:
106,937,996 shares at September 30, 1998; 106,131,209 shares at
September 30, 1997; and 106,032,013 shares at December 31, 1997 267,345 265,328 265,080
Additional paid-in capital 145,768 175,795 163,902
Retained earnings 1,199,518 1,084,824 1,126,803
Deferred compensation on restricted stock (30,943) (14,645) (13,341)
Employee stock ownership plan obligation - (224) (163)
- ---------------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 1,581,688 1,511,078 1,542,281
Accumulated other comprehensive income, net of tax 14,207 2,278 1,696
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,595,895 1,513,356 1,543,977
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $18,863,572 $17,427,949 $17,834,436
===========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, COMMON DEFERRED EMPLOYEE ACCUMULATED
1997 AND SEPTEMBER 30, 1998 SHARES COMPENSATION STOCK OTHER
ISSUED ADDITIONAL ON OWNERSHIP COMPREHENSIVE
(dollars in thousands except per AND COMMON PAID-IN RETAINED RESTRICTED PLAN INCOME (LOSS),
share amounts) OUTSTANDING STOCK CAPITAL EARNINGS STOCK OBLIGATION NET OF TAX TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 105,109,909 $262,775 $239,661 $ 953,062 $ (2,066) $ (443) $ (3,016) $1,449,973
Comprehensive income:
Net income - - - 174,409 - - -
Other comprehensive income,
net of tax - - - - - - 5,294
Comprehensive income 179,703
Issuance of common shares in
connection with Employee Benefit
Plans, net of discount on
Dividend Reinvestment Plan 1,005,435 2,513 15,538 - - - - 18,051
Issuance of shares of restricted
common stock 459,674 1,149 14,002 - (15,151) - - -
Repurchase of shares of common
stock (5,954,855) (14,887) (164,899) - - - - (179,786)
Issuance of common shares for
purchase of Hartsville
Bancshares, Inc. 350,522 876 9,223 - - - - 10,099
Issuance of common shares for
acquisitions of pooled company 5,160,436 12,901 58,929 13,938 - - - 85,768
Amortization of deferred
compensation on restricted stock - - - - 2,572 - - 2,572
Reduction in employee stock
ownership plan obligation - - - - - 219 - 219
Cash dividends declared ($.555 per -
common share) - - - (32,710) - - (32,710)
Cash dividends declared by pooled -
company - - - (23,875) - - (23,875)
Tax benefit from stock option and
award plans - - 3,312 - - - - 3,312
Other 88 1 29 - - - - 30
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 106,131,209 $265,328 $175,795 $1,084,824 $(14,645) $ (224) $ 2,278 $1,513,356
===================================================================================================================================
Balance, January 1, 1998 106,032,013 $265,080 $163,902 $1,126,803 $(13,341) $ (163) $ 1,696 $1,543,977
Comprehensive income:
Net income - - - 136,028 - - -
Other comprehensive income,
net of tax - - - - - - 12,493
Comprehensive income 148,521
Issuance of common shares in
connection with Employee Benefit
Plans, net of discount on Dividend
Reinvestment Plan 735,551 1,839 11,998 - - - - 13,837
Issuance of shares of restricted
common stock 481,377 1,203 21,456 - (22,659) - - -
Repurchase of shares of common
stock (1,182,099) (2,955) (61,538) - - - - (64,493)
Issuance of common shares for -
acquisition of pooled company 871,156 2,178 5,524 (1,206) - 18 6,514
Amortization of deferred compensation
on restricted stock - - - - 5,057 - - 5,057
Reduction in employee stock
ownership plan obligation - - - - - 163 - 163
Cash dividends declared ($.70 per -
common share) - - - (52,722) - - (52,722)
Cash dividends declared by pooled -
company - - - (9,384) - - (9,384)
Tax benefit from stock option and
award plans - - 4,428 - - - - 4,428
Other (2) - (2) (1) - - - (3)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 106,937,996 $267,345 $145,768 $1,199,518 $(30,943) $ - $ 14,207 $1,595,895
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------------
(in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $136,028 $174,409
Adjustments to reconcile net income to net cash and cash equivalents provided by
operating activities:
Provision for loan losses 18,000 5,625
Depreciation and amortization of premises and equipment 28,063 28,273
Amortization of intangible assets 26,712 22,485
Other amortization, net 4,421 1,139
Deferred income tax expense 7,622 12,479
Net loss (gain) on sales and writedowns of other real estate owned 1,143 (4,063)
Net realized gains on sales and write-downs of securities (5,297) (2,871)
Net loss (gain) on sales and writedowns of premises and equipment 448 (37)
Net gain on sales of branches, business operations and subsidiaries (8,294) (2,105)
Change in assets and liabilities, net of effects from acquisitions and dispositions:
(Increase) decrease in mortgage warehouse loans (3,675) 4,758
Increase in accrued interest receivable (14,742) (9,972)
(Decrease) increase in accrued interest payable (4,210) 8,802
Decrease (increase) in trading account securities 15,771 (9,265)
Increase in other assets (187,199) (5,682)
Increase in other liabilities 47,219 11,549
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 62,010 235,524
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 1,286,619 1,770,597
Proceeds from maturities of securities available for sale 1,287,778 377,360
Purchases of securities available for sale (3,708,646) (1,973,234)
Proceeds from maturities of securities held to maturity 438,279 345,928
Purchases of securities held to maturity (386,685) (190,210)
Proceeds from sales of other real estate owned 8,208 14,510
Acquisitions, net of cash and cash equivalents acquired 11,262 76,597
Sales of branches, business operations and subsidiaries, net of cash and cash
equivalents disposed of 11,793 2,007
Net increase in loans, net of repayments and sales (23,590) (473,144)
Proceeds from sales of premises and equipment 7,868 4,849
Purchases of premises and equipment (17,169) (58,430)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,084,283) (103,170)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in deposits (277,266) (470,114)
Net increase in other short-term borrowings 636,941 151,281
Advances from Federal Home Loan Bank 489,979 208,516
Net repayment of other long-term debt (101) (136)
Proceeds from early termination of swap contract on long-term debt - 2,038
Issuance of common shares under Employee Benefit and Dividend Reinvestment Plans 13,837 18,051
Repurchase of common stock (64,493) (179,786)
Tax benefit related to stock options 4,428 3,312
Cash dividends paid (62,106) (56,870)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 741,219 (323,708)
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (281,054) (191,354)
Cash and cash equivalents, January 1 1,190,525 1,263,152
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, September 30 $ 909,471 $1,071,798
===========================================================================================================================
Cash paid during the year for:
Interest expense $ 453,806 $ 413,581
Income taxes 46,179 66,497
Non-cash transactions:
Foreclosures 3,021 3,861
Stock issued for acquisitions 6,514 94,636
Mortgage loans securitized and retained 1,206,958 -
===========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and general practices within the
banking industry.
The interim consolidated financial statements should be read in
conjunction with First American Corporation's (the "Corporation" or "First
American") consolidated financial statements which include the accounts of
Deposit Guaranty Corp. ("Deposit Guaranty") for all periods presented in
accordance with the pooling-of-interests method of accounting for business
combinations. The quarterly consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results for interim periods. Certain prior year amounts have
been reclassified to conform with the current year presentation. The results for
interim periods are not necessarily indicative of results to be expected for the
complete fiscal year.
(2) ACQUISITIONS
Effective May 1, 1998, the Corporation completed the merger of Deposit
Guaranty with and into the Corporation by exchanging approximately 48.7 million
shares of First American common stock for all of the outstanding shares of
Deposit Guaranty (based on an exchange ratio of 1.17 shares of First American
common stock for each share of Deposit Guaranty common stock). Deposit Guaranty
was a $7.2 billion asset financial services holding company headquartered in
Jackson, Mississippi, with banking offices in Mississippi, Louisiana, Arkansas,
and Tennessee. The transaction was accounted for as a pooling of interests, and
accordingly, the consolidated financial statements have been restated to include
the results of Deposit Guaranty for all periods presented. Merger and
integration costs of $72.6 million, net of tax, which are comprised primarily of
investment banking, severance, and systems conversions costs, have been
recognized in 1998.
In April 1998 and in conjunction with the Deposit Guaranty business
combination, the number of authorized shares was increased from 100 million to
200 million.
Net interest income, noninterest income, and net income as originally
reported by First American and Deposit Guaranty for the three months and the
nine months ended September 30, 1997 are presented in the table below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
--------------------------------------- ----------------------------------------
First Deposit First Deposit
(in thousands) American Guaranty Combined American Guaranty Combined
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 95,896 $ 69,851 $165,747 $282,379 $208,650 $491,029
Noninterest income 64,250 35,835 100,085 188,840 99,751 288,591
Net income 37,233 23,263 60,496 106,604 67,805 174,409
================================================================================================================
</TABLE>
7
<PAGE> 8
Other mergers and acquisitions completed by First American since January 1,
1997, are presented in the following table (in millions):
<TABLE>
<CAPTION>
Common
Shares Cash Accounting
Financial Institution State Date Assets Issued Paid Treatment
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jefferson Guaranty Bancorp, Inc. LA Jan. 1997 $299 2.1 $10 Purchase
- --------------------------------------------------------------------------------------------------------------
Hartsville Bancshares, Inc. TN Jan. 1997 90 0.4 - Purchase
- --------------------------------------------------------------------------------------------------------------
First Capital Bancorp, Inc. LA Mar. 1997 186 1.8 - Pooling
- --------------------------------------------------------------------------------------------------------------
NBC Financial Corporation LA July 1997 69 0.5 - Purchase
- --------------------------------------------------------------------------------------------------------------
CitiSave Financial Corporation LA Aug. 1997 75 - 19 Purchase
- --------------------------------------------------------------------------------------------------------------
Victory Bancshares, Inc. TN Mar. 1998 131 0.9 - Pooling
==============================================================================================================
</TABLE>
For the acquisitions accounted for as pooling-of-interests combinations,
the results of operations have been included in the consolidated financial
statements from the beginning of the year acquired or from the date of the
acquisition when preacquisition amounts were not material. Prior period
financial statements have not been restated since the changes would have been
immaterial. For acquisitions accounted for as purchase business combinations,
the results of operations have been included in the consolidated financial
statements from the respective dates of acquisition. The purchase price in
excess of the net assets acquired has been recorded as goodwill and is being
amortized on a straight-line basis over 15 years. The proforma effect on prior
financial statements of these acquisitions is not significant.
On June 1, 1997, the Corporation issued .8 million shares of its common
stock in exchange for the 2 percent interest in Deposit Guaranty National Bank
("DGNB") owned by minority shareholders. With this acquisition the Corporation
became the sole shareholder of DGNB.
Subsequent to September 30, 1998, the following business combinations
have been completed or are pending (in millions):
<TABLE>
<CAPTION>
Common Assets
Shares at
Financial Institution State Effective Date Issued 9/30/98
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Completed:
Peoples Bank of Dickson TN October 1, 1998 .9 $ 142
The Middle Tennessee Bank TN October 1, 1998 1.2 225
CSB Financial Corporation TN October 1, 1998 .9 148
Pending:
Pioneer Bancshares, Inc. TN November 20, 1998 - (1) 991
=======================================================================================================
</TABLE>
(1) The terms of the agreement provide for shareholders of Pioneer
Bancshares, Inc. ("Pioneer") to receive 1.65 shares of First American
common stock for each outstanding share of Pioneer common stock.
Pioneer is subject to shareholder approval.
The business combinations noted in the table above will be accounted for
as poolings of interests. The Corporation's financial statements will be
restated as a result of the Pioneer combination.
8
<PAGE> 9
(3) NONPERFORMING ASSETS Nonperforming assets were as follows:
<TABLE>
<CAPTION>
September 30 December 31
----------------------------------------------
(dollars in thousands) 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 30,303 $ 42,214 $ 36,294
Foreclosed properties 5,580 7,197 7,023
- ---------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 35,883 $ 49,411 $ 43,317
=========================================================================================================
Loans on accrual past due 90 days or more $41,076 $ 32,323 $ 29,382
=========================================================================================================
Nonperforming assets as a percent of loans
and foreclosed properties (excluding loans
on accrual past due 90 days or more) .34% .43% .37%
=========================================================================================================
</TABLE>
(4) ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses and the allowance ratios
were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------------------
(in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $180,043 $185,470
Provision charged to operating expenses 18,000 5,625
Allowance of subsidiary sold - (252)
Allowance of business combinations except Deposit Guaranty 1,317 8,252
- ---------------------------------------------------------------------------------------------------
199,360 199,095
- ---------------------------------------------------------------------------------------------------
Loans charged off 38,853 39,005
Recoveries of loans previously charged off 19,630 20,272
- ---------------------------------------------------------------------------------------------------
Net charge-offs 19,223 18,733
- ---------------------------------------------------------------------------------------------------
Balance, September 30 $180,137 $180,362
===================================================================================================
Allowance end of period to net loans outstanding 1.71% 1.57%
Net charge-offs to average loans (annualized) .23 .23
===================================================================================================
</TABLE>
(5) ACCOUNTING MATTERS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," was adopted by the Corporation on January 1, 1998. SFAS
No. 130 establishes standards for reporting comprehensive income. Comprehensive
income includes net income and other comprehensive income which is defined as
non-owner related transactions in equity. Prior periods have been reclassified
to reflect the application of the provisions of SFAS No. 130.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to
shareholders. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Adoption of SFAS No. 131 will expand disclosures related
to the consolidated financial statements. The Corporation plans to adopt SFAS
No. 131 for 1998 and is currently evaluating its operations to determine the
appropriate disclosures with respect to SFAS No. 131.
9
<PAGE> 10
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," revises and standardizes the disclosure requirements
for employers' pensions and other postretirement benefits plans. This standard
does not change the measurement or recognition of such plans. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. Restatement of
disclosures for earlier periods presented is required unless the information is
not readily available, in which case, all available information and a
description of the information not available shall be included in the notes to
the financial statements. The disclosure requirements of SFAS No. 132 are
intended to provide information that is more comparable, understandable, and
concise for the users of this information. The Corporation adopted SFAS No. 132
on January 1, 1998.
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Gains or losses
resulting from changes in the values of derivatives will be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting with the key criterion for hedge accounting being that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999, and shall not be applied retroactively to financial statements of
prior periods. At this time, the Corporation is evaluating when and how it will
adopt SFAS No. 133 as well as the possible impact of the statement on the
Corporation's consolidated financial statements.
(6) COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- ---------------------------
(in thousands, except per share amounts) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic
Average common shares outstanding 105,839 106,190 105,465 106,946
=========================================================================================================================
Net income $ 54,924 $ 60,496 $136,028 $174,409
=========================================================================================================================
Per share amount $ .52 $ .57 $1.29 $1.63
=========================================================================================================================
Diluted
Average common shares outstanding 105,839 106,190 105,465 106,946
Dilutive common stock options at average market price 1,962 2,203 2,233 2,276
- -------------------------------------------------------------------------------------------------------------------------
Average diluted shares outstanding 107,801 108,393 107,698 109,222
=========================================================================================================================
Net income $ 54,924 $ 60,496 $136,028 $174,409
=========================================================================================================================
Per share amount $ .51 $ .56 $1.26 $1.60
=========================================================================================================================
</TABLE>
(7) LEGAL AND REGULATORY MATTERS
Following the adoption of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, Charter Federal Savings Bank ("Charter" or now "FAFSB"
which was subsequently acquired by First American), brought an action against
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation
seeking injunctive and other relief, contending that Congress' elimination of
supervisory goodwill required rescission of certain supervisory transactions.
The Federal District Court found in Charter's favor, but in 1992 the Fourth
Circuit Court of Appeals reversed, and the U.S. Supreme Court denied Charter's
petition for certiorari. In 1995, the Federal Circuit Court found in favor of
another thrift institution in a similar case (Winstar Corp. v. United States) in
which the association sought damages for breach of contract. Charter also filed
suit against the United States Government ("Government") in the Court of Federal
Claims based on breach of contract. Pending the Supreme Court's review of the
Winstar decision, FAFSB's action was stayed. In July 1996, the
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Supreme Court affirmed the lower court's decision in Winstar. The stay was
automatically lifted and FAFSB's suit is now proceeding. The Government filed a
motion to dismiss the suit based on the prior Fourth Circuit decision, and FAFSB
filed a Motion for Partial Summary Judgment. These motions have not yet been
decided by the Federal Claims Court.
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 Charter shareholders as of December 1, 1995, will be entitled to
receive additional consideration equal in value to 50% of any recovery, net of
all taxes and certain other expenses, including the costs and expenses of such
litigation, received on or before December 1, 2000, subject to certain
limitations in the case of certain business combinations. Such additional
consideration, if any, is payable in the common stock of the Corporation, based
on the average per share closing price on the date of receipt by FAFSB of the
last payment constituting a recovery from the Government.
Also, there are from time to time other legal proceedings pending against
the Corporation and its subsidiaries. In the opinion of management and counsel,
liabilities, if any, arising from such proceedings presently pending would not
have a material adverse effect on the consolidated financial statements of the
Corporation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the
consolidated financial statements and accompanying notes of First American
Corporation (the "Corporation" or "First American") appearing within this report
and by reference to the Corporation's consolidated financial statements and
management's discussion and analysis contained in the Form 8-K filed on July 14,
1998.
To the extent that statements in this discussion relate to the plans,
objectives, or future performance of First American, these statements may be
deemed to be forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are based on
management's current expectations and the current economic environment. Actual
strategies and results in future periods may differ materially from those
currently expected due to various risks and uncertainties.
OVERVIEW
Net income for the third quarter of 1998 was $54.9 million with diluted
earnings per share of $.51. Operating earnings, exclusive of merger and
integration costs in connection with the business combination with Deposit
Guaranty of $37.2 million ($22.8 million, net of tax) and a gain on the sale of
the Deposit Guaranty corporate trust business of $7 million ($4.4 million, net
of tax), were up 21 percent to $73.3 million from $60.5 million in the third
quarter of 1997. Diluted earnings per share, exclusive of the merger and
integration costs and the corporate trust gain, also increased 21 percent to
$.72 from $.56 in the third quarter of 1997. Excluding the merger and
integration costs and the corporate trust gain, return on average assets ("ROA")
improved to 1.59 percent in the third quarter of 1998 compared to 1.41 percent
in the third quarter of 1997 and return on average equity ("ROE") improved to
18.57 percent in the third quarter of 1998 compared to 16.08 percent in the
third quarter of 1997.
Net income for the nine months ended September 30, 1998, was $136 million
with diluted earnings per share of $1.26. Excluding merger and integration costs
of $109.2 million ($72.6 million, net of tax) and the corporate trust gain, net
income for the nine months ended September 30, 1998, was $204.2 million, up 17
percent from $174.4 million earned during the first nine months of 1997. Diluted
earnings per share, exclusive of the merger and integration costs and the
corporate trust gain, rose 19 percent during the first nine months of 1998 to
$1.90 from $1.60 during the same time period last year. Excluding the merger and
integration costs and the corporate trust gain, ROA improved to 1.52 percent
during the first nine months of 1998 versus 1.38 percent during the first nine
months of 1997 and ROE increased to 17.61 percent compared to 15.72 percent.
Effective May 1, 1998, the Corporation completed the merger of Deposit
Guaranty with and into the Corporation by exchanging approximately 48.7 million
shares of First American common stock for all of the outstanding shares of
Deposit Guaranty. Deposit Guaranty was a $7.2 billion asset financial services
holding company headquartered in Jackson, Mississippi, with banking offices in
Mississippi, Louisiana, Arkansas, and Tennessee. The transaction was accounted
for under the pooling-of-interests method of accounting for business
combinations and, accordingly, the consolidated financial statements have been
restated to include the results of Deposit Guaranty for all periods presented.
The $109.2 million of merger and integration costs recognized during 1998 in
connection with the integration of Deposit Guaranty into First American included
$26 million of severance and retention costs, $21 million of systems-related
costs, $19 million of investment banking fees, $15 million to establish a
charitable foundation for the Deposit Guaranty markets, and $28.2 million of
other expenses. Expected synergies to be gained from the Deposit Guaranty merger
are on target and are expected to approximate $88 million, which is the amount
previously reported in the Corporation's 1997 Annual Report. Cost and revenue
enhancement initiatives accounting for $77 million of annualized synergies have
already been implemented during the first nine months of 1998. The expected
benefits of the initiatives include workforce reduction ($31 million), systems
conversion-
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related savings ($15 million), enhanced product lines and pricing changes ($14
million), sale of First Mortgage and McAfee Mortgage adjusted for lost revenue
($4 million), revenue enhancements due to doubling of annuities sales force ($6
million), branch closures ($2 million), and other ($5 million). The Corporation
expects to achieve the full $88 million of synergies in 1999.
Effective March 23, 1998, First American acquired Victory Bancshares,
Inc. ("Victory"), a bank holding company in West Tennessee with $131 million in
assets by exchanging approximately .9 million shares of the Corporation's common
stock for all of the outstanding shares of Victory. The acquisition was
accounted for as a pooling of interests. Results of operations of Victory were
included in the Corporation's financial statements from the date of acquisition,
as prior amounts were not material. NOTE 2 to the consolidated financial
statements presents details of acquisition activity during 1997.
On April 3, 1998, First American completed the sale of three branches in
Virginia with total deposits of approximately $37 million for a pre-tax gain of
$2.7 million. The sale of the three branches were a part of the implementation
of First American's Distribution Management System ("DMS"), which is designed to
reconfigure First American's distribution system to determine the best mix of
distribution alternatives for clients and to maximize return on capital
investment.
Effective July 11, 1998, First American sold First Mortgage Corp., a
mortgage subsidiary operating in Nebraska, Iowa, and Oklahoma, and recognized a
pretax loss of approximately $2.4 million, which was included in second quarter
results. On August 16, 1998, First American Corporation completed the sale of
McAfee Mortgage, a mortgage subsidiary in Texas, and recognized a gain, net of
tax, of $73 thousand, which finalized the strategic process of focusing the
Corporation's mortgage operations on primarily in-market mortgage businesses.
The sale of DGNB's corporate trust business to The Bank of New York,
which was completed on August 31, 1998, resulted in a gain of $7 million ($4.4
million net of tax), involved the transfer of approximately 900 bond trustee and
agency relationships representing $8 billion in outstanding securities for
municipalities and corporations located primarily in Mississippi and Louisiana.
On October 1, 1998, First American completed the merger with CSB
Financial Corporation ("CSB Financial") by exchanging .9 million shares of First
American common stock for all of the outstanding shares of CSB Financial in a
transaction accounted for as a pooling of interests. CSB Financial was a $148
million asset bank holding company headquartered in Kingston Springs, Tennessee,
with four banking offices in Cheatham County. In addition to a community bank,
CSB Financial subsidiaries included a lease financing subsidiary; a financial
planning and insurance, annuity, mutual fund, and securities sales subsidiary;
and a mobile home financing subsidiary.
On October 1, 1998 First American completed the merger with The Middle
Tennessee Bank ("Middle Tennessee") by exchanging 1.2 million shares of First
American common stock for all of the outstanding shares of Middle Tennessee in a
transaction accounted for as a pooling of interests. Middle Tennessee was a $225
million asset bank headquartered in Columbia, Tennessee, with seven banking
offices.
On October 1, 1998, First American completed the merger with Peoples Bank
of Dickson ("Peoples Bank") by exchanging .9 million shares of First American
common stock for all of the outstanding shares of Peoples Bank in a transaction
accounted for as a pooling of interests. Peoples Bank was a $142 million asset
bank headquartered in Dickson, Tennessee, with six banking offices in Middle
Tennessee.
On May 28, 1998, First American entered into a definitive agreement to
merge Pioneer, a $991 million bank holding company headquartered in Chattanooga,
Tennessee, into First American. Pioneer is the parent company of Pioneer Bank,
Valley Bank, and Pioneer Bank f. s. b., a federal savings bank, with 34 banking
offices in southeast Tennessee and northwest Georgia. Terms of the agreement
provide for Pioneer's shareholders to receive 1.65 shares of First American's
common stock for each outstanding share of Pioneer common stock in a transaction
to be accounted for as a pooling of
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interests. The transaction is subject to approval by Pioneer's shareholders and
is expected to close in the fourth quarter of 1998. The Corporation's financial
statements will be restated as a result of the Pioneer combination.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
For purposes of this discussion, total revenues consist of the sum of net
interest income on a taxable equivalent basis and noninterest income. Net
interest income is the difference between total interest income earned on
earning assets, such as loans and securities, and total interest expense paid on
interest-bearing liabilities, such as deposits. Net interest income on a taxable
equivalent basis represented 58 percent of total revenues in the third quarter
of 1998 versus 63 percent in the third quarter of 1997 and 60 percent of total
revenues in the first nine months of 1998 versus 63 percent in the first nine
months of 1997, which is reflective of the Corporation's continuing
transformation from a traditional bank holding company to a financial services
company. Net interest income was $173.9 million in the third quarter of 1998, up
$5.4 million, or 3 percent, from $168.5 million in the third quarter of 1997.
The $5.4 million increase in net interest income resulted primarily from an
increase in the volume of earning assets ($13.4 million net interest income
impact) offset by a decrease in the net interest spread ($8 million net interest
income impact). Net interest income on a taxable equivalent basis was $521.8
million in the first nine months of 1998, up $22.7 million, or 5 percent, from
$499.1 million in the first nine months of 1997. The $22.7 million increase in
net interest income resulted primarily from an increase in the volume of earning
assets ($30.9 million net interest income impact) offset by a decrease in the
net interest spread ($8.2 million net interest income impact).
During the third quarter of 1998 average earning assets increased $1.32
billion, or 9 percent, to $16.72 billion from $15.40 billion in the third
quarter of 1997. Average earning assets increased $1.01 billion, or 7 percent,
for the first nine months of 1998 to $16.30 billion from $15.29 billion for the
same period in 1997. Average investment securities increased $2.19 billion, or
58 percent, during the third quarter of 1998 compared to the third quarter of
1997 and $1.06 billion, or 27 percent, during the first nine months of 1998
compared to the first nine months of 1997. Given loan repayments and relatively
softer loan demand during 1998 as compared with 1997 and in anticipation of a
continuing declining long-term interest rate environment with accelerated
prepayments on loans and mortgage-backed securities, the Corporation
strategically increased its investment securities portfolio. Average loans
decreased $829.9 million, or 7 percent, during the third quarter of 1998
compared to the third quarter of 1997 and $17.6 million, or .2 percent, during
the first nine months of 1998 compared to the first nine months of 1997.
During 1998 $1.21 billion of mortgage loans were securitized and
retained. Approximately half of the increase in average investment securities
was due to the securitization of mortgage loans and the contribution to a real
estate investment trust, which is a subsidiary of the Corporation.
Interest-bearing liabilities averaged $14.01 billion during the third
quarter of 1998, an increase of $1.19 billion, or 9 percent, from $12.82 billion
in the third quarter of 1997. Interest-bearing liabilities averaged $13.62
billion during the first nine months of 1998, an increase of $906.9 million, or
7 percent, from $12.72 billion in the first nine months of 1997. In order to
fund an increased level of earning assets in the most economically desirable
manner, the Corporation placed more reliance on noncore interest-bearing
liabilities during 1998 as compared to 1997. Interest-bearing deposits were up
$170.9 million, or 2 percent, during the third quarter of 1998, and federal
funds purchased and other short-term borrowings increased $600 million, or 33
percent, and long-term debt increased $415.7 million, or 93 percent. During the
first nine months of 1998 compared to the same period in 1997, federal funds
purchased and other short-term borrowings increased $476.3 million, or 28
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<PAGE> 15
percent, and long-term debt increased $255.8 million, or 60 percent, while
interest-bearing deposits increased $174.8 million, or 2 percent.
The net interest spread was 3.41 percent for the third quarter of 1998
and 3.56 percent for the first nine months of 1998 which compared to 3.59
percent for the third quarter of 1997 and 3.62 percent for the first nine months
of 1997. The decrease in the net interest spread from the third quarter of 1997
to the third quarter of 1998 reflected a 26 basis point decrease in the average
yield on earning assets and an 8 basis point decrease in the average rate paid
on interest-bearing liabilities. The decrease in the net interest spread from
the first nine months of 1997 to the first nine months of 1998 reflected a 9
basis point decrease in the average yield on earning assets and a 3 basis point
decrease in the average rate paid on interest-bearing liabilities.
The decrease in the yield on earning assets to 7.82 percent during the
third quarter of 1998 (from 8.08 percent during the third quarter of 1997) and
the decrease in the average yield on earning assets to 7.97 percent during the
first nine months of 1998 (from 8.06 percent for the comparative period in 1997)
was essentially due to decreases in yields on investment securities and the
relative size of the investment securities portfolio to total earning assets.
The interest rate environment impacts the rates that First American earns on
investment securities, charges for loans, and pays on interest-bearing
liabilities. As rates for home mortgages significantly declined in 1998,
mortgage prepayments increased at a rapid pace, which resulted in a decrease in
the average yield on the investment securities portfolio as lower yielding
mortgage-backed securities replaced higher yielding mortgage-backed securities.
Also contributing to the lower yield on the investment securities portfolio was
the increase in volume of investment securities during 1998 at lower yields
compared to 1997. The yield on loans was relatively unchanged at 8.51 percent
for the third quarter of 1998 versus 8.52 percent for the third quarter of 1997
and increased to 8.54 percent during the first nine months of 1998 compared to
8.52 percent during the first nine months of 1997.
Factors contributing to the decrease in the average rate paid on
interest-bearing liabilities to 4.41 percent in the third quarter of 1998 from
4.49 percent in the third quarter of 1997 and to 4.41 percent in the first nine
months of 1998 from 4.44 percent in the first nine months of 1997 were deposit
pricing actions offset by funding mix changes and an increase in the average
rate paid on noncore sources of funds. Through the use of VISION, a customer
information system that captures product utilization, transaction behavior,
profitability, and buying preferences, the Corporation reviewed its deposit
products and adjusted rates accordingly and offered updated products, including
the Tailored Money Sweep account.
The net interest margin decreased to 4.12 percent and 4.28 percent in the
third quarter and first nine months of 1998, respectively, from 4.34 percent and
4.36 percent in the third quarter and first nine months of 1997, respectively,
due primarily to a decline in the net interest spread and a slightly lower
contribution from the benefit of noninterest-bearing deposits.
PROVISION FOR LOAN LOSSES
This topic is addressed under the caption, "Allowance and Provision for
Loan Losses."
NONINTEREST INCOME
Total noninterest income represented 42 percent of total revenues in the
third quarter of 1998 compared with 37 percent in the third quarter of 1997 and
40 percent of total revenues during the first nine months of 1998 compared to 37
percent in the same time period in 1997. Total noninterest income increased
$25.4 million, or 25 percent, to $125.5 million in the third quarter of 1998
from $100.1 million in the third quarter of 1997 and $65.1 million, or 23
percent, to $353.7 million in the first nine months of 1998 compared to $288.6
million in the first nine months of 1997. During the third quarter of 1998 First
American completed the sale of Deposit Guaranty's corporate trust business for a
gain of $7 million. Noninterest income, exclusive of the gain on the sale of the
corporate trust business, totaled $118.5 million in the third quarter of 1998,
an increase of $18.4 million, or 18
15
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percent, from the third quarter of 1997 and totaled $346.7 million in the first
nine months of 1998, an increase of $58.1 million, or 20 percent, from the first
nine months of 1997.
All major categories of noninterest income experienced solid increases
for the third quarter and for the first nine months of 1998. Significant changes
in noninterest income were attributable to increases in investment services
income, service charges on deposit accounts, mortgage banking income, trading
account revenue, and commissions and fees on fiduciary activities.
Investment services income increased $6.7 million, or 22 percent, during
the third quarter of 1998 over the third quarter of 1997 and $23 million, or 25
percent, during the first nine months of 1998 over the first nine months of
1997. The increase in investment services income was substantially due to growth
in retail brokerage commissions related to mutual funds, equities, and annuities
sales of IFC Holdings, Inc. ("IFC"). IFC is the nation's largest marketer of
mutual funds, annuities, and other investment products sold through financial
institutions.
The $4.7 million, or 16 percent, increase in service charges on deposit
accounts for the third quarter of 1998 and the $10.6 million, or 13 percent,
increase for the first nine months of 1998 reflected fee increases and product
changes in conjunction with the utilization of a customer information system
called VISION. Increases primarily occurred in overdraft charges and commercial
analysis fees.
Mortgage banking income was up $3 million, or 37 percent, in the third
quarter of 1998 and $10.1 million, or 39 percent, in the first nine months of
1998. The substantial increases were due to a larger volume of mortgage loans
processed and to an increase in net gains on the sale of mortgage warehouse
loans of $1.5 million in the third quarter of 1998 and $4.6 million in the first
nine months of 1998 compared with the respective time periods in 1997.
Trading account revenue increased $2 million, or 270 percent, in the
third quarter of 1998 and $3.5 million, or 109 percent, in the first nine months
of 1998 due to increased activity as the Corporation benefited from an active
securities market.
Commissions and fees on fiduciary activities increased $.8 million, or 8
percent, during the third quarter of 1998 and $2.5 million, or 9 percent, during
the first nine months of 1998, principally as the result of a growth in
customers and assets under management and increased fees on the existing
customer base, which reflected an increase in the value of assets under
management due to favorable market conditions.
Net realized gains on sales of securities were up $.7 million, or 46
percent, in the third quarter of 1998 and $2.4 million, or 85 percent, in the
first nine months of 1998. Excluding net realized gains on sales of securities
and the gain on the sale of Deposit Guaranty's corporate trust business,
noninterest income was up $17.7 million, or 18 percent in the third quarter of
1998 and $55.7 million, or 19 percent, in the first nine months of 1998.
Other income (exclusive of the gain on the sale of Deposit Guaranty's
corporate trust business) increased $.3 million, or 1 percent, in the third
quarter of 1998 and $5.7 million, or 11 percent, in the first nine months of
1998. Other income during the third quarter and first nine months of 1997
included a $2.1 million gain on the sale of Tennessee Credit Corporation and
First City Life Insurance Company. Increases in the third quarter of 1998 from
the third quarter of 1997 included a $.9 million increase in other corporate
service fees and a $.6 million increase in open-end non-loan fees. Significant
changes in other income in the first nine months of 1998 compared to the same
period in 1997 resulted from a $2.7 million gain on the sale of three branches
in Virginia, a $2.2 million increase in open-end non-loan fees, a $2 million
increase in other corporate service fees, a $1 million increase in collection
expenses and related bank fees, and a $.9 million additional gain on the fourth
quarter 1997 sale of First American's corporate trust assets offset by a $2.4
million loss on the sale of First Mortgage's operations. Increases in open-end
non-loan fees were pushed up by interchange fees generated by the "Check Card"
product for both the third quarter of 1998 and the first nine months of 1998.
Increases in other corporate service fees were essentially due to automated
teller
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("ATM") transactions. The $1 million increase in collection expenses and related
bank fees was primarily attributable to official check fees and syndication
fees.
NONINTEREST EXPENSE
Total noninterest expense increased $36.1 million, or 21 percent, to
$204.4 million for the third quarter of 1998 compared with $168.3 million for
the same period in 1997 and $133 million, or 27 percent, to $631.6 million for
the first nine months of 1998 compared with $498.6 million for the same period
in 1997. Excluding merger and integration costs of $37.2 million in the third
quarter of 1998 and $109.2 million in the first nine months of 1998, noninterest
expense decreased $1.1 million, or .6 percent, in the third quarter of 1998 and
increased $23.8 million, or 5 percent, during the first nine months of 1998.
First American's productivity ratio in the traditional banking business,
excluding the merger and integration costs and the gain on the sale of Deposit
Guaranty's corporate trust business, improved to 52.83 percent for the third
quarter of 1998 and 55.91 percent for the first nine months of 1998 compared to
58.78 percent and 59.44 percent for the respective time periods in 1997. The
improvement in the productivity ratio was the result of improved expense control
and the effect of cost savings in connection with the merger with Deposit
Guaranty.
The largest increase in noninterest expense (exclusive of merger and
integration costs) was due to First American's fee-generating business of IFC.
The increase in IFC's subscribers' commissions comprised approximately 69
percent of the increase in noninterest expense (exclusive of merger and
integration costs) for the first nine months of 1998. Subscribers' commissions
were up $4.3 million, or 24 percent, in the third quarter of 1998 and $16.3
million, or 31 percent, from the respective time periods in 1997, reflecting
increases in IFC's brokerage activities.
Salaries and benefits expense decreased $3.9 million, or 5 percent, for
the third quarter of 1998 and increased only $1.6 million, or less than 1
percent, for the first nine months of 1998. The decrease in salaries and
benefits expense for the third quarter of 1998 was due to a reduction in the
number of employees, which reflected synergies in connection with the merger
with Deposit Guaranty. The slight increase in salaries and benefits expense for
the first nine months of 1998 was attributable to increases in merit pay and
incentive program expenses offset by decreases resulting from a reduction in the
number of employees.
Net occupancy expense was up $.5 million, or 4 percent, for the third
quarter of 1998 and $1.8 million, or 5 percent, for the first nine months of
1998 primarily due to increased leased space and rental rates.
Equipment expense was down $.2 million, or 2 percent, for the third
quarter of 1998 and was up $1.7 million, or 5 percent, for the first nine months
of 1998. The increase in equipment expense for the first nine months of 1998
over the comparable period in 1997 was attributable to rental expense which was
up due to the rental of personal computers and expansion of branch teller
automation equipment.
Systems and processing expense was down $.1 million, or 3 percent, for
the third quarter of 1998 and was down $.9 million, or 8 percent, for the first
nine months of 1998, which was essentially due to the renegotiation of the
equipment component of an outsourcing contract.
Communication expense was up $.5 million, or 8 percent, for the third
quarter of 1998 and was up $1.7 million, or 9 percent, for the first nine months
of 1998. The increases for both periods resulted from higher expenditures for
network telecommunications and courier services offset by decreases in postage
expense.
Marketing expense was down $1.2 million, or 21 percent, for the third
quarter of 1998 and was down $1 million, or 7 percent, for the first nine months
of 1998. Marketing synergies gained from the merger with Deposit Guaranty are
reflected in the decrease in marketing expense.
Supplies expense was down $1.2 million, or 32 percent, for the third
quarter of 1998 and was down $2.7 million, or 24 percent, for the first nine
months of 1998, which reflected the effect of higher expenditures in 1997
related to purchase acquisitions and a reduction in expenditures in 1998
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prior to the merger of DGNB into First American National Bank, which occurred on
September 1, 1998.
Other expense consists of many smaller expense categories such as legal
fees, directors' fees, contributions, travel and entertainment, other real
estate expenses, and others. Other expense was up $.4 million, or 2 percent, for
the third quarter of 1998 and was up $4.8 million, or 8 percent, for the first
nine months of 1998 over the respective time periods in 1997. The increase in
other expenses during the third quarter of 1998 was reduced by the effect of
synergies in connection with the Deposit Guaranty merger. Contributing to the
$4.8 million increase in other expenses for the first nine months of 1998 were
increases in the amortization of mortgage servicing rights ($1.7 million, or 32
percent) and other real estate ($2.9 million, or 78 percent) offset by decreases
in numerous other categories of other noninterest expense. The increase in the
amortization of mortgage servicing rights was primarily attributable to an
increased portfolio of mortgage servicing rights.
The term "Year 2000 issue" refers to the necessity of converting computer
information systems so that such systems recognize more than two digits to
identify a year in any given date field, and are thereby able to differentiate
between years in the twentieth and twenty-first centuries ending with the same
two digits (e.g. 1900 and 2000). To address the Year 2000 issue, First American
has adopted a broad-based approach designed to encompass First American's total
environment.
First American has appointed a project manager from its information
technology ("IT") group and a project team comprised of managers from various
areas of the organization to address the Year 2000 issue. Overseeing the project
is a steering committee made up of senior management. The project team is
responsible for evaluating Year 2000 impact to each area's products and systems,
developing a plan for bringing those products and systems to compliant levels,
and testing or verifying that compliance. Areas being addressed by the project
team include:
- Business Systems Applications--This involves Year 2000 remediation of
application software that is used to perform specific business functions
such as deposits or loan systems.
- Technical Infrastructure--This involves Year 2000 remediation of the
hardware and software environment used to run application software, and
includes PC networks, telecommunications, mainframe computers, operating
systems, and productivity software.
- Credit Administration--In this area, the project team is reviewing the
risk associated with Year 2000 status of the Corporation's clients and
depositors.
- Facilities Systems--This involves Year 2000 remediation of systems such
as elevators, HVAC systems, security systems, lighting systems, and
utilities.
- Vendor and Third Party Assessment--In this area, the project team has
conducted an inventory of the systems and products provided by third
parties and has contacted the providers regarding the status of their
Year 2000 compliance. This has been a broad-based effort including IT
vendors, nonIT vendors, and public utilities.
First American's project team is using a 5-phase approach in its Year
2000 project made up of awareness, assessment, remediation, validation, and
implementation phases. For IT systems, all in-house programs were remediated as
of December, 1997 and are now being tested for Year 2000 compliance. For vendor
supplied systems, First American has contacted the suppliers and determined the
compliance of these systems. Necessary upgrades to these systems are in process,
but are not yet complete. The project team is in the process of testing the
Corporation's vendor supplied systems, and anticipates having substantially
completed the testing of all mission critical applications by the end of 1998.
For nonIT systems, the project team has contacted vendors to establish the Year
2000 compliance of these products, and anticipates having substantially
completed testing of these products by the end of 1998.
First American estimates that the cost of its Year 2000 project will not
exceed $5 million dollars in the aggregate and that the cost will not be
material to earnings. Actual expenditures to date and anticipated future
expenditures are within this estimate. First American management believes its
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approach to the Year 2000 issue to be comprehensive, and does not expect the
Year 2000 issue to have a material impact on its results of operations,
liquidity or financial condition. However, given the widespread nature of the
problem, and the number of factors outside of the Corporation's direct control,
management is continuously evaluating the risks associated with Year 2000. In
order to help mitigate these risks, a Year 2000 element is being developed for
the existing corporate contingency plan, which will focus on mission critical
systems (both IT and nonIT) that are believed to be at high risk for
noncompliance.
INCOME TAXES
During the third quarters of 1998 and 1997, income tax expense was $30.5
million (effective tax rate of 35.7 percent) and $35.1 million (effective tax
rate of 36.7 percent), respectively. During the nine months ended September 30,
1998, and 1997, income tax expense was $81.9 million (effective tax rate of 37.6
percent) and $100.9 million (effective tax rate of 36.7 percent), respectively.
The decrease in the effective tax rate for the third quarter of 1998 compared to
the third quarter of 1997 was primarily attributable to a more favorable
effective state income tax rate. The increase in the effective tax rate for the
first nine months of 1998 over the first nine months of 1997 was primarily due
to nondeductible merger and integration costs in connection with the business
combination with Deposit Guaranty.
BALANCE SHEET REVIEW
ASSETS
Total assets of First American rose $1.43 billion, or 8 percent, to
$18.86 billion at September 30, 1998, from $17.43 billion at September 30, 1997.
The growth in total assets was primarily due to a $2.52 billion, or 64 percent,
increase in investment securities, offset by a $985.7 million, or 9 percent,
decrease in loans. Total assets of First American increased $1.03 billion, or 6
percent, from $17.83 billion at December 31, 1997, to $18.86 billion at
September 30, 1998. The increase in total assets from December 31, 1997, to
September 30, 1998, was primarily due to a $2.33 billion, or 57 percent,
increase in investment securities offset by a $1.13 billion, or 10 percent,
decrease in loans. Average investment securities increased $1.06 billion, or 27
percent, and average loans decreased $17.6 million, or .2 percent, during the
first nine months of 1998 compared to the first nine months of 1997. Excluding
the effect of the securitizations and retention, average investment securities
increased $561.3 million, or 14 percent, between September 30, 1997, and
September 30, 1998. Excluding the effect of securitizations, loan sales, loan
purchases, divestures and business combinations (except Deposit Guaranty),
average loans during the first nine months of 1998 increased $294 million, or 3
percent, when compared to the first nine months of 1997. Total average loans
exclusive of consumer mortgages increased $433.6 million, or 5 percent, during
the first nine months of 1998 compared to the first nine months of 1997.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
Management's policy is to maintain the allowance for loan losses at a
level which is adequate to absorb estimated loan losses inherent in the loan
portfolio. The provision for loan losses is a charge to earnings necessary,
after loan charge-offs and recoveries, to maintain the allowance at an
appropriate level. Determining the appropriate level of the allowance and the
amount of the provision for loan losses involves uncertainties and matters of
judgment and therefore cannot be determined with precision.
The allowance for loan losses was $180.1 million at September 30, 1998,
$180.4 million at September 30, 1997, and $180 million at December 31, 1997. The
allowance for loan losses was 1.71 percent and 1.57 percent of net loans at
September 30, 1998, and 1997, respectively, and 1.55 percent of net loans at
December 31, 1997. The allowance was maintained at approximately $180 million
based upon management's assessment that economic conditions affecting borrowers
remain essentially unchanged.
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<PAGE> 20
In the third quarter of 1998, the allowance was increased by a provision
of $7 million and decreased by net charge-offs of $7 million compared to a
provision of $1.9 million and net charge-offs of $10.1 million in the third
quarter of 1997. Net charge-offs as a percentage of average loans on an
annualized basis amounted to .26 percent and .35 percent, respectively, in the
third quarters of 1998 and 1997.
During the first nine months of 1998, the allowance was increased by a
provision of $18 million and reduced by net charge-offs of $19.2 million
compared to a provision of $5.6 million and net charge-offs of $18.7 million in
the first nine months of 1997. For the nine months ended September 30, 1998, and
1997, activity in the allowance for loan losses also included increases of $1.3
million and $8.3 million, respectively, which consisted of the allowance of
acquisitions. Net charge-offs as a percentage of average loans on an annualized
basis amounted to .23 percent for both the nine months ended September 30, 1998,
and 1997.
ASSET QUALITY
First American's asset quality remains strong as evidenced by the decline
in the ratio of nonperforming assets (excluding loans 90 days past due on
accrual status) to total loans and foreclosed properties to .34 percent at
September 30, 1998, from .43 percent at September 30, 1997, and .37 percent at
December 31, 1997. Nonperforming assets were $35.9 million at September 30,
1998, $49.4 million at September 30, 1997, and $43.3 million at December 31,
1997. At September 30, 1998, nonperforming assets consisted of $30.3 million of
nonaccrual loans and $5.6 million of foreclosed properties. First American has
not experienced asset quality problems related to foreign markets and hedge
funds due to a lack of exposure in those areas.
Other potential problem loans consist of loans that are currently not
considered nonperforming but on which information about possible credit problems
has caused management to doubt the ability of the borrowers to comply fully with
present repayment terms. At September 30, 1998, such loans totaled approximately
$87.1 million. Depending on the economy and other factors, these loans and
others, which may not be presently identified, could become nonperforming assets
in the future.
LIABILITIES
Total deposits increased $180 million, or 1 percent, to $13.21 billion at
September 30, 1998, from $13.03 billion at September 30, 1997. Average deposits
for the first nine months of 1998 compared to the first nine months of 1997
increased 2 percent. Short-term borrowings increased $345.8 million, or 16
percent, to $2.45 billion at September 30, 1998, from $2.10 billion at September
30, 1997, which was primarily due to an increase in federal funds purchased and
securities sold under agreements to repurchase ($671.7 million) offset by a
decrease in borrowings from the Federal Home Loan Bank ("FHLB") ($276.9
million). The level of federal funds purchased and repurchase agreements can
fluctuate significantly on a daily basis depending on funding needs and
availability of sources of funds to meet those needs. Long-term debt increased
$865.6 million, or 224 percent, to $1.25 billion at September 30, 1998, from
$386.5 million at September 30, 1997, which reflected the addition of $930
million variable rate borrowings from the Federal Home Loan Bank ("FHLB"). In
order to fund an increased level of earning assets in the most economically
desirable manner, the Corporation placed more reliance on non-core sources of
funds during the first nine months of 1998 compared to the first nine months of
1997.
Total deposits decreased $199.5 million, or 1 percent, from $13.41
billion at December 31, 1997, to $13.21 billion at September 30, 1998.
Short-term borrowings increased $476 million, or 24 percent, from $1.97 billion
at December 31, 1997, which was primarily attributable to increases in federal
funds purchased and securities sold under agreements to repurchase ($635.1
million) offset by a decrease in borrowings from the FHLB ($158.7 million).
Long-term debt increased $655.9 million, or 110 percent, which resulted
primarily from the addition of $645 million variable rate borrowings from the
FHLB.
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<PAGE> 21
DERIVATIVE INSTRUMENTS
First American has utilized off balance sheet derivative products for a
number of years in managing its interest rate sensitivity. Generally, a
derivative transaction is a payments exchange agreement whose value derives from
an underlying asset or underlying reference rate or index. The use of
non-complex, non-leveraged derivative products has reduced the Company's
exposure to changes in the interest rate environment. By using derivative
products such as interest rate swaps and futures contracts to effectively alter
the interest rate characteristics of specific assets or liabilities on the
balance sheet (for example to change a variable to a fixed rate obligation), the
derivative product offsets fluctuations in net interest income from the
otherwise unhedged position. In other words, if net interest income from the
otherwise unhedged position changes (increases or decreases) by a given amount,
the derivative product should produce close to the opposite result, making the
combined amount (otherwise unhedged position impact plus the derivative product
position impact) essentially unchanged. Derivative products have enabled First
American to improve its balance between interest-sensitive assets and
interest-sensitive liabilities by managing interest rate sensitivity, while
continuing to meet the lending and deposit needs of its customers.
In conjunction with managing interest rate sensitivity, at September 30,
1998, First American had derivatives with notional values totaling $3.24
billion. These derivatives had a net positive fair value (unrealized net pre-tax
gain) of $.8 million. Notional amounts are key elements of derivative financial
instrument agreements. However, notional amounts do not represent the amounts
exchanged by the parties to derivatives and do not measure First American's
exposure to credit or market risks. The amounts exchanged are based on the
notional amounts and the other terms of the underlying derivative agreements. At
September 30, 1997, First American had derivatives with notional values totaling
$2.55 billion. These derivatives had a net positive fair value (unrealized
pre-tax gain) of $11.4 million at September 30, 1997. The instruments utilized
are noted in the following table along with their notional amounts and fair
values at September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Weighted
Average
Weighted Average Rate Maturity
Related Variable Rate Notional ----------------------------- ---------- Fair
(in thousands) Asset/Liability Amount Paid Received Years Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1998
Interest rate swaps Money market deposits $ 150,000 5.97% (1) 5.59% (2) 1.4 $ (1,998)
Interest rate swaps Available for sale securities 110,100 5.04 (1) 5.77 (2) 4.2 (1,234)
Interest rate swaps Available for sale securities 50,000 5.69 (2) 5.33 (3) 4.1 (304)
Interest rate swaps Loans 825,000 5.69 (2) 6.61 (1) 3.7 47,413
Interest rate swaps FHLB borrowings 85,000 6.33 (1) 5.63 (2) 6.0 (6,365)
Interest rate swaps Mortgages 20,100 6.65 (1) 5.63 (4) 8.8 (1,176)
Forward interest rate
swaps Money market deposits 450,000 6.06 (1) 5.63 (2,5) 2.1 (7,762)
Forward interest rate
swaps Available for sale securities 1,300,000 6.10 (1) 5.56 (2,6) 2.2 (31,228)
Floors Loans 250,000 5.45 (1) 5.67 (2) 2.6 3,450
---------- ---------
$3,240,200 $ 796
=================================================================================================================================
September 30, 1997
Interest rate swaps Money market deposits $ 250,000 5.80% (1) 5.74% (7) 1.8 $ 1,012
Interest rate swaps Loans 675,000 5.73 (2) 6.66 (1) 4.5 11,821
Forward interest rate
swaps Available for sale securities 250,000 6.53 (1) N/A (2,8) 3.0 (919)
Forward interest rate
swaps Money market deposits 850,000 6.36 (1) 5.73 (2,9) 1.4 (1,018)
Interest rate swaps FHLB borrowings 75,000 6.36 (1) 5.73 (2) 6.9 (257)
Interest rate swaps Available for sale securities 25,000 5.78 (2) 5.83 (3) 5.0 (271)
Interest rate swaps Mortgages 21,585 6.65 (1) 5.66 (4) 9.8 (307)
Caps Certificates of deposits 100,000 6.88 (1) 5.72 (2) .2 -
Floors Loans 300,000 5.37 (1) 5.76 (2) 3.0 1,320
---------- ---------
$2,546,585 $ 11,381
=================================================================================================================================
</TABLE>
(1) Fixed rate.
(2) Variable rate which reprices quarterly based on 3-month LIBOR.
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<PAGE> 22
(3) Variable rate which reprices quarterly based on the constant maturity
treasury index.
(4) Variable rate which reprices monthly based on 1-month LIBOR.
(5) Forward swap periods have become effective for $150 million and will begin
at various dates during 1999 for $300 million. Variable rates were unknown
at September 30, 1998, for forward swaps which were not yet effective.
(6) Forward swap periods have become effective for $250 million and will begin
at various dates during 1998 and 1999 for $1.05 billion. Variable rates
were unknown at September 30, 1998, for forward swaps which were not yet
effective.
(7) Variable rate which reprices quarterly based on 3-month LIBOR, except for
$25 million which reprices semi-annually based on 6-month LIBOR.
(8) Forward swap periods begin in September 1998. Variable rates were unknown
at September 30, 1997, since their related forward swap periods had not
yet begun.
(9) Forward swap periods have become effective for $200 million and will begin
at various dates during 1998 and 1999 for $650 million. Variable rates were
unknown at September 30, 1997, for forward swaps which were not yet
effective.
As First American's individual derivative contracts approach maturity,
they may be terminated and replaced with derivatives with longer maturities
which offer more interest rate risk protection. At September 30, 1998, there
were $1.9 million of deferred net gains related to terminated derivatives
contracts, and there were $3.0 million of deferred net gains at September 30,
1997. Deferred gains and losses on off balance sheet derivative activities are
recognized as interest income or interest expense over the original covered
periods.
Net interest income for the quarter ended September 30, 1998 and 1997,
was increased by derivative products income of $1.0 million and $.3 million,
respectively. Net interest income for the nine months ended September 30, 1998
and 1997, was increased by derivative products income of $3.2 million and $1.1
million, respectively. The increase in derivative products net interest income
for year-to-date 1998 over year-to-date 1997 was primarily due to actions taken
in mid-1997 to create a derivatives position more balanced between pay-fixed and
receive-fixed interest rate swaps.
Credit risk exposure due to off-balance-sheet hedging is closely
monitored, and counterparts to these contracts are selected on the basis of
their credit worthiness, as well as their market-making ability. As of September
30, 1998, all outstanding derivative transactions were with counterparts with
credit ratings of A-2 or better. Enforceable bilateral netting contracts between
First American and its counterparts allow for the netting of gains and losses in
determining net credit exposure. First American's net credit exposure on
outstanding derivatives on September 30, 1998 was $28.8 million. Given the
credit standing of the counterparts to the derivative contracts, management
believes that this credit exposure is reasonable in light of its objectives.
CAPITAL POSITION
Total shareholders' equity was $1.60 billion, or 8.46 percent of total
assets, at September 30, 1998, $1.51 billion, or 8.68 percent of total assets,
at September 30, 1997, and $1.54 billion, or 8.66 percent of total assets, at
December 31, 1997. Total shareholder's equity increased $82.5 million, or 5
percent, from September 30, 1997, to September 30, 1998, resulting principally
from comprehensive income (net income plus unrealized gains on securities
available for sale) and issuance of shares for employee benefit plans offset by
dividends to shareholders and common stock repurchases. Total shareholders'
equity increased $51.9 million, or 3 percent, from December 31, 1997, to
September 30, 1998, which was primarily due to comprehensive income and issuance
of shares in connection with employee benefit plans offset by common stock
repurchases and dividends to shareholders.
During the third quarter of 1998, First American declared cash dividends
on its common stock of $.25 per common share compared to $.20 per common share
in the third quarter of 1997, an increase of 25 percent. Cash dividends for the
first nine months of 1998 were $.70 per share, an increase of 26 percent over
the same time period last year.
The Federal Reserve Board and the Office of the Comptroller of the
Currency ("OCC") promulgate risk-based capital guidelines and regulations which
require bank holding companies and national banks to maintain minimum capital
ratios. As of September 30, 1998, the Corporation and FANB had ratios which
exceeded the regulatory requirements to be classified as "well capitalized," the
highest regulatory rating. At September 30, 1998, the Corporation and FANB had
total risk-based capital ratios of 11.17 percent and 11.53 percent,
respectively, Tier I risk-based capital ratios of 9.26
22
<PAGE> 23
percent and 10.31 percent, respectively, and Tier I leverage capital ratios of
7.47 percent and 11.24 percent, respectively. In order to be considered well
capitalized, the total risk-based capital ratio must be a minimum of 10 percent,
the Tier I risk-based capital ratio must equal or exceed 6 percent, and the Tier
I leverage capital ratio must equal or exceed 5 percent.
First American Federal Savings Bank ("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. At June 30, 1998, FAFSB had ratios which exceeded the regulatory
requirements to be classified as "well capitalized."
LIQUIDITY
Liquidity management consists of maintaining sufficient cash levels to
fund operations and to meet the requirements of borrowers, depositors, and
creditors. Liquid assets include cash and cash equivalents (which consist of
cash and due from banks, interest-bearing deposits in banks, and federal funds
sold and securities purchased under agreements to resell) less Federal Reserve
Bank reserve requirements in addition to trading account securities and
securities that are estimated to mature within one year. Liquid assets totaled
$1.45 billion and $1.17 billion at September 30, 1998, and 1997, respectively,
which was approximately 8.5 percent and 7.5 percent of earning assets,
respectively. Available for sale securities maturing after one year, which can
be sold to meet liquidity needs, had a balance of $3.95 billion at September 30,
1998, compared to $3.08 billion at September 30, 1997. The overall liquidity
position of First American is further enhanced by a high proportion of core
deposits, which provide a stable funding base. Core deposits comprised 88
percent of total deposits at September 30, 1998, versus 90 percent at September
30, 1997.
An additional source of liquidity is First American's three-year $100
million revolving credit agreement which became effective in July 1998 and
replaced the 1994 $70 million revolving credit agreement. First American had no
borrowings under either revolving agreement during 1998 or 1997.
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<PAGE> 24
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk were included
in the Management's discussion and analysis contained in First American's Form
8-K filed on July 14, 1998. There have been no significant changes in the
contractual balances and the estimated fair value of First American's on-balance
sheet derivative financial instruments, the notional amount and estimated fair
value of the company's off-balance sheet derivative financial instruments, or
weighted-average interest rates.
24
<PAGE> 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information called for by this item is incorporated by reference
to Item 3 of the Registrant's annual report on Form 10-K for the
year ended December 31, 1997, and Note 7 to the Corporation's
Consolidated Financial Statements for the quarter ended September
30, 1998 included herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -------------------------------------------------------------
<S> <C>
3.1 Restated Charter of the Registrant currently in effect as
amended and corrected is incorporated herein by reference to
Exhibit 3.1 of the Registrant's Form 10-Q for the period
ended March 31, 1998.
3.2 By-laws of the Registrant currently in effect as amended
September 17, 1998, are included herein.
10 Rights Agreement dated July 16, 1998 is incorporated herein
by reference to Exhibit 1 under Item 2 of Form 8-A filed
November 10, 1998.
11 "Computation of Earnings per Common Share" is included in
Note 6 to the Consolidated Financial Statements for the three
and nine months ended September 30, 1998 and September 30, 1997.
See Part 1, Item 1.
15 Letter regarding unaudited interim financial information from
KPMG Peat Marwick LLP dated October 15, 1998 included
herein.
27.1 Financial Data Schedule for interim year-to-date period ended
September 30, 1998 included herein.
27.2 Restated Financial Data Schedule for interim year-to-date
period ended September 30, 1997 included herein.
</TABLE>
25
<PAGE> 26
(b) Reports on Form 8-K
(1) A report on Form 8-K dated July 14, 1998 was filed under Item
5 ("Other Events") that includes as Exhibit 99 thereto the
following giving retroactive effect to the merger of Deposit
Guaranty Corp. into First American Corporation on May 1, 1998
in a transaction accounted for as a pooling of interest:
Selected Financial Data
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Quantitative and
Qualitative Disclosures about Market Risk
Supplementary Financial Data
Independent Auditors' Report
Supplemental Consolidated Balance Sheets as of
December 31, 1997 and 1996
Supplemental Consolidated Statements of Income for
the years ended December 31, 1997, 1996, and 1995
Supplemental Consolidated Statements of Changes in
Shareholders' Equity for the Years ended December 31,
1997, 1996 and 1995
Supplemental Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995
Notes to the Supplemental Consolidated Financial
Statements
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST AMERICAN CORPORATION
(Registrant)
/s/ Allan R. Landon
-------------------------------------------
Allan R. Landon
Executive Vice President, CFO and Principal
Financial Officer
Date: November 13, 1998
-------------------------------------
/s/ Marvin J. Vannatta, Jr.
-------------------------------------------
Marvin J. Vannatta, Jr.
Executive Vice President and Principal
Accounting Officer
Date: November 13, 1998
-------------------------------------
27
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
OF
FIRST AMERICAN CORPORATION
(HEREIN SOMETIMES THE "CORPORATION")
AS AMENDED SEPTEMBER 17, 1998
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 such shareholder, and any other information specified in Schedule
14A, Rule 14a-3
1
<PAGE> 2
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 shall have designated in writing to the
Secretary, and shall be deemed delivered personally when actually received by
the shareholder.
2
<PAGE> 3
(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.
SECTION 2.6 SHAREHOLDER NOMINATIONS AND PROPOSALS. (a) No proposal for
a shareholder vote (other than votes that are solely on procedural issues) shall
be submitted by a shareholder (a "Shareholder Proposal") to the Corporation's
shareholders unless the shareholder submitting such proposal (the "Proponent")
shall have filed a written notice setting forth with particularity (i) the names
and business addresses of the Proponent and all persons acting in concert with
the Proponent; (ii) the name and address of the Proponent and the persons
identified in clause (i), as they appear on the Corporation's books (if they so
appear); (iii) the class and number of shares of the Corporation beneficially
owned by the Proponent and the Persons identified in clause (i); (iv) a
description of the Shareholder Proposal containing all material information
relating thereto; and (v) such other information as the Board of Directors
reasonably determines is necessary or appropriate to enable the Board of
Directors and shareholders of the Corporation to consider the Shareholder
Proposal. If the presiding officer at any shareholders meeting determines that
any Shareholder Proposal was not made in accordance with the procedures
prescribed in these Bylaws or is otherwise not in accordance with law, he shall
so declare at the meeting and the Shareholder Proposal shall be disregarded.
(b) Only persons who are selected and recommended by the Board of
Directors or the committee of the Board of Directors designated to make
nominations pursuant to Section 2.5, or who are nominated by shareholders in
accordance with the procedures set forth in this Section 2.6, shall be eligible
for election, or qualified to serve, as directors. Nominations of individuals
for election to the Board of Directors of the Corporation at any annual meeting
or any special meeting of shareholders at which directors are to be elected may
be made by any shareholder of the Corporation entitled to vote for the election
of directors at that meeting by compliance with the procedures set forth in this
Section 2.6. Nominations by shareholders shall be made by written notice (a
"Nomination Notice"), which shall set forth (i) as to each individual nominated,
(A) the name, date of birth, business address and residence address of such
individual; (B) the business experience during the past five years of such
3
<PAGE> 4
nominee, including his or her principal occupations and employment during such
period, the name and principal business of any corporation or other organization
in which such occupations and employment were carried on, and such other
information as to the nature of his or her responsibilities and level of
professional competence as may be sufficient to permit assessment of his or her
prior business experience; (C) whether the nominee is or has ever been at any
time a director, officer or owner of 5% or more of any class of capital stock,
partnership interests or other equity interest of any corporation, partnership
or other entity; (D) any directorships held by such nominee in any company with
a class of securities registered pursuant to section 12 of the Securities
Exchange Act of 1934, as amended, or subject to the requirements of section
15(d) of such Act or any company registered as an investment company under the
Investment Company Act of 1940, as amended; and (E) whether, in the last five
years, such nominee has been convicted in a criminal proceeding or has been
subject to a judgment, order, finding or decree of any federal, state or other
governmental entity, domestic or foreign, concerning any violation of federal,
state or other law, or any proceeding in bankruptcy, which conviction, order,
finding, decree, or proceeding may be material to an evaluation of the ability
or integrity of the nominee, and (ii) as to the person submitting the Nomination
Notice and any person acting in concert with such person, (x) the name and
business address of such person, (y) the name and address of such person as they
appear on the Corporation's books (if they so appear), and (z) the class and
number of shares of the Corporation which are beneficially owned by such person.
A written consent to being named in a proxy statement as a nominee, and to serve
as a director if elected, signed by the nominee, shall be filed with any
Nomination Notice. If the presiding officer at any shareholders meeting
determines that a nomination was not made in accordance with the procedures
prescribed by these Bylaws, he shall so declare to the meeting and the defective
nomination shall be disregarded.
(c) Nomination Notices and Shareholder Proposals shall be delivered to
the Secretary at the principal executive office of the Corporation 90 days or
more before the month and the day of the prior years' shareholders meeting if
such Nomination Notice or Shareholder Proposal is to be submitted at an annual
shareholders meeting, or such other date as the Board of Directors may
determine, provided that the deadline imposed by the Board is more than 60 days
following public announcement of such deadline. Nomination Notices and
Shareholder Proposals shall be delivered to the Secretary at the principal
executive office of the Corporation no later than the close of business on the
15th day following the day on which notice of the date of a special meeting of
shareholders was given if the Nomination Notice or Shareholder Proposal is to be
submitted at a special shareholders meeting.
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
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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 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
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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;
(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
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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
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require in addition to any affirmative vote required by the Act an affirmative
vote of (i) seventy-five percent (75%) of the 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.
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(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 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.
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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 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.
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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.
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
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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
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,
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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 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
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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 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
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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 Community Affairs Committee shall be a
joint committee of the Corporation and the Bank and shall serve both. 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 development, contributions, image issues, government
affairs, market effectiveness, and compliance with the Community Reinvestment
Act, Fair Lending 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
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
counsel 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.
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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 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
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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 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.
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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 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
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<PAGE> 19
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 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.
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<PAGE> 20
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 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.
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<PAGE> 21
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 to the Corporation
in settlement of such a proceeding by such Official; or
21
<PAGE> 22
(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
22
<PAGE> 23
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 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
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<PAGE> 24
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 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,
24
<PAGE> 25
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.
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.
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<PAGE> 26
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.
26
<PAGE> 27
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
27
<PAGE> 28
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.
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.
SECTION 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:
28
<PAGE> 29
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, Tenn. Code Annot. Section 48-103-301 to
312, shall not be applicable to control share acquisitions respecting shares of
the Corporation.
29
<PAGE> 1
Exhibit 15. Letter regarding unaudited interim financial information from KPMG
Peat Marwick LLP
Independent Auditors' Review Report
The Board of Directors and Shareholders
First American Corporation:
We have reviewed the consolidated balance sheets of First American Corporation
and subsidiaries as of September 30, 1998 and 1997, and the related consolidated
income statements, changes in shareholders' equity and cash flows for the
three-month and nine-month periods ended September 30, 1998 and 1997. These
consolidated financial statements are the responsibility of the Corporation's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of First American Corporation and
subsidiaries as of December 31, 1997; and the related consolidated income
statements, changes in shareholders' equity and cash flows for the year then
ended (not presented herein); and in our report dated July 10, 1998, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1997, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP
- --------------------------
October 15, 1998
Nashville, Tennessee
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