<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-6198
FIRST AMERICAN CORPORATION
(Exact name of Registrant as specified in its charter)
TENNESSEE 62-0799975
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
FIRST AMERICAN CENTER, NASHVILLE, TENNESSEE 37237
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 615/748-2000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common shares outstanding: 57,790,150 as of March 31, 1998.
<PAGE> 2
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
- ------- --------------------- ----
<S> <C> <C>
Item 1 Financial Statements (unaudited)
Consolidated Income Statements for the Three
Months Ended March 31, 1998 and 1997 3
Consolidated Balance Sheets as of March 31, 1998 and
1997 and December 31, 1997 4
Consolidated Statements of Changes in Shareholders'
Equity for the Three Months Ended March 31, 1998
and March 31, 1997 5
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and March 31, 1997 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 1 Legal Proceedings 19
Item 6 Exhibits and Reports on Form 8-K 19
</TABLE>
2
<PAGE> 3
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
Quarter Ended
March 31
----------------------
(in thousands except per share amounts) 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $151,298 $138,702
Interest and dividends on securities 43,580 40,567
Interest on federal funds sold and securities purchased under
agreements to resell 987 888
Interest on time deposits with other banks and other interest 1,055 1,143
- ----------------------------------------------------------------------------------------------
Total interest income 196,920 181,300
- ----------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 5,449 4,515
Money market accounts 25,455 25,390
Regular savings 1,332 1,771
Certificates of deposit under $100,000 20,302 21,970
Certificates of deposit $100,000 and over 12,023 10,142
Other time and foreign 6,500 6,266
- ----------------------------------------------------------------------------------------------
Total interest on deposits 71,061 70,054
- ----------------------------------------------------------------------------------------------
Interest on short-term borrowings 17,357 13,356
Interest on long-term debt 6,119 4,956
- ----------------------------------------------------------------------------------------------
Total interest expense 94,537 88,366
- ----------------------------------------------------------------------------------------------
NET INTEREST INCOME 102,383 92,934
PROVISION FOR LOAN LOSSES 4,000 --
- ----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 98,383 92,934
- ----------------------------------------------------------------------------------------------
NONINTEREST INCOME
Investment services income 32,863 29,994
Service charges on deposit accounts 16,754 14,721
Commissions and fees on fiduciary activities 4,987 4,700
Merchant discount fees 780 840
Net realized gain on sales of securities 1,100 147
Trading account revenue 402 369
Other 13,253 10,980
- ----------------------------------------------------------------------------------------------
Total noninterest income 70,139 61,751
- ----------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 51,141 47,295
Subscribers' commissions 20,190 17,802
Net occupancy 7,369 6,828
Equipment 5,886 4,814
Systems and processing 3,529 3,931
Communication 3,945 3,374
Marketing 3,576 2,656
Supplies 1,414 1,606
Foreclosed properties expense (income), net 39 (627)
Other 10,997 11,858
- ----------------------------------------------------------------------------------------------
Total noninterest expense 108,086 99,537
- ----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 60,436 55,148
Income tax expense 22,790 21,118
- ----------------------------------------------------------------------------------------------
NET INCOME $ 37,646 $ 34,030
==============================================================================================
PER COMMON SHARE:
Net income:
Basic $ .66 $ .58
Diluted .64 .56
Dividends declared .20 .155
==============================================================================================
AVERAGE COMMON SHARES OUTSTANDING:
Basic 57,118 59,081
Diluted 59,096 60,757
==============================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
----------------------------- -----------
(dollars in thousands, except share amounts) 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 539,902 $ 476,013 $ 530,662
Time deposits with other banks 63,840 17,863 2,245
Securities:
Held to maturity (fair value $651,816, $799,205, and $572,586,
respectively) 648,964 802,547 570,699
Available for sale (amortized cost $2,288,081, $1,759,072, and
$1,941,352, respectively) 2,293,754 1,732,223 1,940,343
- --------------------------------------------------------------------------------------------------------------------------------
Total securities 2,942,718 2,534,770 2,511,042
- --------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased under agreements to resell 39,417 17,358 129,952
Trading account securities 70,001 59,954 63,011
Loans:
Commercial 3,251,140 3,105,167 3,309,218
Consumer--amortizing mortgages 1,531,741 1,750,259 1,763,579
Consumer--other 1,547,536 1,362,939 1,563,636
Real estate--construction 205,511 175,414 193,226
Real estate--commercial mortgages and other 379,794 363,939 391,865
- --------------------------------------------------------------------------------------------------------------------------------
Total loans 6,915,722 6,757,718 7,221,524
Unearned discount (4,402) (8,873) (4,953)
- --------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount 6,911,320 6,748,845 7,216,571
Allowance for loan losses (114,854) (122,551) (115,393)
- --------------------------------------------------------------------------------------------------------------------------------
Total net loans 6,796,466 6,626,294 7,101,178
- --------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 200,753 169,219 196,106
Foreclosed properties 3,679 4,530 3,528
Other assets 404,813 302,902 334,096
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $11,061,589 $10,208,903 $10,871,820
================================================================================================================================
LIABILITIES
Deposits:
Demand (noninterest-bearing) $ 1,390,752 $ 1,351,427 $ 1,353,941
NOW accounts 1,088,873 871,799 915,201
Money market accounts 2,412,884 2,388,446 2,491,586
Regular savings 262,215 306,795 264,447
Certificates of deposit under $100,000 1,513,275 1,672,671 1,570,357
Certificates of deposit $100,000 and over 914,754 749,387 941,032
Other time 357,770 363,865 366,933
Foreign 120,895 98,447 104,182
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 8,061,418 7,802,837 8,007,679
- --------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 1,377,271 1,080,393 1,326,827
Long-term debt 409,514 323,262 409,821
Other liabilities 321,849 148,268 218,754
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,170,052 9,354,760 9,963,081
- --------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; authorized 100,000,000 shares; issued:
57,790,150 shares at March 31, 1998; 58,643,784 shares at
March 31, 1997; and 58,260,642 shares at December 31, 1997 144,475 146,610 145,652
Additional paid-in capital 77,015 134,047 106,228
Retained earnings 697,046 594,648 670,930
Deferred compensation on restricted stock (30,984) (4,373) (13,341)
Employee stock ownership plan obligation -- (436) (163)
- --------------------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 887,552 870,496 909,306
Accumulated other comprehensive income (loss), net of tax 3,985 (16,353) (567)
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 891,537 854,143 908,739
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,061,589 $10,208,903 $10,871,820
================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, COMMON DEFERRED EMPLOYEE ACCUMULATED
1997 AND MARCH 31, 1998 SHARES COMPENSATION STOCK OTHER
ISSUED ADDITIONAL ON OWNERSHIP COMPREHENSIVE
(dollars in thousands except per AND COMMON PAID-IN RETAINED RESTRICTED PLAN INCOME (LOSS),
share amounts) OUTSTANDING STOCK CAPITAL EARNINGS STOCK OBLIGATION NET OF TAX TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 59,262,998 $148,158 $157,792 $569,851 $ (2,066) $(443) $ (4,585) $868,707
Comprehensive income:
Net income -- -- -- 34,030 -- -- --
Other comprehensive loss, net
of tax -- -- -- -- -- -- (11,768)
Comprehensive income 22,262
Issuance of common shares in
connection with Employee
Benefit Plans, net of discount
on Dividend Reinvestment Plan 366,812 917 6,445 -- -- -- -- 7,362
Issuance of shares of restricted
common stock 93,672 234 2,595 -- (2,829) -- -- --
Repurchase of shares of common
stock (1,430,220) (3,575) (42,721) -- -- -- -- (46,296)
Issuance of common shares for
purchase of Hartsville
Bancshares, Inc. 350,522 876 9,223 -- -- -- -- 10,099
Amortization of deferred
compensation on restricted
stock -- -- -- -- 522 -- -- 522
Reduction in employee stock
ownership plan obligation -- -- -- -- -- 7 -- 7
Cash dividends declared ($.155
per common share) -- -- -- (9,233) -- -- -- (9,233)
Tax benefit from stock option
and award plans -- -- 712 -- -- -- -- 712
Other -- -- 1 -- -- -- -- 1
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 58,643,784 $146,610 $134,047 $594,648 $ (4,373) $(436) $(16,353) $854,143
===================================================================================================================================
Balance, January 1, 1998 58,260,642 $145,652 $106,228 $670,930 $(13,341) $(163) $ (567) $908,739
Comprehensive income:
Net income -- -- -- 37,646 -- -- --
Other comprehensive income,
net of tax -- -- -- -- -- -- 4,552
Comprehensive income 42,198
Issuance of common shares in
connection with Employee
Benefit Plans, net of discount
on Dividend Reinvestment Plan 289,572 724 4,284 -- -- -- -- 5,008
Issuance of shares of restricted
common stock 416,506 1,041 18,107 -- (19,148) -- -- --
Repurchase of shares of common
stock (1,176,570) (2,942) (53,577) -- -- -- -- (56,519)
Amortization of deferred
compensation on restricted
stock -- -- -- -- 1,505 -- -- 1,505
Reduction in employee stock
ownership plan obligation -- -- -- -- -- 163 -- 163
Cash dividends declared ($.20 per
common share) -- -- -- (11,530) -- -- -- (11,530)
Tax benefit from stock option and
award plans -- -- 1,973 -- -- -- -- 1,973
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 57,790,150 $144,475 $ 77,015 $697,046 $(30,984) $ -- $ 3,985 $891,537
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------
(in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 37,646 $ 34,030
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Provision for loan losses 4,000 --
Depreciation and amortization of premises and equipment 4,795 4,437
Amortization of intangible assets 2,969 2,775
Other amortization, net 1,665 551
Deferred income tax expense 878 2,923
Net gain on sales and writedowns of foreclosed property (37) (769)
Net realized gains on sales of securities (1,100) (147)
Net (gain) loss on sales and writedowns of premises and equipment (56) 5
Change in assets and liabilities, net of effects from
acquisitions:
Decrease (increase) in accrued interest receivable 1,211 (2,358)
Increase in accrued interest payable 708 2,954
(Increase) decrease in trading account securities (6,990) 256
(Increase) decrease in other assets (79,169) 11,979
Increase (decrease) in other liabilities 102,387 (107,755)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 68,907 (51,119)
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 112,804 121,136
Proceeds from maturities of securities available for sale 147,311 85,883
Purchases of securities available for sale (573,965) (257,285)
Proceeds from maturities of securities held to maturity 125,312 51,293
Purchases of securities held to maturity (5,371) (19,106)
Proceeds from sales of foreclosed property 496 4,016
Acquisitions, net of cash and cash equivalents acquired -- 2,769
Net decrease (increase) in loans, net of repayments and sales 71,404 (33,699)
Proceeds from sales of premises and equipment 68 156
Purchases of premises and equipment (9,454) (10,027)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (131,395) (54,864)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 53,739 (71,733)
Net increase (decrease) in other short-term borrowings 50,417 (82,979)
(Repayment to) advances from Federal Home Loan Bank (267) 528
Net repayment of other long-term debt (33) (78)
Issuance of common shares under Employee Benefit and Dividend
Reinvestment Plans 5,008 7,362
Repurchase of common stock (56,519) (46,296)
Tax benefit related to stock options 1,973 712
Cash dividends paid (11,530) (9,233)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 42,788 (201,717)
- -------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (19,700) (307,700)
Cash and cash equivalents, January 1 662,859 818,934
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, March 31 $ 643,159 $ 511,234
===================================================================================================================
Cash paid during the year for:
Interest expense $ 93,829 $ 84,920
Income taxes 626 1,416
Non-cash transactions:
Foreclosures 568 496
Stock issued for acquisitions -- 10,099
Mortgage loans securitized and retained 229,471 --
===================================================================================================================
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and general practices within the
banking industry.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
presented in First American Corporation's (the "Corporation" or "First
American") 1997 Annual Report to Shareholders. The quarterly consolidated
financial statements reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for interim
periods. All such adjustments are of a normal recurring nature. Certain prior
year amounts have been reclassified to conform with the current year
presentation. The results for interim periods are not necessarily indicative of
results to be expected for the complete fiscal year.
(2) NONPERFORMING ASSETS
Nonperforming assets were as follows:
<TABLE>
<CAPTION>
March 31 December 31
------------------------------------
(dollars in thousands) 1998 1997 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $15,420 $11,248 $15,090
Foreclosed properties 3,679 4,530 3,528
- ------------------------------------------------------------------------------------
Total nonperforming assets $19,099 $15,778 $18,618
====================================================================================
90 days or more past due on accrual $11,626 $19,038 $13,152
====================================================================================
Nonperforming assets as a percent of loans
and foreclosed properties (excluding
90 days or more past due on accrual) .28% .23% .26%
====================================================================================
</TABLE>
(3) ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
(in thousands) 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $115,393 $123,265
Provision charged to operating expenses 4,000 --
Allowance of subsidiary purchased -- 711
- -------------------------------------------------------------------------
119,393 123,976
- -------------------------------------------------------------------------
Loans charged off 7,568 5,894
Recoveries of loans previously charged off 3,029 4,469
- -------------------------------------------------------------------------
Net charge-offs 4,539 1,425
- -------------------------------------------------------------------------
Balance, March 31 $114,854 $122,551
=========================================================================
</TABLE>
Allowance ratios were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Allowance end of period to net loans outstanding 1.66% 1.82%
Net charge-offs to average loans (annualized) .26 .09
============================================================================
</TABLE>
7
<PAGE> 8
(4) ACQUISITIONS
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 March 31,
1998, Deposit Guaranty had total assets of $7.2 billion and total shareholders'
equity of $648.4 million. Deposit Guaranty had 174 banking offices in
Mississippi, Louisiana, Arkansas, and Tennessee, and mortgage offices in
Oklahoma, Nebraska, Texas, Indiana, and Iowa at March 31, 1998. The transaction
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, 1997.
<TABLE>
<CAPTION>
Three Months Ended March 31
----------------------------
(in thousands except per share amounts) 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Summary income statement:
Net interest income $ 172,517 $ 164,380
Provision for loan losses 6,000 1,875
Noninterest income 105,063 92,402
Noninterest expense 174,114 165,853
Income tax expense 35,480 32,411
- -------------------------------------------------------------------------
Net income $ 61,986 $ 56,643
=========================================================================
Basic earnings per share $ .59 $ .52
Diluted earnings per share .58 .51
=========================================================================
End of period balance sheet:
Assets $18,212,672 $16,983,368
Shareholders' equity 1,539,984 1,431,169
=========================================================================
</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. 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 of
CommunityFirst Bank, which operated five branches in Middle Tennessee.
CommunityFirst was simultaneously merged with and into First American National
Bank ("FANB"), a wholly-owned subsidiary of the Corporation.
(5) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," was adopted by the Corporation on January 1,
1998. SFAS 130 establishes standards for reporting comprehensive income.
Comprehensive income includes net income and other comprehensive income which is
defined as non-owner related transactions in equity. Prior periods have been
reclassified to reflect the application of the provisions of SFAS No. 130. The
following table sets
8
<PAGE> 9
forth the amounts of other comprehensive income included in equity along with
the related tax effect for the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
(in thousands) PRE-TAX (EXPENSE) NET OF TAX
AMOUNT BENEFIT AMOUNT
MARCH 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net unrealized gains on securities available for sale arising during 1998 $ 7,793 $(2,565) $ 5,228
Less: Reclassification adjustment for net gains realized in net income 1,100 (424) 676
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 6,693 $(2,141) $ 4,552
=====================================================================================================================
March 31, 1997
- ---------------------------------------------------------------------------------------------------------------------
Net unrealized losses on securities available for sale arising during 1997 $(19,111) $ 7,433 $(11,678)
Less: Reclassification adjustment for net gains realized in net income 147 (57) 90
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive loss $(19,258) $ 7,490 $(11,768)
=====================================================================================================================
</TABLE>
(6) ACCOUNTING MATTERS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to
shareholders. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Adoption of SFAS No. 131 will expand disclosures related
to the consolidated financial statements. The Corporation adopted SFAS 131 on
January 1, 1998 and is currently evaluating its operations to determine the
appropriate disclosures with respect to SFAS No. 131.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," revises and standardizes the disclosure requirements
for employers' pensions and other postretirement benefits plans. This standard
does not change the measurement or recognition of such plans. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. Restatement of
disclosures for earlier periods presented is required unless the information is
not readily available, in which case, all available information and a
description of the information not available shall be included in the notes to
the financial statements. The disclosure requirements of SFAS No. 132 have been
designed to provide information that is more comparable, understandable, and
concise for the users of this information. The Corporation adopted SFAS 132 on
January 1, 1998.
(7) EARNINGS PER COMMON SHARE
Basic earnings per share ("EPS") is computed by dividing income
available to common shareholders (numerator) by the weighted average number of
common shares outstanding (denominator). Diluted EPS is computed by dividing
income available to common shareholders by the weighted average number of shares
outstanding adjusted to reflect 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.
(8) COMMON STOCK
The Corporation purchased 1.2 million shares of First American
Corporation common stock in the open market during the first three months of
1998 at a total cost of $56.5 million. Under Tennessee law, such shares have
been recognized as authorized but unissued. Accordingly, the
9
<PAGE> 10
Corporation reduced the par value and reflected the excess of the purchase price
over par of such repurchased shares as a reduction from additional paid-in
capital.
(9) LEGAL AND REGULATORY MATTERS
Following the adoption of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, Charter Federal Savings Bank ("Charter" or now
"FAFSB"), brought an action against the Office of Thrift Supervision and the
Federal Deposit Insurance Corporation seeking injunctive and other relief,
contending that Congress' elimination of supervisory goodwill required
rescission of certain supervisory transactions. The Federal District Court found
in Charter's favor, but in 1992 the Fourth Circuit Court of Appeals reversed,
and the U.S. Supreme Court denied Charter's petition for certiorari. In 1995,
the Federal Circuit Court found in favor of another thrift institution in a
similar case (Winstar Corp. v. United States) in which the association sought
damages for breach of contract. Charter also filed suit against the United
States Government ("Government") in the Court of Federal Claims based on breach
of contract. Pending the Supreme Court's review of the Winstar decision, FAFSB's
action was stayed. In July 1996, the Supreme Court affirmed the lower court's
decision in Winstar. The stay was automatically lifted and FAFSB's suit is now
proceeding. The Government, however, has filed a motion to dismiss the suit
based on the prior Fourth Circuit decision. This motion has not yet been decided
by the Federal Claims Court.
The value of FAFSB's claims against the Government, as well as their
ultimate outcome, are contingent upon a number of factors, some of which are
outside of FAFSB's control, and are highly uncertain as to substance, timing and
the dollar amount of any damages which might be awarded should FAFSB finally
prevail. Under the Agreement and Plan of Reorganization as amended by and
between FAFSB and the Corporation, in the event that FAFSB is successful in this
litigation, the FAFSB shareholders as of December 1, 1995, will be entitled to
receive additional consideration equal in value to 50% of any recovery, net of
all taxes and certain other expenses, including the costs and expenses of such
litigation, received on or before December 1, 2000, subject to certain
limitations in the case of certain business combinations. Such additional
consideration, if any, is payable in the common stock of the Corporation, based
on the average per share closing price on the date of receipt by FAFSB of the
last payment constituting a recovery from the Government.
Also, there are from time to time other legal proceedings pending
against the Corporation and its subsidiaries. In the opinion of management and
counsel, liabilities, if any, arising from such proceedings presently pending
would not have a material adverse effect on the consolidated financial
statements of the Corporation.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the
consolidated financial statements of First American Corporation (the
"Corporation" or "First American") appearing within this report and by reference
to the Corporation's 1997 Annual Report.
To the extent that statements in this discussion relate to the plans,
objective, or future performance of First American, these statements may be
deemed to be forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are based on
management's current expectations and the current economic environment. Actual
strategies and results in future periods may differ materially from those
currently expected due to various risks and uncertainties.
OVERVIEW
Net income for the first quarter of 1998 was $37.6 million, up 11
percent from $34 million earned in the first quarter of 1997. Basic earnings per
share increased 14 percent to $.66 during the first quarter of 1998 compared to
$.58 during the first quarter of 1997. Diluted earnings per share rose 14
percent to $.64 in the first quarter of 1998 from $.56 during the first quarter
of 1997. Return on average assets improved to 1.42 percent in the first quarter
of 1998 versus 1.37 percent in the first quarter of 1997. Return on average
equity also improved to 17.21 percent in the first quarter of 1998 compared to
15.78 percent in the first quarter of 1997.
On April 16, 1998, First American's Board of Directors increased the
quarterly cash dividend on its common stock by 25 percent to $.25 per share from
$.20 per share, effective with the second quarter 1998 dividend payable on May
29, 1998.
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 March 31, 1998, Deposit Guaranty had
total assets of $7.2 billion and total shareholders' equity of $648.4 million.
Deposit Guaranty had 174 banking offices in Mississippi, Louisiana, Arkansas,
and Tennessee and mortgage offices in Oklahoma, Nebraska, Texas, Indiana, and
Iowa at March 31, 1998. The transaction is expected to be completed during the
second quarter of 1998.
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 Bank.
Immediately following the merger of Hartsville with and into First American,
CommunityFirst Bank was merged with and into First American National Bank
("FANB"), the principal subsidiary of First American. The acquisition was
accounted for as a purchase.
On April 3, 1998, First American completed the sale of three branches
in Virginia with total deposits of approximately $38 million for a gain of
approximately $2.7 million. The sale of the three branches were a part of the
implementation of First American's Distribution Management System ("DMS") which
is designed to reconfigure First American's distribution system to determine the
best mix of distribution alternatives for clients and to maximize return on
capital investment.
On April 22, 1998, First American entered into a definitive agreement
to merge Peoples Bank of Dickson ("Peoples Bank") into First American in a
transaction valued at approximately $48 million. Peoples Bank is a $135 million
asset bank headquartered in Dickson, Tennessee, with six banking offices in
Middle Tennessee. Terms of the agreement provide for Peoples Bank shareholders
to receive 3.7 shares of First American's common stock for each outstanding
share of Peoples Bank in
11
<PAGE> 12
a transaction to be accounted for as a pooling-of-interests. The transaction is
subject to shareholder and regulatory approval and is expected to close before
year-end 1998.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income on a taxable equivalent basis represented 60
percent of total revenues in both the first quarter of 1998 and the first
quarter of 1997. For purposes of this discussion, total revenues consist of the
sum of net interest income and noninterest income. Net interest income is the
difference between total interest income earned on earning assets such as loans
and securities and total interest expense incurred on interest-bearing
liabilities such as deposits. Net interest income on a taxable equivalent basis
was $103.2 million in the first quarter of 1998, up $9.3 million, or 10 percent,
from $93.9 million in the first quarter of 1997. The $9.3 million increase in
net interest income resulted primarily from an increase in the volume of earning
assets ($5.7 million net interest income impact) and an improvement in the net
interest spread ($3.6 million net interest income impact). During the first
quarter of 1998, average earning assets increased $602.6 million, or 7 percent,
to $9.87 billion from $9.27 billion in the first quarter of 1997. The increase
in average earning assets was essentially due to increases in loans ($486.2
million) and investment securities ($120.7 million). Interest-bearing
liabilities averaged $8.38 billion during the first quarter of 1998, an increase
of $564.8 million, or 7 percent, from $7.82 billion in the first quarter of
1997. During the first quarter of 1998 compared to the same period in 1997,
interest-bearing deposits grew $196.5 million, or 3 percent, to $6.61 billion;
federal funds purchased and securities sold under agreements to repurchase
increased $180.2 million, or 20 percent, to $1.07 billion; and short-term
borrowings increased $101.2 million, or 51 percent, to $301.6 million.
The net interest spread contributed to the increase in net interest
income by improving 16 basis points during the first quarter of 1998 compared to
the first quarter of 1997. The net interest spread increased to 3.55 percent in
the first quarter of 1998 from 3.39 percent in the first quarter of 1997 as
average yields on earning assets increased 15 basis points while the average
rate paid on interest-bearing liabilities decreased 1 basis point. The 15 basis
point increase in the yield on earning assets to 8.12 percent from 7.97 percent
was primarily due to an increase in the yield on loans to 8.59 percent in the
first three months of 1998 from 8.46 percent in the first three months of 1997.
Factors contributing to the increased yield on loans were increased yields on
consumer and commercial loans, a portion of which reflects an increase in the
contribution to interest income from derivatives that hedged loan yields and a
higher average prime rate in 1998 compared to 1997. Factors contributing to the
1 basis point decrease in the average rate paid on interest-bearing liabilities
to 4.57 percent from 4.58 percent were deposit pricing actions on money market,
NOW, and regular savings accounts and a decrease in the expense involved in
hedging the rates paid on interest-bearing deposits.
As net interest income increased and the net interest spread improved,
the net interest margin increased 13 basis points to 4.24 percent in the first
quarter of 1998 from 4.11 percent in the first quarter of 1997.
NONINTEREST INCOME
Total noninterest income represented 40 percent of total revenues in
both the first quarter of 1998 and the first quarter of 1997. Total noninterest
income increased $8.4 million, or 14 percent, to $70.1 million in the first
quarter of 1998 from $61.8 million in the first quarter of 1997. Noninterest
income, excluding net realized securities gains, totaled $69.0 million, an
increase of $7.4 million, or 12 percent, from $61.6 million in the first quarter
of 1997. The increase in noninterest income in the first quarter of 1998 over
the first quarter of 1997 included a $2.9 million, or 10 percent, increase in
investment services income; a $2.0 million, or 14 percent, increase in service
charges on deposit accounts; and a $2.3 million, or 21 percent, increase in
other income. The $2.9 million improvement in investment services income over
the first quarter of 1997 resulted primarily from growth in retail
12
<PAGE> 13
brokerage commissions related to mutual funds, equities, and annuities sales
associated with the operations of IFC Holdings, Inc. ("IFC"). The $2.0 million
increase in service charges on deposit accounts is attributable to fee increases
and product changes in conjunction with the utilization of a customer
information system called VISION. Other income included a $.8 million increase
in real estate fees resulting from an increased volume of mortgage loans
originated. Excluding IFC, total noninterest income increased $4.9 million, or
14 percent.
NONINTEREST EXPENSE
Total noninterest expense increased $8.6 million, or 9 percent, to
$108.1 million for the first quarter of 1998 compared with $99.5 million for the
same period in 1997. Contributing to the $8.6 million increase were noninterest
expenses of IFC which rose $2.8 million primarily due to increases in
subscribers' commissions related to IFC's brokerage activities. Excluding IFC,
noninterest expense increased $5.8 million, or 8 percent.
Significant changes from the first quarter of 1998 compared to the
first quarter of 1997 in noninterest expense, exclusive of IFC, included
increases in salaries and employee benefits, equipment expense, net foreclosed
properties expense, and communication expense offset by a decrease in other
general and administrative expenses. Explanations for the changes, exclusive of
IFC, between the first quarter of 1998 compared to the first quarter of 1997 are
outlined as follows:
- - Salaries and benefits increased $3.5 million, or 8 percent, to $47.0
million from $43.5 million principally due to merit increases and
incentive programs.
- - Equipment expense increased $1.1 million, or 24 percent, to $5.8
million from $4.7 million as the result of an increase in personal
computer rental expense and a greater usage of computer maintenance
contracts specifically related to automated teller machines ("ATMs").
Additional ATMs (the number of ATMs increased by 67, or 17 percent, to
451 at March 31, 1998, from 384 at March 31, 1997) were added during
1997 as part of the implementation of lower-priced yet more convenient,
distribution alternatives.
- - Net foreclosed properties expense increased $.7 million to $39 thousand
from $.6 million of net foreclosed properties income.
- - Communication expense increased $.6 million, or 18.1 percent, to $3.6
million from $3.0 million due to higher expenditures for
telecommunications.
First American's productivity ratio in the traditional banking business
improved to 55.14 percent for the first quarter of 1998 compared to 56.88
percent for the first quarter of 1997. The improvement in the productivity ratio
means that the Corporation spent $1.74 less to generate $100 of bank revenue
during the first three months of 1998 compared to the same time period last
year.
As discussed in detail in the Corporation's 1997 Annual Report, First
American has adopted a broad-based approach designed to encompass total systems
and non-systems environments in addressing the "Year 2000" issue. First American
is meeting the objectives as defined in its Year 2000 work plan initiative in
accordance with the established timeline. First American continues to expect to
be substantially Year 2000 compliant by the end of 1998 and that costs of the
overall Year 2000 initiative will not exceed $5 million in the aggregate.
INCOME TAXES
Income tax expense for the first quarter of 1998 and 1997 was $22.8
million and $21.1 million, respectively. The major factor for the 8 percent
increase in income tax expense was the higher income before income taxes.
13
<PAGE> 14
BALANCE SHEET REVIEW
ASSETS
Total assets of First American rose $852.7 million, or 8 percent, to
$11.06 billion at March 31, 1998, compared to $10.21 billion at March 31, 1997.
The growth in total assets was primarily due to a $407.9 million, or 16 percent,
increase in investment securities and a $162.5 million, or 2 percent, increase
in loans net of unearned discount. During the first quarter of 1998, $229
million of mortgage loans were securitized and transferred to the investment
securities portfolio. Of the $229 million mortgage loans that were securitized,
$31 million was transferred to the available for sale securities portfolio and
$198 million was transferred to the held to maturity securities portfolio.
Excluding the effect of the $229 million mortgage loan securitization and
transfer to investment securities and the purchase of $200 million of
installment loans during the second quarter of 1997, loans net of unearned
discount increased $191.9 million, or 3 percent, and investment securities
increased $178.5 million, or 7 percent. Leading the growth in loans were
consumer-other loans which increased $184.6 million, or 14 percent, primarily
due to the purchase of $200 million of installment loans on June 30, 1997, and
commercial loans which increased $146.0 million, or 5 percent.
Consumer-amortizing mortgages decreased $218.5 million, or 12 percent; excluding
the effect of the securitization and transfer to investment securities of $229
million of mortgage loans, consumer-amortizing mortgages increased $11.0
million, or .6 percent. Also contributing to asset growth were increases in
other assets ($101.9 million), cash and due from banks ($63.9 million), and time
deposits with other banks ($46 million).
Total assets of First American increased $189.8 million from $10.87
billion at December 31, 1997, to $11.06 billion at March 31, 1998. The increase
in total assets from December 31, 1997, to March 31, 1998, was primarily due to
a $431.7 million increase in investment securities offset by a $305.3 million
decrease in loans net of unearned discount. Also contributing to asset growth
were increases in other assets ($70.7 million) and time deposits with other
banks ($61.6 million) offset by a decrease in federal funds sold and securities
purchased under agreements to resell ($90.5 million). Excluding the effect of
the $229 million mortgage loan securitization and transfer to investment
securities, investment securities increased $202.2 million and loans decreased
$75.8 million from year end 1997 to March 31, 1998. Balances in all categories
of loans, with the exception of real estate-construction which increased $12.3
million, declined slightly from December 31, 1997, to March 31, 1998.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
Management's policy is to maintain the allowance for loan losses at a
level which is adequate to absorb estimated loan losses inherent in the loan
portfolio. The provision for loan losses is a charge to earnings necessary,
after loan charge-offs and recoveries, to maintain the allowance at an
appropriate level. Determining the appropriate level of the allowance and the
amount of the provision for loan losses involves uncertainties and matters of
judgment and therefore cannot be determined with precision.
The allowance for loan losses was $114.9 million at March 31, 1998,
$122.6 million at March 31, 1997, and $115.4 million at December 31, 1997. The
allowance for loan losses was 1.66 percent and 1.82 percent of net loans at
March 31, 1998, and 1997, respectively, and 1.60 percent of net loans at
December 31, 1997. In the first quarter of 1998, the allowance was increased by
a provision of $4 million and decreased by net charge-offs of $4.5 million
compared to no provision and net charge-offs of $1.4 million in the first
quarter of 1997. Net charge-offs as a percentage of average loans on an
annualized basis amounted to .26 percent and .09 percent, respectively, in the
first quarters of 1998 and 1997. Activity in the allowance for loan losses in
the first quarter of 1997 also included a $.7 million increase due to the
January 1, 1997, acquisition of Hartsville.
14
<PAGE> 15
ASSET QUALITY
First American's nonperforming assets (excluding loans 90 days past due
on accrual status) were $19.1 million at March 31, 1998, $15.8 million at March
31, 1997, and $18.6 million at December 31, 1997. Nonperforming assets
(excluding loans 90 days past due on accrual status) at March 31, 1998,
represented .28 percent of total loans and foreclosed properties, compared to
.23 percent at March 31, 1997, and .26 percent at December 31, 1997. At March
31, 1998, nonperforming assets consisted of $15.4 million of nonaccrual loans
and $3.7 million of foreclosed properties.
Other potential problem loans consist of loans that are currently not
considered nonperforming but on which information about possible credit problems
has caused management to doubt the ability of the borrowers to comply fully with
present repayment terms. At March 31, 1998, such loans totaled approximately $47
million compared with $57 million at March 31, 1997, and $61 million at December
31, 1997. Depending on the economy and other factors, these loans and others,
which may not be presently identified, could become nonperforming assets in the
future.
LIABILITIES
Total deposits increased $258.6 million, or 3 percent, to $8.06 billion
at March 31, 1998 from $7.80 billion at March 31, 1997. Core deposits, which are
defined as total deposits less certificates of deposit $100,000 and over and
foreign deposits, were $7.03 billion at March 31, 1998, an increase of $70.8
million, or 1 percent, from $6.96 billion at March 31, 1997. Short-term
borrowings increased $296.9 million, or 27 percent, to $1.38 billion at March
31, 1998, from $1.08 billion at March 31, 1997. The increase in short-term
borrowings was primarily attributable to federal funds purchased from
correspondent banks ($109.6 million); sweep repurchase agreements ($80.1
million), in which customer demand deposit account balances are swept into
overnight interest earning accounts; and a reclassification from long- to
short-term borrowings of $108.5 million variable rate and $5.5 million fixed
rate advances from the Federal Home Loan Bank ("FHLB"). Long-term debt increased
$86.2 million, or 27 percent, to $409.5 million at March 31, 1998, from $323.3
million at March 31, 1997, with most of the increase due to the addition of $200
million variable rate borrowings from the FHLB offset by $114 million of FHLB
borrowings that were reclassified from long-term to short-term as discussed
above.
Total deposits increased $53.7 million, or 1 percent, from $8.01
billion at December 31, 1997 to $8.06 billion at March 31, 1998. Core deposits
increased $63.3 million, or 1 percent from $6.96 billion at December 31, 1997,
to $7.03 billion at March 31, 1998. Short-term borrowings increased $50.4
million from $1.33 billion at December 31, 1997.
DERIVATIVE INSTRUMENTS
First American has utilized off balance sheet derivative products for a
number of years in managing its interest rate sensitivity. Generally, a
derivative transaction is a payments exchange agreement whose value derives from
an underlying asset or underlying reference rate or index. The use of
non-complex, non-leveraged derivative products has reduced the Company's
exposure to changes in the interest rate environment. By using derivative
products such as interest rate swaps and futures contracts to alter the nature
of (hedge) specific assets or liabilities on the balance sheet (for example to
change a variable to a fixed rate obligation), the derivative product offsets
fluctuations in net interest income from the otherwise unhedged position. In
other words, if net interest income from the otherwise unhedged position changes
(increases or decreases) by a given amount, the derivative product should
produce close to the opposite result, making the combined amount (otherwise
unhedged position impact plus the derivative product position impact)
essentially unchanged. Derivative products have enabled First American to
improve its balance between interest-sensitive assets and interest-sensitive
liabilities by managing interest rate sensitivity, while continuing to meet the
lending and deposit needs of its customers.
15
<PAGE> 16
In conjunction with managing interest rate sensitivity, at March 31,
1998, First American had derivatives with notional values totaling $2.38
billion. These derivatives had a net positive fair value (unrealized net pre-tax
gain) of $16.8 million. Notional amounts are key elements of derivative
financial instrument agreements. However, notional amounts do not represent the
amounts exchanged by the parties to derivatives and do not measure First
American's exposure to credit or market risks. The amounts exchanged are based
on the notional amounts and the other terms of the underlying derivative
agreements. At March 31, 1997, First American had derivatives with notional
values totaling $1.15 billion. These derivatives had a net positive fair value
(unrealized net pre-tax gain) of $2.7 million at March 31, 1997. The instruments
utilized are noted in the following table along with their notional amounts and
fair values at March 31, 1998 and 1997.
<TABLE>
<CAPTION>
Weighted
Average
Weighted Average Rate Maturity
Related Variable Rate Notional -------------------------- -------- Fair
(in thousands) Asset/Liability Amount Paid Received Years Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MARCH 31, 1998
Interest rate swaps Money market deposits $ 150,000 5.97% (1) 5.68% (2) 1.8 $ (78)
Interest rate swaps Available for sale securities 100,000 5.54 (1) 5.72 (2) 4.8 1,952
Interest rate swaps Loans 775,000 5.64 (2) 6.61 (1) 4.0 20,496
Forward interest rate
swaps Money market deposits 600,000 6.46 (3) 5.65 (3) 1.0 (2,074)
Forward interest rate Available for sale
swaps securities 750,000 6.24 (4) N/A (4) 2.3 (3,516)
---------- -------
$2,375,000 $16,780
===================================================================================================================================
March 31, 1997
Interest rate swaps Money market deposits $ 200,000 5.67% (1) 5.53% (5) 2.3 $ 3,804
Interest rate swaps Loans 350,000 5.55 (2) 6.65 (1) 4.5 (2,824)
Forward interest rate Available for sale
swaps securities 200,000 7.01 (6) N/A (6) 3.6 (117)
Forward interest rate
swaps Money market deposits 400,000 6.27 (6) N/A (6) 1.5 1,857
---------- -------
$1,150,000 $ 2,720
===================================================================================================================================
</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 March 31, 1998,
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, except for
$100 million to begin in April 1998 related to available for sale
securities. 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.
As First American's individual derivative contracts approach maturity,
they may be terminated and replaced with derivatives with longer maturities
which offer more interest rate risk protection. At March 31, 1998, there were
$1.5 million of deferred net gains related to terminated derivatives contracts,
and there were $3.5 million of deferred net losses at March 31, 1997. Deferred
gains and losses on off balance sheet derivative activities are recognized as
interest income or interest expense over the original covered periods.
Net interest income for the quarter ended March 31, 1998, was increased
by derivative products income of $1.7 million. Net interest income for the
quarter ended March 31, 1997, was increased by $.6 million derivative products
income. The increase in derivative products net income in first quarter 1998
from first quarter 1997 was primarily due to actions taken later in 1997 to
create a derivatives position more balanced between pay-fixed and receive-fixed
interest rate swaps.
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<PAGE> 17
Credit risk exposure due to off-balance-sheet hedging is closely
monitored, and counterparts to these contracts are selected on the basis of
their credit worthiness, as well as their market-making ability. As of March 31,
1998, all outstanding derivative transactions were with counterparts with credit
ratings of A-2 or better. Enforceable bilateral netting contracts between First
American and its counterparts allow for the netting of gains and losses in
determining net credit exposure. First American's net credit exposure on
outstanding derivatives was $18.1 million on March 31, 1998. Given the credit
standing of the counterparts to the derivative contracts, Management believes
that this credit exposure is reasonable in light of its objectives.
CAPITAL POSITION
Total shareholders' equity was $891.5 million, or 8.06 percent of total
assets, at March 31, 1998, $854.1 million, or 8.37 percent of total assets, at
March 31, 1997, and $908.7 million, or 8.36 percent of total assets, at December
31, 1997. Total shareholders' equity increased $37.4 million, or 4 percent, from
March 31, 1997, to March 31, 1998, resulting principally from comprehensive
income offset by common stock repurchases and dividends to shareholders. Total
shareholders' equity decreased $17.2 million, or 2 percent, from December 31,
1997, which was primarily due to common stock repurchases and dividends to
shareholders offset by comprehensive income.
During the first quarter of 1998, First American declared cash
dividends on its common stock of $.20 per common share compared to $.155 per
common share in the first quarter of 1997, an increase of 29 percent. The
dividend payout ratio was 30.30 percent in the first quarter of 1998 compared to
26.72 percent in the first quarter of 1997. On April 16, 1998, the First
American Board of Directors increased the quarterly cash dividend on its common
stock from $.20 per share to $.25 per share effective with the second quarter
1998 dividend payable on May 29, 1998, to shareholders of record on April 29,
1998.
The Federal Reserve Board and the Office of the Comptroller of the
Currency ("OCC") promulgate risk-based capital guidelines and regulations which
require bank holding companies and national banks to maintain minimum capital
ratios. As of March 31, 1998, the Corporation and FANB had ratios which exceeded
the regulatory requirements to be classified as "well capitalized," the highest
regulatory rating. At March 31, 1998, the Corporation and FANB had total
risk-based capital ratios of 11.17 percent and 10.81 percent, respectively, Tier
I risk-based capital ratios of 8.80 percent and 9.56 percent, respectively, and
Tier I leverage capital ratios of 7.39 percent and 8.12 percent, respectively.
In order to be considered well capitalized, the total risk-based capital ratio
must be a minimum of 10 percent, the Tier I risk-based capital ratio must equal
or exceed 6 percent, and the Tier I leverage capital ratio must equal or exceed
5 percent.
First American Federal Savings Bank ("FAFSB") is subject to capital
requirements adopted by the Office of Thrift Supervision, which are similar but
not identical to those issued by the Federal Reserve Board and the OCC. At March
31, 1998, FAFSB had ratios which exceeded the regulatory requirements to be
classified as "well capitalized."
LIQUIDITY
Liquidity management consists of maintaining sufficient cash levels to
fund operations and to meet the requirements of borrowers, depositors, and
creditors. Liquid assets include cash and cash equivalents (which consist of
cash and due from banks, interest-bearing deposits in banks, and federal funds
sold and securities purchased under agreements to resell) less Federal Reserve
Bank reserve requirements in addition to trading account securities and
securities that are estimated to mature within one year. Liquid assets totaled
$1,003.4 million and $930.2 million at March 31, 1998, and 1997, respectively,
which was approximately 10 percent of earning assets at both quarter ends.
Available for sale securities maturing after one year, which had a balance of
$1.97 billion at March 31, 1998, compared to $1.62 billion at March 31, 1997 can
also be sold to meet liquidity needs. The overall liquidity position of First
American is further enhanced by a high proportion of core deposits, which
17
<PAGE> 18
provide a stable funding base. Core deposits comprised 87 percent of total
deposits at March 31, 1998, versus 89 percent at March 31, 1997.
An additional source of liquidity is First American's three-year $70
million revolving credit agreement, which expired on March 31,1998, but was
extended for 60 days. A new revolving credit agreement is in the process of
negotiation. First American had no borrowings under the revolving agreement
during 1998 or 1997.
18
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information called for by this item is incorporated by reference to
Item 3 of the Registrant's annual report on Form 10-K for the year
ended December 31, 1997, and Note 9 to the Corporation's Consolidated
Financial Statements for the quarter ended March 31, 1998 included
herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ ----------------------------------------------------
<S> <C>
3.1 Restated Charter of the Registrant currently in
effect as amended and corrected included herein.
3.2 By-laws of the Registrant currently in effect as
amended January 16, 1997, are incorporated herein by
reference to Exhibit 3.2 of the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1996.
11 Statement regarding computation of basic and diluted
per share earnings is included in Note 7 to the
Consolidated Financial Statements for the quarter
ended March 31, 1998. See Part 1, Item 1.
15 Letter regarding unaudited interim financial
information from KPMG Peat Marwick LLP, dated April
16, 1998.
27 Financial Data Schedule for interim year-to-date
period ended March 31, 1998. (For SEC use only)
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1998.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST AMERICAN CORPORATION
(Registrant)
/s/ Dale W. Polley
-----------------------------------------
Dale W. Polley
President and Principal Financial Officer
Date: April 30, 1998
------------------------------------
20
<PAGE> 1
EXHIBIT 3.1
RESTATED CHARTER
OF
FIRST AMERICAN CORPORATION
(herein sometimes the "Corporation")
AS RESTATED ON JANUARY 13, 1997
Pursuant to the provisions of Section 48-20-107 of the Tennessee Business
Corporation Act, the undersigned corporation adopts the following restated
charter (hereinafter the "Charter"):
ARTICLE I
The name of the corporation is First American Corporation.
ARTICLE II
The duration of the Corporation is perpetual.
ARTICLE III
The address of the principal office of the Corporation in the State of
Tennessee shall be First American Center, Nashville, Tennessee 37237, County of
Davidson.
ARTICLE IV
The Corporation is for profit.
ARTICLE V
A. The purpose for which the Corporation is organized is to transact the
business of a holding company with all of the powers granted generally to
corporations for profit by the Statutes of Tennessee, and without limiting in
any manner the scope and generality of the foregoing, the Corporation shall have
the following purposes and powers:
1. To acquire by purchase, subscription, or otherwise, and to receive,
hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge, or
otherwise dispose of or deal in and with any and all securities, as such term is
hereinafter defined, issued or created by any corporation, firm, organization,
association or other entity, public or private, whether formed under the laws of
the United States of America or of any state, commonwealth, territory,
dependency or possession thereof, or of any foreign country or of any political
subdivision, territory, dependency, possession or municipality thereof, or
issued or created by the United States of America or any state or commonwealth
thereof of any foreign country, or by any agency, subdivision, territory,
dependency,
<PAGE> 2
possession or municipality of any of the foregoing, and as owner thereof to
possess and exercise all the rights, powers and privileges of ownership,
including the right to execute consents and vote thereon.
The term "securities" as used in this Charter shall mean any and
all notes, stocks, treasury stocks, bonds, debentures, evidences of
indebtedness, certificates of interest or participation in any profit-sharing
agreement, collateral-trust certificates, preorganization certificates or
subscriptions, transferable shares, investment contracts, voting trust
certificates, certificates of deposit for a security, fraction undivided
interests in oil, gas, or other mineral rights, or, in general, any interests or
instruments commonly known as "securities," or any and all certificates of
interest or participation in, temporary or interim certificates for, receipts
for, guaranties of, or warrants or rights to subscribe to or purchase, any of
the foregoing.
2. To make, establish and maintain investments in securities, and to
supervise and manage such investments.
3. To cause to be organized under the laws of the United States of
America or of any state, commonwealth, territory, dependency or possession
thereof, or of any foreign country or of any political subdivision, territory,
dependency, possession or municipality thereof, one or more corporations, firms,
organizations, associations or other entities and to cause the same to be
dissolved, wound up, liquidated, merged or consolidated.
4. To acquire by purchase or exchange, or by transfer to or by merger
or consolidation with the Corporation or any corporation, firm, organization,
association or other entity owned or controlled, directly or indirectly, by the
Corporation, or to otherwise acquire, the whole or any part of the business,
good will, rights, or other assets of any corporation, firm, organization,
association or other entity, to operate and/or carry on the business of same,
and to undertake or assume in connection therewith the whole or any part of the
liabilities and obligations thereof, to effect any such acquisition in whole or
in part by delivery of cash or other property, including securities issued by
the Corporation, or by any other lawful means.
5. To make loans and give other forms of credit, with or without
security, and to negotiate and make contracts and agreements in connection
therewith.
6. To aid by loan, subsidy, guaranty or in any other lawful manner any
corporation, firm, organization, association or other entity of which any
securities are in any manner directly or indirectly held by the Corporation or
in which the Corporation or any such corporation, firm, organization,
association or entity may be or become otherwise interested; to guarantee the
payment of dividends on any stock issued by any such corporation, firm,
organization, association or entity; to guarantee or, with or without recourse
against any such corporation, firm, organization, association or entity, to
assume the payment of the principal of, or the interest on, any obligations
issued or incurred by such corporation, firm, organization, association or
entity; to do any and all other acts and things for the enhancement, protection
or preservation of any securities which are in
<PAGE> 3
any manner, directly or indirectly, held, guaranteed or assumed by the
Corporation, and to do any and all acts and things designed to accomplish any
such purpose.
7. To borrow money for any business, object or purpose of the
Corporation from time to time, without limit as to amount; to issue any kind of
indebtedness, whether or not in connection with borrowing money, including
evidences of indebtedness convertible into stock of the Corporation, to secure
the payment of any evidence of indebtedness by the creation of any interest in
any of the property or rights of the Corporation, whether at that time owned or
thereafter acquired.
8. To render service, assistance, counsel and advice to, and to act as
representative or agent in any capacity (whether managing, operating, financial,
purchasing, selling, advertising or otherwise) of, any corporation, firm,
organization, association, or other entity.
B. The Corporation shall possess and may exercise all powers and privileges
necessary or convenient to effect any or all of the foregoing purposes, or to
further any or all of the foregoing powers, and the enumeration herein of any
specific purposes or powers shall not be held to limit or restrict in any manner
the exercise by the Corporation of the general powers now or hereafter conferred
by the laws of the State of Tennessee upon corporations formed under the General
Corporation Act of Tennessee.
ARTICLE VI
A. Authorized Shares. The maximum number of shares which the Corporation
shall have authority to issue is FIFTY MILLION (50,000,000) shares of common
stock with a par value of FIVE dollars ($5.00) per share and TWO MILLION FIVE
HUNDRED THOUSAND (2,500,000) shares of preferred stock without par value.
B. No Preemptive Rights. No shareholder of any class of stock of the
Corporation shall, because of his ownership of stock, have a preemptive or other
right to purchase, subscribe for, or take any part of any stock or any part of
the notes, debentures, bonds or other securities convertible into or carrying
options or warrants to purchase stock of the Corporation issued, optioned, or
sold by it after its incorporation. Any part of the capital stock and any part
of the notes, debentures, bonds, or other securities convertible into or
carrying options or warrants to purchase stock of the Corporation authorized by
this Charter or by an amendment thereto duly filed, may at any time be issued,
optioned for sale, and sold or disposed of by the Corporation pursuant to
resolution of its Board of Directors to such persons and upon such terms as may
to such Board seem proper without first offering such stock or securities or any
part thereof to existing shareholders.
C. Issuance of Preferred Stock in Series. The Board of Directors is
expressly authorized at any time, and from time to time, to provide for the
issuance of shares of preferred stock in one or more series, with such voting
powers, full or limited but not to exceed one vote per share, or without voting
powers and with such designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue thereof adopted by the Board of Directors,
and
<PAGE> 4
as are not stated and expressed in this Charter or any amendment thereto,
including (but without limiting the generality of the foregoing) the following:
(i) The designation of such series.
(ii) The dividend rate of such series, the conditions and dates upon
which such dividends shall be payable, the preference or relation which such
dividends shall bear to the dividends payable on any other class or classes or
of any other series of capital stock, and whether such dividends shall be
cumulative or noncumulative.
(iii) Whether the shares of such series shall be subject to redemption
by the Corporation, and, if made subject to such redemption, the times, prices
and other terms and conditions of such redemption.
(iv) The terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such series.
(v) Whether or not the shares of such series shall be convertible into
or exchangeable for shares of any other class or classes or of any other series
of any other class or classes of capital stock of the Corporation, and, if
provision be made for conversion or exchange, the times, prices, rates,
adjustments, and other terms and conditions of such conversion or exchange.
(vi) The extent, if any, to which the holders of the shares of such
series shall be entitled to vote as a class or otherwise with respect to the
election of the directors or otherwise; provided, however, that in no event
shall any holder of any series of preferred stock be entitled to more than one
vote for each share of such preferred stock held by him.
(vii) The restrictions, if any, on the issue or reissue of any
additional preferred stock.
(viii) The rights of the holders of the shares of such series upon the
dissolution of, or upon the distribution of assets of, the Corporation.
D. $2.375 Cumulative Preferred Stock
1. Designation. The initial series of preferred stock without par value
shall be known and designated as $2.375 Cumulative Preferred Stock (hereinafter
referred to as the "Cumulative Preferred Stock"), and shall consist of THREE
HUNDRED THOUSAND (300,000) shares without par value and shall have the rights,
preferences and characteristics set forth below.
2. Dividends.
(a) The holders of shares of Cumulative Preferred Stock shall be
entitled to receive dividends at the rate of $2.375 per share per annum, when,
as and if declared by the Board of
<PAGE> 5
Directors out of funds legally available therefor. Dividends shall accrue from
the date of original issue and shall be payable on the first days of October,
January, April and July, commencing October 1, 1978. The record dates for
determining holders entitled to receive such dividends shall be such dates as
may be fixed by the Board of Directors.
(b) Dividends on the Cumulative Preferred Stock shall be
cumulative from the date of original issue. If such dividends shall not have
been paid, or declared and set apart for payment upon all outstanding shares of
Cumulative Preferred Stock, the deficiency shall be fully paid, or declared and
set apart for payment, before any dividends are paid or declared upon any shares
of Common stock or any class or series of stock ranking as to dividends or
assets junior to the Cumulative Preferred Stock. Whenever full cumulative
dividends on all outstanding shares of Cumulative Preferred Stock shall have
been paid, or declared and set apart for payment, the Board of Directors may
declare dividends upon the Common Stock or any other class or series of stock
junior to the Cumulative Preferred Stock, payable then or thereafter, and no
holder of Cumulative Preferred Stock shall be entitled to share therein by
virtue of such holding.
3. Liquidation. Upon any dissolution, liquidation or winding up of
the Corporation, whether voluntary or involuntary, the holders of the Cumulative
Preferred Stock shall be entitled to be paid from the assets (whether capital or
surplus) of the Corporation the following amounts:
(i) upon involuntary dissolution, liquidation or winding up, $25
per share;
(ii) upon voluntary dissolution, liquidation or winding up, an
amount per share equal to the optional redemption price prevailing on the date
on which such dissolution shall have become legally effective or such
liquidation or winding up shall have been authorized, or if such date shall be
prior to June 1, 1980, $26.75 per share;
plus, in every case, an amount equal to all accumulated and unpaid
dividends accrued to the date fixed for final distribution to such holders,
whether or not earned or declared, before any payment or distribution shall be
made to the holders of the Common Stock or any class or series ranking junior as
to dissolution, liquidation or winding up to the Cumulative Preferred Stock.
After payment in full of such amounts to the holders of the Cumulative Preferred
Stock, the holders of the Cumulative Preferred Stock, as such, shall have no
right or claim to any of the remaining assets of the Corporation, and the same
shall be distributed to the holders of the Common Stock and any other class or
series of stock junior as to dissolution, liquidation or winding up to the
Cumulative Preferred Stock in accordance with their respective rights.
4. Optional Redemption
(a) Subject to the provisions of this subsection D4, the
Corporation may redeem, on or after June 1, 1980, the Cumulative Preferred
Stock, or any part thereof, at the option of the Board of Directors, at the then
applicable optional redemption price plus an amount equal to all accumulated and
unpaid dividends accrued to the redemption date of the shares redeemed, whether
or not earned
<PAGE> 6
or declared, provided, however, that not less than (30) days nor more than (60)
days prior to the date fixed for redemption, (the "Redemption Date"), a notice
specifying the time and place of redemption and the redemption price shall be
given to the holders of record of the shares to be redeemed by publication of
such notice in one newspaper published and of general circulation in the City of
Nashville, Tennessee, and in one newspaper published and of general circulation
in the Borough of Manhattan, The City of New York and by mailing such notice to
such holders at their addresses, as the same appear upon the stock registry
books; provided, however, that if all shares of Cumulative Preferred Stock are
to be redeemed, no failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity of such redemption.
(b) The optional redemption price of shares of Cumulative
Preferred Stock redeemed at the option of the Board of Directors shall be as
follows:
$26.75 if redeemed on or after June 1, 1980 and prior to June 1, 1981;
$26.50 if redeemed on or after June 1, 1981 and prior to June 1, 1982;
$26.25 if redeemed on or after June 1, 1982 and prior to June 1, 1983;
$26.00 if redeemed on or after June 1, 1983 and prior to June 1, 1984;
$25.75 if redeemed on or after June 1, 1984 and prior to June 1, 1985;
$25.50 if redeemed on or after June 1, 1985 and prior to June 1, 1986;
$25.25 if redeemed on or after June 1, 1986 and prior to June 1, 1987;
$25.00 if redeemed on or after June 1, 1987 or thereafter.
The optional redemption price, plus dividends accrued and unpaid to the
Redemption Date, shall be paid on the Redemption Date.
(c) If less than all outstanding shares of Cumulative Preferred
Stock are to be redeemed, and except as otherwise hereinafter required by the
provisions of this subsection D4, such redemption shall be pro rata from each
holder of record, provided that the Corporation shall not redeem a fraction of a
share. If, on a strictly pro rata basis, a record holder would otherwise be
entitled to have redeemed whole shares and a fractional share, only the whole
shares shall be redeemed; however, if, on a strictly pro rata basis, a record
holder would otherwise be entitled to have redeemed only a fractional share (and
no whole shares), one full share shall be redeemed from such record holder.
In the event of any such partial redemption, the notice of
redemption mailed as aforesaid shall inform each holder of record of shares
called for redemption of the total number or proportion of shares registered in
his name that have been called for redemption, but the notice of
<PAGE> 7
redemption to be published as aforesaid need not contain such information.
(d) From and after the Redemption Date, unless default is made in
the payment of the optional redemption price when due, the shares so called for
redemption shall cease to be outstanding, and the holders thereof shall cease to
be shareholders with respect to such shares and shall have no interest in or
claim against the Corporation with respect to such shares, other than to receive
the optional redemption price on and after the date fixed for redemption without
interest thereon, upon surrender of their certificates with endorsement thereof
if required.
(e) At any time after notice of optional redemption shall have
been given as hereinabove provided, the Corporation may deposit, or cause to be
deposited in trust, to be applied to the redemption of the shares of Cumulative
Preferred Stock so called for redemption, with First American National Bank of
Nashville, Nashville, Tennessee, or with some other bank or trust company
organized and doing business under the laws of the United States of America or
the State of Tennessee and having capital surplus and undivided profits
aggregating at least ten million dollars ($10,000,000), the aggregate amount to
be paid on optional redemption to the holders of the shares so to be redeemed
upon surrender of the certificates for such shares. In case any holder of shares
of Cumulative Preferred Stock which shall have been called for redemption shall
not, within six years after such deposit, have claimed the amount deposited with
respect to the redemption thereof, such bank or trust company, upon demand,
shall pay over to the Corporation such unclaimed amount and shall thereupon be
relieved of all responsibility in respect thereof to such holder, and such
holder shall look only to the Corporation for the payment thereof. Any interest
accrued on funds so deposited shall be paid to the Corporation from time to
time.
(f) Notwithstanding the foregoing optional redemption provisions,
if at any time the Corporation shall have failed to declare or pay dividends in
full on all shares of Cumulative Preferred Stock outstanding, then and until all
arrearages of such dividends shall have been paid, or declared and set apart for
payment, the Corporation shall not purchase or redeem or otherwise acquire for
value (nor may moneys be paid or made available to any sinking fund for the
redemption of) any shares of Cumulative Preferred Stock or any shares of Common
Stock or any shares of any class or series of stock ranking as to dividends or
assets equally with or junior to the Cumulative Preferred Stock except in the
case of (i) a redemption of all outstanding shares of Cumulative Preferred Stock
at the redemption price determined in accordance with subsections D4(a) and
D4(b) above; or (ii) a purchase or other acquisition for value of shares of
Cumulative Preferred Stock pursuant to and in accordance with a purchase or
exchange of or made by the Corporation to all holders of record of the
Cumulative Preferred Stock.
5. Voting Rights
(a) Except as set forth in this subsection D5 or in any applicable
statute, the holders of Cumulative Preferred Stock shall have no voting powers,
nor shall they be entitled to notice of any meeting of the shareholders of the
Corporation.
<PAGE> 8
(b) If any time the Corporation shall be arrears in dividends on
any shares of Cumulative Preferred Stock in an amount equal to six full
quarterly dividends thereon, then, until all arrearages of dividends accumulated
on all shares of Cumulative Preferred Stock shall have been paid or declared and
set apart for payment, the holders of the Cumulative Preferred Stock, voting
separately as a class, shall have the sole right, to the exclusion of any other
class of stock, at all annual or special meetings of the shareholders of the
Corporation at which directors are to be elected, to vote for and elect TWO (2)
directors. At all annual or special meetings for election of directors so long
as such right to elect directors shall continue, the holders of the Cumulative
Preferred Stock, voting separately as a class, shall vote for and elect the
directors which they are entitled to elect as aforesaid, and thereafter the
holders of the Common stock and of any other stock of the Corporation having
voting powers, in accordance with their respective rights, shall vote for and
elect the remaining directors. At any meeting of the shareholders at which the
holders of the Cumulative Preferred Stock shall have the right to vote, they
shall have one vote for each share of Cumulative Preferred Stock registered on
the record date for such meeting in their name on the stock registry books. The
holders of the Cumulative Preferred Stock shall be entitled to notice of any
meeting of the shareholders called for the election of directors at which such
holders shall be entitled to vote as provided in this subsection D5(b), and at
any such election the holders of one-third of the shares of Cumulative Preferred
Stock outstanding shall constitute a quorum for the election of the directors
whom the holders of shares of Cumulative Preferred Stock are entitled to elect,
and a plurality of all votes of the Cumulative Preferred Stock represented at
the meeting shall be sufficient to elect such directors.
Whenever all arrearages of dividends on the Cumulative
Preferred Stock as aforesaid shall have been paid or declared and set apart for
payment, all powers of the holders of the Cumulative Preferred Stock to vote for
directors shall terminate, the term of office of all directors elected by them
shall forthwith automatically come to an end, and the number of directors shall
be the number elected by the other shareholders of the Corporation.
If the date upon which such right of the holders of the
Cumulative Preferred Stock shall become vested shall be more than one hundred
fifty days preceding the date of the next ensuing annual meeting of shareholders
as fixed by the by-laws of the Corporation or by the Board of Directors pursuant
to the By-Laws, the size of the Board of Directors shall automatically be
increased by two members, and the President of the Corporation shall call a
special meeting of the holders of the Cumulative Preferred Stock, to be held
within sixty (60) days after such right became vested or as promptly thereafter
as possible, for the purpose of electing two persons to the Board of Directors
to serve until the next annual meeting and until their successors shall be
elected and shall qualify. Notice of such meeting shall be mailed to each holder
of record of Cumulative Preferred Stock not less than ten (10) days prior to the
date of such meeting.
Whenever the holders of Cumulative Preferred Stock shall be
entitled to elect two directors, any holder of such Cumulative Preferred Stock
shall have the right, during regular business hours, in person or by duly
authorized representative, to examine and to make transcripts of the stock
records of the Corporation for the Cumulative Preferred Stock for the purpose of
communicating with other holders of such Cumulative Preferred Stock with respect
to the exercise of such right of
<PAGE> 9
election.
If, during any interval between annual meetings of
shareholders for the election of directors and while the holders of the
Cumulative Preferred Stock shall be entitled to elect two directors, the number
of directors in office who have been so elected by the holders of the Cumulative
Preferred Stock or who succeeded a director so elected shall, by reason of
resignation, death or removal, be less than two, such vacancy shall be filled by
vote of the remaining director then in office who was elected by vote of the
holders of the Cumulative Preferred Stock or succeeded a director so elected or,
if there be no such remaining director then in office or if such vacancy or
vacancies be not so filled within forty (40) days after the creation thereof,
the President of the Corporation shall promptly call a special meeting of the
holders of the Cumulative Preferred Stock and such vacancy or vacancies shall be
filled by vote at such special meeting.
Any director elected by the holders of the Cumulative
Preferred Stock or who succeeded a director so elected may be removed from
office by vote of the holders of a majority of the shares of such stock. A
special meeting of the holders of shares of such stock may be called by a
majority vote of the Board of Directors for the purpose of removing such a
director. The President of the Corporation shall, as promptly as practicable
after delivery to the Corporation at its principal office of a request to such
effect signed by the holders of at least ten percent (10%) of the outstanding
shares of Cumulative Preferred Stock, call a special meeting of the holders of
such stock for such purpose to be held within SIXTY (60) days or as soon
thereafter as possible after the delivery of such request.
(c) So long as any Cumulative Preferred Stock shall be
outstanding, the Corporation shall not without the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of all shares of
Cumulative Preferred Stock at the time outstanding (but may do so with such vote
when so authorized by its Board of Directors and also by vote of the holders of
any other class or series of stock which may then be required) (i) authorize or
create or increase the authorized amount of any stock ranking as to dividends or
assets prior to the Cumulative Preferred Stock or any security convertible into
or exchangeable for or carrying rights to purchase any such prior stock; (ii)
otherwise alter, change or cancel any of the provisions, preferences, rights or
powers of any shares of Cumulative Preferred Stock in any manner which will
adversely affect any shares of Cumulative Preferred Stock then outstanding;
(iii) sell, transfer or lease (otherwise than as security) its property and
assets as an entirety or substantially as an entirety, provided that this
restriction shall not apply to such a sale, transfer or lease if none of the
provisions, preferences, rights or powers of the Cumulative Preferred Stock will
be adversely affected; or (iv) merge or consolidate with or into any other
corporation, provided, however, that this restriction shall not apply to, nor
shall it operate to prevent, the consolidation of merger of the Corporation with
or into another corporation if none of the provisions, preferences, rights or
powers of the Cumulative Preferred Stock or the holders thereof will be
adversely affected thereby.
(d) So long as any Cumulative Preferred Stock shall be
outstanding, the Corporation shall not without the affirmative vote of the
holders of at least a majority of the shares of Cumulative
<PAGE> 10
Preferred Stock present in person or by proxy at a meeting at which holders of
at least a majority of the outstanding shares of Cumulative Preferred Stock are
so present (but may do so with such vote when so authorized by its Board of
Directors and also by vote of the holders of any other class or series of stock
which may then be required: (i) authorize or create or increase the authorized
amount of any other class or series of stock ranking as to dividends or assets
equally with the Cumulative Preferred Stock or of any security convertible into
or exchangeable for or carrying rights to purchase any such pari passu stock, or
(ii) increase the authorized amount of Cumulative Preferred Stock.
(e) Notwithstanding the provisions of subsections D5(b), D5(c) or
D5(d) hereof, the holders of the Cumulative Preferred Stock shall not have any
rights under the provisions of this subsection D5 to vote on any matter
specified therein if, in connection with the accomplishment of such matter,
provision is to be made for the redemption of all the Cumulative Preferred Stock
at the time outstanding.
6. Redemption in the Event of Owner's Death.
(a) Subject to the limitations set forth in this subsection D6,
from and after January 1, 1979, the Corporation, upon the death of any owner of
any shares of Cumulative Preferred Stock, shall redeem within sixty (60) days
following receipt by the Corporation of written notice therefor from such
owner's personal representative(s) or surviving joint tenant(s), and of such
deceased owner's shares as shall be specified in such notice at a redemption
price of $25.00 per share plus accrued and unpaid dividends. The maximum number
of shares of Cumulative Preferred Stock which the Corporation shall be required
to redeem in any calendar year pursuant to this subsection D6 shall be 7,500
shares, and such shares will be redeemed in order of their tender to the
Corporation for redemption. The Corporation may, but shall not be obligated to,
redeem shares prior to January 1, 1979 and redeem in any calendar year shares of
Cumulative Preferred Stock in excess of the 7,500 share maximum. If shares in
excess of the 7,500 share maximum are tendered in a calendar year by the
personal representative(s) or surviving joint tenant(s)of a deceased owner, such
excess shares will be held by the Corporation and will be redeemed (up to the
7,500 maximum) as soon as possible in the next calendar year, unless the tender
for redemption is withdrawn by the personal representative(s) or surviving joint
tenants(s) by written notice received by the Secretary of the Corporation prior
to payment of the redemption price therefor. Shares tendered pursuant to this
subsection D6 must be accompanied by (1) a written request for redemption signed
by the personal representative(s) or surviving joint tenant(s), (2) appropriate
evidence of ownership and authority, (3) the certificates for the shares to be
redeemed, and (4) such waivers by taxing authorities and other documents as may
be required by counsel to the Corporation.
The Corporation shall not be required to redeem any shares
pursuant to this subsection D6, if such redemption would be prohibited by
subsection D4(f) hereof or the provisions of any law or statute, or the
provisions of any loan agreement or indenture to which the Corporation or any of
its subsidiaries is now or may hereafter be bound; provided, however neither the
Corporation nor any of its subsidiaries will enter into any loan agreement or
indenture which would immediately upon its execution or effectiveness prohibit
such redemption by its express terms or by the operation of any
<PAGE> 11
formula contained herein.
E. Series A Junior Preferred Stock. Pursuant to the authority vested in the
Board of Directors in accordance with the provisions of this Article VI of the
Charter, the Board of Directors does hereby create, authorize and provide for
the issuance of Series A Junior Preferred Stock out of the class of 2,500,000
shares of preferred stock, no par value (the "Preferred Stock"), having the
voting powers, designation, relative, participating, optional and other special
rights, preferences, and qualifications, limitations and restrictions thereof
that are set forth as follows:
1. Designation and Amount. The shares of such series shall be
designated as Series A Junior Preferred Stock ("Series A Preferred Stock") and
the number of shares constituting such series shall be 250,000. Such number of
shares may be adjusted by appropriate action of the Board of Directors.
2. Dividends and Distributions.
(a) Subject to the prior and superior rights of the holders of any
shares of any other series of Preferred Stock or any other shares of preferred
stock of the Corporation ranking prior and superior to the shares of Series A
Preferred Stock with respect to dividends, each holder of one one-hundredth
(1/100) of a share (a "Unit") of Series A Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available for that purpose,
(i) quarterly dividends payable in cash on the 1st day of
January, April, July and October in each year (each such date being a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of such Unit of Series A Preferred Stock, in an amount
per Unit (rounded to the nearest cent) equal to the greater of (x) $.01 or (y)
subject to the provision for adjustment hereinafter set forth, the aggregate per
share amount of all cash dividends declared on shares of the common stock of the
Corporation, par value $5.00 per share, (the "Common Stock") since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of a Unit of
Series A Preferred Stock, and (ii) subject to the provision for adjustment
hereinafter set forth, quarterly distributions (payable in kind) on each
Quarterly Dividend Payment Date in an amount per Unit equal to the aggregate per
share amount of all non-cash dividends or other distributions (other than a
dividend payable in shares of Common Stock or a subdivision of the outstanding
shares of Common Stock, by reclassification or otherwise) declared on shares of
Common Stock since the immediately preceding Quarterly Dividend Payment Date, or
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of a Unit of Series A Preferred Stock. In the event that the
Corporation shall at any time after December 27, 1988 (the "Rights Declaration
Date") (i) declare or pay any dividend on outstanding shares of Common Stock
payable in shares of Common Stock, or (ii) subdivide outstanding shares of
Common Stock or (iii) combine outstanding shares of Common Stock into a smaller
number of shares, then in each such case the amount to which the holder of a
Unit of Series A Preferred Stock was entitled immediately prior to such event
pursuant to the preceding sentence shall be adjusted by multiplying such amount
by a fraction the numerator of which shall be the number of shares of Common
Stock that were outstanding immediately prior to such
<PAGE> 12
event.
(b) The Corporation shall declare a dividend or distribution on
Units of Series A Preferred Stock as provided in paragraph (a) above immediately
after it declares a dividend or distribution on the shares of Common Stock
(other than a dividend payable in shares of Common Stock); provided, however,
that, in the event no dividend or distribution shall have been declared on the
Common Stock during the period between any Quarterly Dividend Payment Date and
the next subsequent Quarterly Dividend Payment Date, a dividend of $.01 per Unit
on the Series A Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and shall be cumulative on
each outstanding Unit of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issuance of such Unit of Series A
Preferred Stock, unless the date of issuance of such Unit is prior to the record
date for the first Quarterly Dividend Payment Date, in which case, dividends on
such Unit shall begin to accrue from the date of issuance of such Unit, or
unless the date of issuance is a Quarterly Dividend Payment Date or is a date
after the record date for the determination of holders of Units of Series A
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on Units of
Series A Preferred Stock in an amount less than the aggregate amount of all such
dividends at the time accrued and payable on such Units shall be allocated pro
rata on a unit-by-unit basis among all Units of Series A Preferred Stock at the
time outstanding. The Board of Directors may fix a record date for the
determination of holders of Units of Series A Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be no more than 30 days prior to the date fixed for the payment
thereof.
3. Voting Rights. The holders of Units of Series A Preferred Stock
shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth,
each Unit of Series A Preferred Stock shall entitle the holder thereof to one
vote on all matters submitted to a vote of the shareholders of the Corporation.
In the event the Corporation shall at any time after the Rights Declaration Date
(i) declare any dividend on outstanding shares of Common Stock payable in shares
of Common Stock, (ii) subdivide outstanding shares of Common Stock or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the number of votes per Unit to which holders of Units of
Series A Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction the numerator of which shall
be the number of shares of Common Stock outstanding immediately after such event
and the denominator of which shall be the number of shares of Common Stock that
were outstanding immediately prior to such event.
(b) Except as otherwise provided herein or by law, the holders of
Units of Series A Preferred Stock and the holders of shares of Common Stock
shall vote together as one class on all
<PAGE> 13
matters submitted to a vote of shareholders of the Corporation.
(c)(i) If at any time dividends on any Units of Series A
Preferred Stock shall be in arrears in an amount equal to six quarterly
dividends thereon, then during the period (a "default period") from the
occurrence of such event until such time as all accrued and unpaid dividends for
all previous quarterly dividend periods and for the current quarterly dividend
period on all Units of Series A Preferred Stock then outstanding shall have been
declared and paid or set apart for payment, all holders of Units of Series A
Preferred Stock voting separately as a class, shall have the right, at the next
meeting of shareholders called for the election of directors (the "Next
Meeting"), to elect two directors (the "New Directors" or individually, "New
Director"), which directors shall be in addition to the number previously set by
the Board of Directors pursuant to Article III of the by-laws. One of the New
Directors shall serve as a member of the class of directors being elected for a
three-year term and the other New Director shall serve as a member of the class
of directors whose remaining term at the Next Meeting is two years and until
their successors are elected by such holders and qualified or their earlier
resignation, removal or incapacity or until such earlier time as all accrued and
unpaid dividends upon the outstanding Units of Series A Preferred Stock shall
have been paid (or set aside for payment) in full. The New Directors may be
removed and replaced by such holders, and vacancies in such directorships may be
filled only by such holders (or the remaining directors elected by such holders
if there be one) in the manner permitted by law. After the holders of Units of
Series A Preferred Stock have exercised their right to elect directors during
any default period, the number of directors shall not be increased or decreased
except as approved by a vote of the holders of Units of Series A Preferred Stock
as herein provided or pursuant to the rights of any equity securities ranking
senior to the Series A Preferred Stock.
(ii)Immediately upon the expiration of a default period (x)
the right of holders of Units of Series A Preferred Stock as a separate class to
elect directors shall cease, (y) the term of any directors elected by the
holders of Units of Series A Preferred Stock as a separate class shall
terminate, and (z) the number of directors shall be such number as may be
provided for prior to any increase made pursuant to the provisions of paragraph
3(c)(i) of this paragraph 3 (such number being subject, however, to change
thereafter in any manner provided by law or in the Charter or by-laws). Any
vacancies in the Board of Directors effected by the provisions of clauses (y)
and (z) in the preceding sentence may be filled by a majority of the remaining
directors.
(iii) The provisions of this paragraph (c) shall govern the
election of directors by holders of Units of Series A Preferred Stock during any
default period notwithstanding any provisions of the Charter to the contrary.
(d) Except as set forth herein or required by law, holders of
Units of Series A Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of shares of Common Stock as set forth herein) for the taking of
any corporate action.
4. Certain Restrictions.
<PAGE> 14
(a) Whenever quarterly dividends or other dividends or
distributions payable on Units of Series A Preferred Stock as provided in
paragraph 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on outstanding Units of
Series A Preferred Stock shall have been paid (or set aside for payment) in
full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior to the Series A Preferred Stock;
(ii)declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity as to dividends with
the Series A Preferred Stock, except for dividends paid ratably on Units of
Series A Preferred Stock and shares of all such parity stock on which dividends
are payable or in arrears in proportion to the total amounts to which the
holders of such Units and all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A Preferred Stock,
provided, however, that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such parity stock in exchange for shares of any
stock ranking junior (both as to dividends and upon liquidation, dissolution or
winding up) to the Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any Units
of Series A Preferred Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to all
holders of such Units.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (a) of
this paragraph 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any Units of Series A Preferred Stock purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such Units
shall, upon their cancellation, become authorized but unissued Units of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
6. Liquidation, Dissolution or Winding Up.
(a) Upon any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, no distribution shall be made,
<PAGE> 15
(i) to the holders of shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless the holders of Units of Series A Preferred Stock shall
have received, subject to adjustment as hereinafter provided in paragraph (b),
the greater of either (y) $80.00 per Unit plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not earned or declared,
to the date of such payment, or (z) the amount equal to the aggregate per share
amount to be distributed to holders of shares of Common Stock, or (ii) to the
holders of shares of stock ranking on a parity upon liquidation, dissolution or
winding up with the Series A Preferred Stock, unless simultaneously therewith
distributions are made ratably on Units of Series A Preferred Stock and all
other shares of such parity stock in proportion to the total amounts to which
the holders of Units of Series A Preferred Stock are entitled under clause
(i)(y) of this sentence and to which the holders of shares of such parity stock
are entitled, in each case upon such liquidation, dissolution or winding up.
(b) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on outstanding shares of Common
Stock payable in shares of Common Stock, or (ii) subdivide outstanding shares of
Common Stock, or (iii) combine outstanding shares of Common Stock into a smaller
number of shares, then in each such case the aggregate amount to which holders
of Units of Series A Preferred Stock were entitled immediately prior to such
event pursuant to clause (i)(z) of paragraph (a) of this paragraph 6 shall be
adjusted by multiplying such amount by a fraction the numerator of which shall
be the number of shares of Common Stock that are outstanding immediately after
such event and the denominator of which shall be the number of shares of Common
Stock that were outstanding immediately prior to such event.
7. Share Exchange, Merger, Etc. In case the Corporation shall enter
into any share exchange, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or converted into other stock or
securities, cash and/or any other property, then in any such case Units of
Series A Preferred Stock shall at the same time be similarly exchanged for or
converted into an amount per Unit (subject to the provision for adjustment
hereinafter set forth) equal to the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is converted or exchanged. In the event the
Corporation shall at any time after the Rights Declaration Date (i) declare any
dividend on outstanding shares of Common Stock payable in shares of Common
Stock, or (ii) subdivide outstanding shares of Common Stock, or (iii) combine
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the immediately preceding sentence with respect to the
exchange or conversion of shares of Series A Preferred Stock shall be adjusted
by multiplying such amount by a fraction the numerator of which shall be the
number of shares of Common Stock that are outstanding immediately after such
event and the denominator of which shall be the number of shares of Common Stock
that were outstanding immediately prior to such event.
8. Redemption. The Units of Series A Preferred Stock shall not be
redeemable at the option of the Corporation or any holder thereof.
Notwithstanding the foregoing sentence of this Section, the Corporation may
acquire Units of Series A Preferred Stock in any other manner permitted by law
and the Charter or by-laws of the Corporation.
<PAGE> 16
9. Ranking. The Units of Series A Preferred Stock shall rank junior to
all other series of the Preferred Stock and to any other class of preferred
stock that hereafter may be issued by the Corporation as to the payment of
dividends and the distribution of assets, unless the terms of any such series or
class shall provide otherwise.
10. Amendment. The Charter, including without limitation the provisions
hereof, shall not hereafter be amended, either directly or indirectly, or
through merger or share exchange with another corporation, in any manner that
would alter or change the powers, preferences or special rights of the Series A
Preferred Stock so as to affect the holders thereof adversely without the
affirmative vote of the holders of a majority or more of the outstanding Units
of Series A Preferred Stock, voting separately as a class.
11. Fractional Shares. The Series A Preferred Stock may be issued in
Units or other fractions of a share, which Units or fractions shall entitle the
holder, in proportion to such holder's fractional shares, to exercise voting
rights, receive dividends, participate in distributions and to have the benefit
of all other rights of holders of Series A Preferred Stock.
ARTICLE VII
The amount of capital with which this Corporation will begin business shall
be (not less than one thousand) One Thousand ($1,000.00) Dollars; and when such
amount so fixed shall have been subscribed for, all subscriptions of the stock
of this Corporation shall be enforceable and it may proceed to do business in
the same manner and as fully as though the maximum number of shares authorized
under the provisions of the preceding section hereof shall have been subscribed
for.
ARTICLE VIII
A. By-laws. The by-laws of the Corporation may be made, altered, amended
or repealed by the Board of Directors.
B. Indemnification. Indemnification for directors, officers, employees
and agents of the Corporation may be provided either directly or through the
purchase of insurance, by the Corporation from time to time to the fullest
extent and in the manner permitted by law.
To the full extent from time to time permitted by law, including
without limitation the Tennessee Business Corporation Act, as currently in
effect or as it may be amended from time to time, no director of the corporation
shall be personally liable to the corporation or its shareholders for monetary
damages for breach of any fiduciary duty as a director. Neither the amendment or
repeal of this Article VIII (B), nor the adoption of any provision of this
Charter inconsistent with this Article VIII (B), shall reduce or eliminate the
protection afforded by this Article VIII (B) to a director in respect of any
matter which occurred, or any cause of action or claim which but for this
Article VIII (B) would have accrued or arisen, prior to such amendment, repeal
or adoption.
<PAGE> 17
C. Issuance of Bonds, Debentures or Obligations. Authority is hereby
expressly vested in the Board of Directors to issue bonds, debentures or
obligations of this Corporation and to fix all of the terms thereof including
without limitation the interest to be paid thereon, the convertibility or non-
convertibility thereof and other provisions with regard thereto.
ARTICLE IX
The Board of Directors may take without a meeting on written consent any
action which they are required or permitted to take by the Charter, by-laws or
statutes provided such consent sets forth the action taken and is signed by all
the directors.
ARTICLE X
A. Voting Requirement. In addition to any affirmative vote required by law
or any other Article of this Charter, and except as otherwise expressly provided
in Section B of this Article, any Business Combination shall require an
affirmative vote of (i) seventy-five percent (75%) of the votes entitled to be
cast by all holders of Voting Stock (as defined herein) voting together as a
single class at a meeting of shareholders called for such purpose and, in
addition thereto, (ii) a majority of the votes entitled to be cast by all
holders of Voting Stock, other than shares of Voting Stock which are
Beneficially Owned (as defined herein) by the Interested Shareholder (as defined
herein), voting together as a single class at a meeting of shareholders called
for such purpose. Such affirmative vote shall be required notwithstanding the
fact that a vote would not otherwise be required, or that a lesser percentage
may be specified by law or in any agreement with any national securities
exchange or otherwise.
B. When Voting Requirement Not Applicable. The provisions of Section A of
this Article shall not be applicable to any Business Combination which shall
have been approved by a majority of the Disinterested Directors or as to which
all of the conditions specified in subsections B(1), B(2) and B(3) shall have
been met:
1. Fair Prices. The aggregate amount per share of the cash and the Fair
Market Value (as defined herein), as of the Announcement Date, of the
consideration other than cash to be received in such Business Combination by
holders of shares of the respective classes and series of outstanding capital
stock of the Corporation shall be at least equal to the highest of the
following:
(a) if applicable, the highest per share price (adjusted for any
subsequent stock dividends, splits, combinations, recapitalizations,
reclassifications or other such reorganizations) paid to acquire any shares of
such respective classes and series Beneficially Owned by the Interested
Shareholder during the Pre-announcement period (as defined herein);
(b) The highest per share price (adjusted for any subsequent stock
dividends, splits, combinations, recapitalizations, reclassifications or other
such reorganizations) paid to acquire any shares of such respective classes and
series Beneficially Owned by the Interested Shareholder in the
<PAGE> 18
transaction in which the Interested Shareholder became an Interested
Shareholder;
(c) The Fair Market Value per share of such respective classes
and series on the Announcement Date (as defined herein);
(d) The Fair Market Value per share of such respective classes
and series on the Determination Date (as defined herein); or
(e) The amount per share of any preferential payment to which
shares of such respective classes and series are entitled in the event of a
liquidation, dissolution or winding up of the Corporation.
2. Form of Consideration. The consideration to be received by holders
of each particular class and series of outstanding capital stock of the
Corporation in a Business Combination shall be: (i) cash or (ii) if the majority
of the shares of any particular class or series of the capital stock of the
Corporation Beneficially Owned by the Interested Shareholder shall have been
acquired for a consideration in a form other than cash, the same form of
consideration used to acquire the largest number of shares of such class or
series previously acquired and Beneficially Owned by the Interested Shareholder.
3. Other Requirements. After such Interested Shareholder has become
an Interested Shareholder and prior to the consummation of such Business
Combination, except as approved by a majority of the Disinterested Directors,
there shall have been:
(a) No failure to declare and pay in full, when and as due, any
dividends on any class or series of Preferred Stock (as defined herein) (whether
cumulative or not), except on any class or series of Preferred Stock as to which
dividends were in arrears on the Determination Date;
(b) No reduction in the quarterly rate of dividends on the
Corporation's Common Stock below the dividends paid during the dividend quarter
of the Corporation ended immediately prior to the Determination Date, except any
reduction in dividends necessary to fairly reflect any stock dividend, split,
recapitalization, reclassification or other such reorganization;
(c) No failure to increase the quarterly rate of any dividends per
share paid on the Corporation's Common Stock to fairly reflect any stock
combination, recapitalization, reclassification or other such reorganization
which has the effect of reducing the number of outstanding shares of Common
Stock;
(d) No increase in the number of shares of the capital stock of
the Corporation Beneficially Owned by the Interested Shareholder, except: (i) as
a part of the transaction that resulted in the Interested Shareholder becoming
an Interested Shareholder or (ii) to consummate the Business Combination in
compliance with the provisions of this Article.
<PAGE> 19
(e) No loans, advances, guarantees, pledges or other financial
assistance or tax credits or other tax advantages provided by the Corporation or
its subsidiaries for the benefit, directly or indirectly, of the Interested
Shareholder, whether in anticipation of or in connection with such Business
Combination or otherwise;
(f) No material change in the Corporation's business or capital
structure or the business or capital structure of any subsidiary of the
Corporation effected, directly or indirectly, by or for the benefit of the
Interested Shareholder; and
(g) A proxy or information statement mailed at least thirty (30)
days prior to the completion of the Business Combination to all the holders of
Voting Stock (whether or not shareholder approval of the Business Combination is
required) which proxy or information statement shall (i) describe the Business
Combination, (ii) include in a prominent place the recommendations, if any, of a
majority of the Disinterested Directors as to the advisability or inadvisability
of the Business Combination; (iii) if deemed advisable by a majority of the
Disinterested Directors, include an opinion of a reputable investment banking
firm or other expert as to the fairness or unfairness of the terms of the
Business Combination from the point of view of the shareholders other than the
Interested Shareholder (such investment banking firm to be selected by a
majority of the Disinterested Directors and to be paid a reasonable fee for
their services by the Corporation upon receipt of such opinion) and (iv) be
responsive to the pertinent provisions of the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder, or any laws supplementing
or superseding such Act, rules and regulations, whether or not such proxy or
information statement is required by law to be furnished to any holders of
Voting Stock.
C. Definitions. As used in Articles X, XI, and XII:
1. "Business Combination" means any of the transaction described
below:
(a) Any merger or consolidation of the Corporation or any
Subsidiary (as defined herein) with: (i) any Interested Shareholder or (ii) any
corporation (whether or not itself an Interested Shareholder) which is, or after
such merger or consolidation would be, an Affiliate (as defined herein) of an
Interested Shareholder;
(b) Any sale, lease, exchange, mortgage, pledge, transfer or other
disposition, in one transaction or a series of transactions: (i) to or with any
Interested Shareholder or Affiliate of any Interested Shareholder of any assets
(including securities) of the Corporation or any Subsidiary having an aggregate
Fair Market Value of $1,000,000 or more or (ii) to or with the Corporation or
any Subsidiary of any assets (including securities) of any Interested
Shareholder or any Affiliate of an Interested Shareholder having an aggregate
Fair Market Value of $1,000,000 or more;
(c) The issuance or transfer by the Corporation or any Subsidiary
in one transaction or a series of transactions, of any securities of the
Corporation or any Subsidiary to any Interested Shareholder or an Affiliate of
any Interested Shareholder in exchange for cash, securities or other
<PAGE> 20
property, or a combination thereof, having an aggregate Fair Market Value of
$1,000,000 or more;
(d) The adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Shareholder or any Affiliate of any Interested Shareholder;
(e) Any reclassification of securities (including any reverse
stock split) or any recapitalization or reorganization of the Corporation, or
any merger or consolidation of the Corporation with any of its Subsidiaries or
any other transaction (whether or not with or into or otherwise involving an
Interested Shareholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any class of
equity securities of the Corporation or any Subsidiary (including securities
convertible into equity securities) which is directly or indirectly owned by any
Interested Shareholder or any Affiliate of any Interested Shareholder; or
(f) Any other transaction or series of transactions that is
similar in purpose or effect to those referred to in (a) through (e) of this
subsection C(1).
2. "Voting Stock" means the Common Stock and those classes of
Preferred Stock which would then be entitled to vote in the election of
directors.
3. "Beneficially Owned," with respect to any securities, means the
right or power (directly or indirectly through any contract, understanding or
relationship) (i) vote or direct the voting of such securities (ii) to dispose
or direct the disposition of such Securities, or (iii) to acquire such voting or
investment power, whether such right or power is exercisable immediately or only
after the passage of time.
4. "Interested Shareholder" means any Person (as defined herein) or
member of a Group of Persons (as defined herein) who or which, together with any
Affiliate or Associate (as defined herein) of such Person or member,
Beneficially Owns (within the meaning of subsection C(3) above) ten percent or
more of the outstanding Voting Stock of the Corporation.
5. "Person" means any individual, firm, corporation, partnership,
joint venture or other entity.
6. "Group of Persons" means any two or more Persons who or which are
acting or have agreed to act together for the purpose of acquiring, holding,
voting or disposing of any Voting Stock of the Corporation.
7. "Disinterested Director" means any member of the Board of Directors
of the Corporation who is not an Interested Shareholder or an Affiliate or
Associate of an Interested Shareholder and who (i) was a member of the Board of
Directors prior to the time the Interested Shareholder became an Interested
Shareholder or (ii) was elected or recommended to succeed a Disinterested
Director by a majority of the Disinterested Directors then on the Board of
Directors.
<PAGE> 21
8. "Fair Market Value" means: (i) in the case of stock, the highest
sale price during the 30 day period immediately preceding the date in question
of a share of such stock on the NASDAQ National Market System, or if such stock
is listed on an exchange registered under the Securities Exchange Act of 1934,
on the principal exchange on which such stock is listed, or if no such
quotations are available, the fair market value on the date in question of a
share of such stock as determined by a majority of the Disinterested Directors
in good faith; and (ii) in the case of property other than cash or stock, the
fair market value of such property on the date in question as determined by a
majority of the Disinterested Directors in good faith.
9. "Pre-announcement Period" means the two-year period ending at
11:59 p.m., Nashville time, on the Announcement Date.
10. "Announcement Date" means the date of the first public
announcement of the proposal of the Business Combination.
11. "Determination Date" means the date on which the Interested
Shareholder becomes an Interested Shareholder.
12. "Subsidiary" means any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by the Corporation.
13. "Affiliate," used to indicate a relationship with a specified
Person, means another Person that directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
such specified Person.
14. "Associate," used to indicate a relationship with a specified
Person, means (i) any corporation or other similar organization (other than the
Corporation or a Subsidiary) of which such specified Person is an officer or
partner or is, directly or indirectly, the beneficial owner of ten percent or
more of any class of equity securities, (ii) any trust or estate in which such
specified Person has a substantial beneficial interest or as to which such
specified Person serves as trustee or in a similar fiduciary capacity, (iii) any
relative or spouse of such specified Person, or any relative of such spouse who
has the same home as such Person and (iv) any other Person or Affiliate of a
Person who directly or indirectly has received more than $50,000 for services or
property from the specified Person or from an Affiliate of the specified Person
during any year of the preceding five calendar years or who can reasonably be
expected to receive more than such amount in the current calendar year under any
existing agreement or agreements or understandings with such specified Person or
an Affiliate of such specified Person.
15. "Preferred Stock" means all classes or series of the Corporation's
capital stock other than Common Stock.
D. Powers of Disinterested Directors. A majority of the Disinterested
Directors of the Corporation shall have the power and duty to determine, on the
basis of information known to them
<PAGE> 22
after reasonable inquiry, all facts necessary to determine compliance with this
Article, including without limitation (i) whether a Person is an Interested
Shareholder, (ii) the number of shares of Voting Stock beneficially owned by any
Person, (iii) whether a Person is an Affiliate or Associate of another, (iv)
whether the requirements of Section B, have been met with respect to any
Business Combination, and (v) whether the assets which are the subject of any
Business Combination have, or the consideration to be received for the issuance
or transfer of securities by the Corporation or any Subsidiary in any Business
Combination has an aggregate Fair Market Value of $1,000,000 or more. The good
faith determination of a majority of the Disinterested Directors on such matters
shall be conclusive and binding for all purposes of this Article.
E. No Effect on Preferential Rights. The provisions of this Article shall
not affect in any way the amount or form of consideration that any holder of
shares of the Corporation's capital stock is entitled to receive upon the
liquidation or dissolution of the Corporation or any other preferential rights
of the holders of such shares.
F. No Effect on Fiduciary Obligations of Interested Shareholders.
Nothing contained in this Article shall be construed to relieve any Interested
Shareholder from any fiduciary obligation imposed by law.
G. Amendment or Repeal. In addition to any affirmative vote required by
law, an affirmative vote at least equal to the vote of seventy-five percent
(75%) of the votes entitled to be cast by all holders of Voting Stock voting
together as a single class, and addition thereto and (ii) a majority of the
votes entitled to be cast by all holders of Voting Stock, other than shares of
Voting Stock which are Beneficially Owned by an Interested Shareholder, voting
together as a single class, shall be required to amend or repeal, or adopt any
charter provisions inconsistent with this Article. Such affirmative vote shall
be required notwithstanding the fact that no vote may be required, or that a
lesser percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
ARTICLE XI
A. The Board of Directors shall consist of not less than nine (9) nor more
than twenty-seven (27), the exact number of directors to be established from
time to time exclusively by the Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized directors (whether or
not there exist any vacancies in previously authorized directorships at the time
any such resolution is presented to the Board for adoption). At the annual
meeting of shareholders held in 1985, the directors shall be divided into three
classes, as nearly equal in number as possible with a one year term of office
for the first class, a two year term of office for the second class and a three
year term of office for the third class. At each annual meeting of shareholders
following such initial classification and election, directors elected to succeed
those directors whose terms expire shall be elected for a three year term of
office. Each director shall hold office for the term for which that person was
elected and until his or her successor shall have been elected or qualified.
<PAGE> 23
B. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause shall be filled only by a majority vote of the directors
then in office, though less than a quorum, and directors so chosen shall hold
office for the unexpired term of his or her predecessor, or if there is no such
predecessor, until the next annual meeting of shareholders. No decrease in the
number of authorized directors constituting the entire Board of Directors shall
shorten the term of any incumbent director.
C. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, any director, or the entire Board of Directors, may be removed
(but only for cause as defined in the Tennessee General Corporation Act) from
office at any time by the affirmative vote of seventy-five percent (75%) of the
votes entitled to be cast by all holders of voting stock, voting together as a
single class at a meeting called for such purpose. If the holders of any series
of Preferred Stock then outstanding are entitled to elect one or more directors,
the provision of the foregoing sentence shall not apply, in respect of the
removal of a director or directors so elected, to the vote of the holders of the
outstanding shares of that series and the rights of the holders of such shares
shall be as set forth in this Charter and in the certificate of designation
establishing such series.
D. Notwithstanding any other provision of this Charter or any provision of
applicable law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of holders of any particular class or series of
the capital stock of the Corporation entitled to vote by applicable law or by
the terms of such class or series, this Article may not be altered, amended or
repealed except upon the affirmative vote of the holders of seventy-five percent
(75%) of the votes entitled to be cast by all holders of Voting Stock, voting
together as a single class at a meeting called for such purpose, and, in
addition thereto (ii) a majority of the votes entitled to be cast by all holders
of voting stock, other than shares of voting stock which are Beneficially Owned
by an Interested Shareholder, voting together as a single class.
ARTICLE XII
The Board of Directors of the Corporation, when evaluating any offer of a
Person, other than the Corporation itself, to (a) make a tender or exchange
offer for any equity security of the Corporation or any other security of the
Corporation convertible into an equity security, (b) merge or consolidate the
Corporation with another Person or purchase or (c) otherwise acquire all or
substantially all of the properties and assets of the Corporation (an
"Acquisition Proposal"), shall consider all relevant factors, including without
limitation, the consideration being offered in the Acquisition Proposal in
relation to the then-current market price, in relation to the then-current value
of the Corporation in a freely negotiated transaction, and in relation to the
Board of Directors' then estimate of the future value of the Corporation as an
independent entity, the social and economic effects on the employees, customer,
suppliers and other constituents of the Corporation and its subsidiaries and
on the communities in which the Corporation and its subsidiaries operate or are
located and the desirability of maintaining the Corporation's independence from
other entities.
<PAGE> 24
ARTICLES OF CORRECTION
TO THE RESTATED CHARTER
OF
FIRST AMERICAN CORPORATION
Pursuant to the provisions of Section 48-11-305 of the Tennessee
Business Corporation Act ("TBCA"), the undersigned hereby adopts the following
Articles of Correction.
A. The document to be corrected is the Restated Charter of First
American Corporation (the "Restated Charter") which was filed
with the office of the Tennessee Secretary of State on January
13, 1997.
B. The incorrect statement, located in Article VI, Section D(1) of
the Restated Charter, was the result of a typographical error
and reads as follows:
D. $2.375 Cumulative Preferred Stock
Designation. The initial series of preferred stock
without par value shall be known and designated as $2.375
Cumulative Preferred Stock (hereinafter referred to as
the "Cumulative Preferred Stock"), and shall consist of
TWO MILLION FIVE HUNDRED THOUSAND (2,500,000) shares
without par value and shall have the rights, preferences
and characteristics set forth below.
C. Article VI, Section D(1) of the Restated Charter is hereby
corrected to read as follows:
D. $2.375 Cumulative Preferred Stock
Designation. The initial series of preferred stock
without par value shall be known and designated as $2.375
Cumulative Preferred Stock (hereinafter referred to as
the "Cumulative Preferred Stock"), and shall consist of
300,000 shares without par value, and shall have the
rights, preferences and characteristics set forth below.
FIRST AMERICAN CORPORATION
By: /s/ Mary Neil Price
--------------------------------
Mary Neil Price
Executive Vice President, Deputy
General Counsel and Assistant
Corporate Secretary
<PAGE> 25
ARTICLES OF AMENDMENT TO THE RESTATED CHARTER
OF
FIRST AMERICAN CORPORATION
Pursuant to the provisions of Section 48-16-102 and 48-20-106 of the
Tennessee Business Corporation Act, the undersigned corporation hereby adopts
the following Articles of Amendment to its Charter:
1. The name of the corporation is First American Corporation.
2. The amendment adopted is as follows:
Subsection (E)(1) of Article VI of the corporation's Charter is
amended to read as follows:
"1. Designation and Amount. The shares of such series
shall be designated as Series A Junior Preferred Stock ("Series
A Preferred Stock") and the number of shares constituting such
series shall be 500,000. Such number of shares may be adjusted
by appropriate action of the Board of Directors."
3. The amendment was duly adopted by the Board of Directors on March
20, 1997, without shareholder action, no such action being
required.
4. The amendment shall become effective upon filing.
FIRST AMERICAN CORPORATION
By: /s/ Mary Neil Price
--------------------------------
Mary Neil Price
Executive Vice President
Deputy General Counsel
<PAGE> 26
ARTICLES OF AMENDMENT TO THE RESTATED CHARTER
OF
FIRST AMERICAN CORPORATION
Pursuant to the provisions of Sections 48-20-102 and 48-20-106 of the
Tennessee Business Corporation Act, the undersigned corporation hereby adopts
the following Articles of Amendment to its Charter:
1. The name of the corporation is First American Corporation.
2. The amendment adopted is as follows:
Section (A) of Article VI of the corporation's Charter is amended
to read as follows:
"A. Authorized Shares. The maximum number of shares which the
Corporation shall have authority to issue is ONE HUNDRED MILLION
(100,000,000) shares of common stock with a par value of TWO
dollars and FIFTY cents ($2.50) per share and TWO MILLION FIVE
HUNDRED THOUSAND (2,500,000) shares of preferred stock without par
value."
3. The amendment was duly adopted by the Board of Directors on April
17, 1997, without shareholder action, no such action being
required.
4. The amendment shall become effective at 12:01 AM on May 9, 1997.
FIRST AMERICAN CORPORATION
By: /s/ Mary Neil Price
--------------------------------
Mary Neil Price
Executive Vice President
Deputy General Counsel
<PAGE> 27
ARTICLES OF AMENDMENT TO THE RESTATED CHARTER
OF
FIRST AMERICAN CORPORATION
Pursuant to the provisions of Sections 48-16-102, 48-20-102, 48-20-103
and 48-20-106 of the Tennessee Business Corporation Act, the undersigned
corporation hereby adopts the following Articles of Amendment to its Restated
Charter:
1. The name of the corporation is First American Corporation.
2. The amendments adopted are as follows:
Section (A) of Article VI of the corporation's Restated
Charter is amended to read as follows:
"A. Authorized Shares. The maximum number of shares which the
Corporation shall have authority to issue is TWO HUNDRED
MILLION (200,000,000) shares of common stock with a par value
of TWO dollars and FIFTY cents ($2.50) per share and TWO
MILLION FIVE HUNDRED THOUSAND (2,500,000) shares of preferred
stock without par value."
Subsection (E)(1) of Article VI of the corporation's Charter
is amended to read as follows:
"1. Designation and Amount. The shares of such series shall be
designated as Series A Junior Preferred Stock ("Series A
Preferred Stock") and the number of shares constituting such
series shall be 1,250,000. Such number of shares may be
adjusted by appropriate action of the Board of Directors."
3. On April 16, 1998, the amendment of Section (A) of Article VI
was duly adopted by the shareholders. The amendment of
Subsection (E)(1) of Article VI was duly adopted by the Board
of Directors on April 16, 1998, without shareholder action, no
such action being required.
<PAGE> 28
4. These amendments shall become effective on the date of filing.
FIRST AMERICAN CORPORATION
By: /s/ Mary Neil Price
------------------------
Mary Neil Price
Executive Vice President
General Counsel
<PAGE> 1
EXHIBIT 15.
Letter regarding unaudited interim financial information from KPMG Peat
Marwick LLP
Independent Auditors' Review Report
The Board of Directors and Shareholders
First American Corporation:
We have reviewed the consolidated balance sheets of First American Corporation
and subsidiaries as of March 31, 1998 and 1997, and the related consolidated
income statements, changes in shareholders' equity and cash flows for the
three-month periods ended March 31, 1998 and 1997. These consolidated financial
statements are the responsibility of the Corporation's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of First American Corporation and
subsidiaries as of December 31, 1997; and the related consolidated income
statements, changes in shareholders' equity and cash flows for the year then
ended (not presented herein); and in our report dated January 15, 1998, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1997, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP
- --------------------------
April 16, 1998
Nashville, Tennessee
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 539,902
<INT-BEARING-DEPOSITS> 63,840
<FED-FUNDS-SOLD> 39,417
<TRADING-ASSETS> 70,001
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<LOANS> 6,911,320
<ALLOWANCE> 114,854
<TOTAL-ASSETS> 11,061,589
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0
0
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<SECURITIES-GAINS> 1,100
<EXPENSE-OTHER> 108,086
<INCOME-PRETAX> 60,436
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<NET-INCOME> 37,646
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