-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, WRyuk1vnjHK+KbdTr0VjBCL1vp7cfHlDjIZQ/CFV1Z32uKgbTB03m+BNgqbHElQN SoZNS/cXCIVucHtKfFiGrQ== 0000950144-95-002216.txt : 19950814 0000950144-95-002216.hdr.sgml : 19950814 ACCESSION NUMBER: 0000950144-95-002216 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950811 SROS: CSX SROS: NASD SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST AMERICAN CORP /TN/ CENTRAL INDEX KEY: 0000036068 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 620799975 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-06198 FILM NUMBER: 95561038 BUSINESS ADDRESS: STREET 1: FIRST AMERICAN CTR CITY: NASHVILLE STATE: TN ZIP: 37237 BUSINESS PHONE: 6157482000 MAIL ADDRESS: STREET 1: FIRST AMERICAN CENTER CITY: NASHVILLE STATE: TN ZIP: 37237 FORMER COMPANY: FORMER CONFORMED NAME: FIRST AMTENN CORP DATE OF NAME CHANGE: 19810122 FORMER COMPANY: FORMER CONFORMED NAME: FIRST AMERICAN NATIONAL CORP DATE OF NAME CHANGE: 19731128 10-Q 1 FIRST AMERICAN CORPORATION 06-30-95 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 June 30, 1995 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: 25,429,901 as of July 31, 1995. 2 PART I. FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS FOR QUARTER ENDED JUNE 30, 1995 3 FIRST AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS
QUARTER ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------- -------------------- 1995 1994 1995 1994 -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) INTEREST INCOME Interest and fees on loans $110,018 $ 84,664 $212,260 $162,975 Interest and dividends on securities 32,377 29,514 64,890 60,287 Interest on Federal funds sold and securities purchased under agreements to resell 874 650 1,677 1,843 Interest on time deposits with other banks and other interest 404 246 755 541 - --------------------------------------------------------------------------------------------------------------------- Total interest income 143,673 115,074 279,582 225,646 - --------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits: NOW accounts 3,660 4,048 7,402 7,822 Money market accounts 19,979 14,002 38,099 26,503 Regular savings 1,978 2,484 4,104 4,938 Certificates of deposit under $100,000 15,123 10,316 28,425 20,358 Certificates of deposit $100,000 and over 8,166 3,580 13,323 6,341 Other time and foreign 5,365 3,654 10,053 7,461 - --------------------------------------------------------------------------------------------------------------------- Total interest on deposits 54,271 38,084 101,406 73,423 - --------------------------------------------------------------------------------------------------------------------- Interest on short-term borrowings 11,959 6,592 23,271 11,736 Interest on long-term debt 4,384 959 8,794 1,898 - --------------------------------------------------------------------------------------------------------------------- Total interest expense 70,614 45,635 133,471 87,057 - --------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 73,059 69,439 146,111 138,589 PROVISION FOR LOAN LOSSES (NOTE 3) - - - - - --------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 73,059 69,439 146,111 138,589 - --------------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME Service charges on deposit accounts 11,651 10,440 22,356 19,861 Commissions and fees on fiduciary activities 4,176 4,295 8,079 8,529 Investment services income and trading account revenue 2,301 2,526 5,134 5,178 Merchant discount fees 725 567 1,400 1,191 Net realized gain (loss) and write down on securities 337 117 354 (286) Other income 6,306 6,146 12,378 13,253 - --------------------------------------------------------------------------------------------------------------------- Total non-interest income 25,496 24,091 49,701 47,726 - --------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits 34,404 32,304 68,613 63,972 Net occupancy expense 5,241 5,078 10,485 10,491 Equipment expense 3,919 3,593 7,371 7,180 Systems and processing expense 2,804 2,399 5,256 5,818 FDIC insurance expense 3,181 3,126 6,372 6,225 Marketing expense 2,442 1,861 4,472 3,551 Communication expense 2,366 2,057 4,787 4,043 Supplies expense 1,352 1,308 2,826 2,634 Foreclosed properties expense (income), net (2,651) (222) (3,265) (998) Other expenses 6,355 6,449 12,221 11,982 - --------------------------------------------------------------------------------------------------------------------- Total non-interest expense 59,413 57,953 119,138 114,898 - --------------------------------------------------------------------------------------------------------------------- Income before income tax expense 39,142 35,577 76,674 71,417 Income tax expense 14,576 13,517 28,190 27,417 - --------------------------------------------------------------------------------------------------------------------- NET INCOME $ 24,566 $ 22,060 $ 48,484 $ 44,000 ===================================================================================================================== PER COMMON SHARE: Net income $ .95 $ .85 $ 1.87 $ 1.69 Cash dividends .25 .21 0.50 .42 ===================================================================================================================== Weighted average common shares outstanding 25,731 26,073 25,911 26,057 =====================================================================================================================
See notes to consolidated financial statements. 4 FIRST AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30 DECEMBER 31 -------------------------- ------------ 1995 1994 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Cash and due from banks $ 413,232 $ 368,630 $ 498,273 Time deposits with other banks 26,284 2,784 3,855 Securities: Held to maturity (market value $1,462,105, $1,505,608 and $1,410,504, respectively) 1,461,960 1,543,636 1,485,311 Available for sale (amortized cost $558,995, $420,096 and $685,880, respectively) 558,671 399,693 664,748 - -------------------------------------------------------------------------------------------------------------------- Total securities 2,020,631 1,943,329 2,150,059 - -------------------------------------------------------------------------------------------------------------------- Federal funds sold and securities purchased under agreements to resell 83,805 190,570 26,634 Trading account securities 29,224 8,969 8,617 Loans: Commercial 2,529,817 2,012,696 2,280,702 Consumer--amortizing mortgages 1,205,861 1,088,193 1,136,768 Consumer--other 1,084,717 1,013,252 1,042,688 Real estate--construction 153,953 96,282 127,228 Real estate--commercial mortgages and other 311,395 314,352 282,856 - -------------------------------------------------------------------------------------------------------------------- Total loans 5,285,743 4,524,775 4,870,242 Unearned discount and net deferred loan fees 5,463 7,070 6,932 - -------------------------------------------------------------------------------------------------------------------- Loans, net of unearned discount and net deferred loan fees 5,280,280 4,517,705 4,863,310 Allowance for possible loan losses (note 3) 126,575 136,745 127,148 - -------------------------------------------------------------------------------------------------------------------- Total net loans 5,153,705 4,380,960 4,736,162 - -------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 110,186 104,945 104,244 Foreclosed properties 9,256 15,953 9,607 Other assets 224,823 211,543 219,730 - -------------------------------------------------------------------------------------------------------------------- Total assets $8,071,146 $7,227,683 $7,757,181 ==================================================================================================================== LIABILITIES Deposits: Demand (non-interest-bearing) $1,121,110 $1,132,747 $1,243,863 NOW accounts 731,016 798,448 789,137 Money market accounts 1,777,154 1,471,116 1,590,164 Regular savings 332,312 428,164 392,089 Certificates of deposit under $100,000 1,160,728 1,113,602 1,122,848 Certificates of deposit $100,000 and over 632,467 374,875 355,221 Other time 297,502 315,378 307,439 Foreign 106,047 67,112 60,300 - -------------------------------------------------------------------------------------------------------------------- Total deposits 6,158,336 5,701,442 5,861,061 - -------------------------------------------------------------------------------------------------------------------- Short-term borrowings 819,993 807,958 929,840 Long-term debt 251,637 52,382 252,067 Other liabilities 203,124 84,843 97,517 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 7,433,090 6,646,625 7,140,485 - -------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock, $5 par value; authorized 50,000,000 shares; issued: 25,426,355 shares at June 30, 1995; 26,094,370 shares at June 30, 1994 and 26,144,846 shares at December 31, 1994 127,132 130,472 130,724 Capital surplus 96,223 118,890 119,549 Retained earnings 416,898 346,698 381,408 Deferred compensation on restricted stock (1,696) (1,963) (1,629) - -------------------------------------------------------------------------------------------------------------------- Realized shareholders' equity 638,557 594,097 630,052 Net unrealized gains (losses) on securities available for sale, net of tax (501) (13,039) (13,356) - -------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 638,056 581,058 616,696 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $8,071,146 $7,227,683 $7,757,181 ====================================================================================================================
See notes to consolidated financial statements. 5 FIRST AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NET UNREALIZED DEFERRED GAINS COMPENSATION (LOSSES) ON ON SECURITIES SIX MONTHS ENDED JUNE 30, 1994, AND COMMON CAPITAL RETAINED RESTRICTED AVAILABLE JUNE 30, 1995 STOCK SURPLUS EARNINGS STOCK FOR SALE TOTAL --------- --------- -------- ---------- ---------- --------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Balance, January 1, 1994 $129,941 $117,015 $313,644 $ (940) $ 22,049 $581,709 Issuance of 60,969 common shares in connection with Employee Benefit Plan, net of discount on Dividend Reinvestment Plan 305 728 - - - 1,033 Issuance of 45,200 shares of restricted common stock 226 1,147 - (1,373) - - Amortization of deferred compensation on restricted stock - - - 350 - 350 Net income - - 44,000 - - 44,000 Cash dividends declared ($.42 per common share) - - (10,946) - - (10,946) Change in net unrealized gains and losses on securities available for sale, net of taxes - - - - (35,088) (35,088) - ------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1994 $130,472 $118,890 $346,698 $ (1,963) $(13,039) $581,058 ========================================================================================================================= Balance, January 1, 1995 $130,724 $119,549 $381,408 $ (1,629) $(13,356) $616,696 Issuance of 185,432 common shares in connection with Employee Benefit Plan, net of discount on Dividend Reinvestment Plan 927 3,049 - - - 3,976 Issuance of 15,077 shares of restricted common stock 76 414 - (490) - - Repurchase of 919,000 shares of common stock (4,595) (26,789) - - - (31,384) Amortization of deferred compensation on restricted stock - - - 423 - 423 Net income - - 48,484 - - 48,484 Cash dividends declared ($.50 per common share) - - (12,994) - - (12,994) Change in net unrealized gains and losses on securities available for sale, net of taxes - - - - 12,855 12,855 - ------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1995 $127,132 $ 96,223 $416,898 $ (1,696) $ (501) $638,056 =========================================================================================================================
See notes to consolidated financial statements. 6 FIRST AMERICAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30 ---------------------- 1995 1994 -------- -------- (IN THOUSANDS) Operating Activities Net income $ 48,484 $ 44,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan losses - - Depreciation of premises and equipment 6,522 6,786 Amortization of intangible assets 1,715 1,659 Other amortization (accretion), net (3,905) (107) Deferred income tax expense (benefit) 4,966 (1,329) Net realized (gain) loss and write down on securities (354) 286 Net (gain) loss on sales of premises and equipment (12) (172) Change in assets and liabilities, net of effects from purchase of bank subsidiary: (Increase) decrease in accrued interest receivable (4,807) (2,819) Increase (decrease) in accrued interest payable 4,903 5,736 (Increase) decrease in trading account securities (20,607) 3,294 (Increase) decrease in other assets (14,813) (29,559) Increase (decrease) in other liabilities 100,703 (14,509) - ------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities 122,795 13,266 - ------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Net increase in time deposits with other banks (22,429) (589) Proceeds from sales of securities available for sale 489,921 1,304,215 Proceeds from maturities of securities available for sale 8,859 118,526 Purchases of securities available for sale (368,379) (681,178) Proceeds from maturities of securities held to maturity 110,186 91,112 Purchases of securities held to maturity (85,408) (774,363) Net increase in Federal funds sold and securities purchased under agreements to resell (57,171) (45,785) Net (increase) decrease in loans (417,543) (140,332) Purchase of bank subsidiary, net of cash acquired - (1,784) Proceeds from sales of premises and equipment 137 784 Purchases of premises and equipment (12,589) (8,755) - ------------------------------------------------------------------------------------------------------ Net cash used in investing activities (354,416) (138,149) - ------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Net increase (decrease) in deposits 297,275 (34,129) Net increase (decrease) in short-term borrowings (109,847) 51,195 Redemption of 7 5/8% debentures at 101.22% - (13,759) Net repayment of long-term debt (446) - Net proceeds from issuance of common stock 3,976 1,033 Cash dividends paid (12,994) (10,946) Repurchase of common stock (31,384) - - ------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 146,580 (6,606) - ------------------------------------------------------------------------------------------------------ Decrease in cash and due from banks (85,041) (131,489) Cash and due from banks, January 1 498,273 500,119 - ------------------------------------------------------------------------------------------------------ Cash and due from banks, June 30 $ 413,232 $ 368,630 ====================================================================================================== Cash paid during the period for: Interest expense $ 128,568 $ 81,157 Income taxes 13,416 31,453 Noncash investing activities: Foreclosures 713 1,053 Securities transferred to held to maturity from available for sale - 203,764 - ------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 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 the Corporation's 1994 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. Certain prior year amounts have been reclassified to conform with 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:
JUNE 30 December 31 - ------------------------------------------------------------------------------------------------------------- (in thousands) 1995 1994 1994 - ------------------------------------------------------------------------------------------------------------- Non-accrual loans $ 15,045 $ 15,185 $ 11,510 Foreclosed properties 9,256 15,953 9,607 - ------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 24,301 $ 31,138 $ 21,117 ============================================================================================================= 90 days or more past due on accrual $ 6,567 $ 2,658 $ 4,530 ============================================================================================================= Nonperforming assets as a percent of loans and foreclosed properties .46% .69% .43% =============================================================================================================
(3) ALLOWANCE FOR POSSIBLE LOAN LOSSES Transactions in the allowance for possible loan losses were as follows:
SIX MONTHS ENDED JUNE 30 - ------------------------------------------------------------------------------------------------------------- (in thousands) 1995 1994 - ------------------------------------------------------------------------------------------------------------- Balance, January 1 $127,148 $134,124 Provision (credited) charged to operating expenses - - Allowance of subsidiary purchased - 323 - ------------------------------------------------------------------------------------------------------------- 127,148 134,447 - ------------------------------------------------------------------------------------------------------------- Loans charged off 7,517 7,105 Recoveries of loans previously charged off (6,944) (9,403) - ------------------------------------------------------------------------------------------------------------- Net charge-offs (recoveries) 573 (2,298) - ------------------------------------------------------------------------------------------------------------- Balance, June 30 $126,575 $136,745 =============================================================================================================
Allowance ratios were as follows:
SIX MONTHS ENDED JUNE 30 - ------------------------------------------------------------------------------------------------------------- 1995 1994 - ------------------------------------------------------------------------------------------------------------- Allowance end of period to net loans outstanding 2.40% 3.03% Net charge-offs (recoveries) to average loans (annualized) .02 (.11) =============================================================================================================
8 (4) LONG-TERM DEBT On January 31, 1994, the Corporation redeemed the remaining balance of approximately $13.6 million of its 7 5/8% debentures due in 2002, at a price of 101.22%. The Corporation borrowed $100 million from the Federal Home Loan Bank on August 2, 1994, and $100 million on December 29, 1994. Each advance has a maturity of three years and interest which is payable and reprices monthly based on LIBOR. At June 30, 1995, the average interest rate on the $200 million was 6.11%. (5) ACQUISITIONS In May 1995, the Corporation signed a definitive merger agreement under which all of the outstanding shares of Charter Federal Savings Bank (Charter) will be exchanged for approximately 2.0 million shares of First American Corporation common stock. Of the total Corporation shares to be exchanged in the transaction, up to 100% will be repurchased in the open market. Charter is a federal savings bank headquartered in Bristol, Virginia with $744.1 million in assets at March 31, 1995, and 27 branches (eight in Knoxville, Tennessee; five in Bristol, Tennessee and Bristol, Virginia; and 14 in other locations in southwestern Virginia). The merger is expected to be completed during the fourth quarter of 1995, subject to approval by regulatory authorities and a vote of Charter's shareholders. The transaction is anticipated to be accounted for as a purchase. In February 1995, the Corporation signed a definitive merger agreement under which all of the outstanding shares of Heritage Federal Bancshares, Inc. (Heritage) will be exchanged for approximately 2.6 million shares of First American Corporation common stock. Heritage is the holding company for Heritage Federal Bank for Savings, a federal savings bank with $518.3 million in assets at March 31, 1995, and 13 offices primarily in the East Tennessee areas of Tri-Cities, Anderson County, and Roane County. The merger is expected to be completed during the fourth quarter of 1995, subject to approval by regulatory authorities and a vote of Heritage's shareholders. The transaction is expected to be accounted for as a pooling of interests. On April 1, 1994, the Corporation consummated its purchase of all of the outstanding shares of Fidelity Crossville Corp. (FCC), the parent company of First Fidelity Savings Bank, F.S.B. (First Fidelity) located in Crossville, Tennessee, for $6.5 million. First Fidelity was a federal stock savings bank with offices in Crossville and Fairfield Glade, Tennessee with total assets of $48.7 million on March 31, 1994. In conjunction with the acquisition, First Fidelity was merged into First American National Bank and First Fidelity's two offices became branches of First American National Bank. The transaction was accounted for as a purchase. (6) ACCOUNTING MATTERS During 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 was amended in 1994 by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." These pronouncements, which were adopted prospectively by the Corporation on January 1, 1995, require that impaired loans be measured at the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. The Corporation's financial position and results of operations were not materially impacted by the adoption of SFAS No. 114 and SFAS No. 118. During March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which must be adopted by the Corporation by January 1, 1996. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. At this time the Corporation is evaluating when and how it will adopt SFAS No. 121. Adoption of SFAS No. 121 is not expected to have a material effect on the Corporation's consolidated financial statements. During May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights--An Amendment of FASB Statement No. 65." SFAS No. 122 amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," to require that rights to service mortgage loans for others be recognized as separate assets, however those servicing rights are acquired. An enterprise that acquires mortgage servicing 9 rights through either the purchase or origination of mortgage loans and sells or securitizes those loans with servicing rights retained should allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. SFAS No. 122 also requires that capitalized mortgage servicing rights be assessed for impairment based on the fair value of those rights. SFAS No. 122 must be adopted by the Corporation by January 1, 1996, and applies prospectively to transactions in which an enterprise sells or securitizes mortgage loans with servicing rights retained and to impairment evaluations of all amounts capitalized as mortgage servicing rights, including those purchased before the adoption of SFAS 122. At this time the Corporation is evaluating when and how it will adopt SFAS No. 122, as well as the possible financial impact of the statement on the Corporation's consolidated financial statements. (7) EARNINGS PER COMMON SHARE Earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding during each respective period. (8) COMMON STOCK The Corporation purchased 919,000 shares of First American Corporation stock in the open market during the first six months of 1995 at a total cost of $31.4 million. Under Tennessee law, such shares have been recognized as authorized but unissued. Accordingly, the excess of the purchase price over par has been reflected as a reduction from capital surplus. 10 PART I. FINANCIAL INFORMATION ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR QUARTER ENDED JUNE 30, 1995 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion should be read in conjunction with the consolidated financial statements appearing within this report. Reference should also be made to First American Corporation's 1994 Annual Report for a complete discussion of factors that impact results of operations, liquidity, and capital. OVERVIEW Net income for the second quarter of 1995 was $24.6 million, or $.95 per share compared with $22.1 million, or $.85 per share, for the second quarter of 1994. The $2.5 million increase in second quarter 1995 earnings compared to the same time last year included a $3.6 million increase in net interest income, a $1.4 million increase in non-interest income, and a $1.5 million increase in non-interest expense. Return on average assets (ROA) and return on average equity (ROE) were 1.26% and 15.36%, respectively. Net income for the six months ended June 30, 1995, was $48.5 million, or $1.87 per share compared with $44.0 million, or $1.69 per share, for the first six months of 1994. The $4.5 million increase in earnings for the first six months ended June 30, 1995, compared to the same time last year included a $7.5 million increase in net interest income, a $2.0 million increase in non-interest income, and a $4.2 million increase in non-interest expense. ROA and ROE were 1.27% and 15.29%, respectively. In July 1995, First American signed a definitive merger agreement for First City Bancorp, Inc. (First City) to merge with First American in a transaction valued at approximately $51 million. Of the total First American shares to be exchanged in the transaction, at least 80% are anticipated to be repurchased in the open market. First City is a bank holding company which operates First City Bank and Citizens Bank, both Tennessee state chartered banks, and Tennessee Credit Corporation, a consumer finance company. As of March 31, 1995, First City had $340 million in assets, 11 banking offices, and nine consumer finance locations in the middle Tennessee area. The merger is expected to be completed during the first quarter of 1996, subject to approval by regulatory authorities and a vote of First City's shareholders. The transaction is expected to be accounted for as a purchase. In May 1995, First American signed a definitive merger agreement under which all of the outstanding shares of Charter Federal Savings Bank (Charter) will be exchanged for approximately 2.0 million shares of First American common stock. Of the total First American shares to be exchanged in the transaction, up to 100% are expected to be repurchased in the open market. Charter is a federal savings bank headquartered in Bristol, Virginia with $744 million in assets at March 31, 1995, and 27 branches (eight in Knoxville, Tennessee; five in Bristol, Tennessee and Bristol, Virginia; and 14 in other locations in southwestern Virginia). The merger is expected to be completed during the fourth quarter of 1995, subject to approval by regulatory authorities and a vote of Charter's shareholders. The transaction is anticipated to be accounted for as a purchase. In February 1995, First American signed a definitive merger agreement under which all of the outstanding shares of Heritage Federal Bancshares, Inc. (Heritage) will be exchanged for approximately 2.6 million shares of First American common stock. Heritage is the holding company for Heritage Federal Bank for Savings, a federal savings bank with $518 million in assets at March 31, 1995, and 13 offices primarily in the East Tennessee areas of Tri-Cities, Anderson County, and Roane County. The merger is expected to be completed during the fourth quarter of 1995, subject to approval by regulatory authorities and a vote of Heritage's shareholders. The transaction is expected to be accounted for as a pooling of interests. On April 1, 1994, First American consummated its purchase of all of the outstanding shares of Fidelity Crossville Corp. (FCC), the parent company of First Fidelity Savings Bank, F.S.B.(First Fidelity) located in Crossville, Tennessee, for $6.5 million. First Fidelity was a Federal stock savings bank with offices in Crossville and Fairfield Glade, Tennessee, with total assets of $48.7 million on March 31, 1994. In conjunction with the acquisition, First Fidelity was merged into First American National Bank and First Fidelity's two offices became branches of First American National Bank. The transaction was accounted for as a purchase. 12 RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income is First American's largest source of income and was $73.9 million in the second quarter of 1995 on a taxable equivalent basis. This was up $3.6 million, or 5%, from $70.3 million in the second quarter of 1994. For the six months ended June 30, 1995, net interest income on a taxable equivalent basis increased $7.5 million, or 5%, to $147.8 million from $140.3 million in the first six months of 1994. Net interest income is the difference between total interest income earned on loans, securities, and other earning assets and total interest expense incurred on deposits and other interest-bearing liabilities. Net interest income is affected by the volume and mix of earning assets and interest-bearing liabilities and the corresponding interest yields and costs. Total interest income on a taxable equivalent basis amounted to $144.5 million for the second quarter of 1995, compared to $115.9 million for the second quarter of 1994, an increase of $28.6 million, or 25%. Of the $28.6 million increase, $17.5 million resulted from an increase in average yields and $11.1 million was due to a higher volume of earning assets (primarily loans). The average yield on earning assets increased 98 basis points to 8.05% from 7.07%, primarily due to a higher interest rate environment in short-term financial instruments in the second quarter of 1995 compared to the second quarter of 1994. For example, the national prime lending rate and 1-year treasury security yields averaged 9.00% and 5.97%, respectively, in the second quarter of 1995 compared to 6.90% and 5.13%, respectively, in the second quarter of 1994. Average earning assets rose $625.2 million, or 10%, to $7.20 billion. Average loans increased $654.1 million, or 15%, to $5.14 billion, average securities declined $23.1 million to $1.97 billion, and average money market investments dropped $5.8 million to $84.4 million. Total interest income on a taxable equivalent basis amounted to $281.3 million for the six months ended June 30, 1995, compared to $227.4 million for the comparable period in 1994, an increase of $53.9 million, or 24%. Of the $53.9 million increase, $34.4 million resulted from an increase in average yields and $19.5 million was due to a higher volume of earning assets (primarily loans). The average yield on earning assets increased 98 basis points to 8.00% from 7.02%, primarily due to a higher average interest rate environment in the first six months of 1995 compared to the first six months of 1994. For example, the national prime lending rate and 5-year treasury security yields averaged 8.92% and 6.90%, respectively, in the first six months of 1995 compared to 6.46% and 6.08%, respectively, in the first six months of 1994. Average earning assets rose $559.2 million, or 9%, to $7.09 billion. Average loans increased $625.6 million, or 14%, to $5.02 billion, average securities declined $12.6 million to $1.98 billion, and average money market investments dropped $53.7 million to $82.3 million. Total interest expense in the second quarter of 1995 increased $25.0 million to $70.6 million from the second quarter of 1994. Of the increase, $19.6 million was due to higher average interest rates paid on interest-bearing funds and $5.4 million resulted from an increase in the volume of interest-bearing liabilities. The average rate paid on interest-bearing liabilities increased 131 basis points to 4.72% from 3.41%, reflecting a higher interest rate environment for short-term financial instruments. For example, the Federal funds rate averaged 6.02% in the second quarter of 1995 versus 3.94% in the second quarter of 1994. In the second quarter of 1995, average interest-bearing liabilities grew $633.5 million, or 12%, to $6.01 billion from $5.37 billion in the second quarter of 1994. Average interest-bearing deposits increased $328.5 million, or 7%, to $4.90 billion, average short-term borrowings rose $105.6 million, or 14%, to $855.9 million, and average long-term debt increased $199.4 million, or 381%, to $251.7 million. Total interest expense in the six months ended June 30, 1995, increased $46.4 million to $133.5 million from the first six months of 1994. Of the increase, $37.2 million was due to higher average interest rates paid on interest-bearing funds and $9.2 million resulted from an increase in the volume of interest-bearing liabilities. The average rate paid on interest-bearing liabilities increased 128 basis points to 4.58% from 3.30%, reflecting a higher average interest rate environment for the six months ended June 30, 1995, compared to the first six months of 1994. For example, the Federal funds rate averaged 5.92% in the first six months of 1995 versus 3.58% in the six months ended June 30, 1994. In the first six months of 1995, average interest-bearing liabilities grew $561.6 million, or 11%, to $5.88 billion from $5.32 billion in the first six months of 1994. Average interest-bearing deposits increased $249.9 million, or 6%, to $4.78 billion, average short-term borrowings rose $114.5 million, or 16%, to $851.8 million, and average long-term debt increased $197.3 million, or 361%, to $251.9 million. Net interest income in the second quarter of 1995 increased primarily as a result of the increase in the volume of earning assets partially offset by a lower net interest spread. Net interest spread is the difference between the yield on earning assets and the rate paid on interest-bearing liabilities. For the 13 second quarter of 1995, First American's net interest spread declined 33 basis points to 3.33% from 3.66% for the second quarter of 1994. This decline was due primarily to a 131 basis point increase in the rates paid on interest-bearing liabilities which exceeded the 98 basis point increase in yields on earning assets. As the net interest spread declined, the net interest margin, which is net interest income expressed as a percentage of average earning assets, decreased to 4.12% for the second quarter of 1995 as compared with 4.29% for the same quarter a year earlier. Net interest income in the six months ended June 30, 1995, increased primarily as a result of the increase in the volume of earning assets partially offset by a lower net interest spread. For the first six months of 1995, First American's net interest spread declined 30 basis points to 3.42% from 3.72% for the six months ended June 30, 1994. This decline was due primarily to a 128 basis point increase in the rates paid on interest-bearing liabilities which exceeded the 98 basis point increase in yields on earning assets. As the net interest spread declined, the net interest margin, decreased to 4.20% for the first six months of 1995 as compared with 4.33% for the same period a year earlier. PROVISION FOR LOAN LOSSES This topic is addressed under the caption "Allowance and Provision for Possible Loan Losses." NON-INTEREST INCOME Total non-interest income was $25.5 million for the second quarter of 1995 compared with $24.1 million for the second quarter of 1994, an increase of $1.4 million, or 6%. Non-interest income, excluding net gain (loss) and write-down on securities, totalled $25.2 million in the second quarter of 1995, an increase of $1.2 million, or 5%, from $24.0 million in the second quarter of 1994. The increase from the second quarter of 1994 is primarily due to a $1.2 million, or 12%, increase in service charges on deposit accounts resulting principally from a 12% increase in the average number of retail deposit accounts over the second quarter of 1994. Total non-interest income was $49.7 million for the first six months of 1995 compared with $47.7 million for the six months ended June 30, 1994, an increase of $2.0 million, or 4%. Non-interest income, excluding net gain (loss) and write-down on securities, totalled $49.3 million, an increase of $1.3 million, or 3%, from $48.0 million in the first six months of 1994. The increase from the six months ended June 30, 1994, is primarily due to a $2.5 million, or 13%, increase in service charges on deposit accounts resulting principally from an 11% increase in the average number of retail deposit accounts and a $.9 million, or 7%, decline in other income. NON-INTEREST EXPENSE Total non-interest expense increased $1.5 million, or 3%, to $59.4 million for the second quarter of 1995 compared with $58.0 million for the same period in 1994. The increase is primarily attributable to higher salaries and employee benefits ($2.1 million, a 7% increase) due to merit increases and higher incentive compensation, increased marketing expense ($.6 million, a 31% increase) due to several direct mail campaigns, and increases in several other non-interest expense categories of under $.5 million each. These increases in non-interest expense were partially offset by a $2.4 million increase in net foreclosed properties income due principally to higher gains on the sales of foreclosed properties. First American's operating efficiency ratio (non-interest expense as a percentage of the sum of net interest income, on a fully taxable basis, and non-interest income) equaled 59.8% in the second quarter of 1995, down from 61.4% in the second quarter of 1994. Total non-interest expense increased $4.2 million, or 4%, to $119.1 million for the first six months of 1995 compared with $114.9 million for the same period in 1994. The increase is primarily attributable to higher salaries and employee benefits ($4.6 million, a 7% increase), marketing expense ($.9 million, a 26% increase), and communication expense ($.7 million, an 18% increase). These increases in non-interest expense were partially offset by the increase in net foreclosed properties income ($2.3 million) and a decline in systems and processing expense ($.6 million, a 10% decrease). Salaries and employee benefits increased due to merit increases, incentive compensation, and additional employees resulting from the March 1994 transfer of certain computer programming functions to the Company and the April 1, 1994, acquisition of First Fidelity. Marketing and communication expenses increased during the first six months of 1995 primarily due to several direct mail campaigns promoting the Company's new check card, a new consumer bank service called "Loan by Phone," and several existing money market and checking account 14 products. Net foreclosed properties income increased principally due to higher gains on the sales of foreclosed properties. Systems and processing expense declined due to amendments in March 1994 to First American's agreement with an outside vendor that provides data processing and telecommunication services. The agreement was amended to transfer certain software programming functions to First American which has resulted in cost reductions in systems and processing expense and increases in other non-interest expense categories, such as salaries and benefits. First American's operating efficiency ratio equaled 60.3% in the first six months of 1995 compared to 61.1% in the six months ended June 30, 1994. INCOME TAXES During the second quarters of 1995 and 1994, First American's income tax expense was $14.6 million and $13.5 million, respectively. The major factor for the increase in income tax expense was the higher income before income taxes. During the first six months of 1995 and 1994, income tax expense totalled $28.2 million and $27.4 million, respectively. The primary factor for the increase in income tax expense was the increase in income before income taxes. ASSET/LIABILITY MANAGEMENT First American has utilized off-balance-sheet derivative products for a number of years in managing its interest rate sensitivity. 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. In conjunction with managing interest rate sensitivity, at June 30, 1995, First American had derivatives with notional values totaling $1.84 billion. These derivatives had a net negative fair value (unrealized net pre-tax loss) of $3.9 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 June 30, 1994, First American had derivatives with notional values totaling $1.7 billion. These derivatives had a net positive fair value (unrealized net pre-tax gain) of $8.8 million at June 30, 1994. The instruments utilized are noted in the following table along with their notional amounts and fair values at June 30, 1995 and 1994.
Weighted Average Weighted Average Rate Maturity Related Variable Rate Notional --------------------- -------- Fair (in thousands) Asset/Liability Amount Paid Received Years Value - -------------------------------------------------------------------------------------------------------------------------------- JUNE 30, 1995 Interest rate swaps Money market deposits $ 650,000 5.91% (1) 6.19% (2) 1.4 $ 494 Interest rate swaps Long-term debt 200,000 7.11 (1) 6.11 (3) 1.3 (3,222) Interest rate swaps Loans 200,000 6.22 (3) 7.39 (1) 3.9 9,133 Forward interest rate swaps Money market deposits 650,000 7.81 (4) N/A (4) 1.4 (4) (9,549) Futures contracts (5) Money market deposits 140,000 N/A N/A 1.4 (5) (727) ---------- ------- $1,840,000 $(3,871) ================================================================================================================================ June 30, 1994 Interest rate swaps Money market deposits $ 800,000 4.97% (1) 4.24% (2) 1.2 $ 8,124 Interest rate swaps Loans 100,000 5.09 (3) 6.90 (1) 4.4 (239) Basis swaps Held to maturity securities 200,000 5.06 (6) 4.25 (3) .8 (893) Forward interest rate swaps Money market deposits 200,000 6.64 (7) N/A (7) 2.0 (7) 839 Futures contracts (8) Money market deposits 400,000 N/A N/A 1.9 (8) 967 ---------- ------- $1,700,000 $ 8,798 ================================================================================================================================
(1) Fixed rate. 15 (2) Variable rate which reprices quarterly based on 3-month LIBOR except for $25 million which reprices every 6 months based on 6-month LIBOR. (3) Variable rate which reprices quarterly based on 3-month LIBOR. (4) Forward swap periods began in June 1995 for $200 million and will begin December 1995 for $450 million. The rates paid are fixed and were set at the inception of the contracts. Variable rates are based on 3-month LIBOR and were 5.95% for the contracts which began in June 1995, but are currently unknown on the contracts which begin in December 1995 since they will not be established until the affected periods begin. (5) Represents $140 million short position of Eurodollar futures contracts which in aggregate simulates a $35 million 2-year interest rate swap. (6) Variable rate which reprices quarterly based on 5-year constant maturity Treasury rate less a constant spread. (7) Forward swap periods begin in June 1995. The rates to be paid are fixed and were set at the inception of the contracts. Variable rates are based on 3-month LIBOR but are currently unknown since they will not be established until the affected periods begin. (8) Represents $400 million short position of Eurodollar futures contracts which in aggregate simulates an $100 million 2-year interest rate swap. Net interest income for the quarter ended June 30, 1995, was increased by derivative products income of $1.3 million. Net interest income for the quarter ended June 30, 1994, was decreased by $2.3 million derivative products expense. Net interest income for the six months ended June 30, 1995, was increased by derivative products income of $2.5 million. Net interest income for the first six months of 1994 was decreased by $4.9 million of derivative products expense. 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. Deferred gains related to terminated derivatives contracts amounted to $3.5 million at June 30, 1995, and $3.1 million at June 30, 1994. Deferred gains and losses on off-balance-sheet derivative activities are recognized as interest income or interest expense over the original covered periods. 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 June 30, 1995, 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 $6.8 million on June 30, 1995. Given the credit standing of the counterparts to the derivative contracts, Management believes that this credit exposure is reasonable in light of its objectives. FINANCIAL CONDITION ASSETS Total assets of First American rose $843.5 million, or 12%, to $8.07 billion at June 30, 1995, compared to $7.22 billion one year earlier. The growth in total assets is primarily due to the $762.6 million, or 17%, increase in loans, net of unearned discount and net deferred loan fees, to $5.28 billion at June 30, 1995, from $4.52 billion at June 30, 1994. Leading the growth in loans were commercial loans, which increased $517.1 million, or 26%, over a broad range of industry categories and consumer amortizing mortgages, which increased $117.7 million, or 11%. The increase in loan volume reflects the positive economic conditions in Tennessee and selected markets in adjacent states and the success of First American's marketing programs. ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSSES Management's policy is to maintain the allowance for possible 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 (credit) 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. In order to maintain the allowance at an appropriate level, First American's loan loss methodology produced no provision for loan losses during the second quarters of 1995 and 1994 nor during the six month periods ended June 30, 1995 and 1994. The primary factors leading to no provision for loan losses in the second quarter and six months ended June 30, 1995, were favorable net loan charge-off experience and a continuation of favorable asset quality indicators discussed under the caption "Asset Quality." In the second quarters of 1995 and 1994, gross charge-offs were $4.0 million and $4.6 million while recoveries totalled $3.5 million and $3.9 million, respectively. Net charge-offs were $.5 million 16 in the second quarter of 1995 as compared to $.7 million in the second quarter of 1994. In the first six months of 1995 and 1994, gross charge-offs were $7.5 million and $7.1 million while recoveries totalled $6.9 million and $9.4 million, respectively. Net charge-offs were $.6 million in the six months ended June 30, 1995, as compared to $2.3 million of net recoveries in the six months ended June 30, 1994. The allowance for possible loan losses was $126.6 million at June 30, 1995, compared with $136.7 million at June 30, 1994. The allowance for possible loan losses represented 2.40% and 3.03% of net loans at June 30, 1995 and 1994, respectively. Effective January 1, 1995, First American adopted prospectively Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosure." These pronouncements require that impaired loans be measured at the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. First American's financial position and results of operations were not materially impacted by the adoption of SFAS No. 114 and SFAS No. 118. ASSET QUALITY Nonperforming assets of the Corporation were $24.3 million at June 30, 1995, compared with $31.1 million at June 30, 1994, a decrease of 22%. Nonperforming assets at June 30, 1995, represented .46% of total loans and foreclosed properties, compared to .69% at June 30, 1994. At June 30, 1995, nonperforming assets were comprised of $15.0 million of non-accrual loans and $9.3 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 June 30, 1995, loans totalling approximately $63 million, while not considered nonperforming loans, were classified in First American's internal loan grading system as substandard or worse, compared with approximately $80 million of such loans at June 30, 1994. 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 were $6.16 billion at June 30, 1995, an increase of $456.9 million, or 8%, from $5.70 billion a year earlier. Core deposits, which are defined as total deposits excluding certificates of deposit $100,000 and over and foreign deposits, totalled $5.42 billion at June 30, 1995, and $5.26 billion at June 30, 1994, a 3% increase. Long-term debt increased $199.3 million from June 30, 1994, to a balance of $251.6 million at June 30, 1995, due to two separate $100.0 million advances from the Federal Home Loan Bank occurring on December 29, 1994, and August 2, 1994. CAPITAL POSITION Total shareholders' equity was $638.1 million, or 7.91%, of total assets at June 30, 1995, as compared with $581.1 million, or 8.04%, of total assets at June 30, 1994. Book value per share was $25.09 on June 30, 1995, and $22.27 at June 30, 1994. Total shareholders' equity increased $21.4 million from December 31, 1994, principally from $35.5 million of earnings retention ($48.5 million of net income less $13.0 million of dividends), a $12.9 million decrease in the net unrealized losses on securities available for sale, and the repurchase of $31.4 million of common stock. In the second quarter of 1995, First American declared cash dividends on its common stock of $.25 per share compared to $.21 per share in the second quarter of 1994, a 19% increase. The dividend payout ratio was 26% in the second quarter of 1995 compared to 25% in the second quarter of 1994. Cash dividends for the first six months of 1995 were $.50 versus $.42 in the first six months of 1994, a 19% increase. In July 1995, the Board of Directors voted to increase the quarterly cash dividend from $.25 per share to $.28 per share based on First American's capital position and financial performance. First American repurchased 919,000 shares of First American Corporation stock in the open market during the first six months of 1995 at an average price of $34.15 per share. Under Tennessee law, such shares have been recognized as authorized but unissued. Accordingly, the excess of the purchase price over par has been reflected as a reduction from capital surplus. 17 The Federal Reserve Board and Office of the Comptroller of the Currency (OCC) regulations require that bank holding companies and national banks maintain minimum capital ratios. As of June 30, 1995, the Company and its principal subsidiary, First American National Bank (FANB), had ratios which exceeded the regulatory requirements to be classified as "well capitalized," the highest regulatory capital rating. At June 30, 1995, the Company and FANB, respectively, had total risk-based capital ratios of 12.04% and 10.90%, Tier I risk-based capital ratios of 9.98% and 9.64%, and Tier I leverage capital ratios of 7.93% and 7.70%. In order to be considered well capitalized, the total risk-based capital ratio must be a minimum of 10%, the Tier I risk-based capital ratio must equal or exceed 6%, and the Tier I leverage capital ratio must be 5% or greater. LIQUIDITY Liquidity management consists of maintaining sufficient cash levels to fund operations and to meet the requirements of borrowers, depositors, and creditors. Liquid assets, which include cash and cash equivalents (less Federal Reserve Bank reserve requirements), money market instruments, and securities that will mature within one year, amounted to $751.6 million and $635.3 million at June 30, 1995 and 1994, respectively. The estimated average maturity of securities was 3.7 years and 4.3 years at June 30, 1995 and 1994, respectively. The average repricing life of the total securities portfolio was 1.7 years and 2.9 years at June 30, 1995 and 1994, respectively. The overall liquidity position of First American is further enhanced by a high proportion of core deposits, which provide a stable funding base. Core deposits comprised 88% of total deposits at June 30, 1995, versus 92% at June 30, 1994. Effective March 31, 1995, the total commitment on First American's revolving credit agreement was increased to $70 million from $50 million and the termination date of the agreement was extended to March 31, 1998 from March 31, 1997. There were no revolving credit borrowings outstanding during the first six months of 1995. 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Corporation and seven (7) other financial institutions are defendants in two companion lawsuits, one filed in the U.S. District Court for the Western District of Tennessee and the other filed in the Circuit Court for Shelby County, Tennessee. The federal court action seeks unspecified damages and alleges a conspiracy or combination among the defendant banks to fix the amount of overdraft and insufficient funds charges. The state court action seeks compensatory and punitive damages in the amount of $25 million under state law theories, including implied contract and unconscionability, based on the imposition of overdraft and insufficient funds charges unrelated to cost. Summary judgment was granted in favor of the defendant banks in the federal action. The Plaintiffs appealed, but the Sixth Circuit Court of Appeals affirmed the District Court's granting of summary judgment and denied the Plaintiff's subsequent petition for rehearing. As for the state court action, it was dismissed as a result of motions filed by the defendant banks. An appeal was filed by the Plaintiffs. The Tennessee Court of Appeals affirmed the trial court's dismissal of the lawsuit. The Plaintiffs then appealed to the Tennessee Supreme Court, which denied the Plaintiff's request for permission to appeal. A petition to rehear the Supreme Court's denial of permission to appeal has been filed and is pending. Also, a motion has been filed and is pending with the Tennessee Court of Appeals to set aside its decision due to an alleged conflict of interest on the part of one of the judges. Management believes these suits are without merit and, based upon information currently known and on advice of counsel, that they will not have a material adverse effect on the Corporation's consolidated financial statements. There are from time to time other legal proceedings pending against the Corporation and its subsidiaries. In the opinion of management and counsel, liabilities, if any, arising from such proceedings presently pending would not have a material adverse effect on the consolidated financial statements of the Corporation. Item 4. Submission of Matters to a Vote of Security Holders (a) An annual meeting of shareholders was held on April 20, 1995. (b) At the annual meeting, the shareholders voted on the election of directors. The name of each director elected, including a tabulation of votes, is as follows:
For Against Abstain --- ------- ------- Reginald D. Dickson 21,626,519 43,393 34,124 T. Scott Fillebrown, Jr. 21,646,095 25,167 32,774 Gene C. Koonce 21,648,399 21,563 34,073 Dale W. Polley 21,654,868 15,095 34,073 James F. Smith, Jr. 21,652,860 17,103 34,109 Cal Turner, Jr. 21,653,944 15,968 34,124 Ted H. Welch 21,632,981 36,931 34,124 David K. Wilson 21,644,959 25,004 34,073
19 The name of each other director whose term of office as a director continued after the annual meeting is as follows: (until 1996 meeting) Samuel E. Beall, III, Earnest W. Deavenport, Jr., Martha R. Ingram, James R. Martin, Roscoe R. Robinson, and William S. Wire II; (until 1997 meeting) Dennis C. Bottorff, James A. Haslam II, Walter G. Knestrick, Robert A. McCabe, Jr., William O. McCoy, and Toby S. Wilt. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number Description ------ ----------- 11 Statement regarding computation of per share earnings is included in Note 7 to the Consolidated Financial Statements for the Quarter Ended June 30, 1995. See Part 1, Item 1. 15 Letter regarding unaudited interim financial information from KPMG Peat Marwick LLP, dated July 20, 1995. 27 Financial Data Schedule for interim year-to-date period ended June 30, 1995. (b) Reports on Form 8-K A report on Form 8-K dated May 22, 1995, was voluntarily filed under item 5 disclosing that First American Corporation entered into a definitive merger agreement under which all of the outstanding shares of Charter Federal Savings Bank will, subject to certain terms and conditions, be exchanged for First American Corporation common stock. 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/ Martin E. Simmons -------------------------------------------- Martin E. Simmons Executive Vice President, General Counsel, Secretary and Principal Financial Officer Date: August 7, 1995 --------------------------------- 21 FIRST AMERICAN CORPORATION QUARTERLY STATEMENT ON FORM 10-Q FOR QUARTER ENDED JUNE 30, 1995 EXHIBIT INDEX Exhibit Number Description - ------- ------------------------------------------------- 15 Letter regarding unaudited interim financial information from KPMG Peat Marwick LLP, dated July 20, 1995. 27 Financial Data Schedule for interim year-to-date period ended June 30, 1995. (For SEC use only) EX-15 2 LETTER FROM KPMG PEAT MARWICK 1 Exhibit 15. Letter regarding unaudited interim financial information from KPMG Peat Marwick LLP The Board of Directors First American Corporation: We have reviewed the consolidated balance sheets of First American Corporation and subsidiaries as of June 30, 1995 and 1994, the related consolidated statements of income for the three-month and six-month periods ended June 30, 1995 and 1994, and the related consolidated statements of changes in shareholders' equity and cash flows for the six-month periods ended June 30, 1995 and 1994. These consolidated financial statements are the responsibility of the Corporation's management. We conducted our review 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 review, 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, 1994; and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated January 20, 1995, we expressed an unqualified opinion on those consolidated financial statements. Our report refers to changes in accounting principles related to the adoption in 1993 of the provisions of the Financial Accounting Standards Board's Statements of Financial Accounting Standards No. 109, Accounting for Income Taxes; No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions; No. 112, Employers' Accounting for Postemployment Benefits; and No. 115, Accounting for Certain Investments in Debt and Equity Securities. /s/ KPMG Peat Marwick LLP - ------------------------------ July 20, 1995 Nashville, Tennessee EX-27 3 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF FIRST AMERICAN CORPORATION FOR THE SIX MONTHS ENDED JUNE 30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 413,232 26,284 83,805 29,224 558,671 1,461,960 1,462,105 5,280,280 126,575 8,071,146 6,158,336 819,993 203,124 251,637 127,132 0 0 510,924 8,071,146 212,260 64,890 2,432 279,582 101,406 133,471 146,111 0 354 119,138 76,674 76,674 0 0 48,484 1.87 0 4.16 15,045 6,567 0 63,207 127,148 7,517 6,944 126,575 63,344 0 63,231
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