SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No.
June 30, 1995 1-10534
FIRST OF AMERICA BANK CORPORATION
(Exact name of Registrant as specified in its Charter)
Michigan 38-1971791
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
211 South Rose Street, Kalamazoo, Michigan 49007
(Address of principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code
616-376-9000
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.
Class Outstanding at
Common Stock, July 31, 1995
$10 Par Value 63,243,124
FIRST OF AMERICA BANK CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page
No.
Consolidated Balance Sheets (Unaudited),
June 30, 1995 and December 31, 1994 . . . 1
Consolidated Statements of Income
(Unaudited) - Three and Six Months Ended
June 30, 1995 and 1994 . . . . . . . . . . 2
Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended June 30,
1995 and 1994 . . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements
(Unaudited) . . . . . . . . . . . . . . . 4
Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . 6
PART II. OTHER INFORMATION . . . . . . . . . . 17
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
($ in thousands) 1995 1994
- ---------------------------------------- ------------ ------------
ASSETS
Cash and due from banks $ 1,124,918 1,060,788
Federal funds sold and other short term investments 121,278 55,271
Securities:
Held to maturity, market value of $2,900,535 at
June 30, 1995 and $2,942,793 at Dec. 31, 1994 2,931,061 3,112,876
Available for sale, amortized cost of $2,332,922 at
June 30, 1995 and $2,694,929 at Dec. 31, 1994 2,341,657 2,587,626
Loans (net of unearned income):
Consumer 4,970,865 5,799,025
Commercial 2,502,083 2,344,969
Commercial real estate 3,563,841 3,423,268
Residential real estate 5,341,963 5,237,400
Loans held for sale 116,883 30,196
------------ ------------
Total loans 16,495,635 16,834,858
Less: Allowance for loan losses 235,939 228,115
------------ ------------
Net loans 16,259,696 16,606,743
Premises and equipment, net 470,293 476,165
Other assets 639,220 669,233
------------ ------------
Total assets $ 23,888,123 24,568,702
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 2,891,781 2,810,203
Interest bearing 16,638,942 17,390,063
------------ ------------
Total deposits 19,530,723 20,200,266
Securities sold under repurchase agreements 556,267 583,184
Other short term borrowings 1,133,046 1,299,555
Long term debt 670,484 681,236
Other liabilities 267,728 225,573
------------ ------------
Total liabilities 22,158,248 22,989,814
------------ ------------
SHAREHOLDERS' EQUITY
Common equity 1,729,875 1,578,888
------------ ------------
Total liabilities and shareholders' equity $ 23,888,123 24,568,702
============ ============
See accompanying notes to consolidated financial statements.
1
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------
($ in thousands, except per share data) 1995 1994 1995 1994
- ------------------------------------- --------- --------- -------- ---------
INTEREST INCOME
Loans and fees on loans $ 378,265 306,190 749,190 600,889
Investment securities 81,376 80,987 165,736 148,019
Other interest income 999 487 2,107 1,196
--------- --------- --------- ---------
Total interest income 460,640 387,664 917,033 750,104
--------- --------- --------- ---------
INTEREST EXPENSE
Deposits 181,808 133,434 358,379 258,088
Short term borrowings 32,022 13,477 61,069 19,651
Long term debt 12,436 5,963 25,071 10,594
--------- --------- --------- ---------
Total interest expense 226,266 152,874 444,519 288,333
--------- --------- --------- ---------
NET INTEREST INCOME 234,374 234,790 472,514 461,771
Provision for loan losses 22,000 22,501 42,510 43,109
--------- --------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 212,374 212,289 430,004 418,662
--------- --------- --------- ---------
NON-INTEREST INCOME
Service charges on deposit accounts 25,124 22,292 49,434 42,600
Investment securities transactions, net 81 1,216 (1,382) 8,715
Trust and financial services revenue 23,346 20,657 45,034 40,970
Bank card revenue 12,017 10,224 21,881 19,718
Mortgage banking revenue 10,917 4,839 15,499 13,764
Other operating income 12,065 10,587 22,686 20,649
--------- --------- --------- ---------
Total non-interest income 83,550 69,815 153,152 146,416
--------- --------- --------- ---------
NON-INTEREST EXPENSE
Personnel 110,795 108,873 226,155 213,495
Occupancy, net 15,052 14,504 31,370 29,840
Equipment 14,548 13,758 29,247 26,763
Outside data processing 4,679 4,691 9,474 8,950
Amortization of intangibles 5,367 4,049 10,620 6,610
Other operating expense 58,555 58,525 116,715 116,600
--------- --------- --------- ---------
Total non-interest expense 208,996 204,400 423,581 402,258
--------- --------- --------- ---------
INCOME BEFORE TAXES 86,928 77,704 159,575 162,820
Income tax expense 30,342 24,500 55,600 51,296
--------- --------- --------- ---------
NET INCOME $ 56,586 53,204 103,975 111,524
========= ========= ========= =========
PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.89 0.88 1.64 1.86
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Six Months Ended
June 30,
------------------------
($ in thousands) 1995 1994
- ------------------------------ ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 103,975 111,524
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 23,811 22,078
Provision for loan losses 42,510 43,109
Provision for deferred taxes (1,538) (962)
Amortization of intangibles 10,620 6,610
(Gain) loss on the sale of securities available for sale (2,074) (8,715)
(Gain) loss on the sale of mortgage loans held for sale (9,182) (8,036)
(Gain) loss on the sale of other assets (1,689) (100)
Proceeds from the sales of mortgage loans held for sale 259,194 764,448
Net other decrease (increase) in mortgage loans held for sale (336,699) (461,393)
Change in assets and liabilities net of acquisitions:
(Increase)decrease in interest and other
income receivable (22,203) 25,919
(Increase)decrease in other assets (19,418) 26,085
Increase(decrease) in taxes payable 22,818 (7,866)
Increase(decrease) in interest and
other expense payable 102,512 (10,940)
Increase(decrease) in other liabilities (102,692) (47,669)
---------- ----------
NET CASH FROM OPERATING ACTIVITIES 69,945 454,092
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held
to maturity 194,570 258,041
Purchases of investment securities held to maturity (95,987) (1,533,748)
Proceeds from the sale of securities available for sale 453,009 1,256,745
Proceeds from the maturities of securities available for sale 232,458 600,761
Purchases of securities available for sale (241,944) (1,426,457)
Proceeds from the securitization of loans 498,588 0
Net other (increase) decrease in loans & leases (107,364) (922,462)
Premises and equipment purchased (52,890) (42,638)
Proceeds from the sale of premises and equipment 36,640 2,071
(Acquisition)/sale of affiliates, net of cash acquired 373 319,316
---------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 917,453 (1,488,371)
CASH FLOWS FROM FINANCING ACTIVITIES: ---------- ----------
Net increase(decrease) in short term deposits (416,788) 134,108
Net increase(decrease) in time deposits (252,755) 35,105
Net increase(decrease) in short term borrowings (193,426) 818,291
Proceeds from issuance of long term debt 25,004 231,000
Repayments of long term debt (33,301) (74,504)
Proceeds from issuance of common stock 1,015 177
Payments for purchase and retirement of common stock 0 (75,896)
Dividends paid (53,017) (47,619)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES (923,268) 1,020,662
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ---------- ----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 64,130 (13,617)
1,060,788 903,517
CASH AND CASH EQUIVALENTS AT END OF PERIOD ---------- ----------
1,124,918 889,900
See accompanying notes to consolidated financial statements. ========== ==========
3
NOTE 1: GENERAL
The accompanying interim financial statements are unaudited. In
the opinion of management, all adjustments necessary for a fair
presentation of the consolidated financial statements have been
included and all such adjustments are of a normal recurring
nature. Certain amounts included in the prior period financial
statements have been reclassified to conform with the current
financial statement presentation.
NOTE 2: NON-PERFORMING ASSETS
June 30,
-------------------------
(in thousands) 1995 1994
- ----------------------------- ----------- ---------
Non-accrual loans $ 104,277 116,103
Restructured loans 4,726 9,686
Other real estate owned 33,376 42,467
----------- ---------
Total non-performing assets $ 142,379 168,256
============ ==========
NOTE 3: ALLOWANCE FOR LOAN LOSSES
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
(in thousands) 1995 1994 1995 1994
- ------------------- ------- ------- ------- -------
Balance, beginning of period $230,524 194,745 228,115 188,664
Provision charged against income 22,000 22,501 42,510 43,109
Recoveries 14,076 9,632 26,906 18,305
Loans charged off (30,661) (24,607) (61,592) (47,807)
Allowance of acquired/(sold) banks -- 2,194 -- 2,194
--------- --------- -------- --------
Balance, end of period $235,939 204,465 235,939 204,465
========= ========= ======== ========
On January 1, 1995, First of America adopted Financial Accounting
Standards Board Statement No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by Statement No. 118,
"Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." First of America's non-performing
loan policies, which address nonaccrual and restructured loans,
meet the definitions set forth for "impaired loans" in Statement
No. 114. Therefore, commercial and commercial mortgage loans
meeting the definition of nonaccrual and restructured are
reported as impaired loans for disclosure purposes.
On January 1, 1995, First of America identified $82.8 million of
impaired loans under the guidelines of Statement No. 114. This
resulted in an allowance for impaired loan losses of $17.4
million which was transferred from the general allowance. At
June 30, 1995, the recorded investment in loans considered to be
impaired under Statement No. 114 was $81.0 million with an
average recorded investment in impaired loans during the quarter
of approximately $79.7 million. Included in the impaired loans
total were $32.9 million of impaired loans for which the related
specific allowance for loan losses was $14.9 million. The
remaining $46.8 million of impaired loans did not require a
specific allowance for loan losses according to Statement No.
114. For the quarter, First of America recognized interest
4
income on impaired loans of $920 thousand.
NOTE 4: COMMON STOCK AND CALCULATION OF EARNINGS PER SHARE
At June 30, 1995 and 1994, there were 63,242,491 and 59,171,456
common shares outstanding, respectively. At the same dates,
there were 100,000,000 authorized shares of $10 par value common
stock. Common and common equivalent earnings per share amounts
were calculated by dividing net income applicable to common stock
by the weighted average number of common and common equivalent
shares outstanding during the respective periods adjusted for
outstanding stock options.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
1995 1994 1995 1994
------------- ---------- ---------- ----------
Average common and common
equivalents shares outstanding 63,420,197 60,141,900 63,377,736 59,957,182
NOTE 5: MERGERS AND ACQUISITIONS
Date of Total Assets Financial
($ in thousands) Acquisition Acquired Reporting Value
- --------------------------------- ---------------- ----------- --------------
Underwriting Consultants, Inc. February 1, 1995 $ 1,256 --
New England Trust Company January 1, 1995 1,576 1,092
Presidential Holding Corporation December 31, 1994 256,352 6,714
F&C Bancshares, Inc. December 31, 1994 379,791 35,064
First Park Ridge Corporation October 1, 1994 327,391 75,890
LGF Bancorp, Inc. May 1, 1994 412,336 61,902
Goldome Federal Savings Bank April 15, 1994 376,858 60,015
(Florida offices)
5
Item 2. Managements' Discussion and Analysis of Financial
Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary: The following table sets forth the period to period changes in the principal items
included in the consolidated statement of income for the three and six months ended
June 30, 1995, compared with the corresponding 1994 periods. The bracketed
amounts represent decreases.
Three Months Ended Six Months Ended
June 30, June 30,
1995 vs 1994 1995 vs 1994
------------------------ ------------------------
($ in thousands) Change Percent Change Percent
- ----------------------------- --------- --------- --------- ---------
Interest and fee income on loans $ 72,075 23.5 % $ 148,301 24.7 %
Interest income on investments 389 0.5 17,717 12.0
Interest income on federal funds sold and
other short term investments 512 105.1 911 76.2
--------- --------- --------- ---------
Total interest income 72,976 18.8 166,929 22.3
--------- --------- --------- ---------
Interest expense on deposits 48,374 36.3 100,291 38.9
Interest expense on borrowed funds 25,018 128.7 55,895 184.8
--------- --------- --------- ---------
Total interest expense 73,392 48.0 156,186 54.2
--------- --------- --------- ---------
Net interest income (416) (0.2) 10,743 2.3
Provision for loan losses (501) (2.2) (599) (1.4)
Non-interest income 13,735 19.7 6,736 4.6
Non-interest expense 4,596 2.2 21,323 5.3
--------- --------- --------- ---------
Income before tax expense 9,224 11.9 (3,245) (2.0)
Applicable income tax expense 5,842 23.8 4,304 8.4
--------- --------- --------- ---------
Net income $ 3,382 6.4 % $ (7,549) (6.8)%
========= ========= ========= =========
HIGHLIGHTS
Net income for the second quarter was $56.6 million, up 6.4
percent from $53.2 million a year ago. Earnings per share for
the quarter were $0.89 per share, up 1.1 percent from the 0.88
reported for the second quarter of 1994 and up 18.7 percent from
the first quarter of 1995. The earnings for the quarter were a
result of higher fee income and lower operating costs offsetting
$6.6 million in restructuring charges and a lower net interest
margin. Year-to-date income was $104.0 million, or $1.64 per
share, and $111.5 million, or $1.86 per share, for 1994.
Return on average assets for the quarter and year-to-date periods
was 0.94 percent and 0.86 percent compared with 0.96 percent and
1.04 percent a year ago. Return on average equity for the same
periods was 13.49 percent and 12.79 percent compared with 13.92
percent and 14.69 percent.
Total assets were $23.9 billion, up 3.5 percent from a year ago.
Total loans increased 8.4 percent from a year ago and total
deposits increased 2.1 percent. All three categories increased
mainly due to acquisitions completed since June 30, 1994.
Excluding acquisitions and the $500 million credit card
securitization, discussed later in this report, loans would have
increased 7.8 percent. Excluding acquisitions, deposits would
have decreased 2.1 percent.
6
INCOME ANALYSIS - SECOND QUARTER AND YEAR-TO-DATE COMPARISON
Net interest income (FTE) decreased slightly over the year ago
quarter and increased 2.2 percent for the year-to-date periods.
The higher level of average earning assets offset the lower year-
to-date margin. The current quarter's net interest margin was
down from a year ago, 4.26 percent compared with 4.65 percent,
but was basically level with the first quarter margin of 4.29
percent. The year-to-date net interest margin was 4.28 percent
compared with 4.73 percent a year ago. The lower margins for
1995 were the result of the rapidly rising interest rate
environment during 1994 and the acquisitions completed during
1994. The acquisitions, primarily thrifts, combined to lower the
1995 quarter and year-to-date margins by approximately 11 basis
points and 14 basis points, respectively. Table 1 provides
detail on the yields earned on interest earning assets and the
average rates paid on interest-bearing liabilities for the last
six quarters.
The provision for loan losses was slightly lower than a year ago
for both periods. As a percent of average assets, the quarterly
provision decreased to 0.37 percent compared with 0.41 percent in
the second quarter of 1994. As a percent of average loans, net
charge-offs were level, representing 0.39 percent and 0.42
percent for the current year periods compared with 0.41 percent
for both 1994 periods. Charge-offs and recoveries by type are
detailed in Table 3.
Total non-interest income was up 19.7 percent for the quarter and
4.6 percent year-to-date over 1994. Included in the current year
results were a $4.1 million gain from the sale of certain
mortgage servicing rights and $1.3 million additional gain from
the adoption of Financial Accounting Standards Board Statement
No. 122, "Accounting for Mortgage Servicing Rights an Amendment
of FASB Statement No. 65." Service charges on deposit accounts
increased 12.7 percent over the 1994 second quarter and 16.0
percent for the six month period.
Traditional trust fees were up 9.9 percent for the quarter and
9.0 percent year-to-date. The managed assets upon which these
fees are based were up 20.0 percent from a year ago, totalling
$14.8 billion. The increase in assets under management was a
result of the rising market values of securities and the January
1, 1995 acquisition of the New England Trust Company which had
over $600 million in assets under management. Other financial
services revenue was up 22.2 percent and 12.5 percent over the
year ago periods.
Mortgage banking revenue, including the gain on the sale of
mortgage servicing rights, increased 125.6 percent and 12.6
percent for the comparable periods. Mortgage servicing income
increased 6.7 percent for the quarter and 10.3 percent year-to-
date. At June 30, 1995, the servicing portfolio for outside
investors was $3.0 billion, down from $3.2 billion a year ago,
primarily due to the sale of servicing. Loan originations at
$421 million, lagged last year's second quarter total of $598
million, but increased 29.1 percent over the $326 million
originated during the first quarter of 1995.
Credit card fees, including servicing fees on securitized
receivables, increased 17.5 percent and 11.0 percent. During
June, First of America securitized $500 million in credit card
receivables. This transaction lowered net interest income after
the provision for loan losses by $1.6 million, but added $1.4
million of non-interest servicing fees. The net interest margin
for the quarter was reduced by approximately two basis points due
to this transaction. The estimated full year, or twelve month,
impact on the net interest margin would be 13 basis points. The
managed credit card portfolio, which included securitized
receivables, was $1.3 billion at June 30, 1995, up 5.7 percent
from the $1.2 billion last year.
Total non-interest expense included $6.6 million in restructuring
7
costs related to First of America's internal restructuring during
the second quarter and $12.6 million year-to-date. First of
America's restructuring costs to date totalled $16.5 million,
which includes $3.9 million recorded during the fourth quarter of
1994. First of America does not expect to record any material
restructuring charges during the remainder of 1995. Full time
equivalent employees (FTEs) have been reduced from 14,094 at the
end of August, 1994, to 12,759 at June 30, 1995. The lower FTE
number has been achieved even with the 303 FTEs added from the
acquisitions of First Park Ridge Corporation, F&C Bancshares,
Inc. and Presidential Holding Corporation since last August.
Also as part of the restructuring, First of America has closed or
sold 29 branches.
Total non-interest expense, excluding restructuring charges,
decreased one percent from the second quarter of 1994 and three
percent from the first quarter of 1995. Year-to-date, non-
interest expense increased 2.2 percent excluding the $12.6
million in restructuring costs. The impact of the restructuring
was reflected by improvements in the following expense ratios.
Excluding severance costs, personnel costs as a percent of
average assets, annualized, were 1.76 percent and 1.79 percent
for the 1995 second quarter and year-to-date periods. These
ratios compare favorably to the year ago ratios of 1.96 percent
and 2.00 percent, respectively.
The burden ratio, excluding restructuring costs, was 1.97 percent
for the quarter and 2.14 percent year-to-date. The comparable
1994 ratios were 2.43 percent and 2.39 percent. The efficiency
ratio, excluding restructuring costs, over the quarter and year-
to-date periods was 63.63 percent and 64.85 percent compared with
66.23 percent and 65.22 percent for 1994. The lower 1995 net
interest margin continues to negatively impact the efficiency
ratio.
ASSET QUALITY AND CREDIT RISK PROFILE
First of America's loan portfolio has no significant industry
concentrations of credit, thereby minimizing credit risk
exposure. Also minimizing credit risk are First of America's
conservative lending policies and loan review process. In
addition, First of America's loan customers are largely
consumers, individual homeowners and small to mid-sized
businesses. At June 30, 1995, the loan portfolio was made up of
residential mortgages (33.1 percent), consumer loans (30.1
percent), commercial mortgages (21.6 percent) and commercial
loans (15.2 percent).
Total non-performing assets, which include non-accrual loans,
renegotiated loans and other real estate owned, totalled $142.4
million, or 0.86 percent of total loans plus other real estate
owned. This compared favorably with $168.3 million, or 1.10
percent, reported at June 30, 1994. The primary improvement was
in commercial mortgage non-accrual loans which decreased $20.0
million from a year ago. The allowance for loan losses as a
percent of total loans and the allowance coverage of non-
performing loans both improved from a year ago. Tables 3 and 4
provide further detail on non-performing and 90 day past due
loans as well as charge-offs and recoveries by loan category.
FUNDING, LIQUIDITY AND INTEREST RATE RISK
First of America continues to monitor appropriate interest rate
risk, provide liquidity and moderate changes in the market value
of the investment securities portfolio through a centralized
funds management division.
Liquidity is measured by a financial institution's ability to
raise funds through deposits, borrowed funds, capital and the
sale of assets. First of America relies primarily upon core
deposits for its liquidity. At June 30, 1995, core deposits
equalled 95.2 percent of total deposits. First of America does
8
not issue negotiated CD's in the national money markets, and the
level of purchased funds is limited by corporate policy to less
than 10 percent of assets. The majority of negotiated CD's and
purchased funds originate from the core deposit customer base,
including downstream correspondents.
During June 1995, First of America securitized $500 million in
credit card receivables through the First of America Credit Card
Master Trust, Series 1995-1. The proceeds from this transaction
were used for general corporate purposes. This transaction has
been recorded as a sale in accordance with SFAS No. 77,
"Reporting by Transferors for Transfers of Receivables with
Recourse." First of America recorded no gain or loss at the time
of sale. The associated net servicing fees are recognized
monthly over the life of the transaction on an accrual basis and
are included in credit card fee income in the statements of
income.
First of America's interest rate risk policy is to minimize the
effect on net income resulting from a change in interest rates
through asset/liability management at all levels in the company.
Each banking affiliate completes an interest analysis each
quarter using an asset/liability model, and a consolidated
analysis is then completed using the affiliates' data. The Asset
and Liability Committees, which exist at each banking affiliate
and at the consolidated level, review the analysis and as
necessary, take appropriate action to minimize changes in the net
interest spread.
At December 31, 1994, First of America adopted the provisions of
Financial Accounting Standards Board Statement No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value
of Financial Instruments." To manage interest rate sensitivity
First of America and its subsidiaries have entered into interest
rate swaps as a hedge against certain debt and deposit
liabilities, as detailed in the table below. The contracts
represent an exchange of interest payments and the underlying
principal balances of the assets or liabilities are not affected.
Net settlement amounts are reported as adjustments to interest
income or interest expense. Gains or losses on the termination
of interest rate swaps are deferred and amortized over the
remaining lives of the designated balance sheet liability. When
the swap becomes uncovered during the swap agreement period, the
swap is immediately marked-to-market with a corresponding charge
to current earnings.
Although the notional amounts are often used to express the
volume of these transactions, the amounts potentially subject to
credit risk are much smaller. The company minimizes this risk by
performing normal credit reviews of its counterparties and
collateralizing its exposure when it exceeds a predetermined
limit. The following table outlines First of America's
outstanding interest rate swaps at June 30, 1995.
9
INTEREST RATE SWAPS
($ in thousands)
Net Interest Income
Weighted Average Average Impact for the
Notional Fair Market Average Rate Received Rate Paid Six Months Ended
Hedged Asset/Liability Amount Value Maturity (Mos.) Variable/Fixed Variable/Fixed June 30,
- ------------------------ --------- ------------ -------------- --------------- --------------- ---------------------
Rising Rate CD -- -- -- -- -- (1,158)
Market Rate CDs * 22,066 1,455 6.0 -- -- (562)
FHLB Advance -- -- -- -- -- 25
FirstRate Fund deposits 12,000 (40) 14.0 6.06%/variable 6.03/fixed 2
Bank notes 30,000 41 6.6 6.08%variable 5.88/fixed 29
Long term debt 95,000 (1,700) 18.4 5.10%/fixed 6.19/variable (580)
- ------------------------ --------- ------------ -------------- --------------- --------------- ---------------------
Total $159,066 (110) 14.1 $(2,244)
========================= ========== ============= ============== ======================
* This represents a basis swap.
At June 30, 1995, First of America had $1.6 million in deferred
swap losses from sales and terminations that are being amortized
into earnings over the remaining life of the hedged liabilities.
At June 30, 1994, outstanding swaps totalled $830.1 million in
notional amounts which added $989 thousand to net interest income
for the six months ended June 30, 1994. At December 31, 1994,
First of America had interest swap agreements totalling $707.8
million in notional amounts which had a replacement value of a
negative $17.2 million.
At June 30, 1995, First of America also had outstanding interest
rate cap agreements with notional amounts totalling $125 million,
which were designated to certain FirstRate Fund deposits.
Interest rate caps are agreements to make/receive payments for
interest rate differentials between an index rate and a specified
maximum rate, computed on notional amounts. First of America
also utilizes interest rate caps to manage its interest rate
risk. First of America had no outstanding interest rate cap
agreements at June 30, 1994.
The difference between rate sensitive assets and liabilities,
including the impact of off-balance sheet interest rate swaps, is
presented in Table 5. The GAP reports' reliability in measuring
the risk to income from a change in interest rates is tested
through the use of simulation models. The most recent simulation
models, using various interest rate shock scenarios, show that
less than one percent of First of America's annual net income is
at risk if interest rates were to move up or down an immediate
one percent. Management has determined that these simulation
models provide a more accurate measurement of the company's
interest rate risk position than the GAP tables.
At June 30, 1995, Securities Held to Maturity totalled $2.9
billion, with a resulting net unrealized loss of $30.5 million.
This compares with a net unrealized loss in the Held to Maturity
portfolio a year ago of $82.1 million. In accordance with
Financial Accounting Standards Board Statement No. 115
"Accounting for Certain Investments in Debt and Equity
Securities," Securities Available for Sale are carried at market
which totalled $2.3 billion at June 30, 1995. The $8.7 million
net unrealized gain in Available for Sale securities resulted in
a corresponding, after tax market value adjustment to equity of
$5.6 million. At December 31, 1994, the negative adjustments to
securities and equity from the Securities Available for Sale
portfolio were $107.3 million and $92.3 million, respectively.
10
CAPITAL STRENGTH
Total shareholders' equity increased 13.7 percent from a year ago
to $1.7 billion at June 30, 1995. The increase in equity is due
to net earnings retention, $118.8 million of equity issued in
acquisitions and the positive $25.7 million change in the FAS 115
adjustment offsetting a $47.7 million reduction due to the stock
repurchase program. The book value per share rose to $27.35 from
the $25.71 reported a year ago.
First of America continues to maintain, both on a consolidated
level and an affiliate basis, capital levels within the
parameters of "well capitalized" as defined by regulatory
guidelines. The consolidated total capital to risk adjusted
assets ratio at June 30, 1995 was 12.53 percent, the tier I ratio
was 9.09 percent and the tier I leverage ratio was 6.27 percent.
IN CONCLUSION
First of America is in the process of completing the internal
restructuring which it began in the third quarter of 1994. Its
affiliate banks have been merged into one bank in each state of
operation and all the material restructuring charges have been
incurred. Cost improvements and the absence of restructuring
charges should be reflected in improving expense ratios and
profitability ratios during the remainder of 1995.
11
TABLE 1
CONSOLIDATED YIELD ANALYSIS (a)
1995 1994
---------------- ---------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
Jun. 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
-------- -------- -------- -------- -------- --------
Average Prime Rate (b) 9.0 % 8.9 8.1 7.5 6.9 6.0
EARNING ASSETS
Money Market Investments 5.96 % 5.18 3.77 3.51 2.83 2.95
U.S. Government and agencies
securities 5.90 5.90 5.81 5.70 5.61 5.45
State and municipal securities 8.94 8.71 8.57 8.73 8.43 7.56
Other securities 6.33 5.32 6.21 6.16 6.00 6.40
-------- -------- -------- -------- -------- --------
Total securities 6.06 6.08 5.98 5.89 5.79 5.67
-------- -------- -------- -------- -------- --------
Consumer loans 9.83 9.58 9.19 9.14 8.98 9.29
Commercial loans 9.33 9.25 8.70 8.32 7.99 7.48
Commercial real estate loans 9.40 9.35 8.99 8.69 8.47 8.24
Residential real estate loans 7.95 7.84 7.76 7.71 7.66 7.79
-------- -------- -------- -------- -------- --------
Total loans 9.06 8.95 8.65 8.51 8.36 8.39
-------- -------- -------- -------- -------- --------
Total earning assets 8.32 % 8.20 7.94 7.77 7.63 7.66
======== ======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES
Time deposits:
CD's - less than 12 months 5.19 % 4.79 4.46 4.20 4.29 4.28
CD's - 12 months or more 5.55 5.26 4.79 4.55 4.43 4.56
CD's - $100,000 or more 6.10 5.72 5.05 4.53 3.71 3.30
Other time deposits 5.71 5.46 5.27 5.17 5.07 5.02
Other core deposits:
Savings deposits and NOW 1.71 1.70 1.84 1.49 1.49 1.55
Money market savings and checking 3.98 4.01 3.39 3.06 2.50 2.17
-------- -------- -------- -------- -------- --------
Total deposits 4.35 4.16 3.81 3.51 3.31 3.24
-------- -------- -------- -------- -------- --------
Short term borrowings 6.09 5.96 5.32 4.71 4.13 3.38
Long term debt 7.53 7.66 7.15 6.78 6.86 7.02
-------- -------- -------- -------- -------- --------
Total borrowed funds 6.44 6.39 5.93 5.23 4.70 4.35
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 4.65 % 4.45 4.06 3.72 3.44 3.31
======== ======== ======== ======== ======== ========
NET INTEREST MARGIN
Interest income to average earning
assets 8.32 % 8.20 7.94 7.77 7.63 7.66
Interest expense to average earning
assets 4.06 % 3.91 3.55 3.26 2.98 2.85
Net interest margin 4.26 % 4.29 4.39 4.51 4.65 4.81
(a) Fully taxable equivalent, based on a marginal federal income tax rate of 35%.
(b) The First National Bank of Chicago Corporate Base Rate.
12
TABLE 2
ANALYSIS OF NET INTEREST INCOME
Second Quarter 1995 Versus Second Quarter 1995 Versus
($ in thousands) Second Quarter 1994 First Quarter 1995
- ------------------------------ -------------------------------- --------------------------------
CHANGES IN RATE AND VOLUME Total Change Due To Total Change Due To
INCREASE (DECREASE): Change Volume Rate Change Volume Rate
------- ------- ------- ------- ------- -------
INTEREST INCOME
Loans (FTE) $ 72,589 45,488 27,101 7,431 (164) 7,595
Taxable securities 1,284 (2,813) 4,097 (2,721) (2,856) 135
Tax exempt securities (FTE) (1,475) (1,440) (35) (565) (382) (183)
Money market investments 512 (11) 523 (109) (265) 156
------- ------- ------- ------- ------- -------
Total Interest Income 72,910 41,224 31,686 4,036 (3,667) 7,703
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
Interest-bearing deposits 48,374 4,824 43,550 5,237 (4,956) 10,193
Short term borrowings 18,545 10,439 8,106 2,975 2,105 870
Long term borrowings 6,473 5,835 638 (199) (123) (76)
------- ------- ------- ------- ------- -------
Total Interest Expense 73,392 21,098 52,294 8,013 (2,974) 10,987
------- ------- ------- ------- ------- -------
Change in net interest income (FTE) $ (482) 20,126 (20,608) (3,977) (693) (3,284)
======= ======= ======= ======= ======= =======
NOTE: The change in income attributable to volume is calculated by multiplying the change in volume times
the prior year's rate. The change in income attributable to rate is calculated by multiplying the change in rate
times the prior year's volume. Any variance attributable jointly to volume and rate changes is allocated to
volume and rate in proportion to the relationship of the absolute dollar amount of the change in each. Fully
taxable equivalent income on certain tax exempt loans and securities is calculated using a 35% tax rate.
13
TABLE 3
SUMMARY OF LOAN LOSS EXPERIENCE
($ in thousands) 1995 1994
- ----------------------------- ---------------- ---------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
Jun. 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
ALLOWANCE FOR LOAN LOSSES --------- --------- --------- --------- --------- ---------
Balance, at beginning of period $ 230,524 228,115 213,596 204,465 194,745 188,664
Provision charged against income 22,000 20,510 22,224 21,238 22,501 20,608
Allowance of acquired (sold) banks -- -- 9,200 26 2,194 --
Recoveries:
Commercial 1,375 1,626 2,243 1,555 2,265 1,213
Commercial mortgage 456 884 426 403 480 862
Residential mortgage 19 27 40 95 75 75
Consumer installment 10,043 8,093 4,891 5,963 4,803 4,804
Consumer revolving 2,183 2,200 2,153 2,060 2,009 1,719
--------- --------- --------- --------- --------- ---------
Total recoveries 14,076 12,830 9,753 10,076 9,632 8,673
--------- --------- --------- --------- --------- ---------
Charge-offs:
Commercial 1,177 1,119 2,621 3,612 3,449 3,938
Commercial mortgage 2,220 627 2,882 1,121 2,619 1,199
Residential mortgage 73 73 212 373 254 245
Consumer installment 15,133 16,554 7,778 7,598 8,831 8,410
Consumer revolving 12,058 12,558 13,165 9,505 9,454 9,408
--------- --------- --------- --------- --------- ---------
Total charge-offs 30,661 30,931 26,658 22,209 24,607 23,200
--------- --------- --------- --------- --------- ---------
Net charge-offs 16,585 18,101 16,905 12,133 14,975 14,527
--------- --------- --------- --------- --------- ---------
Balance, at end of period $ 235,939 230,524 228,115 213,596 204,465 194,745
========= ========= ========= ========= ========= =========
Average loans outstanding (net of
unearned income) $16,848,514 16,855,909 16,112,582 15,484,765 14,777,048 14,292,647
CHARGE-OFFS AND RECOVERIES RATIOS
Net charge-offs to average loans (a) 0.39 % 0.44 0.42 0.31 0.41 0.41
Net charge-offs to period end
allowance (a) 28.19 31.84 29.40 22.54 29.38 30.25
Earnings coverage of net charge-offs 6.57 x 5.15 5.89 8.58 6.69 7.28
Recoveries to total charge-offs 45.91 % 41.48 36.59 45.37 39.14 37.38
Provision to average loans (a) 0.52 0.49 0.55 0.54 0.61 0.58
Allowance to total period end loans 1.43 1.36 1.36 1.35 1.34 1.35
(a) Annualized
ALLOWANCE FOR LOAN LOSS SUMMARY
At December 31, 1994 1993 1992 1991 1990 1989
- ----------------------------- --------- --------- --------- --------- --------- ---------
Balance, at beginning of period $ 188,664 176,793 174,882 137,012 126,175 133,609
Provision charged against income 86,571 84,714 78,809 71,030 44,782 43,805
Allowance of acquired/(sold) banks 11,420 50 (372) 27,094 11,185 2,324
Recoveries 38,134 35,863 33,640 30,280 28,470 27,728
Less: Charge-offs 96,674 108,756 110,166 90,534 73,600 81,291
--------- --------- --------- --------- --------- ---------
Balance, at end of period $ 228,115 188,664 176,793 174,882 137,012 126,175
========= ========= ========= ========= ========= =========
14
TABLE 4
MEASUREMENT OF ASSET QUALITY
($ in thousands) 1995 1994
- ----------------------------- ---------------- ---------------------------------------------------
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
Jun. 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
NON-PERFORMING ASSETS --------- --------- --------- --------- --------- ---------
Non-accrual loans:
Commercial $ 21,880 21,203 22,156 22,884 24,584 26,486
Commercial mortgage 55,339 53,270 56,917 68,294 75,316 76,911
Residential mortgage 25,155 18,368 16,118 16,709 14,739 13,469
Revolving mortgage 426 492 482 389 333 331
Consumer installment 1,477 981 1,141 662 1,131 1,120
Consumer revolving -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total non-accrual loans $ 104,277 94,314 96,814 108,938 116,103 118,317
--------- --------- --------- --------- --------- ---------
Renegotiated loans:
Commercial $ 3,306 3,310 411 427 469 477
Commercial mortgage 503 514 3,327 4,335 8,084 8,303
Residential mortgage 917 960 1,056 1,065 1,074 1,106
Revolving mortgage -- -- -- -- -- --
Consumer installment -- -- 58 58 59 --
Consumer revolving -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total renegotiated loans $ 4,726 4,784 4,852 5,885 9,686 9,886
--------- --------- --------- --------- --------- ---------
Total non-performing loans $ 109,003 99,098 101,666 114,823 125,789 128,203
--------- --------- --------- --------- --------- ---------
Other real estate owned $ 33,376 40,349 38,662 40,669 42,467 46,417
--------- --------- --------- --------- --------- ---------
Total non-performing assets $ 142,379 139,447 140,328 155,492 168,256 174,620
========= ========= ========= ========= ========= =========
Loans past due 90 days or more:
Commercial $ 1,360 674 1,709 1,578 915 2,756
Commercial mortgage 1,297 1,838 1,956 2,120 1,680 10,289
Residential mortgage 3,001 2,593 711 1,189 2,027 8,955
Revolving mortgage 390 395 370 542 434 521
Consumer installment 7,661 5,947 7,178 4,839 780 1,093
Consumer revolving 6,136 6,276 6,284 5,168 4,927 4,980
--------- --------- --------- --------- --------- ---------
Total loans past due 90 days or more $ 19,845 17,723 18,208 15,436 10,763 28,594
========= ========= ========= ========= ========= =========
ASSET QUALITY RATIOS
Non-performing assets as a % of total assets 0.60 % 0.57 0.57 0.66 0.73 0.82
Non-performing assets as a % of
total loans + OREO 0.86 % 0.82 0.83 0.98 1.10 1.21
Allowance coverage of non-performing loans 216.45 % 232.62 224.38 186.02 162.55 151.90
NONPERFORMING ASSET SUMMARY
At December 31, 1994 1993 1992 1991 1990 1989
- ------------------------------ --------- --------- --------- --------- --------- ---------
Non-accrual loans $ 96,814 121,186 126,619 116,995 76,533 55,556
Renegotiated loans 4,852 10,879 20,669 16,837 12,234 14,762
Other real estate owned 38,662 50,595 48,699 34,601 17,620 16,759
--------- --------- --------- --------- --------- ---------
Total non-performing assets $ 140,328 182,660 195,987 168,433 106,387 87,077
========= ========= ========= ========= ========= =========
Loans past due 90 days or more $ 18,208 23,462 20,887 32,499 31,380 20,901
15
TABLE 5
INTEREST RATE SENSITIVITY
June 30, 1995
0 to 0 to 0 to 0 to 0 to
($ in millions) 30 Days 60 Days 90 Days 180 Days 365 Days
- ----------------------------- --------- --------- --------- --------- ---------
ASSETS
Other earning assets $ 129 129 129 129 129
Investment securities (1) 425 503 563 798 1,228
Loans, net of unearned income (2) 4,546 5,044 5,530 6,511 8,275
--------- --------- --------- --------- ---------
Total rate sensitive assets (RSA) $ 5,100 5,676 6,222 7,438 9,632
========= ========= ========= ========= =========
LIABILITIES (3)
Money market type deposits $ 2,710 2,760 2,810 2,955 3,229
Other core savings and time deposits 691 1,123 1,555 2,843 4,968
Negotiated deposits 528 775 820 876 918
Borrowings 1,218 1,463 1,478 1,628 1,874
Interest rate swap agreements (42) 13 23 148 123
Interest rate cap agreements (125) (125) (125) (125) (125)
--------- --------- --------- --------- ---------
Total rate sensitive liabilities (RSL) $ 4,980 6,009 6,561 8,325 10,987
========= ========= ========= ========= =========
GAP (RSA - RSL) $ 120 (333) (339) (887) (1,355)
========= ========= ========= ========= =========
RSA divided by RSL 102.41 % 94.46 94.83 89.35 87.67
GAP divided by total assets 0.50 (1.39) (1.42) (3.71) (5.67)
Assumptions:
(1) Maturities of rate sensitive securities are based on contractual maturities and estimated prepayments.
(2) Maturities of rate sensitive loans are based on contractual maturities, estimated prepayments and
estimated repricing impact.
(3) Maturities of rate sensitive liabilities, interest rate swaps and interest rate caps are based on contractual
maturities and estimated repricing.
16
II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Registrant's Annual Meeting of Shareholders was
held on April 19, 1995.
(c) At the Annual Meeting, shareholders elected as
directors the nominees listed in the following table:
Number of Shares Number of
Nominees Voted For Shares Withheld
--------------------- ------------------------ ---------------------
John W. Brown 50,307,298 1,196,140
Clifford L. Greenwalt 50,306,730 1,196,707
Dorothy A. Johnson 50,300,850 1,202,587
Martha Mayhood Mertz 49,078,784 2,424,653
James W. Wogsland 50,258,237 1,245,200
Walter J. Wolpin 50,300,404 1,203,033
Shareholders also voted to ratify the selection of KPMG Peat
Marwick LLP as the Registrant's independent auditors for 1995;
50,927,981 shares voted in favor of the ratification with 201,702
voted against, and 373,754 abstained from voting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement regarding computation of per share
earnings.
The computation of common and common
equivalents per share is described in Note 4
to the Consolidated Financial Statements of
this report.
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the
Registrant during the three months ended June 30,
1995.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, First of America has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
FIRST OF AMERICA BANK CORPORATION
REGISTRANT
Date: August 4, 1995 /s/ Thomas W. Lambert
Thomas W. Lambert
Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
18
EXHIBIT INDEX
(27) Financial Data Schedule
19