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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997. Commission file number 0-6198.
FIRST AMERICAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-0799975
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
FIRST AMERICAN CENTER,
NASHVILLE, TENNESSEE 37237-0700
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 615/748-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $2.50 PER SHARE AND ASSOCIATED
SERIES A JUNIOR PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
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Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value (computed on the basis of the reported last
sale price on February 5, 1998) of shares of Common Stock, par value $2.50 per
share, held by non-affiliates of the Registrant was $2,471,927,276.37. The
aggregate market value calculation assumes (i) that all shares beneficially held
by members of the Board of Directors of the Registrant are shares owned by
"affiliates," a status which each of the directors individually disclaims, and
(ii) that shares beneficially owned by the Registrant's subsidiaries are owned
by "affiliates".
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
Class February 5, 1998
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<S> <C>
Common Stock, $2.50 par value: 59,007,497
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE:
<TABLE>
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DOCUMENT FROM WHICH PORTIONS ARE PART OF FORM 10-K
INCORPORATED BY REFERENCE TO WHICH INCORPORATED
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<S> <C>
1. JOINT PROXY STATEMENT - PROSPECTUS
DATED MARCH 11, 1998 PART III
</TABLE>
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TABLE OF CONTENTS
<TABLE>
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Page
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PART I
Items 1-2 Business and Properties....................................................................... 1
General.............................................................................. 1
Statistical Information.............................................................. 5
Supervision and Regulation........................................................... 6
Competition.......................................................................... 13
Employees............................................................................ 14
Item 3 Legal Proceedings............................................................................. 14
Item 4 Submission of Matters to a Vote of
Security Holders..................................................................... 14
PART II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters...................................................... 15
Item 6 Selected Financial Data....................................................................... 15
Items 7; 7A Management's Discussion and Analysis of Financial Condition
and Results of Operations; Quantitative and Qualitative Disclosures
About Market Risk............................................................................. 18
Item 8 Financial Statements and Supplementary Data................................................... 49
Item 9 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.................................................. 49
PART III
Item 10 Directors and Executive Officers of the Registrant............................................ 49
Item 11 Executive Compensation........................................................................ 52
Item 12 Security Ownership of Certain Beneficial Owners
and Management....................................................................... 52
Item 13 Certain Relationships and Related Transactions................................................ 52
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................................................. 53
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PART I
ITEMS 1-2: BUSINESS AND PROPERTIES
GENERAL
First American Corporation (the "Corporation"), a Tennessee
corporation, was incorporated in 1968 and is registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended ("BHCA"), and as
a savings and loan holding company under the Home Owner's Loan Act, as amended
("HOLA"). The Corporation owns all of the capital stock of First American
National Bank ("FANB"), a national banking association headquartered in
Nashville, Tennessee; First American Federal Savings Bank ("FAFSB"), a federal
savings bank headquartered in Roanoke, Virginia; and First American Enterprises,
Inc. ("FAE"), a Tennessee corporation headquartered in Nashville, Tennessee.
FANB owns 98.50% of the issued and outstanding capital stock of IFC
Holdings, Inc. ("IFC"), a Delaware corporation headquartered in Tampa, Florida,
which is engaged in the distribution of securities, other investment products,
and insurance. IFC offers these products under two brand names, INVEST Financial
Corporation ("INVEST") and Investment Centers of America, Inc. ("ICA"). The
INVEST brand markets investment products to financial institutions of various
asset sizes while the ICA brand markets investment products primarily to
community banks.
FANB also owns 49% of the capital stock of The SSI Group, Inc.
("SSI"), a Florida corporation headquartered in Mobile, Alabama, which is
engaged in health care claims processing.
The Corporation coordinates the financial resources of the consolidated
enterprise and maintains systems of financial, operational and administrative
controls that allow coordination of selected policies and activities. The
Corporation derives its income from interest, dividends and management fees
received from its subsidiaries. The mailing address of the principal executive
offices of the Corporation is First American Center, Nashville, Tennessee
37237-0700, and the telephone number is (615) 748-2000.
As of December 31, 1997, the Corporation had total assets of
approximately $10.9 billion, total deposits of $8.0 billion, shareholders'
equity of approximately $908.7 million, and net income of $145.5 million. As of
December 31, 1997, FANB had total assets of approximately $10.59 billion, total
deposits of $7.79 billion, shareholders' equity of approximately $947.1 million,
and net income of $146.0 million for 1997. As of December 31, 1997, the
Corporation estimates that it ranked, on the basis of aggregate deposits in
Tennessee held by FANB, the Corporation's principal subsidiary, as the second
largest bank holding company headquartered in Tennessee.
The Corporation's subsidiary banks engage in lending in the following
areas: commercial, consumer -- amortizing mortgages, consumer -- other, real
estate-- construction, and real estate -- commercial mortgages and other. The
risk involved to the Corporation and its subsidiary banks in making these loans
varies based on, among other things, the amount of the loan, the length of
amortization of the principal, the type of collateral, if any, used to secure
the loan, and characteristics
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of the borrower. For a further discussion of the Corporation's and its
subsidiary banks' lending activities, see the following sections of Management's
Discussion and Analysis of Financial Condition Results of Operations, included
in this Report as Item 7: Loans, pages 27-29; Allowance and Provision for Loan
Losses, pages 32-34; and Nonperforming Assets, page 31-32.
For a discussion of the Corporation's and its subsidiary banks'
investment activities, see the following sections of Management's Discussion and
Analysis of Financial Condition and Results of Operations, included in this
Report as Item 7: Investment Securities, pages 29-30.
For a discussion of the Corporation's and its subsidiary banks' deposit
and other funding activities, see the following sections of Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in this Report as Item 7: Deposits and Other Sources of Funds, pages
30-31; and Liquidity, pages 37-39.
COMMERCIAL BANKING
Founded in 1883, FANB, at December 31, 1997, had banking offices in 35
Tennessee counties containing approximately 74% of Tennessee's population. FANB
also has banking offices in two Kentucky counties containing approximately 2.6%
of Kentucky's population and two Virginia counties (or cities) containing
approximately 1% of Virginia's population. On the basis of deposits at December
31, 1997, the Corporation estimates that FANB was the second largest bank in
Tennessee, and had the largest deposit base in the Nashville-Davidson County,
Tennessee market, the largest deposit base in the Tri-Cities (Sullivan, Carter,
Hawkins and Washington Counties, Tennessee and Washington County and Bristol
City, Virginia) market, the second largest deposit base in the Knoxville (Knox
County, Tennessee) market, the fifth largest deposit base in the Memphis (Shelby
County, Tennessee) market, the eighth largest deposit base in the Chattanooga
(Hamilton County, Tennessee) market, the second largest deposit base in the
Bowling Green, Kentucky, market, and the tenth largest deposit base in the
Southwest Virginia market.
At December 31, 1997, FANB had a total of 156 banking offices in
Tennessee, Kentucky, and Virginia. In its primary market of Tennessee, FANB had
banking offices in 20 of the 25 largest Tennessee counties (measured by
aggregate bank deposits of banks in the county at June 30, 1997) and in each of
the 15 most populous Tennessee cities.
FANB offers the services generally performed by commercial banks of
like size and character. FANB also provides individual trust services and
investment management services for customers of the Corporation's subsidiary
banks. In addition, FANB owns First Amtenn Life Insurance Company, which
underwrites credit life and accident and health insurance on extensions of
credit made by FANB. For a discussion of the securities brokerage services
provided by FANB, please see "Investment Product Distribution; Broker/Dealer
Services" on pages 3-4 of this report.
FANB offers 24-hour banking service through a variety of means,
including automated teller machines located at a majority of its banking offices
and at other locations. At December 31, 1997, FANB operated a total of 437
automated teller machines. In 1997, FANB also introduced PC and telephone
banking to its customers.
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On January 1, 1997, the Corporation completed its acquisition of
Hartsville Bancshares, Inc., a Tennessee bank holding company headquartered in
Hartsville, Tennessee ("HBI"), which owned CommunityFIRST Bank, a Tennessee
chartered bank with five branches in Sumner and Trousdale Counties, Tennessee,
which was simultaneously merged with and into FANB. The Corporation acquired HBI
through a tax-free exchange of stock valued at approximately $11.0 million in a
transaction accounted for as a purchase.
Effective July 1, 1997, First American National Bank of Kentucky
("FANBKY"), a wholly owned national bank subsidiary of the Corporation, was
merged into FANB. As a result, four FANBKY branches in Warren and Simpson
Counties, Kentucky, became FANB branches.
On July 17, 1997, FANB sold the common stock of Tennessee Credit
Corporation ("TCC"), a wholly owned FANB consumer finance subsidiary, and First
City Life Insurance Company, TCC's wholly owned credit life insurance company,
to Norwest Financial Tennessee, Inc. for $3,250,000.
FAFSB offers the services generally performed by savings banks of like
size and character. At December 31, 1997, FAFSB had 13 branches in the
southwestern region of Virginia and offered 24-hour banking service through 13
automated teller machines. On the basis of deposits at December 31, 1997, the
Corporation estimates that FAFSB had the sixth largest deposit base in the
Bristol City/Washington County, Virginia market.
FAE was incorporated in 1995 for the purpose of developing sources of
non-traditional financial services income. FAE has concentrated its efforts in
exploring the potential of fee income generation in the areas of health care
payment processing, insurance company relational database services, and
third-party marketing and securities distribution. A division of FANB manages
the Corporation's investments in these areas, including investments in IFC and
SSI.
INVESTMENT PRODUCT DISTRIBUTION; BROKER/DEALER SERVICES
IFC, which was formerly known as INVEST Financial Corporation, is a
securities broker-dealer registered with the National Association of Securities
Dealers, Inc. ("NASD"), and through its subsidiaries, is licensed to sell
investment products in all 50 states, the District of Columbia, and Puerto Rico.
Headquartered in Tampa, Florida, IFC's primary business is selling
investment products through financial institutions for which it functions as a
third party marketer. IFC offers investment products under the INVEST brand for
its financial institution clients. ICA, a North Dakota corporation headquartered
in Bismarck, North Dakota and a wholly owned subsidiary of IFC, is also a
broker-dealer registered with the NASD and a third-party marketer of its own
brand of investment products through financial institutions. ICA primarily
services community banks with assets of $500 million or less. As of December 31,
1997, IFC and ICA collectively service more than 400 banks through approximately
1900 licensed representatives in 1120 investment centers located throughout the
United States.
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Effective February 1, 1997, AmeriStar Capital Markets, Inc., formerly a
wholly owned subsidiary of FANB and a broker-dealer registered with the NASD,
was merged with and into IFC. Through its AmeriStar Investment Products
operating division, IFC currently serves as the third-party marketer of
investment products for the Corporation's subsidiary banks.
HEALTH CARE CLAIMS PROCESSING
SSI, a health care claims processing company headquartered in Mobile,
Alabama, uses automated data processing to assist hospitals and physicians in
communicating billing and payment-related information to medical benefits
third-party payors, including government agencies, health maintenance
organizations, and insurance carriers. SSI's claims processing services include
transmission of bill payments by both patients and third-party payors to
hospitals or physicians. SSI provides these electronic financial data processing
services to more than 600 hospitals, clinics, and physicians in 38 states.
Effective January 1, 1997, SSI acquired CareWare Systems, Inc.
("CareWare"), a Tampa, Florida-headquartered developer of medical management
computer software for managed care organizations, insurance carriers and health
maintenance organizations. CareWare's principal software product allows
preapproval or authorization of patient treatment, consistent with recognized
medical guidelines, and facilitates SSI's health care claims processing function
by helping control the selection, delivery, and cost of medical services. Under
the terms of the merger agreement, CareWare's shareholders received 5.1% of
SSI's common stock. Simultaneously, FANB exercised its option to maintain its
49% ownership of SSI, for an additional cost of approximately $667,000. The
balance of SSI is owned, either directly or indirectly, by Celia A. Wallace, who
was appointed to the Corporation's Board of Directors in June 1996.
RECENT DEVELOPMENTS
On December 7, 1997, the Corporation and Deposit Guaranty Corp.
("Deposit Guaranty") entered into a definitive agreement under which Deposit
Guaranty will be merged into the Corporation. Deposit Guaranty is a bank holding
company headquartered in Jackson, Mississippi, and had, as of December 31, 1997,
170 banking offices and 195 automated teller machines in its three state
operating areas of Mississippi, Louisiana and Arkansas. Deposit Guaranty is the
parent company of Deposit Guaranty National Bank, a national bank association,
and has mortgage offices in Oklahoma, Nebraska, Texas, Indiana and Iowa.
Approximately 3,500 people worked for Deposit Guaranty as of December 31, 1997.
Deposit Guaranty had previously announced plans to acquire Victory
Bancshares, Inc., a bank holding company with total assets, as of December 31,
1997, of $131 million headquartered in Memphis, Tennessee, which closed on March
23, 1998. This transaction was accounted for as a pooling-of-interests.
Under the terms of the agreement with the Corporation, Deposit Guaranty
shareholders will receive, in a tax-free exchange, 1.17 shares of the
Corporation's Common Stock for each share of Deposit Guaranty common stock. The
value of the transaction is approximately $2.3 billion and
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represents an exchange value of $54.62 for each common share of Deposit Guaranty
stock, based on the Corporation's closing share price of $46.69 on March 10,
1998, the last trading day for which information is practicably available. The
transaction will be accounted for as a pooling-of-interests. Subject to
requisite regulatory and stockholder approvals, the transaction is expected to
close in the second quarter of 1998.
Upon consummation of the transaction, the Corporation will continue to
be headquartered in Nashville, Tennessee, and will operate banking offices in
Tennessee, Mississippi, Louisiana, Arkansas, Virginia, and Kentucky.
STATISTICAL INFORMATION
Management's Discussion and Analysis of Financial Condition and Results
of Operations and the Consolidated Year-End Balance Sheets, which discuss the
Corporation and its subsidiaries from a financial perspective, are contained in
Items 7, 7A, and 8 of this Report.
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SUPERVISION AND REGULATION
GENERAL
The Corporation is a bank holding company subject to the
supervision of the Federal Reserve Board under the BHCA and a savings and loan
holding company subject to the supervision of the Office of Thrift Supervision
("OTS") under HOLA. FANB is a national bank and, as such, is subject to the
supervision of, and is regularly examined by, the Office of the Comptroller of
the Currency ("OCC"). FAFSB is a federal savings bank and, as such, is subject
to the supervision of, and is regularly examined by, the OTS. Each of the
Corporation's depository institution subsidiaries is also insured by, and
subject to the regulations of, the Federal Deposit Insurance Corporation (the
"FDIC"), and is also affected significantly by the actions of the Federal
Reserve Board by virtue of its role in regulating money supply and credit
availability, as well as by the U.S. economy in general. Areas subject to
regulation by federal authorities include loan loss reserves, investments,
loans, mergers, issuance of securities, capital, payment of dividends,
establishment and closing of branches, product offerings and other aspects of
operations.
The Corporation's non-banking subsidiaries are subject to the
supervision of the Federal Reserve Board, and other non-banking subsidiaries may
be subject to the supervision of other regulatory agencies including the
Securities and Exchange Commission ("SEC"), the NASD and state securities and
insurance regulators. Subsidiaries and permitted investments of FANB, such as
IFC and SSI, are also subject to regulation and conditions of acquisition by the
OCC.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by federal law
and regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in the
event the depository institution becomes in danger of default or is in default.
For example, under Federal Reserve Board policy, the Corporation is expected to
serve as a source of financial and managerial strength to each of its subsidiary
banks and to commit resources to support each of them. This support may be
required at times when the Corporation would not otherwise be inclined to
provide it.
Under the "cross guarantee" provisions of the Federal Deposit Insurance
Act ("FDIA"), any FDIC-insured subsidiary of the Corporation can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured subsidiary
or (ii) any assistance provided by the FDIC to any commonly controlled
FDIC-insured subsidiary "in danger of default." "Default" is defined generally
as the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"), or both. The FDIC's claim for damages is
superior to claims of shareholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
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The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or shareholder. This
provision would give depositors a preference over general and subordinated
creditors and shareholders in the event a receiver is appointed to distribute
the assets of any of the bank subsidiaries of the Corporation.
CAPITAL
The Federal Reserve Board and the OCC have adopted substantially
similar risk-based capital and leverage guidelines applicable to U.S. banking
organizations. The minimum guideline for the ratio of total capital ("Total
Capital") to risk-weighted assets (including certain off-balance-sheet
activities, such as standby letters of credit) is 8.00%. At least half of the
Total Capital must be composed of common shareholders' equity, and to the extent
applicable, minority interests in the equity accounts of consolidated
subsidiaries, non-cumulative perpetual preferred stock and a limited amount of
cumulative perpetual preferred stock, less disallowed intangibles ("Tier 1
Capital"). The remainder, which is "Tier 2 Capital", may consist of subordinated
debt (or certain other qualifying debt issued prior to March 12, 1988), other
preferred stock and a limited amount of loan loss reserves. In addition, each of
the federal bank regulatory agencies has established minimum leverage capital
ratio guidelines. These guidelines provide for a minimum Tier 1 leverage capital
ratio (Tier 1 Capital to total assets, less disallowed intangibles) of 3% for
banks and bank holding companies that meet certain specified criteria, including
that such financial institutions have the highest regulatory examination rating
and are not contemplating significant growth or expansion. All other
institutions are expected to maintain a leverage ratio of at least 100 to 200
basis points above the minimum.
FAFSB is subject to capital requirements adopted by the OTS, which are
similar, but not identical, to those issued by the Federal Reserve Board and the
OCC. Under the OTS' capital guidelines, a savings bank is required to maintain
tangible capital of at least 1.5% of tangible assets, core (leverage) capital of
at least 3% of the association's adjusted total assets and risk-based capital of
at least 8% of risk-weighted assets. For more information on these capital
ratios, please see Note 15 ("Legal and Regulatory Matters") to the Corporation's
Consolidated Financial Statements on pages 91-94 herein.
In 1991, each federal banking agency was required to revise its
risk-based capital standards to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk and the risks of
nontraditional activities. Each of the federal banking agencies subsequently
revised the risk-based capital guidelines to take account of concentration of
credit risk, risk of nontraditional activities, and a bank's exposure to
declines in the economic value of its capital due to changes in interest rates.
In 1996, these agencies adopted a joint policy statement requiring that banks
adopt comprehensive policies and procedures for managing interest rate risk, and
this statement sets forth the general standards that such policies and
procedures must meet. Unlike an earlier proposal, however, the statement does
not contain a standardized measure or explicit capital charge for interest rate
risk.
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The OTS regulatory capital requirements which are applicable to FAFSB
also incorporate an interest rate risk component. Under the OTS regulation, a
savings institution's interest rate risk is measured by the decline in the net
portfolio value of its assets that would result from a hypothetical 200 basis
point increase or decrease in interest rates, divided by the estimated economic
value of the institution's assets. A savings institution whose interest rate
risk exposure exceeds 2% would be required to deduct an amount equal to one half
of the difference between the institution's interest rate risk and 2% multiplied
by the estimated economic value of the institution's assets. The OTS, however,
has postponed requiring any such deductions from capital until an appeals
process is developed for the measurement of an institution's interest rate risk.
ACQUISITION AND EXPANSION
The BHCA requires any bank holding company to obtain the prior approval
of the Federal Reserve Board before it may acquire all or substantially all of
the assets of any bank, or ownership or control of any voting shares of any
bank, if, after acquiring such shares, it would own or control, directly or
indirectly, more than 5% of the voting shares of such bank.
The BHCA currently permits bank holding companies from any state to
acquire banks and bank holding companies located in any other state, subject to
certain conditions, including certain nationwide and state imposed concentration
limits. Under these concentration limits, a bank holding company which controls
more than 10% of the total amount of deposits of insured depository institutions
in the United States is prohibited from further acquisitions; federal statewide
concentration limits prohibit an acquisition if, upon consummation of the
transaction, a bank holding company would control 30% or more of the total
amount of deposits of insured depository institutions in the state which is the
home state of the bank or bank holding company being acquired. The Corporation
estimates that, as of December 31, 1997, it held less than 14.6% of all such
deposits in Tennessee, less than 1% of all such deposits in Kentucky and less
than 1% of all such deposits in Virginia. Although individual state deposit caps
are not superseded by the legislation, in 1995, Tennessee adopted conforming
legislation incorporating the deposit caps enacted by Congress. The legislation
repealed the Tennessee laws previously applicable to acquisitions by bank
holding companies, and reenacted in modified form one of these laws, the
Tennessee Bank Structure Act (the "TBSA"). Under the TBSA, as reenacted, no bank
holding company, whether a Tennessee or out-of-state company, may acquire any
bank in Tennessee that has been in operation less than five years or organize a
new bank in Tennessee except in the case of certain interim bank mergers and
acquisitions of banks in financial difficulty. Under the Tennessee laws
pertaining to bank mergers, which (with the exception of a merger between a
Tennessee bank and an out-of-state bank) were not directly affected by
reenactment of the legislation, banks in separate counties in Tennessee which
have been in operation at least five years may merge. Banks with principal
offices in the same county may merge, even if one or both have been in operation
less than five years. The effect of these provisions is that the Corporation may
acquire banks in Tennessee which have been in operation for over five years but
may not form or acquire a new bank in any Tennessee county other than Davidson
County, in which the main office of FANB is located.
Banks became able to branch across state lines by acquisition, merger
or de novo, under federal law, effective June 1, 1997 (unless state law would
permit such de novo interstate branching
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at an earlier date), provided certain conditions are met, including that
applicable state law must expressly permit such de novo interstate branching.
Tennessee enacted a interstate branching law in response to the federal law
which became effective June 1, 1997. Tennessee state law currently only allows
interstate branching by acquisition or merger and does not expressly permit de
novo branching.
BANK REGULATION
Payment of Dividends. The Corporation is a legal entity separate and
distinct from its subsidiary banks and its nonbank subsidiaries. The
Corporation's revenues (on a parent company only basis) result, in part, from
dividends paid to the Corporation by its subsidiaries. The right of the
Corporation, and consequently the right of creditors and shareholders of the
Corporation, to participate in any distribution of the assets or earnings of any
subsidiary through the payment of such dividends or otherwise is necessarily
subject to the prior claims of creditors of the subsidiary (including
depositors, in the case of banking subsidiaries), except to the extent that
claims of the Corporation in its capacity as a creditor may be recognized.
Additionally, with respect to dividend payments from FAFSB to the Corporation,
the OTS must approve such payments. For more information on "Payment of
Dividends," please see Note 15 ("Legal and Regulatory Matters") to the
Corporation's Consolidated Financial Statements on pages 91-94 herein. For a
discussion on the impact of the Corporation's long-term debt on its ability to
pay dividends to shareholders, please see Note 9 ("Long-term Debt") to the
Corporation's Consolidated Financial Statements on pages 80-81 herein.
In addition to the foregoing, under the FDIA, insured depository
institutions are prohibited from making capital distributions, including the
payment of dividends, if, after making such distribution, the institutions would
become "undercapitalized" (as such term is used in the statute). Based on the
current financial condition of these institutions, the Corporation does not
expect that this provision will have any impact on its ability to obtain
dividends from its bank subsidiaries.
FDIC Insurance. The Corporation's subsidiary depository institutions
are subject to FDIC deposit insurance assessments. The FDIC has promulgated
risk-based deposit insurance assessment regulations which became effective in
1993. Under these regulations, insured institutions (whether members of BIF or
SAIF) are assigned assessment risk classifications based upon capital levels and
supervisory evaluations.
With the exception of deposits attributable to thrift acquisitions,
FANB pays its premiums at the BIF rate. As a federal savings bank, FAFSB pays
its premiums at the SAIF rate. Thus, the Corporation's overall deposit insurance
premium expenses are affected by changes in both the BIF and the SAIF assessment
rate.
The Deposit Insurance Funds Act of 1996 ("DIFA") requires BIF members
to pay one-fifth of the assessment rate imposed upon thrifts to cover the annual
Financing Corporation ("FICO") bond payments from January 1, 1997 until December
31, 1999. From January 1, 2000 until the FICO bonds are retired, the law will
require banks and thrifts to pay the assessment on a pro rata basis. DIFA also
stipulates that the BIF and SAIF will be merged on January 1, 1999 into the new
Deposit Insurance Fund, contingent upon there being no federally insured savings
associations or
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thrifts in existence on that date and subject to further legislative action. For
more information regarding FDIC assessment rates, please see Note 15 ("Legal and
Regulatory Matters") of the Corporation's Consolidated Financial Statements on
pages 91-94 herein.
Community Reinvestment Act. The Corporation's subsidiary depository
institutions also are subject to the requirements of the Community Reinvestment
Act of 1976 ("CRA"). The CRA imposes on financial institutions an affirmative
and ongoing obligation to meet the credit needs of their local communities,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of those institutions. Each financial institution's efforts in
meeting community credit needs currently are evaluated as part of the
examination process, as well as when an institution applies to undertake a
merger, acquisition or to open a branch facility. CRA regulations incorporate an
evaluation system that rates institutions based on their performance in meeting
community credit needs. Under these regulations, each institution is evaluated
based on the degree to which it is providing loans (the lending test), branches
and other services (the service test), and investments (the investment test) to
low and moderate income areas in the communities it serves, based on the
communities' demographics, characteristics and needs, the institution's
capacity, product offerings and business strategy. Under this evaluation system,
institutions receive one of four composite ratings: Outstanding, Satisfactory,
Needs to Improve or Substantial Noncompliance.
Certain Transactions with Affiliates. Provisions of the Federal Reserve
Act impose restrictions on the type, quantity and quality of transactions
between affiliates of an insured bank (including the Corporation and its nonbank
subsidiaries) and the insured bank (or savings institution) itself. Under these
restrictions, an insured bank (or savings institution) and its subsidiaries are,
among other things, limited in engaging in "covered transactions" with any one
affiliate to no more than 10% of the capital stock and surplus of the insured
bank (or savings institution); and with all affiliates in the aggregate, to no
more than 20% of the capital stock and surplus of the bank (or savings
institution). "Covered transactions" are defined by statute to include a loan or
extension of credit, as well as a purchase of securities issued by an affiliate,
a purchase of assets (unless otherwise exempted by the Federal Reserve Board),
the acceptance of securities issued by the affiliate as collateral for a loan
and the issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate. In addition, any transaction with an affiliate, including loans,
contractual arrangements and purchases, must be on terms and conditions that are
substantially the same or at least as favorable to the bank (or savings
institution) as those prevailing at the time for comparable transactions with
non-affiliated companies. The purpose of these restrictions is to prevent the
misuse of the resources of the bank by its uninsured affiliates. An exception to
the quantitative restrictions is provided for transactions between two insured
banks or savings institutions that are within the same holding company structure
where the holding company owns 80% or more of each institution. A proposed rule
by the Federal Reserve Board, published on July 15, 1997, if promulgated,
potentially affects "covered transactions" between banks, such as FANB and
FAFSB, and their operating subsidiaries. The proposed rule, among other things,
would potentially limit credit transactions between banks and their
subsidiaries and affect the size of companies that could be acquired by banks.
Transactions with Insiders. Any loans made by the Corporation's
depository institution subsidiaries to their respective executive officers,
directors or 10% shareholders, as well as entities such persons control, are
required to be made on terms substantially the same as those offered to
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<PAGE> 13
unaffiliated individuals and to involve not more than the normal risk of
repayment, and are subject to individual and aggregate limits depending on the
person involved. Further, provisions of the BHCA prohibit a bank holding company
and its subsidiaries from engaging in certain tie-in arrangements in connection
with any extension of credit, lease or sale of property or furnishing of
services.
Other Safety and Soundness Regulations. The federal banking agencies
have broad powers under current federal law to take prompt corrective action to
resolve problems of insured depository institutions. The extent of these powers
depends upon whether the institutions in question are categorized as "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized," as such terms are defined
under uniform regulations defining such capital levels issued by each of the
federal banking agencies.
In addition, FDIC regulations require that management report on its
institution's responsibility for preparing financial statements, and
establishing and maintaining an internal control structure and procedures for
financial reporting and compliance with designated laws and regulations
concerning safety and soundness. Under these rules, independent auditors must
attest to and report separately on assertions in management's report concerning
the effectiveness of the internal control structure over financial reporting,
using FDIC-approved audit procedures.
The FDIA also requires each of the federal banking agencies to develop
regulations addressing certain safety and soundness standards for insured
depository institutions, including operational and managerial standards, asset
quality, earnings and stock valuation standards, as well as compensation
standards (but not dollar levels of compensation). Each of the federal banking
agencies has issued regulations and interagency guidelines implementing these
standards. The regulations and guidelines set forth general operational and
managerial standards in the areas of internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth and compensation, fees and benefits. Recently proposed
rules would add asset quality and earnings standards to the guidelines. The
current rules contemplate that each federal agency would determine compliance
with these standards through the examination process, and if necessary to
correct weaknesses, require an institution to file a written safety and
soundness compliance plan.
INTEREST RATE LIMITATIONS
The maximum permissible rates of interest on most commercial and
consumer loans made by FANB are governed by Tennessee's general usury law and
the Tennessee Industrial Loan and Thrift Companies Act ("Industrial Loan Act").
Tennessee's general usury law authorizes a floating rate of 4% per annum over
the average prime or base commercial loan rate, as published by the Federal
Reserve Board from time to time, subject to an absolute 24% per annum limit. The
Industrial Loan Act, which also is generally applicable to most of the loans
made by FANB in Tennessee, authorizes an interest rate of 24% per annum and also
allows certain loan charges, generally on a more liberal basis than does the
general usury law. Kentucky's general usury law provides for a legal rate of
interest of 8% or less per annum; however, by written agreement, parties may
agree for the payment of interest at any rate under any written contract or
other written obligation where the original principal amount is in excess of
$15,000. For loans where the original principal amount is $15,000 or less, any
rate allowed national banking associations under federal law is permissible.
Under
11
<PAGE> 14
Virginia law, usury limits do not generally apply to the type of loans most
commonly made by savings institutions such as FAFSB or FANB. Under the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the usury
or interest laws of Tennessee may be applied to FANB's operations in Kentucky
and Virginia.
Certain other usury laws affect limited classes of loans, but the laws
referenced above are by far the most significant.
ENVIRONMENTAL REGULATION
As real estate lenders and as owners of real property, financial
institutions such as the Corporation and its subsidiary banks may become subject
to liability under various statutes and regulations applicable to property
owners, specifically including those which impose liability with respect to the
environmental condition of real property. The Corporation's primary exposure
under these statutes and regulations stems from the lending activities of its
subsidiary commercial banks, FANB and FAFSB, which have adopted policies and
procedures to identify and monitor their exposure to avoid any material loss or
liability related to the environmental condition of mortgaged property.
Environmental liability can also result from mergers and acquisitions, and the
Corporation has implemented procedures to identify and avoid any material loss
or liability related to the acquisition of real property through mergers and
acquisitions.
YEAR 2000
On May 5, 1997, the Federal Financial Institutions Examination Council
("FFIEC"), which consists of the Federal Reserve Board, the OCC, the FDIC, and
the OTS, and the National Credit Union Administration, issued a statement (the
"Interagency Statement") encouraging financial institutions, such as the
Corporation and its subsidiaries, to undertake initiatives to address and
resolve the Year 2000 issue by December 31, 1998. On December 17, 1997, the
FFIEC expanded on its Interagency Statement to provide further guidance to
management of financial institutions in addressing the Year 2000 issue. For a
discussion of the Corporation's initiative undertaken response to the
Interagency Statement, as updated, please see pages 26-27 of Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in this Report as Item 7.
RIEGLE COMMUNITY DEVELOPMENT AND REGULATORY IMPROVEMENT ACT
The Riegle Community Development and Regulatory Improvement Act
("RCDRIA") is an effort to alleviate certain regulatory burdens imposed on the
banking industry by amending sections of FDICIA and other statutes pertaining to
the regulation of financial institutions and financial institution holding
companies. For example, as amended by the RCDRIA, FDICIA empowers each agency to
adopt its own standards for safety and soundness relating to quality, earnings,
and stock valuation as the agency deems appropriate.
The RCDRIA also contains various community development initiatives;
measures to promote the securitization of small business loans; changes to the
National Flood Insurance Program and changes to the Bank Secrecy Act in terms of
money laundering; protection against bank insolvency
12
<PAGE> 15
of the security interests of public entities in bank assets pledged to secure
the entities' deposits; restrictions on certain high-rate, high-fee mortgages;
and disclosure requirements for reverse mortgages.
BROKER/DEALER REGULATION
The United States securities industry generally is subject to extensive
regulation under federal and state laws. The SEC is the federal agency charged
with administration of the federal securities laws. Much of the regulation of
broker/dealers, however, has been delegated to self-regulatory organizations,
principally the NASD and the national securities exchanges. These
self-regulatory organizations adopt rules (which are subject to approval by the
SEC) which govern the industry and conduct periodic examinations of member
broker/dealers. Securities firms are also subject to regulation by state
securities commissions in the states in which they are registered. IFC is a
registered broker-dealer in securities under the Securities Exchange Act of
1934, as amended, and is a member of the NASD. IFC is also an investment adviser
pursuant to the Investment Advisers Act of 1940, as amended, and is a member of
the Securities Investor Protection Corporation. IFC is registered as a
broker-dealer in 50 states, the District of Columbia, and Puerto Rico. As a
third-party marketer of investment products, IFC may, in certain instances, be
subject to regulation by those agencies having supervisory authority over IFC's
financial institution clients, including, for example, the Federal Reserve
Board, the OCC, the OTS, the FDIC, and various state banking agencies.
The regulations to which broker/dealers are subject cover all aspects
of the securities business, including sales methods, trade practices among
broker/dealers, capital structure of securities firms, uses and safekeeping of
customers' funds and securities, recordkeeping, and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the SEC and by self-regulatory organizations, or changes in interpretation or
enforcement of existing laws and rules, often affect directly the method of
operation and profitability of broker/dealers. The SEC and the self-regulatory
organizations may conduct administrative proceedings which can result in
censure, fines, suspension or expulsion of a broker/dealer, its directors,
officers or employees. The principal purpose of regulation and discipline of
broker/dealers is the protection of customer and the securities market rather
than the protection of creditors and stockholders of broker/dealers.
COMPETITION
The activities in which the Corporation engages are very competitive.
Generally, the lines of activity and markets served by the Corporation involve
competition with money market mutual funds, national and state banks, mutual
savings banks, savings and loan associations, finance companies, brokerage
firms, credit unions and other financial institutions located primarily in the
southeastern region of the United States. The principal methods of competition
center around such aspects as interest rates on loans and deposits, lending
limits, customer services, location of offices, provision of financial services,
and other service delivery systems. Some of the Corporation's competitors are
major corporations with substantially more assets and personnel than the
Corporation and its subsidiaries. Additionally, the Corporation's competitive
environment is subject to future changes in federal and state legislation.
13
<PAGE> 16
The Corporation's subsidiary banks actively compete for loans and
deposits with other commercial banks, savings and loan associations, and credit
unions. Consumer finance companies, department stores, factors, mortgage brokers
and insurance companies are also significant competitors for various types of
loans. FANB competes for various types of fiduciary and trust business from
other banks, trust and investment companies, investment advisory firms and
others.
Through IFC, FANB competes with other third-party marketers of
investment products and other entities offering securities brokerage services.
EMPLOYEES
As of December 31, 1997, the Corporation and its subsidiaries employed
4,066 full-time equivalent officers and employees, compared with 4,355 at
December 31, 1996.
ITEM 3: LEGAL PROCEEDINGS
Note 15 to the Corporation's Consolidated Financial Statements,
included in this Report under Item 8, is hereby incorporated in this Item 3 by
reference.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1997.
14
<PAGE> 17
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Corporation's Common Stock is traded on the National Association of
Securities Dealers Automated Quotation National Market System (the "Nasdaq
National Market System") under the symbol "FATN." At the close of business on
February 5, 1998, there were approximately 10,035 holders of record of the
Corporation's Common Stock. The following table sets out the quarterly high and
low sales prices of the Corporation's Common Stock. The dividends declared
during each quarter for the last two years are also shown.
STOCK PRICES*
<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW DECLARED
---- --- --------
<S> <C> <C> <C>
1996
First Quarter $24.25 $21.19 $.14
Second Quarter 22.81 21.06 .155
Third Quarter 24.13 20.38 .155
Fourth Quarter 29.38 23.88 .155
===== ===== ====
1997
First Quarter $34.63 $28.00 $.155
Second Quarter 40.00 29.63 .20
Third Quarter 50.13 38.00 .20
Fourth Quarter 55.38 43.75 .20
===== ===== ====
</TABLE>
(* STOCK PRICES AND DIVIDEND AMOUNTS HAVE BEEN RESTATED TO GIVE RETROACTIVE
EFFECT TO THE 2 FOR 1 SPLIT OF THE CORPORATION'S COMMON STOCK EFFECTIVE MAY 9,
1997.)
See SUPERVISION AND REGULATION, PAYMENT OF DIVIDENDS. See also, Notes 9 and 15
to the Corporation's Consolidated Financial Statements, included in this Report
under Item 8, which are incorporated herein by reference.
ITEM 6: SELECTED FINANCIAL DATA
The table "Selected Financial Data: 1993-1997" on page 17 hereof is
incorporated in this Item 6 by reference.
15
<PAGE> 18
ITEMS 7 AND 7A:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS; QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
16
<PAGE> 19
TABLE 1: SELECTED FINANCIAL DATA: 1993-1997
<TABLE>
<CAPTION>
===================================================================================================================================
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONDENSED INCOME STATEMENTS (in thousands):
Net interest income, taxable equivalent basis(1) $ 387,051 $ 353,298 $ 315,761 $ 301,689 $ 291,242
Less taxable equivalent adjustment 3,641 3,600 3,451 3,447 4,042
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 383,410 349,698 312,310 298,242 287,200
Provision for loan losses 5,000 - 83 (9,919) (41,405)
Noninterest income 259,594 180,533 108,487 85,715 88,379
Noninterest expense 402,002 334,455 252,448 239,270 248,227
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and cumulative effect
of changes in accounting principles 236,002 195,776 168,266 154,606 168,757
Income tax expense 90,530 74,204 65,186 57,404 61,348
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting
principles 145,472 121,572 103,080 97,202 107,409
Cumulative effect of changes in accounting principles,
net of tax - - - - (84)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 145,472 $ 121,572 $ 103,080 $ 97,202 $ 107,325
===================================================================================================================================
SELECTED PER SHARE DATA:
Net income:
Basic $ 2.48 $ 2.05 $ 1.82 $ 1.70 $ 1.89
Diluted 2.40 2.01 1.78 1.66 1.86
Cash dividends declared and paid .755 .605 .53 .44 .275
Book value (end of year) 15.60 14.66 13.47 11.62 11.17
Market price (end of year) 49.75 28.81 23.69 13.44 16.00
Market/book (end of year) 3.19 x 1.97 x 1.76 x 1.16 x 1.43 x
===================================================================================================================================
AVERAGES (in thousands):
Assets $10,257,521 $ 9,723,937 $8,554,146 $ 7,785,831 $ 7,322,284
Loans, net of unearned discount and net deferred
loan fees 6,924,968 6,508,716 5,592,273 4,851,386 4,214,138
Earning assets 9,442,478 8,977,115 7,898,742 7,119,433 6,672,027
Deposits 7,682,434 7,376,880 6,538,746 6,186,809 5,975,643
Long-term debt 318,167 356,768 292,455 109,031 60,134
Shareholders' equity 882,955 830,416 704,290 644,247 550,840
===================================================================================================================================
END OF PERIOD (in thousands):
Assets $10,871,820 $10,399,468 $9,681,629 $ 8,278,727 $ 7,707,781
Loans, net of unearned discount and net deferred
loan fees 7,216,571 6,658,597 6,425,976 5,171,966 4,669,571
Earning assets 9,922,821 9,447,064 8,899,747 7,545,903 7,041,597
Deposits 8,007,679 7,792,977 7,382,294 6,307,779 6,150,551
Long-term debt 409,821 331,157 421,791 271,473 77,053
Shareholders' equity 908,739 868,707 795,532 667,673 623,562
===================================================================================================================================
SIGNIFICANT RATIOS:
Return on average assets 1.42% 1.25% 1.21% 1.25% 1.47%
Return on average equity 16.48 14.64 14.64 15.09 19.48
Dividends declared per share to net income per share
(dividend payout ratio) 30.44 29.51 29.12 25.88 14.55
Productivity ratio(2) 55.63 57.19 57.79 60.25 62.75
Average equity to average assets 8.61 8.54 8.23 8.27 7.52
Average loans to average deposits 90.14 88.23 85.53 78.41 70.52
Average core deposits to average total deposits 88.45 89.25 89.32 92.85 93.13
Allowance to net loans (end of year) 1.60 1.85 2.06 2.50 2.92
Nonperforming assets to loans and foreclosed properties
(end of year)(3) .26 .36 .46 .42 .91
Net interest margin 4.10 3.94 4.00 4.24 4.37
===================================================================================================================================
OTHER STATISTICS:
Number of common shareholders (end of year) 10,100 10,161 9,092 10,380 10,731
Average common shares outstanding (in thousands):
Basic 58,679 59,184 56,629 57,340 56,710
Diluted 60,497 60,454 57,927 58,536 57,737
End of period common shares (in thousands) 58,261 59,263 59,080 57,450 55,830
Number of full-time equivalent employees (end of year) 4,103 4,095 3,591 3,449 3,309
Number of banking offices (end of year) 169 168 164 155 151
Number of automatic teller machines (end of year) 450 302 224 181 150
===================================================================================================================================
</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 $9.7 million of
losses in the fourth quarter on sales of securities available for sale. For
1993, calculation excludes the $10.0 million First American Foundation
contribution.
(3) Excludes loans 90 days or more past due on accrual.
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<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis is presented as a review of the
major trends affecting the performance of First American Corporation (the
"Corporation" or "First American") and to aid in understanding the Corporation's
results of operations and financial condition. This discussion supplements the
Corporation's consolidated financial statements and accompanying notes which
begin on page 59.
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. All financial data included herein has been restated to reflect the
impact of the stock split.
First American continued its earnings momentum during 1997 and earned a
record $145.5 million for the year ended December 31, 1997, up 20 percent from
1996 net income of $121.6 million. Net income increased 18 percent in 1996 from
$103.1 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 $2.48,
up 21 percent over $2.05 in 1996. Basic earnings per share increased 13 percent
in 1996 compared to $1.82 in 1995. Diluted earnings per share rose 19 percent in
1997 to $2.40 from $2.01 in 1996. Diluted earnings per share increased 13
percent in 1996 over $1.78 in 1995. Return on average assets ("ROA") improved 17
basis points in 1997 to 1.42 percent for 1997 from 1.25 percent for 1996. ROA
was 1.21 percent for 1995. Return on average equity ("ROE") also improved to
16.48 percent for 1997 compared to 14.64 percent for both 1996 and 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 million, net of
tax, or $.08 per share. Excluding the one-time SAIF assessment, net income
increased 15 percent in 1997, and ROA and ROE were 1.30 percent and 15.24
percent, respectively, in 1996. Net income for 1995 was reduced by $7.5 million
(or $.13 per share) for after-tax acquisition expenses related to the merger of
Heritage Federal Bancshares, Inc. ("Heritage"). Excluding the SAIF assessment
and the Heritage merger expenses, net income increased 14 percent in 1996 over
1995. Excluding these expenses, ROA and ROE were 1.29 percent and 15.70 percent,
respectively, in 1995.
18
<PAGE> 21
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 10 percent in
1997. The net interest margin improved to 4.10 percent in 1997 from 3.94
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 44 percent over 1996 to $259.6 million
from $180.5 million. This compares to a 66 percent increase in noninterest
income in 1996 from $108.5 million in 1995. Noninterest income contributed
40 percent to total revenue in 1997 as compared to 34 percent in 1996 and 26
percent in 1995. The increases in noninterest income are primarily the
result of the acquisition of INVEST Financial Corporation ("INVEST") 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 INVEST, noninterest
income increased 18 percent in 1997.
- - Noninterest expense was $402 million in 1997 compared to $334.5 million in
1996, an increase of 20 percent. The primary reason for the 20 percent
increase was the inclusion of a full year of INVEST's expenses in 1997,
whereas in 1996 INVEST's expenses were included for only six months.
Excluding the one-time SAIF assessment and INVEST, noninterest expense
increased 8 percent in 1997 from 1996.
- - The productivity (operating efficiency) ratio related to traditional banking
activities improved 156 basis points to 55.63 percent in 1997 from 57.19
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 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.
- - Asset quality remained strong as evidenced by the decline in the ratio of
nonperforming assets to total loans and foreclosed properties to .26 percent
at December 31, 1997, from .36 percent at December 31, 1996, and .46 percent
at December 31, 1995.
- - Capital adequacy remained strong in 1997. The ratio of average equity to
average assets was 8.61 percent in 1997 compared to 8.54 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
19
<PAGE> 22
at the rate of $0.755 per common share in 1997, up 25 percent from $.605 in
1996. The dividend payout ratio increased to 30.44 percent in 1997 from
29.51 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.
- - On December 7, 1997, First American entered into a definitive agreement to
merge Deposit Guaranty Corp., a $6.9 billion Jackson, Mississippi based
financial services company with offices in Mississippi, Louisiana, and
Arkansas, into First American in a transaction valued at $2.7 billion. The
merger, which is subject to regulatory and shareholder approval, is expected
to be completed in the second quarter of 1998 and will be accounted for as a
pooling-of-interests. Management expects that the merger will further the
Corporation's goal of reaching the "Sweet 16." See NOTE 2 to the
consolidated financial statements.
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 December 7, 1997, First American entered into a definitive agreement
providing for the merger of Deposit Guaranty Corp. ("Deposit Guaranty") into
First American. Terms of the agreement provide for Deposit Guaranty shareholders
to receive 1.17 shares of First American's common stock for each outstanding
share of Deposit Guaranty common stock in a transaction to be accounted for as a
pooling-of-interests. Deposit Guaranty is a financial services holding company
headquartered in Jackson, Mississippi. At December 31, 1997, Deposit Guaranty
had total assets of $6.9 billion and total shareholders' equity of $635.2
million. Deposit Guaranty had 170 banking offices in Mississippi, Louisiana, and
Arkansas and mortgage offices in Oklahoma, Nebraska, Texas, Indiana, and Iowa at
December 31, 1997. The transaction is subject to shareholder and regulatory
approval and is expected to be completed during the second quarter of 1998.
Management estimates that this transaction will be neutral to earnings per share
in 1998 excluding the effect of restructuring and merger-related costs of
approximately $102 million, or $71 million after tax. The transaction is
expected to be accretive to earnings per
20
<PAGE> 23
share in 1999 and thereafter as a result of achieving targeted expense and
revenue synergies of $88 million pretax. See NOTE 2 to the consolidated
financial statements.
Effective January 1, 1997, First American acquired Hartsville
Bancshares, Inc. ("Hartsville"), a bank holding company with $90 million in
assets, by exchanging approximately 350,000 shares of the Corporation's common
stock for all of the outstanding shares of Hartsville. Hartsville had five
branches in Middle Tennessee and operated under the name CommunityFirst.
Immediately following the merger of Hartsville with and into First American,
CommunityFirst was merged with and into First American National Bank ("FANB"),
the principal subsidiary of First American. The acquisition was accounted for as
a purchase.
Effective July 1, 1996, FANB, a wholly-owned subsidiary of First
American, purchased 96.2 percent of the stock of INVEST Financial Corporation
("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 $5 million, making INVEST the
nation's largest marketer of mutual funds, annuities, and other investment
products sold through financial institutions. Both transactions were accounted
for as purchases. During the third quarter of 1996, FANB purchased an additional
2.1 percent of the stock of INVEST. 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 INVEST. As a result of the merger, FANB's equity
ownership in INVEST increased to 98.5 percent. Effective December 2, 1997, the
name of INVEST was changed to IFC Holdings, Inc. ("IFC") and will be referred to
as IFC hereafter.
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.
Effective March 11, 1996, First American acquired First City Bancorp,
Inc. ("First City") by exchanging approximately 2.2 million shares of the
Corporation's common stock for all of the outstanding shares of First City.
First City was a bank holding company headquartered in Murfreesboro, Tennessee,
and operated two Tennessee state chartered banks and a consumer finance company.
First City had $366 million in assets and 11 banking offices and 9 consumer
finance locations in the middle Tennessee area. The transaction was accounted
for as a purchase.
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.
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EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income on a taxable equivalent basis increased $33.8
million, or 10 percent, to $387.1 million during 1997 from $353.3 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 60 percent of total revenues in 1997 versus 66 percent in
1996 and 74 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 swaps, 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.
As net interest income increased, the net interest margin improved by
16 basis points to 4.10 percent in 1997 from 3.94 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 $33.8 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 $33.8 million increase in net interest
income, $16.9 million was attributable to volume changes and $16.9 million was
attributable to the effect of an improved spread. During 1997, average earning
assets increased $465.4 million to $9.44 billion, or 5 percent, from $8.98
billion in 1996. The increase in average earning assets was essentially due to
increases in loans ($416.3 million) and investment securities ($105.7 million)
offset by decreases in federal funds sold and securities purchased under
agreements to resell ($76.2 million). Interest-bearing liabilities averaged
$7.98 billion, an increase of $423.1 million, or 6 percent, from $7.56 billion
in 1996. Approximately half of the increase in interest-bearing liabilities was
in money market deposit accounts and half was from other short-term nondeposit
sources.
The net interest spread improved 20 basis points during 1997 to 3.39
percent from 3.19 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 9 basis points to 8.01 percent in 1997
from 7.92 percent in 1996. In general, the 9 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
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percent on average, respectively, during 1997 versus 5.52 percent and 6.18
percent on average, respectively, during 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 11
basis points to 4.62 percent in 1997 from 4.73 percent in 1996. Factors
contributing to the 11 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 $37.5 million, or 12
percent, in 1996 from $315.8 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 $131.5 million more than
average interest-bearing liabilities. The 5 basis point decline in the net
interest spread in 1996 from 3.24 percent in 1995 resulted from the average
yield on earning assets increasing 3 basis points compared to an 8 basis point
increase in the average rate paid on interest-bearing liabilities. 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 (primarily loans) and to improvements
in the net interest margin and net interest spread.
NONINTEREST INCOME
Noninterest income represented 40 percent of total revenues during 1997
compared with 34 percent in 1996 and 26 percent in 1995. Noninterest income
increased $79.1 million, or 44 percent, to $259.6 million in 1997 from $180.5
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 45 percent of total noninterest
income in 1997 compared with 34 percent in 1996. Investment services income
increased $55.2 million, or 91 percent, in 1997 to $116.1 million from $60.9
million in 1996. IFC contributed to substantially all of the increase in
investment services income. Excluding IFC, total noninterest income increased
$23.6 million, or 18 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
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charges on deposit accounts, commissions and fees on fiduciary activities, and
other income. Service charges on deposit accounts increased $8.8 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 $1.3
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 $15 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 acquired with the purchase of First City. 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 $15 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 million was recognized as a gain on the sale of
First American's equity ownership in HONOR Technologies, Inc., a bankcard
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 million increase in income from related bank fees such as factoring
commissions, agency fees, and fees from outgoing wire transfers.
Noninterest income increased $72 million, or 66 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 $130.9 million, a $22.4 million, or 21 percent, increase from 1995.
Investment services income contributed 70 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.
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 148 to 450 at December 31, 1997, or 49 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
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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 156 basis points during 1997
to 55.63 percent from 57.19 percent in 1996. The improvement in the productivity
ratio from 1996 to 1997 means that the Corporation spent $1.56 less in 1997
compared to 1996 to earn $100 of revenues. The ratio was 57.79 percent in 1995
excluding the impact of $7.3 million of Heritage merger-related expenses.
Total noninterest expense was $402 million in 1997 compared to $334.5
million in 1996. The primary reason for the $67.5 million, or 20 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 $67.5 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 $15.1
million, or 5 percent. Excluding IFC and the one-time SAIF assessment,
noninterest expense increased $23.2 million, or 8 percent.
Significant changes from 1996 to 1997 in noninterest expense
categories, exclusive of IFC, are outlined as follows:
- - Salaries and benefits, the largest component of noninterest expense,
increased $15.9 million, or 10 percent, in 1997 primarily due to merit
increases, incentive programs, related payroll taxes, and the increased cost
of medical benefits.
- - Equipment expenses increased $4.2 million, or 25 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 enhancements and housing for
ATMs. A greater usage of computer maintenance contracts also contributed to
the increase in equipment expenses.
- - Communication expenses increased $1.5 million, or 13 percent, in 1997 due to
higher expenditures for telecommunications.
- - Net occupancy expense was up $1.2 million, or 5 percent, in 1997 as the
result of increased depreciation expense attributed to remodeling of banking
facilities.
- - The $9.3 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 $82 million, or 32 percent,
to $334.4 million from $252.4 million for 1995. IFC expenses, which consisted
primarily of subscribers' commissions, were $48.8 million from its date of
acquisition through December 31, 1996.
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Excluding the acquisition of IFC, noninterest expense was $285.7 million, a
$33.3 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 acquisitions of Charter Federal
Savings, the name of which was changed to First American Federal Savings Bank
("Charter" or "FAFSB"), in December 1995 and First City in 1996; 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
$10.2 million, or 4 percent.
Management will 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 will improve the productivity ratio by approximately 5
percentage points.
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. 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 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
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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 $90.5 million, which resulted in an
effective tax rate of 38.4 percent of pretax income versus $74.2 million, or
37.9 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 $65.2 million, or 38.7 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.
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 78 percent of interest income during 1997 compared to 77 percent during
1996. During 1997 average loans increased $416.3 million, or 6 percent, to $6.92
billion from $6.51 billion. Excluding the effects of the Hartsville and First
City acquisitions, the purchase of $200 million of installment loans, and
$123.7 million of mortgage loan sales (other than through mortgage banking
operations), 1997 year-to-date average loans increased $293.7 million, or 4.5
percent. The 4.5 percent loan growth in 1997 was attributable to (1) positive
economic conditions in primary markets, (2) organized sales efforts in
conjunction with effective administrative support and responsive credit
decisions, and (3) marketing programs. Management anticipates loan growth in the
next year will be between 5 to 10 percent.
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 $3.12 billion during 1997, up $244.5 million,
or 8 percent, from $2.88 billion in 1996 and accounted for 59 percent of loan
growth in 1997. During 1997 and 1996, commercial loans comprised 45 percent and
44 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
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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 million was funded under these limits.
Consumer Loans
The consumer loan portfolio increased $160.8 million, or 5 percent, to
average $3.25 billion during 1997 from $3.09 billion during 1996. Total consumer
loans averaged 47 percent of the loan portfolio in both 1997 and 1996. Consumer
loans consist of mortgage loans, installment loans, open-end loans, and single
payment loans.
Growth in installment loans accounted for 53 percent of the increase in
average consumer loans during 1997. The increase of $85.2 million in average
installment loans was primarily attributable 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 this federally sponsored enterprise, whereby First
American assumes underwriting, funding, and administrative responsibilities.
The largest category of consumer loans, amortizing mortgages, decreased
on average $10.5 million to $1.76 billion during 1997, from $1.77 billion in
1996. Consumer amortizing mortgages comprised 26 percent of First American's
average net loans during 1997 compared to 27 percent in 1996. Excluding the
effect of $123.7 million mortgage loans that were sold during 1997, average
consumer amortizing mortgages increased $57.8 million, or 3 percent.
Average open-end loans, which consist primarily of credit card loans
and home equity lines of credit, accounted for 51 percent of the increase in
average consumer loans in 1997. Average open-end loans increased $82.4 million,
or 31 percent, to $347.1 million in 1997 from $264.7 million in 1996. 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 $40 million 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 $10.9 million, or 2 percent, to
average $554.4 million during
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1997 compared with $543.5 million during 1996. Average total commercial real
estate loans were 8 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
21 percent of total taxable equivalent interest income in 1997 and in 1996.
Total investment securities were $2.51 billion at December 31, 1997 and 1996,
and comprised 25 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
$1.65 billion in 1997 compared with $1.38 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. Total average AFS
fixed rate securities increased $482.9 million while AFS floating rate
securities decreased $207.5 million. HTM securities averaged $725.1 million
during 1997 compared with $894.8 million in 1996.
The average estimated maturity of the total securities portfolio was
3.3 years at December 31, 1997 (3.6 years for AFS securities and 2.3 years for
HTM securities) compared with 4.4 years at year-end 1996 (5.7 years for AFS
securities and 1.9 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 2.7 years at December 31, 1997 (2.9 years for AFS securities and
2.2 years for HTM securities). The average yield of the securities portfolio was
6.80 percent in 1997 compared to 6.61 percent in 1996. TABLE 5 presents
additional detail on estimated average maturities, average repricings, and
weighted-average yields.
Mortgage-backed securities comprised 95 percent of total investment
securities at December 31, 1997, compared to 80 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 $4.4 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 $438.6 million 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
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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 72 percent of
average earning assets in 1997 compared to 73 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 $211.9 million, or 3 percent, to $6.8
billion in 1997. Increases in core deposits are attributable, in part, to the
continued popularity of the First American Investment Reserve ("FAIR") account
and to the effect of acquisitions. Of the $211.9 million increase in average
core deposits, $194.4 million was related to the FAIR account, which is a money
market deposit account combining many features common among money market funds.
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, respectively, at December 31, 1996. Excluding the effect of the
First City and Hartsville acquisitions, the increase in average core deposits
was 1 percent.
Other core deposit accounts that increased during 1997 included NOW
accounts ($74.8 million increase) and noninterest bearing demand deposits ($45
million increase), which were offset by decreases in regular savings ($49.5
million decrease) and CD's under $100,000 ($47.9 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,
minibranches, 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. Total CD's
$100,000 and over, foreign deposits, and short-term borrowings averaged $2.1
billion for 1997, up 16 percent, or $294.8 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
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attributable to increases in CD's $100,000 and over ($94.2 million); sweep
repurchase agreements ($94.9 million), in which customer demand deposit account
balances are swept into overnight interest earning accounts; and borrowings from
the Federal Home Loan Bank ("FHLB") ($115.2 million). The increase in the period
end balance of other short-term borrowings to $344.8 million at December 31,
1997, from $214.6 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 $78.6 million to $409.8 million at December 31, 1997, from $331.2
million at December 31, 1996. Most of the increase was due to the addition of
$200 million variable rate borrowings from the FHLB offset by $123 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 $300 million with a weighted-average
interest rate of 5.90 percent, and total fixed rate long-term borrowings were
$109.8 million with a weighted-average interest rate of 6.65 percent.
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 and
selected markets in Virginia, Kentucky, 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 4 percent of total loans, compared to $215.5 million, or 3 percent of total
loans, at year-end 1996. At December 31, 1997, the largest loan relationship had
$46.9 million outstanding; FANB's regulatory legal lending limit was $146
million in 1997.
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,
31
<PAGE> 34
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 .26 percent at December 31, 1997, down 10 basis points
from .36 percent at December 31, 1996. Nonperforming assets totaled $18.6
million at December 31, 1997, and consisted of $15.1 million of nonaccrual loans
and $3.5 million of foreclosed properties. This compared to $23.7 million of
nonperforming assets at December 31, 1996, which was comprised of $16.3 million
of nonaccrual loans and $7.4 million of foreclosed properties. There were no
restructured loans during 1997 or 1996. TABLE 8 summarizes changes in
nonperforming assets for each of the past five years and presents the
composition of the nonperforming assets balance at the end of each year.
Total past due loans, excluding nonaccrual loans, were 1.16 percent of
total loans at December 31, 1997, versus 1 percent of total loans at December
31, 1996. Loans under 90 days past due at December 31, 1997, excluding
nonaccrual loans, were .98 percent of total loans compared to .82 percent 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 $61.3 million of outstanding loans at December 31,
1997, versus $51.7 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
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<PAGE> 35
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.
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 $115.4 million,
or 1.60 percent of net loans, versus $123.3 million, or 1.85 percent of net
loans, at December 31, 1996. The allowance for loan losses was $132.4 million,
or 2.06 percent of net loans, at December 31, 1995. The changes in the allowance
during 1997 from year-end 1996 were primarily due to a $5 million provision
for loan losses and $13.3 million of net loan charge-offs. Using the guidelines
outlined above, the allowance was increased by a provision recognized in the
fourth quarter of 1997, which was the first provision since the first quarter of
1993. Activity in the allowance for loan losses during 1997 also included a $.7
million increase due to the acquisition of Hartsville and a $.2 million decrease
due to the sale of Tennessee Credit Corporation. The allowance as a percentage
of nonperforming loans increased to 765 percent at December 31, 1997, compared
to 755 percent at December 31, 1996, and 709 percent at December 31, 1995. First
American's coverage ratio is one of the highest in the industry.
Net loan charge-offs were $13.3 million, or .19 percent of average
loans, in 1997; $11.3 million, or .17 percent of average loans, in 1996; and
$3.7 million, or .07 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
$31.4 million in both 1997 and 1996 and $18.8 million in 1995. Total recoveries
were $18.1 million in 1997, $20.1 million in 1996, and $15.1 million in 1995.
The $2.1 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 $6.1
million in 1997 compared to net recoveries of $.6 million in 1996. The ratio of
commercial loan net charge-offs to average commercial loans increased 22 basis
points to .20 percent from (.02) percent in 1996. (A negative percentage of net
charge-offs indicates that recoveries exceeded net charge-offs.)
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<PAGE> 36
Of the major loan categories, consumer-other loans had the highest
level of net charge-offs in 1997, 1996, and 1995, but experienced a $3 million
decrease in net loan charge-offs between December 31, 1997, and December 31,
1996. Consumer-other loan net charge-offs were $9.1 million and $12.1 million,
or .61 and .92 percent of average consumer-other loans, in 1997 and 1996,
respectively. Consumer-other loan net charge-offs were $6.8 million, or .61
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. At December
31, 1997, past due consumer-other loans were 1.05 percent of consumer-other
loans compared to 1.24 percent at December 31, 1996, and .99 percent at December
31, 1995. 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.
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 18.8 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 $1,867.3 million, or 18.8 percent of all earning assets. This compares to a
cumulative net
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<PAGE> 37
liability sensitivity of 16.9 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 $3.7 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 $686.7 million, or 6.9 percent,
of earning assets at December 31, 1997.
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 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
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<PAGE> 38
products have enabled First American to improve its balance between
interest-sensitive assets and interest-sensitive liabilities by managing its
interest rate sensitivity while continuing to meet the credit and deposit needs
of customers.
In aggregate, many of First American's securities and loans with fixed
rates may be funded with variable rate money market deposits. Consequently, net
interest income can be negatively affected if short-term interest rates rise. To
reduce this exposure, the Corporation has entered into interest rate swaps on
which the Corporation pays a fixed rate and receives a variable rate tied to
three-month 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 $2.28 billion. At December 31, 1997, these derivatives had net positive
fair values (unrealized net pretax gains) of $13.1 million. At December 31,
1996, the Corporation had interest rate swaps with notional values totaling
$1 billion for a total of $3.3 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 $1.9 million at December 31,
1997, and $3.6 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 $1.9
million of net deferred gain at December 31, 1997, $1.1 million will increase
net interest income during 1998 and $.8 million will be recognized in the years
from 1999 to 2002.
Net interest income for the year ended December 31, 1997, included
derivative products pretax net income of $3.7 million, consisting of $7.1
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. This compares to $11.9 million of derivatives products net
pretax expense in 1996. The change in derivative products net expense in 1996 to
net pretax income in 1997 was primarily due to amortization of deferred
gains/losses on terminated derivatives contracts ($.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
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<PAGE> 39
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.
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 $908.6 million, or 9 percent of
earning assets, at December 31, 1997, versus $1.22 billion, or 13 percent of
earning assets, at December 31, 1996 and $1.09 billion, or 12 percent of earning
assets at year-end 1995. 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
$1.8 billion at December 31, 1997 compared to $1.57 billion at December 31,
1996. Loans, exclusive of consumer loans, maturing within the year amounted to
$1.45 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 $6.8 billion during 1997 and $6.58 billion during 1996 and comprised
88 percent and 89 percent of average deposits in 1997 and 1996, respectively.
During 1995 core deposits averaged $5.84 billion and comprised 89 percent of
average deposits. Core deposits funded 72 percent, 73 percent, and 74 percent of
earning assets in 1997, 1996, and 1995, respectively. Average loans as a
percentage of average core deposits was 102 percent in 1997 compared to 99
percent in 1996 due to loan growth
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<PAGE> 40
exceeding growth in core deposits. Average loans as a percentage of average core
deposits was 96 percent in 1995.
Short-term funding needs can arise from declines in deposits or other
funding sources, drawdowns of loan commitments, and requests for new loans.
Relationships with a stable and growing customer base and a current network of
approximately 275 downstream correspondent banks routinely supply some of these
funds. Additional funds, if needed, can be raised from regional, national, and
international money markets. Short-term funding sources, comprised of non-core
deposits and short-term borrowings, totaled $2.37 billion, or 22 percent of
total assets, at December 31, 1997, compared with $2.15 billion, or 21 percent
of total assets, at December 31, 1996. Short-term funding sources were $1.83
billion, or 19 percent of total assets, at December 31, 1995. 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 8.36 percent compared with 8.35
percent at December 31, 1996, and 8.22 percent at December 31, 1995. At the end
of 1997, long-term debt totaled 4 percent of total assets versus 3 percent of
total assets at December 31, 1996, and 4 percent of total assets at year-end
1995.
An additional source of liquidity is First American's three-year $70
million revolving credit agreement which will expire March 31, 1998. First
American had no borrowings under this agreement during 1997. Plans are underway
to negotiate a revolving credit agreement in 1998.
The CONSOLIDATED STATEMENTS OF CASH FLOWS show net cash provided or
used by operating, investing, and financing activities and the net effect of
those activities on cash and cash equivalents. As such, it is a tool in
analyzing liquidity. During 1997 cash provided by operating activities was $90.4
million compared to $254 million in 1996 and $102.4 million in 1995. The
largest component of cash provided by operating activities in both years was net
income. The decrease in cash provided by operating activities between 1997 and
1996 was attributed to increases in other assets and decreases in other
liabilities. Investing activities utilized $518.6 million of cash in 1997,
$351.8 million in 1996, and $361.4 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 $1.63 billion of cash in 1997 and $1.46 billion
in 1996. Financing activities provided $272.1 million in net cash in 1997,
$104.4 million in 1996, and $525.3 million in 1995. During 1997 financing
activities included an increase in FHLB advances of $215.8 million, an increase
in deposits of $133.1 million, and a decrease of $103.6 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
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service, and reasonable borrower, depositor, and creditor requirements over the
next twelve months.
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
$.20 per share. During 1997 First American paid dividends at the rate of $.755
per common share, up 25 percent from $.605 per share during 1996. The rate of
dividends paid per common share was up 14 percent in 1996 over $.53 per share
in 1995. The dividend payout ratio increased slightly in 1997 to 30.44 percent
from 29.51 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 29.12%.
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 11.5
percent from 10.7 percent in 1996. The internal capital generation ratio was
10.9 percent in 1995.
Total shareholders' equity at December 31, 1997, was $908.7 million, up
5 percent, from December 31, 1996. This followed an increase of $73.2 million,
or 9 percent, from year-end 1995. The ratio of average equity to average assets
increased to 8.61 percent in 1997 compared to 8.54 percent in 1996 and 8.23
percent in 1995. The tangible equity ratio, which adjusts capital for the impact
of intangibles acquired through acquisitions, increased to 7.42 percent at
December 31, 1997, from 7.35 percent at year-end 1996. The tangible equity ratio
was 7.57 percent at December 31, 1995.
During 1997 shareholders' equity was increased by $101.1 million of
earnings retention ($145.5 million of net income less $44.4 million of
dividends), $20.1 million of common stock issued for employee benefit and
dividend reinvestment plans, $10.1 million of common stock issued for the
acquisition of Hartsville, and $4 million change in net unrealized gains and
losses on securities available for sale, net of tax. Shareholders' equity was
reduced by the repurchase of $103.6 million of common stock in 1997. During 1996
shareholders' equity was increased by $85.9 million of earnings retention
($121.6 million of net income less $35.7 million of dividends), $12.6 million of
common stock issued for employee benefit and dividend reinvestment plans, and
$46.3 million of common stock issued for the acquisition of First City.
Shareholders' equity was reduced by the $8.1 million change in net unrealized
gains and losses
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on securities available for sale, net of tax, and by the repurchase of $67.6
million of common stock in 1996. 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."
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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 --------------------
(dollars in millions) (DECREASE) VOLUME RATE (Decrease) Volume Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN INTEREST INCOME:
Securities:
Taxable
Held to maturity $ (11.0) $ (11.4) $ .4 $ (41.9) $ (41.9) $ -
Available for sale 22.0 18.3 3.7 47.4 47.1 .3
Tax-exempt
Held to maturity .3 .3 - .9 .8 .1
Available for sale .1 - .1 - - -
------- -------
Total securities 11.4 7.1 4.3 6.4 5.6 .8
------- -------
Loans 36.6 35.1 1.5 77.2 77.4 (.2)
Federal funds sold and securities purchased
under agreements to resell (4.0) (4.1) .1 2.7 3.6 (.9)
Time deposits with other banks (.2) (.1) (.1) - (.1) .1
Other 1.7 1.3 .4 1.1 1.4 (.3)
------- -------
Total change in interest income 45.5 36.9 8.6 87.4 85.1 2.3
------- -------
CHANGE IN INTEREST EXPENSE:
NOW, money market, and savings accounts 1.8 8.4 (6.6) 22.3 11.9 10.4
Certificates of deposit 4.5 2.5 2.0 17.6 19.1 (1.5)
Other interest-bearing deposits (.8) (.1) (.7) 4.1 4.1 -
Short-term borrowings 11.6 9.8 1.8 .8 6.8 (6.0)
Long-term debt (5.4) (2.7) (2.7) 5.1 4.4 .7
------- -------
Total change in interest expense 11.7 20.0 (8.3) 49.9 44.1 5.8
------- -------
CHANGE IN NET INTEREST INCOME $ 33.8 16.9 16.9 $ 37.5 41.0 (3.5)
====================================================================================================================================
</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.
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<PAGE> 44
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 $ 688.9 $ 45.6 6.62% $ 862.6 $ 56.6 6.56%
Available for sale 1,651.9 113.2 6.85 1,376.4 91.2 6.63
Tax-exempt securities
Held to maturity 36.2 2.7 7.50 32.2 2.4 7.34
Available for sale .7 .1 5.96 .8 - 5.32
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 2,377.7 161.6 6.80 2,272.0 150.2 6.61
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and repurchase agreements 63.2 3.5 5.56 139.4 7.5 5.41
Loans, net of unearned discount and net
deferred loan fees:
Commercial 3,120.7 258.2 8.27 2,876.2 240.4 8.36
Consumer-amortizing mortgages 1,763.8 140.3 7.95 1,774.3 140.4 7.91
Consumer-other 1,486.1 136.6 9.19 1,314.8 119.0 9.05
Real estate-construction 190.2 16.1 8.44 186.4 16.0 8.60
Real estate-commercial mortgages
and other 364.2 34.9 9.60 357.0 33.7 9.45
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and
net deferred loan fees 6,925.0 586.1 8.46 6,508.7 549.5 8.44
- ------------------------------------------------------------------------------------------------------------------------------------
Other 76.6 4.9 6.40 57.0 3.4 5.90
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets(1) 9,442.5 $ 756.1 8.01% 8,977.1 $ 710.6 7.92%
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (119.2) (131.4)
Cash and due from banks 465.9 449.2
Other assets 468.3 429.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $10,257.5 $ 9,723.9
====================================================================================================================================
DEPOSITS AND BORROWED FUNDS:
Demand deposits $ 1,237.1 $ 1,192.1
Interest-bearing deposits:
NOW accounts 881.2 $ 19.4 2.20% 806.4 $ 15.9 1.97%
Money market accounts 2,391.9 106.4 4.45 2,201.9 106.9 4.86
Regular savings 289.9 6.7 2.31 339.3 7.9 2.32
Certificates of deposit under $100,000 1,633.8 86.1 5.27 1,681.8 87.4 5.20
Certificates of deposit $100,000 and over 781.8 44.1 5.64 687.6 38.3 5.58
Other time 361.5 20.1 5.56 362.0 20.6 5.69
Foreign 105.2 5.4 5.17 105.8 5.7 5.36
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,445.3 288.2 4.47 6,184.8 282.7 4.57
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 7,682.4 7,376.9
Federal funds purchased and repurchase
agreements 939.3 45.8 4.88 864.9 41.5 4.80
Other short-term borrowings 277.4 15.4 5.57 150.6 8.1 5.36
Long-term debt 318.2 19.6 6.15 356.8 25.0 7.01
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits and
borrowed funds 7,980.2 $ 369.0 4.62% 7,557.1 $ 357.3 4.73%
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowed funds 9,217.3 8,749.2
Other liabilities 157.2 144.3
Shareholders' equity 883.0 830.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $10,257.5 $ 9,723.9
====================================================================================================================================
NET INTEREST INCOME(1) $ 387.1 $ 353.3
Provision for loan losses 5.0 -
Noninterest income 259.6 180.5
Noninterest expense 402.0 334.4
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and
cumulative effect of changes in
accounting principles 239.7 199.4
Income tax expense 94.2 77.8
- ------------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes
in accounting principles 145.5 121.6
Cumulative effect of changes in accounting
principles, net of tax - -
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 145.5 $ 121.6
====================================================================================================================================
Net interest spread 3.39% 3.19%
Benefit of interest-free funding .71 .75
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.10% 3.94%
====================================================================================================================================
<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 $ 1,502.8 $ 98.5 6.55%
Available for sale 663.1 43.8 6.61
Tax-exempt securities
Held to maturity 20.9 1.5 7.18
Available for sale .6 - 5.72
- --------------------------------------------------------------------------------------
Total securities 2,187.4 143.8 6.58
- --------------------------------------------------------------------------------------
Federal funds sold and repurchase agreements 79.9 4.8 6.02
Loans, net of unearned discount and net
deferred loan fees:
Commercial 2,527.3 213.0 8.43
Consumer-amortizing mortgages 1,479.1 117.0 7.91
Consumer-other 1,112.8 99.0 8.89
Real estate-construction 163.9 15.3 9.36
Real estate-commercial mortgages
and other 309.2 28.0 9.06
- --------------------------------------------------------------------------------------
Loans, net of unearned discount and
net deferred loan fees 5,592.3 472.3 8.45
- --------------------------------------------------------------------------------------
Other 39.1 2.3 5.64
- --------------------------------------------------------------------------------------
Total earning assets(1) 7,898.7 $ 623.2 7.89%
- --------------------------------------------------------------------------------------
Allowance for loan losses (129.7)
Cash and due from banks 460.1
Other assets 325.0
- --------------------------------------------------------------------------------------
Total assets $ 8,554.1
======================================================================================
DEPOSITS AND BORROWED FUNDS:
Demand deposits $ 1,112.9
Interest-bearing deposits:
NOW accounts 806.4 $ 16.1 2.00%
Money market accounts 1,805.8 82.7 4.58
Regular savings 404.5 9.6 2.38
Certificates of deposit under $100,000 1,406.9 72.8 5.17
Certificates of deposit $100,000 and over 607.0 35.3 5.82
Other time 303.8 16.9 5.57
Foreign 91.4 5.3 5.75
- --------------------------------------------------------------------------------------
Total interest-bearing deposits 5,425.8 238.7 4.40
- --------------------------------------------------------------------------------------
Total deposits 6,538.7
Federal funds purchased and repurchase
agreements 792.0 42.6 5.38
Other short-term borrowings 100.0 6.2 6.18
Long-term debt 292.4 19.9 6.83
- --------------------------------------------------------------------------------------
Total interest-bearing deposits and
borrowed funds 6,610.2 $ 307.4 4.65%
- --------------------------------------------------------------------------------------
Total deposits and borrowed funds 7,723.1
Other liabilities 126.7
Shareholders' equity 704.3
- --------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 8,554.1
======================================================================================
NET INTEREST INCOME(1) $ 315.8
Provision for loan losses .1
Noninterest income 108.5
Noninterest expense 252.4
- --------------------------------------------------------------------------------------
Income before income tax expense and
cumulative effect of changes in
accounting principles 171.8
Income tax expense 68.7
- --------------------------------------------------------------------------------------
Income before cumulative effect of changes
in accounting principles 103.1
Cumulative effect of changes in accounting
principles, net of tax -
- --------------------------------------------------------------------------------------
NET INCOME $ 103.1
======================================================================================
Net interest spread 3.24%
Benefit of interest-free funding .76
- --------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.00%
======================================================================================
</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 $5.9 million in 1997,
$8.6 million in 1996, $6.3 million in 1995, $4.8 million in 1994, and $2.3
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 $3.6 million in 1997, $3.6 million in 1996, $3.5 million in 1995, $3.4
million in
42
<PAGE> 45
<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
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1,449.9 $ 85.6 5.90% $1,341.5 $ 82.7 6.16% (20.14)% (16.99)% (19.43)% (18.97)%
688.1 43.0 6.26 899.2 62.3 6.93 20.02 61.84 24.12 62.47
19.8 1.4 7.07 11.1 .8 7.21 12.42 40.98 12.50 40.11
.4 - 5.63 - - - (12.50) - - -
- ---------------------------------------------------------------------------------------------------------------------------------
2,158.2 130.0 6.02 2,251.8 145.8 6.47 4.65 4.56 7.59 2.76
- ---------------------------------------------------------------------------------------------------------------------------------
78.6 3.1 3.99 152.1 4.9 3.24 (54.66) (27.74) (53.33) (18.94)
2,038.0 151.4 7.42 1,773.6 120.6 6.81 8.50 12.40 7.40 16.37
1,326.6 102.5 7.73 1,059.4 88.7 8.37 (.59) 15.78 (.07) 11.56
1,028.4 84.4 8.21 936.3 80.7 8.62 13.03 10.20 14.79 9.47
113.6 9.1 8.00 110.3 8.8 7.99 2.04 3.73 .63 4.86
344.7 28.7 8.33 334.5 27.0 8.06 2.02 (1.08) 3.56 1.00
- ---------------------------------------------------------------------------------------------------------------------------------
4,851.3 376.1 7.75 4,214.1 325.8 7.73 6.40 11.36 6.66 11.84
- ---------------------------------------------------------------------------------------------------------------------------------
31.3 1.3 4.05 54.0 1.8 3.32 34.39 (15.53) 44.12 (6.89)
- ---------------------------------------------------------------------------------------------------------------------------------
7,119.4 $510.5 7.17% 6,672.0 $478.3 7.17% 5.18 8.13 6.40% 8.93%
- ---------------------------------------------------------------------------------------------------------------------------------
(139.9) (175.3) (9.28) (8.78)
494.5 491.0 3.72 (.05)
311.8 334.6 9.16 7.83
- ---------------------------------------------------------------------------------------------------------------------------------
$7,785.8 $7,322.3 5.49% 7.98%
=================================================================================================================================
$1,174.7 $1,137.8 3.77% 3.34%
877.9 $ 17.5 1.99% 793.5 $ 16.5 2.08% 9.28 5.25 22.01% .74%
1,516.1 57.7 3.81 1,411.7 47.2 3.35 8.63 10.84 (.47) 17.11
510.5 12.1 2.38 487.1 12.9 2.65 (14.56) (7.00) (15.19) (14.07)
1,347.2 52.8 3.92 1,397.4 56.8 4.06 (2.85) 1.38 (1.49) 1.81
401.5 16.9 4.22 384.6 14.9 3.86 13.70 13.64 15.14 16.79
317.9 14.5 4.56 337.7 16.7 4.96 (.14) (.29) (2.43) (1.06)
41.0 1.7 4.04 25.8 .7 2.74 (.57) 40.38 (5.26) 50.47
- ---------------------------------------------------------------------------------------------------------------------------------
5,012.1 173.2 3.46 4,837.8 165.7 3.43 4.21 5.84 1.95 7.35
- ---------------------------------------------------------------------------------------------------------------------------------
6,186.8 5,975.6 4.14 5.41
681.2 25.8 3.80 587.1 15.5 2.64 8.60 12.58 10.36 22.95
59.2 2.7 4.51 49.8 1.6 3.19 84.20 68.87 90.12 85.56
109.0 7.1 6.48 60.1 4.3 7.13 (10.82) 77.82 (21.60) 69.52
- ---------------------------------------------------------------------------------------------------------------------------------
5,861.5 $208.8 3.56% 5,534.8 $187.1 3.38% 5.60 8.08 3.27% 10.84%
- ---------------------------------------------------------------------------------------------------------------------------------
7,036.2 6,672.6 5.35 7.37
105.4 98.8 8.94 13.25
644.2 550.9 6.33 14.84
- ---------------------------------------------------------------------------------------------------------------------------------
$7,785.8 $7,322.3 5.49% 7.98%
=================================================================================================================================
$301.7 $291.2 9.57% 7.28%
(9.9) (41.4) - (33.76)
85.7 88.4 43.82 27.42
239.3 248.2 20.22 10.86
- ---------------------------------------------------------------------------------------------------------------------------------
158.0 172.8 20.21 27.77
60.8 65.4 21.08 31.23
- ---------------------------------------------------------------------------------------------------------------------------------
97.2 107.4 19.65 25.79
- (.1) - -
- ---------------------------------------------------------------------------------------------------------------------------------
$ 97.2 $107.3 19.65% 25.79%
=================================================================================================================================
3.61% 3.79%
.63 .58
- ---------------------------------------------------------------------------------------------------------------------------------
4.24% 4.37%
=================================================================================================================================
</TABLE>
1994, and $4.0 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.
43
<PAGE> 46
TABLE 4: INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
===============================================================================================================
Interest-Sensitive Periods
-----------------------------------------------------
Months
-------------------------------------
Over Over
Three Six Total
Within Through Through One
(dollars in millions) Three Six Twelve Year
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
EARNING ASSETS:
Securities:
Available for sale $ 60.0 $ 31.9 $ 62.5 $ 154.4
Held to maturity 159.6 116.6 229.0 505.2
- ---------------------------------------------------------------------------------------------------------------
Total securities 219.6 148.5 291.5 659.6
Loans 3,195.2 512.4 899.8 4,607.4
Other earning assets 195.2 - - 195.2
- ---------------------------------------------------------------------------------------------------------------
Total earning assets $ 3,610.0 $ 660.9 $1,191.3 $ 5,462.2
===============================================================================================================
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
NOW, money market, and savings accounts $ 3,671.2 $ - $ - $ 3,671.2
Certificates of deposit 1,047.8 596.0 605.1 2,248.9
Other interest-bearing deposits 288.0 36.1 58.5 382.6
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 5,007.0 632.1 663.6 6,302.7
Other borrowed funds 1,595.3 6.5 - 1,601.8
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 6,602.3 638.6 663.6 7,904.5
Net effect of swaps 475.0 100.0 (1,150.0) (575.0)
- ---------------------------------------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 7,077.3 $ 738.6 $ (486.4) $ 7,329.5
===============================================================================================================
INTEREST-SENSITIVITY GAP:
For the indicated period $(3,467.3) $ (77.7) $1,677.7 $(1,867.3)
Cumulative (3,467.3) (3,545.0) (1,867.3) (1,867.3)
Cumulative, as a percent of total earning assets (34.9)% (35.7)% (18.8)% (18.8)%
===============================================================================================================
DECEMBER 31, 1996
EARNING ASSETS:
Securities:
Available for sale $ 420.3 $ 77.5 $ 154.4 $ 652.2
Held to maturity 156.2 51.1 106.3 313.6
- ---------------------------------------------------------------------------------------------------------------
Total securities 576.5 128.6 260.7 965.8
Loans 2,711.9 398.8 647.6 3,758.3
Other earning assets 275.7 - - 275.7
- ---------------------------------------------------------------------------------------------------------------
Total earning assets $ 3,564.1 $ 527.4 $ 908.3 $ 4,999.8
===============================================================================================================
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
NOW, money market, and savings accounts $ 3,429.1 $ - $ - $ 3,429.1
Certificates of deposit 909.1 553.5 554.1 2,016.7
Other interest-bearing deposits 233.6 34.0 46.2 313.8
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 4,571.8 587.5 600.3 5,759.6
Other borrowed funds 1,249.1 19.6 65.8 1,334.5
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,820.9 607.1 666.1 7,094.1
Net effect of swaps (100.0) - (400.0) (500.0)
- ---------------------------------------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 5,720.9 $ 607.1 $ 266.1 $ 6,594.1
===============================================================================================================
INTEREST-SENSITIVITY GAP:
For the indicated period $(2,156.8) $ (79.7) $ 642.2 $(1,594.3)
Cumulative (2,156.8) (2,236.5) (1,594.3) (1,594.3)
Cumulative, as a percent of total earning assets (22.8)% (23.7)% (16.9)% (16.9)%
===============================================================================================================
<CAPTION>
=====================================================================================================
Interest-Sensitive Periods
-------------------------------------------
1-5 Over 5
(dollars in millions) Years Years Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1997
EARNING ASSETS:
Securities:
Available for sale $ 355.1 $ 61.2 $ 570.7
Held to maturity 1,318.0 117.1 1,940.3
- ---------------------------------------------------------------------------------------------------
Total securities 1,673.1 178.3 2,511.0
Loans 2,364.5 244.6 7,216.5
Other earning assets - - 195.2
- ---------------------------------------------------------------------------------------------------
Total earning assets $ 4,037.6 $ 422.9 $ 9,922.7
===================================================================================================
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
NOW, money market, and savings accounts $ - $ - $ 3,671.2
Certificates of deposit 262.5 - 2,511.4
Other interest-bearing deposits 88.5 - 471.1
- ---------------------------------------------------------------------------------------------------
Total interest-bearing deposits 351.0 - 6,653.7
Other borrowed funds 34.1 100.7 1,736.6
- ---------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 385.1 100.7 8,390.3
Net effect of swaps 575.0 - -
- ---------------------------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 960.1 $ 100.7 $ 8,390.3
===================================================================================================
INTEREST-SENSITIVITY GAP:
For the indicated period $ 3,077.6 $ 322.2 $ 322.2
Cumulative 1,210.3 1,532.4 1,532.4
Cumulative, as a percent of total earning assets 12.2% 15.4% 15.4%
===================================================================================================
DECEMBER 31, 1996
EARNING ASSETS:
Securities:
Available for sale $ 883.0 $ 143.1 $ 1,678.3
Held to maturity 441.9 79.0 834.5
- ---------------------------------------------------------------------------------------------------
Total securities 1,324.9 222.1 2,512.8
Loans 2,439.4 460.9 6,658.6
Other earning assets - - 275.7
- ---------------------------------------------------------------------------------------------------
Total earning assets $ 3,764.3 $ 683.0 $ 9,447.1
===================================================================================================
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
NOW, money market, and savings accounts $ - $ - $ 3,429.1
Certificates of deposit 534.7 8.1 2,559.5
Other interest-bearing deposits 116.9 .1 430.8
- ---------------------------------------------------------------------------------------------------
Total interest-bearing deposits 651.6 8.2 6,419.4
Other borrowed funds 42.0 108.0 1,484.5
- ---------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 693.6 116.2 7,903.9
Net effect of swaps 500.0 - -
- ---------------------------------------------------------------------------------------------------
Adjusted interest-bearing liabilities $ 1,193.6 $ 116.2 $ 7,903.9
===================================================================================================
INTEREST-SENSITIVITY GAP:
For the indicated period $ 2,570.7 $ 566.8 $ 1,543.2
Cumulative 976.4 1,543.2 1,543.2
Cumulative, as a percent of total earning assets 10.3% 16.3% 16.3%
===================================================================================================
</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 $686.7 million and (6.92)%,
respectively, for 1997, as compared to a net asset interest-sensitive gap
position and percent of earning assets of $460.3 million and 4.87%,
respectively, for 1996.
44
<PAGE> 47
TABLE 5: SECURITY PORTFOLIO ANALYSIS
<TABLE>
<CAPTION>
======================================================================================================================
Estimated Maturity at December 31, 1997
---------------------------------------------------------------------------------
Within 1 Year 1-5 Years 5-10 Years
---------------------------------------------------------------------------------
(dollars in millions) Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:(1)
U.S. Gov. agencies and
corporations:
Mortgage-backed $ 173.2 6.80% $ 227.7 6.95% $ 1.5 6.63%
Other 10.0 5.00 8.1 5.82 - -
Obligations of state and
political subdivisions(2) 3.8 5.65 10.7 6.08 6.5 6.47
Other debt securities:
Mortgage-backed 30.3 6.80 74.6 6.93 - -
Other 1.0 8.00 .2 10.13 - -
- ----------------------------------------------------------------------------------------------------------------------
Total debt securities held
to maturity $ 218.3 6.71% $ 321.3 6.89% $ 8.0 6.50%
======================================================================================================================
SECURITIES AVAILABLE FOR SALE:(1)
U.S. Gov. agencies and
corporations:
Mortgage-backed $ 75.5 7.13% $ 1,373.7 7.13% $ 86.4 7.28%
Other 5.0 6.34 - - - -
Other debt securities:
Mortgage-backed - - 334.8 6.92 - -
- ----------------------------------------------------------------------------------------------------------------------
Total debt securities
available for sale $ 80.5 7.08% $ 1,708.5 7.09% $ 86.4 7.28%
======================================================================================================================
Total equity securities
Total securities available
for sale
TOTAL SECURITIES:
Total debt securities $ 298.8 6.81% $ 2,029.8 7.06% $ 94.4 7.21%
======================================================================================================================
Total equity securities
Total securities
======================================================================================================================
<CAPTION>
============================================================================================================================
Estimated Maturity at December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Total Market Average Average
After 10 Years Amortized Cost Value Maturity Repricing
- ----------------------------------------------------------------------------------------------------------------------------
(dollars in millions) Amount Yield Amount Yield Amount Years Years
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:(1)
U.S. Gov. agencies and
corporations:
Mortgage-backed $ 1.4 7.00% $ 403.8 6.89% $ 404.6 1.7 1.7
Other - - 18.1 5.37 18.0 .7 .1
Obligations of state and
political subdivisions(2) 21.7 6.05 42.7 6.09 44.2 9.7 9.7
Other debt securities:
Mortgage-backed - - 104.9 6.89 104.6 1.7 1.6
Other - - 1.2 8.39 1.2 1.0 .3
- ----------------------------------------------------------------------------------------------------------------------------
Total debt securities held
to maturity $ 23.1 6.11% $ 570.7(3) 6.78% $ 572.6 2.3 2.2
============================================================================================================================
SECURITIES AVAILABLE FOR SALE:(1)
U.S. Gov. agencies and
corporations:
Mortgage-backed $ 11.3 7.11% $ 1,546.9 7.14% $1,546.9 3.5 3.3
Other - - 5.0 6.34 5.0 .3 .3
Other debt securities:
Mortgage-backed - - 334.8 6.92 333.7 4.3 4.3
- ----------------------------------------------------------------------------------------------------------------------------
Total debt securities
available for sale $ 11.3 7.11% 1,886.7 7.10% $1,885.6 3.6 2.9
=========================================================== ==== ===================
Total equity securities 54.7 54.7
--------- --------
Total securities available $ 1,941.4 $1,940.3(3)
for sale ========= ========
TOTAL SECURITIES:
Total debt securities $ 34.4 6.44% $ 2,457.4 7.03% $2,458.2 3.3 2.7
=========================================================== ==== ==================
Total equity securities 54.7 54.7
--------- --------
Total securities $ 2,512.1 $2,512.9
=====================================================================================================================
</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
$2,511 million.
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 $1,279.1 $1,594.6 $ 431.4 $3,305.1
Real estate--construction loans 92.8 67.7 32.9 193.4
Real estate--commercial mortgages
and other 73.0 207.3 112.0 392.3
- ------------------------------------------------------------------------------------------------------------------------
Total $1,444.9 $1,869.6 $ 576.3 $3,890.8
========================================================================================================================
For maturities over one year:
Loans with fixed interest rates $1,034.7 $ 176.3 $1,211.0
Loans with floating interest rates 834.9 400.0 1,234.9
- ------------------------------------------------------------------------------------------------------------------------
Total $1,869.6 $ 576.3 $2,445.9
========================================================================================================================
</TABLE>
45
<PAGE> 48
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 $123,265 $132,415 $129,436 $136,512 $ 183,446
Loans charged off:
Commercial 11,361 8,822 3,070 3,933 10,509
Consumer--amortizing mortgages 923 730 313 401 1,365
Consumer--other 18,515 21,783 14,787 10,644 13,375
Real estate--construction 562 - 555 - 594
Real estate--commercial mortgages and other 87 95 23 939 1,332
- ------------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 31,448 31,430 18,748 15,917 27,175
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial 5,266 9,423 5,390 7,776 10,432
Consumer--amortizing mortgages 401 575 767 694 1,470
Consumer--other 9,340 9,685 8,032 8,611 7,611
Real estate--construction 2 5 380 143 128
Real estate--commercial mortgages and other 3,108 466 502 802 709
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries 18,117 20,154 15,071 18,026 20,350
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 13,331 11,276 3,677 (2,109) 6,825
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in allowance due to subsidiaries purchased/sold 459 2,126 6,573 323 1,296
Provision charged (credited) to operating expenses 5,000 - 83 (9,919) (41,405)
Adjustment for change in fiscal year of pooled company - - - 411 -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $115,393 $123,265 $132,415 $129,436 $ 136,512
====================================================================================================================================
Allocation of allowance for loan losses, end of year:
Commercial $ 43,138 $ 40,263 $ 41,604 $ 38,596 $ 35,366
Consumer loans 24,463 22,738 18,621 21,420 32,649
Real estate 5,591 5,451 6,478 11,579 16,095
Unallocated/general 42,201 54,813 65,712 57,841 52,402
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $115,393 $123,265 $132,415 $129,436 $ 136,512
====================================================================================================================================
Net charge-offs (recoveries) as a percent of average loans, net .19 % .17 % .07 % (.04)% .16%
Allowance to net loans (end of year) 1.60 1.85 2.06 2.50 2.92
====================================================================================================================================
Percent of total year-end loans:
Commercial 45.8 % 45.2 % 43.9 % 44.2 % 41.9%
Consumer--amortizing mortgages 24.5 26.7 27.8 26.7 27.7
Consumer--other 21.6 20.0 19.9 20.4 21.0
Real estate--construction 2.7 2.9 2.9 2.6 2.4
Real estate--commercial mortgages and other 5.4 5.2 5.5 6.1 7.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total percent of year-end loans 100.0 % 100.0 % 100.0 % 100.0 % 100.0%
====================================================================================================================================
</TABLE>
TABLE 8: NONPERFORMING ASSET ACTIVITY
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended December 31
-----------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1 $ 23,694 $ 29,353 $ 21,765 $ 42,450 $ 91,686
Transfers in and new foreclosed properties 30,869 16,112 21,294 14,676 40,658
Change in nonperforming assets due to subsidiaries purchased 32 39 3,091 208 199
Payments received (13,140) (11,619) (11,549) (15,592) (58,107)
Proceeds from sales of foreclosed properties (11,674) (7,592) (9,119) (14,672) (20,146)
Net gains on sales 4,903 4,383 5,461 5,186 3,530
Charge-offs and writedowns (6,095) (5,795) (1,080) (2,193) (8,985)
Return to earning status (9,971) (1,187) (510) (7,150) (6,644)
Other - - - (969) 259
Adjustment for change in fiscal year for pooled company - - - (179) -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $ 18,618 $ 23,694 $ 29,353 $ 21,765 $ 42,450
====================================================================================================================================
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 15,090 $ 16,331 $ 18,670 $ 11,674 $ 22,944
Restructured loans - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 15,090 16,331 18,670 11,674 22,944
Foreclosed properties 3,528 7,363 10,683 10,091 19,506
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 18,618 $ 23,694 $ 29,353 $ 21,765 $ 42,450
====================================================================================================================================
Nonperforming assets to total loans plus foreclosed properties(1) .26 % .36 % .46 % .42 % .91 %
====================================================================================================================================
90 days or more past due on accrual $ 13,152 $ 11,711 $ 6,123 $ 4,530 $ 4,764
====================================================================================================================================
</TABLE>
(1) Excludes loans 90 days or more past due on accrual.
46
<PAGE> 49
TABLE 9: CERTIFICATES OF DEPOSIT $100,000 AND OVER
<TABLE>
<CAPTION>
===============================================================================================================
MATURITIES AT DECEMBER 31
--------------------------------
(dollars in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<C> <C> <C>
3 months or less $517,893 $516,211
Over 3 through 6 months 219,286 165,261
Over 6 through 12 months 154,798 141,535
Over 12 months 49,055 70,787
- ---------------------------------------------------------------------------------------------------------------
TOTAL $941,032 $893,794
===============================================================================================================
</TABLE>
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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Net interest income $101,031 $ 95,896 $ 93,549 $ 92,934
Net interest income, taxable equivalent basis(1) 101,836 96,974 94,355 93,886
Provision for loan losses 5,000 - - -
Noninterest income 70,754 64,250 62,839 61,751
Noninterest expense 103,493 99,931 99,041 99,537
Net income 38,868 37,233 35,341 34,030
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
Net income:
Basic $ .67 $ .63 $ .60 $ .58
Diluted .64 .62 .58 .56
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) 1.46 % 1.44 % 1.40 % 1.37 %
Return on average equity (annualized) 17.11 16.80 16.18 15.78
Net interest margin 4.15 4.07 4.07 4.11
====================================================================================================================================
1996
Net interest income $ 91,362 $ 89,291 $ 85,227 $ 83,818
Net interest income, taxable equivalent basis(1) 92,258 90,223 86,131 84,686
Provision for loan losses - - - -
Noninterest income 59,349 57,719 31,456 32,009
Noninterest expense 97,169 103,177 66,421 67,688
Net income 33,464 27,419 30,889 29,800
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
Net income:
Basic $ .56 $ .47 $ .52 $ .50
Diluted .55 .45 .51 .49
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) 1.35 % 1.11 % 1.28 % 1.26 %
Return on average equity (annualized) 15.48 12.97 15.05 15.08
Net interest margin 4.06 3.96 3.87 3.85
====================================================================================================================================
</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.
47
<PAGE> 50
TABLE 11: CONSOLIDATED YEAR-END BALANCE SHEETS
<TABLE>
<CAPTION>
=================================================================================================================================
December 31
-------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 530,662 $ 603,456 $ 494,496 $ 513,916 $ 515,122
Securities:
U.S. Treasury and other U.S. Government
agencies and corporations 1,973,858 2,149,813 1,813,782 2,116,371 2,144,726
Obligations of states and political
subdivisions 42,668 39,303 32,788 21,730 21,573
Other 494,516 323,663 287,007 195,230 37,409
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities 2,511,042 2,512,779 2,133,577 2,333,331 2,203,708
- ---------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities
purchased under agreements to resell 129,952 161,677 291,042 28,134 153,860
Loans:
Commercial
Commercial and industrial 2,552,776 2,263,070 2,157,164 1,734,783 1,446,781
For purchasing or carrying securities 37,170 59,463 57,386 32,921 41,098
Financial institutions 60,165 61,315 68,106 77,113 98,462
Other domestic loans 652,998 625,538 539,559 444,112 373,716
International 1,899 739 1,612 623 -
- ---------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 3,305,008 3,010,125 2,823,827 2,289,552 1,960,057
- ---------------------------------------------------------------------------------------------------------------------------------
Consumer
Amortizing mortgages 1,763,470 1,782,630 1,784,836 1,385,081 1,295,307
Installment 1,171,876 999,118 1,046,615 870,451 801,820
Single payment 20,251 18,432 14,272 17,185 21,747
Open end 369,233 317,200 221,034 168,307 159,900
- ---------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 3,324,830 3,117,380 3,066,757 2,441,024 2,278,774
- ---------------------------------------------------------------------------------------------------------------------------------
Real estate
Construction 193,433 190,673 186,655 134,513 112,353
Commercial mortgages and other 392,309 345,466 354,918 316,242 330,983
- ---------------------------------------------------------------------------------------------------------------------------------
Total real estate loans 585,742 536,139 541,573 450,755 443,336
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans 7,215,580 6,663,644 6,432,157 5,181,331 4,682,167
Unearned discount and net deferred loan costs (fees) 991 (5,047) (6,181) (9,365) (12,596)
- ---------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net
deferred loan fees 7,216,571 6,658,597 6,425,976 5,171,966 4,669,571
Allowance for loan losses 115,393 123,265 132,415 129,436 136,512
- ---------------------------------------------------------------------------------------------------------------------------------
Total net loans 7,101,178 6,535,332 6,293,561 5,042,530 4,533,059
- ---------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 196,106 162,257 129,419 111,075 109,320
Foreclosed properties 3,528 7,363 10,683 10,091 19,506
Other assets 399,352 416,604 328,851 239,650 173,206
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,871,820 $10,399,468 $ 9,681,629 $ 8,278,727 $ 7,707,781
=================================================================================================================================
LIABILITIES
Deposits:
Demand (noninterest-bearing) $ 1,353,941 $ 1,374,528 $ 1,266,285 $ 1,252,136 $ 1,240,543
Time, NOW, savings, money market 6,549,556 6,321,192 5,971,048 4,995,343 4,878,033
Foreign 104,182 97,257 144,961 60,300 31,975
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 8,007,679 7,792,977 7,382,294 6,307,779 6,150,551
- ---------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold
under agreements to repurchase 981,992 939,740 788,569 855,618 664,826
Other short-term borrowings 344,835 214,632 149,718 74,222 91,937
Long-term debt 409,821 331,157 421,791 271,473 77,053
Other liabilities 218,754 252,255 143,725 101,962 99,852
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 9,963,081 9,530,761 8,886,097 7,611,054 7,084,219
- ---------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock 145,652 148,158 147,699 143,625 139,574
Additional paid-in capital 106,228 157,792 162,254 130,933 128,195
Retained earnings 670,930 569,851 483,973 409,638 336,648
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 (567) (4,585) 3,530 (13,581) 22,049
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 908,739 868,707 795,532 667,673 623,562
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,871,820 $10,399,468 $ 9,681,629 $ 8,278,727 $ 7,707,781
=================================================================================================================================
</TABLE>
48
<PAGE> 51
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in Item 14(a)(1) and (2) are included
in this Report beginning on page 59 and are incorporated in this Item 8 by
reference. The table "Quarterly Financial Data" on page 47 hereof, "Consolidated
Year-End Balance Sheets" on page 48 hereof, and "Consolidated Average Balance
Sheets and Taxable Equivalent Income/Expense and Yields/Rates" on pages 42-43
hereof are incorporated in this Item 8 by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers of the Registrant
The following is a list of the Corporation's executive officers, their
ages and their positions and offices during the last five years (listed
alphabetically).
<TABLE>
<CAPTION>
Officer Age Business Experience - Past 5 years
- ------- --- ----------------------------------
<S> <C> <C>
Dennis C. Bottorff 53 Mr. Bottorff serves as Chairman and Chief Executive Officer
of the Corporation and FANB and also served as the
Corporation's President until August 1997. From November
1991 until January 1994, Mr. Bottorff also served as President
of FANB. Mr. Bottorff also serves as a director of the
Corporation's affiliates SSI and IFC.
Melissa J. Buffington 40 Since August 1996, Ms. Buffington has served as Executive
Vice President and Director of Human Resources of the
Corporation and FANB. From June 1992 though June 1993,
she served as Assistant Director of Strategic Planning for
FANB. From June 1993 through August 1996, she served as
the Corporation's Director of Quality Management.
R. Booth Chapman 57 Since September 1991, Mr. Chapman has served as Executive
Vice President - Independent Loan Review of FANB.
Brian L. Cooper 39 Mr. Cooper is Executive Vice President - Marketing of FANB
and has served in such capacity since September 1995. In
November 1997, Mr. Cooper also became President of
</TABLE>
49
<PAGE> 52
<TABLE>
<S> <C> <C>
AmeriStar Investments & Trust. From March 1992 through August
1995, he served as Senior Vice President -- Marketing &
Electronic Banking of Banc One Corporation (Western Region).
Emery F. Hill 54 Mr. Hill is Executive Vice President - Operations and
Technology of the Corporation and FANB and has served in
this position since March 1992.
Carroll E. Kimball 35 Ms. Kimball is the Corporation's Executive Vice President -
Segment Management Director and has served in this position
since August 1997. She also currently serves as the
Corporation's Director of Investor Relations. From January
1992 until March 1995, she served in various capacities in the
Strategic Planning and Investor Relations area of FANB.
From March 1995 until August 1997, she served as the
Corporation's Director of Investor Relations and Executive
Vice President - Strategic Planning, Asset Liability
Management.
Rufus B. King 52 Mr. King is Executive Vice President and Chief Credit Officer
of FANB and has served in such position since July 1989.
Michael Kruklinski 32 Mr. Kruklinski is Senior Vice President and the Corporation's
and FANB's Director of Quality & Process Management and
has served in such position since August 1996. From 1993
through 1995, he served, at various times, as Manager of
Internal Auditing and Manager of Strategic Planning at
Siemens AG. From 1995 until August 1996, he served as a
Senior Consultant/Project Manager at Siemens Corporation.
John W. Logan 55 Mr. Logan is Executive Vice President - Investments of the
Corporation and FANB and has served in such position since
1991.
Robert A. McCabe, Jr. 47 Mr. McCabe is President - FAE and Vice Chairman of the
Board of Directors of the Corporation and FANB. From
January 1992 until January 1994, he served as President,
General Bank of FANB. Mr. McCabe serves as a director of
the Corporation's affiliates SSI and IFC.
Dale W. Polley 48 Mr. Polley serves as President and Director of the Corporation
and FANB. He also serves as the Corporation's and FANB's
</TABLE>
50
<PAGE> 53
<TABLE>
<S> <C> <C>
Principal Financial Officer, a position he held from November
1992 through 1994. From December 1991 until January 1994,
he served as Vice Chairman and Chief Administrative Officer of
the Corporation and FANB.
Mary Neil Price 37 Ms. Price is Executive Vice President, General Counsel, and
Corporate Secretary of the Corporation and FANB and has
served in such capacity since August 1997. From November
1992 through October 1993, she was Associate General
Counsel and Vice President of FANB. From October 1993
through February 1995, she served as Associate General
Counsel and Senior Vice President of FANB. From February
1995 through July 1996, she served as Senior Vice President
and Senior Counsel of FANB. From July 1996 through July
1997, she served as Deputy General Counsel and Executive
Vice President of the Corporation and FANB. She is also the
corporate secretary and a director of IFC.
Terry S. Spencer 41 Mr. Spencer serves as Executive Vice President and Treasurer
of the Corporation and as Executive Vice President of FANB.
From September 1993 until March 1995, he served as
Executive Vice President-Development of FANB. From
December 1991 until September 1993, he served as Senior
Vice President-Director of Strategic Planning of FANB.
Claire W. Tucker 45 Ms. Tucker is President - Corporate Bank of FANB and has
served in such capacity since January 1997. From August
1991 through January 1995, she served as Manager of
FANB's Health Care and Manufacturers Divisions and Senior
Vice President. From January 1995 through January 1997,
she served as the Manager of FANB's Specialized Lending
Group and was appointed Executive Vice President in April
1995.
M. Terry Turner 43 Mr. Turner serves as President - General Bank of FANB and
has served in this position since January 1994. He served as
Executive Vice President - Business and Professional Banking
of FANB from January 1991 until January 1994.
Marvin J. Vannatta, Jr. 54 Mr. Vannatta serves as Executive Vice President and Principal
Accounting Officer of the Corporation and FANB and as
Cashier of FANB. From April 1994 until March 1995, he
served as Senior Vice President, Principal Accounting Officer
</TABLE>
51
<PAGE> 54
and Treasurer of the Corporation.
From January 1994 until March 1995,
Mr. Vannatta served as Senior Vice
President and as the Cashier of
FANB. From 1981 until January 1994,
he served in various capacities at
FANB, including Senior Vice
President, Controller and Cashier.
The additional information required by Item 405 of Regulation S-K is
contained in the definitive written proxy statement required pursuant to
Regulation 14A and set forth in the Corporation's Registration Statement on
Form S-4 filed with the SEC on March 11, 1998 (the "Joint Proxy Statement -
Prospectus"). Such information appears in the sections entitled "Election of
Directors" and "Reports of Beneficial Ownership" in the Joint Proxy Statement -
Prospectus and is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
This information appears in the sections entitled "Executive
Compensation", "Human Resources Committee Interlocks and Insider Participation",
"Compensation of Directors" and "Retirement Plans" in the Joint Proxy Statement
- - Prospectus, and is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information appears in the section entitled "Security Ownership of
Management" in the Joint Proxy Statement - Prospectus, and is incorporated
herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information appears in the sections entitled "Certain
Transactions" and "Human Resources Committee Interlocks and Insider
Participation" in the Joint Proxy Statement - Prospectus, and is incorporated
herein by reference.
52
<PAGE> 55
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
The Report of KPMG Peat Marwick LLP, Independent Auditors
Consolidated Income Statements of First American
Corporation and Subsidiaries for each of the years in
the three year period ended December 31, 1997
Consolidated Balance Sheets of First American Corporation
and Subsidiaries at December 31, 1997 and 1996
Consolidated Statements of Changes in Shareholders'
Equity of First American Corporation and Subsidiaries
for each of the years in the three year period ended
December 31, 1997
Consolidated Statements of Cash Flows of First
American Corporation and Subsidiaries for each of the
years in the three year period ended December 31,
1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules are omitted because they are not applicable.
The following reports and consents are submitted herewith:
Accountants' Consent by
KPMG Peat Marwick LLP -- Exhibit 23
53
<PAGE> 56
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.1 Agreement and Plan of Merger by and between the
Corporation and Deposit Guaranty Corp., dated December
7, 1997 (previously filed as part of the Corporation's
Registration Statement on Form S-4 filed with the SEC
on March 11, 1998, and incorporated herein by reference).
3.1 Restated Charter of the Corporation effective January
13, 1997, and amendments and corrections thereto
(previously filed as Exhibit 3.1 to the Corporation's
Form 10-Q for the quarter ending March 31, 1997 and
incorporated herein by reference).
3.2 By-Laws of the Corporation currently in effect as
amended January 16, 1997 (previously filed as Exhibit
3.2 to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1996 and incorporated
herein by reference).
4.1 The Corporation agrees to provide the Securities and
Exchange Commission, upon request, copies of
instruments defining the rights of holders of long-term
debt of the Corporation, and all of its subsidiaries
for which consolidated or unconsolidated financial
statements are required to be filed with the Securities
and Exchange Commission.
4.2 Rights Agreement, dated December 14, 1988, between
First American Corporation and First American Trust
Company, N.A. (previously filed as Exhibit 1 to a
Current Report on Form 8-K dated December 14, 1988, and
incorporated herein by reference).
4.3(a) Indenture, dated as of April 22, 1993, between First
American Corporation and Chemical Bank, as Trustee
(previously filed as Exhibit 4.1 to Registration
Statement No. 33-59844 and incorporated herein by
reference).
4.3(b) Supplemental Indenture, dated as of April 22, 1993,
between First American Corporation and Chemical Bank,
as Trustee (previously filed as Exhibit 4.2 to
Registration Statement No. 33-59844 and incorporated
herein by reference).
</TABLE>
54
<PAGE> 57
<TABLE>
<S> <C>
10.1(a) First American STAR Award Plan (previously filed as
Exhibit 10.03(b) to the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1986 and
incorporated herein by reference).
10.1(b) First American Corporation 1991 Employee Stock
Incentive Plan (previously filed as part of the
Corporation's Notice of Annual Meeting and Proxy
Statement dated March 18, 1991 for the annual meeting
of shareholders held April 18, 1991, amended as of
April 21, 1994 and April 17, 1997, and incorporated
herein by reference).
10.1(c) 1993 Non-Employee Director Stock Option Plan
(previously filed as part of the Corporation's Notice
of Annual Meeting and Proxy Statement dated March 18,
1993 for the annual meeting of shareholders held
April 15, 1993 and incorporated herein by reference).
10.1(d) First American Corporation 1992 Executive Early
Retirement Program (previously filed as Exhibit
10.4(a) to the Corporation's Annual Report on Form
10-K for the year ended December 31, 1992 and
incorporated herein by reference).
10.1(e) First American Corporation Directors' Deferred
Compensation Plan as amended on October 18, 1996
(previously filed as Exhibit 10.3(e) to the
Corporation's Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by
reference).
10.1(f) First American Corporation Supplemental
Executive Retirement Program dated as of
January 1, 1989 (previously filed as Exhibit
19.2 to the Corporation's Annual Report on
Form 10-K for the year ended December 31,
1992 and incorporated herein by reference).
10.1(g) Form of Deferred Compensation Agreement
approved by the Human Resources Committee of
the Board of Directors of the Corporation on
December 19, 1996 (previously filed as
Exhibit 10.3(g) to the Corporation's Annual
Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by
reference).
10.1(h) Restated and Amended First American Corporation First
Incentive Reward Savings Thrift Plan (previously
filed as Exhibit 4 to Registration Statement No.
33-57385 filed January 20, 1995 and incorporated
herein by reference).
</TABLE>
55
<PAGE> 58
<TABLE>
<S> <C>
10.1(i) Form of Key Employee Change in Control Agreement by and
between the Corporation and certain of its Executive Officers
(previously filed as Exhibit 10.3(j) to the Corporation's
Annual Report on Form 10-K for the year ended December 31,
1995 and incorporated herein by reference).
10.1(j) Agreement effective August 1, 1997 by and between the
Corporation and Martin E. Simmons (previously filed as
Exhibit 10 to the Corporation's Form 10-Q for the quarter
ending September 30, 1997 and incorporated herein by
reference).
11 Calculation of basic and diluted earnings per share is
included in Note 13 to the consolidated financial statements
contained herein on page 88, included in this Report.
13 First American Corporation's Annual Report to Shareholders
for the fiscal year ended December 31, 1997. Such report,
except for the portions included herein, is furnished for the
information of the Securities and Exchange Commission and is
not "filed" as part of this Report.
21 List of Subsidiaries included herein.
23 Consent of KPMG Peat Marwick LLP, independent auditors
included herein.
27 Financial Data Schedule included herein.(for SEC use only).
</TABLE>
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
(b) One report on Form 8-K was filed in the last quarter of 1997.
1) December 12, 1997 - Item 5 ("Other Events") Report that includes the
following exhibits:
(a) Exhibit 99.1 - Press Release dated December 8, 1997; and
(b) Exhibit 99.2 - Investor Presentation dated December 8,
1997.
56
<PAGE> 59
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 58
Financial Statements:
Consolidated Income Statements of First American Corporation and
Subsidiaries for each of the years in the three period ended
December 31, 1997 59
Consolidated Balance Sheets of First American Corporation and Subsidiaries
at December 31, 1997 and 1996 60
Consolidated Statements of Changes in Shareholders' Equity of First
American Corporation and Subsidiaries for each of the years in the three year
period ended December 31, 1997 61
Consolidated Statements of Cash Flows of First American Corporation and
Subsidiaries for each of the years in the three year period ended December
1997 62
Notes to Consolidated Financial Statements 63
Supplemental Data:
Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense
and Yields/Rates for each of the years in the period ended December 31, 1997,
1996, 1995, 1994 and 1993 42
Consolidated Year-End Balance Sheets of First American Corporation and
Subsidiaries at December 31, 1997, 1996, 1995, 1994 and 1993 48
</TABLE>
57
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
First American Corporation:
We have audited the accompanying consolidated balance sheets of First
American Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated income statements, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
American Corporation and subsidiaries as of December 31, 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.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Nashville, Tennessee
January 15, 1998
58
<PAGE> 61
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
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 $583,453 $546,803 $469,449
Interest and dividends on securities 160,669 149,426 143,299
Interest on federal funds sold and securities purchased under
agreements to resell 3,515 7,536 4,811
Interest on time deposits with other banks and other interest 4,821 3,284 2,140
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 752,458 707,049 619,699
- ------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 19,387 15,885 16,128
Money market accounts 106,410 106,961 82,648
Regular savings 6,707 7,865 9,624
Certificates of deposit under $100,000 86,096 87,422 72,742
Certificates of deposit $100,000 and over 44,070 38,348 35,329
Other time and foreign 25,532 26,260 22,196
- ------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 288,202 282,741 238,667
- ------------------------------------------------------------------------------------------------------------------------
Interest on short-term borrowings (note 8) 61,287 49,617 48,751
Interest on long-term debt (note 9) 19,559 24,993 19,971
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 369,048 357,351 307,389
- ------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 383,410 349,698 312,310
PROVISION FOR LOAN LOSSES (NOTE 5) 5,000 - 83
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 378,410 349,698 312,227
- ------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Investment services income 116,138 60,948 10,358
Service charges on deposit accounts 66,426 57,586 48,545
Commissions and fees on fiduciary activities 19,204 17,899 16,571
Merchant discount fees 3,633 3,616 3,279
Net realized gain on sales of securities (note 4) 2,149 2,467 737
Trading account revenue 566 1,576 373
Gain on sales of branches (note 2) - - 3,000
Other 51,478 36,441 25,624
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income 259,594 180,533 108,487
- ------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits (note 10) 190,885 167,376 143,909
Subscribers' commissions (note 1) 70,785 35,075 --
Net occupancy (note 6) 28,259 25,933 21,874
Equipment 22,068 17,452 15,686
Systems and processing (note 6) 15,149 14,755 11,389
Communication 14,322 12,183 9,863
Marketing 13,068 13,133 9,153
Supplies 5,688 5,402 4,471
Foreclosed properties expense (income), net (4,281) (4,401) (6,070)
FDIC insurance (note 15) 1,065 10,389 7,974
Merger-related (note 2) - - 7,269
Other 44,994 37,158 26,930
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 402,002 334,455 252,448
- ------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 236,002 195,776 168,266
Income tax expense (note 11) 90,530 74,204 65,186
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $145,472 $121,572 $103,080
========================================================================================================================
PER COMMON SHARE (NOTE 13):
Net income:
Basic $ 2.48 $ 2.05 $ 1.82
Diluted 2.40 2.01 1.78
Dividends declared .755 .605 .53
========================================================================================================================
AVERAGE COMMON SHARES OUTSTANDING (note 13):
Basic 58,679 59,184 56,629
Diluted 60,497 60,454 57,927
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE> 62
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
First American Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------
December 31
-----------------------------------
(dollars in thousands except per share amounts) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks (note 3) $ 530,662 $ 603,456
Time deposits with other banks 2,245 53,801
Securities (note 4):
Held to maturity (fair value $572,586 and $835,192, respectively) 570,699 834,547
Available for sale (amortized cost $1,941,352 and $1,685,743, respectively) 1,940,343 1,678,232
- ------------------------------------------------------------------------------------------------------------------------
Total securities 2,511,042 2,512,779
- ------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under agreements to resell 129,952 161,677
Trading account securities 63,011 60,210
Loans (note 5):
Commercial 3,305,008 3,010,125
Consumer--amortizing mortgages 1,763,470 1,782,630
Consumer--other 1,561,360 1,334,750
Real estate--construction 193,433 190,673
Real estate--commercial mortgages and other 392,309 345,466
- ------------------------------------------------------------------------------------------------------------------------
Total loans 7,215,580 6,663,644
Unearned discount and net deferred loan costs (fees) 991 (5,047)
- ------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and net deferred loan fees 7,216,571 6,658,597
Allowance for loan losses (115,393) (123,265)
- ------------------------------------------------------------------------------------------------------------------------
Total net loans 7,101,178 6,535,332
- ------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net (note 6) 196,106 162,257
Foreclosed properties 3,528 7,363
Other assets (notes 7, 10, and 11) 334,096 302,593
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,871,820 $10,399,468
========================================================================================================================
LIABILITIES
Deposits:
Demand (noninterest-bearing) $ 1,353,941 $ 1,374,528
NOW accounts 915,201 830,269
Money market accounts 2,491,586 2,295,112
Regular savings 264,447 303,691
Certificates of deposit under $100,000 1,570,357 1,665,675
Certificates of deposit $100,000 and over 941,032 893,794
Other time 366,933 332,651
Foreign 104,182 97,257
- ------------------------------------------------------------------------------------------------------------------------
Total deposits 8,007,679 7,792,977
- ------------------------------------------------------------------------------------------------------------------------
Short-term borrowings (note 8) 1,326,827 1,154,372
Long-term debt (note 9) 409,821 331,157
Other liabilities (notes 10 and 11) 218,754 252,255
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 9,963,081 9,530,761
- ------------------------------------------------------------------------------------------------------------------------
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 100,000,000 shares; issued:
58,260,642 shares at December 31, 1997; 59,262,998 shares at
December 31, 1996 145,652 148,158
Additional paid-in capital 106,228 157,792
Retained earnings 670,930 569,851
Deferred compensation on restricted stock (13,341) (2,066)
Employee stock ownership plan obligation (163) (443)
- ------------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 909,306 873,292
Net unrealized losses on securities available for sale, net of tax (567) (4,585)
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 908,739 868,707
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,871,820 $10,399,468
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
60
<PAGE> 63
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
First American Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
Net
Unrealized
Common Deferred Employee Gains
Shares Compensation Stock (Losses) on
Issued Additional on Ownership Securities
(dollars in thousands and Common Paid-in Retained Restricted Plan Available
except per share amounts) Outstanding Stock Capital Earnings Stock Obligation for Sale Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 57,450,138 $ 143,625 $130,933 $409,638 $ (2,161) $ (781) $(13,581) $667,673
Issuance of common shares in
connection with Employee
Benefit Plans, net of discount
on Dividend Reinvestment Plan
(note 10) 1,357,156 3,393 10,302 - - - - 13,695
Issuance of shares of restricted
common stock (note 12) 32,190 81 498 - (492) - - 87
Repurchase of shares of common
stock (note 12) (3,290,316) (8,226) (54,121) - - - - (62,347)
Issuance of common shares for
purchase of Charter Federal
Savings Bank (note 2) 3,530,470 8,826 71,547 - - - - 80,373
Amortization of deferred
compensation on restricted stock
(note 12) - - - - 1,390 - - 1,390
Reduction in employee stock
ownership plan obligation
(note 10) - - - - - 120 - 120
Net income - - - 103,080 - - - 103,080
Cash dividends declared
($.53 per common share) - - - (27,883) - - - (27,883)
Cash dividends declared by pooled
company - - - (908) - - - (908)
Change in net unrealized gains
(losses) on securities
available for sale, net of tax
(note 4) - - - - - - 17,111 17,111
Tax benefit from stock option and
award plans - - 3,095 - - - - 3,095
Other - - - 46 - - - 46
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 59,079,638 147,699 162,254 483,973 (1,263) (661) 3,530 795,532
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common shares in
connection with Employee Benefit
Plans, net of discount on
Dividend Reinvestment Plan
(note 10) 959,374 2,398 11,704 - - - - 14,102
Issuance of shares of restricted
common stock (note 12) 92,976 232 1,958 - (2,190) - - -
Repurchase of shares of common stock
(note 12) (3,015,314) (7,538) (61,611) - - - - (69,149)
Issuance of common shares for
purchase of First City Bancorp, Inc.
(note 2) 2,147,518 5,369 40,937 - - - - 46,306
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 - - - 121,572 - - - 121,572
Cash dividends declared
($.605 per common share) - - - (35,694) - - - (35,694)
Change in net unrealized gains
(losses) on securities available
for sale, net of tax (note 4) - - - - - - (8,115) (8,115)
Tax benefit from stock option and
award plans - - 2,568 - - - - 2,568
Other (1,194) (2) (18) - - - - (20)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 59,262,998 148,158 157,792 569,851 (2,066) (443) (4,585) 868,707
- ------------------------------------------------------------------------------------------------------------------------------------
ISSUANCE OF COMMON SHARES IN
CONNECTION WITH EMPLOYEE BENEFIT
PLANS, NET OF DISCOUNT ON DIVIDEND
REINVESTMENT PLAN (NOTE 10) 1,076,491 2,691 17,443 - - - - 20,134
ISSUANCE OF SHARES OF RESTRICTED
COMMON STOCK (NOTE 12) 445,583 1,114 13,564 - (14,678) - - -
REPURCHASE OF SHARES OF COMMON STOCK
(NOTE 12) (2,875,040) (7,188) (96,387) - - - - (103,575)
ISSUANCE OF COMMON SHARES FOR
PURCHASE OF HARTSVILLE BANCSHARES,
INC. (NOTE 2) 350,522 876 9,223 - - - - 10,099
AMORTIZATION OF DEFERRED COMPENSATION
ON RESTRICTED STOCK (NOTE 12) - - - - 3,403 - - 3,403
REDUCTION IN EMPLOYEE STOCK OWNERSHIP
PLAN OBLIGATION (NOTE 10) - - - - - 280 - 280
NET INCOME - - - 145,472 - - - 145,472
CASH DIVIDENDS DECLARED ($.755 PER
COMMON SHARE) - - - (44,393) - - - (44,393)
CHANGE IN NET UNREALIZED GAINS
(LOSSES) ON SECURITIES AVAILABLE
FOR SALE, NET OF TAX (NOTE 4) - - - - - - 4,018 4,018
TAX BENEFIT FROM STOCK OPTION AND
AWARD PLANS - - 4,590 - - - - 4,590
OTHER 88 1 3 - - - - 4
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 58,260,642 $145,652 $106,228 $670,930 $(13,341) $ (163) $ (567) $908,739
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE> 64
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
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 $ 145,472 $ 121,572 $ 103,080
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 5,000 -- 83
Depreciation and amortization of premises and equipment 19,903 16,044 14,538
Amortization of intangible assets 11,227 9,577 4,152
Other amortization (accretion), net 2,636 750 (4,218)
Deferred income tax expense 11,836 23,082 18,005
Net gain on sales and writedowns of foreclosed property (4,689) (4,269) (5,222)
Net realized gains on sales and write-downs of securities (2,149) (2,467) (737)
Net (gain) loss on sales and write-downs of premises and equipment (189) 118 (287)
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:
(Increase) decrease in accrued interest receivable (10,447) 8,242 (25,116)
Increase (decrease) in accrued interest payable 6,695 (8,507) 20,591
Increase in trading account securities (2,801) (29,772) (13,802)
(Increase) decrease in other assets (45,335) 20,089 (7,818)
(Decrease) increase in other liabilities (40,275) 99,530 2,199
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 90,432 253,989 102,448
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 1,074,153 733,054 1,108,411
Proceeds from maturities of securities available for sale 323,191 373,150 187,449
Purchases of securities available for sale (1,625,153) (1,460,227) (839,869)
Proceeds from maturities of securities held to maturity 386,693 215,373 273,922
Purchases of securities held to maturity (123,512) (116,107) (203,729)
Proceeds from sales of foreclosed property 11,674 7,592 9,119
Acquisitions, net of cash acquired 3,375 14,691 6,932
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 (524,589) (75,806) (850,998)
Proceeds from sales of premises and equipment 5,473 5,434 1,413
Purchases of premises and equipment (57,891) (48,920) (29,567)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (518,588) (351,766) (361,368)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 133,109 83,436 599,568
Net increase (decrease) in short-term borrowings 46,813 173,469 (101,142)
Proceeds from issuance of long-term debt -- -- 49,513
Advances from (repayments to) Federal Home Loan Bank 215,753 (64,166) 52,724
Net repayment of other long-term debt (350) (126) (1,116)
Issuance of common shares under Employee Benefit and Dividend
Reinvestment Plans 20,134 14,102 13,782
Repurchase of common stock (103,575) (69,149) (62,347)
Tax benefit related to stock options 4,590 2,568 3,095
Cash dividends paid (44,393) (35,694) (28,791)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 272,081 104,440 525,286
- ---------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (156,075) 6,663 266,366
Cash and cash equivalents, beginning of year 818,934 812,271 545,905
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $662,859 $818,934 $812,271
===========================================================================================================================
Cash paid during the year for:
Interest expense $362,353 $367,297 $286,798
Income taxes 61,167 51,041 37,129
Non-cash investing activities:
Foreclosures 3,222 1,548 4,133
Reclassification of investment securities (note 4) -- -- 693,968
Stock issued for acquisitions (note 2) 10,099 46,306 80,373
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
62
<PAGE> 65
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1: DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF OPERATIONS
First American Corporation ("Corporation") is the Nashville, Tennessee
based parent company of First American National Bank ("FANB"), First American
Federal Savings Bank ("FAFSB"), and First American Enterprises, Inc. The
Corporation's bank and thrift subsidiaries operate 169 offices and make
commercial, consumer, and real estate loans and provide various banking and
mortgage-related services to its customers located within the Corporation's
market, which consists primarily of Tennessee and selected markets in Virginia,
Kentucky and other adjacent states.
FANB owns 98.5% 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 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 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 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 consolidated financial statements for all periods
presented have been restated to reflect the impact of the stock split.
63
<PAGE> 66
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.
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 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 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 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 swap is
accrued over the life of the agreement based on expected settlement payments and
is recorded as an
64
<PAGE> 67
adjustment to interest income or expense in the period in which it accrues and
in the category appropriate to the related asset or liability. The related
amount receivable from or payable to the swap counterpart is included in other
assets or liabilities in the consolidated balance sheets. Realized and
unrealized gains and losses on futures contracts which are designated as
effective hedges of interest rate exposure arising out of nontrading assets and
liabilities are deferred and recognized as interest income or interest expense,
in the category appropriate to the related asset or liability, over the covered
periods or lives of the hedged assets or liabilities. Gains or losses on early
terminations of derivative financial instruments that modify the underlying
characteristics of specified assets or liabilities are deferred and amortized as
an adjustment to the yield or rate of the related assets or liabilities over the
remaining covered period. At such time that there is no longer correlation of
interest rate movements between the derivative instrument and the underlying
asset or liability, or if all of the underlying assets or liabilities
specifically related to a derivative instrument 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.
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.
65
<PAGE> 68
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.
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 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.
66
<PAGE> 69
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.
FORECLOSED PROPERTIES
Foreclosed properties include property acquired in situations in which
the Corporation has physical possession of a debtor's assets (collateral)
regardless of whether formal foreclosure proceedings have taken place.
Foreclosed properties are valued at the lower of cost or fair value minus
estimated costs to sell. The fair value of the assets is the amount that the
Corporation could reasonably expect to receive for them in a current sale
between a willing buyer and a willing seller, that is, other than in a forced or
liquidation sale. Cost includes loan principal, foreclosure expense, and
expenditures for subsequent improvements. The excess of cost over fair value
minus estimated costs to sell at the time of foreclosure is charged to the
allowance for loan losses. Subsequent write-downs to fair value minus estimated
costs to sell are included in foreclosed properties expense.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization, which is computed principally on the straight-line method
based on the estimated useful lives 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 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 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
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<PAGE> 70
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
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 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.
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<PAGE> 71
INCOME TAXES
The Corporation files a consolidated federal income tax return, with
the exception of its credit life insurance subsidiary, which files a separate
return. 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
capital 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 percentage of gross commissions after deduction of certain
contractual charges, and paid to subscribing institutions in the month following
settlement of the transactions.
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<PAGE> 72
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 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 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 selected
information about operating segments in interim financial reports to
shareholders. Operating segments are components of an enterprise about which
separate financial information
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<PAGE> 73
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
On December 7, 1997, the Corporation entered into a definitive
agreement providing for the merger of Deposit Guaranty Corp. ("Deposit
Guaranty") into the Corporation. Terms of the agreement provide for Deposit
Guaranty shareholders to receive 1.17 shares of the Corporation's common stock
for each outstanding share of Deposit Guaranty common stock in a transaction to
be accounted for as a pooling-of-interests. Deposit Guaranty is a financial
services holding company headquartered in Jackson, Mississippi. At December 31,
1997, Deposit Guaranty had total assets of $6.9 billion and total shareholders'
equity of $635.2 million. Deposit Guaranty had 170 banking offices in
Mississippi, Louisiana, and Arkansas and mortgage offices in Oklahoma, Nebraska,
Texas, Indiana, and Iowa at December 31, 1997. The transaction is subject to
shareholder and regulatory approval and is expected to be completed during the
second quarter of 1998.
The following unaudited proforma data summarizes the combined results
of operations of the Corporation and Deposit Guaranty as if the business
combination had been consummated on January 1, 1995.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
(dollars in thousands except per share amounts) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Summary of income statement:
Net interest income $ 668,006 $ 599,232 $ 541,582
Provision for loan losses 12,500 5,340 2,243
Noninterest income 393,197 297,778 200,476
Noninterest expense 673,049 571,663 463,900
Income tax expense 137,902 114,825 100,215
- ---------------------------------------------------------------------------------------------------------------
Net income $ 237,752 $205,182 $ 175,700
- ---------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 2.23 $ 1.96 $ 1.73
- ---------------------------------------------------------------------------------------------------------------
Diluted earnings per share 2.18 1.93 1.70
- ---------------------------------------------------------------------------------------------------------------
End of period balance sheet:
Assets $17,811,547 $16,782,365 $15,707,828
Shareholders' equity 1,543,977 1,449,973 1,334,585
===============================================================================================================
</TABLE>
Effective January 1, 1997, the Corporation completed its acquisition of
Hartsville Bancshares, Inc. ("Hartsville"), a holding company with $90 million
in assets, by exchanging approximately 350,000 shares of the Corporation's
common stock for all of the outstanding shares of Hartsville. The acquisition
was accounted for as a purchase and the purchase price in excess of the fair
value of net assets acquired of $6 million was recorded as goodwill and is being
amortized on a straight-line basis over 15 years. Hartsville was the parent
company of CommunityFirst Bank which operated five branches in Middle Tennessee.
CommunityFirst Bank was simultaneously merged with and into FANB.
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<PAGE> 74
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 million. INVEST is a national marketer
of mutual funds, annuities, insurance, and other investment products sold
through financial institutions. Both transactions were accounted for as
purchases and, accordingly, the results of operations of INVEST are included in
the consolidated financial statements since the date of acquisition. During the
third quarter of 1996, FANB purchased an additional 2.1% of the stock of INVEST.
The purchase price in excess of the fair value of net assets acquired was an
aggregate $17.7 million which is recorded as goodwill and is being amortized on
a straight-line basis over 15 years. 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. Proforma results of operations for 1996 and 1995 as if the
Corporation and INVEST had combined at the beginning of 1995 are not presented
because the effect was not material.
Effective April 1, 1996, FANB purchased 49% of the stock of the SSI
Group, Inc. ("SSI"), a healthcare payments processing company, for $8.6 million.
The transaction is being accounted for under the equity method of accounting.
The Corporation's investment in SSI at December 31, 1997 and 1996 includes the
unamortized excess of the Corporation's investment over its equity in net assets
by $6.1 million and $6.5 million, respectively, which is being amortized over an
estimated economic useful life of 15 years.
Effective March 11, 1996, the Corporation acquired First City Bancorp,
Inc. ("First City") by exchanging approximately 2.1 million shares of the
Corporation's common stock for all of the outstanding shares of First City. The
acquisition was accomplished by the merger of First City with and into the
Corporation with the Corporation as the surviving entity. First City was the
holding company for First City Bank and Citizens Bank, both of which were merged
with and into FANB. First City was also the parent company of Tennessee Credit
Corporation ("TCC") and First City Life Insurance ("FCLI"), both of which became
subsidiaries of FANB. At March 11, 1996, First City had $366 million in assets,
11 banking offices, and 9 consumer finance locations in the Middle Tennessee
area. The transaction was accounted for as a purchase and the operating results
of First City have been included in the consolidated financial statements since
the date of acquisition. The purchase price in excess of the fair value of net
assets acquired of $32.2 million has been recorded as goodwill, which is being
amortized on a straight-line basis over 15 years.
Effective November 1, 1995, the Corporation acquired Heritage Federal
Bancshares, Inc. ("Heritage") by exchanging approximately 5.8 million shares of
the Corporation's common stock for all of the outstanding shares of Heritage.
Heritage was merged with and into the Corporation with the Corporation as the
surviving entity. Heritage was the holding company for Heritage Federal Bank for
Savings, a federal savings bank which was merged into FANB, and had
approximately $526 million in assets and 13 offices primarily in the East
Tennessee areas of Tri-Cities, Anderson County, and Roane County. The
transaction was accounted for as a pooling-of-interests. After-tax
merger-related expenses recognized in 1995 were approximately $7.5 million, and
were comprised primarily of payments for severance, systems
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conversions, investment banking and other professional fees, and the recapture
of the tax bad debt reserve.
On December 1, 1995, the Corporation exchanged approximately 3.6
million shares of the Corporation's common stock for all of the outstanding
shares of Charter Federal Savings Bank ("Charter"), a federal savings bank
headquartered in Bristol, Virginia with 27 branches (8 in Knoxville, Tennessee;
5 in Bristol, Tennessee and Bristol, Virginia; and 14 in other locations in
southwestern Virginia). This transaction was accounted for as a purchase, and
accordingly, the results of operations of Charter are included in the
Corporation's consolidated income statements beginning December 1, 1995. The
name of Charter was changed to First American Federal Savings Bank ("FAFSB") and
the Virginia branches of the Corporation are operated under this legal entity.
The excess of the purchase price over the fair value of the net identifiable
assets acquired of $40 million has been recorded as goodwill and is being
amortized on a straight-line basis over 15 years. The purchase agreement also
provides that Charter's shareholders may receive additional consideration
consisting of shares of the Corporation's common stock with a value equal to 50%
of any goodwill litigation recovery, net of certain related expenses, received
within five years of the merger. See Note 15.
The following unaudited proforma financial information presents the
combined results of operations of the Corporation, Charter, First City, and
Hartsville as if the acquisitions had occurred as of the beginning of 1994 for
Charter, of 1995 for First City, and of 1996 for Hartsville, after giving effect
to certain adjustments, including amortization of goodwill. The proforma
financial information does not necessarily reflect the results of operations
that would have occurred had the Corporation, Charter, First City, and
Hartsville constituted a single entity during such periods.
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
(dollars in thousands, except per share amounts) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net interest income $356,343 $345,284
Net income 121,697 100,521
Basic earnings per share 1.97 1.65
Diluted earnings per share 1.93 1.60
===================================================================================================================
</TABLE>
On July 17, 1997, the Corporation completed the sale of TCC and FCLI
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.
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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,
against its deposit liabilities. Approximately $116.8 and $101.1 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 $421,879 $1,809 $1,149 $422,539
Obligations of states and political subdivisions 42,668 1,588 48 44,208
Other debt securities (primarily mortgage-backed
securities) 106,152 181 494 105,839
- -----------------------------------------------------------------------------------------------------------------
Total securities held to maturity $570,699 $3,578 $1,691 $572,586
=================================================================================================================
December 31, 1996
U.S. Treasury and other U.S. Government agencies and
corporations $654,979 $2,939 $2,243 $655,675
Obligations of states and political subdivisions 39,303 262 261 39,304
Other debt securities (primarily mortgage-backed
securities) 140,265 541 593 140,213
- -----------------------------------------------------------------------------------------------------------------
Total securities held to maturity $834,547 $3,742 $3,097 $835,192
=================================================================================================================
</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 $403.8 million ($404.6 million fair value) at December
31, 1997, and $555.7 million ($556.4 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.
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<PAGE> 77
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 $1,551,902 $ 9,765 $ 9,696 $1,551,971
Other debt securities 334,789 1,313 2,391 333,711
- -------------------------------------------------------------------------------------------------------------------
Total debt securities 1,886,691 11,078 12,087 1,885,682
Equity securities (primarily Federal Reserve
Bank and Federal Home Loan Bank stock) 54,661 -- -- 54,661
- -------------------------------------------------------------------------------------------------------------------
Total securities available for sale $1,941,352 $11,078 $12,087 $1,940,343
===================================================================================================================
December 31, 1996
U.S. Treasury and other U.S. Government
agencies and corporations $1,499,160 $ 4,489 $ 8,815 $1,494,834
Other debt securities 135,955 498 3,683 132,770
- -------------------------------------------------------------------------------------------------------------------
Total debt securities 1,635,115 4,987 12,498 1,627,604
Equity securities (primarily Federal Reserve
Bank and Federal Home Loan Bank stock) 50,628 -- -- 50,628
- -------------------------------------------------------------------------------------------------------------------
Total securities available for sale $1,685,743 $ 4,987 $12,498 $1,678,232
===================================================================================================================
</TABLE>
Included in U.S. Treasury and other U.S. Government agencies and
corporations securities available for sale were agency-issued mortgage-backed
securities amounting to $1,546.9 million ($1,546.9 million amortized cost) at
December 31, 1997 and $1,176.9 million ($1,179.6 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 $532.4 million of securities from held to maturity to available for
sale. At the time of transfer, such securities had an unrealized gain of $1.2
million ($.7 million net of tax).
In conjunction with the 1995 Heritage merger, the Corporation
transferred $161.6 million of securities previously classified as held to
maturity by Heritage to securities available for sale in order to maintain the
Corporation's existing interest rate risk position. At the time of transfer,
such securities had an unrealized loss of $.5 million ($.3 million net of tax).
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The sale of securities available for sale resulted in net realized
gains of $2.1 million, $2.5 million, and $2 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 $ 4,091 $ 1,950 $ 3,546 $ 1,130 $ 5,887 $ 3,929
Other debt securities 8 - 51 - - -
- -----------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 4,099 $ 1,950 $ 3,597 $ 1,130 $ 5,887 $ 3,929
=================================================================================================================
</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 $ 218,257 $ 218,102 $ 80,547 $ 81,250
Due after one year through five years 321,311 321,994 1,708,470 1,706,238
Due after five years through ten years 7,989 8,260 86,412 86,743
Due after ten years 23,142 24,230 11,262 11,451
- -----------------------------------------------------------------------------------------------------------------
Total debt securities 570,699 572,586 1,886,691 1,885,682
Equity securities - - 54,661 54,661
- -----------------------------------------------------------------------------------------------------------------
Total securities $ 570,699 $ 572,586 $ 1,941,352 $ 1,940,343
=================================================================================================================
</TABLE>
At December 31, 1997 and 1996, the Corporation held securities with
amortized cost amounting to $1,097.6 million and $831.9 million, respectively,
which were issued or guaranteed by the Federal National Mortgage Association and
$780.5 million and $875.1 million, respectively, which were issued or guaranteed
by the Federal Home Loan Mortgage Corporation.
Securities carried in the consolidated balance sheets at approximately
$1,875.8 million and $1,836.6 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 make commercial,
consumer, and real estate loans to its customers, located within the
Corporation's market, which consists primarily of Tennessee and selected
markets in Virginia, Kentucky and other adjacent states. Although
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<PAGE> 79
the bank and thrift subsidiaries have a diversified loan portfolio, a
substantial portion of their debtors' ability to honor their contracts is
dependent upon economic conditions in the Corporation's markets.
Loans are either secured or unsecured based on the type of loan and the
financial condition of the borrower. The loans are generally expected to be
repaid from cash flow or proceeds from the sale of selected assets of the
borrower; however, the Corporation is exposed to risk of loss on loans due to
the borrower's difficulties, which may arise from any number of factors
including problems within the respective industry or economic conditions,
including those within the Corporation's market.
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $123,265 $132,415 $129,436
Provision charged to operating expenses 5,000 - 83
Allowance of subsidiary sold (note 2) (252) - -
Allowance of subsidiaries purchased (note 2) 711 2,126 6,573
- -----------------------------------------------------------------------------------------------------------------
Subtotal 128,724 134,541 136,092
- -----------------------------------------------------------------------------------------------------------------
Loans charged off 31,448 31,430 18,748
Recoveries of loans previously charged off (18,117) (20,154) (15,071)
- -----------------------------------------------------------------------------------------------------------------
Net charge-offs 13,331 11,276 3,677
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31 $115,393 $123,265 $132,415
=================================================================================================================
</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 $ 6,095 $ (601) $(2,320)
Consumer--amortizing mortgages 522 155 (454)
Consumer--other 9,175 12,098 6,755
Real estate--construction 560 (5) 175
Real estate--commercial mortgages and other (3,021) (371) (479)
- ----------------------------------------------------------------------------------------------------------------
Total net charge-offs $13,331 $11,276 $ 3,677
================================================================================================================
</TABLE>
At December 31, 1997 and 1996, loans on a nonaccrual status amounted to
$15.1 million and $16.3 million, respectively. Interest income not recognized on
nonaccrual loans was approximately $.6 million in 1997, $1.5 million in 1996,
and $1.5 million in 1995. Interest income recognized on a cash basis on
nonaccrual loans was $3.7 million, $4.8 million, and $6.3 million for the same
respective periods.
Directors and executive officers (and their associates, including
companies in which they hold ten percent or more ownership) of the Corporation
and its significant subsidiary, FANB, had loans outstanding with the Corporation
and its subsidiaries of $47.7 million and $45.3 million at December 31, 1997 and
1996, respectively. During 1997, $2,973.6 million of new loans or advances on
existing loans were made to such related persons, repayments from such persons
were $2,952 million, and $19.3 million of existing loans were to persons no
longer considered related. The Corporation believes that such loans were made on
substantially the
77
<PAGE> 80
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 and 1996 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 $16,887 $ 4,269 $ 8,939 $ 2,375 $18,506 $ 4,157
Impaired loans with no loan loss reserves 1,679 - 11,381 - 16,092 -
- --------------------------------------------------------------------------------------------------------------------
Total $18,566 $ 4,269 $20,320 $ 2,375 $34,598 $ 4,157
====================================================================================================================
</TABLE>
The average recorded investment in impaired loans for the twelve months
ended December 31, 1997, 1996, and 1995 was $18 million, $29 million, and $28
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 $ 22,969 $ 22,781
Buildings 113,929 108,044
Furniture and equipment 184,647 150,021
Leasehold improvements 34,876 35,759
Premises leased under capital leases 3,008 3,008
- -----------------------------------------------------------------------------------------------------------------
Subtotal 359,429 319,613
Accumulated depreciation and amortization (163,323) (157,356)
- -----------------------------------------------------------------------------------------------------------------
Net book value $196,106 $162,257
=================================================================================================================
</TABLE>
Depreciation and amortization expense of premises and equipment for
1997, 1996, and 1995 was $19.9 million, $16 million, and $14.5 million,
respectively.
Rent expense, net of rental income, on bank premises for 1997, 1996,
and 1995 was $7.7 million, $7.3 million, and $5.1 million, respectively. Rental
income on bank premises for 1997, 1996, and 1995 was $4 million, $4.1 million,
and $3.8 million, respectively.
78
<PAGE> 81
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 $ 12,019 $ 11,743 $ 276
1999 11,908 11,628 280
2000 10,549 10,279 270
2001 9,848 9,578 270
2002 9,278 9,007 271
Thereafter 65,564 63,765 1,799
- -----------------------------------------------------------------------------------------------------------------
Total $119,166 $116,000 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 consolidated income
statements.
NOTE 7: INTANGIBLE ASSETS
Following is a summary of intangible assets included in other assets on
the consolidated balance sheets including related amortization.
<TABLE>
<CAPTION>
Mortgage Total
Servicing Other Intangible
(in thousands) Goodwill Rights Intangibles Assets
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ 20,553 $ -- $ 6,008 $ 26,561
Additions 40,207 259 5,236 45,702
Amortization (3,109) (10) (1,033) (4,152)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 57,651 249 10,211 68,111
Additions 50,120 752 2,696 53,568
Amortization (7,687) (152) (1,738) (9,577)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 100,084 849 11,169 112,102
ADDITIONS 6,281 2,165 814 9,260
DISPOSITIONS (319) -- -- (319)
AMORTIZATION (8,886) (478) (1,863) (11,227)
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ 97,160 $ 2,536 $ 10,120 $109,816
===================================================================================================================
</TABLE>
The estimated fair value of the capitalized mortgage servicing rights
at December 31, 1997 and 1996, was $3.1 million and $1.0 million, respectively.
The related valuation allowance for 1997 and 1996 was $33.6 thousand and $7.4
thousand, respectively.
79
<PAGE> 82
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 $ 981,992 $ 939,740
Other short-term borrowings 344,835 214,632
- -----------------------------------------------------------------------------------------------------------------
Total short-term borrowings $1,326,827 $1,154,372
=================================================================================================================
</TABLE>
Other short-term borrowings included U.S. Treasury tax and loan
accounts of $112.7 million and $111.5 million in 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 million (due within three
months), and $5.5 million (due within six 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 $ 981,992 $939,740 $788,569
Average rate at December 31 4.45 % 4.59 % 4.79 %
Average amount outstanding during the year $ 939,310 $864,853 $791,975
Average rate paid for the year 4.88 % 4.80 % 5.38 %
Maximum amount outstanding at any month-end $1,105,424 $939,740 $910,653
===================================================================================================================
</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 $309,090 $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
Capitalized lease obligations (note 6) 1,289 1,417
- -----------------------------------------------------------------------------------------------------------------
Total long-term debt $409,821 $331,157
=================================================================================================================
</TABLE>
At December 31, 1997, the $309.1 million of advances from the FHLB
consisted of $300 million of advances with interest rates tied to one-month
London Interbank Offering Rate ("LIBOR") and $9.1 million of advances with fixed
interest rates; weighted-average interest rates were 5.90% 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,
80
<PAGE> 83
'
and after 2003 of $2.6 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 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 $79.5 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.
The following table sets forth the plan's funded status and amounts
recognized in the Corporation's 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 $135,757 $116,873
- -----------------------------------------------------------------------------------------------------------------
Actuarial present value of benefits for service rendered to date:
Accumulated benefit obligation, including vested benefits of $101,284 and
$89,849, respectively 106,111 93,714
Additional benefits based on projected future compensation 16,909 14,198
- -----------------------------------------------------------------------------------------------------------------
Projected benefit obligation 123,020 107,912
- -----------------------------------------------------------------------------------------------------------------
Plan assets in excess of accumulated benefit obligation 29,646 23,159
- -----------------------------------------------------------------------------------------------------------------
Plan assets greater than projected benefit obligation 12,737 8,961
Unrecognized net (gain) loss from past experience different from that assumed
and effects of changes in assumptions (3,429) 1,327
Unrecognized net transition asset (902) (1,203)
Unrecognized prior service cost 426 602
- -----------------------------------------------------------------------------------------------------------------
Prepaid pension cost $ 8,832 $ 9,687
=================================================================================================================
</TABLE>
81
<PAGE> 84
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 $ 3,572 $ 3,594 $ 2,784
Interest cost on projected benefit obligation 8,237 7,705 6,900
Actual return on plan assets (21,901) (13,366) (20,708)
Net amortization and deferral 10,947 3,372 13,097
- ----------------------------------------------------------------------------------------------------------------
Net periodic pension expense $ 855 $ 1,305 $ 2,073
================================================================================================================
</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; 7.75%
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 9.3% 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.
The status of the plans was as follows:
<TABLE>
<CAPTION>
December 31
-------------------------
(in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $12,939 $12,608
Fully eligible, active plan participants 881 877
Other active plan participants 4,308 3,141
- ------------------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 18,128 16,626
Plan assets at market value - -
- ------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess of plan assets 18,128 16,626
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions 353 1,308
- ------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $18,481 $17,934
==================================================================================================================
</TABLE>
82
<PAGE> 85
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 $ 401 $ 303 $ 291
Interest cost on accumulated postretirement benefit obligation 1,267 1,205 1,230
Amortization of net gain - (1,382) -
- ----------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit expense $1,668 $ 126 $ 1,521
================================================================================================================
</TABLE>
The Corporation continues to fund medical and death benefit costs
principally on a pay-as-you-go basis.
For measurement purposes, a 9.% 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, 7.75% 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.
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-
83
<PAGE> 86
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.
Heritage, which merged with the Corporation effective November 1, 1995,
maintained an Employee Stock Ownership Plan ("ESOP"). The ESOP, which remains in
existence, covers substantially all former Heritage employees who qualified as
to age and length of service. Annual contributions to the ESOP are equal to the
required principal and interest payments related to the ESOP loan. Dividends
paid on shares held by the ESOP are used to reduce the outstanding debt. The
consolidated financial statements for 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 $67,354 $43,572 $39,814
Current state income taxes 11,340 7,550 7,367
Deferred federal income tax expense 10,094 19,456 15,226
Deferred state income tax expense 1,742 3,626 2,779
- ----------------------------------------------------------------------------------------------------------------
Total income tax expense from operations 90,530 74,204 65,186
- ----------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) reported in
shareholders' equity related to:
Securities available for sale 2,482 (5,162) 10,907
Employee stock option and award plans (4,590) (2,568) (3,095)
- ----------------------------------------------------------------------------------------------------------------
Total income tax expense (benefit) reported in
shareholders' equity (2,108) (7,730) 7,812
- ----------------------------------------------------------------------------------------------------------------
Total income taxes $88,422 $66,474 $72,998
================================================================================================================
</TABLE>
84
<PAGE> 87
The following table presents a reconciliation of the provision for
income taxes as shown in the consolidated income statements with that which
would be computed by applying the statutory federal income tax rate of 35% to
income before income tax expense.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rates $82,600 $68,522 $58,893
Increase (decrease) in taxes resulting from:
Tax-exempt interest (2,336) (2,444) (2,276)
Goodwill amortization 3,110 2,690 1,088
State income taxes, net of federal income tax benefit 8,503 7,265 6,595
Other, net (1,347) (1,829) 886
- ----------------------------------------------------------------------------------------------------------------
Total income tax expense from operations $90,530 $74,204 $65,186
================================================================================================================
</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
consolidated balance sheets. Management 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 $41,198 $43,572
Postretirement benefit obligation 7,717 7,697
Unrealized loss on securities available for sale 425 2,907
Other 12,637 12,350
- ---------------------------------------------------------------------------------------------------------------
Total deferred tax asset 61,977 66,526
- ---------------------------------------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant, and equipment 5,078 4,981
Direct lease financing 54,275 42,984
FHLB stock 4,489 3,418
Purchase accounting 3,109 5,446
Pension 2,976 3,201
Other 3,431 2,911
- --------------------------------------------------------------------------------------------------------------
Total deferred tax liability 73,358 62,941
- ---------------------------------------------------------------------------------------------------------------
Net deferred tax (liability) asset $ (11,381) $ 3,585
===============================================================================================================
</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 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.
85
<PAGE> 88
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.
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 9.5 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 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:
86
<PAGE> 89
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
(dollars in millions, except per share amounts) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $145.5 $121.6 $103.1
Net income, proforma 144.0 120.7 102.8
- ---------------------------------------------------------------------------------------------------------------
Basic earnings per share, as reported 2.48 2.05 1.82
Basic earnings per share, proforma 2.45 2.04 1.82
- ---------------------------------------------------------------------------------------------------------------
Diluted earnings per share, as reported 2.40 2.01 1.78
Diluted earnings per share, proforma 2.39 2.01 1.78
===============================================================================================================
</TABLE>
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 6.35% 5.38% 7.64%
Expected life of the option (in years) 6.1 6.1 6.1
Expected dividend yield over the expected life of the option 2.70% 2.75% 2.75%
Expected volatility of the stock over the option's life 22.45% 22.51% 24.24%
================================================================================================================
</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 3,631,592 $15.84 3,329,096 $12.75 3,999,162 $11.51
Options granted 691,830 30.06 930,500 23.19 631,744 14.26
Options exercised (672,013) 12.53 (566,954) 9.47 (1,209,804) 7.58
Options cancelled (144,780) 23.47 (61,050) 17.30 (92,006) 11.90
Options expired - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Options outstanding at end of year 3,506,629 $18.98 3,631,592 $15.84 3,329,096 $12.75
Options exercisable at year-end 1,576,080 $13.91 1,641,466 $12.09 1,613,134 $10.62
Weighted average fair value of options granted
during the year $8.07 $5.62 $4.44
==============================================================================================================================
</TABLE>
87
<PAGE> 90
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 - $10.938 412,349 2.94 $ 8.79 412,349 $ 8.79
$11.438 - $14.750 910,188 5.40 13.23 608,428 12.70
$15.188 - $20.000 720,698 6.13 17.39 406,859 17.57
$21.375 - $24.625 819,924 8.08 23.15 147,524 23.11
$29.563 - $47.750 643,470 9.08 30.10 920 29.56
- ---------------------------------------------------------------------------------------------------------------
$ 4.625 - $47.750 3,506,629 6.56 18.98 1,576,080 13.91
===============================================================================================================
</TABLE>
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 $145,472 $121,572 $103,080
==================================================================================================================
Average shares
Average shares - basic 58,679 59,184 56,629
Effect of dilutive common stock options 1,818 1,270 1,298
- ------------------------------------------------------------------------------------------------------------------
Average shares - diluted 60,497 60,454 57,927
==================================================================================================================
Basic earnings per share $2.48 $2.05 $1.82
Diluted earnings per share 2.40 2.01 1.78
==================================================================================================================
</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
88
<PAGE> 91
risk under commitments to extend credit and letters of credit is the contractual
(notional) amount of the instruments. Interest rate swap 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 $3.9 billion and $2.7 billion of unfunded
commitments to extend credit. Of these amounts, unfunded commitments for
borrowers with 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 $306.4 million and $243.5 million, respectively. The Corporation
also had commercial letters of credit of $37.3 million and $38.1 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.
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.
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:
89
<PAGE> 92
<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 Loans 775,000 5.82 (2) 6.61 (1) 4.3 17,507
Forward interest rate swaps Money market deposits 600,000 6.46 (3) 5.89 (3) 1.3 (1,821)
Forward interest rate swaps Available for sale securities 750,000 6.24 (4) N/A (4) 2.5 (2,755)
---------- --------
$2,275,000 $ 13,095
=============================================================================================================================
December 31, 1996
Interest rate swaps Money market deposits $ 300,000 5.70% (1) 5.54% (5) 2.0 $ 1,717
Interest rate swaps Loans 200,000 5.50 (2) 6.75 (1) 4.4 3,782
Forward interest rate swaps Money market deposits 400,000 6.27 (6) N/A (6) 1.8 (327)
Forward interest rate swaps Available for sale securities 100,000 7.02 (6) N/A (6) 3.5 (1,853)
---------- --------
$1,000,000 $ 3,319
=============================================================================================================================
</TABLE>
(1) Fixed rate.
(2) Variable rate which reprices quarterly based on 3-month LIBOR.
(3) 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 3-month 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.
(4) 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 3-month LIBOR and reprice quarterly.
(5) Variable rate which reprices quarterly based on 3-month LIBOR except for $25
million which reprices every 6 months based on 6-month LIBOR.
(6) 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 3-month 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. Credit risk disclosures, however, relate to losses that would be
recognized if counterparts failed completely to perform their obligations.
The risk that counterparts to derivative financial instruments might
default on their obligations is monitored on an ongoing basis. To manage the
level of credit risk, the Corporation reviews the credit standing of its
counterparts and enters into master netting agreements whenever possible, and
when appropriate, obtains collateral. Master netting agreements incorporate
rights of setoff that provide for the net settlement of subject contracts with
the same counterparts in the event of default.
Interest rate swap contracts are primarily used to convert certain
deposits and long-term debt to fixed interest rates or to convert certain groups
of customer loans to fixed rates. The Corporation's net credit exposure with
interest rate swap counterparts, considering master netting agreements, totaled
$14.1 million at December 31, 1997, and $4.8 million at December 31, 1996.
90
<PAGE> 93
The table below summarizes, by notional amounts, the activity for each
major category of derivative financial instruments.
<TABLE>
<CAPTION>
Forward
Interest Rate Swaps Swaps
-------------------------- ----------
Pay Receive Pay Futures
(in thousands) Fixed Fixed Fixed Contracts
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $1,100,000 $ - $ 300,000 $ 140,000
ADDITIONS - 300,000 700,000 -
MATURITIES/TERMINATIONS (800,000) (100,000) (500,000) (140,000)
- ------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 300,000 200,000 500,000 -
ADDITIONS 50,000 775,000 1,300,000 -
MATURITIES/TERMINATIONS (200,000) (200,000) (450,000) -
- ------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ 150,000 $ 775,000 $1,350,000 $ -
==================================================================================================================
</TABLE>
The table below presents the net deferred gains (losses) related to
terminated derivative financial instruments at December 31, 1997 and 1996.
Deferred gains of $7.7 million and deferred losses of $5.8 million are included
in other liabilities and other assets, respectively, on the consolidated balance
sheet at December 31, 1997. Deferred gains of $7 million and deferred losses
of $3.4 million are included in other liabilities and other assets,
respectively, on the consolidated balance sheet at December 31, 1996.
<TABLE>
<CAPTION>
December 31
------------------------------------
(in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate swaps $1,880 $3,711
Futures contracts - (113)
- ------------------------------------------------------------------------------------------------------------------
Total net deferred gains $1,880(1) $3,598(2)
==================================================================================================================
</TABLE>
(1) $1.1 million of net deferred gains to be recognized during 1998 and $.8
million of net deferred gains to be recognized during 1999 through 2002.
(2) $1 million of net deferred gains recognized during 1997 and $2.6 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.
91
<PAGE> 94
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:
<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 $ 909,306 $ 873,292 $ 948,678 $ 853,386
Less disallowed intangibles (104,178) (107,223) (85,817) (82,370)
- ------------------------------------------------------------------------------------------------------------------
Total Tier I capital 805,128 766,069 862,861 771,016
- ------------------------------------------------------------------------------------------------------------------
Tier II capital:
Allowable allowance for loan losses 115,289 98,825 112,949 94,557
Unsecured holding company debt 99,442 99,361 -- --
- ------------------------------------------------------------------------------------------------------------------
Total Tier II capital 214,731 198,186 112,949 94,557
- ------------------------------------------------------------------------------------------------------------------
Total capital $ 1,019,859 $ 964,255 $ 975,810 $ 865,573
==================================================================================================================
Risk-adjusted assets $ 9,222,977 $7,881,542 $ 9,069,673 $7,538,564
Quarterly average assets 10,488,058 9,720,114 10,176,854 9,189,499
==================================================================================================================
CAPITAL RATIOS(1)
Total risk-based capital ratio 11.06% 12.23% 10.76% 11.48%
Tier I risk-based capital ratio 8.73 9.72 9.51 10.23
Tier I leverage ratio 7.68 7.88 8.48 8.39
==================================================================================================================
</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 these 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 $76.6 million available for distribution as dividends to
the Corporation.
92
<PAGE> 95
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 $5 million, net of tax ($.08 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 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.
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
93
<PAGE> 96
proceedings presently pending would not have a material adverse effect on the
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 $ 532,907 $ 532,907 $ 657,257 $ 657,257
Securities held to maturity 570,699 572,586 834,547 835,192
Securities available for sale 1,940,343 1,940,343 1,678,232 1,678,232
Federal funds sold and securities purchased
under agreements to resell 129,952 129,952 161,677 161,677
Trading account securities 63,011 63,011 60,210 60,210
Loans, net of unearned discount and net
deferred loan fees 7,216,571 7,194,115 6,658,597 6,527,191
Financial instruments (liabilities):
Noninterest-bearing deposits 1,353,941 1,353,941 1,374,528 1,374,528
Interest-bearing deposits 6,653,738 6,662,654 6,418,449 6,433,897
Short-term borrowings 1,326,827 1,326,827 1,154,372 1,154,372
Long-term debt 409,821 411,078 331,157 328,545
===================================================================================================================
</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 $3,901,449 $ 164 $2,698,585 $ 542
Standby letters of credit 306,397 999 243,517 1,109
Commercial letters of credit 37,313 93 38,135 95
Interest rate swaps 925,000 17,671 500,000 5,499
Forward interest rate swaps 1,350,000 (4,576) 500,000 (2,180)
===================================================================================================================
</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.
94
<PAGE> 97
Securities held to maturity, securities available for sale, and trading
account securities -- Fair values are based on quoted market prices or
dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans -- For variable-rate loans that reprice frequently, fair values are
based on carrying values. The fair values for certain homogeneous categories
of loans, such as residential mortgages, are estimated using quoted market
prices for securities backed by similar loans, adjusted for differences in
loan characteristics. The fair values for other performing loans are
estimated by discounting estimated future cash flows using the current rates
at which similar loans would be made to borrowers with similar credit risk
and for similar maturities. Included within financial assets are certain
nonperforming assets, consisting primarily of nonperforming loans, the fair
values of which are based principally on the lower of the amount due from
customers or the fair value of the loans' collateral, which is the amount
the Corporation could reasonably expect to receive in a current sale between
a willing buyer and seller other than in a forced or liquidation sale.
Deposits -- The fair value of deposits with no stated maturity, such as
demand deposits, NOW accounts, money market accounts, and regular savings
accounts, is equal to the amount payable on demand at the reporting date.
The fair value of certificates of deposits and other fixed maturity time
deposits is estimated using the rates currently offered for deposits of
similar remaining maturities. Any foreign deposits are valued at the
carrying value due to the frequency with which rates for such deposits are
adjusted to a market rate.
Short-term borrowings -- Fair value is estimated to equal the carrying
amount since these instruments have a relatively short maturity.
Long-term debt -- Rates for long-term debt with similar terms and remaining
maturities are used to estimate fair value of existing debt.
Off-balance-sheet instruments -- The fair value of commitments to extend
credit is based on unamortized deferred loan fees and costs. For letters of
credit, fair value is estimated using fees currently charged to enter into
similar agreements with similar maturities. The fair value of the
Corporation's outstanding futures contracts is based on quoted market
prices, and the estimated fair value of interest rate swaps and forward
interest rate swaps is based on estimated costs to settle the obligations
with the counterparts at the reporting date.
NOTE 17: PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for First American Corporation (Parent
Company only) was as follows:
CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from subsidiaries:
Banks $105,736 $ 45,904 $ 27,836
Fees from subsidiaries 3,608 3,392 2,722
Interest from subsidiaries 941 1,771 3,076
Interest on time deposits with other banks and other income 3,584 40 589
- -------------------------------------------------------------------------------------------------------------------
Total income 113,869 51,107 34,223
- -------------------------------------------------------------------------------------------------------------------
Expenses
Interest expense on long-term debt 6,897 6,934 3,639
Other expenses 3,617 4,254 5,731
- -------------------------------------------------------------------------------------------------------------------
Total expenses 10,514 11,188 9,370
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 103,355 39,919 24,853
Reduction to consolidated income taxes arising from parent
company loss 1,010 2,838 1,204
- -------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of subsidiaries 104,365 42,757 26,057
- -------------------------------------------------------------------------------------------------------------------
Equity in undistributed earnings of subsidiaries
Banks 41,107 78,815 77,023
- -------------------------------------------------------------------------------------------------------------------
Net income $145,472 $121,572 $103,080
===================================================================================================================
</TABLE>
95
<PAGE> 98
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-------------------------------
(in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 41 $ 83
Short-term investments with subsidiary 2,855 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 995,067 934,046
Other assets 14,146 11,129
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 1,012,272 $ 971,270
===================================================================================================================
Liabilities and shareholders' equity
Long-term debt $ 99,442 $ 99,361
Other liabilities 4,091 3,202
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 103,533 102,563
- -------------------------------------------------------------------------------------------------------------------
Preferred stock, without par value - -
Common stock, $2.50 par value 145,652 148,158
Additional paid-in capital 106,228 157,792
Retained earnings 670,930 569,851
Deferred compensation on restricted stock (13,341) (2,066)
Employee stock ownership plan obligation (163) (443)
- -------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 909,306 873,292
Net unrealized losses on securities available for sale, net of tax (567) (4,585)
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 908,739 868,707
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,012,272 $ 971,270
===================================================================================================================
</TABLE>
96
<PAGE> 99
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $145,472 $121,572 $103,080
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed income of subsidiaries (41,107) (78,815) (77,023)
Amortization 81 81 34
Deferred income tax expense 302 54 12
Gain on sale of other assets (1,960) - -
Change in assets and liabilities, net of effect of acquisitions:
Increase in accrued interest payable - - 118
Increase in other assets (7,966) (3,133) (5,283)
Increase (decrease) in other liabilities 3,521 (2,341) 4,037
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 98,343 37,418 24,975
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net decrease (increase) in employee stock ownership plan loan 280 218 (661)
Acquisitions, net of cash acquired (635) (1,303) -
Sale of other assets 2,500 - -
Net decrease in investment in subsidiary - - 7,500
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 2,145 (1,085) 6,839
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt - - 49,513
Repayment of long-term debt - (2,734) (782)
Issuance of common shares for Employee Benefit and Dividend
Reinvestment Plans 20,134 14,102 13,782
Repurchase of common stock (103,575) (69,149) (62,347)
Tax benefit-related to stock options 4,590 2,568 3,095
Cash dividends paid (44,393) (35,694) (28,791)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (123,244) (90,907) (25,530)
- ----------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (22,756) (54,574) 6,284
Cash and cash equivalents, beginning of year 25,652 80,226 73,942
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,896 $ 25,652 $ 80,226
================================================================================================================
Cash paid during the year for:
Interest expense $ 6,897 $ 6,934 $ 3,521
Income taxes 61,237 53,626 36,861
Noncash investing activities:
Stock issued for acquisition (note 2) 10,099 46,306 80,373
================================================================================================================
</TABLE>
97
<PAGE> 100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST AMERICAN CORPORATION
(Registrant)
BY: /s/ Dennis C. Bottorff
----------------------------------
DENNIS C. BOTTORFF,
CHAIRMAN, CHIEF
EXECUTIVE OFFICER, AND DIRECTOR
Date: March 19, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Dennis C. Bottorff /s/ Dale W. Polley
- ---------------------------------- -----------------------------------
Dennis C. Bottorff Dale W. Polley
Chairman, Chief Executive President, Director and Principal
Officer and Director Financial Officer
Dated: March 19, 1998 Dated: March 19, 1998
/s/ Marvin J. Vannatta, Jr.
-----------------------------------
Marvin J. Vannatta, Jr.
Executive Vice President and
Principal Accounting Officer
Dated: March 19, 1998
98
<PAGE> 101
<TABLE>
<S> <C>
/s/ Samuel H. Anderson, Jr. /s/ Robert A. McCabe, Jr.
- ------------------------------- --------------------------
SAMUEL H. ANDERSON, JR. ROBERT A. MCCABE, JR.
Director Director
Dated: March 19, 1998 Dated: March 19, 1998
/s/ Dennis C. Bottorff /s/ Dale W. Polley
- ------------------------------- --------------------------
DENNIS C. BOTTORFF DALE W. POLLEY
Director Director
Dated: March 19, 1998 Dated: March 19, 1998
/s/ Dr. Roscoe R. Robinson
- ------------------------------- --------------------------
EARNEST W. DEAVENPORT, JR. DR. ROSCOE R. ROBINSON
Director Director
Dated: March 19, 1998 Dated: March 19, 1998
/s/ James F. Smith, Jr.
- ------------------------------- --------------------------
REGINALD D. DICKSON JAMES F. SMITH, JR.
Director Director
Dated: March 19, 1998 Dated: March 19, 1998
/s/ James A. Haslam, II /s/ Cal Turner, Jr.
- ------------------------------- --------------------------
JAMES A. HASLAM, II CAL TURNER, JR.
Director Director
Dated: March 19, 1998 Dated: March 19, 1998
- ------------------------------- --------------------------
MARTHA R. INGRAM CELIA A. WALLACE
Director Director
Dated: March 19, 1998 Dated: March 19, 1998
/s/ Ted H. Welch
- ------------------------------- --------------------------
WALTER G. KNESTRICK TED H. WELCH
Director Director
Dated: March 19, 1998 Dated: March 19, 1998
/s/ Gene C. Koonce /s/ David K. Wilson
- ------------------------------- --------------------------
GENE C. KOONCE DAVID K. WILSON
Director Director
Dated: March 19, 1998 Dated: March 19, 1998
/s/ Toby S. Wilt
- ------------------------------- --------------------------
JAMES R. MARTIN TOBY S. WILT
Director Director
Dated: March 19, 1998 Dated: March 19, 1998
/s/ William S. Wire
--------------------------
WILLIAM S. WIRE
Director
Dated: March 19, 1998
</TABLE>
99
<PAGE> 102
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER NAME PAGE
- ------ ---- ----
<S> <C> <C>
Exhibit 21 List of Subsidiaries 101
Exhibit 23 Accountants' Consent 103
Exhibit 27 Financial Data Schedule (for SEC use only) 104
</TABLE>
100
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES OF REGISTRANT
AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
NAME STATE OR JURISDICTION
OF INCORPORATION
<S> <C>
- -First American National Bank U.S.A.
-Guaranty Title Company Tennessee
-First Amtenn Life Insurance Co. Arizona
-First American Network, Inc. Tennessee
-IFC Holdings, Inc.(1) Delaware
-Investment Centers of America, Inc. North Dakota
-Trust Center of America North Dakota
-First Dakota, Inc. North Dakota
-Lewis & Clark Securities, Inc.(2) North Dakota
-First Dakota of Montana, Inc. Montana
-First Dakota of Texas, Inc.* Texas
-First Dakota of New Mexico, Inc. New Mexico
-First Dakota of Wyoming, Inc. Wyoming
-INVEST Financial Corporation Insurance Agency, Inc.
Of Delaware**
-INVEST Financial Corporation Insurance Agency, Inc. Of Alabama
-INVEST Financial Corporation Insurance Agency, Inc. Of Connecticut
-INVEST Financial Corporation Insurance Agency, Inc. Of Georgia
-INVEST Financial Corporation Insurance Agency, Inc. Of Illinois
-INVEST Financial Corporation Insurance Agency, Inc. Of Maryland
-INVEST Financial Corporation Insurance Agency, Inc. Of Massachusetts
-INVEST Financial Corporation Insurance Agency, Inc. Of Mississippi*
-INVEST Financial Corporation Insurance Agency, Inc. Of Montana
-INVEST Financial Corporation Insurance Agency, Inc. Of Nevada
-INVEST Financial Corporation Insurance Agency, Inc. Of New Mexico
-INVEST Financial Corporation Insurance Agency, Inc. Of Ohio
</TABLE>
<PAGE> 2
-INVEST Financial Corporation Insurance Agency, Inc. Of Oklahoma*
-INVEST Financial Corporation Insurance Agency, Inc. Of South Carolina
-INVEST Financial Corporation Insurance Agency, Inc. Of Texas*
-INVEST Financial Corporation Insurance Agency, Inc. Of Wyoming
<TABLE>
<S> <C>
- -First American Federal Savings Bank U.S.A.
-Charter Financial Services Corporation Virginia
- -First American Enterprises, Inc. Tennessee
NON-PROFIT CORPORATIONS
NAME STATE OR JURISDICTION
OF INCORPORATION
- -First American Community Development Corporation Tennessee
- -First American Foundation Tennessee
</TABLE>
(1) f/k/a "INVEST Financial Corporation"; name changed December 1997.
(2) f/k/a "Farwest Securities, Inc."; name changed December 1997.
"*" indicates that corporation is held by nominee for the benefit of IFC
Holdings, Inc.
"**" indicates that the state of incorporation for the indicated subsidiary of
INVEST Financial Corporation Insurance Agency, Inc. of Delaware is contained in
its corporate name.
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
First American Corporation:
We consent to incorporation by reference in the Registration Statements No.
33-57387 and No. 33-59844 each on Form S-3 and No. 33-53269, No. 33-57385, No.
33-44286, No. 2-81920, No. 2-81685, No. 33-44775, No. 33-63188, No. 33-64161,
No. 333-19577, and No. 333-25491 each on Form S-8 of First American
Corporation, of our report dated January 15, 1998, relating to the consolidated
balance sheets of First American Corporation and subsidiaries as of December
31, 1997 and 1996, and the related consolidated income statements, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997, which report appears in the December 31, 1997
Annual Report on Form 10-k of First American Corporation.
NASHVILLE, TENNESSEE
MARCH 23, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 530,662
<INT-BEARING-DEPOSITS> 2,245
<FED-FUNDS-SOLD> 129,952
<TRADING-ASSETS> 63,011
<INVESTMENTS-HELD-FOR-SALE> 1,940,343
<INVESTMENTS-CARRYING> 570,699
<INVESTMENTS-MARKET> 572,586
<LOANS> 7,216,571
<ALLOWANCE> 115,393
<TOTAL-ASSETS> 10,871,820
<DEPOSITS> 8,007,679
<SHORT-TERM> 1,326,827
<LIABILITIES-OTHER> 218,754
<LONG-TERM> 409,821
0
0
<COMMON> 145,652
<OTHER-SE> 763,087
<TOTAL-LIABILITIES-AND-EQUITY> 10,871,820
<INTEREST-LOAN> 583,453
<INTEREST-INVEST> 160,669
<INTEREST-OTHER> 8,336
<INTEREST-TOTAL> 752,458
<INTEREST-DEPOSIT> 288,202
<INTEREST-EXPENSE> 369,048
<INTEREST-INCOME-NET> 383,410
<LOAN-LOSSES> 5,000
<SECURITIES-GAINS> 2,149
<EXPENSE-OTHER> 402,002
<INCOME-PRETAX> 236,002
<INCOME-PRE-EXTRAORDINARY> 236,002
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 145,472
<EPS-PRIMARY> 2.48
<EPS-DILUTED> 2.40
<YIELD-ACTUAL> 4.06
<LOANS-NON> 15,090
<LOANS-PAST> 13,152
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 61,300
<ALLOWANCE-OPEN> 123,265
<CHARGE-OFFS> 31,448
<RECOVERIES> 18,117
<ALLOWANCE-CLOSE> 115,393
<ALLOWANCE-DOMESTIC> 73,192
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 42,201
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FIRST AMERICAN CORPORATION FOR THE YEAR ENDED DECEMBER
31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 603,456
<INT-BEARING-DEPOSITS> 53,801
<FED-FUNDS-SOLD> 161,677
<TRADING-ASSETS> 60,210
<INVESTMENTS-HELD-FOR-SALE> 1,678,232
<INVESTMENTS-CARRYING> 834,547
<INVESTMENTS-MARKET> 835,192
<LOANS> 6,658,597
<ALLOWANCE> 123,265
<TOTAL-ASSETS> 10,399,468
<DEPOSITS> 7,792,977
<SHORT-TERM> 1,154,372
<LIABILITIES-OTHER> 252,255
<LONG-TERM> 331,157
0
0
<COMMON> 148,158
<OTHER-SE> 720,549
<TOTAL-LIABILITIES-AND-EQUITY> 10,399,468
<INTEREST-LOAN> 546,803
<INTEREST-INVEST> 149,426
<INTEREST-OTHER> 10,820
<INTEREST-TOTAL> 707,049
<INTEREST-DEPOSIT> 282,741
<INTEREST-EXPENSE> 357,351
<INTEREST-INCOME-NET> 349,698
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 2,467
<EXPENSE-OTHER> 334,455
<INCOME-PRETAX> 195,776
<INCOME-PRE-EXTRAORDINARY> 195,776
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 121,572
<EPS-PRIMARY> 2.05
<EPS-DILUTED> 2.01
<YIELD-ACTUAL> 3.90
<LOANS-NON> 16,331
<LOANS-PAST> 11,711
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 51,700
<ALLOWANCE-OPEN> 132,415
<CHARGE-OFFS> 31,430
<RECOVERIES> 20,154
<ALLOWANCE-CLOSE> 123,265
<ALLOWANCE-DOMESTIC> 68,452
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 54,813
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FIRST AMERICAN CORPORATION FOR THE YEAR ENDED DECEMBER
31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 494,496
<INT-BEARING-DEPOSITS> 26,733
<FED-FUNDS-SOLD> 291,042
<TRADING-ASSETS> 22,419
<INVESTMENTS-HELD-FOR-SALE> 1,202,493
<INVESTMENTS-CARRYING> 931,084
<INVESTMENTS-MARKET> 933,911
<LOANS> 6,425,976
<ALLOWANCE> 132,415
<TOTAL-ASSETS> 9,681,629
<DEPOSITS> 7,382,294
<SHORT-TERM> 938,287
<LIABILITIES-OTHER> 143,725
<LONG-TERM> 421,791
0
0
<COMMON> 147,699
<OTHER-SE> 647,833
<TOTAL-LIABILITIES-AND-EQUITY> 9,681,629
<INTEREST-LOAN> 469,449
<INTEREST-INVEST> 143,299
<INTEREST-OTHER> 6,951
<INTEREST-TOTAL> 619,699
<INTEREST-DEPOSIT> 238,667
<INTEREST-EXPENSE> 307,389
<INTEREST-INCOME-NET> 312,310
<LOAN-LOSSES> 83
<SECURITIES-GAINS> 737
<EXPENSE-OTHER> 252,448
<INCOME-PRETAX> 168,266
<INCOME-PRE-EXTRAORDINARY> 168,266
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,080
<EPS-PRIMARY> 1.82
<EPS-DILUTED> 1.78
<YIELD-ACTUAL> 3.95
<LOANS-NON> 18,670
<LOANS-PAST> 6,123
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 67,191
<ALLOWANCE-OPEN> 129,436
<CHARGE-OFFS> 18,748
<RECOVERIES> 15,071
<ALLOWANCE-CLOSE> 132,415
<ALLOWANCE-DOMESTIC> 66,703
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 65,712
</TABLE>
