<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8K
CURRENT REPORT
Current Report Pursuant
to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: July 14, 1998
Date of earliest event reported: July 14, 1998
FIRST AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
TENNESSEE
(State or other jurisdiction of incorporation)
0-6198 62-0799975
(Commission File Number) (I.R.S. Employer
Identification No.)
FIRST AMERICAN CENTER, NASHVILLE, TENNESSEE 37237-0700
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615) 748-2000
<PAGE> 2
Item 5. Other Events
Included herein as Exhibit 99 are the selected financial data,
the management's discussion and analysis and supplementary
data and the audited supplemental consolidated financial
statements of First American Corporation and Subsidiaries
which give 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 interests.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
23. Accountants' Consent
99. 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
</TABLE>
2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST AMERICAN CORPORATION
--------------------------
(Registrant)
Date: July 14, 1998 /s/ Mary Neil Price
-----------------------------
Name: Mary Neil Price
Title: Executive Vice President, General
Counsel and Corporate Secretary
3
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No: Description
- ----------- -----------
<S> <C>
23 Accountants' Consent
99 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
</TABLE>
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
First American Corporation:
We consent to incorporation by reference in the Registration Statements
No.-57387 and No. 33-59844 each on Form S-3 and No. 33-53269, No. 33-57385,
No.-44286, No. 2-81920, No. 2-81685, No. 33-44775, No. 33-63188, No. 33-64161,
No. 333-19577, No. 333-25491, and No. 333-52127 each on Form S-8 of First
American Corporation, of our report dated July 10, 1998, relating to the
supplemental consolidated balance sheets of First American Corporation and
subsidiaries as of December 31, 1997 and 1996, and the related supplemental
consolidated income statements, changes in shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1997, which
report appears in the Form 8-K of the First American Corporation dated July 14,
1998.
KPMG PEAT MARWICK LLP
Nashville, Tennessee
July 14, 1998
<PAGE> 1
Exhibit 99
SUPPLEMENTAL TABLE 1: SELECTED FINANCIAL DATA: 1993-1997
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONDENSED INCOME STATEMENTS (in thousands):
Net interest income, taxable equivalent basis(1) $ 673,188 $ 604,537 $ 548,444 $ 486,553
Less taxable equivalent adjustment 11,065 11,276 9,391 8,930
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 662,123 593,261 539,053 477,623
Provision for loan losses 12,500 5,340 2,243 (14,669)
Noninterest income 395,761 303,749 203,005 181,224
Noninterest expense 669,731 571,663 463,900 419,317
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and cumulative effect of changes
in accounting principles 375,653 320,007 275,915 254,199
Income tax expense 137,901 114,825 100,215 89,867
- ------------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles 237,752 205,182 175,700 164,332
Cumulative effect of changes in accounting principles, net of tax -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 237,752 $ 205,182 $ 175,700 $ 164,332
====================================================================================================================================
SELECTED PER SHARE DATA:
Net income:
Basic $ 2.23 $ 1.96 $ 1.73 $ 1.67
Diluted 2.18 1.93 1.70 1.64
Cash dividends declared and paid .755 .605 .53 .44
Book value (end of year) 14.56 13.79 12.78 11.27
Market price (end of year) 49.75 28.81 23.69 13.44
Market/book (end of year) 3.42x 2.09x 1.85x 1.19x
AVERAGES (in thousands):
Assets $16,999,652 $15,767,645 $14,137,640 $ 12,731,851
Loans, net of unearned discount 11,211,291 10,277,452 8,860,625 7,429,671
Earning assets 15,397,309 14,372,595 12,860,122 11,546,287
Deposits 13,026,990 12,160,478 10,990,279 10,188,641
Long-term debt 446,203 424,656 292,455 109,031
Shareholders' equity 1,494,207 1,382,170 1,202,313 1,074,214
====================================================================================================================================
END OF PERIOD (in thousands):
Assets $17,834,436 $16,806,010 $15,727,890 $ 13,416,688
Loans, net of unearned discount 11,641,732 10,632,665 9,999,637 8,027,142
Earning assets 16,019,727 15,080,134 14,256,228 12,103,819
Deposits 13,405,457 12,848,368 12,180,187 10,354,439
Long-term debt 596,218 430,562 421,791 271,473
Shareholders' equity 1,543,977 1,449,973 1,334,585 1,111,222
====================================================================================================================================
SIGNIFICANT RATIOS:
Return on average assets 1.40% 1.30% 1.24% 1.29%
Return on average equity 15.91 14.84 14.61 15.30
Dividends declared per share to basic net income per share
(dividend payout ratio) 33.86 30.87 30.64 26.35
Productivity ratio(2) 59.04 59.87 60.67 63.06
Average equity to average assets 8.79 8.77 8.50 8.44
Average loans to average deposits 86.06 84.52 80.62 72.92
Average core deposits to average total deposits 90.06 90.60 90.46 92.66
Allowance to net loans (end of year) 1.55 1.74 1.91 2.31
Nonperforming assets to loans and foreclosed properties
(end of year)(3) .37 .43 .57 .66
Net interest margin 4.37 4.21 4.26 4.21
====================================================================================================================================
OTHER STATISTICS:
Average common shares outstanding (in thousands):
Basic 106,745 104,533 101,593 98,683
Diluted 108,950 106,092 103,300 100,180
End of period common shares (in thousands) 106,032 105,110 104,428 98,583
Number of full-time equivalent employees (end of year) 7,371 7,288 6,585 6,062
Number of banking offices (end of year) 339 321 301 275
Number of automatic teller machines (end of year) 639 438 350 294
====================================================================================================================================
<CAPTION>
===========================================================================================
Year Ended December 31
- -------------------------------------------------------------------------------------------
1993
- -------------------------------------------------------------------------------------------
<S> <C>
CONDENSED INCOME STATEMENTS (in thousands):
Net interest income, taxable equivalent basis(1) $ 468,191
Less taxable equivalent adjustment 9,808
------------
Net interest income 458,383
Provision for loan losses (57,405)
Noninterest income 166,617
Noninterest expense 419,794
------------
Income before income tax expense and cumulative effect of changes
in accounting principles 262,611
Income tax expense 88,650
------------
Income before cumulative effect of changes in accounting principles 173,961
Cumulative effect of changes in accounting principles, net of tax (84)
------------
Net income $ 173,877
==========================================================================================
SELECTED PER SHARE DATA:
Net income:
Basic $ 1.77
Diluted 1.75
Cash dividends declared and paid .275
Book value (end of year) 10.49
Market price (end of year) 16.00
Market/book (end of year) 1.53x
==========================================================================================
AVERAGES (in thousands):
Assets $ 12,152,946
Loans, net of unearned discount 6,505,751
Earning assets 11,003,964
Deposits 9,849,869
Long-term debt 60,134
Shareholders' equity 918,432
==========================================================================================
END OF PERIOD (in thousands):
Assets $ 12,612,944
Loans, net of unearned discount 7,085,384
Earning assets 11,418,732
Deposits 10,082,265
Long-term debt 77,053
Shareholders' equity 1,019,450
==========================================================================================
SIGNIFICANT RATIOS:
Return on average assets 1.43%
Return on average equity 18.93
Dividends declared per share to basic net income per share
(dividend payout ratio) 15.54
Productivity ratio(2) 64.21
Average equity to average assets 7.56
Average loans to average deposits 66.05
Average core deposits to average total deposits 92.32
Allowance to net loans (end of year) 2.80
Nonperforming assets to loans and foreclosed properties
(end of year)(3) 1.21
Net interest margin 4.25
==========================================================================================
OTHER STATISTICS:
Average common shares outstanding (in thousands):
Basic 98,011
Diluted 99,349
End of period common shares (in thousands) 97,172
Number of full-time equivalent employees (end of year) 5,884
Number of banking offices (end of year) 263
Number of automatic teller machines (end of year) 260
==========================================================================================
</TABLE>
(1) Adjusted to a taxable equivalent basis based on the statutory federal income
tax rates, adjusted for applicable state income taxes net of the related
federal tax benefit.
(2) Ratio of operating expenses to taxable equivalent net interest income plus
noninterest income. For 1997, calculation excludes $2.4 million gain on the
sale of corporate trust services, $2.0 million gain on the sale of HONOR
Technologies, Inc. stock, and nonbank subsidiaries. For 1996, calculation
excludes $8.1 million one-time SAIF assessment and nonbank subsidiaries. For
1995, calculation excludes $7.3 million of Heritage Federal Bancshares, Inc.
merger-related expenses. For 1994, calculation excludes $3.9 million of
gains on sales of securities available for sale. For 1993, calculation
excludes a $10.0 million First American Foundation contribution and a $2
million Deposit Guaranty Foundation contribution.
(3) Excludes loans 90 days or more past due on accrual.
1
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis is presented as a review of the
major trends effecting the performance of First American Corporation (the
"Corporation" or "First American") and to aid in understanding the Corporation's
results of operations and financial condition. This discussion supplements the
Corporation's supplemental consolidated financial statements and accompanying
notes which begin on page 38.
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
- ---------
On May 9, 1997, First American completed a 2-for-1 split of its common
stock. On May 1, 1998, First American completed the merger of the $7.2 billion
asset Deposit Guaranty Corp. with and into the Corporation. The transaction was
accounted for as a pooling-of-interests. All financial data included herein has
been restated to reflect the impact of the stock split and the merger of Deposit
Guaranty Corp.
First American continued its earnings momentum during 1997 and earned a
record $237.8 million for the year ended December 31, 1997, up 16 percent from
1996 net income of $205.2 million. Net income increased 17 percent in 1996 from
$175.7 million in 1995. Effective December 31, 1997, the Corporation adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which requires the presentation of basic and diluted earnings per share
amounts. Prior year amounts are presented in accordance with SFAS No. 128 for
comparative purposes. Basic earnings per share increased during 1997 to $2.23,
up 14 percent over $1.96 in 1996. Basic earnings per share increased 13 percent
in 1996 compared to $1.73 in 1995. Diluted earnings per share rose 13 percent in
1997 to $2.18 from $1.93 in 1996. Diluted earnings per share increased 14
percent in 1996 over $1.70 in 1995. Return on average assets ("ROA") improved 10
basis points in 1997 to 1.40 percent for 1997 from 1.30 percent for 1996. ROA
was 1.24 percent for 1995. Return on average equity ("ROE") also improved to
15.91 percent for 1997 compared to 14.84 percent for 1996 and 14.61 percent for
1995.
A nonrecurring item in 1996 that impacted the comparison of the results
of operations for 1997 versus 1996 and 1996 versus 1995 was the one-time
assessment on deposits insured by the Savings Association Insurance Fund
("SAIF"). First American's one-time SAIF assessment was $5.0 million, net of
tax, or $.05 per share. Excluding the one-time SAIF assessment, net income
increased 13 percent in 1997, and ROA and ROE were 1.33 percent and 15.21
percent, respectively, in 1996. Net income for 1995 was reduced by $7.5 million
(or $.07 per share) for after-tax acquisition expenses related to the merger of
Heritage Federal Bancshares, Inc.
2
<PAGE> 3
("Heritage"). Excluding the SAIF assessment and the Heritage merger expenses,
net income increased 15 percent in 1996 over 1995. Excluding these expenses, ROA
and ROE were 1.30 percent and 15.24 percent, respectively, in 1995.
The components of First American's strategy for 1997 were (1)
transforming from a bank to a financial services company, (2) targeting
profitable customer segments with tailored client solutions, (3) continually
lowering the costs of distribution, (4) aggressively and effectively managing
capital and the balance sheet, and (5) building organizational competencies. The
1997 results reflect implementation of First American's well-defined strategy
with growth in net interest income and noninterest income, improved operating
efficiency, and effective balance sheet and capital management.
Financial highlights illustrating the successful implementation of
First American's strategy include:
- - Net interest income on a taxable equivalent basis increased 11 percent in
1997. The net interest margin improved to 4.37 percent in 1997 from 4.21
percent in 1996. Improvements in the net interest margin in the current
interest rate environment reflect asset and liability management actions
such as pricing and earning asset mix improvements.
- - Noninterest income in 1997 increased 30 percent over 1996 to $395.8 million
from $303.7 million. This compares to a 50 percent increase in noninterest
income in 1996 from $203.0 million in 1995. Noninterest income contributed
37 percent to total revenue in 1997 as compared to 34 percent in 1996 and 27
percent in 1995. The increases in noninterest income are primarily the
result of the acquisition of IFC Holdings, Inc. ("IFC"), formerly INVEST
Financial Corporation on July 1, 1996, which was accounted for as a
purchase. The increases are also indicative of First American's continuing
transformation from a bank holding company to a financial services company.
Excluding IFC, noninterest income increased 14 percent in 1997.
- - Noninterest expense was $669.7 million in 1997 compared to $571.7 million in
1996, an increase of 17 percent. The primary reason for the 17 percent
increase was the inclusion of a full year of IFC's expenses in 1997, whereas
in 1996 IFC's expenses were included for only six months. Excluding the
one-time SAIF assessment and IFC, noninterest expense increased 10 percent
in 1997 from 1996. Expenses also increased as a result of several bank
acquisitions in 1996 and 1997.
- - The productivity (operating efficiency) ratio related to traditional banking
activities improved 83 basis points to 59.04 percent in 1997 from 59.87
percent in 1996. For purposes of calculating the productivity ratio, in 1997
a $2.4 million gain on the sale of corporate trust services, a $2.0 million
gain on the sale of HONOR Technologies, Inc. stock, and nonbank subsidiaries
were excluded, and in 1996 the one-time SAIF assessment and nonbank
subsidiaries were excluded.
3
<PAGE> 4
- - Asset quality remained strong as evidenced by the decline in the ratio of
nonperforming assets to total loans and foreclosed properties to .37 percent
at December 31, 1997, from .43 percent at December 31, 1996, and .57 percent
at December 31, 1995.
- - Capital adequacy remained strong in 1997. The ratio of average equity to
average assets was 8.79 percent in 1997 compared to 8.77 percent in 1996.
- - In addition to the 2-for-1 common stock split, the Board of Directors
increased the quarterly cash dividend by 29 percent to $.20 per share in
April 1997. First American paid dividends at the rate of $0.755 per common
share in 1997, up 25 percent from $0.605 in 1996. The dividend payout ratio
increased to 33.86 percent in 1997 from 30.87 percent in 1996.
- - During 1997, First American took steps to further align the goals of
management with the strategic and financial goals of the Corporation. The
Human Resources Committee of the Board of Directors approved a program
under the terms of the 1991 Employee Stock Incentive Plan to compensate
management based on the Corporation's overall achievement of its goals.
Executive and senior management were given the choice of receiving part, or
all, of their annual incentive compensation (ranging from 20-50 percent of
total compensation) in restricted common stock, rather than cash, with the
opportunity to have the portion taken in stock matched by the Corporation.
First American's matching contribution will vest if the Corporation
achieves performance objectives equal to the median of a defined high
performing peer group (referred to internally as the "Sweet 16") by the end
of the year 2000.
- -------------------------------------
ACQUISITION AND DIVESTITURE ACTIVITY
- -------------------------------------
Strategic acquisitions in new markets and acquisitions designed to
enhance the Corporation's presence in existing markets have contributed to First
American's growth in earnings and assets over the last three years. Acquisitions
of nontraditional financial services businesses are an integral part of First
American's strategy of transforming from a bank to a financial services company.
Acquisitions of banking businesses are designed to enhance First American's
branch network, to lower distribution costs, and to offer opportunities to
leverage existing banking and technological capabilities.
On May 1, 1998, First American acquired Deposit Guaranty Corp.
("Deposit Guaranty), a financial services holding company with assets totaling
approximately $7.2 billion headquartered in Jackson, Mississippi. Deposit
Guaranty had 170 banking offices in Mississippi, Louisiana, Arkansas, and
Tennessee operating under the name Deposit Guaranty National Bank and mortgage
offices in Oklahoma, Nebraska, Texas, Indiana, and Iowa. First American
exchanged approximately 48.7 million shares of common stock for all of the
outstanding shares of Deposit Guaranty common stock in a transaction accounted
for as a pooling-of-interests.
4
<PAGE> 5
Prior to being acquired by First American, Deposit Guaranty entered
into a series of mergers to enhance their presence in existing markets and to
enter new markets. The following table briefly outlines the banking mergers
completed by First American and Deposit Guaranty during the past three years.
<TABLE>
<CAPTION>
Financial Total Assets Date Accounting
Institution State (Millions) Acquired Treatment
<S> <C> <C> <C> <C>
LBO Bancorp, Inc. LA $ 96 Jan. 1995 Purchase
Citizens National Bancshares, Inc. LA 193 May 1995 Pooling
First Merchants Financial Corporation AR 280 Aug. 1995 Purchase
Heritage Federal Bancshares, Inc. TN 526 Nov. 1995 Pooling
Charter Federal Savings Bank VA 725 Dec. 1995 Purchase
First City Bancorp, Inc. TN 366 Mar. 1996 Purchase
Bank of Gonzales Holding Company LA 126 Jun. 1996 Purchase
Tuscaloosa Bancshares, Inc. LA 41 Nov. 1996 Purchase
Jefferson Guaranty Bancorp, Inc. LA 299 Jan. 1997 Purchase
Hartsville Bancshares, Inc. TN 90 Jan. 1997 Purchase
First Capital Bancorp, Inc. LA 186 Mar. 1997 Pooling
NBC Financial Corporation LA 69 Jul. 1997 Purchase
CitiSave Financial Corporation LA 75 Aug. 1997 Purchase
Victory Bancshares, Inc. TN 115 Mar. 1998 Pooling
</TABLE>
In addition to the above mergers, First American and Deposit Guaranty
acquired several nontraditional financial services companies as described below.
Effective July 1, 1996, FANB, a wholly-owned subsidiary of First
American, purchased 96.2 percent of the stock of IFC for $26.0 million in cash.
Simultaneously, IFC completed its acquisition of Investment Center Group, Inc.,
the parent company of Investment Centers of America, in a transaction valued at
$5.0 million, making IFC the nation's largest marketer of mutual funds,
annuities, and other investment products sold through financial institutions.
Both transactions were accounted for as purchases. During the third quarter of
1996, FANB purchased an additional 2.1 percent of the stock of IFC. Effective
February 1, 1997, AmeriStar Capital Markets, Inc., formerly a wholly-owned
subsidiary of FANB and a broker-dealer registered with the National Association
of Securities Dealers, was merged with and into IFC. As a result of the merger,
FANB's equity ownership in IFC increased to 98.5 percent.
Effective April 1, 1996, FANB purchased 49 percent of the stock of The
SSI Group, Inc., a healthcare payments processing company, for $8.6 million. The
transaction is being accounted for under the equity method of accounting.
On June 29, 1996, Deposit Guaranty purchased McAfee Mortgage and
Investment Company, a mortgage banking operation headquartered in Lubbock, Texas
in a transaction accounted for as a purchase business combination. McAfee
Mortgage and Investment Company
5
<PAGE> 6
has fifteen offices located throughout Texas and originated approximately $240
million in mortgage loans in 1995. On August 8, 1995, Deposit Guaranty purchased
First Mortgage Corp., a mortgage banking operation headquartered in Omaha,
Nebraska. This acquisition was accounted for as a purchase business combination.
First Mortgage Corp. had a $1.1 billion mortgage servicing portfolio and 6
production offices in Nebraska and Oklahoma.
For those acquisitions accounted for as a purchase business
combination, the results of operations have been included in the financial
statements from the date of acquisition. The pro forma effect on prior earnings
of such acquisitions is not significant. Prior year financial and other
information has been restated to include the pooling of Deposit Guaranty. For
other pooling transactions, the results of operations have been included in the
financial statements from the beginning of the year acquired, and prior year
financial information has not been restated as the changes would have been
immaterial.
From time to time, divestitures may be necessary to support First
American's strategies of targeting profitable customer segments and of
efficiently and effectively managing capital. On July 17, 1997, First American
completed the sale of Tennessee Credit Corporation and First City Life Insurance
Company, with total assets of $13.6 million, to Norwest Financial Tennessee,
Inc. The transaction resulted in a net gain of $2.1 million. On December 22,
1997, First American completed the sale of its corporate trust business to the
Bank of New York for a gain of $2.4 million. The sale consisted of the transfer
of approximately 250 bond trustee and agency relationships representing $4
billion of assets under management.
- ---------------------
EARNINGS PERFORMANCE
- ---------------------
NET INTEREST INCOME
Net interest income on a taxable equivalent basis increased $68.7
million, or 11 percent, to $673.2 million during 1997 from $604.5 million in
1996. Net interest income is the difference between the income earned on earning
assets and the interest paid on interest-bearing liabilities. Net interest
income represented 63 percent of total revenues in 1997 versus 66 percent in
1996 and 73 percent in 1995. The decline in the ratio of net interest income to
total revenues is reflective of management's focus on increasing fee income in
conjunction with First American's transformation to a financial services
company.
Both net interest income and the net interest margin, which is net
interest income expressed as a percentage of average earning assets, are
affected by the volume and mix of earning assets and interest-bearing
liabilities and the corresponding yields and costs. Product pricing, the volume
of noninterest-bearing sources of funds, interest rate contracts,
securitizations and sales of loans, and asset quality also affect net interest
income and the net interest margin. The discussion of net interest income should
be read with reference to TABLE 2 and TABLE 3. In this discussion, interest
income has been adjusted to a fully taxable equivalent basis which means that
any tax-exempt income has been increased to a level that would yield the same
after-tax income had that income been subject to taxation.
6
<PAGE> 7
As net interest income increased, the net interest margin improved by
16 basis points to 4.37 percent in 1997 from 4.21 percent in 1996. The net
interest margin improvement in 1997 over 1996 was primarily due to a better
earning asset mix, pricing actions on loans and deposits, and a decrease in
hedging expense. The $68.7 million increase in net interest income during 1997
resulted primarily from an increase in the volume of earning assets over
interest-bearing liabilities and an improvement in the net interest spread (the
difference between the yield on earning assets and the rate paid on
interest-bearing liabilities). Of the $68.7 million increase in net interest
income, $42.2 million was attributable to volume changes and $26.5 million was
attributable to the effect of an improved spread. During 1997, average earning
assets increased $1.0 billion to $15.4 billion, or 7 percent, from $14.4 billion
in 1996. The increase in average earning assets was essentially due to increases
in loans ($934 million) and investment securities ($295.6 million) offset by
decreases in federal funds sold and securities purchased under agreements to
resell ($220.5 million). Interest-bearing liabilities averaged $12.8 billion, an
increase of $869.4 million, or 7 percent, from $11.9 billion in 1996.
Approximately 44 percent of the increase in interest-bearing liabilities was in
money market and NOW deposit accounts, 31 percent was in time deposit accounts
and 25 percent was from other short-term nondeposit sources.
The net interest spread improved 19 basis points during 1997 to 3.62
percent from 3.43 percent in 1996 as average yields on earning assets increased
while the average rates paid on interest-bearing liabilities decreased. The
average yield on earning assets increased 11 basis points to 8.07 percent in
1997 from 7.96 percent in 1996. In general, the 11 basis point increase in the
yield on earning assets reflected a slightly higher overall interest rate
environment in 1997 over 1996. For example, the average prime rate for 1997 was
8.44 percent compared to 8.27 percent for 1996. Also, 1-year and 5-year treasury
securities yielded 5.63 percent and 6.22 percent on average, respectively,
during 1997 versus 5.52 percent and 6.18 percent on average, respectively,
during 1996. Also, the yield on earning assets benefited from a tightening of
First American's liquidity position. During 1997, the average balance of lower
yielding federal funds sold and securities purchased under agreements to resell
was less than 1% of total earning assets compared to over 2% for 1996. The
average yield on investment securities increased 19 basis points during 1997 as
the result of a realignment of the portfolio. Factors contributing to the
increase in the average yield on loans in 1997 over 1996 were increased yields
on consumer loans, the sale of approximately $123.7 million of lower yielding
consumer mortgages, and an increase in the contribution to interest income from
derivatives that hedged loan yields. The average rate paid on interest-bearing
liabilities decreased 8 basis points to 4.45 percent in 1997 from 4.53 percent
in 1996. Factors contributing to the 8 basis point decrease were deposit pricing
actions and a decrease in the expense involved in hedging the rates paid on
these liabilities.
Taxable equivalent net interest income increased $56.1 million, or 10
percent, in 1996 from $548.4 million in 1995. The increase in net interest
income during 1996 resulted primarily from an increased volume of earning assets
(mainly loans) with average earning assets increasing $232.2 million more than
average interest-bearing liabilities. The 6 basis point decline in the net
7
<PAGE> 8
interest spread in 1996 from 3.49 percent in 1995 resulted from the average
yield on earning assets decreasing 4 basis points and the average rate paid on
interest-bearing liabilities increasing 2 basis points. As the volume of
interest-bearing liabilities increased in 1996, the mix of interest-bearing
liabilities consisted of a larger percentage of higher-costing balances which
caused an increase in both the rate paid on interest-bearing liabilities and
interest expense. The 6 basis point decrease in the net interest margin from
1995 to 1996 reflected competitive pricing pressures, balance sheet mix changes,
and the overall average interest rate environment.
Management currently anticipates that net interest income will increase
in 1998 due to expected growth in earning assets and that the net interest
margin could decline due to lower levels of interest rates and a flatter yield
curve resulting in lower reinvestment rates and a higher level of prepayments
on same asset classes.
NONINTEREST INCOME
Noninterest income represented 37 percent of total revenues during 1997
compared with 34 percent in 1996 and 27 percent in 1995. Noninterest income
increased $92.0 million, or 30 percent, to $395.8 million in 1997 from $303.7
million in 1996. Noninterest income for 1997 included a full year of IFC's
noninterest income, whereas 1996 included IFC's income from its date of
acquisition of July 1, 1996. During 1997, income from nontraditional banking
services continued to grow for First American as evidenced by the increase in
investment services income, which comprised 31 percent of total noninterest
income in 1997 compared with 22 percent in 1996. Investment services income
increased $55.0 million, or 81 percent, in 1997 to $123.4 million from $68.4
million in 1996. IFC contributed to substantially all of the increase in
investment services income. Excluding IFC, total noninterest income increased
$36.5 million, or 14 percent. First American is ranked as a leader in sales of
investment products. According to the Bank Securities Journal (Nov. 1997), First
American ranked tenth in the U.S. in terms of total investment products sold
(bank only), during the first quarter of 1997. When investment assets sold are
compared to the deposit base, First American ranked second in the U.S. This
ranking reflects the IFC acquisition, as well as the emphasis placed on the
continued development of First American's investment management services.
In addition to investment services income, several other categories
which contributed significantly to the improvement in noninterest income in 1997
over 1996 included service charges on deposit accounts, commissions and fees on
fiduciary activities, and other income. Service charges on deposit accounts
increased $20.2 million, which is attributable to fee increases and product
changes in conjunction with the utilization of a customer information system
called VISION. VISION captures product utilization, transaction behavior,
profitability, and buying preferences for each customer. Commissions and fees on
fiduciary activities increased $4.5 million principally as a result of an
increase in the value of assets managed due to favorable market conditions and
increased trust activity from improved marketing efforts.
Other income increased $13.8 million in 1997. As First American took
steps to target profitable customer segments during 1997, decisions were made to
sell First American's corporate trust business and Tennessee Credit Corporation,
a consumer finance subsidiary
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acquired with the purchase of First City Bancorp, Inc. The gains included in
other noninterest income related to these sales amounted to $2.4 million and
$2.1 million, respectively.
Also included in the $13.8 million increase in other income was a $2.5
million increase in automated teller machines ("ATM") surcharge and network
transaction fees resulting from non-First American customer's use of ATMs and
from the introduction of new ATM services such as stamps and mini-statements.
Additionally, approximately $2.0 million was recognized as a gain on the sale of
First American's equity ownership in HONOR Technologies, Inc., a bank-card
network company. Other income included a $1.3 million increase in open-end,
non-loan fees due to interchange fees generated by the "Check Card" product and
a $1.0 million increase in income from related bank fees such as factoring
commissions, agency fees, and fees from outgoing wire transfers.
Noninterest income increased $100.7 million, or 50 percent, in 1996
over 1995. IFC contributed $49.6 million to noninterest income primarily as
investment services income. Excluding the effects of IFC from its effective date
of acquisition, July 1, 1996, through December 31, 1996, noninterest income in
1996 was $254.1 million, a $51.1 million, or 25 percent, increase from 1995.
Investment services income contributed 52 percent of the growth in noninterest
income between 1996 and 1995. Other increases in noninterest income were
primarily the result of First American's diverse income and fee generating
activities, including service charges on deposit accounts, income and fees
related to selling and servicing mortgage loans, "Check Card" interchange fees,
and ATM surcharges and network transaction fees.
Management expects noninterest income to increase in 1998 as the result
of initiatives in generating fee growth through the integration and expansion of
banking, investing, and financial planning services offered to clients and
through the continued utilization of technological enhancements such as the
VISION customer information system.
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NONINTEREST EXPENSE
During 1997 First American continued efforts to control costs without
sacrificing service to clients. Steps taken during 1997 to control costs
included the implementation of lower-priced yet more convenient, distribution
alternatives such as expanded telephone banking, additional ATMs (the number of
ATMs increased by 200 to 638 at December 31, 1997, or 46 percent), and PC
banking. Other steps taken during 1997 to increase efficiency included the
development of a new financial system to streamline financial procedures, review
of pay administration to ensure that jobs are designed to support the
transformation to a financial services company, revision of incentive plans,
reconfiguration of branches, and initiation of the replacement of the proof
operation with a new imaging system. A key measure of a bank holding company's
efficiency is the productivity ratio (also known as the operating efficiency
ratio) which is the ratio of operating expenses to taxable equivalent net
interest income plus noninterest income. Excluding nonbank subsidiaries, $4.4
million of nonrecurring gains pertaining to the sale of corporate trust assets
and First American's investment in HONOR Technologies, Inc., in 1997, and the
$8.1 million one-time SAIF assessment in 1996, First American's productivity
ratio improved 83 basis points during 1997 to 59.04 percent from 59.87 percent
in 1996. The improvement in the productivity ratio from 1996 to 1997 means that
the Corporation spent $0.83 less in 1997 compared to 1996 to earn $100 of
revenues. The ratio was 60.67 percent in 1995 excluding the impact of $7.3
million of Heritage merger-related expenses.
Total noninterest expense was $669.7 million in 1997 compared to $571.7
million in 1996. One significant reason for the $98 million, or 17 percent,
increase in noninterest expense in 1997 over 1996 was that in 1997 a full year
of IFC's expenses were included, whereas in 1996 IFC's expenses for six months
from its date of acquisition of July 1, 1996 were included. Of the $98 million
increase in noninterest expense, $52.4 million was attributed to IFC. Increases
in subscribers' commissions of $35.8 million, increases in salaries and employee
benefits of $7.6 million, and increases in general and administrative expenses
of $7.4 million comprised the major portion of the increase in noninterest
expense attributable to IFC. Excluding IFC, noninterest expenses increased $45.6
million, or 9 percent. Excluding IFC and the one-time SAIF assessment,
noninterest expense increased $53.8 million, or 10 percent. This increase is
primarily attributable to the effects of the bank acquisitions made in 1997 and
1996.
Significant changes from 1996 to 1997 in noninterest expense
categories, inclusive of IFC and the bank acquisitions are outlined as follows:
- - Salaries and benefits, the largest component of noninterest expense,
increased $32.8 million, or 11 percent, in 1997 primarily due to merit
increases, incentive programs, related payroll taxes and the increased cost
of medical benefits.
- - Equipment expenses increased $7.7 million, or 22 percent, in 1997. During
1997 First American improved operations and banking facilities to better
serve customers in a more cost effective manner. Specifically, depreciation
expense increased due to additions and renovations at various branches, the
addition of new image scanning equipment, and
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enhancements and housing for ATMs. A greater usage of computer maintenance
contracts also contributed to the increase in equipment expenses.
- - Communication expenses increased $5.0 million, or 24 percent, in 1997 due
to higher expenditures for telecommunications.
- - Net occupancy expense was up $6.2 million, or 15 percent, in 1997 primarily
as the result of increased depreciation, rentals and maintenance for branch
banking facilities acquired through acquisitions and depreciation attributed
to remodeling of other banking facilities.
- - The $8.7 million decrease in FDIC insurance expense in 1997 was primarily
related to the $8.1 million one-time assessment on SAIF deposits held as of
March 31, 1995, which was accrued in the third quarter of 1996.
During 1996 noninterest expense increased $107.8 million, or 23
percent, to $571.7 million from $463.9 million for 1995. IFC expenses, which
consisted primarily of subscribers' commissions, were $48.8 million from its
date of acquisition through December 31, 1996. Excluding the acquisition of IFC,
noninterest expense was $522.9 million, a $59.0 million, or 13 percent, increase
from 1995. In addition to the acquisition of IFC, a significant portion of the
increase in 1996 over 1995 was due to increased costs of salaries and employee
benefits; net occupancy expense; intangibles amortization associated with the
bank acquisitions made during 1996 and 1995; and the one-time $8.1 million SAIF
assessment. Excluding the one-time SAIF assessment and the effects of the 1995
and 1996 acquisitions, noninterest expense increased $15.8 million, or 3
percent.
Management intends to continue to emphasize cost control while
developing the capacity to absorb future growth in connection with the Deposit
Guaranty merger and the Corporation's transformation to a financial services
company. Management's long-term objective is to improve the productivity ratio
to less than or equal to 50 percent by the year 2000. It is anticipated that the
Deposit Guaranty merger and the resulting cost synergies will assist in
improving the productivity ratio.
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). This issue affects not only First
American, but virtually all companies, organizations and governments worldwide
that use computer information systems. To address the Year 2000 issue, First
American has adopted a broad-based approach designed to encompass First
American's total systems and nonsystems environments, including Deposit
Guaranty. This approach includes the development of a conversion time line,
costs budget, resource allocation, and independent verification of each system's
capacity to properly recognize dates following such conversion. First American
has formed an enterprise-wide steering committee and implementation team to
oversee and complete the conversion project.
A principal Year 2000 issue for First American relates to its mainframe
computer operating system software and application software. The operating
system software is subject to a data processing outsourcing agreement with IBM
Global Services ("IBM"). First American
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management believes that IBM is well into the process of modifying this
operating system code. In addition, First American contracted with PLATINUM
technology, inc., a leading software technology company, to assist First
American in its Year 2000 efforts by converting First American's proprietary
code to Year 2000 compliance, and this work was substantially complete as of
December 31, 1997. First American is also actively working with its other third
party software vendors to ensure Year 2000 readiness. An inventory of software
applications at First American has been conducted and third party vendors have
been contacted regarding the status of the Year 2000 compliance of their
products. First American plans to conduct extensive testing of application
systems used in its operations, including both internally-developed and
third-party-vendor application systems, beginning in early 1998. With respect to
credit decisions, First American is taking steps to insure that Year 2000
compliance is taken into account in its loan underwriting procedures. Year 2000
issues related to physical facilities and other electronic interactions are also
being addressed.
First American expects to be substantially Year 2000 compliant by the
end of 1998. Management anticipates that internally-developed and third-party
provided applications will be tested for compliance in 1998 and 1999. The costs
of First American's overall Year 2000 initiative have not yet been finally
determined, but are not expected to exceed $5 million in the aggregate.
INCOME TAXES
Income tax expense in 1997 was $137.9 million, which resulted in an
effective tax rate of 36.7 percent of pretax income versus $114.8 million, or
35.9 percent of pretax income, for 1996. The higher effective tax rate for 1997
was primarily attributable to an increase in nondeductible goodwill expense.
Income tax expense in 1995 was $100.2 million, or 36.3 percent, of pretax
income. The decrease in the tax rate for 1996 versus 1995 was attributable in
part to a more favorable overall effective state income tax rate. First American
expects the effective tax rate to decrease in 1998 due to the realignment of
certain corporate entities. For additional information on income taxes of the
Corporation, see NOTE 11 to the consolidated financial statements.
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BALANCE SHEET REVIEW
- ---------------------
LOANS
Loans comprise the largest component of First American's earning assets
and continue to be the highest yielding category of earning assets. Loans
provided 77 percent of interest income during 1997 and 1996. During 1997 average
loans increased $934.0 million, or 9 percent, to $11.21 billion from $10.28
billion. Excluding the effects of the acquisitions during 1997, the purchase of
$200.0 million of installment loans, and $123.7 million of mortgage loan sales
(other than through mortgage banking operations), 1997 average loans increased
$555.4 million, or 5 percent. The 5 percent loan growth in 1997 was attributable
to (1) positive economic conditions in primary markets, (2) organized sales
efforts in conjunction with effective administrative
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support and responsive credit decisions, and (3) marketing programs. Management
anticipates loan growth in the next year will be between 5 to 10 percent. (IS
THIS STILL TRUE?)
TABLE 11 presents end of period loan balances by category for the past
five years. TABLE 6 presents the maturities of loans, exclusive of consumer
loans, outstanding at December 31, 1997.
Commercial Loans
Commercial loans averaged $4.34 billion during 1997, up $420.3 million,
or 11 percent, from $3.92 billion in 1996 and accounted for 45 percent of loan
growth in 1997. During 1997 and 1996, commercial loans comprised 39 percent and
38 percent of average total loans, respectively. The increase in commercial
loans occurred over a broad range of industry categories, including the
healthcare, hotels/amusement/recreation, and printing/publishing segments, and
was attributable to a continued focus on increasing First American's
specialization in these categories. First American also experienced strong
growth in loans generated through those business lending units which target
companies with revenues up to $2 million. During 1997, First American continued
to maintain a leadership position in the state of Tennessee in small business
(revenues under $10 million) and middle market lending (revenues of $10 million
to $100 million).
First American is monitoring the present turbulence in the Asian
economy, limiting direct exposure and continually evaluating indirect exposure.
Substantially all exposure to Asian-related companies was in the form of credit
facilities extended to United States-based affiliates of Asian companies. First
American's exposure to such companies at December 31, 1997 was $59.1 million,
while funded loans amounted to $11.7 million.
To facilitate the foreign trade needs of our customers, First American
maintains relationships with a number of foreign banks. Total approved exposure
to Asian banks amounted to $11.9 million which is comprised of various
commitments. As of December 31, 1997, $2.0 million was funded under these
limits.
Consumer Loans
The consumer loan portfolio increased $330.6 million, or 7 percent, to
average $5.16 billion during 1997 from $4.83 billion during 1996. Total consumer
loans averaged 46 percent of the loan portfolio in 1997 and 47 percent in 1996.
Consumer loans consist of mortgage loans, installment loans, open-end loans, and
single payment loans.
Average installment loans increased primarily due to the purchase of
$200 million loans, with recourse, from a wholly-owned corporate agency and
instrumentality of the U.S. Government on June 30, 1997. First American also
secured the right to finance new loans with
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this federally sponsored enterprise, whereby First American assumes
underwriting, funding, and administrative responsibilities.
The largest category of consumer loans, amortizing mortgages, increased
on average $90.7 million to $2.75 billion during 1997, from $2.66 billion in
1996. Consumer amortizing mortgages comprised 25 percent of First American's
average net loans during 1997 compared to 26 percent in 1996. Considering the
effect of $123.7 million mortgage loans that were sold during 1997, average
consumer amortizing mortgages increased $159.0 million, or 6 percent.
Average open-end loans consists primarily of credit card loans and home
equity lines of credit. Average credit card loans increased $42.9 million in
1997 due to continued growth from the reintroduction of credit card loans in
1995. Average home equity lines of credit increased in 1997 as the result of
activation of existing lines of credit and a number of targeted sales
initiatives to acquire new lines of credit.
Commercial Real Estate Loans
Commercial real estate loans, which include real estate construction
and real estate commercial mortgages, increased $182.9 million, or 12 percent,
to average $1.71 billion during 1997 compared with $1.52 billion during 1996.
Average total commercial real estate loans were 15 percent of total loans during
1997 and 1996. There have been and continue to be, selective opportunities for
commercial real estate lending in First American's markets; the Corporation's
goal is to provide construction, acquisition/development and intermediate term
financing for clients in First American's markets.
INVESTMENT SECURITIES
The investment securities portfolio is the second largest component of
First American's earning assets and interest earned on investment securities was
22 percent of total taxable equivalent interest income in 1997 and in 1996.
Total investment securities were $4.1 billion at December 31, 1997 and 1996, and
comprised 26 and 27 percent of total earning assets at year-end 1997 and 1996,
respectively. As an integral component of asset/liability strategy, First
American manages the investment securities portfolio to maintain liquidity,
balance interest rate risk, and augment interest income. The portfolio is also
used to meet pledging requirements for deposits and borrowings. Additional
information on investment securities is provided under the captions "Net
Interest Income" and "Liquidity."
Securities in the investment portfolio are classified as either
available for sale ("AFS") or held to maturity ("HTM"). AFS securities averaged
$3.13 billion in 1997 compared with $2.68 billion in 1996. During 1997 the AFS
portfolio was realigned by increasing the amount of fixed rate securities held
and reducing the amount of floating rate securities held. HTM securities
averaged $872.6 million during 1997 compared with $1.03 billion in 1996.
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The average estimated maturity of the total securities portfolio was
3.4 years at December 31, 1997 (3.6 years for AFS securities and 2.7 years for
HTM securities) compared with 4.1 years at year-end 1996 (4.7 years for AFS
securities and 2.3 years for HTM securities). The expected maturity for
nonamortizing securities is the stated maturity and the expected maturity for
mortgage-backed securities is based on current estimates of average maturities
including prepayment assumptions. The average repricing life of the securities
portfolio was 3.0 years at December 31, 1997 (3.2 years for AFS securities and
1.8 years for HTM securities). The average yield of the securities portfolio was
6.94 percent in 1997 compared to 6.80 percent in 1996. TABLE 5 presents
additional detail on estimated average maturities, average repricings, and
weighted-average yields.
Mortgage-backed securities comprised 75 percent of total investment
securities at December 31, 1997, compared to 67 percent at December 31, 1996.
Mortgage-backed security holdings on December 31, 1997, included $46.6 million
floating rate mortgage-backed securities (of which $42.1 million were classified
as AFS and $4.5 million were classified as HTM). All mortgage-backed securities
classified as U.S. Government agencies and corporations were issued or
guaranteed by the Federal National Mortgage Association ("Fannie Mae"), the
Federal Home Loan Mortgage Corporation ("Freddie Mac"), or the Government
National Mortgage Association ("Ginnie Mae"). Other mortgage-backed securities
of 1.1 billion consisted of AAA-rated collateralized mortgage obligations
("CMO's"), which were purchased because of their high credit quality and
relatively certain average lives. At year-end 1997, over 99.9 percent of First
American's debt securities were investment grade with the remaining .1 percent
unrated. Of the securities which are rated, none are below investment grade
(BBB).
DEPOSITS AND OTHER SOURCES OF FUNDS
Core deposits, which consist of total deposits less certificates of
deposit ("CD's") $100,000 and over and foreign deposits, continue to be First
American's primary source of funding for supporting earning asset growth. In
addition, core deposits provide a customer base for cross selling other products
and services offered by First American. Average core deposits were 76 percent of
average earning assets in 1997 compared to 77 percent in 1996. The mix of
average core deposits remained fairly constant between 1997 and 1996 with money
market accounts, CD's under $100,000, and noninterest-bearing demand deposits
continuing to comprise the majority of core deposits in both 1997 and 1996.
Average core deposits increased $715.3 million, or 6 percent, to $11.7
billion in 1997. Increases in core deposits are attributable, primarily to the
effect of acquisitions and to the continued popularity of the First American
Investment Reserve ("FAIR") account. Of the $715.3 million increase in average
core deposits, over 60% related to the effect of the acquisitions made during
1997 and 1996. The FAIR account, a money market deposit account combining many
features common among money market funds, accounted for another $194.4 million
of the increase. On December 31, 1997, FAIR account balances outstanding were
$2.45 billion and the stated interest rate paid was 4.25 percent compared to
$2.25 billion and 4.30 percent,
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respectively, at December 31, 1996.
Other core deposit accounts that had increases in the average balances
during 1997 included NOW accounts ($190.9 million increase), noninterest bearing
demand deposits ($326.7 million increase), ) and CD's under $100,000 ($110.0
million increase) which were offset by a slight decrease in the average balance
of regular savings ($24.2 million decrease). First American is taking steps to
strengthen customer relationships in order to maintain its core deposit funding
base. Steps towards this objective include the implementation of an extensive
Distribution Management System ("DMS") and the Select Rewards program. The DMS
allows First American to reconfigure its distribution system based on client
preference to specifically tailor distribution channels market by market and to
provide the best mix of branches, mini branches, ATMs, telephone, and PC banking
in each individual market. For example, First American has entered into
contracts to sell three branches in Virginia as part of the reconfiguration
process; these sales are expected to close in the second quarter of 1998. The
Select Rewards program is a relationship-oriented program which is similar to
the airline industry's frequent flyer program and rewards customers for banking
with First American with points based on the number, size, and longevity of
accounts.
In addition to core deposits, other sources of funding utilized by
First American include CD's $100,000 and over, foreign deposits, short-term
borrowings, and long-term debt. Total short-term borrowings include overnight
federal funds purchased primarily from correspondent banks, securities sold
under agreements to repurchase, and other short-term borrowings, principally
funds due to the U.S. Treasury Department tax and loan accounts and the Federal
Home Loan Bank. Total CD's $100,000 and over, foreign deposits, and short-term
borrowings averaged $3.07 billion for 1997, up 14 percent, or $369.3 million
from the previous year. The increase in average CD's $100,000 and over, foreign
deposits, and short-term borrowings during 1997 is primarily attributable to
increases in CD's $100,000 and over ($151.8 million), Federal funds purchased
and repurchase agreements ($73.0 million), and other short-term borrowings
($145.1 million). The increase in the period end balance of other short-term
borrowings to $354.7 million at December 31, 1997, from $225.1 million at
December 31, 1996, was essentially due to a reclassification from long- to
short-term of $108.5 million variable rate and $14.5 million fixed rate advances
from the FHLB. TABLE 9 details maturities of CD's $100,000 and over at December
31, 1997 and 1996.
Long-term debt, which consists primarily of borrowings from the FHLB,
increased $165.7 million to $596.2 million at December 31, 1997, from $430.6
million at December 31, 1996. Most of the increase was due to the addition of
$285.0 million variable rate borrowings from the FHLB offset by $123.0 million
of FHLB borrowings that were reclassified from long-term to short-term as
discussed in the preceding paragraph. At December 31, 1997, First American's
variable rate long-term borrowings totaled $385.0 million with a
weighted-average interest rate of 5.86 percent, and total fixed rate long-term
borrowings were $211.2 million with a weighted-average interest rate of 6.94
percent.
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CREDIT RISK MANAGEMENT AND ASSET QUALITY
- -----------------------------------------
First American seeks to exercise prudent credit risk management in
lending, including diversification of the loan portfolio by loan category and by
industry segment, as well as by identification of credit risks. Accordingly,
First American places importance on industry specialization and relationship
management so that relationship managers (loan officers) are better able to
understand the complexities of an industry's characteristics. Specialization by
relationship managers permits First American to provide expertise in structuring
the original credit facility and to provide continuous risk evaluation.
First American's loans are predominantly to borrowers from its primary
market territory, an area in which First American's relationship managers are
knowledgeable. First American's primary market territory includes Tennessee,
Mississippi, Louisiana and selected markets in Virginia, Kentucky, Arkansas and
other adjacent states. Based on Standard Industrial Classification codes, there
were no industry concentrations within the commercial loan category in excess of
10 percent of total loans at December 31, 1997, or at December 31, 1996. First
American's ten largest outstanding loan relationships at December 31, 1997,
amounted to $265.5 million, or 2.3 percent of total loans, compared to $215.5
million, or 2.0 percent of total loans, at year-end 1996. At December 31, 1997,
the largest loan relationship had $46.9 million outstanding. In 1997, FANB's
regulatory legal lending limit would have been $238.5 million based on capital
as restated to reflect the impact of the acquisition of Deposit Guaranty.
NONPERFORMING ASSETS
First American carefully monitors loans for possible credit problems
through relationship managers and a staff of seasoned credit officers. The
Credit Policy Committee and an Independent Loan Review Division assist in the
monitoring of loans for possible credit problems. The Credit Policy Committee
gives broad direction to the lending activities of the Corporation by reviewing
and recommending matters relating to corporate lending policy, loan allocations,
concentrations, and underwriting criteria. The Independent Loan Review Division
of the Corporation performs periodic independent reviews of identified problem
loans and the general overall quality of the loan portfolios in light of
economic and market conditions and conducts annual examinations of the loan
portfolios to verify the monitoring process. Problem loans are assigned to
specialized areas for resolution.
Nonperforming assets include nonaccrual and restructured loans and
foreclosed properties. The ratio of nonperforming assets to total loans and
foreclosed properties was .37 percent at December 31, 1997, down 6 basis points
from .43 percent at December 31, 1996. Nonperforming assets totaled $43.3
million at December 31, 1997, and consisted of $36.3 million of nonaccrual loans
and $7.0 million of foreclosed properties. This compared to $45.2 million of
nonperforming assets at December 31, 1996, which was comprised of $32.7 million
of nonaccrual loans, $11.8 million of foreclosed properties and less than $1
million in restructured loans. There were no restructured loans during 1997.
TABLE 8 summarizes changes in
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nonperforming assets for each of the past five years and presents the
composition of the nonperforming assets balance at the end of each year.
Loans 90 days or more past due, excluding nonaccrual loans, were .23
percent of total loans at December 31, 1997, versus .20 percent of total loans
at December 31, 1996. The increase in total past due loans was primarily
attributable to increases in the loan categories of consumer-other and
commercial loans across several industry types.
First American had $61.9 million of outstanding loans at December 31,
1997, versus $52.1 million at December 31, 1996, which were not considered
nonperforming, but whose borrowers, in management's opinion, are experiencing
financial difficulties severe enough that serious doubt exists as to their
continued ability to comply fully with present repayment terms. Depending on the
economy and other factors, these loans and others, which may not be presently
identified, could become nonperforming assets in the future.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
In the normal course of business First American must manage the risk
that borrowers may default on their obligations to the Corporation. The
allowance for loan losses (the "allowance") is a reserve established and
maintained to protect the Corporation against estimated losses inherent in the
loan portfolio. The allowance is increased by the provision for loan losses
(which is an expense on the income statement) and through recoveries of
previously written-off loans and is decreased by charged-off loans. Management
reviews the allowance at least quarterly to ensure the level is adequate to
absorb estimated losses.
The allowance consists of two portions: an allocated portion and an
unallocated portion. The allocated portion is established separately by risk
group as follows: commercial and commercial real estate loans, consumer loans,
and off-balance-sheet commitments (unfunded loan commitments and standby letters
of credit). The processes applied to each group are similar but have been
tailored as appropriate for the nature of risk in each group. The assessment of
the allocated portion of the allowance is based on a detailed statistical
analysis of historical loan balances, net charge-offs, and off-balance-sheet
loan and letter of credit commitments. Specific reserves are allocated to
individual loans as considered necessary based upon periodic reviews of
significant lending relationships.
The unallocated portion of the allowance is for inherent losses which
probably exist as of the valuation date even though they may have not have been
identified by the more objective processes used for the allocated portion of the
allowance. This is due to the risk of error and/or inherent imprecision in the
process. This portion of the allowance is particularly subjective and requires
judgments based upon qualitative factors which do not lend themselves to exact
mathematical calculations. Some of the factors considered are changes in credit
concentrations, loan mix, historical loss experience, and the general economic
environment in First American's markets.
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While the total allowance is described as consisting of an allocated
and an unallocated portion, these terms are primarily used to describe a
process. Both portions are available to support inherent losses in the loan
portfolio. An analysis of the changes in the allowance for loan losses for the
past five years, including the provision and charge-offs and recoveries by loan
category, is presented in TABLE 7. The table also contains the year-end
allocation of the allowance for loan losses among the various loan portfolios
and the unallocated portion of the allowance for each of the past five years.
At December 31, 1997, the allowance for loan losses was $180.0 million,
or 1.55 percent of net loans, versus $185.5 million, or 1.74 percent of net
loans, at December 31, 1996. The allowance for loan losses was $191.1 million,
or 1.91 percent of net loans, at December 31, 1995. The changes in the allowance
during 1997 from year-end 1996 were primarily due to a $12.5 million provision
for loan losses and $25.9 million of net loan charge-offs. Activity in the
allowance for loan losses during 1997 also included a $8.2 million increase due
to the acquisitions made during 1997, offset slightly by a $.2 million decrease
due to the sale of Tennessee Credit Corporation. The allowance as a percentage
of nonperforming loans increased to 496 percent at December 31, 1997, compared
to 555 percent at December 31, 1996, and 465 percent at December 31, 1995. First
American's coverage ratio is one of the highest in the industry.
Net loan charge-offs were $25.9 million, or .23 percent of average
loans, in 1997; $15.2 million, or .15 percent of average loans, in 1996; and
$7.7 million, or .09 percent of average loans, in 1995. The low level of net
loan charge-offs is indicative of First American's loan quality and credit
administration standards and the generally good economic environment existing in
the Corporation's primary market territory. Total gross loan charge-offs were
$54.3 million in 1997, $45.7 million in 1996 and $31.1 million in 1995. Total
recoveries were $28.4 million in 1997, $30.5 million in 1996, and $23.4 million
in 1995.
The $10.7 million increase in net loan charge-offs in 1997 over 1996
was primarily due to an increase in commercial loan net charge-offs, which were
$12.6 million in 1997 compared to net recoveries of $2.6 million in 1996. The
ratio of commercial loan net charge-offs to average commercial loans increased
36 basis points to .29 percent from (.07) percent in 1996. (A negative
percentage of net charge-offs indicates that recoveries exceeded net
charge-offs.)
Of the major loan categories, consumer-other loans had the highest
level of net charge-offs in 1997, 1996, and 1995, but experienced a $2.5 million
decrease in net loan charge-offs between December 31, 1997, and December 31,
1996. Consumer-other loan net charge-offs were $15.0 million and $17.6 million,
or .62 and .81 percent of average consumer-other loans, in 1997 and 1996,
respectively. Consumer-other loan net charge-offs were $11.1 million, or .59
percent of average consumer-other loans, in 1995. Increases in credit card loan
and other open-end loan net charge-offs were offset by decreases in direct and
indirect loan net charge-offs from year-end 1996 to year-end 1997. First
American generally charges off consumer loans on which principal or interest is
past due more than 120 days. Management expects that consumer-other loan net
charge-offs in 1998 will be slightly higher than in 1997.
19
<PAGE> 20
Future provisions for loan losses depend on such factors as asset
quality, net loan charge-offs, loan growth, and other criteria as discussed
above. The appropriate level of the allowance for loan losses and the
corresponding provision will continue to be determined quarterly based on the
allowance assessment methodology. Under its current methodology, management
anticipates that there will be a provision for loan losses in 1998; however, the
specific amount cannot be determined at this time. Changes in circumstances
affecting the various factors of the Corporation's methodology could determine
whether a provision is warranted in 1998 and, if so, the amount.
- ---------------------------
ASSET/LIABILITY MANAGEMENT
- ---------------------------
INTEREST RATE SENSITIVITY
The focus of Asset/Liability Management is to maximize net interest
income within prudent constraints. Net interest income is managed within a
framework of guidelines approved by the Board of Directors and administered by
the Asset/Liability Committee ("ALCO"). ALCO is comprised of Senior Executives
at First American.
The Corporation's guideline for earnings variance is that net income
will not vary by more than 5 percent for a 150 basis point change in rates from
management's most likely interest rate forecast over the next twelve months.
During 1997, the Corporation maintained a variance within these guidelines.
Factors affecting interest rate sensitivity are reviewed and updated at least
monthly. Periodically, earnings and interest rate risks are projected for longer
periods.
ALCO evaluates interest rate risk by assessing the Corporation's
current interest sensitivity position and estimating possible earnings and
economic value of equity at risk. TABLE 4 provides the Corporation's interest
rate sensitivity position.
First American had a net liability sensitive position for a cumulative
one-year period of 18.2 percent at December 31, 1997, which is within
management's objective of a cumulative net liability sensitivity of 4 percent to
24 percent. In other words, the amount of net liabilities that reprice more
quickly than assets, adjusted for the effects of off-balance-sheet activities,
is $2,913.6 million, or 18.2 percent of all earning assets. This compares to a
cumulative net liability sensitivity of 21.5 percent at December 31, 1996. A
cumulative net liability sensitivity indicates that First American's net
interest income has a tendency to increase if interest rates decline. An
interest rate gap sensitivity analysis is limited in its usefulness since the
interest rate gap position presents a snapshot of interest sensitivity for one
point in time (interest gap sensitivity can change on a daily basis), whereas
management will make pricing decisions whenever such actions are deemed
necessary. First American classifies NOW, money market, and regular savings
accounts, totaling $5.6 billion at December 31, 1997, as immediately rate
sensitive. If NOW and regular savings were not classified as immediately rate
sensitive, then the one-year cumulative gap would be a liability sensitive
position of $174.5 million, or 1.1 percent, of earning assets at December 31,
1997.
20
<PAGE> 21
Management believes that interest rate sensitivity is best measured by
its simulation modeling. Forecasted levels of earning assets, interest-bearing
liabilities, and off-balance-sheet financial instruments are combined with
ALCO's forecasts of alternative interest rates for the next twelve months and
with other factors in order to produce various earnings simulations. By
forecasting earnings under multiple interest rate scenarios, ALCO can assess the
extent of its earnings at risk.
The economic value of equity calculation is a present value computation
of all future cash flows for assets, liabilities, and off-balance-sheet items
based on the current yield of each of these instruments. In this computation,
First American assumes a discount rate that is equal to current market rates of
balance sheet categories being simulated. The present values of assets less
liabilities, adjusted for the present values of off-balance-sheet items,
establish a base case economic value of equity. The impact to the base case
economic value arising from instantaneous changes in interest rates by equal
amounts to all categories provides a measure of the economic value of equity at
risk. The Corporation's guideline states that for an instantaneous change in
interest rates of 150 basis points, the economic value of equity will not change
by more than 20 percent. During 1997, the Corporation maintained a variance
which was well within this guideline.
The Corporation's most likely interest rate scenario at December 31,
1997, was based on no change in the federal funds or prime rates through 1998.
DERIVATIVES
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
noncomplex, non-leveraged derivative products has reduced the Corporation's
exposure to changes in the interest rate environment. By using derivatives, such
as interest rate swaps, interest rate caps and floors and occasionally futures
contracts, to alter the nature of (hedge) specific assets or liabilities on the
balance sheet (for example, to change a variable rate obligation to a fixed rate
obligation), the derivative products offset fluctuations in net interest income
from the otherwise unhedged position. In other words, if net interest income
from the otherwise unhedged position changes (increases or decreases) by a given
amount, the derivative product should produce close to the opposite result,
making the combined amount (otherwise unhedged position impact plus the
derivative product position impact) essentially unchanged. Derivative products
have enabled First American to improve its balance between interest-sensitive
assets and interest-sensitive liabilities by managing its interest rate
sensitivity while continuing to meet the credit and deposit needs of customers.
In aggregate, many of First American's securities and loans with fixed
rates may be funded with variable rate money market deposits. Consequently, net
interest income can be negatively affected if short-term interest rates rise. To
reduce this exposure, the Corporation has
21
<PAGE> 22
entered into interest rate swaps on which the Corporation pays a fixed rate and
receives a variable rate tied to three-month London Interbank Offering Rate
("LIBOR"). Thus, these swaps act to "fix" the rates paid on a portion of the
money market account balances for the period of time covered by the swaps, which
in turn reduces the potential negative impact on net interest income of rising
interest rates. NOTE 14 to the consolidated financial statements presents the
derivative financial instruments outstanding at December 31, 1997 and 1996.
Notional amounts are key elements of derivative financial instruments
agreements. However, notional amounts do not represent the amounts exchanged by
the parties to derivatives and do not measure First American's exposure to
credit or market risks. The amounts of payments exchanged are based on the
notional amounts and the other terms of the underlying derivative agreements. At
December 31, 1997, First American had interest rate swaps with notional values
totaling $2.43 billion and interest rate floors with notional values totaling
$300 million. At December 31, 1997, these derivatives had net positive fair
values (unrealized net pretax gains) of $12.0 million. At December 31, 1996, the
Corporation had interest rate swaps, floors and caps with notional values
totaling $1.12 billion, $300 million and $100 million, respectively, for a total
of $7.7 million net positive fair values (unrealized net pretax gains). For
estimated fair value information related to all financial instruments, see NOTE
14 to the consolidated financial statements.
As First American's individual derivative contracts approach maturity,
they may be terminated and replaced with derivatives with longer maturities
which offer more interest rate risk protection. NOTE 14 to the consolidated
financial statements presents the net deferred gain related to terminated
derivative contracts. The net deferred gain totaled $5.4 million at December 31,
1997, and $5.0 million at December 31, 1996. Deferred gains and losses on
terminated off-balance-sheet derivative contracts are recognized as interest
income or interest expense over the original covered periods. Of the $5.4
million of net deferred gain at December 31, 1997, $1.1 million will increase
net interest income during 1998 and $4.3 million will be recognized in the years
from 1999 to 2006.
Net interest income for the year ended December 31, 1997, included
derivative products pretax net income of $.8 million, consisting primarily of
$6.4 million additional interest income on loans, $1.5 million reduction in
interest income on securities, and $1.9 million in additional interest expense
on money market deposits and $1.9 million in additional interest on other
deposits. This compares to $13.6 million of derivatives products net pretax
expense in 1996. The change in derivative products net expense in 1996 to net
pretax income in 1997 was primarily due to amortization of deferred gains/losses
on terminated derivatives contracts ($.7 million net deferred gains recognized
in 1997 compared with $10 million net deferred losses recognized in 1996).
All derivatives activity is conducted under ALCO and Board of
Director's supervision and according to detailed policies and procedures
governing these activities. Policy prohibits the use of leveraged and complex
derivatives. The Board of Directors also sets interim limitations on the total
notional amount of derivatives contracts that may be outstanding at any time.
22
<PAGE> 23
Off-balance-sheet derivative activities give rise to credit risk when
interest rate changes move in the Corporation's favor. In such cases, First
American relies on the ability of the contract counterparts to make contractual
payments over the remaining lives of the contracts. Credit risk exposure due to
off-balance-sheet derivative activities is closely monitored, and counterparts
to these contracts are selected on the basis of their creditworthiness as well
as their market-making ability. As of December 31, 1997, all outstanding
derivative transactions were with counterparts with credit ratings of A-2 or
better. Enforceable bilateral netting contracts between First American and its
counterparts allow for the netting of gains and losses in determining net credit
exposure to the counterpart. First American's net credit exposure on outstanding
interest rate swaps was $14.1 million on December 31, 1997.
LIQUIDITY
First American's goal in liquidity management is to ensure that
sufficient funds are available to meet the demands of depositors, borrowers, and
creditors. ALCO is responsible for structuring the balance sheet to meet these
demands and regularly reviews current and forecasted funding needs. Liquid
assets, which include cash and cash equivalents (less Federal Reserve Bank
reserve requirements), money market instruments, and securities that are
estimated to mature within one year, amounted to $1.36 billion, or 8 percent of
earning assets, at December 31, 1997, versus $1.61 billion, or 11 percent of
earning assets at December 31, 1996. The decrease in the ratio of liquid assets
to earning assets between year-end 1997 and 1996 was primarily attributable to
decreases in HTM securities estimated to mature within one year and in cash and
due from banks. In addition to assets included in liquid assets, AFS securities
maturing after one year, which can be sold to meet liquidity needs, had a
balance of $3.29 billion at December 31, 1997 compared to $3.07 billion at
December 31, 1996. Loans, exclusive of consumer loans, maturing within one year
amounted to $2.43 billion at December 31, 1997. NOTES 1 and 4 to the
consolidated financial statements discuss accounting for securities in further
detail. Maturity of securities is also discussed under the caption "Investment
Securities" and provided in TABLE 5. TABLE 6 presents the maturities of loans,
exclusive of consumer loans.
First American's primary sources of liquidity are core deposits, short-
and long-term borrowings, and cash flows from operations. First American's
strategy is to fund assets to the maximum extent possible with core deposits,
which provide a sizable source of relatively stable and low-cost funds.
Management monitors liquidity by reviewing trends in ratios such as core
deposits as a percentage of total deposits, core deposits as a percentage of
earning assets, and loans as a percentage of core deposits. Core deposits
averaged $11.73 billion during 1997 and $11.02 billion during 1996 and comprised
90 percent and 91 percent of average deposits in 1997 and 1996, respectively.
During 1995 core deposits averaged $9.94 billion and comprised 90 percent of
average deposits. Core deposits funded 76 percent, 77 percent, and 77 percent of
earning assets in 1997, 1996, and 1995, respectively. Average loans as a
percentage of average core deposits was 96 percent in 1997 compared to 93
percent in 1996 due to growth in loans exceeding core deposit growth. Average
loans as a percentage of average core deposits was 89 percent in 1995.
23
<PAGE> 24
Short-term funding needs can arise from declines in deposits or other
funding sources, drawdowns of loan commitments, and requests for new loans.
Relationships with a stable and growing customer base and a current network of
over 300 downstream correspondent banks routinely supply some of these funds.
Additional funds, if needed, can be raised from regional, national, and
international money markets. Short-term funding sources, comprised of non-core
deposits and short-term borrowings, totaled $3.46 billion, or 19 percent of
total assets, at December 31, 1997, compared with $3.04 billion, or 18 percent
of total assets, at December 31, 1996. An analysis of short-and long-term
borrowings can be found under the caption "Deposits and Other Borrowed Funds."
Shareholders' equity and long-term debt also contribute to liquidity by
reducing the need to continually rely on short-term purchased funds. At December
31, 1997, the ratio of equity to assets was 8.66 percent compared with 8.63
percent at December 31, 1996, and 8.49 percent at December 31, 1995. Long-term
debt totaled 3 percent of total assets at December 31, 1997, 1996, and 1995.
An additional source of liquidity is First American's three-year $70
million revolving credit agreement which will expire in May 31, 1998. First
American had no borrowings under this agreement during 1997. Plans are underway
to negotiate a revolving credit agreement in 1998.
The SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS show net cash
provided or used by operating, investing, and financing activities and the net
effect of those activities on cash and cash equivalents. As such, it is a tool
in analyzing liquidity. During 1997 cash provided by operating activities was
$243 million compared to $337 million in 1996 and $65 million in 1995. The
largest component of cash provided by operating activities in all years was net
income. Investing activities utilized $421 million of cash in 1997, $889 million
in 1996, and $385 million in 1995. The largest component of cash used in
investing activities in 1997 and 1996 was purchases of securities available for
sale, which used $3.2 billion of cash in 1997 and $3.6 billion in 1996.
Financing activities provided $105 million in net cash in 1997, $191 million in
1996, and $704 million in 1995. During 1997 financing activities included an
increase in FHLB advances of $301 million, an increase in deposits of $91
million, and a decrease of $197 million from cash utilized to purchase First
American common stock.
First American had no material capital expenditure commitments at
year-ends 1997, 1996, or 1995.
Management believes that First American has adequate liquidity to meet
all known commitments including common stock repurchases, loan commitments,
dividend payments, debt service, and reasonable borrower, depositor, and
creditor requirements over the next twelve months.
24
<PAGE> 25
- -----------------------------------------
CAPITAL MANAGEMENT AND CAPITAL RESOURCES
- -----------------------------------------
Capital adequacy is important to the continued soundness,
profitability, and growth of First American. The principal objectives of First
American's strategy in managing capital are to (1) protect shareholders and
depositors, (2) comply with all regulatory requirements, (3) improve
profitability, and (4) utilize excess capital. Plans to utilize excess capital
include investing in nontraditional financial services businesses that yield
returns in excess of 20 percent, focusing on bank acquisitions to further
enhance the branch network and lower distribution costs, and returning excess
capital to shareholders through buying back stock and increasing dividends.
On April 17, 1997, in addition to authorizing a 2-for-1 stock split,
the Board of Directors increased the quarterly cash dividend by 29 percent to
$0.20 per share. During 1997 First American paid dividends at the rate of $0.755
per common share, up 25 percent from $0.605 per share during 1996. The rate of
dividends paid per common share was up 14 percent in 1996 over $0.53 per share
in 1995. The dividend payout ratio increased slightly in 1997 to 33.86 percent
from 30.87 percent in 1996 and met management's strategic goal of a dividend
payout ratio in the range of 30 to 40 percent. The dividend payout rate in 1995
was 30.64 percent.
Another strategic goal of First American's capital management policy is
to maintain the rate of internal capital generation at a level sufficient to
ensure growth in assets and earnings. Management's year 2000 strategic goal is
to maintain an internal capital generation ratio (calculated by dividing net
income less dividends by the average realized shareholders' equity) of 10 to 14
percent. During 1997 the internal capital generation ratio increased to 10.7
percent from 10.2 percent in 1996. The internal capital generation ratio was
10.3 percent in 1995.
Total shareholders' equity at December 31, 1997, was $1.54 billion, up
6 percent, from December 31, 1996. This followed an increase of $115.4 million,
or 9 percent, from year-end 1995. The ratio of average equity to average assets
increased to 8.79 percent in 1997 compared to 8.77 percent in 1996 and 8.50
percent in 1995. The tangible equity ratio, which adjusts capital for the impact
of intangibles acquired through acquisitions, decreased to 7.17 percent at
December 31, 1997, from 7.32 percent at year-end 1996. The tangible equity ratio
was 7.50 percent at December 31, 1995.
During 1997 shareholders' equity was increased by $159.8 million of
earnings retention ($237.8 million of net income less $78.0 million of
dividends), $94.6 million of common stock issued for bank acquisitions, $22.1
million of common stock issued for employee benefit and dividend reinvestment
plans, and $4.7 million change in net unrealized gains and losses on securities
available for sale, net of tax. Shareholders' equity was reduced by the
repurchase of $196.5 million of common stock in 1997. During 1996 shareholders'
equity was increased by $141.5 million of earnings retention ($205.2 million of
net income less $63.7 million of dividends), $17.9 million of common stock
issued for employee benefit and dividend reinvestment plans, and $83.7 million
of common stock issued for acquisitions. Shareholders' equity was reduced by the
$25.6 million change in net unrealized gains and losses on securities available
for sale, net of tax, and by the repurchase of $108.2 million of common stock in
1996.
25
<PAGE> 26
The CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY detail the
changes in shareholders' equity during 1997, 1996, and 1995 and NOTES 1 and 4 to
the consolidated financial statements provide further information regarding
unrealized gains and losses on securities available for sale.
The Federal Reserve Board and the Office of the Comptroller of the
Currency ("OCC") promulgate risk-based capital guidelines and regulations for
bank holding companies and national banks which require minimum levels of
capital based upon calculations which apply various risk ratings to defined
categories of assets and to certain off-balance-sheet items. Under the
risk-based capital requirements, total capital consists of Tier I capital
(essentially realized common equity less disallowed intangible assets) plus Tier
II capital (essentially Tier I capital plus qualifying long-term debt and a
portion of the allowance for loan losses). Assets by type, or category, are
assigned risk-weights of 0 to 100 percent, depending on regulatory assigned
levels of credit risk associated with such assets. Off-balance-sheet items are
considered in the calculation of risk-adjusted assets through conversion factors
established by regulatory agencies. These regulations require bank holding
companies and national banks to maintain certain minimum capital ratios. As of
December 31, 1997, First American and its principal subsidiary, FANB, had ratios
which exceeded the regulatory requirements to be classified as "well
capitalized," the highest regulatory capital rating. NOTE 15 to the consolidated
financial statements summarizes the risk-based capital and related ratios for
First American and FANB.
FAFSB is subject to capital requirements adopted by the Office of
Thrift Supervision ("OTS") which are similar but not identical to those issued
by the Federal Reserve Board and the OCC. As of December 31, 1997, FAFSB had
ratios which exceeded the regulatory requirements to be classified as "well
capitalized."
26
<PAGE> 27
SUPPLEMENTAL TABLE 2: RATE-VOLUME RECAP
<TABLE>
<CAPTION>
===============================================================================================================================
1997 FROM 1996 1996 from 1995
-------------------------------------- -----------------------------------
INCREASE (DECREASE)(1) Increase (Decrease)(1)
TOTAL DUE TO Total Due to
INCREASE ---------------------- Increase ----------------------
(in millions) (DECREASE) VOLUME RATE (Decrease) Volume Rate
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN INTEREST INCOME:
Securities:
Taxable
Held to maturity $ (8.9) $ (10.6) $ 1.7 $ (119.4) $ (119.3) $ (.1)
Available for sale 37.7 30.8 6.9 109.9 106.5 3.4
Tax-exempt
Held to maturity .3 .3 -- (10.8) (9.9) (.9)
Available for sale (1.4) (1.8) .4 15.2 13.1 2.1
---------- ----------
Total securities 27.7 19.9 7.8 (5.1) (2.9) (2.2)
---------- ----------
Loans 81.6 79.3 2.3 113.6 121.4 (7.8)
Federal funds sold and securities purchased
under agreements to resell (11.7) (11.9) .2 6.4 8.1 (1.7)
Other 1.1 1.0 .1 .4 -- .4
---------- ----------
Total change in interest income 98.7 81.6 17.1 115.3 121.0 (5.7)
---------- ----------
CHANGE IN INTEREST EXPENSE:
NOW, money market, and savings accounts 4.5 12.4 (7.9) 22.3 15.3 7.0
Certificates of deposit 14.1 13.9 .2 25.3 25.9 (.6)
Other interest-bearing deposits (.7) .4 (1.1) 4.2 4.8 (.6)
Short-term borrowings 13.2 10.7 2.5 (1.8) 6.2 (8.0)
Long-term debt (1.1) 1.5 (2.6) 9.1 9.0 .1
---------- ----------
Total change in interest expense 30.0 39.4 (9.4) 59.1 57.8 1.3
---------- ----------
CHANGE IN NET INTEREST INCOME $ 68.7 42.2 26.5 $ 56.2 63.2 (7.0)
===============================================================================================================================
</TABLE>
(1) Amounts are adjusted to a fully taxable basis, based on the statutory
federal income tax rates, adjusted for applicable state income taxes net of
the related federal tax benefit. The effect of volume change is computed by
multiplying the change in volume by the prior year rate. The effect of rate
change is computed by multiplying the change in rate by the prior year
volume. Rate/volume change is computed by multiplying the change in volume
by the change in rate and included in the rate change.
27
<PAGE> 28
SUPPLEMENTAL TABLE 3: CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT
INCOME/EXPENSE AND YIELDS/RATES
<TABLE>
<CAPTION>
======================================================================================================================
1997 1996
--------------------------------- -----------------------------------
AVERAGE Average
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
(dollars in millions) BALANCE EXPENSE RATE Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:(1)
Taxable securities:
Held to maturity $ 836.2 $ 58.1 6.95% $ 992.9 $ 67.0 6.75%
Available for sale 2,958.4 201.5 6.81 2,490.0 163.8 6.58
Tax-exempt securities
Held to maturity 36.4 2.7 7.42 32.2 2.4 7.46
Available for sale 166.6 15.2 9.12 186.9 16.6 8.88
- ---------------------------------------------------------------------------------------------------------------------
Total securities 3,997.6 277.5 6.94 3,702.0 249.8 6.75
- ---------------------------------------------------------------------------------------------------------------------
Federal funds sold and repurchase agreements 103.6 5.8 5.60 324.1 17.5 5.40
Loans, net of unearned discount
Commercial 4,342.3 355.8 8.19 3,922.0 327.0 8.34
Consumer-amortizing mortgages 2,751.7 223.7 8.13 2,661.0 209.2 7.86
Consumer-other 2,410.4 222.9 9.25 2,170.5 197.1 9.08
Real estate-construction 391.0 32.4 8.29 348.3 28.4 8.15
Real estate-commercial mortgages
and other 1,315.9 119.7 9.10 1,175.7 111.2 9.46
- ---------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount 11,211.3 954.5 8.51 10,277.5 872.9 8.49
- ---------------------------------------------------------------------------------------------------------------------
Other 84.8 5.4 6.37 69.0 4.3 6.23
- ---------------------------------------------------------------------------------------------------------------------
Total earning assets(1) 15,397.3 $1,243.2 8.07% 14,372.6 $1,144.5 7.96%
- ---------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (187.7) (191.4)
Cash and due from banks 841.0 757.8
Other assets 949.1 828.6
- ---------------------------------------------------------------------------------------------------------------------
Total assets $16,999.7 $ 15,767.6
=====================================================================================================================
DEPOSITS AND BORROWED FUNDS:
Demand deposits $ 2,453.6 $ 2,216.9
Interest-bearing deposits:
NOW accounts 1,843.5 $ 40.9 2.22% 1,652.6 $ 34.3 2.08%
Money market accounts 2,825.8 120.3 4.26 2,631.5 121.5 4.62
Regular savings 882.5 21.8 2.47 906.7 22.7 2.50
Certificates of deposit under $100,000 3,002.1 158.7 5.29 2,892.1 151.7 5.25
Certificates of deposit $100,000 and over 1,189.4 64.1 5.39 1,037.6 57.0 5.49
Other time 724.9 40.8 5.63 717.3 41.2 5.74
Foreign 105.2 5.4 5.13 105.8 5.7 5.39
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 10,573.4 452.0 4.27 9,943.6 434.1 4.37
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 13,027.0 12,160.5
- ---------------------------------------------------------------------------------------------------------------------
Federal funds purchased and repurchase
agreements 1,467.3 72.5 4.94 1,394.3 67.8 4.86
Other short-term borrowings 312.0 17.5 5.61 166.9 9.0 5.39
Long-term debt 446.2 28.0 6.28 424.7 29.1 6.85
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits and
borrowed funds 12,798.9 $ 570.0 4.45% 11,929.5 $ 540.0 4.53%
- ---------------------------------------------------------------------------------------------------------------------
Total deposits and borrowed funds 15,252.5 14,146.4
- ---------------------------------------------------------------------------------------------------------------------
Other liabilities 253.0 239.0
Shareholders' equity 1,494.2 1,382.2
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $16,999.7 $ 15,767.6
=====================================================================================================================
NET INTEREST INCOME(1) $ 673.2 $ 604.5
Provision for loan losses 12.5 5.3
Noninterest income 395.8 303.7
Noninterest expense 669.7 571.6
- ---------------------------------------------------------------------------------------------------------------------
Income before income tax expense and
cumulative effect of changes in
accounting principles 386.8 331.3
Income tax expense 149.0 126.1
- ---------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes
in accounting principles 237.8 205.2
Cumulative effect of changes in accounting
principles, net of tax -- --
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 237.8 $ 205.2
=====================================================================================================================
Net interest spread 3.62% 3.43%
Benefit of interest-free funding .75 .78
- ---------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.37% 4.21%
=====================================================================================================================
<CAPTION>
=======================================================================================
1995
-------------------------------------
Average
Average Income/ Yield/
(dollars in millions) Balance Expense Rate
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:(1) Taxable securities:
Held to maturity $ 2,759.7 $ 186.4 6.75%
Available for sale 836.9 53.9 6.44
Tax-exempt securities
Held to maturity 129.2 13.2 10.22
Available for sale 18.1 1.4 7.73
- ---------------------------------------------------------------------------------------
Total securities 3,743.9 254.9 6.81
- ---------------------------------------------------------------------------------------
Federal funds sold and repurchase agreements 187.4 11.1 5.92
Loans, net of unearned discount
Commercial 3,448.3 291.5 8.46
Consumer-amortizing mortgages 2,225.7 178.7 8.03
Consumer-other 1,873.5 168.0 8.97
Real estate-construction 276.2 24.7 8.94
Real estate-commercial mortgages
and other 1,036.9 96.4 9.30
- ---------------------------------------------------------------------------------------
Loans, net of unearned discount 8,860.6 759.3 8.57
- ---------------------------------------------------------------------------------------
Other 68.2 3.9 5.72
- ---------------------------------------------------------------------------------------
Total earning assets(1) 12,860.1 $1,029.2 8.00%
- ---------------------------------------------------------------------------------------
Allowance for loan losses (188.8)
Cash and due from banks 793.1
Other assets 673.2
- ---------------------------------------------------------------------------------------
Total assets $ 14,137.6
- ---------------------------------------------------------------------------------------
DEPOSITS AND BORROWED FUNDS:
Demand deposits $ 2,080.8
Interest-bearing deposits:
NOW accounts 1,582.3 $ 34.8 2.20%
Money market accounts 2,180.6 95.5 4.38
Regular savings 964.0 25.9 2.69
Certificates of deposit under $100,000 2,486.2 131.5 5.29
Certificates of deposit $100,000 and over 956.8 51.9 5.42
Other time 648.2 37.4 5.77
Foreign 91.4 5.3 5.80
- ---------------------------------------------------------------------------------------
Total interest-bearing deposits 8,909.5 382.3 4.29
- ---------------------------------------------------------------------------------------
Total deposits 10,990.3
- ---------------------------------------------------------------------------------------
Federal funds purchased and repurchase
agreements 1,331.4 71.6 5.38
Other short-term borrowings 115.8 7.0 6.04
Long-term debt 292.5 20.0 6.81
- ---------------------------------------------------------------------------------------
Total interest-bearing deposits and
borrowed funds 10,649.2 $ 480.8 4.51%
- ---------------------------------------------------------------------------------------
Total deposits and borrowed funds 12,730.0
- ---------------------------------------------------------------------------------------
Other liabilities 205.3
Shareholders' equity 1,202.3
- ---------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 14,137.6
=======================================================================================
NET INTEREST INCOME(1) $ 548.4
Provision for loan losses 2.2
Noninterest income 203.0
Noninterest expense 463.9
- ---------------------------------------------------------------------------------------
Income before income tax expense and
cumulative effect of changes in
accounting principles 285.3
Income tax expense 109.6
- ---------------------------------------------------------------------------------------
Income before cumulative effect of changes
in accounting principles 175.7
Cumulative effect of changes in accounting
principles, net of tax --
- ---------------------------------------------------------------------------------------
NET INCOME $ 175.7
=======================================================================================
Net interest spread 3.49%
Benefit of interest-free funding .77
- ---------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.26%
=======================================================================================
</TABLE>
(1) Loan fees and amortization of net deferred loan fees (costs), which are
considered an integral part of the lending function and are included in
yields and related interest categories, amounted to $6.6 million in 1997,
$9.4 million in 1996, $6.7 million in 1995, $4.8 million in 1994, and $1.7
million in 1993. Yields/rates and income/expense amounts are presented on a
fully taxable equivalent basis based on the statutory federal income tax
rates, adjusted for applicable state income taxes net of the related federal
tax benefit; related interest income includes taxable equivalent adjustments
of $11.1 million in 1997, $11.3 million in 1996, $9.4 million in 1995,
28
<PAGE> 29
<TABLE>
<CAPTION>
==========================================================================================================================
1994 1993 AVERAGE BALANCE INCOME/EXPENSE
- ----------------------------- ---------------------------------- -------------------------- -----------------------
Average Average COMPOUND COMPOUND
Average Income/ Yield/ Average Income/ Yield/ % CHANGE GROWTH RATE % CHANGE GROWTH RATE
Balance Expense Rate Balance Expense Rate 1997/1996 1997/1992 1997/1996 1997/1992
- --------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 2,059.4 $127.1 6.17% $ 1,623.0 $107.8 6.64% (15.78)% (22.61)% (13.28)% (23.50)%
1,415.2 79.4 5.61 2,205.4 136.5 6.19 18.81 57.59 23.02 48.29
129.1 13.3 10.30 125.5 13.7 10.92 13.04 (28.93) 12.45 (32.02)
1.8 .1 5.56 2.4 .3 12.50 (10.86) 156.52 (8.43) 173.13
- --------------------------------------------------------------------------------------------------------------------------
3,605.5 219.9 6.10 3,956.3 258.3 6.53 7.98 2.58 11.09 .66
- --------------------------------------------------------------------------------------------------------------------------
348.0 14.2 4.08 429.2 13.5 3.15 (68.03) (28.58) (66.86) (22.62)
2,875.2 212.6 7.39 2,455.9 168.4 6.86 10.72 11.64 8.81 15.22
1,803.1 140.6 7.80 1,550.6 127.0 8.19 3.41 16.11 6.93 13.08
1,650.2 137.6 8.34 1,490.8 128.5 8.62 11.05 11.19 13.09 10.57
197.0 15.1 7.66 176.9 13.5 7.63 12.26 10.46 14.08 12.10
904.2 74.5 8.24 831.6 67.0 8.06 11.92 9.38 7.64 11.39
- --------------------------------------------------------------------------------------------------------------------------
7,429.7 580.4 7.81 6,505.8 504.4 7.75 9.09 12.20 9.35 12.95
- --------------------------------------------------------------------------------------------------------------------------
163.1 6.8 4.17 112.7 3.8 3.37 22.90 (21.23) 25.58 (14.33)
- --------------------------------------------------------------------------------------------------------------------------
11,546.3 $821.3 7.11% 11,004.0 $780.0 7.09% 7.13 7.63 8.62% 8.67%
- --------------------------------------------------------------------------------------------------------------------------
(201.0) (245.9) (1.93) (7.37)
797.9 780.5 10.98 2.46
588.7 614.3 14.54 8.34
- --------------------------------------------------------------------------------------------------------------------------
$12,731.9 $ 12,152.9 7.81% 7.63%
==========================================================================================================================
$ 2,055.2 $ 1,942.2 10.68% 6.61%
1,575.1 $ 31.5 2.00% 1,421.3 $ 29.8 2.10% 11.55 8.62 19.24% 4.13%
1,857.1 67.6 3.64 1,761.9 55.9 3.17 7.38 8.65 (.99) 13.88
1,065.0 25.5 2.39 1,006.3 25.3 2.51 (2.67) .24 (3.96) (5.29)
2,244.9 93.8 4.18 2,289.3 97.6 4.26 3.80 3.45 4.61 3.78
707.2 28.8 4.07 730.3 28.1 3.85 14.63 8.31 12.46 10.56
643.1 33.6 5.22 672.8 38.5 5.72 1.06 .83 (.97) (1.68)
41.0 1.7 4.15 25.8 .7 2.71 (.57) 40.38 (5.26) 50.47
- --------------------------------------------------------------------------------------------------------------------------
8,133.4 282.5 3.47 7,907.7 275.9 3.49 6.33 5.73 4.12 5.83
- --------------------------------------------------------------------------------------------------------------------------
10,188.6 9,849.9 7.13 5.89
- --------------------------------------------------------------------------------------------------------------------------
1,105.3 41.0 3.71 1,107.6 29.9 2.70 5.24 7.36 6.93 17.19
87.7 4.1 4.68 54.5 1.7 3.12 86.94 65.67 94.44 85.35
109.0 7.1 6.51 60.1 4.3 7.15 5.06 79.12 (3.78) 69.52
- --------------------------------------------------------------------------------------------------------------------------
9,435.4 $334.7 3.55% 9,129.9 $311.8 3.42% 7.29 7.10 5.56% 8.67%
- --------------------------------------------------------------------------------------------------------------------------
11,490.6 11,072.1 7.82 7.02
- --------------------------------------------------------------------------------------------------------------------------
167.1 162.4 5.86 11.59
1,074.2 918.4 8.10 14.54
- --------------------------------------------------------------------------------------------------------------------------
$12,731.9 $ 12,152.9 7.81% 7.63%
==========================================================================================================================
$486.6 $468.2 11.36% 8.67%
(14.7) (57.4) 135.85 (24.09)
181.2 166.6 30.33 21.66
419.3 419.8 17.16 10.60
- --------------------------------------------------------------------------------------------------------------------------
263.2 272.4 16.75 22.80
98.9 98.4 18.16 26.06
- --------------------------------------------------------------------------------------------------------------------------
164.3 174.0 15.89 21.00
-- (.1) -- --
- --------------------------------------------------------------------------------------------------------------------------
$164.3 $173.9 15.89% 21.00%
==========================================================================================================================
3.56% 3.67%
.65 .58
- --------------------------------------------------------------------------------------------------------------------------
4.21% 4.25%
==========================================================================================================================
</TABLE>
$8.9 million in 1994, and $9.8 million in 1993. Nonaccrual and restructured
loans are included in average loans and average earning assets. Consequently,
yields on these items are lower than they would have been if these loans had
earned at their contractual rates of interest. Yields on all securities are
computed based on carrying value.
29
<PAGE> 30
SUPPLEMENTAL TABLE 4: INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
===================================================================================================================================
Interest-Sensitive Periods
-------------------------------------------------------------
Months
--------------------------------
Over Over
Three Six Total
Within Through Through One 1-5
(dollars in millions) Three Six Twelve Year Years
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
EARNING ASSETS:
Securities:
Available for sale $ 313.0 $ 131.9 $ 244.3 $ 689.2 $1,939.5
Held to maturity 81.9 32.7 63.3 177.9 369.7
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities 394.9 164.6 307.6 867.1 2,309.2
Loans 4,815.2 912.8 1,300.2 7,028.2 3,978.9
Other earning assets 267.5 -- -- 267.5 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets $5,477.6 $1,077.4 $1,607.8 $ 8,162.8 $6,288.1
===================================================================================================================================
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
NOW, money market, and savings accounts $5,615.2 $ -- $ -- $ 5,615.2 $ --
Certificates of deposit 1,577.5 999.2 1,008.3 3,585.0 731.9
Other interest-bearing deposits 347.7 90.7 113.1 551.5 260.7
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 7,540.4 1,089.9 1,121.4 9,751.7 992.6
Other borrowed funds 2,228.3 11.4 4.9 2,244.6 34.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 9,768.7 1,101.3 1,126.3 11,996.3 1,026.7
Net effect of swaps 78.8 125.6 (1,124.3) (919.9) 834.0
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $9,847.5 $1,226.9 $ 2.0 $11,076.4 $1,860.7
===================================================================================================================================
INTEREST-SENSITIVITY GAP:
For the indicated period $(4,369.9) $ (149.5) $1,605.8 $(2,913.6) $4,427.4
Cumulative (4,369.9) (4,519.4) (2,913.6) (2,913.6) 1,513.8
Cumulative, as a percent of total earning assets (27.3)% (28.2)% (18.2)% (18.2)% 9.4%
===================================================================================================================================
DECEMBER 31, 1996
EARNING ASSETS:
Securities:
Available for sale $ 423.1 $ 80.0 $ 156.9 $ 660.0 $1,504.2
Held to maturity 156.5 51.1 106.3 313.9 444.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities 579.6 131.1 263.2 973.9 1,948.3
Loans 3,515.0 876.7 1,125.5 5,517.2 4,090.5
Other earning assets 327.6 -- -- 327.6 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets $4,422.2 $1,007.8 $1,388.7 $ 6,818.7 $6,038.8
===================================================================================================================================
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
NOW, money market, and savings accounts $5,334.7 $ -- $ -- $ 5,334.7 $ --
Certificates of deposit 1,086.1 984.9 985.5 3,056.5 1,090.3
Other interest-bearing deposits 585.5 34.0 46.2 665.7 116.9
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 7,006.3 1,018.9 1,031.7 9,056.9 1,207.2
Other borrowed funds 1,793.2 19.6 65.8 1,878.6 42.0
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 8,799.5 1,038.5 1,097.5 10,935.5 1,249.2
Net effect of swaps (577.0) 101.0 (400.0) (876.0) 806.8
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $8,222.5 $1,139.5 $ 697.5 $10,059.5 $2,056.0
===================================================================================================================================
INTEREST-SENSITIVITY GAP:
For the indicated period $(3,800.3) $ (131.7) $ 691.2 $(3,240.8) $3,982.8
Cumulative (3,800.3) (3,932.0) (3,240.8) (3,240.8) 742.0
Cumulative, as a percent of total earning assets (25.2)% (26.1)% (21.5)% (21.5)% 4.9%
===================================================================================================================================
<CAPTION>
Over 5
(dollars in millions) Years Total
- -------------------------------------------------------------------------------------------
DECEMBER 31, 1997
EARNING ASSETS:
Securities:
Available for sale $ 766.8 $ 3,395.5
Held to maturity 167.4 715.0
- -------------------------------------------------------------------------------------------
Total securities 934.2 4,110.5
Loans 634.6 11,641.7
Other earning assets -- 267.5
- -------------------------------------------------------------------------------------------
Total earning assets $1,568.8 $16,019.7
===========================================================================================
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
NOW, money market, and savings accounts $ -- $ 5,615.2
Certificates of deposit 3.1 4,320.0
Other interest-bearing deposits 10.3 822.5
- -------------------------------------------------------------------------------------------
Total interest-bearing deposits 13.4 10,757.7
Other borrowed funds 287.1 2,565.8
- -------------------------------------------------------------------------------------------
Total interest-bearing liabilities 300.5 13,323.5
Net effect of swaps 85.9 --
- -------------------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 386.4 $13,323.5
===========================================================================================
INTEREST-SENSITIVITY GAP:
For the indicated period $1,182.4 $ 2,696.2
Cumulative 2,696.2 2,696.2
Cumulative, as a percent of total earning assets 16.8% 16.8%
===========================================================================================
DECEMBER 31, 1996
EARNING ASSETS:
Securities:
Available for sale $ 985.8 $ 3,150.0
Held to maturity 211.8 969.8
- -------------------------------------------------------------------------------------------
Total securities 1,197.6 4,119.8
Loans 1,025.0 10,632.7
Other earning assets -- 327.6
- -------------------------------------------------------------------------------------------
Total earning assets $2,222.6 $15,080.1
===========================================================================================
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
NOW, money market, and savings accounts $ -- $ 5,334.7
Certificates of deposit 19.0 4,165.9
Other interest-bearing deposits .1 782.7
- -------------------------------------------------------------------------------------------
Total interest-bearing deposits 19.1 10,283.3
Other borrowed funds 207.4 2,128.0
- -------------------------------------------------------------------------------------------
Total interest-bearing liabilities 226.5 12,411.2
Net effect of swaps 69.2 --
- -------------------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 295.7 $12,411.2
===========================================================================================
INTEREST-SENSITIVITY GAP:
For the indicated period $1,926.9 $ 2,668.9
Cumulative 2,668.9 2,668.9
Cumulative, as a percent of total earning assets 17.7% 17.7%
===========================================================================================
</TABLE>
Each column includes earning assets and interest-bearing liabilities that are
estimated to mature or reprice within the respective time frame. All floating
rate balance sheet items are included as "within three months" regardless of
maturity. Non-earning assets (cash and due from banks, premises and equipment,
foreclosed properties, and other assets), noninterest-bearing liabilities
(demand deposits and other liabilities) and shareholders' equity are considered
to be noninterest-sensitive for purposes of this presentation and thus are not
included in the above table.
In the table, all NOW, money market, and savings accounts are reflected as
interest-sensitive within three months. NOW accounts, savings, and certain money
market accounts are not totally interest-sensitive in all interest rate
environments. If NOW and regular savings accounts were not considered
interest-sensitive, the one year cumulative net liability interest-sensitive gap
position and percent of earning assets would be $174.4 million and (1.1)%,
respectively, for 1997, as compared to a net liability interest-sensitive gap
position and percent of earning assets of $638.7 million and (4.2)%,
respectively, for 1996.
30
<PAGE> 31
SUPPLEMENTAL TABLE 5: SECURITY PORTFOLIO ANALYSIS
<TABLE>
<CAPTION>
====================================================================================================================
Estimated Maturity at December 31, 1997
--------------------------------------------------------------------------------
Within 1 Year 1-5 Years 5-10 Years After 10 Years
--------------------------------------------------------------------------------
(dollars in millions) Amount Yield Amount Yield Amount Yield Amount Yield
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:(1)
U.S. Gov. agencies and
corporations:
Mortgage-backed $ 173.2 6.80% $ 244.1 7.17% $ 3.4 8.01% $ 1.4 7.00%
Other 10.4 5.01 17.1 5.73 -- -- -- --
Obligations of states and
political subdivisions(2) 3.8 5.69 10.7 6.08 6.5 6.47 21.7 6.05
Other debt securities:
Mortgage-backed 30.3 6.80 74.6 6.93 -- -- -- --
Other 6.8 6.82 10.5 6.73 100.5 7.99 -- --
- --------------------------------------------------------------------------------------------------------------------
Total debt securities
held to maturity $ 224.5 6.70% $ 357.0 7.00% $ 110.4 7.90% $ 23.1 6.11%
====================================================================================================================
SECURITIES AVAILABLE FOR SALE:(1)
U.S. Gov. agencies and
corporations:
Mortgage-backed $ 75.5 7.13% $ 1,937.5 7.09% $ 208.9 7.11% $ 11.3 7.10%
Other 20.4 6.58 250.1 6.77 220.3 6.88 69.8 7.64
Obligations of states and
political subdivisions(2) 8.9 10.19 35.6 8.83 53.2 7.74 81.3 8.78
Other debt securities:
Mortgage-backed -- -- 334.8 6.92 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total debt securities
available for sale $ 104.8 7.28% $ 2,558.0 7.06% $ 482.4 7.07% $162.4 8.17%
====================================================================================================================
Total equity securities
Total securities available
for sale
====================================================================================================================
TOTAL SECURITIES:
Total debt securities $ 329.3 6.88% $ 2,915.0 7.05% $ 592.8 7.22% $185.5 7.91%
====================================================================================================================
Total equity securities
Total securities
====================================================================================================================
<CAPTION>
=====================================================================================
Estimated Maturity at December 31, 1997
-------------------------------------------------
Total Fair Average Average
Amortized Cost Value Maturity Repricing
-------------------------------------------------
(dollars in millions) Amount Yield Amount Years Years
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:(1)
U.S. Gov. agencies and
corporations:
Mortgage-backed $ 422.1 7.03% $ 424.3 1.8 1.8
Other 27.5 5.46 27.3 .8 .4
Obligations of states and
political subdivisions(2) 42.7 6.09 44.3 9.7 9.7
Other debt securities:
Mortgage-backed 104.9 6.89 104.6 1.7 1.6
Other 117.8 7.81 122.7 5.2 .1
- -------------------------------------------------------------------------------------
Total debt securities
held to maturity $ 715.0(3) 7.02% $ 723.2 2.7 1.8
=====================================================================================
SECURITIES AVAILABLE FOR SALE:(1)
U.S. Gov. agencies and
corporations:
Mortgage-backed $2,233.2 7.09% $2,233.8 3.6 3.4
Other 560.6 6.91 560.0 1.7 1.7
Obligations of states and
political subdivisions(2) 179.0 8.55 182.7 8.5 8.5
Other debt securities:
Mortgage-backed 334.8 6.92 333.7 4.3 4.3
- ------------------------------------------------------------------------------------
Total debt securities
available for sale 3,307.6 7.12% 3,310.2 3.6 3.2
==================================== ============ ====================
Total equity securities 85.3 85.3
-------- --------
Total securities available
for sale $3,392.9 $3,395.5(3)
====================================================================================
TOTAL SECURITIES:
Total debt securities $4,022.6 7.10% $4,033.4 3.4 3.0
==================================== ============ ====================
Total equity securities 85.3 85.3
-------- --------
Total securities $4,107.9 $4,118.7
====================================================================================
</TABLE>
(1) Yields on all securities were computed based on carrying value.
(2) Yields presented on a taxable equivalent basis, based on the statutory
federal income tax rate, adjusted for applicable state income taxes net
of the related federal tax benefit.
(3) Securities held to maturity were reported on the consolidated balance
sheet at amortized cost and securities available for sale were reported
on the consolidated balance sheet at fair value for a combined carrying
value of $4,110.5 million.
31
<PAGE> 32
SUPPLEMENTAL TABLE 6: MATURITIES OF LOANS, EXCLUSIVE OF CONSUMER LOANS
<TABLE>
<CAPTION>
========================================================================================================
Maturities at December 31, 1997
-------------------------------------------------------
Within 1-5 After
(dollars in millions) 1 Year Years 5 Years Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial loans $1,830.4 $2,185.1 $ 555.4 $4,570.9
Real estate--construction loans 183.9 140.0 76.6 400.5
Real estate--commercial mortgages
and other 411.9 499.4 463.4 1,374.7
- --------------------------------------------------------------------------------------------------------
Total $2,426.2 $2,824.5 $1,095.4 $6,346.1
========================================================================================================
For maturities over one year:
Loans with fixed interest rates $1,763.1 $ 729.3 $2,492.4
Loans with floating interest rates 1,061.4 366.1 1,427.5
- --------------------------------------------------------------------------------------------------------
Total $2,824.5 $1,095.4 $3,919.9
========================================================================================================
</TABLE>
32
<PAGE> 33
SUPPLEMENTAL TABLE 7: ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
=========================================================================================================================
Year Ended December 31
-------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, January 1 $185,470 $191,134 $185,309 $ 198,544 $ 258,302
Loans charged off:
Commercial 19,214 10,100 4,661 11,784 13,390
Consumer--amortizing mortgages 2,242 1,995 1,679 1,700 2,660
Consumer--other 31,494 31,909 23,620 15,878 18,750
Real estate--construction 625 119 732 132 634
Real estate--commercial mortgages and other 725 1,616 380 1,331 1,883
- ------------------------------------------------------------------------------------------------------------------------
Total charge-offs 54,300 45,739 31,072 30,825 37,317
- ------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 6,626 12,655 7,607 12,939 15,596
Consumer--amortizing mortgages 1,376 1,475 1,638 1,753 2,700
Consumer--other 16,476 14,316 12,498 12,709 12,290
Real estate--construction 133 76 652 764 1,526
Real estate--commercial mortgages and other 3,762 2,025 1,034 2,136 1,556
- ------------------------------------------------------------------------------------------------------------------------
Total recoveries 28,373 30,547 23,429 30,301 33,668
- ------------------------------------------------------------------------------------------------------------------------
Net charge-offs 25,927 15,192 7,643 524 3,649
- ------------------------------------------------------------------------------------------------------------------------
Net change in allowance due to subsidiaries purchased/sold 8,000 4,188 11,225 1,547 1,296
Provision charged (credited) to operating expenses 12,500 5,340 2,243 (14,669) (57,405)
Adjustment for change in fiscal year of pooled company -- -- -- 411 --
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $180,043 $185,470 $191,134 $ 185,309 $ 198,544
========================================================================================================================
Allocation of allowance for loan losses, end of year:
Commercial $ 59,810 $ 58,387 $ 55,428 $ 52,447 $ 51,049
Consumer loans 40,702 42,278 36,603 35,914 46,221
Real estate 15,899 15,316 17,311 19,872 24,225
Unallocated/general 63,632 69,489 81,792 77,076 77,049
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $180,043 $185,470 $191,134 $ 185,309 $ 198,544
========================================================================================================================
Net charge-offs as a percent of average loans, net .23% .15% .09% .01% .06%
Allowance to net loans (end of year) 1.55 1.74 1.91 2.31 2.80
========================================================================================================================
Percent of total year-end loans:
Commercial 39.2% 38.7% 38.3% 40.0% 37.7%
Consumer--amortizing mortgages 23.9 25.5 26.0 23.8 25.5
Consumer--other 21.7 21.0 21.1 21.7 22.1
Real estate--construction 3.4 3.4 3.1 2.8 2.6
Real estate--commercial mortgages and other 11.8 11.4 11.5 11.7 12.1
- ------------------------------------------------------------------------------------------------------------------------
Total percent of year-end loans 100.0% 100.0% 100.0% 100.0% 100.0%
========================================================================================================================
</TABLE>
33
<PAGE> 34
SUPPLEMENTAL TABLE 8: NONPERFORMING ASSET ACTIVITY
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended December 31
----------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1 $ 45,248 $ 57,365 $ 53,180 $ 85,404 $ 147,840
Transfers in and new foreclosed properties 47,199 24,061 34,166 23,391 56,614
Change in nonperforming assets due to subsidiaries purchased 1,279 2,348 6,393 2,045 199
Payments received (18,881) (23,085) (28,196) (20,923) (69,649)
Proceeds from sales of foreclosed properties (12,910) (10,872) (11,426) (24,174) (31,714)
Net gains on sales 5,127 5,113 5,963 7,557 4,528
Charge-offs and writedowns (12,917) (7,871) (2,091) (10,740) (10,191)
Return to earning status (10,828) (1,811) (624) (8,232) (12,482)
Other -- -- -- (969) 259
Adjustment for change in fiscal year for pooled company -- -- -- (179) --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $ 43,317 $ 45,248 $ 57,365 $ 53,180 $ 85,404
====================================================================================================================================
<CAPTION>
DECEMBER 31
----------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 36,294 $ 32,716 $ 41,122 $ 37,230 $ 53,369
Restructured loans -- 694 -- -- 54
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 36,294 33,410 41,122 37,230 53,423
Foreclosed properties 7,023 11,838 16,243 15,950 31,981
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 43,317 $ 45,248 $ 57,365 $ 53,180 $ 85,404
====================================================================================================================================
Nonperforming assets to total loans plus foreclosed properties(1) .37% .43% .57% .66% 1.20%
====================================================================================================================================
90 days or more past due on accrual $ 26,875 $ 21,422 $ 10,890 $ 7,585 $ 7,699
====================================================================================================================================
</TABLE>
(1) Excludes loans 90 days or more past due on accrual.
34
<PAGE> 35
SUPPLEMENTAL TABLE 9: CERTIFICATES OF DEPOSIT $100,000 AND OVER
<TABLE>
<CAPTION>
===============================================================================
MATURITIES AT DECEMBER 31
------------------------------------
(IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
3 months or less $ 718,777 $ 661,653
Over 3 through 6 months 319,841 238,301
Over 6 through 12 months 232,178 200,953
Over 12 months 119,352 148,286
- -------------------------------------------------------------------------------
TOTAL $1,390,148 $1,249,193
===============================================================================
</TABLE>
SUPPLEMENTAL TABLE 10: QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
============================================================================================================
Three Months Ended
--------------------------------------------------------
(dollars in thousands except per share amounts) December 31 September 30 June 30 March 31
- ------------------------------------------------------------------------------------------------------------
1997
<S> <C> <C> <C> <C>
Net interest income $ 171,094 $ 165,747 $ 162,288 $ 162,994
Net interest income, taxable equivalent basis(1) 174,067 168,501 164,845 165,775
Provision for loan losses 6,875 1,875 1,875 1,875
Noninterest income 107,170 100,085 95,626 92,880
Noninterest expense 171,087 168,321 165,378 164,945
Net income 63,343 60,496 57,270 56,643
- ------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
Net income:
Basic $ .60 $ .57 $ .54 $ .52
Diluted .58 .56 .53 .51
Cash dividends paid .20 .20 .20 .155
Common stock price
High 55.38 50.13 40.00 34.63
Low 43.75 38.00 29.63 28.00
Last trade 49.75 48.88 38.38 31.81
- ------------------------------------------------------------------------------------------------------------
SELECTED RATIOS:
Return on average assets (annualized) 1.45 % 1.41 % 1.37 % 1.36 %
Return on average equity (annualized) 16.46 16.08 15.82 15.26
Net interest margin 4.39 4.34 4.36 4.40
============================================================================================================
1996
Net interest income $ 155,273 $ 152,235 $ 143,843 $ 141,910
Net interest income, taxable equivalent basis(1) 157,989 155,188 146,747 144,613
Provision for loan losses 1,335 1,335 1,335 1,335
Noninterest income 91,389 88,869 60,745 62,746
Noninterest expense 162,651 162,444 122,476 124,092
Net income 52,949 49,619 51,325 51,289
- ------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
Net income:
Basic $ .51 $ .47 $ .49 $ .49
Diluted .50 .46 .49 .48
Cash dividends paid .155 .155 .155 .14
Common stock price
High 29.38 24.13 22.81 24.25
Low 23.88 20.38 21.06 21.19
Last trade 28.81 24.00 21.06 22.25
- ------------------------------------------------------------------------------------------------------------
SELECTED RATIOS:
Return on average assets (annualized) 1.32 % 1.24 % 1.32 % 1.33 %
Return on average equity (annualized) 14.61 14.07 15.32 15.44
Net interest margin 4.32 4.26 4.14 4.10
============================================================================================================
</TABLE>
(1) Adjusted to a taxable equivalent basis based on the statutory federal
income tax rates, adjusted for applicable state income taxes net of the
related federal tax benefit.
35
<PAGE> 36
SUPPLEMENTAL TABLE 11: CONSOLIDATED YEAR-END BALANCE SHEETS
<TABLE>
<CAPTION>
===================================================================================================================================
December 31
-------------------------------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 987,520 $ 998,302 $ 865,550 $ 849,153 $ 832,451
Securities:
U.S. Treasury and other U.S. Government
agencies and corporations 3,243,447 3,499,549 2,956,035 3,309,827 3,708,044
Obligations of states and political
subdivisions 225,410 220,241 177,275 128,492 131,268
Other 641,664 400,114 338,691 233,814 46,982
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities 4,110,521 4,119,904 3,472,001 3,672,133 3,886,294
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 189,542 209,317 732,057 252,243 362,000
Loans:
Commercial 4,570,941 4,118,480 3,833,265 3,221,391 2,682,558
Consumer-amortizing mortgages 2,783,097 2,717,894 2,600,040 1,912,596 1,816,943
Consumer-other 2,524,577 2,239,558 2,116,345 1,747,035 1,572,801
Real estate-construction 400,557 361,451 309,264 227,016 183,441
Real estate-commercial mortgages and other 1,374,661 1,209,748 1,152,795 938,952 861,398
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 11,653,833 10,647,131 10,011,709 8,046,990 7,117,141
Unearned discount (12,101) (14,466) (12,072) (19,848) (31,757)
- -----------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount 11,641,732 10,632,665 9,999,637 8,027,142 7,085,384
Allowance for loan losses (180,043) (185,470) (191,134) (185,309) (198,544)
- -----------------------------------------------------------------------------------------------------------------------------------
Total net loans 11,461,689 10,447,195 9,808,503 7,841,833 6,886,840
- -----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 362,047 310,584 273,759 242,696 234,826
Other assets 723,117 720,708 576,020 558,630 410,533
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 17,834,436 $ 16,806,010 $ 15,727,890 $ 13,416,688 $ 12,612,944
===================================================================================================================================
LIABILITIES
Deposits:
Demand (noninterest-bearing) $ 2,647,765 $ 2,565,084 $ 2,378,146 $ 2,207,757 $ 2,126,404
Interest-bearing 10,757,692 10,283,284 9,802,041 8,146,682 7,955,861
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 13,405,457 12,848,368 12,180,187 10,354,439 10,082,265
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold
under agreements to repurchase 1,614,931 1,472,277 1,355,431 1,415,397 1,169,301
Other short-term borrowings 354,708 225,124 182,338 79,232 96,958
Long-term debt 596,218 430,562 421,791 271,473 77,053
Other liabilities 319,145 379,706 253,558 184,925 167,917
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 16,290,459 15,356,037 14,393,305 12,305,466 11,593,494
- -----------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock 265,080 262,775 261,070 246,457 242,930
Additional paid-in capital 163,902 239,661 241,213 200,169 199,621
Retained earnings 1,126,803 953,062 811,606 679,146 557,754
Deferred compensation on restricted stock (13,341) (2,066) (1,263) (2,161) (1,851)
Employee Stock Ownership Plan (163) (443) (661) (781) (1,053)
Net unrealized gains (losses) on securities
available for sale, net of tax 1,696 (3,016) 22,620 (11,608) 22,049
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,543,977 1,449,973 1,334,585 1,111,222 1,019,450
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,834,436 $ 16,806,010 $ 15,727,890 $ 13,416,688 $ 12,612,944
===================================================================================================================================
</TABLE>
36
<PAGE> 37
Independent Auditors' Report
The Board of Directors and Shareholders
First American Corporation:
We have audited the accompanying supplemental consolidated balance sheets of
First American Corporation and subsidiaries as of December 31, 1997 and 1996,
and the related supplemental consolidated income statements, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. These supplemental consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of First American Corporation and Deposit Guaranty Corp. on May 1,
1998 which has been accounted for as a pooling of interests as described in Note
2 to the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation. However, they will
become the historical consolidated financial statements of First American
Corporation and subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of First
American Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
KPMG PEAT MARWICK LLP
Nashville, Tennessee
July 10, 1998
37
<PAGE> 38
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED INCOME STATEMENTS
First American Corporation and Subsidiaries
- -------------------------------------------------------------------------------------------------------
Year Ended December 31
------------------------------------
(dollars in thousands except per share amounts) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 949,676 $ 867,897 $ 754,662
Interest and dividends on securities 271,441 243,853 250,437
Interest on federal funds sold and securities purchased under 5,779 17,525 11,128
agreements to resell
Interest on time deposits with other banks and other interest 5,235 4,025 3,647
- -------------------------------------------------------------------------------------------------------
Total interest income 1,232,131 1,133,300 1,019,874
- -------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 40,882 34,255 34,800
Money market accounts 120,253 121,545 95,448
Regular savings 21,808 22,719 25,959
Certificates of deposit under $100,000 158,725 151,689 131,521
Certificates of deposit $100,000 and over 64,143 56,994 51,902
Other time and foreign 46,169 46,914 42,677
- -------------------------------------------------------------------------------------------------------
Total interest on deposits 451,980 434,116 382,307
- -------------------------------------------------------------------------------------------------------
Interest on short-term borrowings (note 8) 90,067 76,839 78,543
Interest on long-term debt (note 9) 27,961 29,084 19,971
- -------------------------------------------------------------------------------------------------------
Total interest expense 570,008 540,039 480,821
- -------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 662,123 593,261 539,053
PROVISION FOR LOAN LOSSES (NOTE 5) 12,500 5,340 2,243
- -------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 649,623 587,921 536,810
- -------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Investment services income 123,431 68,364 15,525
Service charges on deposit accounts 113,461 93,170 80,629
Commissions and fees on fiduciary activities 38,787 34,312 31,364
Mortgage banking 25,071 20,169 12,700
Merchant discount fees 3,766 4,492 4,878
Net realized gain on sales of securities (note 4) 4,234 2,585 1,656
Trading account revenue 4,414 6,939 4,899
Gain on sales of branches (note 2) -- -- 3,000
Other 82,597 73,718 48,354
- -------------------------------------------------------------------------------------------------------
Total noninterest income 395,761 303,749 203,005
- -------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits (note 10) 329,882 297,036 255,465
Subscribers' commissions (note 1) 70,785 35,075 --
Net occupancy (note 6) 48,159 42,006 35,712
Equipment 42,785 35,070 31,882
Systems and processing (note 6) 15,662 14,755 11,389
Communication 25,731 20,684 17,205
Marketing 21,737 21,102 16,403
Supplies 14,678 12,710 10,329
FDIC insurance (note 15) 1,754 10,483 12,880
Merger-related (note 2) -- -- 7,269
Other 98,558 82,742 65,366
- -------------------------------------------------------------------------------------------------------
Total noninterest expense 669,731 571,663 463,900
- -------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 375,653 320,007 275,915
Income tax expense (note 11) 137,901 114,825 100,215
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 237,752 $ 205,182 $ 175,700
=======================================================================================================
PER COMMON SHARE (NOTE 13):
Net income:
Basic $ 2.23 $ 1.96 $ 1.73
Diluted 2.18 1.93 1.70
Dividends declared .755 .605 .53
=======================================================================================================
AVERAGE COMMON SHARES OUTSTANDING (note 13):
Basic 106,745 104,533 101,593
Diluted 108,950 106,092 103,300
=======================================================================================================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
38
<PAGE> 39
- -------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
First American Corporation and Subsidiaries
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
--------------------------
(dollars in thousands except per share amounts) 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks (note 3) $ 987,520 $ 998,302
Time deposits with other banks 13,463 55,533
Securities (note 4):
Held to maturity (fair value $723,228 and $977,767, respectively) 715,027 969,797
Available for sale (amortized cost $3,392,894 and $3,156,024, respectively) 3,395,494 3,150,107
- ---------------------------------------------------------------------------------------------------------------
Total securities 4,110,521 4,119,904
- ---------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under agreements to resell 189,542 209,317
Trading account securities 64,469 62,715
Loans (note 5):
Commercial 4,570,941 4,118,480
Consumer--amortizing mortgages 2,783,097 2,717,894
Consumer--other 2,524,577 2,239,558
Real estate--construction 400,557 361,451
Real estate--commercial mortgages and other 1,374,661 1,209,748
- ---------------------------------------------------------------------------------------------------------------
Total loans 11,653,833 10,647,131
Unearned discount (12,101) (14,466)
- ---------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount 11,641,732 10,632,665
Allowance for loan losses (180,043) (185,470)
- ---------------------------------------------------------------------------------------------------------------
Total net loans 11,461,689 10,447,195
- ---------------------------------------------------------------------------------------------------------------
Premises and equipment, net (note 6) 362,047 310,584
Other assets (notes 7, 10, and 11) 645,185 602,460
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 17,834,436 $ 16,806,010
===============================================================================================================
LIABILITIES
Deposits:
Demand (noninterest-bearing) $ 2,647,765 $ 2,565,084
NOW accounts 1,879,520 1,739,668
Money market accounts 2,875,958 2,732,810
Regular savings 859,690 862,253
Certificates of deposit under $100,000 2,929,845 2,916,709
Certificates of deposit $100,000 and over 1,390,148 1,249,193
Other time 718,349 685,394
Foreign 104,182 97,257
- ---------------------------------------------------------------------------------------------------------------
Total deposits 13,405,457 12,848,368
- ---------------------------------------------------------------------------------------------------------------
Short-term borrowings (note 8) 1,969,639 1,697,401
Long-term debt (note 9) 596,218 430,562
Other liabilities (notes 10 and 11) 319,145 379,706
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 16,290,459 15,356,037
- ---------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 6, 10, 14, and 15)
SHAREHOLDERS' EQUITY (NOTES 2, 4, 9, 10, 12, AND 15)
Preferred stock, without par value; authorized 2,500,000 shares -- --
Common stock, $2.50 par value; authorized 200,000,000 shares; issued:
106,032,013 shares at December 31, 1997; 105,109,909 shares at
December 31, 1996 265,080 262,775
Additional paid-in capital 163,902 239,661
Retained earnings 1,126,803 953,062
Deferred compensation on restricted stock (13,341) (2,066)
Employee stock ownership plan obligation (163) (443)
- ---------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 1,542,281 1,452,989
Net unrealized losses on securities available for sale, net of tax 1,696 (3,016)
- ---------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,543,977 1,449,973
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,834,436 $ 16,806,010
===============================================================================================================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
39
<PAGE> 40
- -------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
First American Corporation and Subsidiaries
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common
Shares
Issued Additional
and Common Paid-in Retained
(dollars in thousands except per share amounts) Outstanding Stock Capital Earnings
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994
Issuance of common shares in connection with Employee Benefit 98,582,780 $ 246,457 $ 200,169 $ 679,146
Plans, net of discount on Dividend Reinvestment Plan (note 10) 1,514,404 3,786 11,010 --
Issuance of shares of restricted common stock (note 12) 32,190 81 498 --
Repurchase of shares of common stock (6,385,902) (15,965) (95,142) --
Issuance of common shares for purchase of Charter Federal
Savings Bank (note 2) 3,530,470 8,826 71,547 --
Issuance of common shares for acquisitions of pooled company 7,154,061 17,885 49,557 8,580
Amortization of deferred compensation on restricted stock
(note 12) -- -- -- --
Reduction in employee stock ownership plan obligation (note 10) -- -- -- --
Net income -- -- -- 175,700
Cash dividends declared ($.53 per common share) -- -- -- (27,883)
Cash dividends declared by pooled companies -- -- -- (23,983)
Change in net unrealized gains (losses) on securities available
for sale, net of tax (note 4) -- -- -- --
Tax benefit from stock option and award plans -- -- 3,574 --
Other -- -- -- 46
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 104,428,003 261,070 241,213 811,606
- -----------------------------------------------------------------------------------------------------------------------
Issuance of common shares in connection with Employee Benefit
Plans, net of discount on Dividend Reinvestment Plan (note 10) 1,390,074 3,475 14,472 --
Issuance of shares of restricted common stock (note 12) 92,976 232 1,958 --
Repurchase of shares of common stock (4,922,297) (12,306) (95,943) --
Issuance of common shares for purchase of First City Bancorp,
Inc. (note 2) 2,147,518 5,369 40,937 --
Issuance of common shares for acquisitions of pooled company 1,974,829 4,937 32,512 (32)
Amortization of deferred compensation on restricted stock
(note 12) -- -- -- --
Reduction in employee stock ownership plan obligation (note 10) -- -- -- --
Net income -- -- -- 205,182
Cash dividends declared ($.605 per common share) -- -- -- (35,694)
Cash dividends declared by pooled company -- -- -- (28,000)
Change in net unrealized gains (losses) on securities available
for sale, net of tax (note 4) -- -- -- --
Tax benefit from stock option and award plans -- -- 4,530 --
Other (1,194) (2) (18) --
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 105,109,909 262,775 239,661 953,062
- -----------------------------------------------------------------------------------------------------------------------
Issuance of common shares in connection with Employee
Benefit Plans, net of discount on Dividend
Reinvestment Plan (note 10) 1,234,445 3,086 18,979 --
Issuance of shares of restricted common stock (note 12) 445,583 1,114 13,564 --
Repurchase of shares of common stock (6,268,784) (15,672) (180,828) --
Issuance of common shares for purchase of Hartsville
Bancshares, Inc. (note 2) 350,522 876 9,223 --
Issuance of common shares for acquisitions of pooled company 5,160,250 12,900 57,698 13,940
Amortization of deferred compensation on restricted stock
(note 12) -- -- -- --
Reduction in employee stock ownership plan obligation
(note 10) -- -- -- --
Net income -- -- -- 237,752
Cash dividends declared ($.755 per common share) -- -- -- (44,393)
Cash dividends declared by pooled company -- -- -- (33,558)
Change in net unrealized gains (losses) on securities
available for sale, net of tax (note 4) -- -- -- --
Tax benefit from stock option and award plans -- -- 5,603 --
Other 88 1 2 --
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 106,032,013 $ 265,080 $ 163,902 $1,126,803
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Net
Unrealized
Deferred Employee Gains
Compensation Stock (Losses) on
on Ownership Securities
(dollars in thousands except per share amounts) Stock Obligation for Sale Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ (2,161) $ (781) $ (11,608) $ 1,111,222
Issuance of common shares in connection with Employee Benefit
Plans, net of discount on Dividend Reinvestment Plan (note 10) -- -- -- 14,796
Issuance of shares of restricted common stock (note 12) (492) -- -- 87
Repurchase of shares of common stock -- -- -- (111,107)
Issuance of common shares for purchase of Charter Federal
Savings Bank (note 2) -- -- -- 80,373
Issuance of common shares for acquisitions of pooled company -- -- -- 76,022
Amortization of deferred compensation on restricted stock
(note 12) 1,390 -- -- 1,390
Reduction in employee stock ownership plan obligation (note 10) -- 120 -- 120
Net income -- -- -- 175,700
Cash dividends declared ($.53 per common share) -- -- -- (27,883)
Cash dividends declared by pooled companies -- -- -- (23,983)
Change in net unrealized gains (losses) on securities available
for sale, net of tax (note 4) -- -- 34,228 34,228
Tax benefit from stock option and award plans -- -- -- 3,574
Other -- -- -- 46
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 (1,263) (661) 22,620 1,334,585
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of common shares in connection with Employee Benefit
Plans, net of discount on Dividend Reinvestment Plan (note 10) -- -- -- 17,947
Issuance of shares of restricted common stock (note 12) (2,190) -- -- --
Repurchase of shares of common stock -- -- -- (108,249)
Issuance of common shares for purchase of First City Bancorp,
Inc. (note 2) -- -- -- 46,306
Issuance of common shares for acquisitions of pooled company -- -- -- 37,417
Amortization of deferred compensation on restricted stock
(note 12) 1,387 -- -- 1,387
Reduction in employee stock ownership plan obligation (note 10) -- 218 -- 218
Net income -- -- -- 205,182
Cash dividends declared ($.605 per common share) -- -- -- (35,694)
Cash dividends declared by pooled company -- -- -- (28,000)
Change in net unrealized gains (losses) on securities available
for sale, net of tax (note 4) -- -- (25,636) (25,636)
Tax benefit from stock option and award plans -- -- -- 4,530
Other -- -- -- (20)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 (2,066) (443) (3,016) 1,449,973
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of common shares in connection with Employee
Benefit Plans, net of discount on Dividend
Reinvestment Plan (note 10) -- -- -- 22,065
Issuance of shares of restricted common stock (note 12) (14,678) -- -- --
Repurchase of shares of common stock -- -- -- (196,500)
Issuance of common shares for purchase of Hartsville
Bancshares, Inc. (note 2) -- -- -- 10,099
Issuance of common shares for acquisitions of pooled company -- -- -- 84,538
Amortization of deferred compensation on restricted stock
(note 12) 3,403 -- -- 3,403
Reduction in employee stock ownership plan obligation
(note 10) -- 280 -- 280
Net income -- -- -- 237,752
Cash dividends declared ($.755 per common share) -- -- -- (44,393)
Cash dividends declared by pooled company -- -- -- (33,558)
Change in net unrealized gains (losses) on securities
available for sale, net of tax (note 4) -- -- 4,712 4,712
Tax benefit from stock option and award plans -- -- -- 5,603
Other -- -- -- 3
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $(13,341) $ (163) $ 1,696 $ 1,543,977
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
40
<PAGE> 41
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
First American Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31
---------------------------------------
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 237,752 $ 205,182 $ 175,700
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 12,500 5,340 2,243
Depreciation and amortization of premises and equipment 38,122 35,119 31,526
Amortization of intangible assets 29,717 20,315 14,417
Other amortization (accretion), net 1,929 (2,140) (28,223)
Deferred income tax expense 19,357 25,061 14,746
Net gain on sales and writedowns of foreclosed property (4,164) (4,991) (5,586)
Net realized gains on sales and write-downs of securities (4,234) (2,585) (1,656)
Net gain on sales and write-downs of premises and equipment (799) (131) (399)
Gain on sales of branches and other assets (4,347) -- (3,000)
Gain on sale of subsidiaries (2,105) -- --
Change in assets and liabilities, net of effects from acquisitions and
sales of branches:
Decrease (increase) in mortgage loans held for sale 3,372 9,821 (97,353)
(Increase) decrease in accrued interest receivable (10,506) 3,919 (31,851)
Increase (decrease) in accrued interest payable 10,049 (10,548) 25,277
Increase in trading account securities (7,077) (22,619) (18,398)
Increase in other assets (53,805) (8,461) (9,992)
(Decrease) increase in other liabilities (22,528) 83,750 (1,919)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 243,233 337,032 65,532
- -----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 2,625,181 2,125,045 1,531,941
Proceeds from maturities of securities available for sale 532,884 918,793 361,820
Purchases of securities available for sale (3,226,092) (3,614,276) (1,332,543)
Proceeds from maturities of securities held to maturity 452,650 261,450 1,089,987
Purchases of securities held to maturity (212,131) (168,211) (846,778)
Proceeds from sales of foreclosed property 16,099 16,007 12,998
Acquisitions, net of cash acquired 76,697 25,156 21,335
Proceeds from sale of subsidiary, net of cash disposed of 1,907 -- --
Sales of branches and other assets 6,091 -- (24,451)
Net increase in loans, net of repayments and sales (623,037) (391,972) (1,153,574)
Proceeds from sales of premises and equipment 7,075 6,176 1,999
Purchases of premises and equipment (78,249) (67,183) (48,118)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (420,925) (889,015) (385,384)
- -----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in deposits (90,620) 197,061 847,451
Net increase (decrease) in short-term borrowings 138,794 106,618 (69,179)
Proceeds from issuance of long-term debt -- 99,381 49,513
Repayment of line of credit to fund loans held for sale -- -- (32,954)
Advances from (repayments to) Federal Home Loan Bank 300,753 (64,166) 52,724
Net repayment of other long-term debt (350) (126) (1,116)
Proceeds from early termination of swap contract on long-term debt 2,038 -- --
Issuance of common shares under Employee Benefit and Dividend
Reinvestment Plans 22,065 17,947 14,883
Repurchase of common stock (196,500) (108,249) (111,107)
Tax benefit related to stock options 5,603 4,530 3,574
Cash dividends paid (76,718) (62,201) (50,146)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 105,065 190,795 703,643
- -----------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (72,627) (361,188) 383,791
Cash and cash equivalents, beginning of year 1,263,152 1,624,340 1,240,549
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,190,525 $ 1,263,152 $ 1,624,340
=======================================================================================================================
Cash paid during the year for:
Interest expense $ 559,959 $ 550,584 $ 455,544
Income taxes 98,402 89,613 72,597
Non-cash investing activities:
Foreclosures 5,357 3,614 4,770
Reclassification of investment securities (note 4) -- -- 1,822,027
Stock issued for acquisitions (note 2) 94,636 83,723 156,395
=======================================================================================================================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
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<PAGE> 42
- --------------------------------------------------------------------------------
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1: DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS
First American Corporation ("Corporation" or "First American") is the
Nashville, Tennessee based parent company of First American National Bank
("FANB"), First American Federal Savings Bank ("FAFSB"), G&W Life Insurance
Company, Central South Financial Services LLC, and First American Enterprises,
Inc. The Corporation and its subsidiaries make commercial, consumer, and real
estate loans and provide various banking and mortgage-related services to its
customers located within the Corporation's market, which consists primarily of
the Mid South region of the United States and Oklahoma, Nebraska, Texas,
Indiana, and Iowa.
FANB owns 98.5% of the issued and outstanding capital stock of IFC
Holdings, Inc. ("IFC"), formerly INVEST Financial Corporation, headquartered in
Tampa, Florida, which is engaged in the distribution of securities, investment,
and insurance products to customers of subscribing financial institutions
located throughout the country. IFC is a broker-dealer registered with the
National Association of Securities Dealers.
CONSOLIDATION AND BASIS OF PRESENTATION
The supplemental consolidated financial statements of the Corporation
have been prepared in conformity with generally accepted accounting principles
including general practices of the banking industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of related revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The supplemental consolidated financial statements include the accounts
of the Corporation and its subsidiaries more than 50 percent owned. Subsidiaries
not more than 50 percent owned are recorded under the equity method and included
in other assets. All significant intercompany accounts and transactions have
been eliminated in consolidation. The supplemental consolidated financial
statements for prior periods also reflect certain reclassifications to conform
to the 1997 presentation.
On May 9, 1997, the Corporation completed a 2-for-1 split of its common
stock. Accordingly, the supplemental consolidated financial statements for all
periods presented have been restated to reflect the impact of the stock split.
CASH AND CASH EQUIVALENTS
Cash and highly liquid investments with maturities of three months or
less when purchased are considered cash and cash equivalents. Cash and cash
equivalents consist primarily of cash and due from banks, interest-bearing
deposits in banks, and federal funds sold.
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<PAGE> 43
SECURITIES
The Corporation classifies investments in equity securities that have a
readily determinable fair value and investments in debt securities into three
categories: held to maturity debt securities, securities available for sale, and
trading securities.
Classification of a debt security as held to maturity is based on the
Corporation's intent and ability to hold such security to maturity. Securities
held to maturity are stated at cost adjusted for amortization of premiums and
accretion of discounts, unless there is a decline in value which is considered
to be other than temporary, in which case the cost basis of such security is
written down to fair value and the amount of the write-down is included in
earnings.
Securities classified as available for sale, which are reported at fair
value with unrealized gains and losses excluded from earnings and reported, net
of tax, in a separate component of shareholders' equity, include all securities
not classified as trading account securities or securities held to maturity.
These include securities used as part of the Corporation's asset/liability
strategy which may be sold in response to changes in interest rates, prepayment
risk, the need or desire to increase capital, and other similar factors. Gains
or losses on the sale of securities available for sale are recognized at the
time of sale (trade date), based upon the specific identification of the
security sold, and are included in noninterest income in the supplemental
consolidated income statements. Declines in value that are considered other than
temporary are recorded in noninterest income as a loss on investment securities.
Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading account securities,
which are valued at fair value with unrealized gains and losses included in
earnings. Gains or losses on sales and adjustments to the fair value of trading
account securities are included in noninterest income in the supplemental
consolidated income statements.
Purchased premiums and discounts are amortized and accreted into
interest income on a constant yield basis over the lives of the securities,
taking into consideration current prepayment projections.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation enters into interest rate swap and forward interest
rate swap transactions (swaps), as well as interest rate caps, floors, and
futures contracts, in connection with its asset/liability management program in
managing interest rate exposure arising out of nontrading assets and
liabilities. There must be correlation of interest rate movements between these
derivative instruments and the underlying assets or liabilities to qualify for
hedge accounting. The impact of a derivative is accrued over the life of the
agreement based on expected settlement payments and is recorded as an adjustment
to interest income or expense in the period in which it accrues and in the
category appropriate to the related asset or liability. The related amount
receivable from or payable to the derivative counterpart is included in other
assets or liabilities in the supplemental consolidated balance sheets. Realized
and unrealized gains and losses on futures contracts which are designated as
effective hedges of interest rate exposure arising out of nontrading assets and
liabilities are deferred and recognized as interest income or interest expense,
in the category
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<PAGE> 44
appropriate to the related asset or liability, over the covered periods or lives
of the hedged assets or liabilities. Gains or losses on early terminations of
derivative financial instruments that modify the underlying characteristics of
specified assets or liabilities are deferred and amortized as an adjustment to
the yield or rate of the related assets or liabilities over the remaining
covered period. At such time that there is no longer correlation of interest
rate movements between the derivative instrument and the underlying asset or
liability, or if all of the underlying assets or liabilities specifically
related to a derivative instrument matures, is sold or terminated, then the
related derivative instrument would be closed out or marked to market as an
element of noninterest income on an ongoing basis.
Interest rate contracts used in connection with the securities
available for sale portfolio are carried at fair value with gains and losses,
net of applicable deferred income taxes, reported in stockholders' equity,
consistent with the reporting of unrealized gains and losses on such securities.
Premiums paid for interest rate floors qualifying for hedge accounting are
deferred and classified with the assets and liabilities hedged and are amortized
into interest income or expense over the life of the instrument.
On a limited basis, the Corporation also enters into interest rate swap
agreements, as well as interest rate cap and floor agreements, with customers
desiring protection from possible adverse future fluctuations in interest rates.
As an intermediary, the Corporation generally maintains a portfolio of matched
offsetting interest rate contract agreements. At the inception of such
agreements, the portion of the compensation related to credit risk and ongoing
servicing, if any, is deferred and taken into income over the term of the
agreements.
LOANS
Loans are stated at the principal amount outstanding. Unearned
discount, deferred loan fees net of loan origination costs, and the allowance
for loan losses are shown as reductions of loans. Loan origination and
commitment fees and certain loan-related costs are being deferred and the net
amount amortized as an adjustment of the related loan's yield over the
contractual life of the loan. Unearned discount represents the unamortized
amount of finance charges, principally related to certain installment loans.
Interest income on loans is primarily accrued based on the principal amount
outstanding. Interest income on installment loans which have unearned discounts
is recognized primarily by the sum-of-the-month's digits method.
The Corporation identifies a loan as impaired when it is probable that
the Corporation will be unable to collect the scheduled payments of principal
and interest due under the contractual terms of the loan agreement. Impaired
loans are measured at the present value of expected future cash flows discounted
at the loan's effective interest rate, at the loan's observable market price, or
the fair value of the collateral if the loan is collateral dependent. If the
measure of the impaired loan is less than the recorded investment in the loan,
the Corporation shall recognize this impairment by creating a valuation
allowance with a corresponding charge to the provision for loan losses or by
adjusting an existing valuation allowance for the impaired loan with a
corresponding charge or credit to the provision for loan losses. The
Corporation's consumer loans are divided into various groups of smaller-balance
homogeneous loans that are collectively evaluated for impairment.
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<PAGE> 45
The Corporation considers all loans on nonaccrual status to be
impaired. Commercial loans are placed on nonaccrual status when doubt as to
timely collection of principal or interest exists, or when principal or interest
is past due 90 days or more unless such loans are well-secured and in the
process of collection. Delays or shortfalls in loan payments are evaluated along
with various other factors to determine if a loan is impaired. Generally,
delinquencies under 90 days are not considered impaired unless certain other
factors are present which indicate impairment is probable. The decision to place
a loan on nonaccrual status is also based on an evaluation of the borrower's
financial condition, collateral, liquidation value, and other factors that
affect the borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status, all
interest accrued and uncollected on the loan in the current fiscal year is
reversed from income, and all interest accrued and uncollected from the prior
year is charged off against the allowance for loan losses. Thereafter, interest
on nonaccrual loans is recognized as interest income only to the extent that
cash is received and future collection of principal is not in doubt. If the
collectibility of outstanding principal is doubtful, such interest received is
applied as a reduction of principal. A nonaccrual loan may be restored to an
accruing status when principal and interest are no longer past due and unpaid
and future collection of principal and interest on a timely basis is not in
doubt.
Loans not on nonaccrual status are classified as impaired in certain
cases when there is inadequate protection by the current net worth and financial
capacity of the borrower or of the collateral pledged, if any. In those cases,
such loans have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt, and if such deficiencies are not corrected, there is a
probability that the Corporation will sustain some loss. In such cases, interest
income continues to accrue as long as the loan does not meet the Corporation's
criteria for nonaccrual status.
The Corporation's charge-off policy for impaired loans is similar to
its charge-off policy for all loans in that loans are charged off in the month
when they are considered uncollectible. Consumer loans on which interest or
principal is past due more than 120 days are charged off.
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
ALLOWANCE FOR LOAN LOSSES
The provision for loan losses represents a charge to earnings
necessary, after loan charge-offs and recoveries, to maintain the allowance for
loan losses at an appropriate level which is adequate to absorb estimated losses
inherent in the loan portfolio. Such estimated losses arise primarily from the
loan portfolio but may also be derived from other sources, including commitments
to extend credit and standby letters of credit. The level of the allowance for
loan losses is determined on a quarterly basis using procedures which include:
(1) categorizing commercial and commercial real estate loans into risk
categories to estimate loss probabilities based primarily on the historical loss
experience of those risk categories; (2) analyzing significant commercial and
commercial real estate credits and calculating specific reserves as
45
<PAGE> 46
necessary; (3) assessing various homogeneous consumer loan categories to
estimate loss probabilities based primarily on historical loss experience; (4)
reviewing unfunded commitments; and (5) considering various other factors, such
as changes in credit concentrations, loan mix, and economic conditions which may
not be specifically quantified in the loan analysis process. 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.
OTHER REAL ESTATE OWNED
Other real estate owned is reported in other assets and consists
primarily of foreclosed properties. Foreclosed properties include property
acquired in situations in which the Corporation has physical possession of a
debtor's assets (collateral) regardless of whether formal foreclosure
proceedings have taken place. Other real estate owned also includes premises no
longer used for business operations.
Other real estate is valued at the lower of cost or fair value of the
assets minus estimated costs to sell. The fair value of the assets is the amount
that the Corporation could reasonably expect to receive for them in a current
sale between a willing buyer and a willing seller, that is, other than in a
forced or liquidation sale. Cost includes loan principal, foreclosure expense,
and expenditures for subsequent improvements. The excess of cost over fair value
minus estimated costs to sell at the time of foreclosure is charged to the
allowance for loan losses. Subsequent write-downs to fair value minus estimated
costs to sell are included in other real estate owned expense.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization, which is computed principally on the straight-line method
based on the estimated useful lives of the assets or the lease terms, whichever
is shorter.
On January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by the Corporation be reviewed for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use is based on the
fair market value of the asset. The statement requires that the majority of
long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
adoption of this statement had no effect on the supplemental consolidated
financial statements.
REPURCHASE AND RESALE AGREEMENTS; BONDS LOANED
The Corporation utilizes "repurchase agreements" (securities sold under
agreements to repurchase) to borrow funds from customers, security dealers, and
others. The Corporation uses "resale agreements" (securities purchased under
agreements to resell) to lend money to security
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<PAGE> 47
dealers and banks. The Corporation lends its own and its customers' securities
to security dealers both directly and through the intermediation of a major
money center bank. All such transactions are governed by policies approved by
the Board of Directors. These policies specify that repurchase, resale, and
bonds loaned transactions be subject to approved written agreements with the
counterparts; that each counterpart meet creditworthiness criteria; that each
transaction be confirmed in writing; that all transactions comply with
applicable law and regulation; and that the Corporation be fully secured
throughout the duration of each transaction. The Corporation perfects a security
interest in the counterpart's collateral either by taking direct delivery or
through the use of independent third party custodians. Collateral is valued
regularly and margin calls are issued to counterparts whenever deficiencies
occur. The Corporation deems its policies and procedures adequate to ensure that
loss in case of counterpart default would be minimal.
INTANGIBLES
For acquisitions accounted for as purchases, the net assets have been
adjusted to their estimated fair values as of the respective acquisition dates.
The value of core deposit rights and the excess of the purchase price of
subsidiaries over net assets acquired (goodwill) are being amortized on a
straight-line basis over periods ranging from ten to twenty years. Core deposit
rights and the excess of the purchase price of subsidiaries over net assets
acquired, net of amounts amortized, are included in other assets in the
supplemental consolidated balance sheets.
The carrying value of the excess of the purchase price of subsidiaries
over net assets acquired will be reviewed if the facts and circumstances suggest
that it may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on the undiscounted cash flows of an entity
acquired over the remaining amortization period, the Corporation's carrying
value of the goodwill will be reduced by the estimated shortfall of discounted
cash flows.
Separate assets are recognized for the rights to service mortgage loans
for others regardless of how those servicing rights are acquired (as part of
purchased loans or through the sale of loans with servicing retained). Mortgage
servicing rights are determined based on the present value of the difference
between the yield on the loans sold less a normal servicing fee and the yield
paid to the investors over the estimated lives of the loans. The mortgage
servicing rights are amortized on a method which approximates a level yield over
the estimated lives of serviced loans considering assumed prepayment patterns.
The carrying values of mortgage servicing rights and the amortization thereon
are periodically evaluated in relation to estimated future net servicing
revenues. For purposes of impairment evaluation and measurement, the risk
characteristics used to stratify the mortgage servicing rights are loan type,
loan-to-value ratio, and interest rate stratum, which results in groups of loans
that have similar credit and prepayment risk characteristics. Impairment of
mortgage servicing rights is recorded through a valuation allowance.
EMPLOYEE BENEFIT PLANS
The Corporation provides a variety of benefit plans to eligible
employees. Retirement plan expense is accrued each year and plan funding
represents at least the minimum amount required by the Employee Retirement
Income Security Act of 1974, as amended. Differences
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<PAGE> 48
between expense and funded amounts are carried in other assets or other
liabilities. The Corporation recognizes postretirement benefits other than
pensions on an accrual basis and other postemployment benefits are also
recognized on an accrual basis. The Corporation also makes contributions to an
employee thrift and profit-sharing plan based on employee contributions and
performance levels of the Corporation.
INCOME TAXES
The Corporation files a consolidated federal income tax return, with
the exception of its life insurance subsidiaries, which file separate returns.
The provision for income tax expense is determined under the asset and liability
method. Under this method, deferred tax assets and liabilities are determined
based on the differences between financial reporting and tax bases of assets and
liabilities, and are measured using enacted tax rates and laws expected to apply
to taxable income in the years in which these temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
EARNINGS PER COMMON SHARE
First American adopted SFAS No. 128, "Earnings Per Share," at December
31, 1997. SFAS No. 128 establishes standards for computing and presenting
earnings per share ("EPS") and applies to companies with publicly held common
stock. The statement simplifies the standards for computing EPS and provides a
more compatible computation with international EPS standards. It replaced the
presentation of primary EPS with a presentation of basic EPS and requires dual
presentation of basic and diluted EPS on the face of the income statement. Basic
EPS is computed by dividing income available to common shareholders (numerator)
by the weighted average number of common shares outstanding (denominator). The
denominator utilized in computing diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Prior period financial EPS
data has been restated to reflect the implementation of SFAS No. 128.
TREASURY STOCK
Under Tennessee law, when a corporation purchases its common stock in
the open market, such repurchased shares become authorized but unissued.
Accordingly, the Corporation reduces the par value and reflects the excess of
the purchase price over par of any such repurchased shares as a reduction from
additional paid-in capital.
REVENUE RECOGNITION
Commission revenues and subscribers' commissions for IFC are recorded
as of the trade date of the transactions. Certain revenues and subscribers'
commissions, such as trailer fee commissions earned from mutual funds, are
estimated based upon historical experience.
Subscribers' commissions are commissions on sales of products marketed
by IFC and are paid to subscribing institutions. These commissions are accrued
monthly based upon a
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<PAGE> 49
percentage of gross commissions after deduction of certain contractual charges,
and paid to subscribing institutions in the month following settlement of the
transactions.
OTHER ACCOUNTING CHANGES
SFAS No. 123, "Accounting for Stock-Based Compensation," issued in
1995, provides an optional method of accounting for stock-based compensation
based on calculations of fair value at grant date. The Corporation will continue
to account for all stock-based compensation plans under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Compensation cost for fixed and variable stock-based awards is measured by the
excess, if any, of the fair market price of the underlying stock over the amount
the individual is required to pay (the intrinsic value). Compensation cost for
fixed awards is measured at the grant date, while compensation cost for variable
awards is estimated until both the number of shares an individual is entitled to
receive and the exercise or purchase price are known (measurement date).
On January 1, 1997, the Corporation prospectively adopted SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities
based on consistent application of a "financial-components approach" that
focuses on control. Under this approach, after transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, and derecognizes liabilities when extinguished.
SFAS No. 125 provides standards for consistently distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. The
adoption of this statement had no material impact on the supplemental
consolidated financial statements.
SFAS No. 129, "Disclosure of Information About Capital Structure," was
adopted in 1997 and requires disclosure of information about an entity's capital
structure that has issued securities. This statement requires no change in the
Corporation's previous disclosure requirements under APB Opinion No. 15 and, as
such, had no impact on the supplemental consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements and requires that all components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The presentation of
comprehensive income for earlier periods is required. Adoption of SFAS No. 130
does not affect recognition or measurement of comprehensive income and its
components and, as such, will only affect the reporting and display in the
consolidated financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
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<PAGE> 50
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 is currently
evaluating its operations to determine the appropriate disclosures with respect
to SFAS No. 131.
NOTE 2: ACQUISITIONS AND DIVESTITURES
Effective May 1, 1998, the Corporation completed the merger of the $7.2
billion asset Deposit Guaranty Corp. ("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 financial services
holding company headquartered in Jackson, Mississippi, with banking offices in
Mississippi, Louisiana, Arkansas, and Tennessee, and mortgage offices in
Oklahoma, Nebraska, Texas, Indiana, and Iowa. The transaction was accounted for
as a pooling-of-interests and, accordingly, the accompanying supplemental
consolidated financial statements have been restated to include the results of
Deposit Guaranty for all periods presented. After-tax restructuring and
merger-related costs, comprised primarily of investment banking, severance, and
systems conversions costs, are expected to total approximately $71 million and
will be recognized in 1998.
In April 1998 and in conjunction with the Deposit Guaranty business
combination, the Board of Directors increased the number of authorized shares
from 100 million to 200 million.
Net interest income and net income as originally reported by First
American and Deposit Guaranty for the years ended December 31, 1997, 1996, and
1995 are presented in the table below:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ------------------------------ ----------------------------
First Deposit First Deposit First Deposit
(in thousands) American Guaranty Combined American Guaranty Combined American Guaranty Combined
- -------------------------------------------------------- ------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $383,410 $278,713 $662,123 $349,698 $243,563 $593,261 $312,310 $226,743 $539,053
Noninterest income 259,594 136,167 395,761 180,533 123,216 303,749 108,487 94,518 203,005
Net income 145,472 92,280 237,752 121,572 83,610 205,182 103,080 72,620 175,700
========================================================================================================================
</TABLE>
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Bank and thrift mergers and acquisitions completed by First American
during the three years ended December 31, 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>
LBO Bancorp, Inc. LA Jan. 1995 $ 96 1.6 $ -- Purchase
- -------------------------------------------------------------------------------------------------------------------
Citizens National Bancshares, Inc. LA May 1995 193 3.2 -- Pooling
- -------------------------------------------------------------------------------------------------------------------
First Merchants Financial Corporation AR Aug. 1995 280 2.3 4 Purchase
- -------------------------------------------------------------------------------------------------------------------
Heritage Federal Bancshares, Inc. TN Nov. 1995 526 5.8 -- Pooling
- -------------------------------------------------------------------------------------------------------------------
Charter Federal Savings Bank VA Dec. 1995 725 3.6* -- Purchase
- -------------------------------------------------------------------------------------------------------------------
First City Bancorp, Inc. TN Mar. 1996 366 2.1 -- Purchase
- -------------------------------------------------------------------------------------------------------------------
Bank of Gonzales Holding Company LA June 1996 126 1.5 -- Purchase
- -------------------------------------------------------------------------------------------------------------------
Tuscaloosa Banshares, Inc. LA Nov. 1996 41 0.5 -- Purchase
- -------------------------------------------------------------------------------------------------------------------
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
===================================================================================================================
</TABLE>
* The purchase agreement also provides that shareholders of Charter Federal
Savings Bank ("Charter") may receive additional consideration consisting of
shares of the Corporation's common stock with a value equal to 50 percent of
any goodwill litigation recovery, net of certain related expenses. See Note
15.
The merger of Heritage Federal Bancshares, Inc. ("Heritage") was
accounted for as prescribed by the pooling-of-interests method of accounting
with all historical financial information restated to reflect the effects of
Heritage. Approximately $7.5 million of after-tax merger-related expenses,
comprised primarily of payments for severance, system conversions, investment
banking and other professional fees, and the recapture of the tax bad debt
reserve, were recognized in 1995 in connection with the merger of Heritage. For
other acquisitions accounted for as pooling-of-interests combinations, the
results of operations have been included in the accompanying supplemental
consolidated financial statements from the beginning of the year acquired; prior
year 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 accompanying
supplemental 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 earnings of such acquisitions is not
significant.
In addition to the bank and thrift mergers and acquisitions included in
the tables above, during the past three years the Corporation acquired
investments in a securities broker-dealer and a health care claims processing
company, two branch mortgage companies, and a branch operation. All of these
acquisitions were accounted for as purchase business combinations, and
accordingly, results of operations have been included from the respective dates
of acquisition. The purchase price of these acquisitions in excess of the fair
value of net assets acquired has been recorded as goodwill and is being
amortized on a straight-line basis over 15 years. Proforma results of operations
for these acquisitions have not been presented because the effect was not
material.
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A summary of these acquisitions is presented below:
- On July 1, 1996, FANB purchased 96.2% of the stock of INVEST
for $26 million in cash. Simultaneously, INVEST completed its
acquisition of Investment Center Group, Inc., the parent
company of Investment Centers of America, in a transaction
valued at approximately $5.0 million. INVEST is a national
marketer of mutual funds, annuities, insurance, and other
investment products sold through financial institutions.
During the third quarter of 1996, FANB purchased an additional
2.1% of the stock of INVEST. On February 1, 1997, AmeriStar
Capital Markets, Inc., formerly a wholly-owned subsidiary of
FANB and a broker-dealer registered with the National
Association of Securities Dealers, was merged with and into
INVEST. As a result of this merger, FANB's equity ownership in
INVEST, increased to 98.5%. Effective December 2, 1997, the
name of INVEST was changed to IFC Holdings, Inc.
- On June 29, 1996, the Corporation purchased McAfee Mortgage
and Investment Company ("McAfee") for $3.6 million. McAfee is
headquartered in Lubbock, Texas, and has 15 offices located
throughout Texas.
- Effective April 1, 1996, FANB purchased 49% of the stock of
the SSI Group, Inc. ("SSI"), a healthcare payments processing
company, for $8.6 million. The transaction is being accounted
for under the equity method of accounting.
- On August 8, 1995, the Corporation purchased First Mortgage
Corp., a mortgage company located in Omaha, Nebraska, with a
$1.1 billion mortgage servicing portfolio and six production
offices in Nebraska and Oklahoma, for $15.8 million.
- On March 10, 1995, the Corporation purchased the Coahoma
County, Mississippi, operations of a local Mississippi bank
with assets of $82 million.
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.
On September 24, 1997, the Corporation entered into a definitive
agreement to acquire Victory Bancshares, Inc. ("Victory") located in Memphis,
Tennessee. The acquisition of Victory, with approximately $132 million in assets
at December 31, 1997, was consummated during the first quarter of 1998 and was
accounted for as a pooling-of-interests. Results of operations of Victory will
be included in the Corporation's financial statements from the date of
acquisition, as prior amounts are not material. The number of shares of the
Corporation's common stock exchanged for all of the outstanding shares of
Victory was .9 million shares.
52
<PAGE> 53
On July 17, 1997, the Corporation completed the sale of Tennessee
Credit Corporation and First City Life Insurance with total assets of $13.6
million to Norwest Financial Tennessee, Inc. The transaction resulted in a net
gain of $2.1 million. On December 22, 1997, the Corporation completed the sale
of its corporate trust business to The Bank of New York for a gain of $2.4
million. The sale consisted of the transfer of approximately 250 bond trustee
and agency relationships representing $4 billion of assets under management.
During the year ended December 31, 1995, the Corporation consummated
the sale of two branches with deposits of approximately $39.6 million. The
transaction resulted in a $3 million gain.
NOTE 3: CASH AND DUE FROM BANKS
The Corporation's bank and thrift subsidiaries are required to maintain
reserves, in the form of cash and balances with the Federal Reserve Bank.
Approximately $214.7 and $182.7 million of the cash and due from banks balance
at December 31, 1997 and 1996, respectively, represented reserves maintained in
order to meet Federal Reserve requirements.
NOTE 4: SECURITIES
SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gains, gross unrealized losses,
and approximate fair values of securities held to maturity at December 31, 1997
and 1996, are presented in the following table:
<TABLE>
<CAPTION>
Unrealized
Amortized ------------------------ Fair
(in thousands) Cost Gross Gains Gross Losses Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. Treasury and other U.S. Government agencies and
corporations $449,633 $ 3,276 $ 1,208 $451,701
Obligations of states and political subdivisions 42,723 1,588 48 44,263
Other debt securities (primarily mortgage-backed securities) 222,671 5,088 495 227,264
- --------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $715,027 $ 9,952 $ 1,751 $723,228
====================================================================================================================
DECEMBER 31, 1996
U.S. Treasury and other U.S. Government agencies and
corporations $724,939 $ 7,986 $ 2,353 $730,572
Obligations of states and political subdivisions 39,408 262 261 39,409
Other debt securities (primarily mortgage-backed securities) 205,450 2,964 628 207,786
- --------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $969,797 $ 11,212 $ 3,242 $977,767
====================================================================================================================
</TABLE>
Included in U.S. Treasury and other U.S. Government agencies and
corporations securities held to maturity were agency-issued mortgage-backed
securities amounting to $422.1 million ($424.3 million fair value) at December
31, 1997, and $616.3 million ($622 million fair value) at December 31, 1996.
Mortgage-backed securities included in other debt securities amounted to $104.9
million ($104.6 million fair value) and $139 million ($139 million fair value)
at December 31, 1997 and 1996, respectively.
53
<PAGE> 54
SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains, gross unrealized losses,
and approximate fair values of securities available for sale at December 31,
1997 and 1996, are presented in the following table:
<TABLE>
<CAPTION>
Unrealized
Amortized ------------------------ Fair
(in thousands) Cost Gross Gains Gross Losses Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. Treasury and other U.S. Government
agencies and corporations $2,793,823 $ 12,610 $ 12,619 $2,793,814
Obligations of states and political subdivisions 179,000 3,877 190 182,687
Other debt securities 334,786 1,313 2,391 333,708
- -----------------------------------------------------------------------------------------------------------------
Total debt securities 3,307,609 17,800 15,200 3,310,209
Equity securities (primarily Federal Reserve
Bank and Federal Home Loan Bank stock) 85,285 -- -- 85,285
- -----------------------------------------------------------------------------------------------------------------
Total securities available for sale $3,392,894 $ 17,800 $ 15,200 $3,395,494
=================================================================================================================
DECEMBER 31, 1996
U.S. Treasury and other U.S. Government
agencies and corporations $2,782,203 $ 10,491 $ 18,084 $2,774,610
Obligations of states and political subdivisions 175,977 6,092 1,236 180,833
Other debt securities 137,379 503 3,683 134,199
- -----------------------------------------------------------------------------------------------------------------
Total debt securities 3,095,559 17,086 23,003 3,089,642
Equity securities (primarily Federal Reserve
Bank and Federal Home Loan Bank stock) 60,465 -- -- 60,465
- -----------------------------------------------------------------------------------------------------------------
Total securities available for sale $3,156,024 $ 17,086 $ 23,003 $3,150,107
=================================================================================================================
</TABLE>
Included in U.S. Treasury and other U.S. Government agencies and
corporations securities available for sale were agency-issued mortgage-backed
securities amounting to $2,233.8 million ($2,233.2 million amortized cost) at
December 31, 1997 and $1,745.2 million ($1,746.8 million amortized cost) at
December 31, 1996. Mortgage-backed securities included in other debt securities
amounted to $333.7 million ($334.8 million amortized cost) and $132.8 million
($135.9 million amortized cost) at December 31, 1997 and 1996, respectively.
In November 1995, the Financial Accounting Standards Board ("FASB")
issued a Special Report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." The FASB
permitted a one-time opportunity to reassess the appropriateness of the
designation of all securities held upon the initial application of the Special
Report. The Corporation reviewed its current designation of all securities in
conjunction with liquidity needs and management of interest rate risk and
transferred $1.64 billion of securities from held to maturity to available for
sale. At the time of transfer, such securities had an unrealized gain of $25.9
million ($16.1 million net of tax).
In conjunction with the 1995 Heritage merger, the Corporation
transferred $161.6 million of securities previously classified as held to
maturity by Heritage to securities available for sale in order to maintain the
Corporation's existing interest rate risk position. At the time of transfer,
such securities had an unrealized loss of $.5 million ($.3 million net of tax).
54
<PAGE> 55
The sale of securities available for sale resulted in net realized
gains of $4.2 million, $2.6 million, and $2.9 million in 1997, 1996, and 1995,
respectively. Gross realized gains and losses on such sales were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------------
1997 1996 1995
---------------------- --------------------- --------------------
GROSS GROSS Gross Gross Gross Gross
REALIZED REALIZED Realized Realized Realized Realized
(in thousands) GAINS LOSSES Gains Losses Gains Losses
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and corporations $ 9,820 $ 9,825 $14,047 $11,547 $ 7,135 $ 4,190
Obligations of states and political
subdivisions 4,043 172 409 375 -- 2
Other debt securities 368 -- 51 -- 9 75
- -----------------------------------------------------------------------------------------------------------------
Total securities available for sale $14,231 $ 9,997 $14,507 $11,922 $ 7,144 $ 4,267
=================================================================================================================
</TABLE>
TOTAL SECURITIES
The amortized cost and approximate fair values of debt securities at
December 31, 1997, by average estimated maturity are shown below. The expected
maturity for governmental and corporate securities is the stated maturity, and
the expected maturity for mortgage-backed securities and other asset-backed
securities is based on current estimates of average maturities, which include
prepayment assumptions.
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY SECURITIES AVAILABLE FOR SALE
--------------------------------- ----------------------------------
AMORTIZED FAIR AMORTIZED FAIR
(in thousands) COST VALUE COST VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 224,523 $ 224,393 $ 104,768 $ 105,522
Due after one year through five years 356,963 359,480 2,558,077 2,557,646
Due after five years through ten years 110,399 115,125 482,352 484,212
Due after ten years 23,142 24,230 162,412 162,829
- -----------------------------------------------------------------------------------------------------------------
Total debt securities 715,027 723,228 3,307,609 3,310,209
Equity securities -- -- 85,285 85,285
- -----------------------------------------------------------------------------------------------------------------
Total securities $ 715,027 $ 723,228 $3,392,894 $ 3,395,494
=================================================================================================================
</TABLE>
At December 31, 1997 and 1996, the Corporation held securities with
amortized cost amounting to $1,399.2 million and $1,102 million, respectively,
which were issued or guaranteed by the Federal National Mortgage Association and
$1,096.6 million and $1,153.1 million, respectively, which were issued or
guaranteed by the Federal Home Loan Mortgage Corporation.
Securities carried in the supplemental consolidated balance sheets at
approximately $3,069.8 million and $2,856.5 million at December 31, 1997 and
1996, respectively, were pledged to secure public and trust deposits, repurchase
transactions, and for other purposes as required or permitted by law.
NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES
The Corporation's bank and thrift subsidiaries have a diversified loan
portfolio consisting of commercial, consumer, and real estate loans with
customers located within the Corporation's market, which consists primarily of
the Mid South and Oklahoma, Nebraska, Texas, Indiana,
55
<PAGE> 56
and Iowa. Mortgage loans held for sale at December 31, 1997 and 1996, were
$270.4 million and $306.9 million, respectively. Total mortgage loans serviced,
including mortgage loans serviced on behalf of the Corporation's banking
subsidiaries, approximated $6.4 billion and $6.3 billion at December 31, 1997
and 1996, respectively.
Loans are either secured or unsecured based on the type of loan and the
financial condition of the borrower. The loans are generally expected to be
repaid from cash flow or proceeds from the sale of selected assets of the
borrower; however, the Corporation is exposed to risk of loss on loans due to
the borrower's difficulties, which may arise from any number of factors
including problems within the respective industry or economic conditions,
including those within the Corporation's market.
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $185,470 $191,134 $185,309
Provision charged to operating expenses 12,500 5,340 2,243
Allowance of subsidiary sold (note 2) (252) -- --
Additions due to business combinations (note 2) 8,252 4,188 11,225
- -----------------------------------------------------------------------------------------------------------------
Subtotal 205,970 200,662 198,777
- -----------------------------------------------------------------------------------------------------------------
Loans charged off 54,300 45,739 31,072
Recoveries of loans previously charged off (28,373) (30,547) (23,429)
- -----------------------------------------------------------------------------------------------------------------
Net charge-offs 25,927 15,192 7,643
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31 $180,043 $185,470 $191,134
=================================================================================================================
</TABLE>
Net charge-offs (recoveries) by major loan categories were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial $ 12,588 $ (2,555) $ (2,946)
Consumer--amortizing mortgages 866 520 41
Consumer--other 15,018 17,593 11,122
Real estate--construction 492 43 80
Real estate--commercial mortgages and other (3,037) (409) (654)
- -----------------------------------------------------------------------------------------------------------------
Total net charge-offs $ 25,927 $ 15,192 $ 7,643
=================================================================================================================
</TABLE>
At December 31, 1997 and 1996, loans on a nonaccrual status amounted to
$36.3 million and $32.7 million, respectively. Interest income not recognized on
nonaccrual loans was approximately $2.4 million in 1997, $1.9 million in 1996,
and $3.8 million in 1995. Interest income recognized on a cash basis on
nonaccrual loans was immaterial for all years.
Directors and executive officers (and their associates, including
companies in which they hold ten percent or more ownership) of the Corporation
and its significant subsidiary, FANB, had loans outstanding with the Corporation
and its subsidiaries of $91.8 million and $108.5 million at December 31, 1997
and 1996, respectively. During 1997, $3,131.6 million of new loans or advances
on existing loans (including participations sold) were made to such related
persons, repayments from such persons were $3,111.2 million, and $37.1 million
of existing loans were to persons no longer considered related. The Corporation
believes that such loans
56
<PAGE> 57
were made on substantially the same terms, including interest and collateral, as
those prevailing at the time for comparable transactions with other borrowers
and did not involve more than the normal risk of collectibility or present other
unfavorable features at the time such loans were made.
Impaired loans and related loan loss reserve amounts at December 31,
1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------
1997 1996 1995
----------------------- --------------------- ----------------------
RECORDED LOAN LOSS Recorded Loan Loss Recorded Loan Loss
(in thousands) INVESTMENT RESERVE Investment Reserve Investment Reserve
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Impaired loans with loan loss reserves $23,287 $ 7,086 $12,939 $ 3,157 $23,806 $ 6,557
Impaired loans with no loan loss reserves 16,483 -- 23,766 -- 33,244 --
- -------------------------------------------------------------------------------------------------------------------
Total $39,770 $ 7,086 $36,705 $ 3,157 $57,050 $ 6,557
===================================================================================================================
</TABLE>
The average recorded investment in impaired loans for the twelve months
ended December 31, 1997, 1996, and 1995 was $33 million, $51 million, and $44
million, respectively. The related total amount of interest income recognized on
an accrual basis for the period that such loans were impaired was $382 thousand,
$798 thousand, and $982 thousand for the twelve months ended December 31, 1997,
1996, and 1995, respectively. No interest income was recognized on a cash basis
for impaired loans during 1997. The amount of interest income recognized on a
cash basis during the period of impairment for the years ended December 31,
1996, and 1995, was $147 thousand and $188 thousand, respectively.
NOTE 6: PREMISES AND EQUIPMENT AND LEASE COMMITMENTS
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31
----------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 56,999 $ 50,266
Buildings 295,745 272,826
Furniture and equipment 290,527 257,486
Leasehold improvements 49,891 48,064
Premises leased under capital leases 3,008 3,008
- -----------------------------------------------------------------------------------------------------------------
Subtotal 696,170 631,650
Accumulated depreciation and amortization (334,123) (321,066)
- -----------------------------------------------------------------------------------------------------------------
Net book value $ 362,047 $ 310,584
=================================================================================================================
</TABLE>
Depreciation and amortization expense of premises and equipment for
1997, 1996, and 1995 was $38.3 million, $35.1 million, and $31.5 million,
respectively.
Rent expense, net of rental income, on bank premises for 1997, 1996,
and 1995 was $5.4 million, $4.4 million, and $1.7 million, respectively. Rental
income on bank premises for 1997, 1996, and 1995 was $10.2 million, $9.8
million, and $9.1 million, respectively.
57
<PAGE> 58
At December 31, 1997, the future minimum lease payments under operating
and capital leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
(in thousands) Total Leases Leases
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 $ 15,165 $ 14,889 $ 276
1999 14,408 14,128 280
2000 12,705 12,435 270
2001 10,691 10,421 270
2002 10,074 9,803 271
Thereafter 69,214 67,415 1,799
- -----------------------------------------------------------------------------------------------------------------
Total $132,257 $129,091 3,166
- -----------------------------------------------------------------------------------------------------------------
Purchase option 110
Amounts representing interest at 6.75% (1,860)
- -----------------------------------------------------------------------------------------------------------------
Total capitalized lease obligations 1,416
Amounts included in short-term borrowings (127)
- -----------------------------------------------------------------------------------------------------------------
Capitalized lease obligations included in long-term debt $ 1,289
=================================================================================================================
</TABLE>
The Corporation has a data processing outsourcing agreement expiring in
2001 that had an average annual base expense of $8.5 million in 1995 through
1997. As amended in 1997, the average annual base expense will be $7.5 million
for future years. Total annual fees vary with cost of living adjustments and
changes in services provided by the vendor, which services depend upon the
Corporation's volume of business and system needs. The related expense is
included in systems and processing expense in the supplemental consolidated
income statements.
NOTE 7: INTANGIBLE ASSETS
Following is a summary of intangible assets included in other assets on
the supplemental consolidated balance sheets including related amortization.
<TABLE>
<CAPTION>
Mortgage Total
Servicing Other Intangible
(in thousands) Goodwill Rights Intangibles Assets
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ 40,403 $ 6,766 $ 20,646 $ 67,815
Additions 69,775 25,611 18,076 113,462
Amortization (5,754) (4,457) (4,206) (14,417)
- ------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 104,424 27,920 34,516 166,860
Additions 71,973 13,203 7,042 92,218
Dispositions -- (1,012) -- (1,012)
Amortization (11,704) (3,753) (4,858) (20,315)
- ------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 164,693 36,358 36,700 237,751
ADDITIONS 51,717 14,838 15,036 81,591
DISPOSITIONS (319) (2,645) -- (2,964)
AMORTIZATION (16,050) (7,131) (6,536) (29,717)
- ------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $200,041 $ 41,420 $ 45,200 $286,661
============================================================================================================
</TABLE>
The estimated fair value of the capitalized mortgage servicing rights
at December 31, 1997 and 1996, was $46.2 million and $39.9 million,
respectively. The related valuation allowance for 1997 and 1996 was $310
thousand and $259 thousand, respectively.
58
<PAGE> 59
NOTE 8: SHORT-TERM BORROWINGS
Short-term borrowings are issued on normal banking terms and consisted
of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased and securities sold under agreements to repurchase $1,614,931 $1,472,277
Other short-term borrowings 354,708 225,124
- -----------------------------------------------------------------------------------------------------------------
Total short-term borrowings $1,969,639 $1,697,401
=================================================================================================================
</TABLE>
Other short-term borrowings included U.S. Treasury tax and loan
accounts of $112.7 million and $116.9 million at December 31, 1997 and 1996,
respectively. In addition, December 31, 1997 included borrowings from the
Federal Home Loan Bank ("FHLB") of $10 million (due upon demand), $199.1 million
(due within 3 months), $5.7 million (due within 6 months), and $9.6 million (due
within 12 months).
The following table presents information regarding federal funds
purchased and securities sold under agreements to repurchase:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------
(dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and securities sold under agreements
to repurchase:
Amount outstanding at December 31 $1,614,931 $1,472,277 $1,355,431
Average rate at December 31 4.70% 4.68% 4.97%
Average amount outstanding during the year $1,467,281 $1,394,251 $1,331,359
Average rate paid for the year 4.94% 4.86% 5.38%
Maximum amount outstanding at any month-end $1,732,169 $1,513,294 $1,497,451
===============================================================================================================
</TABLE>
NOTE 9: LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
------------------------------
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FHLB advances $394,090 $230,378
6 7/8% noncallable subordinated notes (effective rate of 6.965%) due 2003,
interest payable semiannually (less unamortized discount of $169 in
1997 and $201 in 1996) 49,831 49,799
6 5/8% noncallable subordinated notes (effective rate of 6.761%) due 2005,
interest payable semiannually (less unamortized discount of $389 in 1997
and $427 in 1996) 49,611 49,563
7.25% noncallable senior notes (effective rate of 7.375%) due 2006, interest
payable semiannually (less unamortized discount of $550 in 1997 and $595
in 1996) 101,397 99,405
Capitalized lease obligations (note 6) 1,289 1,417
- ---------------------------------------------------------------------------------------------------------------
Total long-term debt $596,218 $430,562
===============================================================================================================
</TABLE>
59
<PAGE> 60
At December 31, 1997, the $394.1 million of advances from the FHLB
consisted of $300 million of advances with interest rates tied to one-month
London Interbank Offering Rate ("LIBOR"), $85 million of advances with interest
rates tied to three-month LIBOR, and $9.1 million of advances with fixed
interest rates; weighted-average interest rates were 5.86% and 5.51%,
respectively. Included in these amounts are advances maturing in 1999 of $11.4
thousand, in 2000 of $300 million, in 2002 of $3.1 million, in 2003 of $3.4
million, and after 2003 of $87.6 million. The Corporation's FHLB advances are
collateralized by a blanket pledge of 1-4 family mortgage loans.
The Corporation entered into an unsecured revolving credit agreement in
1994. As amended in 1995, the agreement provides for loans up to $70 million.
Under the terms of the agreement, which expires in March 1998, the Corporation
pays a fee for the availability of these funds computed at the rate of 3/16 of
1% per annum on the commitment. Interest to be paid on the outstanding balances
will be computed based on the prime interest rate of the lending banks,
Eurodollar rates, or adjusted certificate of deposit rates, as selected by the
Corporation. The Corporation had no revolving credit borrowings outstanding at
December 31, 1997 or 1996.
The Corporation also maintained a $50 million line of credit at a
commercial bank. The line of credit, which is for general corporate purposes
bears an adjustable rate based on LIBOR and expires in May 1998. There is no
commitment fee or compensating balance arrangement relating to this line of
credit. The Corporation had no line of credit borrowings outstanding at December
31, 1997, or 1996.
The terms of the credit agreements provide for, among other things,
restrictions on payment of cash dividends and purchases, redemptions, and
retirement of capital shares. Under the Corporation's most restrictive debt
covenant, approximately $126.7 million of retained earnings was available to pay
dividends as of December 31, 1997.
NOTE 10: EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
The Corporation and its subsidiaries participate in a noncontributory
retirement plan with death and disability benefits covering substantially all
employees (except the employees of IFC) with one or more years of service. The
benefits are based on years of service and average monthly earnings of a
participant for the 60 consecutive months which produce the highest average
earnings.
60
<PAGE> 61
The following table sets forth the plan's funded status and amounts
recognized in the Corporation's supplemental consolidated balance sheets:
<TABLE>
<CAPTION>
December 31
--------------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Plan assets at fair value, primarily U.S. bonds and listed stocks $307,735 $251,726
- -----------------------------------------------------------------------------------------------------------------
Actuarial present value of benefits for service rendered to date:
Accumulated benefit obligation, including vested benefits of $198,300 and
$178,704, respectively 205,293 184,336
Additional benefits based on projected future compensation 32,765 28,122
- -----------------------------------------------------------------------------------------------------------------
Projected benefit obligation 238,058 212,458
- -----------------------------------------------------------------------------------------------------------------
Plan assets in excess of accumulated benefit obligation 102,442 67,390
- -----------------------------------------------------------------------------------------------------------------
Plan assets greater than projected benefit obligation 69,677 39,268
Unrecognized net gain from past experience different from that assumed
and effects of changes in assumptions (46,046) (15,491)
Unrecognized net transition asset (2,755) (3,395)
Unrecognized prior service cost 2,055 2,409
- -----------------------------------------------------------------------------------------------------------------
Prepaid pension cost $ 22,931 $ 22,791
=================================================================================================================
</TABLE>
Net pension expense included the following components:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during the period $ 7,947 $ 7,250 $ 5,565
Interest cost on projected benefit obligation 15,918 14,659 13,218
Actual return on plan assets (60,811) (24,100) (29,279)
Net amortization and deferral 36,984 3,060 12,552
- ----------------------------------------------------------------------------------------------------------------
Net periodic pension expense $ 38 $ 869 $ 2,056
================================================================================================================
</TABLE>
The discount rate and the rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 7.25% and 4.5-8.5%, respectively, at December 31, 1997;
7.25-7.75% and 4.5-8.5%, respectively, at December 31, 1996; and 7.25% and
4.5-8.5%, respectively, at December 31, 1995. The expected long-term rate of
return on plan assets was 9 to 9.3% in all years.
SUPPLEMENTAL RETIREMENT PLAN
The Corporation has a supplemental retirement plan which provides
supplemental retirement benefits to certain executives of the Corporation. The
expense was $. 3 million in 1997, $.3 million in 1996, and $.2 million in 1995.
Benefit payments from the plan are made from general assets of the Corporation.
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation at December 31, 1997 were 7.25% and 4.5%, respectively, and at
December 31, 1996 were 7.75% and 4.5%, respectively.
OTHER POSTRETIREMENT BENEFITS
In addition to pension benefits, the Corporation and its subsidiaries
have postretirement benefit plans that provide medical insurance and death
benefits for retirees and eligible dependents (except the retirees of IFC).
Because the death benefit plan is not significant, it is combined with the
healthcare plan for disclosure purposes.
61
<PAGE> 62
The status of the plans was as follows:
<TABLE>
<CAPTION>
December 31
---------------------------
(in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $13,818 $13,843
Fully eligible, active plan participants 1,462 1,219
Other active plan participants 4,705 3,350
- ----------------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 19,985 18,412
Plan assets at market value -- --
- ----------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess of plan assets 19,985 18,412
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions 674 1,717
- ----------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $20,659 $20,129
================================================================================================================
</TABLE>
The components of net periodic expense for postretirement benefits were
as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during the year $ 434 $ 330 $ 311
Interest cost on accumulated postretirement benefit obligation 1,395 1,317 1,366
Amortization of net gain (14) (1,434) (29)
- ----------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit expense $ 1,815 $ 213 $ 1,648
================================================================================================================
</TABLE>
The Corporation continues to fund medical and death benefit costs
principally on a pay-as-you-go basis.
For measurement purposes, a 9.0% annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for 1997, declining
gradually to 5.5% per year by 2011 and remaining at that level thereafter. The
discount rate used to determine the accumulated postretirement benefit
obligation was 7.25% in 1997, 7.25-7.75% in 1996, and 7.25% in 1995.
The healthcare cost trend rate assumption has a significant effect on
the accumulated postretirement benefit obligation and net periodic benefit
costs. A 1% increase in the trend rate for healthcare costs would have increased
the accumulated postretirement benefit obligation by $1 million as of December
31, 1997, and the net periodic expense (service cost and interest cost) would
have increased by $.1 million for 1997.
62
<PAGE> 63
IFC provides medical and life insurance benefits to its retired
employees. The medical plan provides for medical insurance benefits at
retirement, with eligibility based upon age and the participant's number of
years of participation attained at retirement. Postretirement life insurance
benefits are limited to $10,000 per participant. The discount rate used in
determining the postretirement benefit obligation was 7.25% during 1997 and 7.5%
in 1996. The status of the plan was as follows:
<TABLE>
<CAPTION>
December 31
------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and beneficiaries $ 43 $ 39
Fully eligible plan participants 143 101
Other active plan participants 722 583
- -----------------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 908 723
Plan assets at market value -- --
- -----------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess of plan assets 908 723
Unrecognized loss from actuarial experience (129) (22)
- -----------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $779 $701
=================================================================================================================
</TABLE>
A 1% increase in the trend rate for healthcare cost would increase
IFC's accumulated postretirement benefit obligation as of December 31, 1997 by
$.2 million.
OTHER EMPLOYEE BENEFITS
The Corporation has a combination savings thrift and profit-sharing
plan ("FIRST Plan") available to all employees (except the employees of IFC and
hourly paid and special exempt-salaried employees). The plan is funded by
employee and employer contributions. The Corporation's annual contribution to
the plan is based upon the amount of basic contributions of participants,
participants' compensation, and the achievement of certain corporate performance
standards and may be made in the form of cash or the Corporation's common stock
with a market value equal to the cash contribution amount. Total plan expense in
1997 was $5 million, $4.3 million in 1996 and $3.5 million in 1995. During 1997,
1996 and 1995 the Corporation matched employees' qualifying contributions at
100%.
In 1983, IFC formed the Salary Savings Retirement Plan. IFC has also
established a profit sharing plan covering certain employees. Contributions to
both plans totaled $.5 million in 1997 and $.2 million in 1996.
Deposit Guaranty, which merged with the Corporation effective May 1,
1998, maintained a retirement savings plan. This plan, which remains in
existence, covers substantially all former Deposit Guaranty employees. Deposit
Guaranty automatically contributed an amount equal to 2% of each participant's
base salary to the plan. A participant, in addition, may elect to contribute up
to 15% of base salary to the plan. The Corporation contributes an additional
amount to the plan equal to 50% of the participant's contribution up to 5% of
base salary.
Heritage, which merged with the Corporation effective November 1, 1995,
maintained an Employee Stock Ownership Plan ("ESOP"). The ESOP, which remains in
existence, covers substantially all former Heritage employees who qualified as
to age and length of service.
63
<PAGE> 64
Annual contributions to the ESOP are equal to the required principal and
interest payments related to the ESOP loan. Dividends paid on shares held by the
ESOP are used to reduce the outstanding debt. The supplemental consolidated
financial statements for the year ended December 31, 1995, includes related
compensation expense of approximately $.1 million.
During 1995, the ESOP refinanced its notes payable with borrowings from
the Corporation. The new loan, which has essentially the same terms as the prior
borrowings, is payable in quarterly principal payments of approximately $30
thousand plus interest at the Corporation's base rate through March 30, 2002. At
December 31, 1997, the note payable bore interest at 8.5% and had a balance of
$.2 million.
NOTE 11: INCOME TAXES
The components of the income tax provision are presented below:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense from operations:
Current federal income taxes $105,604 $ 80,472 $ 75,834
Current state income taxes 12,940 9,292 9,635
Deferred federal income tax expense 16,997 21,291 12,553
Deferred state income tax expense 2,360 3,770 2,193
- ----------------------------------------------------------------------------------------------------------------
Total income tax expense from operations 137,901 114,825 100,215
- ----------------------------------------------------------------------------------------------------------------
Prior business combinations -- -- (181)
Valuation allowance -- -- (2,949)
Income tax expense (benefit) reported in
shareholders' equity related to:
Securities available for sale 2,857 (15,818) 21,354
Employee stock option and award plans (5,603) (4,530) (3,574)
- ----------------------------------------------------------------------------------------------------------------
Total income tax expense (benefit) reported in
shareholders' equity (2,746) (20,348) 14,650
- ----------------------------------------------------------------------------------------------------------------
Total income taxes $135,155 $ 94,477 $114,865
================================================================================================================
</TABLE>
The following table presents a reconciliation of the provision for
income taxes as shown in the supplemental consolidated income statements with
that which would be computed by applying the statutory federal income tax rate
of 35% to income before income tax expense.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rates $131,478 $112,003 $ 96,570
Increase (decrease) in taxes resulting from:
Tax-exempt interest (6,525) (7,284) (6,227)
Cash surrender value of life insurance (1,680) (1,461) (1,834)
Amortization of intangibles 5,618 4,096 2,014
State income taxes, net of federal income tax benefit 9,945 8,490 7,688
Other, net (935) (1,019) 2,004
- ----------------------------------------------------------------------------------------------------------------
Total income tax expense from operations $137,901 $114,825 $100,215
================================================================================================================
</TABLE>
The 1997 net deferred tax liability is included in other liabilities
and the 1996 net deferred tax asset is included in other assets on the
supplemental consolidated balance sheets. Management
64
<PAGE> 65
believes that it is more likely than not that the deferred tax asset will be
realized. Significant components of the deferred tax assets and liabilities are,
as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 66,107 $ 67,387
Deferred compensation 14,829 13,725
Postretirement benefit obligation 8,728 7,697
Unrealized loss on securities available for sale -- 1,937
Other 18,712 19,035
- ---------------------------------------------------------------------------------------------------------------
Total deferred tax asset 108,376 109,781
- ---------------------------------------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant, and equipment 12,392 9,485
Direct lease financing 54,000 43,209
Unrealized gain on securities available for sale 920 --
Purchase accounting 15,081 13,917
Pension 8,568 8,132
Mortgage servicing rights 10,234 7,989
Other 10,708 7,995
- ---------------------------------------------------------------------------------------------------------------
Total deferred tax liability 111,903 90,727
- ---------------------------------------------------------------------------------------------------------------
Net deferred tax (liability) asset $ (3,527) $ 19,054
===============================================================================================================
</TABLE>
At December 31, 1997, IFC had approximately $1.9 million in pretax net
operating losses for federal income tax purposes which are available to offset
future taxable income of IFC. The net operating loss was generated in the fiscal
year ended June 30, 1986 and will expire on December 31, 2000. All of the net
operating loss carryforward resulted from operations prior to the date of the
Corporation's acquisition of IFC, and as such, its utilization is dependent upon
future income of IFC. In addition, the carryforward is further limited by
Section 382 of the Internal Revenue Code which applies to changes in ownership.
Based upon a projection of anticipated future taxable income, the Corporation
believes that it is more likely than not that sufficient levels of taxable
income will be generated by IFC in appropriate taxable periods prior to December
31, 2000, and as such, has recorded a net deferred tax asset related to the net
operating loss in the accompanying supplemental consolidated balance sheets.
Management's assessment of anticipated future taxable income is based upon
numerous factors including, but not limited to, projected interest rates,
economics in the securities industry and certain other cost saving strategies.
Retained earnings at December 31, 1997 includes approximately $4
million of income that has not been subject to tax because of deductions for bad
debts allowed for federal income tax purposes. Deferred income taxes have not
been provided on such bad debt deductions since it is not intended to use the
accumulated bad debt deductions for purposes other than to absorb loan losses.
The tax liability would have been $1.6 million at December 31, 1997 if this
portion of retained earnings were used for purposes other than as described.
At December 31, 1997, Deposit Guaranty Louisiana Corp. had investment
tax credit carryforwards for federal income tax purposes of approximately $1.6
million which are available to reduce future federal income taxes, if any,
through 2001. Based upon anticipated future taxable income over the periods
which the deferred tax assets are realizable, management
65
<PAGE> 66
believes it is more likely than not Deposit Guaranty Louisiana Corp. will
realize the benefits of these deferred tax assets.
NOTE 12: CAPITAL STOCK
The Corporation has stock-based compensation plans covering certain
officers and other key employees of the Corporation. The plans provide for
restricted stock incentives based on the attainment of annual and long-term
performance goals. Stock-based compensation plans also include stock option
programs, which provide for the granting of statutory incentive stock options
and nonstatutory options to key employees. Additionally, the Corporation has a
stock option plan for nonemployee directors. As of December 31, 1997, the
Corporation had 11.7 million shares of common stock reserved for issuance under
these plans.
Since 1991, the Corporation has issued restricted common stock to
certain executive officers. The restrictions lapse within primarily 10 years of
issuance; however, if certain performance criteria are met, restrictions will
lapse earlier. The amount recorded for the restricted stock issued is based on
the market value of the Corporation's common stock on the award dates and is
shown as deferred compensation in shareholders' equity. Such compensation
expense is recognized over a three- to ten-year period. The amount of
compensation expense recognized from awards of restricted stock in the
Corporation's supplemental consolidated financial statements for 1997, 1996, and
1995 was $3.4 million, $1.4 million, and $1.4 million, respectively.
The following table summarizes the Corporation's restricted stock
grants and the weighted-average fair values at grant date:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Restricted stock granted during the year 445,583 92,976 32,190
Weighted-average fair value of restricted stock granted during the
year. $32.94 $23.55 $16.66
_____________
</TABLE>
As discussed under Note 1, the Corporation has chosen to follow APB
Opinion No. 25 and related interpretations in accounting for employee stock
options, and accordingly, no compensation expense has been recognized for
options granted during 1997, 1996, and 1995. Had the Corporation used the
provisions under SFAS No. 123, the fair value of each option grant would be
estimated on the date of grant using the Black-Scholes option-pricing model.
Based on this fair value calculation of compensation expense, net income and
earnings per share on a proforma basis has been computed and is compared with
reported amounts in the table below:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
(dollars in millions, except per share amounts) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $237.8 $205.2 $175.7
Net income, proforma 235.9 204.1 175.4
- ----------------------------------------------------------------------------------------------------------------
Basic earnings per share, as reported 2.23 1.96 1.73
Basic earnings per share, proforma 2.21 1.95 1.73
- ----------------------------------------------------------------------------------------------------------------
Diluted earnings per share, as reported 2.18 1.93 1.70
Diluted earnings per share, proforma 2.17 1.93 1.70
================================================================================================================
</TABLE>
66
<PAGE> 67
The following weighted-average assumptions were used in the
Black-Scholes option-pricing model:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate during the life of the option 6.42% 5.74% 7.34%
Expected life of the option (in years) 6.1 6.1 6.1
Expected dividend yield over the expected life of the option 2.67% 2.75% 2.75%
Expected volatility of the stock over the option's life 22.47% 22.44% 23.97%
================================================================================================================
</TABLE>
The effects of applying SFAS No. 123, for either recognizing or
disclosing compensation cost under such pronouncement, may not be representative
of the effects on reported net income in future years.
A summary of the Corporation's stock option plans as of December 31,
1997, 1996, and 1995, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ----------------------- ----------------------
TOTAL WEIGHTED- Total Weighted- Total Weighted-
OPTION AVERAGE Option Average Option Average
SHARES EXERCISE Shares Exercise Shares Exercise
OUTSTANDING PRICE Outstanding Price Outstanding Price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year 4,424,363 $15.34 4,365,367 $ 12.11 4,991,679 $10.98
Options granted 845,100 29.41 1,117,700 22.69 807,946 15.22
Options exercised (829,966) 12.47 (997,654) 9.24 (1,342,252) 7.57
Options cancelled (144,780) 23.47 (61,050) 17.30 (92,006) 11.90
Options expired -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Options outstanding at end of year 4,294,717 $18.40 4,424,363 $ 15.34 4,365,367 $12.11
Options exercisable at year-end 2,364,168 $14.56 2,434,238 $ 12.41 2,649,407 $10.40
Weighted average fair value of options
granted during the year $8.66 $ 5.75 $4.67
==================================================================================================================
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------
Options Weighted- Options
Outstanding Average Weighted- Exercisable Weighted-
Range of at Remaining Average at Average
Exercise December 31, Contractual Life Exercise December 31, Exercise
Prices 1997 (years) Price 1997 Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.625 - $10.938 573,111 2.96 $ 8.29 573,111 $ 8.29
$11.438 - $14.750 1,091,304 5.47 12.99 789,544 12.48
$15.180 - $20.200 1,019,036 6.63 17.52 705,197 17.67
$21.375 - $26.500 967,796 8.27 23.66 295,396 24.80
$29.563 - $47.750 643,470 9.08 30.10 920 29.56
- ---------------------------------------------------------------------------------------------------------------
$ 4.625 - $47.750 4,294,717 6.58 18.40 2,364,168 14.56
===============================================================================================================
</TABLE>
67
<PAGE> 68
NOTE 13: EARNINGS PER SHARE
The following reflects the reconciliation of the basic and diluted per
share computations for net income:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
(dollars in thousands, except per share amounts) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income available to common shareholders $237,752 $205,182 $175,700
==================================================================================================================
Average shares
Average shares - basic 106,745 104,533 101,593
Effect of dilutive securities:
Forward purchase commitment 21 -- --
Common stock options 2,184 1,559 1,707
- ------------------------------------------------------------------------------------------------------------------
Average shares - diluted 108,950 106,092 103,300
==================================================================================================================
Basic earnings per share $ 2.23 $ 1.96 $ 1.73
Diluted earnings per share 2.18 1.93 1.70
==================================================================================================================
</TABLE>
The effect from assumed exercise of .6 million and .3 million of stock
options was not included in the computation of diluted earnings per share for
1996 and 1995, respectively, because such shares would have had an antidilutive
effect on earnings.
NOTE 14: OFF-BALANCE-SHEET AND DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Corporation is a party to
financial transactions which have off-balance-sheet risk. Such transactions
arise in meeting customers' financing needs and from the Corporation's
activities in reducing its own exposure to fluctuations in interest rates.
Off-balance-sheet items involving customers consist primarily of commitments to
extend credit and letters of credit, which generally have fixed expiration
dates. These instruments may involve, to varying degrees, elements of credit and
interest rate risk. To evaluate credit risk, the Corporation uses the same
credit policies in making commitments and conditional obligations on these
instruments as it does for instruments reflected on the balance sheet.
Collateral obtained, if any, varies but may include deposits held in financial
institutions; U.S. Treasury securities or other marketable securities;
income-producing commercial properties; accounts receivable; property, plant,
and equipment; and inventory. The Corporation's exposure to credit risk under
commitments to extend credit and letters of credit is the contractual (notional)
amount of the instruments. Interest rate contract transactions may have credit
and interest rate risk significantly less than the contractual amount.
COMMITMENTS
Commitments to extend secured or unsecured credit are contractual
agreements to lend money provided there is no violation of any condition.
Commitments may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. At December 31, 1997 and 1996,
respectively, the Corporation had $5.1 billion and $4.1 billion of unfunded
commitments to extend credit. Of these amounts, unfunded commitments for
borrowers with
68
<PAGE> 69
loans on nonaccrual status were $.1 million at December 31, 1997, and $3 million
at December 31, 1996.
Standby letters of credit are commitments issued by the Corporation to
guarantee the performance of a customer to a third party. As of December 31,
1997 and 1996, the Corporation had standby letters of credit issued amounting to
approximately $402.4 million and $343.3 million, respectively. The Corporation
also had commercial letters of credit of $40.9 million and $42.5 million at
December 31, 1997 and 1996, respectively. Commercial letters of credit are
conditional commitments issued by the Corporation to facilitate trade for
corporate customers. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Forward commitments are contracts for the delayed delivery of
securities in which the seller agrees to make delivery of a specified instrument
at a specified future date and at a specified price or yield. Credit risk may
arise from the possibility that counterparties may not have the ability to
fulfill their commitments, while market risk may arise from movements in
interest rates and security values. The majority of the forward commitments
represent agreements to sell mortgage loans. As of December 31, 1997, the
contract amounts for forward commitments totaled $139 million compared to $131
million at December 31, 1996.
The Corporation contracts to buy and sell foreign exchange primarily to
meet the currency needs of its customers and to hedge any resulting exposure
against market risk. At December 31, 1997 and 1996, the Corporation had $30.6
million and $23.2 million, respectively, of foreign exchange forward contracts,
which is the sum of customers' contracts with the Corporation and the
Corporation's offsetting contracts to minimize its exposure.
DERIVATIVES
The Corporation's principal objective in holding or issuing derivative
financial instruments is the management of interest rate exposure arising out of
nontrading assets and liabilities. The Corporation's earnings are subject to
risk of interest rate fluctuations to the extent that interest-earning assets
and interest-bearing liabilities mature or reprice at different times or in
differing amounts. Asset/liability management activities are aimed at maximizing
net interest income within liquidity, capital and interest rate risk constraints
established by management. The Corporation's objective is to manage the interest
sensitivity position so that net income will not be impacted more than 5% for
interest rates varying up to 150 basis points from the Corporation's most likely
interest rate forecast over the next 12 months.
69
<PAGE> 70
To achieve its risk management objective, the Corporation uses a
combination of derivative financial instruments, particularly interest rate
swaps. The instruments utilized are noted in the following table along with
their notional amounts and fair values at year-end 1997 and 1996:
<TABLE>
<CAPTION>
Weighted-
Average
Weighted-Average Rate Maturity
Related Variable Rate Notional ---------------------- ---------- Fair
(dollars in thousands) Asset/Liability Amount Paid Received Years Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Interest rate swaps Money market deposits $ 150,000 5.97% (1) 5.91% (2) 2.1 $ 164
Interest rate swaps Commercial loans 775,000 5.82 (2) 6.61 (1) 4.3 17,507
Interest rate swaps Mortgage loans 21,225 6.65 (1) 6.00 (2) 9.5 (545)
Interest rate swaps FHLB advances 85,000 6.33 (1) 5.88 (2) 6.7 (1,439)
Interest rate swaps Available for sale securities 50,000 5.75 (3) 5.77 (2) 4.8 (693)
Forward interest rate swaps Money market deposits 600,000 6.46 (4) 5.89 (4) 1.3 (1,821)
Forward interest rate swaps Available for sale securities 750,000 6.24 (5) N/A (5) 2.5 (2,755)
----------- --------
Total interest rate swaps 2,431,225 10,418
Interest rate floors Commercial loans 300,000 5.37 (6) N/A 2.9 1,604
----------- --------
Total interest rate contracts $ 2,731,225 $ 12,022
================================================================================================================================
December 31, 1996
Interest rate swaps Money market deposits $ 300,000 5.70% (1) 5.54% (2) 2.0 $ 1,717
Interest rate swaps Commercial loans 200,000 5.50 (2) 6.75 (1) 4.4 3,782
Interest rate swaps Mortgage loans 22,622 6.65 (1) 5.56 (2) 10.5 (182)
Interest rate swaps Long-term debt 100,000 5.56 (2) 6.94 (1) 9.3 1,789
Forward interest rate swaps Money market deposits 400,000 6.27 (7) N/A (7) 1.8 (327)
Forward interest rate swaps Available for sale securities 100,000 7.02 (7) N/A (7) 3.5 (1,853)
----------- --------
Total interest rate swaps 1,122,622 4,926
Interest rate caps Time deposits 100,000 6.88 (6) N/A 1.0 7
Interest rate floors Commercial loans 300,000 5.37 (6) N/A 3.9 2,814
----------- --------
Total interest rate contracts $ 1,522,622 $ 7,747
================================================================================================================================
</TABLE>
(1) Fixed rate.
(2) Variable rate which reprices quarterly based on LIBOR.
(3) Variable rate which reprices periodically based on the Constant Maturity
Treasury rate.
(4) Forward swap periods have become effective for $150 million and will begin
at various dates during 1998 for $450 million. The rates to be paid are
fixed and were set at the inception of the contracts. Variable rates to be
received are based on LIBOR, repricing quarterly, but were unknown for $450
million of forward swaps at December 31, 1997, since the related forward
swap periods had not yet begun.
(5) Forward swap periods begin at various dates during 1998. The rates paid are
fixed and were set at the inception of the contracts. Variable rates are
based on LIBOR and reprice quarterly.
(6) Fixed rate strike price, based on the 3-month LIBOR rate.
(7) Forward swap periods began at various dates during 1997. The rates paid are
fixed and were set at the inception of the contracts. Variable rates are
based on LIBOR and reprice quarterly.
Notional amounts are key elements of derivative financial instrument
agreements. However, notional amounts do not represent the amounts exchanged by
the parties to derivatives and do not measure the Corporation's exposure to
credit or market risks. The amounts exchanged are based on the notional amounts
and the other terms of the underlying derivative agreements. The Corporation's
credit exposure at the reporting date from derivative financial instruments is
represented by the fair value of instruments with a positive fair value at that
date offset by any collateral held. Credit risk disclosures, however, relate to
losses that would be recognized if counterparts failed completely to perform
their obligations.
70
<PAGE> 71
The risk that counterparts to derivative financial instruments might
default on their obligations is monitored on an ongoing basis. To manage the
level of credit risk, the Corporation reviews the credit standing of its
counterparts and enters into master netting agreements whenever possible, and
when appropriate, obtains collateral. Master netting agreements incorporate
rights of setoff that provide for the net settlement of subject contracts with
the same counterparts in the event of default.
Interest rate swap contracts are primarily used to convert certain
deposits and long-term debt to fixed interest rates or to convert certain groups
of customer loans to fixed rates. The Corporation's net credit exposure with
interest rate contract counterparts, considering master netting agreements and
collateral held, totaled $14.1 million at December 31, 1997, and $4.8 million at
December 31, 1996.
Interest rate caps with three-year maturities were purchased during
1994 in anticipation of further increases in interest rates and allowed the
Corporation to limit its exposure to unfavorable interest rate fluctuations over
and above a "capped" rate for certificates of deposit with maturities of three
months or less. A premium was paid for this protection. The risk assumed by the
Corporation was limited to the amount of the premium and not the notional amount
of the interest rate cap. At December 31, 1997, the Corporation did not have any
outstanding interest rate caps.
Interest rate floors with five-year maturities were purchased during
1995 in anticipation of decreases in interest rates and allowed the Corporation
to limit its exposure to unfavorable interest rate fluctuations below a
particular rate for commercial loans. A premium is paid for this protection. The
risk assumed by the Corporation is limited to the amount of the premium and not
the notional amount of the interest rate floor. At December 31, 1997, the
unamortized portion of the interest rate floor was $1.9 million.
The table below summarizes, by notional amounts, the activity for each
major category of derivative financial instruments.
<TABLE>
<CAPTION>
Forward
Interest Rate Swaps Swaps
---------------------- ---------
Interest Interests Basis Pay Receive Pay Futures
(in thousands) Rate Caps Rate Floors Swap Fixed Fixed Fixed Contracts
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 100,000 $115,000 $ -- $1,213,910 $ 40,000 $ 300,000 $ 140,000
ADDITIONS -- 185,000 -- -- 400,000 700,000 --
MATURITIES/TERMINATIONS -- -- -- (891,288) (140,000) (500,000) (140,000)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 100,000 300,000 -- 322,622 300,000 500,000 --
ADDITIONS -- -- 50,000 135,000 775,000 1,300,000 --
MATURITIES/TERMINATIONS (100,000) -- -- (201,397) (300,000) (450,000) --
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ -- $300,000 $50,000 $ 256,225 $ 775,000 $1,350,000 $ --
======================================================================================================================
</TABLE>
71
<PAGE> 72
The table below presents the net deferred gains (losses) related to
terminated derivative financial instruments at December 31, 1997 and 1996.
Deferred gains of $11.2 million and deferred losses of $5.8 million are included
in other liabilities and other assets, respectively, on the supplemental
consolidated balance sheet at December 31, 1997. Deferred gains of $8.4 million
and deferred losses of $3.4 million are included in other liabilities and other
assets, respectively, on the supplemental consolidated balance sheet at December
31, 1996.
<TABLE>
<CAPTION>
December 31
-----------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate swaps $5,402 $5,067
Futures contracts -- (113)
- -----------------------------------------------------------------------------------------------------------
Total net deferred gains $5,402 (1) $4,954 (2)
===========================================================================================================
</TABLE>
(1) $1.1 million of net deferred gains to be recognized during 1998 and $4.3
million of net deferred gains to be recognized during 1999 through 2006.
(2) $.8 million of net deferred gains recognized during 1997 and $4.2 million of
net deferred gains to be recognized during 1998 through 2001.
NOTE 15: LEGAL AND REGULATORY MATTERS
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation to maintain minimum ratios of Tier I and total
capital to risk-weighted assets, and of Tier I capital to average assets of 4%,
8%, and 4%, respectively. Management believes as of December 31, 1997, that the
Corporation met all capital adequacy requirements to which it was subject.
As of December 31, 1997, the most recent notification from the Office
of the Comptroller of the Currency ("OCC") categorized FANB as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, FANB must maintain minimum Tier I risk-based capital, total
risk-based capital, and Tier I leverage ratios of 6%, 10%, and 5%, respectively.
There are no conditions or events since that notification that management
believes would change FANB's well capitalized status. The actual capital amounts
and ratios for the Corporation and FANB are presented in the table below:
72
<PAGE> 73
<TABLE>
<CAPTION>
Corporation First American National Bank
---------------------------- ----------------------------
December 31 December 31
- ----------------------------------------------------------------------------- ----------------------------
(dollars in thousands) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CAPITAL COMPONENTS Tier I capital:
Realized shareholders' common equity $ 1,542,281 $ 1,452,989 $ 1,638,492 $ 1,386,152
Less disallowed intangibles (242,257) (188,050) (223,802) (126,524)
- -----------------------------------------------------------------------------------------------------------
Total Tier I capital 1,300,024 1,264,939 1,414,690 1,259,628
- -----------------------------------------------------------------------------------------------------------
Tier II capital:
Allowable allowance for loan losses 178,013 153,593 175,612 145,701
Unsecured holding company debt 99,442 99,361 -- --
- -----------------------------------------------------------------------------------------------------------
Total Tier II capital 277,455 252,954 175,612 145,701
- -----------------------------------------------------------------------------------------------------------
Total capital $ 1,577,479 $ 1,517,893 $ 1,590,302 $ 1,405,329
===========================================================================================================
Risk-adjusted assets $14,239,010 $12,255,593 $14,046,948 $11,624,579
Quarterly average assets 17,121,849 15,791,618 16,769,687 14,630,903
===========================================================================================================
CAPITAL RATIOS(1)
Total risk-based capital ratio 11.08% 12.39% 11.32% 12.09%
Tier I risk-based capital ratio 9.13 10.32 10.07 10.84
Tier I leverage ratio 7.59 8.01 8.44 8.61
===========================================================================================================
</TABLE>
(1) Risk-based capital ratios were computed using realized equity (total
shareholders' equity exclusive of net unrealized gains (losses) on
securities available for sale, net of tax).
The extent to which dividends may be paid to the Corporation from its
subsidiaries is governed by applicable laws and regulations. For the
Corporation's national bank subsidiary, the approval of the OCC is required if
dividends declared in any year exceed net profits for that year (as defined
under the National Bank Act) combined with the retained net profits of the two
preceding years. In addition, a national bank may not pay a dividend, make any
other capital distribution, or pay management fees if such payment would cause
it to fail to satisfy certain minimum capital requirements. Under the
regulations of the Office of Thrift Supervision ("OTS"), a savings association
that exceeds its fully phased-in capital requirements both immediately prior to
and on a proforma basis after giving effect to a proposed capital distribution
is generally permitted without prior approval of the OTS to make a capital
distribution during a calendar year equal to the greater of (i) 100% of net
earnings to date during the calendar year, plus the amount that would reduce by
one-half its "surplus capital ratio" (i.e., the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year; or (ii)
75% of its net income for the previous four quarters. In accordance with the
most restrictive regulations, at December 31, 1997, the above subsidiaries had
$90.4 million available for distribution as dividends to the Corporation.
On September 30, 1996, special legislation was enacted which required
many financial institutions to pay a one-time assessment on deposits insured by
the Savings Association Insurance Fund ("SAIF") at the rate of $.657 per $100 of
deposits held as of March 31, 1995. The Corporation's assessment was $8.1
million or $5 million, net of tax ($.05 per share). The purpose of the
legislation was to recapitalize the thrift fund up to the statutorily prescribed
1.25%. Effective January 1, 1997, the normal SAIF deposit insurance rate for
well-capitalized institutions dropped to 0 basis points per $100 of deposits.
Beginning January 1, 1997, a separate 1.3 basis point annual charge will be
assessed through 1999 on Bank Insurance Fund deposits and a 6.4 basis point
annual charge will be assessed on SAIF deposits in order to
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<PAGE> 74
service debt incurred by the Financing Corporation, a corporation established by
the Federal Housing Finance Board to issue stock and debt principally to assist
in funding the Federal Savings and Loan Insurance Corporation Resolution Fund.
Starting in the year 2000 until the Financial Corporation debt is retired, banks
and thrifts will pay such assessment on a pro rata basis, which is estimated to
run approximately 2.5 basis points.
Following the adoption of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA"), Charter Federal Savings Bank ("Charter"
or now "FAFSB"), brought an action against the OTS and the Federal Deposit
Insurance Corporation seeking injunctive and other relief, contending that
Congress' elimination of supervisory goodwill required rescission of certain
supervisory transactions. The Federal District Court found in Charter's favor,
but in 1992 the Fourth Circuit Court of Appeals reversed, and the U.S. Supreme
Court denied Charter's petition for certiorari. In 1995, the Federal Circuit
Court found in favor of another thrift institution in a similar case (Winstar
Corp. v. United States) in which the association sought damages for breach of
contract. Charter also filed suit against the United States Government
("Government") in the Court of Federal Claims based on breach of contract.
Pending the Supreme Court's review of the Winstar decision, FAFSB's action was
stayed. In July 1996, the Supreme Court affirmed the lower court's decision in
Winstar. The stay was automatically lifted and FAFSB's suit is now proceeding.
The Government, however, has filed a motion to dismiss the suit based on the
prior Fourth Circuit decision. This motion has not yet been decided by the
Federal Claims Court.
The value of FAFSB's claims against the Government, as well as their
ultimate outcome, are contingent upon a number of factors, some of which are
outside of FAFSB's control, and are highly uncertain as to substance, timing and
the dollar amount of any damages which might be awarded should FAFSB finally
prevail. Under the Agreement and Plan of Reorganization as amended by and
between FAFSB and the Corporation, in the event that FAFSB is successful in this
litigation, the FAFSB shareholders as of December 1, 1995 will be entitled to
receive additional consideration equal in value to 50% of any recovery, net of
all taxes and certain other expenses, including the costs and expenses of such
litigation, received on or before December 1, 2000 subject to certain
limitations in the case of certain business combinations. Such additional
consideration, if any, is payable in the common stock of the Corporation, based
on the average per share closing price on the date of receipt by FAFSB of the
last payment constituting a recovery from the Government.
DGNB is a defendant in a case in which the plaintiffs are beneficiaries
of a trust for which DGNB is the trustee. In an amended complaint, the
plaintiffs claim that DGNB was negligent in its dealings with the trust
property, breached its trust duties by allegedly abusing its discretion and
negligently handling trust assets, engaged in self dealing, and was grossly
negligent in its handling of the trusts. The case seeks actual damages for waste
of trust assets and loss of income and punitive damages, both in an unspecified
amount to be proven at trial, and attorney fees and court costs. While the
ultimate outcome of the lawsuit cannot be predicted with certainty, management
denies all liability and believes that the ultimate resolution of this matter
will not have a material effect on the Corporation's supplemental consolidated
financial statements.
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
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<PAGE> 75
proceedings presently pending would not have a material adverse effect on the
supplemental consolidated financial statements of the Corporation.
NOTE 16: FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments for
both on- and off-balance-sheet assets and liabilities for which it is
practicable to estimate fair value. The techniques used for this valuation are
significantly affected by the assumptions used, including the amount and timing
of future cash flows and the discount rate. Such estimates involve uncertainties
and matters of judgment and therefore cannot be determined with precision. In
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets. Accordingly, the aggregate fair value amounts
presented are not meant to represent the underlying value of the Corporation.
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------
1997 1996
--------------------------- ------------------------------
ESTIMATED Estimated
CARRYING FAIR Carrying Fair
(in thousands) AMOUNT VALUE Amount Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial instruments (assets):
Cash and short-term investments $1,000,983 $1,000,983 $ 1,053,835 $1,053,835
Securities held to maturity 715,027 723,228 969,797 977,767
Securities available for sale 3,395,494 3,395,494 3,150,107 3,150,107
Federal funds sold and securities purchased
under agreements to resell 189,542 189,542 209,317 209,317
Trading account securities 64,469 64,469 62,715 62,715
Loans, net of unearned discount and allowance for
loan losses 11,461,689 11,578,452 10,447,195 10,440,387
Financial instruments (liabilities):
Noninterest-bearing deposits 2,647,765 2,647,765 2,565,084 2,565,084
Interest-bearing deposits 10,757,692 10,773,139 10,283,284 10,315,892
Short-term borrowings 1,969,639 1,969,639 1,697,401 1,697,401
Long-term debt 596,218 600,622 430,562 429,204
===================================================================================================================
</TABLE>
The estimated fair values for the Corporation's off-balance-sheet
financial instruments are summarized as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------
1997 1996
--------------------------- ------------------------------
CONTRACTUAL ESTIMATED Contractual Estimated
OR NOTIONAL FAIR or Notional Fair
(in thousands) AMOUNT VALUE Amount Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to extend credit $5,136,991 $ 8,860 $4,065,635 $ 7,118
Standby letters of credit 402,400 1,270 343,342 2,326
Commercial letters of credit 40,930 95 42,489 100
Interest rate swaps 1,081,225 14,994 622,622 7,106
Forward interest rate swaps 1,350,000 (4,576) 500,000 (2,180)
Interest rate caps -- -- 100,000 7
Interest rate floors 300,000 1,604 300,000 2,814
===================================================================================================================
</TABLE>
The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments:
Short-term financial instruments -- The carrying amounts of short-term
financial instruments, including cash, federal funds sold and purchased and
resell and repurchase agreements approximate fair value. These instruments
expose the Corporation to limited credit risk and have no stated maturity or
mature within one year or less and carry interest rates which approximate
market.
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<PAGE> 76
Securities held to maturity, securities available for sale, and trading
account securities -- Fair values are based on quoted market prices or
dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans -- For variable-rate loans that reprice frequently, fair values are
based on carrying values. The fair values for certain homogeneous categories
of loans, such as residential mortgages, are estimated using quoted market
prices for securities backed by similar loans, adjusted for differences in
loan characteristics. The fair values for other performing loans are
estimated by discounting estimated future cash flows using the current rates
at which similar loans would be made to borrowers with similar credit risk
and for similar maturities. Included within financial assets are certain
nonperforming assets, consisting primarily of nonperforming loans, the fair
values of which are based principally on the lower of the amount due from
customers or the fair value of the loans' collateral, which is the amount
the Corporation could reasonably expect to receive in a current sale between
a willing buyer and seller other than in a forced or liquidation sale.
Deposits -- The fair value of deposits with no stated maturity, such as
demand deposits, NOW accounts, money market accounts, and regular savings
accounts, is equal to the amount payable on demand at the reporting date.
The fair value of certificates of deposits and other fixed maturity time
deposits is estimated using the rates currently offered for deposits of
similar remaining maturities. Any foreign deposits are valued at the
carrying value due to the frequency with which rates for such deposits are
adjusted to a market rate.
Short-term borrowings -- Fair value is estimated to equal the carrying
amount since these instruments have a relatively short maturity.
Long-term debt -- Rates for long-term debt with similar terms and remaining
maturities are used to estimate fair value of existing debt.
Off-balance-sheet instruments -- The fair value of commitments to extend
credit is based on unamortized deferred loan fees and costs. For letters of
credit, fair value is estimated using fees currently charged to enter into
similar agreements with similar maturities. The fair value of the
Corporation's outstanding futures contracts, interest rate caps, and
interest rate floors is based on quoted market prices, and the estimated
fair value of interest rate swaps and forward interest rate swaps is based
on estimated costs to settle the obligations with the counterparts at the
reporting date.
NOTE 17: PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for First American Corporation (Parent
Company only) was as follows:
SUPPLEMENTAL CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from subsidiaries:
Banks $249,594 $ 76,524 $ 52,170
Fees from subsidiaries 39,510 37,681 30,836
Interest from subsidiaries 1,407 3,734 3,633
Interest on time deposits with other banks and other income 4,368 207 697
- ----------------------------------------------------------------------------------------------------------------
Total income 294,879 118,146 87,336
- ----------------------------------------------------------------------------------------------------------------
Expenses
Salaries and employee benefits 23,368 25,597 21,118
Interest expense 14,701 11,627 4,076
Other expenses 21,620 22,467 19,699
- ----------------------------------------------------------------------------------------------------------------
Total expenses 59,689 59,691 44,893
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 235,190 58,455 42,443
Reduction to consolidated income taxes arising from parent
company loss 7,529 8,049 5,717
- ----------------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of subsidiaries 242,719 66,504 48,160
- ----------------------------------------------------------------------------------------------------------------
Equity in undistributed earnings (dividends in excess of earnings)
of subsidiaries
Banks (5,315) 138,152 126,714
Nonbanks 348 526 826
- ----------------------------------------------------------------------------------------------------------------
Net income $237,752 $205,182 $175,700
=================================================================================================================
</TABLE>
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<PAGE> 77
SUPPLEMENTAL CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------------------
(in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 2,645 $ 47,279
Interest-bearing deposit with unaffiliated bank 7,600 --
Short-term investments with subsidiary 24,355 25,569
Employee stock ownership plan loan 163 443
Investment in subsidiaries, at cost adjusted for equity in earnings and net
unrealized gains (losses) on securities available for sale:
Bank 1,700,775 1,571,468
Nonbank 8,091 7,743
Other assets 52,749 47,156
- -----------------------------------------------------------------------------------------------------------------
Total assets $1,796,378 $1,699,658
=================================================================================================================
Liabilities and shareholders' equity
Long-term debt $ 200,839 $ 198,767
Other liabilities 51,562 50,918
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 252,401 249,685
- -----------------------------------------------------------------------------------------------------------------
Preferred stock, without par value -- --
Common stock, $2.50 par value 265,080 262,775
Additional paid-in capital 163,902 239,661
Retained earnings 1,126,803 953,062
Deferred compensation on restricted stock (13,341) (2,066)
Employee stock ownership plan obligation (163) (443)
- -----------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 1,542,281 1,452,989
Net unrealized losses on securities available for sale, net of tax 1,696 (3,016)
- -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,543,977 1,449,973
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,796,378 $1,699,658
=================================================================================================================
</TABLE>
77
<PAGE> 78
SUPPLEMENTAL CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 237,752 $ 205,182 $ 175,700
Adjustments to reconcile net income to net cash provided
by operating activities:
Dividends in excess of income (undistributed income) of
subsidiaries 4,967 (138,678) (127,540)
Depreciation and amortization 2,256 3,425 3,020
Deferred income tax expense 540 1,614 1,295
Gain on sale of other assets (2,258) -- --
Change in assets and liabilities, net of effect of acquisitions:
Increase in interest receivable and other assets (8,740) (13,822) (10,094)
Increase in interest payable and other liabilities 1,029 7,420 9,233
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 235,546 65,141 51,614
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net decrease (increase) in employee stock ownership plan loan 280 218 (661)
Acquisitions, net of cash acquired (29,587) (1,477) (9,294)
Sale of other assets 2,830 -- --
Proceeds from sale of premises and equipment 156 301 11
Purchases of premises and equipment (3,961) (2,071) (1,086)
Net decrease in notes receivable from nonbank subsidiary -- 2,990 750
Net decrease in investment in subsidiary -- -- 7,500
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (30,282) (39) (2,780)
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in short-term borrowings -- (27,600) 27,600
Proceeds from issuance of long-term debt -- 99,381 49,513
Repayment of long-term debt -- (2,734) (782)
Proceeds from early termination of swap contract on long-term debt 2,038 -- --
Issuance of common shares for Employee Benefit and Dividend
Reinvestment Plans 22,065 17,947 14,883
Repurchase of common stock (196,500) (108,249) (94,729)
Tax benefit-related to stock options 5,603 4,530 3,574
Cash dividends paid (76,718) (62,201) (50,146)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (243,512) (78,926) (50,087)
- ----------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (38,248) (13,824) (1,253)
Cash and cash equivalents, beginning of year 72,848 86,672 87,925
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 34,600 $ 72,848 $ 86,672
================================================================================================================
Cash paid during the year for:
Interest expense $ 14,701 $ 10,419 $ 3,958
Income taxes 58,971 48,255 30,894
Noncash investing activities:
Stock issued for acquisitions (note 2) 94,637 83,723 156,395
================================================================================================================
</TABLE>
78
