SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year Ended December 31, 1997 Commission File Number 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 Identification
incorporation or Organization) No.)
211 South Rose Street, Kalamazoo, Michigan 49007
(Address of principal Executive Offices) (Zip Code)
616-376-9000
Registrant's telephone number, including area code
Common Stock, $10, Par Value
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
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 by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
State the aggregate market value of the voting stock held by non-
affiliates of registrant, $6,284,898,770 on December 31, 1997.
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 December 31, 1997
Common Stock, $10 Par Value 87,166,376
DOCUMENTS INCORPORATED BY REFERENCE
Information from the following document has Parts of this
been incorporated into this report by reference report into which
to the extent indicated in those parts incorporated
Not Applicable
PART I
ITEM 1. BUSINESS OF FIRST OF AMERICA BANK CORPORATION
General
First of America Bank Corporation (herein after referred to as
First of America or the Registrant) is a bank holding company
headquartered in Kalamazoo, Michigan. The Registrant was
incorporated as a Michigan corporation in May 1971. Its principal
activity consists of owning and supervising its two subsidiary banks
which operate general, commercial banking businesses from 545 banking
offices and facilities located in Michigan, Illinois, and Indiana.
The Registrant also has divisions and non-banking subsidiaries which
provide mortgage, trust, data processing, pension consulting,
revolving credit, insurance, securities brokerage and investment
advisory services. At December 31, 1997, the Registrant had assets of
$21.1 billion, deposits of $15.8 billion and shareholders' equity of
$1.9 billion.
The Registrant has responsibility for the overall conduct,
direction and performance of its affiliates. The Registrant
establishes direction and policies for the entire organization and
monitors compliance with these policies. The Registrant also provides
capital funds to affiliates as required and assists affiliates in
asset and liability management, marketing, planning, accounting, tax,
internal audit, loan review, and human resource management for its
10,622 full time equivalent employees. The Registrant derives its
income principally from dividends upstreamed from its subsidiaries.
On November 30, 1997, First of America entered into an Agreement
and Plan of Merger with National City Corporation (NCC) providing for
the merger of First of America into NCC. The merger is subject to
approval by the respective shareholders of First of America and NCC,
regulatory authorities and other customary conditions. Pursuant to
the merger agreement, upon consummation of the merger, each
outstanding share of First of America's common stock will be converted
into 1.2 shares of NCC common stock. The merger is expected to be a
tax-free reorganization and accounted for as a pooling of interests.
The merger is expected to be completed in the second quarter of 1998.
First of America recognizes the need to ensure its operations
will not be adversely impacted by Year 2000 software failures.
Potential software failures due to processing errors arising from
calculations using the Year 2000 date are a known risk. Further
discussion of this issue is presented within "Item 7. Management's
Discussion and Analysis" appearing later in this document.
Subsidiary Banks
On June 30, 1997, the Registrant merged its former subsidiary,
First of America Bank-Indiana, into First of America Bank-Michigan,
N.A., which was renamed First of America Bank, N.A.. On October 1,
1997, the Registrant sold its former subsidiary First of America Bank-
Florida, F.S.B. and its other Florida-based operations (the Florida
Sale).
As of December 31, 1997, the Registrant had two wholly owned
subsidiary banks, First of America Bank, N.A. and First of America
Bank-Illinois, N.A. (collectively, the Banks) First of America Bank,
N.A., is a general commercial bank based in Kalamazoo, Michigan with
offices in Michigan and Indiana. At December 31, 1997, it had $15.2
billion in assets, $9.3 billion in loans and $11.3 billion in
deposits. First of America Bank-Illinois, N.A., is a general
commercial bank based in Bannockburn, Illinois with offices throughout
Illinois. At December 31, 1997, it had $6.1 billion in assets, $4.3
billion in loans and $4.6 billion in deposits. The Banks offer a
broad range of lending, depository and related financial services to
individual, commercial, industrial, financial, and governmental
customers, including demand, savings and time deposits, secured and
unsecured loans, lease financing, letters of credit, money transfers,
corporate and personal trust services, cash management, and other
financial services. These services are organized into four core lines
of business: Commercial Banking, Retail Sales & Delivery, Consumer
Finance & Mortgage, and Trust & Financial Services.
No material part of the business of First of America and its
subsidiaries is dependent upon a single customer, or a very few
customers, where the loss of any one would have a materially adverse
effect on the Registrant.
Non-Banking Subsidiaries
First of America Loan Services, Inc. is a wholly owned subsidiary
of First of America Bank, N.A. First of America Loan Services, Inc.
engages in the servicing of both commercial and residential real
estate loans for institutional investors and certain affiliates of the
Registrant and secondary market sales.
First of America Mortgage Company is a wholly owned subsidiary of
First of America Bank, N.A. that provides mortgage loan origination
services.
First of America Insurance Company is a wholly owned subsidiary
of the Registrant. The insurance company reinsures credit life and
disability insurance provided by an unaffiliated insurer for customers
of the Registrant's affiliates.
First of America Brokerage Service, Inc. is a wholly owned
subsidiary of First of America Bank, N.A. It is a registered broker-
dealer and provides retail securities brokerage services, through a
clearing broker, to customers of the Banks and others.
First of America Investment Corporation is a wholly owned
subsidiary of First of America Bank, N.A. First of America Investment
Corporation is a registered investment adviser which provides
comprehensive investment advisory services to the trust and financial
services division of the Registrant and to individual and
institutional investors. It also serves as investment adviser for The
Parkstone Group of Funds, First of America's proprietary mutual funds.
First of America Securities, Inc. is a wholly owned subsidiary of
the Registrant. It is a registered broker-dealer and engages in
limited securities underwriting and dealing as well as other capital
market activities.
First of America Trust Company is a wholly owned subsidiary of
the Registrant. It provides trust services to customers of the
Registrant's Illinois affiliate bank.
New England Trust Company, based in Providence, Rhode Island, is
a wholly owned subsidiary of the Registrant and provides fiduciary
investment advisory services to individual and institutional
investors.
First of America Community Development Corporation is a wholly
owned subsidiary of the Registrant. It invests in qualifying
businesses or housing projects, as allowed by federal law, to address
the needs of low to moderate income neighborhoods.
First of America Insurance Group - Michigan, Inc. is a wholly
owned subsidiary of First of America Bank, N.A. and First of America
Insurance Group - Illinois, Inc. is a wholly owned subsidiary of First
of America Bank - Illinois, N.A. These affiliates provide personal,
commercial and group insurance and employee benefit products.
Competition
The Banks compete primarily with other banks and savings and loan
associations for loans, deposits and trust accounts. They are also
faced with increasing competition from other financial intermediaries
including consumer finance companies, leasing companies, credit
unions, retailers and investment banking firms.
The Banks of the Registrant have 714 automated teller machines
(ATM's) located on bank premises and on off-premise sites located in
high volume retail and service locations.
Supervision and Regulation
First of America and the Banks are subject to supervision,
regulation and periodic examination by federal banking regulatory
agencies, including, primarily, the Board of Governors of the Federal
Reserve Board (FRB) and the Office of the Comptroller of the Currency
(OCC).
The following is a summary of certain statutes and regulations
affecting First of America and the Banks. This summary is qualified
in its entirety by such statutes and regulations, which are subject to
change based on pending and future legislation and actions by
regulatory agencies.
Bank Holding Companies - As a bank holding company, First of
America is subject to regulation under the Bank Holding Company Act of
1956, as amended (BHCA) and by the FRB. Among other things, the BHCA
imposes requirements for the maintenance of capital adequate to
support a bank holding company's operations. The BHCA also restricts
the product range of bank holding companies by circumscribing the
types of institutions bank holding companies may own or acquire. The
BHCA limits bank holding companies to owning and managing banks or
companies engaged in activities determined by the FRB to be closely
related to banking. The BHCA requires bank holding companies to
obtain the prior approval of the FRB before acquiring substantially
all the assets of any bank or bank holding company or direct or
indirect ownership or control of more than 5% of the voting shares of
a bank or bank holding company.
Under the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (Interstate Act), commencing on September 29, 1995, bank
holding companies became permitted to acquire banks located in any
state regardless of the state law in effect at the time. The
Interstate Act also provides for the nationwide interstate branching
of banks. Under the Interstate Act, both national and state-chartered
banks are also allowed to merge across state lines (thereby creating
interstate branches) commencing June 1, 1997. States were permitted
to "opt out" of the interstate branching authority by taking action
prior to the commencement date. The States of Illinois, Indiana and
Michigan did not opt out of the Interstate Act's provisions.
Banks - The Banks, as national banking associations, are subject
to regulation by the OCC under the National Bank Act. Additionally,
the Banks are members of the Federal Reserve System, and as such are
subject to applicable provisions of the Federal Reserve Act and
regulations thereunder. The National Bank Act, the Federal Reserve
Act as well as OCC and FRB regulations govern among other things, the
scope of the Banks' businesses, maintenance of adequate capital,
reserves against deposits, investments and loans they may make,
transactions with affiliates (such as the Registrant), their ability
to pay dividends and activities with respect to mergers and
establishing branches.
Deposit Insurance Assessments and Other Federal Regulation-
Deposits held by the Banks are insured, to the extent permitted by
law, by the Bank Insurance Fund (BlF) and the Savings Association
Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation
(FDIC).
A majority of the deposits of the Banks are insured by the BIF,
with a portion of each of those banks' deposits insured by the SAIF.
The Banks are therefore subject to deposit insurance assessments.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act
of 1991, the FDIC is required to set deposit insurance rates at a
level that will maintain the BIF and SAIF reserve ratio at a mandated
level and has implemented a risk-based assessment scheme. Under this
arrangement, each depository institution is assigned to one of nine
categories (based upon three categories of capital adequacy and three
categories of perceived risk to the applicable insurance fund). On
September 30,1996, the federal Deposit Insurance Funds Act (DIFA) was
enacted. DIFA provided for a one-time special assessment by the FDIC
on SAIF-assessable deposits, which raised the SAIFs reserve ratio to
the designated level. This allowed the FDIC to effectively equalize
the formerly disparate deposit insurance assessment ratios of the BIF
and SAIF. For 1997, the effective BIF and SAIF assessment rates ranged
from 0 basis points for well-capitalized institutions displaying
little risk, to 27 basis points for undercapitalized institutions
displaying high risk. Going forward, both BIF insured banks and SAIF
insured thrifts are also required to pay interest on Financing
Corporation (FICO) bonds issued in connection with the federal
government's bail out of the thrift industry.
The Financial Institutions Reform Recovery and Enforcement Act of
1989 provides for cross-guarantees of the liabilities of insured
depository institutions pursuant to which any insured bank or savings
association subsidiary of a holding company may be required to
reimburse the FDIC for any loss incurred or reasonably anticipated to
be incurred by the FDIC in connection with a default of any of such
holding company's other insured subsidiary banks or savings
associations or from assistance provided to such other subsidiaries in
danger of default. This right of recovery by the FDIC generally is
superior to any claim of the shareholders of the depository
institution that is liable or any affiliate of such institution. The
Federal Deposit Insurance Act also requires receivers of failed
depository institutions to give priority to depositors over general
creditors, subordinated creditors and shareholders when distributing
assets of a failed bank. This depositor preference applies on a
nationwide basis.
Non-banking Subsidiaries - First of America has non-banking
subsidiaries that are broker-dealers and investment advisers, each
registered and subject to regulation by the Securities and Exchange
Commission under federal securities laws. The broker-dealer
subsidiaries are also subject to regulation under various state
securities laws. Because they are affiliated with First of America's
subsidiary banks, these subsidiaries are subject to certain
limitations on their securities activities imposed by federal banking
laws. First of America also has non-banking subsidiaries that are
insurance agencies licensed and subject to regulation by state
insurance regulatory agencies.
Economic Conditions and Governmental Policy - First of America's
earnings are affected not only by the extensive regulation described
above, but also by general economic conditions. These economic
conditions influence and are influenced by the monetary and fiscal
policies of the United States government and its various agencies,
particularly the FRB. The Registrant cannot predict changes in
monetary policies or their impact on its operations and earnings.
Capital Adequacy - Reference is made to Note 18 of the Notes to
Consolidated Financial Statements included under "Item 8. Financial
Statements and Supplementary Data" included later in this document for
a discussion of capital adequacy matters.
Statistical Data
The statistical data as required is presented with "Item 7.
Management's Discussion and Analysis" and in certain of the Notes to
Consolidated Financial Statements and Supplemental Data included with
"Item 8. Financial Statements and Supplementary Data" appearing later
in this document.
ITEM 2. PROPERTIES
First of America is headquartered in Kalamazoo, Michigan.
First of America's subsidiaries operate a total of 545 banking
offices, a majority of which are owned by the Banks with the remaining
offices under lease agreements. Reference is made to Note 10 of the
Notes to Consolidated Financial Statements included under "Item 8.
Financial Statements and Supplementary Data" included later in this
document for further information regarding the terms of these leases.
All of these offices are considered by management to be well
maintained and adequate for the purpose intended.
ITEM 3. LEGAL PROCEEDINGS
First of America and its subsidiaries are parties to routine
litigation arising in the normal course of their respective business.
In the opinion of management after consultation with counsel,
liabilities arising from these proceedings, if any, are not expected
to be material to First of America's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders
during the three months ended December 31, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
First of America's common stock is listed for trading on the New
York Stock Exchange (NYSE). The range of high and low sales prices
appear under the caption "Market Price of Common Stock" under
Supplemental Information included with "Item 8. Financial Statements
and Supplementary Data" included later in this document.
Common stock dividends, payable in cash, were declared on a
quarterly basis during 1997 and 1996. The dividends declared per
common share totaled $1.33 during 1997 and $1.21 during 1996.
Restrictions on First of America's ability to pay dividends are
described in Note 13 in the paragraph beginning "The various loan
agreements" and in Note 17 of the Registrant's "Notes to Consolidated
Financial Statements" included under "Item 8. Financial Statements and
Supplementary Data" included later in this document.
At the 1997 annual meeting, shareholders approved an increase in
the number of authorized common stock from 100,000,000 to 200,000,000
shares. On May 30, 1997, a 3-for-2 stock split, effected in the form
of a 50 percent stock dividend, was distributed to shareholders. All
prior period data presented in this filing regarding the number of
common shares outstanding and amounts per share have been restated to
reflect the preceding two events. Further information on this topic
is presented in Note 22 of the Registrant's "Notes to Consolidated
Financial Statements" included later in this document.
On January 1, 1997, and January 7, 1997 First of America issued
93,855 shares and 73,742 shares of its common stock, par value $10.00
per share, to shareholders of Scott, Doerschler, Messner & Gauntlett,
Inc. and Elliot & Sons Insurance Agency, Inc./Michigan Benefit Plans,
Inc., respectively, in connection with First of America's acquisitions
of these companies pursuant to statutory share exchanges. First of
America's common stock was issued in the transaction without
registration under the Securities Act of 1933 in reliance on
Regulation D and Rule 505 under the Securities Act.
The number of record holders of First of America's common stock
as of December 31, 1997 was 29,141.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to the following information included in "Item
7. Management's Discussion and Analysis - Table II" under the caption
"Selected Financial Data": the line items "Interest income" through
earnings per share," "Cash dividends declared per common share,"
"Total assets" and "Long-term debt" for the years 1993 through 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following financial review discusses the performance of First
of America, on a consolidated basis, for the three years ended
December 31, 1997, and should be read in conjunction with the
consolidated financial statements and notes thereto.
Mergers and Acquisitions
On November 30, 1997, First of America and NCC entered into an
Agreement and Plan of Merger. Refer to the "General" section of "Item
1. Business of First of America Bank Corporation" included earlier in
this document and Note 3 to the Notes to Consolidated Financial
Statements included later in this document for details of the
agreement.
Table I below and Note 2 of the Notes to Consolidated Financial
Statements, included later in this document, summarize First of
America's business combinations for the past three years.
Business Combinations Table I
($ in thousands)
1997 1996 1995
Assets Assets Assets
Affiliate Acquired Affiliate Acquired Affiliate Acquired
Scott, Doerschler, Messner & $73 Huttenlochers Kerns Norvell, $3,994 New England Trust Company
Gauntlett, Inc. Inc. $1,576
Elliot & Sons Insurance 1,424 Underwriting Consultants,
Agency, Inc./Michigan Benefit Inc. 1,255
Plans, Inc.
West Suburban Financial
Corporation 12
------- ------- -------
$1,497 $3,994 $2,843
======= ======= =======
The January 1997 acquisitions noted in Table I were for companies
located in Michigan that provide insurance, employee benefit and other
financial services.
1997 Highlights
Net income for 1997 was $314.8 million, up 22.5 percent compared
with the $256.9 million earned in 1996. For the same periods, diluted
earnings per share were $3.53 and $2.77, respectively. The current
year's results include the following one-time events (net of tax): a
gain of $12.0 million from the Florida Sale; gains from branch sales
of $13.8 million; and a gain of $4.1 million on the sale of certain
affinity card receivables. Partially offsetting these gains were
$17.2 million in severance costs and other one-time charges.
At the time of the Florida Sale, the Florida operations had
approximately $1.1 billion in assets, loans of $790 million and
deposits of $870 million. On a year-to-date basis (through September
30, 1997), net income for the operation was $4.8 million. For the
same period, on a pre-tax basis, net interest income after the
provision for loan losses was $28.9 million, non-interest revenue
was $6.6 million and non-interest expense was $29.6 million.
For 1996, reported results included the impact of the Federal
Deposit Insurance Corporation's one-time assessment fee of $14.0
million (net of tax) to recapitalize the Savings Association Insurance
Fund, gains from branch sales of $17.0 million (net of tax), and one-
time charges of $7.3 million (net of tax) associated with severance
and various write-downs. For 1995, the results included restructuring
charges of $8.6 million (net of tax) and gains from branch office
sales of $10.6 million (net of tax).
Return on average assets was 1.49 percent for 1997 compared with
1.16 percent for 1996 and 1.00 percent for 1995. Return on average
equity was up for the year-over-year comparison, 17.41 percent
compared with 14.39 percent. Return on average equity was 13.89
percent for 1995.
Asset quality remained strong in 1997. Nonperforming assets were
0.51 percent of total assets, compared with 0.52 percent and 0.63
percent at year-ends 1996 and 1995, respectively. Net charge-offs as
a percent of average loans for 1997 was 0.58 percent, higher than the
0.53 percent and 0.47 percent reported for 1996 and 1995. The
increase in the ratio from 1996 to 1997 was primarily the result of a
higher level of commercial and credit card net charge-offs and lower
average outstandings. Management does not believe that the increase
in commercial net charge-offs, which occurred mostly in the fourth
quarter, is indicative of a deteriorating trend in the remainder of
the portfolio. The preceding statement is forward looking and First
of America's actual results may differ due to, among other things,
changes in economic and interest rate conditions. The increase in
credit card net charge-offs is common across the banking industry, as
personal bankruptcies increased during 1997. To reverse this trend,
First of America has intensified its collection efforts and tightened
credit controls. The 1995 to 1996 increase was primarily due to a
decreasing loan portfolio, which resulted from a planned balance sheet
restructuring. The allowance for loan losses as a percent of total
loans did increase, however, to 1.78 percent at year-end 1997 compared
with 1.68 percent at year-end 1996, as the provision for loan loss
expense covered net charge-offs by 102 percent. The allowance as a
percent of total loans was 1.50 percent at December 31, 1995.
Total assets were $21.1 billion at December 31, 1997, decreasing
from the $22.1 billion reported at December 31, 1996, as a result of
the Florida Sale and targeted balance sheet restructuring efforts.
Higher priced deposits and selected loan portfolios with narrower net
interest spreads were reduced and greater emphasis was placed on loans
and deposits meeting specific targeted returns. Total assets were
$23.6 billion at December 31, 1995.
The 1995 to 1996 decrease was also affected by the restructuring
of the balance sheet.
Total shareholders' equity was up slightly from a year ago to
$1.9 billion resulting in a book value per common share of $21.52 at
December 31, 1997. The book value per common share was $19.89 at
year-end 1996 and $19.26 at year-end 1995. The total risk-based
capital ratio of 14.74 percent at year-end 1997 was the highest
reported by First of America since it began computing risk-based
ratios in 1989.
In August 1997, the Board of Directors increased the cash
dividend per common share by 11.7 percent to $1.40 annually. This
increase indicated the Board's continued confidence in First of
America's profitability and represents the fifteenth year in a row
that the dividend was increased.
Several organizational changes were completed in 1997 which were
implemented to continue First of America's efforts towards creating a
delivery system that revolves around its customers' needs. The
changes realigned the company from a geographic focus to a line of
business focus, allowed more resources to be targeted to sales
incentives and sales training, reduced costs for delivery of products
and services, and improved profitability.
Selected Financial Data Table II
($ in thousands, except per share data)
5 Year
Compounded Year Ended December 31,
Growth 1997 1996 1995 1994 1993 1992
Rate
SUMMARY OF OPERATIONS
Interest income (0.1)% $1,590,778 1,663,554 1,796,524 1,600,877 1,510,966 1,596,127
Interest expense (0.1) 718,856 761,066 872,528 662,142 608,949 721,300
Net interest income (0.1) 871,922 902,488 923,996 938,735 902,017 874,827
Provision for loan losses 1.7 85,707 93,456 91,488 86,571 84,714 78,809
Total non-interest income 13.3 487,129 419,314 346,100 284,373 292,184 261,316
Total non-interest expense 0.1 801,839 845,003 815,271 813,418 763,528 796,348
Applicable income tax
expense 11.4 156,744 126,457 126,629 102,616 98,574 91,506
Extraordinary item, net of
tax n/a -- -- -- -- -- (21,956)
-------------------------------------------------------------------------------------------
Net income 16.4% $314,761 256,886 236,708 220,503 247,385 147,524
===========================================================================================
Net income applicable to 18.4% $314,761 256,886 236,708 220,503 241,232 135,015
common stock ===========================================================================================
EARNINGS PER SHARE
Common 16.7% $3.57 2.79 2.50 2.47 2.82 1.65
Diluted 16.4 3.53 2.77 2.49 2.46 2.76 1.65
Average common shares
outstanding (000) 1.5 88,170 92,044 94,831 89,295 85,667 81,944
Cash dividends declared
per common share 8.3 $ 1.33 1.21 1.15 1.09 1.03 0.89
Book value per common
share 7.9 21.52 19.89 19.26 16.75 17.07 14.75
-------------------------------------------------------------------------------------------
BALANCE SHEET SUMMARY
ASSETS:
Cash and due from banks 3.9% 1,180,883 1,205,962 1,207,062 1,060,788 903,517 918,960
Federal funds sold, resale
agreements and time
deposits (1.4) 162,730 163,400 269,737 55,271 74,909 175,030
Securities:
Held to maturity n/a -- -- -- 3,112,876 1,856,623 3,489,626
Available for sale n/a 4,941,969 4,562,381 5,060,746 2,587,626 3,261,481 --
Held for sale n/a -- -- -- -- 1,137,420
Loans - net of unearned
income (0.1) 13,669,486 15,056,006 16,076,942 16,834,858 14,394,155 13,756,017
Allowance for loan losses 6.6 (243,469) (252,846) (241,182) (228,115) (188,664) (176,793)
Other assets 10.1 1,368,055 1,327,276 1,226,790 1,145,398 928,450 846,507
-------------------------------------------------------------------------------------------
Total assets 0.9% $21,079,654 22,062,179 23,600,095 24,568,702 21,230,471 20,146,767
===========================================================================================
LIABILITIES AND EQUITY
Deposits (2.7)% $15,759,294 17,619,296 19,342,467 20,200,266 18,243,703 18,035,553
Short term borrowings (14.4) 1,554,121 1,837,990 1,649,965 1,882,739 994,578 338,023
Long term debt 42.4 1,486,777 521,124 490,315 681,236 254,193 254,051
Other liabilities 17.0 402,553 299,571 289,367 225,573 214,560 183,649
Total shareholders' equity 7.0 1,876,909 1,784,198 1,827,981 1,578,888 1,523,437 1,335,491
-------------------------------------------------------------------------------------------
Total liabilities and
equity 0.9% $21,079,654 22,062,179 23,600,095 24,568,702 21,230,471 20,146,767
===========================================================================================
FINANCIAL RATIOS
Return on average total
equity 8.9% 17.41 14.39 13.89 14.44 17.50 11.38
Return on average assets 14.7 1.49 1.16 1.00 0.98 1.20 0.75
Net interest margin (a) (1.3) 4.67 4.53 4.28 4.58 4.86 4.98
Total shareholders' equity
to assets at year-end 6.4 8.90 8.09 7.75 6.43 7.18 6.63
(a) Fully taxable equivalent based on a marginal federal income tax rate of 35% for 1997, 1996, 1995, 1994 and 1993,
and 34% for 1992.
Income Analysis
Net Interest Income - Net interest income on a fully taxable
equivalent (FTE) basis was $895.5 million compared with $920.0 million
in 1996. This decrease reflects the impact of the balance sheet
restructuring and the Florida sale that reduced average earning assets
$1.1 billion, or 5.8 percent. These strategies improved the net
interest margin, which rose 14 basis points to 4.67 during the year.
At mid-year 1995, First of America completed the securitization of
$500 million in credit card receivables, shifting revenue from
interest income to non-interest fee revenue. If 1995's net interest
income was restated for the impact of the securitization, 1996's net
interest income would have been level with 1995.
Table III presents a summary of the changes in net interest
income resulting from changes in volumes and rates for 1997 and 1996.
Net interest income, average balance sheet amounts, and the
corresponding yields and costs for the years 1993 through 1997 are
shown in Table IV.
Total interest income FTE declined 4.0 percent in 1997. As
illustrated in Table III, the decrease resulted mainly from a lower
volume of earning assets. On the other hand, interest expense was
down 5.6 percent as a result of lower rates on interest-bearing
liabilities and a $1.2 billion decrease in average interest bearing
liabilities. The combination of these changes resulted in the 2.7
percent decrease in net interest income FTE for 1997 compared with
1996.
Volume/Rate Analysis Table III
($ in thousands)
1997 Change From 1996 Due To 1996 Change From 1995 Due To
Volume Rate Total Volume Rate Total
INTEREST INCOME:
Loans (FTE) (96,027) 16,615 (79,412) $ (95,181) (13,930) (109,111)
Taxable securities (14,176) 12,818 (1,358) (43,999) 11,697 (32,302)
Tax exempt securities (FTE) 16,383 (497) 15,886 5,999 (591) 5,408
Money market investments (1,693) (163) (1,856) 3,591 947 4,538
-----------------------------------------------------------------------------
Total interest income (FTE) (95,513) 28,773 (66,740) $ (129,590) (1,877) (131,467)
-----------------------------------------------------------------------------
INTEREST EXPENSE:
Interest bearing deposits (71,684) (10,513) (82,197) $ (55,743) (23,423) (79,166)
Short term borrowings 6,814 2,441 9,255 (11,837) (8,859) (20,696)
Long term debt 33,547 (2,816) 30,731 (13,408) 1,808 (11,600)
-----------------------------------------------------------------------------
Total interest expense (31,323) (10,888) (42,211) $ (80,988) (30,474) (111,462)
-----------------------------------------------------------------------------
Change in net interest income (64,190) 39,661 (24,529) $ (48,602) 28,597 (20,005)
=============================================================================
* 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. Non-taxable income
has been adjusted to a fully taxable equivalent basis.
/TABLE
Average Balances/Net Interest Income/Average Rates Table IV
($ in thousands)
Year Ended December 31, 1997 1996
Average Average
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
ASSETS:
Money market investments $ 140,380 8,534 6.08 $ 168,182 10,390 6.18%
Investment securities:
U.S. Treasury, federal agencies and other 4,163,999 270,485 6.50 4,387,256 271,843 6.20
State and municipal securities (1) 497,674 40,152 8.07 294,728 24,266 8.23
Total loans (1)(2) 14,394,193 1,295,186 9.00 15,463,335 1,374,598 8.89
---------------------- ----------------------
Total earnings assets/total
interest income (1) 19,196,246 1,614,357 8.41 20,313,501 1,681,097 8.28
---------------------- ----------------------
Less allowance for loan losses 256,572 249,833
Cash and due from banks 889,437 932,239
Other assets 1,287,803 1,198,433
---------- ----------
Total $21,116,914 $ 22,194,340
========== ==========
LIABILITIES AND EQUITY:
Deposits:
Savings and NOW accounts $ 3,767,274 81,648 2.17 $ 3,843,700 80,490 2.09%
Money market savings accounts 3,823,099 149,391 3.91 3,898,886 142,811 3.66
Time deposits 6,148,527 332,758 5.41 7,739,404 422,694 5.46
---------------------- ----------------------
Total interest-bearing deposits 13,738,900 563,797 4.10 15,481,990 645,995 4.17
Short term borrowings 1,563,328 89,243 5.71 1,443,047 79,988 5.54
Long term debt 903,171 65,814 7.29 445,329 35,083 7.87
---------------------- ----------------------
Total interest-bearing liabilities/
total interest expense 16,205,399 718,854 4.44 17,370,366 761,066 4.38
---------------------- ----------------------
Demand deposits 2,785,164 2,790,118
Other liabilities 318,704 248,448
Non-redeemable preferred/preference stock -- --
Common shareholders' equity 1,807,647 1,785,408
---------- ----------
Total $21,116,914 $ 22,194,340
========== ==========
Interest income/earning assets 8.41 8.28%
Interest expense/earning assets 3.74 3.75
Net interest margin/earning assets 4.67 4.53%
Year Ended December 31, 1995 1994
Average Average
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
ASSETS:
Money market investments $ 108,480 5,852 5.39% $ 72,736 2,349 3.23%
Investment securities:
U.S. Treasury, federal agencies and other 5,103,380 304,145 5.96 5,319,354 303,098 5.70
State and municipal securities (1) 222,055 18,858 8.49 306,946 25,296 8.24
Total loans (1)(2) 16,532,752 1,483,709 8.97 15,172,618 1,287,121 8.48
---------------------- ----------------------
Total earnings assets/total
interest income (1) 21,966,667 1,812,564 8.25 20,871,654 1,617,864 7.75
---------------------- ----------------------
Less allowance for loan losses 234,933 206,703
Cash and due from banks 919,598 892,959
Other assets 1,100,940 992,857
---------- ----------
Total $23,752,272 $22,550,767
========== ==========
LIABILITIES AND EQUITY:
Deposits:
Savings and NOW accounts $ 3,444,077 59,342 1.72% $3,948,604 59,476 1.51%
Money market savings accounts 4,254,533 166,906 3.92 3,551,445 110,220 3.10
Time deposits 9,105,938 498,913 5.48 8,849,576 398,239 4.50
---------------------- ----------------------
Total interest-bearing deposits 16,804,548 725,161 4.32 16,349,625 567,935 3.47
Short term borrowings 1,647,634 100,684 6.11 1,325,584 60,389 4.56
Long term debt 616,357 46,683 7.57 485,494 33,818 6.97
---------------------- ----------------------
Total interest-bearing liabilities/
total interest expense 19,068,539 872,528 4.58 18,160,703 662,142 3.65
Demand deposits 2,710,566 2,665,183
Other liabilities 269,073 197,330
Non-redeemable preferred/preference stock -- --
Common shareholders' equity 1,704,094 1,527,551
---------- ----------
Total $23,752,272 $22,550,767
========== ==========
Interest income/earning assets 8.25% 7.75%
Interest expense/earning assets 3.97 3.17
Net interest margin/earning assets 4.28% 4.58%
Year Ended December 31, 1993
Average
Interest Rate
Average Income/ Earned/
Balance Expense Paid
ASSETS:
Money market investments $ 93,662 2,854 3.05%
Investment securities:
U.S. Treasury, federal agencies and other 4,537,814 262,871 5.79
State and municipal securities (1) 530,407 42,605 8.03
Total loans (1)(2) 13,875,584 1,225,736 8.83
----------------------
Total earnings assets/total
interest income (1) 19,037,467 1,534,066 8.06
----------------------
Less allowance for loan losses 182,594
Cash and due from banks 839,506
Other assets 850,783
----------
Total $20,545,162
==========
LIABILITIES AND EQUITY:
Deposits:
Savings and NOW accounts $3,980,815 82,664 2.08%
Money market savings accounts 3,009,796 78,738 2.62
Time deposits 8,638,044 409,097 4.74
----------------------
Total interest-bearing deposits 15,628,655 570,499 3.65
Short term borrowings 575,074 18,546 3.22
Long term debt 272,297 19,904 7.31
----------------------
Total interest-bearing liabilities/
total interest expense 16,476,026 608,949 3.70
Demand deposits 2,463,534
Other liabilities 191,922
Non-redeemable preferred/preference stock 74,586
Common shareholders' equity 1,339,094
----------
Total $20,545,162
==========
Interest income/earning assets 8.06%
Interest expense/earning assets 3.20
Net interest margin/earning assets 4.86%
(1) Interest income on obligations of states and political subdivisions and
on tax exempt commercial loans has been adjusted to a fully taxable
equivalent basis using a marginal federal tax rate of 35%.
(2) Non-accrual loans are included in average loan balances.
Net Interest Margin - The net interest margin was 4.67 percent in
1997, higher than the 4.53 percent reported for 1996, as a result of
pricing strategies implemented to improve the interest spread of
certain loan products to achieve the corporation's internal targeted
return on equity and on improving the mix within deposits and
borrowings.
The net interest margin improved steadily throughout 1996,
reaching 4.64 percent in the fourth quarter as a result of initiating
the balance sheet restructuring strategy and maintaining strong
pricing controls. If 1995's net interest margin was adjusted for the
impact of the June 1995 credit card securitization, the increase for
1996 over 1995 would have been 32 basis points, as the credit card
securitization shifted interest income to non-interest income.
Provision for Loan Losses - The provision for loan losses is
based on the current level of net charge-offs and management's
assessment of the credit risk inherent in the loan portfolio. For
1997, the provision for loan losses was decreased to $85.7 million
from $93.5 million in 1996. The 1995 provision was $91.5 million.
The 102 percent coverage of net charge-offs by the provision for loan
losses, the decrease in the loan portfolio due to the balance sheet
restructuring strategy and the Florida Sale were some of the issues
considered in setting 1997's provision. The higher allowance as a
percent of total loans ratio which was 1.78 percent, up from 1.68
percent at December 31, 1996 and 1.50 percent at December 31, 1995 was
also considered.
Additional information on the provision for loan losses, net
charge-offs and nonperforming assets is provided in Tables IX and XI
under the caption,"Credit Risk Profile," presented later in this
discussion.
Non-interest Revenue - Non-interest revenue of $487.1 million was
up 16.2 percent over 1996. Included in 1997's results was the impact
of one-time gains of $18.8 million from the Florida Sale, $23.5
million from the sale of branch offices, and $6.7 million from the
sale of consumer credit card receivables. Results for 1996 included
$29.7 million in gains from branch sales. Excluding these one-time
items, non-interest revenue would have increased 12.5 percent over
1996. Non-interest revenue totaled $346.1 million in 1995. Table V
presents the trends in the major components of non-interest revenue
from 1993 to 1997.
Non-Interest Revenue and Non-Interest Expense Table V
($ in thousands)
Change
1997/1996
1997 1996 1995 1994 1993 Amount Percent
NON-INTEREST REVENUE
Service charges on deposits $117,095 112,516 100,281 89,164 84,648 4,579 4.1%
Trust and financial services revenue 136,325 114,024 94,179 81,717 77,290 22,301 19.6
Investment securities transaction (3,384) (515) 62 5,349 16,753 (2,869) n/a
Other operating revenue 237,093 193,289 151,578 108,143 113,493 43,804 22.7
-----------------------------------------------------------------------
Total non-interest revenue $487,129 419,314 346,100 284,373 292,184 67,815 16.2
=======================================================================
NON-INTEREST EXPENSE
Personnel $459,699 454,170 430,977 430,563 403,119 5,529 1.2%
Occupancy, net 60,268 64,871 64,108 60,471 55,093 (4,603) (7.1)
Equipment 56,140 58,462 59,322 56,111 53,376 (2,322) (4.0)
Data processing 18,420 19,182 18,825 17,524 14,963 (762) (4.0)
Amortization of intangibles 19,946 23,355 21,146 16,577 8,902 (3,409) (14.6)
FDIC premiums 3,115 28,685 28,373 42,055 39,680 (25,570) (89.1)
Other operating expense 184,251 196,278 192,520 190,117 188,395 (12,027) (6.1)
-----------------------------------------------------------------------
Total non-interest expense $801,839 845,003 815,271 813,418 763,528 (43,164) (5.1)%
=======================================================================
Non-interest revenue as a percent
of average assets 2.31% 1.89 1.46 1.26 1.42
Non-interest expense as a percent
of average assets 3.80% 3.81 3.43 3.61 3.72
Burden ratio 1.49 1.92 1.97 2.35 2.30
Efficiency ratio 57.99 63.09 63.39 65.59 62.72
Efficiency ratio,
excluding FDIC premiums 57.77 60.95 61.18 62.20 59.46
Service charges on deposit accounts, which increased 4.1 percent
from 1996, remained a significant component of non-interest revenue in
1997.
In total, trust and financial services revenue was the largest
component of non-interest revenue for 1997, increasing 19.6 percent
from a year ago. Traditional trust fees increased 3.5 percent for
1997 over 1996 while other financial services fees, generated by cash
management, investment management, brokerage, securities trading and
underwriting along with insurance services, increased 45.3 percent,
benefiting from the sales and services strategies implemented in
partnership with the branch employees. Total revenue from the sale of
Parkstone and other mutual funds and annuities was $15.9 million
compared with $14.0 million in 1996. Insurance revenue for 1997 was
$12.1 million compared with $5.1 million in 1996 reflecting the
Registrant's expanding commitment to this product line.
Net losses on the sales of investment securities totaled $3.4
million compared with losses of $0.5 million in 1996 and gains of $3.7
million in 1995. During December 1995, First of America transferred
all of its Held to Maturity securities into the Available for Sale
classification. More detail on that reclassification is provided in
Note 5 of the Notes to Consolidated Financial Statements included
later in this document. At December 31, 1997, the amortized cost and
corresponding market value of Available for Sale securities each
totaled $4.9 billion compared with $4.5 billion and $4.6 billion,
respectively, for 1996. The changes in the relative market value of
Available for Sale Securities resulted in an adjustment which
increased shareholders' equity $23.7 million for 1997.
Bank card revenue totaled $79.8 million, up 8.0 percent over the
$73.9 million earned in 1996. Excluding the gain in 1997 from the
sale of consumer card receivables, bank card revenue was approximately
level with 1996. Although interchange revenue was up 19.6 percent for
the year, lower merchant discount and securitization fees offset the
increase. Bank card revenue totaled $60.4 million in 1995. The
managed credit card portfolio, which includes the $724.0 million in
receivables remaining on the balance sheet and the securitized
receivables, was $1.2 billion at December 31, 1997, down from $1.3
billion a year ago.
Mortgage banking revenue of $34.6 million increased 21.2 percent
from $28.5 million for 1996 due to higher servicing income and loan
sale gains. Mortgage banking revenue decreased to $28.5 million in
1996 from $31.5 million in 1995.
Other operating revenue of $122.8 million was up $31.8 million
over 1996. The largest components of this category, gains on branch
sales and the gain on the Florida Sale, totaled $42.2 million for 1997
compared to gains on branch sales of $29.7 million for 1996. The
review of branch offices to determine their fit with the company's
strategies is an ongoing activity which was intensified during the
internal restructuring effort. Also included in this total were
nonaffiliate corporate services revenue of $17.7 million, up 17.4
percent; letter of credit fees of $10.3 million, up 60.7 percent;
and the increase in cash surrender values of life insurance policies
of $13.6 million.
Non-interest Expense - As detailed in Table V, non-interest
expense was $801.8 million, down 5.1 percent from 1996. The current
year included $6.4 million for severance, $2.1 million for building
and land writedowns, $8.3 million for a one-time staff bonus accrual,
$5.4 million for an equipment impairment write-down and other expenses
related to the Year 2000, and $4.8 million to fund the merger
announcement's stock appreciation impact on certain benefit programs.
Non-interest expense for 1996 included $22.0 million for the FDIC one-
time assessment and $11.5 million for severance and writedowns. If
one-time charges are excluded from both years, non-interest expense
would have been 4.7 percent lower for 1997 compared with 1996.
Total personnel cost was $459.7 million in 1997 compared with
$454.2 million in 1996 and $431.0 million in 1995. Excluding
severance charges, the bonus accrual and the costs to fund certain
benefit programs due to the upcoming merger from both years, personnel
cost decreased slightly from 1996. Total full time equivalent
employees (FTEs) were 10,622 at December 31, 1997, 12,148 at December
31, 1996 and 12,690 at December 31, 1995.
Two ratios which measure internal efficiencies are the number of
FTEs per one million dollars of average assets and net income per FTE.
For 1997, there were 0.52 FTEs per one million dollars of average
assets compared with 0.55 a year ago, and $29,633 of net income per
FTE versus $21,146 a year ago. These ratios were 0.55 and $18.653 for
1995.
Net occupancy and equipment costs were $116.4 million for 1997, a
5.6 percent decrease from 1996. Other operating expense, which
includes all the other costs of doing business such as advertising,
supplies, travel, telephone, professional fees and outside services
purchased, was $184.3 million in 1997, down 6.1 percent from 1996's
total of $196.3 million. As a percent of average assets, other
operating expense was 0.9 percent compared with 0.88 percent in 1996
and 0.81 percent in 1995. The 1997 ratio increased as a combined
result of the decrease in other operating expense and average assets
during 1997.
Efficiency Ratio and Burden Ratio - The efficiency ratio measures
non-interest expense as a percent of the sum of net interest income
FTE and non-interest income. The lower the ratio, the more
efficiently a company's resources produce revenue. Table V presents
the efficiency ratio over the last five years. In 1997, the
efficiency ratio was 57.99 percent compared with 63.09 percent a year
ago.
The burden ratio measures the relationship of non-interest income
and expense to average assets. The burden ratio improved from a high
of 2.35 percent in 1994 to 1.49 percent in 1997. The 46 basis point
improvement in the 1997 burden ratio compared with 1996 was a result
of an increase in non-interest income combined with lower non-interest
expense.
Income Tax Expense - Income tax expense was $156.7 million in
1997 compared with $126.5 million in 1996 and $126.6 million in 1995.
A summary of significant tax components is provided in Note 21 of the
Notes to Consolidated Financial Statements included later in this
document.
Pro Forma Results -- Cash Earnings
The calculation of "cash earnings" provides an alternative analysis of
First of America's results. "Cash earnings" adds back the
amortization of intangibles and assumes that all intangibles were
charged off against retained earnings upon the original acquisition
date of all mergers accounted for as purchases. These pro forma
results, as detailed below, indicate that First of America's
underlying return on equity for the last three years would have been
within the 17 to 20 percent range. Also earnings per share and return
on assets would have been higher than reported. The book value per
share, while lower than the reported $21.52 for year-end 1997, would
be the equivalent of a reported tangible book value per share. In
fact, the tier I leverage ratio, the strictest regulatory capital
ratio, remains unchanged under these assumptions since it already
excludes intangibles from its computation.
1997 1996 1995
Net income ($ in thousands) $ 332,672 276,762 255,131
Diluted earnings per share 3.73 2.99 2.68
Common book value per share (year end) 19.88 17.64 16.87
Return on average assets 1.59 % 1.26 1.09
Return on total equity 20.56 17.65 17.43
Efficiency ratio 56.55 61.35 61.75
Tier one leverage ratio 8.74 7.15 6.70
Line of Business Financial Performance Table VI
($ in thousands)
Total Consumer Trust & Corporate
Community Finance & Financial Investments Consolidated
For The Year Ended December 31, 1997 Banking Mortgage Services & Funding Results
INCOME STATEMENT
Net interest income (FTE) $ 692,068 173,733 5,766 23,936 895,503
Provision for loan losses 26,266 59,441 -- -- 85,707
Non-interest revenue 180,670 120,298 132,113 11,837 444,918
Non-interest expense 500,238 124,607 96,471 33,543 754,859
Corporate support 23,249 5,769 4,525 (33,543) --
Income tax expense (FTE) 117,308 37,871 13,392 7,234 175,805
--------------------------------------------------------------
Income before goodwill and one-time
gains and charges $ 205,677 66,343 23,491 28,539 324,050
================================================
Gains from branch sales; severance
and other one time charges
(net of tax) 8,626
Goodwill (net of tax) 17,915
--------
Net income $ 314,761
========
PERFORMANCE RATIOS
Profit margin (pre-tax) 23.57 % 22.56 17.04 --
Efficiency ratio 59.98 44.34 73.25 --
Return on equity 19.36 15.74 31.39 --
For the Year Ended December 31, 1996
INCOME STATEMENT
Net interest income (FTE) $ 706,718 201,116 6,719 5,480 920,003
Provision for loan losses 24,296 69,160 -- -- 93,456
Non-interest revenue 158,983 106,300 114,169 8,809 388,261
Non-interest expense 551,207 136,861 83,133 19,407 790,608
Corporate support 13,869 3,447 2,091 (19,407) --
Income tax expense (FTE) 97,776 34,736 12,675 (344) 144,843
--------------------------------------------------------------
Income before goodwill and one-time
gains and charges $ 178,553 63,212 22,989 14,633 279,387
================================================
Gains from branch sales; severance
and other one-time charges
(net of tax) (4,206)
Goodwill (net of tax) 18,295
---------
Net income $ 256,886
=========
PERFORMANCE RATIOS
Profit margin (pre-tax) 20.63 % 20.56 19.02 --
Efficiency ratio 65.27 45.64 70.50 --
Return on equity 16.53 13.02 32.87 --
Line of Business Analysis
An objective of First of America's recent restructuring effort
was to define specific lines of business which would cross legal
entity lines and focus its management and information systems
accordingly. As a result, First of America currently measures the
individual performance of four business lines -- Commercial Banking,
Retail Sales & Delivery, Consumer Finance & Mortgage, and Trust &
Financial Services -- as well as the performance of certain product
lines within those businesses. A fifth category, Corporate
Investments & Funding, includes activities that are not directly
attributable to any one of the four major lines of business.
In developing the management accounting system for line of
business reporting, certain assumptions and allocations were
necessary. Equity was allocated on the basis of required regulatory
levels, inherent operational risk or market-determined factors as
evidenced by similar independent single business line companies.
Support services which were centrally provided were allocated on a
per-unit cost basis or in proportion to the balances of assets and
liabilities associated with a particular business line. Funds
transfer pricing was used to allocate a cost of funds used or a credit
for funds provided from market-determined indices. Because of the
assumptions and allocations utilized, the financial results of the
individual business lines might vary from the actual results if those
lines were in fact separate operating entities. For reporting
purposes this year, Commercial Lending and Retail Sales & Delivery are
combined and shown as Total Community Banking. Table VI presents
summarized income statements and performance ratios for 1997 and 1996
for the business lines. The results for 1996 have been restated to
reflect this new organizational structure.
Net income for each of the lines of business for 1997 was higher
than for 1996. Total Community Banking's net income was up 15.2
percent over 1996 as a result of a $27.7 million increase non-interest
income and a $51.0 reduction in non-interest expense. Consumer
Finance & Mortgage's net income enhanced by gains on the credit card
receivables and mortgage loans increased 5.0 percent. Trust &
Financial Services' net income was up 2.2 percent.
Credit Risk Profile
First of America's community banking structure helps minimize its
credit risk exposure. Community banking means that loans are made in
local markets to consumers and small to mid-sized businesses from
deposits gathered in the same market. A centralized, independent loan
review staff evaluates the loan portfolio of each line of business on
a regular basis and shares its evaluation with the management of the
business line as well as corporate management.
First of America's loan portfolio includes a large percentage of
loans with balances less than $100,000, which effectively reduces
total portfolio risk. At year-end 1997, consumer installment and
revolving loans totaled 22.7 percent of the total portfolio, one-to-
four family residential mortgages and home equity loans accounted for
27.8 percent, commercial loans totaled 20.8 percent, and commercial
mortgages totaled 28.7 percent. First of America does not have any
concentrations of credit risk to any specific borrower or within any
geographic area. The total loan portfolio, as presented in Table VII,
was $13.7 billion at year-end 1997, down 9.2 percent from $15.1
billion a year ago.
Components of the Loan Portfolio Table VII
($ in thousands)
December 31, 1997 1996 1995 1994 1993
Consumer $ 3,099,394 3,774,803 4,504,255 5,799,025 5,062,173
Commercial, financial and agricultural 2,837,647 2,722,676 2,589,038 2,344,969 2,148,663
Real estate - construction 590,996 597,726 514,612 438,067 252,839
Real estate - mortgage 7,141,449 7,960,801 8,469,037 8,252,797 6,930,480
---------------------------------------------------------------
Total loans $ 13,669,486 15,056,006 16,076,942 16,834,858 14,394,155
===============================================================
Consumer Loans - First of America's consumer loan portfolio,
which includes indirect and direct installment loans, credit cards and
other revolving loans, declined 17.9 percent from 1996's level. The
managed credit card portfolio was $1.2 billion at year end. First of
America offers its credit card products in all fifty states; the
largest portion of the portfolio, 56.8 percent, was to customers in
its three operating states. As a percent of average loans, the net
charge-offs for the managed portfolio were 4.97 percent in 1997
compared with 4.31 percent in 1996.
The consumer installment portfolio was $2.2 billion at December
31, 1997, down 19.8 percent from the previous year due to the
combination of intense competition within the industry, the Florida
Sale, and First of America's more stringent pricing policies. First
of America's consumer installment loans originate primarily from its
three state operating area. Net charge-offs as a percent of average
consumer installment loans were 1.00 percent in 1997 and 1.12 percent
in 1996. Management lowered the provision in this portfolio in 1997
due to the improved loan quality being observed within the portfolio.
Residential Mortgage Loans - At December 31, 1997, residential
mortgage loans totaled $3.8 billion compared with $4.6 billion at
year-end 1996. Originations of residential mortgage loans during 1997
were $1.4 billion compared with $1.5 billion in 1996. The average
loan size was $59,000. The loans were originated within First of
America's three operating states as well as stand alone origination
offices in Arizona, North Carolina, Iowa, and Nevada. First of
America's portfolio continued to have excellent credit quality
measurements. Net charge-offs as a percent of average residential
mortgage loans were 0.03 percent in 1997 and 0.02 percent in 1996.
At December 31, 1997, residential mortgage loans held for sale
and included in outstandings on the balance sheet totaled $118.8
million with a market value of $121.9 million. In addition, First of
America had entered into commitments to originate residential mortgage
loans, at prevailing market rates, totaling $88.1 million. Mandatory
commitments to deliver mortgage loans to investors, at prevailing
market rates, totaled $173.4 million at December 31, 1997.
Commercial and Commercial Mortgage Loans - First of America's
commercial and commercial mortgage loan portfolio is comprised
primarily of loans to small and mid-sized businesses within its local
markets. The average loan size within this portfolio at year-end was
$60,000 for commercial loans and $289,000 for commercial mortgages,
allowing for a more diverse customer base and limiting exposure from
any one borrower. First of America has no foreign loans, no highly
leveraged transactions and no syndicated purchase participations. The
maturity and rate sensitivity of selected loan categories is presented
in Table VIII.
First of America's commercial and commercial mortgages increased
3.15 percent during 1997 after adjusting for the Florida Sale. Total
non-performing commercial and commercial mortgage loans as a percent
of outstandings remained at 1.03 percent and net charge-offs as a
percent of average loans was 0.19, compared to 0.09 at year-end 1996.
Maturity and Rate Sensitivity of Selected Loans Table VIII
($ in thousands)
One year One year to After
December 31, 1997 or less five years five years Total
Commercial, financial and agricultural $ 1,956,074 538,722 10,197 2,504,993
Commercial tax-exempt 131,364 122,050 79,241 332,655
Real estate construction 552,672 61,826 7,688 622,186
--------------------------------------------------
Total $ 2,640,110 722,598 97,126 3,459,834
==================================================
TOTAL LOANS ABOVE DUE AFTER ONE YEAR:
With predetermined interest rate 572,315 92,889 665,204
With floating or adjustable interest rates 150,283 4,237 154,520
----------------------------------
Total 722,598 97,126 819,724
==================================
Asset Quality - Non-performing assets, including nonaccrual
loans, renegotiated loans and other real estate owned, totaled $106.8
million or 0.51 percent of total assets. Non-performing assets were
0.52 percent and 0.63 percent of total assets at year-end 1996 and
1995, respectively. Total non-performing loans, other real estate
owned and other loans of concern for the past five years are detailed
in Table IX.
Risk Elements in the Loan Portfolio Table IX
($ in thousands)
December 31, 1997 1996 1995 1994 1993
Non-accrual loans $ 87,271 84,185 104,174 96,814 121,186
Restructured loans 3,045 6,414 12,327 4,852 10,879
Other real estate owned 16,478 24,190 31,103 38,662 50,595
----------------------------------------------------------
Non-performing assets 106,794 114,789 147,604 140,328 182,660
Past due loans 90 days or more
(excluding the above two categories) 25,194 26,726 28,124 18,208 23,462
Other loans of concern 50,766 30,541 17,660 31,653 53,206
----------------------------------------------------------
Total $ 182,754 172,056 193,388 190,189 259,328
==========================================================
Other loans of concern, which represent loans where known
information about possible credit problems of borrowers causes
management concern about the ability of such borrowers to comply with
the present loan terms, totaled $50.8 million at year-end 1997, an
increase from 1996's year-end total. While management has identified
these loans as requiring additional monitoring, they do not
necessarily represent future non-performing loans.
The allowance for loan losses is determined by management taking
into consideration charge-off experience, estimated loss exposure on
specific loans and the current and projected economic climate.
Management evaluates the adequacy of the allowance for loan losses
quarterly based on information compiled by the corporate loan review
area. Management's allocation of the allowance for loan losses over
the last five years is presented in Table X. The amounts indicated
for each loan type include amounts allocated for specific loans as
well as a general allocation.
The allowance coverage of non-performing loans at year-end 1997
was 269.57 percent compared with 279.09 percent at year-end 1996 and
207.02 percent at year-end 1995. It is management's judgment that the
level of the allowance is adequate to absorb potential loan losses.
Other ratios measuring asset quality and the adequacy of the allowance
for loan losses are presented in Table XI.
As of December 31, 1997 and 1996, respectively, First of America
identified $69.5 million and $68.7 million of impaired loans under the
guidelines of 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 -
Recognition and Disclosures" (FAS 114). At year-end 1997, the
allowance for impaired loan losses was $15.2 million compared with
$13.7 million at year-end 1996. The 1995 adoption of FAS 114 does not
significantly impact the comparability of the allowance related tables
included in this report.
Allocation of Allowance for Loan Losses Table X
($ in thousands)
December 31, 1997 1996 1995 1994 1993
% of % of % of % of % of
Allowance Loans* Allowance Loans* Allowance Loans* Allowance Loans* Allowance Loans*
Commercial, financial and
agricultural $ 40,750 1.44%$ 34,827 1.28% $ 37,133 1.43% $ 33,543 1.43%$ 39,231 1.83%
Real estate 37,913 0.49 38,611 0.45 46,712 0.52 55,721 0.64 55,661 0.77
Consumer 93,303 3.01 95,219 2.52 103,498 2.30 76,235 1.31 69,633 1.38
Unallocated 71,503 0.52 84,189 0.56 53,839 0.33 62,616 0.37 24,139 0.17
-------- ------- ------- ------- -------
Total $243,469 $252,846 $241,182 $228,115 $188,664
======== ======= ======= ======= =======
Allowance to total loans 1.78% 1.68% 1.50% 1.36% 1.31%
* Allowance as a percent of year-end loans outstanding by type. Unallocated ratio is the unallocated portfolio
allowance as a percent of total loans at year-end.
Summary of Loan Loss Experience Table XI
($ in thousands)
December 31, 1997 1996 1995 1994 1993
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $ 252,846 241,182 228,115 188,664 176,793
Provision charged against income 85,707 93,456 91,488 86,571 84,714
Allowance for loan losses of
acquired/(sold) banks (11,389) -- -- 11,420 50
RECOVERIES:
Commercial, financial and agricultural 4,414 5,087 5,757 7,277 8,692
Real estate - construction -- -- 54 51 --
Real estate - mortgage 3,773 4,166 3,896 2,404 2,615
Consumer loans 43,206 52,996 47,231 28,402 24,556
--------------------------------------------------------------------
Total recoveries 51,393 62,249 56,938 38,134 35,863
--------------------------------------------------------------------
CHARGE-OFFS:
Commercial, financial and agricultural 17,496 8,964 7,007 13,621 19,764
Real estate - construction -- -- 395 80 --
Real estate - mortgage 4,826 7,248 7,777 8,825 10,539
Consumer loans 112,766 127,829 120,180 74,148 78,453
--------------------------------------------------------------------
Total charge-offs 135,088 144,041 135,359 96,674 108,756
--------------------------------------------------------------------
Net charge-offs 83,695 81,792 78,421 58,540 72,893
--------------------------------------------------------------------
Balance at end of period $ 243,469 252,846 241,182 228,115 188,664
====================================================================
Average loans (net of unearned income) $14,394,193 15,463,335 16,532,752 15,172,618 13,875,584
Earnings coverage of net losses 6.66x 5.83 5.80 7.00 5.91
Allowance to total end of period loans 1.78% 1.68 1.50 1.36 1.31
Net losses to end of period allowances 34.38 32.35 32.52 25.66 38.64
Recoveries to total charge-offs 38.04 43.22 42.06 39.45 32.98
Provision to average loans 0.60 0.60 0.55 0.57 0.61
Net charge-offs to average loans 0.58 0.53 0.47 0.39 0.53
/TABLE
Funding, Liquidity and Interest Rate Risk
Liquidity is measured by a financial institution's ability to
raise funds through deposits, borrowed funds, capital or the sale of
assets. Funding is achieved through growth in core deposits and
accessibility to the money and capital markets.
Deposits - First of America's primary source of funding is its
core deposits which include all deposits except negotiated
certificates of deposit. As a percent of total deposits, core
deposits were 96.4 percent at year-end 1997 and 95.7 percent at year-
end 1996. First of America does not issue negotiated CD's in the
national money markets, and has established a policy limit of ten
percent of assets to provide a guideline for assisting in the prudent
management of the corporations's purchased funds position. The
majority of negotiated CD's and purchased funds originate from the
Registrant's core deposit customer base, including downstream
correspondents.
The average deposit balances outstanding and the rates paid on
those deposits for the three years ended December 31, 1997, are
presented in Table XII. The maturity distribution of time deposits of
$100,000 or more at year-end 1997 is detailed in Table XIII.
In addition to deposits, First of America's sources of funding
include money market borrowings, capital funds, securitizations and
long term debt. First of America entered into a Three-Year
Competitive Advance and Revolving Credit Facility Agreement dated as
of March 25, 1994 and amended by its First Amendment dated December 9,
1994 and by the Second Amendment dated February 15, 1996
(collectively, the Credit Agreement). The Credit Agreement allows
First of America to borrow up to $350 million on a standby revolving
credit basis on an uncommitted competitive advance basis. The
proceeds of all borrowings made pursuant to the Credit Agreement will
be used to provide working capital or for general corporate purposes.
At December 31, 1997 and 1996, there was no outstanding balance under
the Credit Agreement.
In January 1997, First of America privately placed $150 million
of fixed rate capital securities through First of America Capital
Trust I, a newly formed Delaware business trust, controlled by the
Registrant. The 8.12% Capital Securities of First of America Capital
Trust I were priced at par. Cash distributions are payable semi-
annually on January 31 and July 31, beginning July 31, 1997. The
proceeds from the issuance were used for general corporate purposes
and further enhanced the Registrant's strong capital position, while
reducing the cost of capital.
In July 1997, all of the privately placed 8.12% Capital
Securities were exchanged for identical, but registered freely
tradable 8.12% Capital Securities.
During 1995 and 1996, First of America's Section 20 subsidiary,
First of America Securities, Inc., entered into three uncommitted
secured broker loan guidance facilities to finance the purchase of
securities for resale. At December 31, 1997, there was no outstanding
balance and $174.0 million available on these agreements. At December
31, 1996, there was $54.0 million outstanding and $120.0 million
available. There was no outstanding balance at December 31, 1995,
although $80.0 million was available at December 31, 1995.
In June 1995, First of America securitized $500 million in credit
card receivables. This transaction was an effective balance sheet
management tool since it had no impact on net income, but released
funds which were used to reduce short-term borrowings.
On July 26, 1994, First of America issued $200 million of 7-3/4%
Subordinated Notes Due July 15, 2004, which are not subject to
redemption prior to maturity and which qualify as tier II capital
under the Federal Reserve Board's capital guidelines. The proceeds
received from the Notes were used to discharge indebtedness incurred
to fund the acquisition of the Goldome Federal branches, to fund the
repurchase of common stock and for other general corporate purposes.
During August 1994, certain First of America bank subsidiaries
began issuing Bank Notes due from 30 days to 10 years from date of
issue. The proceeds from the sale of the notes are used for general
operating purposes by the issuing banks. Total outstanding for all
bank notes at December 31, 1997 was $949.8 million, of which $374.8
million was included in long term debt.
Deposits Table XII
($ in thousands)
1997 1996 1995
Average Average Average
Balance Rate Balance Rate Balance Rate
Non-interest bearing $ 2,785,164 -- $ 2,790,118 -- $ 2,710,566 --
Savings and NOW accounts 3,767,274 2.17% 3,843,700 2.09% 3,444,077 1.72%
Money market savings 3,823,099 3.91 3,898,886 3.66 4,254,533 3.92
Time 6,184,527 5.41 7,739,404 5.46 9,105,938 5.48
---------- ---------- ----------
Total $16,560,064 $18,272,108 $19,515,114
========== ========== ==========
Maturity Distribution of Time Deposits of $100,000 or More Table XIII
($ in thousands)
Three Three
months months to Six months After
or less six months to one year one year Total
Certificates of deposit 421,780 273,080 192,523 132,811 1,020,194
Other time deposits 67,147 4,191 5,627 46,165 123,130
---------------------------------------------------------------
Total 488,927 277,271 198,150 178,976 1,143,324
===============================================================
Asset / Liability Management - The primary goal of Asset/Liability
management is to maximize Net Interest Income through the prudent
management of the balance sheet's future cash flows within the risk
limits established by the Board of Directors.
Interest Rate Risk - Interest Rate risk is monitored primarily through
the utilization of two complimentary measurement techniques: (1) a
static Gap analysis and (2) an earnings simulation analysis. No
singular interest rate risk measurement technique provides a complete
diagnosis of interest rate risk exposure. Reviewing the results of
several, however, can provide management with a reasonably
comprehensive view of key components of interest rate risk. The
relative concentration and trends of interest sensitive assets and
liabilities, the magnitude of earnings exposure to changes in interest
rates, and the key components of interest rate risk such as prepayment
risk, option risk, and basis or index risk are all reflective of the
analytics reviewed by management to assess interest rate risk within
First of America.
First of America does utilize from time to time instruments such as
interest rate caps and floors, swaps, futures contracts, options and
foreign exchange contracts. However, the amount of risk exposure
related to these activities is not considered material. The earnings
at risk at First of America relate to non-trading market sensitive
instruments.
First of America has one remaining swap agreement outstanding as of
December 31, 1997 totaling $25 million in notional amount versus $80
million at December 31, 1996. This swap is a hedge against the parent
company's 8.50% subordinated Notes due February 1, 2004. The impact
of the swap upon net interest income is not material as a 100 basis
point change in rates results in a 3 basis point change in net
interest income. See Note 23 of the Notes to Consolidated Financial
Statements, included later in this document, for further details on
First of America's interest rate swap agreements.
Interest rate swap transactions generally involve the exchange of
fixed and floating rate interest payment obligations without the
exchange of the underlying financial instrument. The company becomes
a counterparty in the exchange of interest payments with other parties
and, therefore, is exposed to the loss of future interest payments
should the counterparty default. The company minimized this risk by
performing normal credit reviews of its counterparties and
collateralizing its exposure when it exceeds a predetermined limit
established by policy.
Static Gap - Gap analysis reflects the amount of repricing risk
embedded in the balance sheet at a singular point in time by comparing
the repricing characteristics of assets and liabilities. Gap is
defined as the difference between the principal amount of rate
sensitive assets and liabilities repricing within a specified time
period, including the impact of off-balance sheet interest rate swap
and cap agreements. Table XIV reflects First of America's Gap
position as of December 31, 1997 for periods of one year or less.
Table XV reflects First of America's Gap position for periods between
one and five years. The reliability of Gap in measuring the risk to
income from a change in interest rates is validated by comparison to
the earnings simulation modeling.
Earnings Simulation - The primary interest rate risk analytical tool
is referred to as the "Current Position" earning simulation analysis.
This simulation, completed monthly, forecasts the effect of a 100
basis point change in interest rates upon net interest income
generated over the next twelve months from various perspectives. One
perspective provides insight into the effect on Net Interest Income
from an immediate and parallel change in rates on all balance sheet
categories. A second provides insight into the effect on Net Interest
Income from an immediate and parallel change in rates on all balance
sheet categories except non-maturity deposits. The latter is referred
to as the Net Managed risk exposure. The current balance sheet
configuration is assumed to remain in tact. The results of these
scenarios are compared to base "stable rate" scenarios whereby
interest rates remain at current levels for the entire period. This
type of analysis affords management with an opportunity to examine the
trend in risk exposure inherent within the actual balance sheet and
separates the effects of possible differences due to forecasting
parameters, which may or may not come to fruition. Assumptions are
held reasonably constant allowing management to assess the effects of
potential changes in interest rates upon the balance sheet cash flows.
This approach allows for a more accurate isolation of risk components
such as option risk and basis risk and increases the accuracy of
comparing the effects of rate changes against management's intuitive
expectation. Assumptions can have an effect upon results, such as
changes in prepayment assumptions or core deposit migration
assumptions. Management believes the assumptions incorporated into
all interest rate risk analyses to be reasonable and meaningful.
Table XVI reflects the results of the December 31, 1997 "Current
Position" earnings simulation. This analysis details the effects of
interest rate changes on major asset and liability categories. A 100
basis point immediate and parallel increase in interest rates, on all
balance sheet categories except non-maturity deposits, would cause Net
Interest Income to decline by 1.63 percent or $13.0 million.
This compares to the reported monthly average annual decline
for the year of 1.28 percent. Temporary seasonal year end increases
in Cash & Due caused Borrowings to increase. This added 37 basis
points to the exposure in the +1.00% scenario. Excluding the affect
of this temporary phenomenon, risk exposure in December would have
been in line with the monthly average annual results. A 100 basis
point decline in rates would cause Net Interest Income to increase by
0.24 percent or approximately $1.9 million. This compares to an
average annual decline for the year of 0.29 percent. These results
reflect Off-Balance Sheet Instruments effects.
The trend during most of 1997 has been one of moderate liability
sensitivity with a slight reduction in exposure to increasing rates.
The effect upon each major balance sheet category is detailed in Table
XVI.
Interest Rate Sensitivity - Short Term Table XIV
($ in millions)
0 to 30 0 to 60 0 to 90 0 to 180 0 to 365
December 31, 1997 Days Days Days Days Days
ASSETS:
Other earning assets $ 162.7 162.7 162.7 162.7 162.7
Investment securities (1) 233.5 344.7 424.6 808.8 1,502.8
Loans, net of unearned discount (2) 4,961.6 5,380.6 5,667.9 6,458.6 7,757.9
---------------------------------------------------------
Total rate sensitive assets (RSA) $ 5,357.8 5,888.0 6,255.2 7,430.1 9,423.4
---------------------------------------------------------
LIABILITIES: (3)
Money market type deposits $ 4,502.5 4,502.5 4,502.4 4,502.5 4,502.5
Other core savings and time deposits 788.7 1,358.1 1,955.6 2,856.2 4,040.3
Negotiated deposits 231.5 319.3 403.0 500.3 561.9
Borrowings 700.3 725.4 903.4 1,179.5 1,629.8
Interest rate swap agreements (3) -- -- (25.0) (25.0) --
---------------------------------------------------------
Total rate sensitive liabilities (RSL) $ 6,223.0 6,905.2 7,739.5 9,013.5 10,734.5
---------------------------------------------------------
GAP (RSA - RSL) $ (865.2) (1,017.2) (1,484.3) (1,583.4) (1,311.1)
=========================================================
RSA divided by RSL 86.10% 85.27 80.82 82.43 87.79
GAP divided by total assets (4.10) (4.83) (7.04) (7.51) (6.22)
(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.
(3) Maturities of rate sensitive liabilities and interest rate swaps are based on contractual maturities and estimated
repricing.
Interest Rate Sensitivity - Long Term Table XV
($ in millions)
13 to 25 to 37 to 0 to 60
December 31, 1997 24 months 36 months 60 months months
ASSETS:
Other earning assets -- -- -- 162.7
Investment securities (1) $ 948.8 685.2 804.6 3,941.4
Loans, net of unearned discount (2) 1,822.0 1,095.8 1,881.1 12,556.8
---------------------------------------------
Total rate sensitive assets (RSA) $ 2,770.8 1,781.0 2,685.7 16,660.9
---------------------------------------------
LIABILITIES: (3)
Money market type deposits $ 73.5 73.5 49.0 4,698.4
Other core savings and time deposits 2,677.0 1,560.6 1,460.2 9,738.1
Negotiated deposits 5.6 0.7 (0.8) 567.4
Borrowings 900.4 0.6 -- 2,530.9
Interest rate swap agreements (3) -- -- -- --
---------------------------------------------
Total rate sensitive liabilities (RSL) $ 3,656.5 1,635.4 1,508.4 17,534.8
---------------------------------------------
GAP (RSA - RSL) $ (885.7) 145.6 1,177.3 (873.9)
=========================================================
RSA divided by RSL 75.8% 108.9 178.0 95.0
GAP divided by total assets (4.20)% 0.69 5.58 (4.15)
(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.
(3) Maturities of rate sensitive liabilities and interest rate swaps are based on contractual maturities and estimated
repricing.
SENSITIVITY ANALYSIS TABLE
Table XVI
Interest income
risk due to change in rate
for each category
+1.00% -1.00%
On-balance sheet intruments
Investments and money market investments 4.94% (3.33)%
Loans: 4.81 (5.69)
Fixed rate 1.88 (2.49)
Variable rate 10.77 (11.18)
Earning assets 4.73 (5.20)
Deposits: 13.82% (13.06)%
Fixed rate 4.05 (4.05)
Variable rate 9.78 (9.00)
Other Debt Obligations 6.34 (6.34)
Total funding sources 11.88 (11.13)
Net interest income before
off-balance sheet instruments (1.63)% 0.24%
Off-balance sheet instruments (1) 66.03 (65.69)
Net interest income after
off-balance sheet instruments (1.65) 0.26
(1) Off-balance sheet effect of interest rate swaps do not have a
material effect on net interest income or the change in net
interest income as a result of a change in rates; however,
information relating to the effect of interest rate swaps is
provided for reporting continuity.
Capital Strength
Regulatory Requirements - First of America's capital policy is to
maintain its capital levels above minimum regulatory guidelines. As
shown in Table XVII, at December 31, 1997, First of America's capital
ratios exceeded required regulatory minimums with a tier I risk based
ratio of 11.33 percent, a total risk based ratio of 14.74 percent and
a tier I leverage ratio of 8.74 percent. Capital ratios exclude the
mark-to-market adjustment for Available for Sale securities in
accordance with the Federal Reserve's regulations. Additional
information relating to capital adequacy is provided in Note 18 of the
Notes to Consolidated Financial Statements included later in this
document.
The long term debt which qualified as tier I capital at December
31, 1997, consisted of the privately placed $150 million of fixed rate
capital securities discussed earlier in this document. Additional
information relating to these securities is provided in Note 14 of the
Notes to Consolidated Financial Statements included later in this
document.
The long term debt which qualified as tier II capital at December
31, 1997, consisted of $150 million in 8.5% Subordinated Notes Due
February 1, 2004, a $10 million 6.35% Subordinated Note which matures
ratably over a five year period beginning December 31, 2003, and $200
million in 7.75% Subordinated Notes Due July 15, 2004. This debt is
included in tier II capital on a weighted maturity basis. Additional
information relating to First of America's various long term debt
agreements is provided in Note 13 of the Notes to Consolidated
Financial Statements included later in this document.
Risk-Based Capital Table XVII
($ in thousands)
December 31, 1997 1996 1995
TIER I CAPITAL:
Common shareholders' equity $1,876,909 1,784,198 1,827,981
Mandatorily Redeemable Securities 150,000 -- --
Less: Intangibles 152,389 202,336 227,303
Net unrealized gain (loss) on
securities available for sale 32,125 8,438 25,939
Section 20 affiliate debt and
equity 10,993 11,826 12,500
-------------------------------------
Tier I capital $1,831,402 1,561,598 1,562,239
-------------------------------------
TIER II CAPITAL:
Allowance for loan losses* $ 202,584 200,701 205,515
Qualifying long term debt 360,000 360,000 360,000
Less: Section 20 affiliate debt and equity 10,993 11,826 12,500
-------------------------------------
Tier II capital $ 551,591 548,875 553,015
-------------------------------------
Total capital $2,382,993 2,110,473 2,115,254
=====================================
RISK-BASED CAPITAL RATIOS:
Tier I 11.33% 9.76 9.52
Total 14.74 13.19 12.89
Tier I leverage ratio 8.74 7.15 6.70
* Limited to 1.25% of total risk-weighted assets.
Total Shareholders' Equity - First of America's total
shareholders' equity at year-end 1997 was $1.9 billion, an increase
from $1.8 billion a year ago as net earnings retained and the positive
change in the market value adjustment to equity for available for sale
securities, more than offset the effect of the share repurchase
program.
During 1997, First of America repurchased 3.0 million shares of
First of America Common Stock for a total cost of $138.7 million at an
average cost of $46.20 per share. These repurchases were part of a
program begun in 1994 which resulted in the repurchase through
December 1997, of 13.5 million shares. In an action related to the
proposed merger with NCC, the Board of Directors rescinded its
previous authorization to repurchase up to six million additional
shares of First of America common stock.
In Conclusion
First of America recognizes the need to ensure its operations
will not be adversely impacted by Year 2000 software failures.
Potential software failures due to processing errors arising from
calculations using the Year 2000 date are a known risk. A corporate
wide task force, with representation from all major business units,
has been established to evaluate and manage the risks, solutions, and
costs associated with addressing this issue.
The costs incurred, except property and equipment writedowns, in
addressing the Year 2000 problem will be expensed as incurred in
compliance with generally accepted accounting principles. Due to
the impending merger with NCC and subsequent conversion to many of
NCC's computer systems, this project is being revisited for
opportunities to reduce the costs associated with Year 2000
compliance. Prior to the merger agreement with NCC, management
estimated the cost of achieving Year 2000 compliance to be
approximately $30 to $35 million (pre-tax) over the cost of normal
software upgrades and replacements that would have been incurred
through the year 1999. A significant portion of these costs
would probably not have been incremental to First of America, but
would represent a redeployment of existing information technology
resources. The preceding statements in this paragraph are forward
looking, and First of America's actual costs and results may differ
due to, among other things, the conversion to NCC systems, additional
system testing, vendor contract negotiations, and technological
developments.
In October 1997, the Accounting Standards Executive Committee of
the AICPA voted to issue a final Statement of Position (SOP),
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." However, the issuance of this SOP is subject to
approval by the Financial Accounting Standards Board (FASB). The
AICPA hopes to issue a final SOP in the first quarter of 1998. The
SOP would be effective for financial statements for fiscal years
beginning after December 15, 1998, with earlier application
encouraged.
In summary, the SOP states that the following costs incurred in
developing internal-use software should be capitalized: direct costs
for materials and services paid to external parties for developing or
obtaining the software; payroll and payroll-related costs for
employees' time spent directly on the project; and interest costs
incurred in developing the software.
Currently, banks must expense such costs, which can be material
to the results of operation, in accordance with the guidance provided
by the Comptroller of the Currency. The impact of this SOP to First
of America's results is currently being evaluated and cannot currently
be estimated.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Statement of Management Responsibility
The following consolidated financial statements and accompanying
notes to the consolidated financial statements of First of America
have been prepared by management, which has the responsibility for
their integrity and objectivity. The statements have been prepared in
accordance with generally accepted accounting principles to reflect,
in all material respects, the substance of financial events and
transactions occurring during the respective periods.
In meeting its responsibility, management relies on First of
America's accounting systems and related internal controls. These
systems are designed to provide reasonable assurance that assets are
safeguarded and that transactions are properly recorded and executed
in accordance with management's authorization. Augmenting these
systems are written policies and procedures and audits performed by
First of America's internal audit staff.
The consolidated financial statements and notes to the
consolidated financial statements of First of America, have been
audited by the independent certified public accounting firm, KPMG Peat
Marwick LLP, which was engaged to express an opinion as to the
fairness of presentation of such financial statements.
/S/ RICHARD F. CHORMAN /S/ THOMAS W. LAMBERT
Richard F. Chormann Thomas W. Lambert
Chairman, President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
Letter of Audit Committee Chairman
The audit committee of the Board of Directors is composed of six
independent directors with Robert L. Hetzler as chairman. The
committee held four meetings during fiscal year 1997
The audit committee oversees First of America's financial
reporting process on behalf of the Board of Directors. In fulfilling
its responsibility, the committee recommended to the Board of
Directors, subject to shareholder approval, the selection of First of
America's independent auditor. The audit committee discussed with the
internal auditor and the independent auditor the overall scope and
specific plans for their respective audits. The committee
additionally discussed First of America's consolidated financial
statements and the adequacy of First of America's internal controls.
The committee also met with First of America's internal auditor and
independent auditor, without management present, to discuss the
results of their audits, their evaluations of First of America's
internal controls and the overall quality of First of America's
financial reporting. This meeting was designed to facilitate private
communications between the committee, the internal auditor and the
independent auditor.
The audit committee believes that, for the period ended December
31, 1997, its duties, as indicated, were satisfactorily discharged and
that First of America's system of internal controls is adequate.
/S/ ROBERT L. HETZLER
Robert L. Hetzler
Chairman
Audit Committee
Report of Independent Auditors
To the Shareholders and Board of Directors,
First of America Bank Corporation:
We have audited the accompanying consolidated balance sheets of
First of America Bank Corporation and its subsidiaries as of December
31, 1997 and 1996 and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of First of America Bank Corporation and its subsidiaries as of
December 31, 1997 and 1996, and the results of their operations and
their cash flows for each of the years in the three-year period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
/S/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Chicago, Illinois
January 20, 1998
CONSOLIDATED BALANCE SHEETS
($ In thousands)
December 31, 1997 1996
ASSETS
Cash and due from banks $1,180,883 1,205,962
Federal funds sold and resale agreements 162,730 163,400
Securities available for sale, amortized cost
of $4,892,562 at December 31, 1997
and $4,549,383 at December 31, 1996 4,941,969 4,562,381
Loans, net of unearned income:
Consumer 3,099,394 3,774,803
Commercial, financial and agricultural 2,837,647 2,722,676
Commercial real estate 3,927,606 3,918,248
Residential real estate 3,686,030 4,531,868
Loans held for sale, market value of $121,945
for 1997 and $109,955 for 1996 118,809 108,411
----------------------------
Total loans 13,669,486 15,056,006
Less: Allowance for loan losses 243,469 252,846
----------------------------
Net loans 13,426,017 14,803,160
Premises and equipment, net 378,726 433,408
Other assets 989,329 893,868
----------------------------
TOTAL ASSETS $21,079,654 22,062,179
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 2,912,070 3,009,252
Interest bearing 12,847,224 14,610,044
----------------------------
Total deposits 15,759,294 17,619,296
Securities sold under repurchase agreements 57,259 493,556
Other short term borrowings 1,496,862 1,344,434
Long term debt 1,336,777 521,124
Company Obligated Mandatory Redeemable
New Capital Securities of Subsidiary
Trust Holding Solely Debentures of the Company 150,000 --
Other liabilities 402,553 299,571
----------------------------
Total liabilities 19,202,745 20,277,981
----------------------------
SHAREHOLDERS' EQUITY
Common stock-$10 par value:
Authorized Outstanding
1997 200,000 87,166
1996 100,000 89,720 871,664 598,132
Capital surplus 36,814 145,950
Net unrealized gain on securities
available for sale, net of tax expense
of $17,282 for 1997 and of $4,561 for 1996 32,125 8,438
Retained earnings 936,306 1,031,678
----------------------------
Total shareholders' equity 1,876,909 1,784,198
----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $21,079,654 22,062,179
============================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands except per share data)
Year ended December 31, 1997 1996 1995
INTEREST INCOME
Loans and fees on loans $1,285,970 1,366,083 1,473,210
Securities:
Taxable income 269,454 270,647 304,145
Tax exempt income 26,819 16,434 13,317
Federal funds sold and resale agreements 7,924 8,804 4,651
Bank time deposits 610 1,586 1,201
----------------------------------
Total interest income 1,590,777 1,663,554 1,796,524
----------------------------------
Deposits 563,798 645,995 725,161
Short term borrowings 89,243 79,988 100,684
Long term debt 65,814 35,083 46,683
----------------------------------
Total interest expense 718,855 761,066 872,528
----------------------------------
NET INTEREST INCOME 871,922 902,488 923,996
Less: Provision for loan losses 85,707 93,456 91,488
----------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 786,215 809,032 832,508
----------------------------------
NON-INTEREST REVENUE
Service charges on deposit accounts 117,095 112,516 100,281
Trust and financial services revenue 136,325 114,024 94,179
Investment securities transactions, net (3,384) (515) 62
Bank card revenue 79,761 73,900 60,449
Mortgage banking revenue 34,564 28,525 31,505
Other operating revenue 122,768 90,864 59,624
----------------------------------
Total non-interest revenue 487,129 419,314 346,100
----------------------------------
NON-INTEREST EXPENSE
Personnel 459,699 454,170 430,977
Occupancy, net 60,268 64,871 64,108
Equipment 56,140 58,462 59,322
Outside data processing 18,420 19,182 18,825
Amortization of intangibles 19,946 23,355 21,146
Other operating expenses 187,366 224,963 220,893
----------------------------------
Total non-interest expense 801,839 845,003 815,271
----------------------------------
Income before income taxes 471,505 383,343 363,337
Income taxes 156,744 126,457 126,629
----------------------------------
NET INCOME $ 314,761 256,886 236,708
==================================
Common earnings per share $ 3.57 2.79 2.50
Diluted earnings per share 3.53 2.77 2.49
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
($ in thousands except per share data) Net Unrealized
Common Capital Gain (Loss) on Securities Retained
Stock Surplus Available for Sale Earnings Total
BALANCE, JANUARY 1, 1995 $ 628,492 284,877 (92,271) 757,790 1,578,888
Net Income 236,708 236,708
Issuance of stock:
Acquisition of subsidiaries 3,336 (2,243) 1,093
Stock Options Exercised 1,016 1,089 2,105
Other (5) (314) (319)
Change in market value adjustment
of securities available for sale,
net of tax expense of $28,885 118,210 118,210
Cash dividends declared on
Common stock -- $1.15 per share (108,704) (108,704)
---------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 632,839 283,409 25,939 885,794 1,827,981
Net Income 256,886 256,886
Issuance of stock:
Acquisition of subsidiaries 920 2,968 3,888
Stock Options Exercised 673 (1,821) (1,148)
Other 204 204
Repurchases (36,300) (138,810) (175,110)
Change in market value adjustment
of securities available for sale,
net of tax benefit of $9,292 (17,501) (17,501)
Cash dividends declared on
Common stock -- $1.21 per share (111,002) (111,002)
---------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 598,132 145,950 8,438 1,031,678 1,784,198
Net Income 314,761 314,761
Issuance of stock:
50% stock dividend 293,730 (293,730) --
Acquisition of subsidiaries 1,676 8,038 9,714
Stock Options Exercised, net of
tax benefit of $4,983 1,572 (1,327) 245
Other 54 (670) (10) (626)
Repurchases (23,500) (115,177) (138,677)
Change in market value adjustment
of securities available for sale,
net of tax benefit of $12,721 23,687 23,687
Cash dividends declared on
Common stock -- $1.33 per share (116,393) (116,393)
---------------------------------------------------------------------
$ 871,664 36,814 32,125 936,306 1,876,909
=====================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOW
($ in thousands)
Year ended December 31, 1997 1996 1995
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 314,761 256,886 236,708
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 46,984 47,040 48,263
Provision for loan losses 85,707 93,456 91,488
Provision for deferred taxes 2,134 (155) (7,372)
Amortization of intangibles 19,946 23,355 21,146
(Gain) loss sale of securities available
for sale 3,384 514 (3,707)
(Gain) on sale of mortgage loans held
for sale (24,890) (20,235) (19,627)
(Gain) on sale of other assets (42,522) (28,829) (16,577)
Proceeds from the sales of mortgage loans
held for sale 1,460,638 1,215,172 959,721
Originations of mortgage loans held for
sale, net (1,446,146) (1,202,069) (1,011,177)
Change in assets and liabilities net of acquisitions:
(Increase) decrease in interest and other income
receivable 83,757 37,560 (81,195)
(Increase) in other assets (338,999) (81,475) (233,389)
Increase in accrued expenses and
other liabilities 85,119 18,808 38,068
------------------------------------
Net cash from operating activities 249,873 360,028 22,350
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the maturities of investment
securities (held to maturity) -- -- 368,738
Purchases of investment securities
(held to maturity) -- -- (191,325)
Proceeds from the sale of securities
available for sale 955,952 1,065,313 785,239
Proceeds from the maturities of securities
available for sale 1,124,742 1,107,359 518,927
Purchases of securities available for sale (2,421,521) (1,702,437) (698,163)
Proceeds from the securitization of loans -- -- 498,588
Net other decrease in loans and leases 1,301,834 946,276 251,990
Premises and equipment purchased (44,328) (46,768) (63,485)
Proceeds from the sale of premises and equipment 93,681 60,886 42,466
(Acquisition)sale of affiliates, net of cash acquired 150,850 944 (4,369)
------------------------------------
Net cash flows used in investing activities 1,161,210 1,431,573 1,508,606
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short term deposits (473,748) 43,387 (164,820)
Net (decrease) in time deposits (1,386,254) (1,766,558) (692,979)
Net increase (decrease) in short term borrowings (283,869) 188,025 (232,774)
Proceeds from issuance of long term debt 1,019,835 104,924 25,004
Repayments of long term debt (54,182) (74,115) (213,470)
Net proceeds/(cost) from issuance of common stock (382) (969) 2,105
Dividends paid (114,146) (110,810) (107,429)
Payments for purchase and retirement of common stock (143,416) (176,585) --
Other, net -- -- (319)
------------------------------------
Net cash provided by financing activities (1,436,162) (1,792,701) (1,384,682)
------------------------------------
Net increase(decrease) in cash and cash equivalents (25,079) (1,100) 146,274
Cash and cash equivalents at beginning of year 1,205,962 1,207,062 1,060,788
------------------------------------
CASH AND CASH EQUIVALENTS AT YEAR END $1,180,883 1,205,962 1,207,062
====================================
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
NOTE 1: ACCOUNTING POLICIES
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and reporting
practices prescribed for the banking industry. The significant
accounting and reporting policies of First of America Bank Corporation
and its subsidiaries follow.
Nature of Business:
First of America Bank Corporation is a bank holding company
headquartered in Kalamazoo, Michigan, it was incorporated as a
Michigan corporation in May 1971. Its principal activity consists of
owning and supervising two affiliate banks which operate general,
commercial banking businesses from 545 banking offices and facilities
located in Michigan, Illinois and Indiana. The Registrant also has
divisions and non-banking subsidiaries which provide mortgage, trust,
data processing, pension consulting, revolving credit, securities
brokerage and underwriting, insurance products, and investment
advisory services.
Consolidation:
The consolidated financial statements include the accounts of
First of America and its subsidiaries, after elimination of
significant intercompany transactions and accounts. Goodwill, the
cost over the fair value of assets acquired, is amortized on a basis
which matches the periods estimated to be benefitted. First of
America's policy is to amortize goodwill generated from acquisitions
over a fifteen year period and core deposit intangibles over their
estimated lives, not to exceed ten years.
Basis of Presentation:
Certain amounts in the prior years' financial statements have
been reclassified to conform with current financial statement
presentation. First of America uses the accrual basis of accounting
for financial reporting purposes, except for immaterial sources of
income and expenses which are recorded when received or paid.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Securities:
Securities Available for Sale include those securities which
would be available to be sold prior to final maturity in response to
asset-liability management needs. All securities owned by First of
America as of December 31, 1997 and 1996, were classified as
Securities Available for Sale. Using the specific identification
method such securities are carried at market value with a
corresponding market value adjustment carried as a separate component
in the equity section of the balance sheet on a net of tax basis. The
adjusted cost of each security sold is used to compute realized gains
or losses on the sales of these securities.
Loans Held for Sale:
Loans held for sale consist mainly of fixed rate and variable
rate residential mortgage loans with maturities of fifteen to thirty
years. Such loans are recorded at the lower of aggregate cost or
estimated fair value.
Allowance for Loan Losses:
Losses on loans are charged to the allowance for loan losses.
The allowance is increased by recoveries of principal and accrued
interest previously charged to the allowance and by a provision
charged against income. Management determines the adequacy of the
allowance based on reviews of individual loans, recent loss
experience, current economic conditions, risk characteristics of
various categories of loans and such other factors which, in
management's judgement, deserve recognition in estimating possible
loan losses.
In accordance with Financial Accounting Standards Board (FASB)
Statement No. 114, "Accounting by Creditors for Impairment of a Loan,"
and as amended by Statement No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures" First of
America maintains a separate allowance for loan losses for impaired
loans as defined in the statement.
Non-Performing Loans:
Loans are considered non-performing when placed in non-accrual
status or when terms are renegotiated that meet the definition of
troubled debt restructuring as defined by the FASB Statement No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring."
Commercial, commercial mortgage and residential mortgage loans
are placed in non-accrual status when, in the opinion of management,
there is doubt as to collectibility of interest or principal, or when
principal or interest is past due 90 days or more and the loan is
either not well secured or in the process of collection. Consumer and
revolving loans are generally charged off when payments are 120 days
past due; therefore, they are not included in non-performing loans.
Management has determined that First of America's non-accrual and
renegotiated commercial and commercial mortgage loans meet the
definition for impaired loans under FASB Statement No. 114. Payments
received on non-accrual loans are applied to the principal balance.
Other Real Estate Owned:
Other real estate owned includes, primarily, properties acquired
through foreclosure or deed in lieu of foreclosure. Other real estate
owned is included in other assets at the lower of the amount of the
loan balance plus unpaid accrued interest or its current fair value
less estimated costs to sell the property. Any write-down of the loan
balance to fair value when the property is acquired is charged to the
allowance for loan losses. Subsequent market write-downs, operating
expenses, and gains or losses on the sale of other real estate owned
are charged or credited to other operating expense.
Mortgage Servicing Rights:
First of America recognizes as separate assets the rights to
service mortgage loans for others, however those rights are acquired.
After the residential mortgage loan portfolio is stratified for
impairment analysis, loan type, rate type and interest rate, the fair
value of the Mortgage Servicing Rights (MSRs) is determined using the
present value of estimated expected future cash flows assuming a
market discount rate and certain forecasted prepayment rates based on
industry experience. The MSRs are amortized in proportion to and over
the period of the estimated net servicing income.
Premises and Equipment:
Premises and equipment are stated at cost, less accumulated
depreciation, and include capital leases, expenditures for new
facilities and additions which materially extend the useful lives of
existing premises and equipment. Expenditures for normal repairs and
maintenance are charged to operations as incurred. The cost of assets
retired or otherwise disposed of and the related accumulated
depreciation are eliminated from the accounts in the year of disposal,
and the resulting gains or losses are reflected in operations.
Depreciation is computed principally by the straight-line method
and is charged to operations over the estimated useful lives of the
assets. Capital leases and leasehold improvements are being amortized
over the lesser of the remaining term of the respective lease or the
estimated useful life of the asset.
Long-Lived Assets and Long-Lived Assets to Be Disposed Of:
In accordance with FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," First of America reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. The impairment is measured based on the present value of
expected future cash flows from the use of the asset and its eventual
disposition. If the expected future cash flows are less than the
carrying amount of the asset, an impairment loss is recognized based
on current fair values.
Interest Income on Loans:
Interest income on loans is recognized over the terms of the
loans based on the unpaid principal balance. Interest accrual on
loans is discontinued when, in the opinion of management, the ultimate
full collection of both principal and interest is in doubt, unless the
loan is well secured and in the process of collection. Interest
previously accrued on charged off loans is reversed, by charging
interest income, to the extent of the amount included in current year
income. The excess, if any, is charged to the allowance for loan
losses.
Loan Fees:
Non-refundable loan origination fees and direct loan origination
costs are deferred and amortized as an adjustment of yield by a method
that approximates the interest method. The deferred fees and costs
are netted against outstanding loan balances. When a loan is placed
into non-accrual status, amortization of the loan fees and costs is
stopped until the loan returns to accruing status.
Deferred fees net of direct origination costs related to credit
card loans are included in other assets and are amortized into non-
interest income over a twelve month period.
Income Taxes:
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Derivative Instruments:
The corporation and its subsidiaries have entered into interest
rate swaps as a hedge against certain deposit and debt liabilities in
an attempt to manage interest rate sensitivity. First of America may
also utilize interest rate caps, futures contracts, options, and
foreign exchange contracts. The amount associated with these
activities is not considered material.
Interest rate swaps are contracts that 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 and
losses from the termination of interest rate swaps are deferred and
amortized over the remaining lives of the designated balance sheet
assets or liabilities. When the swap becomes uncovered during the
swap agreement period, the swap is immediately marked-to-market with a
corresponding effect on current earnings.
Stock Option Plans:
As of December 31, 1996, First of America adopted the disclosure
requirements of FASB Statement No. 123, "Accounting for Stock-Based
Compensation." First of America applies APB Opinion 25 and related
interpretations in accounting for its stock option plans.
Accordingly, no compensation cost has been recognized for its plans.
Recent Accounting Pronouncements:
The FASB issued the following Statements during 1997 that apply
to First of America:
Statement No. 128, "Earnings Per Share," which is effective for
fiscal years ending after December 15, 1997. This Statement was
adopted by First of America for reporting the results of operations
for the year ended December 31, 1997, and all prior periods presented.
Statement No. 130, "Reporting Comprehensive Income," which is
effective for fiscal years beginning after December 15, 1997, and,
therefore, does not impact the financial statements presented in this
report. This Statement establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements; it does not change the display
of, or components of present-day net income.
Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This Statement establishes
standards for the way that public business enterprises report
information about operating segments in interim and annual financial
statements. First of America adopted this Statement January 1, 1998.
First of America's current disclosure meets the basic requirements of
this Statement.
NOTE 2: BUSINESS COMBINATIONS
Information relating to mergers and acquisitions for the three
year period ended December 31, 1997 follows.
Intangible
Financial Number of Assets
Date of Reporting Common Cash Paid/ Acquired at
Acquisition Value* Shares Issued Debt Issued Acquisition
Scott, Doerschler, Messner & Gauntlett, Inc. Jan. 1, 1997 $ 5,455,000 93,855 - $ 5,414,000
Elliot & Sons Insurance Agency Inc.,
Michigan Benefit Plans Inc. Jan. 7, 1997 4,259,000 73,742 - 3,727,000
Huttenlochers Kerns Norvell, Inc. (Michigan) Feb. 12, 1996 3,912,000 92,053 - 1,612,000
West Suburban Financial Corp. (Illinois) Aug. 4, 1995 - - $1,000 -
Underwriting Consultants, Inc. (Michigan) Feb. 1, 1995 1,000 148,170 - **
New England Trust Company (Rhode Island) Jan. 1, 1995 1,092,000 185,327 - **
* Includes direct acquisition costs on all purchased affiliates.
** Accounted for as a pooling of interests with no restatement of prior periods as the amounts involved were not
material to First of America.
Goodwill, the cost over the fair value of assets acquired, is
amortized on a basis which matches the periods estimated to be
benefitted. Goodwill is reviewed annually for permanent impairment
using a discounted cash flow analysis. During 1997, goodwill was
reduced by $40,807,000 as a result of the Florida Sale and other
branch sales. The reductions were included in the calculation of the
net gains on the transactions. Goodwill, which is included in other
assets in the Consolidated Balance Sheets, amounted to $149,972,000 at
December 31, 1997 and $201,631,000 at December 31, 1996.
NOTE 3: PENDING MERGER
On November 30, 1997, First of America entered into an Agreement
and Plan of Merger with National City Corporation (NCC) providing for
the merger of First of America into NCC. The merger is subject to
approval by the respective shareholders of First of America and NCC,
regulatory authorities and other customary conditions. Pursuant to
the merger agreement, upon consummation of the merger, each
outstanding share of First of America's common stock will be converted
into 1.2 shares of NCC common stock. The merger is expected to be a
tax-free reorganization and accounted for as a pooling of interests.
The merger is currently expected to be completed early in the second
quarter of 1998.
NOTE 4: RESTRICTIONS ON CASH AND DUE FROM BANKS
Federal regulations require First of America to maintain as
reserves, minimum cash balances based on deposit levels at its
subsidiary banks. Cash balances restricted from usage due to these
requirements were $329,274,000 and $289,899,000 at December 31, 1997
and 1996, respectively.
NOTE 5: CASH FLOW
For the purpose of reporting cash flows, cash and cash
equivalents include only cash and due from banks. The following
schedule presents noncash investing activities for the years 1997,
1996 and 1995.
Fair Value
of Noncash Common
($ in thousands) Assets Liabilities Stock Net Cash
Acquired Assumed Issued Paid
PURCHASE OF AFFILIATES
1997
Scott, Doerschler, Messner & Gauntlett, Inc. $ 63 22 5,455 --
Elliot & Sons Insurance Agency Inc.,
Michigan Benefit Plans Inc. 1,424 893 4,259 --
1996
Huttenlochers Kerns Norvell, Inc 5,094 2,126 3,912 (944)
1995
Gulfstream Global Investors, Ltd. 4,742 -- -- 4,742
The following schedule details supplemental disclosures for the
cash flow statements:
Assets
Transferred
Loans to Securities Total Total Income
($ in thousands) Securitized Available for Sale Interest Paid Taxes Paid
1997 $ -- -- 693,398 165,685
1996 -- -- 788,875 120,643
1995 503,976 2,851,746 864,519 92,338
In conjunction with the FASB's issuance of A Guide to
Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities, FASB approved the transfer of
securities from the Held to Maturity to the Available for Sale
classification during the period from November 15, 1995, to December
31, 1995, with no recognition of any related unrealized gain or loss
in current earnings.
NOTE 6: SECURITIES
The amortized cost and estimated market value of Securities
Available for Sale at December 31, 1997 and 1996 follow.
1997 1996
Estimated Estimated
Amortized Market Average Amortized Market Average
($ in thousands) Cost Value Maturity Cost Value Maturity
U.S. government and agency securities $ 3,833,352 3,849,229 2.8 yrs 3,483,720 3,494,016 2.6 yrs
State and municipal securities 578,782 608,749 9.7 398,041 403,354 8.8
Collateralized mortgage obligations 333,849 335,965 2.7 486,945 484,333 1.8
Other securities 146,579 148,026 27.2 180,677 180,678 5.4
---------------------- -------------------
Total $ 4,892,562 4,941,969 4,549,383 4,562,381
====================== ===================
The following table details the gross unrealized gains and losses
on Securities Available for Sale at December 31, 1997 and 1996.
1997 1996
Gross Unrealized Gross Unrealized Gross Unrealized Gross Unrealized
($ in thousands) Gains Losses Gains Losses
U.S. government and agency securities $ 23,863 (7,986) 25,670 (15,374)
State and municipal securities 30,091 (124) 6,783 (1,470)
Collateralized mortgage obligations 3,211 (1,095) 1,580 (4,192)
Other securities 1,448 (1) 1 --
------------------------------- -------------------------------
Total $ 58,613 (9,206) 34,034 (21,036)
=============================== ===============================
Except as indicated below, total securities of no individual
state, political subdivision or other issuer exceeded 10% of
shareholders' equity at December 31, 1997. At December 31, 1997 and
1996, the book value of securities issued by the State of Michigan and
all of its political subdivisions totaled approximately $165,057,000
and $145,917,000, respectively, with a market value of approximately
$171,012,000 and $146,961,000, respectively. The securities at
December 31, 1997, represent a wide range of ratings, all of
"investment grade," with a substantial portion rated A-1 or higher.
First of America has no concentration of credit risk in its investment
portfolio.
Assets, principally securities, carried at approximately
$947,890,000 at December 31, 1997, and $1,569,685,000 at December 31,
1996, were pledged to secure public deposits, exercise trust powers
and for other purposes required or permitted by law.
Securities Available for Sale
Maturity Distribution and Portfolio Yields
($ in millions)
December 31, 1997 One year or less One year to five years Five years to ten years
Market Amortized Market Amortized Market Amortized
Value Cost Yield Value Cost Yield Value Cost Yield
U.S. government securities $ 358,973 358,563 5.80% $374,830 370,846 6.26% -- -- --
U.S. agency securities 15,004 14,583 7.26 128,203 127,168 6.30 $ 621,214 616,137 6.47%
State and municipal securities* 82,109 81,800 7.24 36,707 35,015 9.51 430,341 405,413 8.08
Collateralized mortgage
obligations 46 46 6.37 -- -- -- -- -- --
Other securities 115,918 115,918 7.21 1,807 1,807 7.99 9,574 9,574 6.80
--------------- ------------------ -------------------
Total $ 572,050 570,910 6.33% $541,547 534,836 6.49% $1,061,129 1,031,124 7.11%
=============== ================== ===================
Market value as a percent of
amortized cost 100.20% 101.25 102.91
====== ====== ======
December 31, 1997 After ten years Total
Market Amortized Market Amortized
Value Cost Yield Value Cost Yield
U.S. government securities -- -- -- $ 733,803 729,409 6.03%
U.S. agency securities $2,351,005 2,346,055 5.73% 3,115,426 3,103,943 6.66
State and municipal securities* 59,592 56,554 8.02 608,749 578,782 8.03
Collateralized mortgage
obligations 335,919 333,803 5.43 335,965 333,849 6.43
Other securities 20,727 19,280 8.26 148,026 146,579 7.35
-------------------- --------------------
Total $2,767,243 2,755,692 6.73% $4,941,969 4,892,562 6.73%
==================== ====================
Market value as a percent of
amortized cost 100.42% 101.01%
====== ======
* Yields on state and political obligations have been adjusted to a taxable equivalent basis
using a 35% tax rate. Yields are calculated on the basis of cost and weighted for the
scheduled maturity and dollar amount of each issue.
NOTE 7: RISK ELEMENTS IN THE LOAN PORTFOLIO AND OTHER REAL ESTATE
OWNED
Assets earning at less than normal interest rates include (1)
non-accrual loans, (2) restructured loans (loans for which the
interest rate or principal balance has been reduced because of a
borrower's financial difficulty) and (3) other real estate owned which
has been acquired in lieu of loan balances due. Information
concerning these assets, loans past due 90 days or more and other
loans of concern (loans where known information about possible credit
problems of borrowers causes management concern about the ability of
such borrowers to comply with the present loan terms) at December 31,
1997 and 1996 follows.
($ in thousands) 1997 1996
BALANCES OUTSTANDING:
Non-accrual loans $ 87,271 84,185
Restructured loans 3,045 6,414
Past due 90 days or more 25,194 26,726
Other loans of concern 52,138 30,541
Other real estate owned (included in other assets) 16,478 24,190
Interest income of $7,587,000 and $6,929,000 during 1997 and
1996, respectively, was recognized as income on non-accrual and
restructured loans. Had these loans been performing under the
original contract terms, an additional $6,579,000 and $7,732,000 of
interest would have been reflected in interest income during 1997 and
1996, respectively.
First of America does not have any concentrations of credit risk
to any specific borrower or within any geographic area.
NOTE 8: LOANS TO RELATED PARTIES
First of America's subsidiary banks have extended loans to
directors and executive officers of the corporation and the subsidiary
banks and their associates (other than members of their immediate
families). In conformance with First of America's written corporate
policy and applicable laws and regulations, these loans to related
parties were made in accordance with sound business and banking
practices on non-preferential terms and rates available to non-
insiders of comparable creditworthiness under similar circumstances.
The loans do not involve more than the normal risk of collectibility
or present other unfavorable features. All such extensions of credit
must be properly documented as complying with this corporate policy.
The aggregate loans outstanding as reported by the directors and
executive officers of the corporation and its subsidiary banks which
exceeded $60,000 during 1997 totaled less than 5 percent of total
shareholders' equity at year-end 1997. First of America relies on its
directors and executive officers for identification of loans to their
associates.
First of America maintains a line of credit for First of America
Securities, Inc. and First of America Community Development
Corporation; at December 31, 1997 only First of America Community
Development Corporation had borrowings outstanding, and these amounted
to $265,000. In conformance with First of America's corporate policy
and applicable law, such extensions of credit to subsidiaries are made
in accordance with sound banking practices and on non-preferential
terms and rates.
In the opinion of management, the amount and nature of these
loans to related parties and subsidiaries do not materially affect the
financial condition of First of America.
NOTE 9: ALLOWANCE FOR LOAN LOSSES
An analysis of the transactions in the allowance for loan losses
for 1997, 1996 and 1995 follows.
($ in thousands) 1997 1996 1995
Balance, beginning of year $ 252,846 241,182 228,115
Additions: Provision charged against income 85,707 93,456 91,488
Recoveries 51,393 62,249 56,938
--------------------------------------
389,946 396,887 376,541
Less: Loans charged off (135,088) (144,041) (135,359)
Allowance of sold banks, net (11,389) -- --
--------------------------------------
Balance, end of year $ 243,469 252,846 241,182
======================================
Management has evaluated the loan portfolio and believes that the
balance in the allowance for loan losses is adequate in light of the
composition of the loan portfolio, economic conditions and other
pertinent factors.
As of December 31, 1997 and 1996, respectively, the recorded
investment in loans considered to be impaired under Statement No. 114
as amended by Statement No. 118 was $69.5 million and $68.7 million,
with an average recorded investment in impaired loans during 1997 and
1996 of approximately $66.8 million and $80.3 million, respectively.
Included in the impaired loans total as of the same dates were $36.2
and $29.6 million of impaired loans for which the related specific
allowance for loan losses were $15.2 million and $13.7 million,
respectively. The remaining $33.3 million and $39.1 million of
impaired loans did not require a specific allowance for loan losses
due to the net realizable value of loan collateral, guarantees and
other factors.
NOTE 10: PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1997 and 1996
follows.
($ in thousands) 1997 1996
Land $ 70,898 79,713
Buildings and leasehold improvements 413,169 444,805
Equipment 229,767 269,099
Capital leases 2,925 3,587
---------------------------
716,759 797,204
Less:
Accumulated depreciation and amortization 338,033 363,796
---------------------------
Total $ 378,726 433,408
===========================
First of America and certain of its subsidiaries have capital and
operating leases for premises and equipment under agreements expiring
at various dates through 2034. These leases, in general, provide for
renewal options and options to purchase certain premises at fair
values, and require the payment of property taxes, insurance premiums
and maintenance costs. Total rental expense for operating leases was
$15,818,000 in 1997, $16,364,000 in 1996, and $17,554,000 in 1995.
The future minimum payments by year, and in the aggregate, under
capital leases and noncancelable operating leases with initial or
remaining terms of one year or more consisted of the following at
December 31, 1997.
($ in thousands) Capital Operating
Leases Leases
1998 $ 377 13,331
1999 322 10,466
2000 307 8,445
2001 286 6,738
2002 286 5,123
Thereafter 3,234 25,358
-----------------------
Total minimum lease payments 4,812 69,461
Amounts representing interest (2,928) --
-----------------------
Present value of net minimum
lease payments $ 1,884 69,461
=======================
NOTE 11: MORTGAGE SERVICING RIGHTS
The fair value of capitalized mortgage servicing rights was $51.3
million on December 31, 1997, and $16.1 million on December 31, 1996.
First of America serviced $5.5 billion and $3.6 billion of mortgage
loans for other investors as of December 31, 1997 and 1996,
respectively. A summary of the changes in capitalized mortgage
servicing rights and in the valuation allowance follows.
($ in thousands) 1997 1996 1995
Balance - beginning of year $ 15,427 4,323 1,172
Originated servicing rights capitalized 11,894 10,026 3,516
Purchased servicing rights capitalized 23,505 1,835 --
Excess servicing rights capitalized 2,238 758 234
Amortization of servicing rights (3,408) (1,434) (504)
Valuation allowance - net change 111 (81) (95)
----------------------------------------------
Balance - end of year $ 49,767 15,427 4,323
==============================================
Valuation allowance - beginning of year $ (176) (95) --
Additions charged to operations (112) (412) (95)
Reductions credited to operations 223 331 --
----------------------------------------------
Valuation allowance - end of year $ (65) (176) (95)
==============================================
NOTE 12: IMPAIRMENT OF LONG-LIVED ASSETS
In 1997, First of America recorded an impairment on long-lived
assets to be disposed of totaling $6.7 million. The impaired assets
included current or former bank premises, computers and other related
assets. The expected disposal date for the impaired assets has not
yet been determined.
The carrying value of impaired assets at December 31, 1997, was
$7.0 million. The fair value was determined based on a combination of
independent appraisals, brokers' opinions, and offers to purchase.
Management does not currently anticipate that the ultimate disposal of
the assets will have a material effect on the financial position,
results of operations or liquidity of First of America.
NOTE 13: LONG TERM DEBT
Information relating to long term debt at December 31, 1997 and
1996 follows.
($ in thousands) 1997 1996
PARENT COMPANY:
7.75% subordinated notes due July 15, 2004 $ 200,000 200,000
8.50% subordinated notes due February 1, 2004 150,000 150,000
6.35% subordinated debenture due December 31, 2007 10,000 10,000
Capital lease obligations (Note 10) 919 923
------------------------------
360,919 360,923
SUBSIDIARIES:
Bank notes, with interest rates ranging from
5.70% to 6.25%, due through October 1, 1999 374,826 54,992
Revolving credit agreement -- 54,000
FHLB borrowings, with interest rates ranging
from 5.50% to 6.26%, due through November 23, 1999 600,000 50,000
Company Obligated Mandatory Redeemable New Capital
Securities of Subsidiary Trust Holding Solely
Debentures of the Company 150,000 --
Mortgages and land contracts, payable in
installments through 2000 with interest 67 107
rates ranging from 4.75% to 10.25%
Capital lease obligations (Note 10) 965 1,102
---------------------------------
TOTAL LONG TERM DEBT $ 1,486,777 521,124
=================================
First of America has entered into a Three-Year Competitive
Advance and Revolving Credit Facility Agreement dated as of March 25,
1994 and amended by the First Amendment dated December 9, 1994, and by
the Second Amendment dated February 15, 1996 (collectively, the Credit
Agreement). The Credit Agreement allows First of America to borrow on
a standby revolving credit basis and an uncommitted competitive
advance basis of up to $350,000,000. The proceeds of all borrowings
made pursuant to the Credit Agreement will be used to provide working
capital and for other general corporate purposes.
During 1995 and 1996, First of America's Section 20 subsidiary,
First of America Securities, Inc., entered into three uncommitted
secured broker loan guidance facilities to finance the purchase of
securities for resale. At December 31, 1997, there was nothing
outstanding and $174 million available on these agreements. There was
$54.0 million outstanding and $120.0 million available at December 31,
1996.
The various loan agreements include restrictions on consolidated
capital. First of America's net worth, under the most restrictive
loan covenant, may not be less than $1.4 billion. The indebtedness of
subsidiary banks is subordinated to the claims of their depositors and
certain other creditors. Management has determined that First of
America is in compliance with all of its loan covenants.
Maturities of outstanding indebtedness at December 31, 1997
follow.
Total
($ in thousands) Principal
Amount Due
Year ending December 31
1998 $ 275,169
1999 699,953
2000 123
2001 92
2002 102
Thereafter 511,338
---------
Total $ 1,486,777
=========
NOTE 14: COMPANY OBLIGATED MANDATORILY-REDEEMABLE NEW CAPITAL
SECURITIES OF FIRST OF AMERICA CAPITAL TRUST I
First of America Capital Trust I was formed for the purpose of
issuing capital securities and investing the proceeds from the sale of
such capital securities in junior subordinated deferrable interest
debentures issued by the corporation. The corporation is the owner of
all of the beneficial interests of the Trust represented by common
securities, the proceeds from the sale of which were also invested in
the junior subordinated deferrable interest debentures issued by the
corporation. On January 28, 1997, the Trust issued $4.6 million
Common Securities, $150 million of 8.12% Capital Securities, Series A
and invested the proceeds from the sale of such securities in
$154,640,000 8.12% Junior Subordinated Deferrable Interest Debentures
Due January 31, 2027, Series A, issued by the corporation. Pursuant
to an exchange offer consummated on July 30, 1997, the Trust exchanged
all of the Series A Debentures held by the Trust for $154,640,000 of
8.12% Junior Subordinated Deferrable Interest Debentures Due January
31, 2027, Series B, issued by the corporation. The sole assets of the
Trust are these Series B Debentures. Subject to the corporation
having received prior approval of the Federal Reserve if then required
under applicable capital guidelines or policies of the Federal
Reserve, the junior subordinated debentures will be prepayable, in
whole or in part, at the option of the corporation from January 31,
2007, until January 31, 2017, at a ratably declining rate of 104.06
percent to 100.00 percent of the principal amount, plus accrued and
unpaid interest thereon to the prepayment date. After January 31,
2017, prepayment is at par until January 31, 2027, when payment is
mandatory.
NOTE 15: PREFERRED STOCK
First of America has reserved 500,000 shares of preferred stock
for issuance as Series A Junior Participating Preferred Stock (Series
A Preferred) upon the exercise of certain preferred stock purchase
rights (each a Right) issued to holders of and in tandem with shares
of First of America Common Stock. The Rights are not currently
exercisable, and the pending merger of First of America into NCC, and
the transactions related thereto, will not cause the Rights to become
exercisable. Therefore, no Series A Preferred are currently
outstanding.
If issued, each share of Series A Preferred is entitled to 100
votes on all matters submitted to a vote of the shareholders of First
of America. Additionally, in the event First of America fails to pay
dividends on the Series A Preferred for four full quarters, holders of
the Series A Preferred have certain rights to elect additional
directors of the company. Except as described in the Rights
Agreement, holders of the Series A Preferred have no preemptive rights
to subscribe for additional securities which the company may issue.
The Series A Preferred will not be redeemable. Each share of Series A
Preferred will, subject to the rights of any other preferred stock the
company may issue ranking senior to the Series A Preferred, if any, be
entitled to preferential quarterly dividends equal to the greater of
$10.00, or subject to certain adjustments, 100 times the dividend
declared per share of First of America Common Stock. Upon liquidation
of the company, holders of Series A Preferred will, subject to the
rights of senior securities, be entitled to a preferential liquidation
payment equal to $190.00 per share, plus accrued and unpaid dividends.
In the event of any merger, consolidation, or other transaction in
which shares of First of America Common Stock are exchanged, each
share of Series A Preferred will, subject to the rights of senior
securities, be entitled to receive 100 times the amount received per
share on common stock. The rights of the Series A Preferred are
protected by customary antidilution provisions.
NOTE 16: STOCK OPTION PLANS
First of America maintains three stock option plans: the First of
America Bank Corporation Restated 1987 Stock Option Plan (the 1987
Plan), the First of America Bank Corporation Stock Compensation Plan
(the 1996 Plan), and the First of America Bank Corporation Director
Stock Compensation Plan (the 1997 Plan).
The 1987 Plan provides only for the grant of non-qualified stock
options. Stock options were last granted under the 1987 Plan in 1995.
No further options will be granted under this Plan, although options
previously granted will continue in effect until they are exercised,
are forfeited or expire. The options granted under the 1987 Plan are
exercisable during a ten year period and vest over a three year
period, beginning on the date granted. The options were granted at
prices not less than the fair market value on the date of grant.
Under the 1996 Plan, eligible participants may be granted
incentive stock options, non-qualified stock options or restricted
stock. The aggregate number of shares of First of America Common
Stock that may be issued, pursuant to the exercise of options and the
grant of restricted stock, under the 1996 Plan will not exceed
3,000,000 shares. In 1997, incentive stock options for 475,250 shares
were granted at the fair market value on the date of grant and vest
over the next three years. Other options granted to date under the
1996 Plan were granted at the fair market value on the date of grant
and vested in thirds upon the attainment of each of three targets for
the market price of First of America Common Stock. The options are
exercisable during a ten year period from the date of grant.
The 1997 Plan was approved at First of America's annual
shareholders meeting held on April 16, 1997. The 1997 Plan provides
for the payment of retainer, meeting, committee, chairperson and any
other fees payable for service to eligible directors of First of
America and its subsidiaries in the form of restricted stock, stock
options or phantom stock. Stock options granted under the 1997 Plan
are exercisable in full immediately upon grant. The exercise price
may not be less than the fair market value of First of America Common
Stock on the date of grant. The term during which stock options
granted under the 1997 Plan vest may not exceed ten years from the
date of grant.
The Nominating and Compensation Committee of the corporation
administers each of the Plans. Members of the Nominating and
Compensation Committee are eligible to participate only in the 1997
Plan.
A summary of the status of First of America's stock option
transactions under the Plans as of December 31, 1997, 1996 and 1995,
and the changes during the years ended on those dates is presented
below:
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options (number of shares in thousands): Shares Price Shares Price Shares Price
Outstanding at beginning of year 2,637 25.92 2,186 $21.42 1,872 $18.89
Granted * 818 50.18 759 36.32 488 28.83
Exercised (491) 18.40 (293) 19.20 (153) 13.81
Forfeited (29) 32.47 (15) 27.26 (21) 23.53
----- ------ -----
Outstanding at end of year 2,935 33.87 2,637 25.92 2,186 21.42
===== ====== =====
Exercisable at year end 1,980 1,505 1,388
Weighted-average exercise 50.18 $54.47 43.25
price of options granted
during the year
Weighted-average fair 11.31 $11.18 7.88
value of options granted
during the year
* All options granted during 1996, represent nonqualified stock options under the Plan.
Under the 1996 Plan, First of America issued and had outstanding
62,000 shares of restricted stock as of December 31, 1997.
As of December 31, 1996, First of America adopted the disclosure
provisions of FASB Board Statement No. 123, "Accounting for Stock-
Based Compensation." Accordingly, the Company is required to disclose
pro forma net income and earnings per share for 1997, 1996 and 1995 as
if compensation expense relative to the fair value of options granted
had been included in earnings. The fair value of each option grant
was estimated using the Black-Scholes option-pricing model with the
following assumptions used for grants in 1997, 1996 and 1995,
respectively: a ten year expected life for all years; expected
volatility of 20.9 percent, 21.3 percent and 22.2 percent,
respectively; risk-free interest rates of 6.3 percent, 6.2 percent and
7.5 percent; and expected dividend yields of 3.6 percent, 8.0 percent
and 8.4 percent. Had compensation cost for the Company's option plans
been determined and recorded consistent with FASB Statement No. 123,
the Company's net income and diluted earnings per share would have
been reduced to the pro forma amounts indicated in the following
table:
1997 1996 1995
NET INCOME ($ in Thousands)
As reported $ 314,761 256,886 236,708
Pro forma 311,279 253,404 236,197
DILUTED EARNINGS PER SHARE
As reported $ 3.53 2.77 2.49
Pro forma 3.48 2.75 2.48
The following table summarizes information about fixed stock
options outstanding at December 31, 1997:
Options Outstanding Options Exercisable
Range Number Weighted-Avg. Number
of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
$10 to 20 316,168 3.1 yrs $14.77 316,168 14.77
$21 to 30 1,055,157 6.7 25.32 891,640 20.59
$31 to 40 758,775 8.9 36.31 758,775 36.51
$41 to 51 804,825 9.6 50.29 13,050 42.71
--------- ---------
2,934,925 7.7 33.87 1,979,633 25.83
========= =========
NOTE 17: DIVIDENDS FROM BANKING SUBSIDIARIES
Dividends paid to First of America by its bank subsidiaries
amounted to $242,000,000 in 1997, $357,800,000 in 1996 and
$337,407,000 in 1995. Banking regulations limit the amount of
dividends that First of America's banking subsidiaries can declare
during 1998 to the 1998 net profits, as defined in the Federal Reserve
Act, plus retained net profits for 1997 and 1996. In recent years,
First of America requested and obtained regulatory approval to exceed
banking regulatory limits for certain subsidiary banks, based largely
on the well capitalized position of those banks. As a result, the net
retained profits for 1997 and 1996 were $30.1 million. Under the
Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA), there are strong incentives to maintaining a bank's capital
at the "well capitalized" level.
NOTE 18: CAPITAL ADEQUACY
First of America Bank Corporation and its banking subsidiaries
are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a
direct material effect on First of America's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, First of America must meet specific capital
guidelines that involve quantitative measures of the banks' assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The banks' capital amounts and
classification are also subject to qualitative judgements by the
regulators about components, risk weightings, and other factors.
Management believes that as of December 31, 1997, First of America met
all capital adequacy requirements to which it is subject.
Risk-based capital guidelines for bank holding companies and
banks adopted by the federal banking agencies were fully phased in at
the end of 1992. The minimum ratio of qualifying total capital to
risk-weighted assets, (including certain off-balance sheet items, such
as standby letters of credit) under the fully phased-in guidelines is
eight percent. At least half of the total capital must be comprised of
common stock, retained earnings, noncumulative perpetual preferred
stock, minority interests, and, for bank holding companies, a limited
amount of qualifying cumulative perpetual preferred stock, less
goodwill and certain other intangibles (Tier 1 capital). The remainder
(Tier 2 capital) may consist of other preferred stock, certain other
instruments, and limited amounts of subordinated debt and reserves for
credit losses. In addition, the federal banking agencies have
established minimum leverage ratio (Tier 1 capital to total average
assets less goodwill and certain other intangibles) guidelines for
bank holding companies and banks. These guidelines provide for a
minimum leverage ratio of three percent for bank holding companies and
banks that meet certain specified criteria, including that they have
the highest supervisory rating. All other banking organizations are
required to maintain a leverage ratio of three percent plus an
additional cushion of at least 100 to 200 basis points. Failure to
meet applicable capital guidelines could subject a bank to a variety
of enforcement actions available to the federal regulatory
authorities. Under the prompt corrective action provisions of FDICIA,
the scope and degree of regulatory intervention is linked to the level
of capital and the supervisory rating of the institution. Prompt
corrective action can include limitations on the ability to pay
dividends, the issuance of a directive to increase capital, the
termination of deposit insurance by the FDIC, and (in severe cases)
the appointment of a conservator or receiver.
As of December 31, 1997, the most recent notification from the
Federal Reserve categorized First of America as well capitalized under
the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes
have changed First of America's category.
The following table summarizes First of America Bank
Corporation's and its significant subsidiaries' actual capital and the
capital that would be required to maintain ratios indicated as of
December 31, 1997 and 1996:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Minimum Minimum
Capital Ratio Capital Ratio Capital Ratio
($ in thousands) Amount % Required % Required %
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets):
First of America Bank Corporation $2,382,793 14.74 $1,308,730 8.00 $1,635,912 10.00
First of America Bank, N.A. 1,314,455 11.43 920,161 8.00 1,150,201 10.00
First of America Bank-Illinois, N.A. 512,990 11.66 351,977 8.00 439,971 10.00
Tier 1 Capital (to Risk-Weighted Assets):
First of America Bank Corporation 1,831,402 11.33 654,365 4.00 981,547 6.00
First of America Bank, N.A. 1,170,472 10.18 460,081 4.00 690,121 6.00
First of America Bank-Illinois, N.A. 457,650 10.40 175,989 4.00 263,983 6.00
Tier 1 Leverage Ratio:
First of America Bank Corporation 1,831,402 8.74 838,056 4.00 1,047,570 5.00
First of America Bank, N.A. 1,170,472 7.75 605,528 4.00 756,710 5.00
First of America Bank-Illinois, N.A. 457,650 7.65 239,406 4.00 299,258 5.00
As of December 31, 1996
Total Capital (to Risk-Weighted Assets):
First of America Bank Corporation 2,110,473 13.19 $ 1,280,315 8.00 $ 1,600,394 10.00
First of America Bank, N.A. 1,079,110 11.36 759,091 8.00 948,864 10.00
First of America Bank-Illinois, N.A. 498,106 10.68 373,090 8.00 466,363 10.00
Tier 1 Capital (to Risk-Weighted Assets):
First of America Bank Corporation 1,561,598 9.76 640,157 4.00 960,236 6.00
First of America Bank, N.A. 960,124 10.11 379,546 4.00 569,319 6.00
First of America Bank-Illinois, N.A. 439,531 9.43 186,545 4.00 279,818 6.00
Tier 1 Leverage Ratio:
First of America Bank Corporation 1,561,598 7.15 872,836 4.00 1,091,044 5.00
First of America Bank, N.A. 960,124 7.43 517,374 4.00 646,717 5.00
First of America Bank-Illinois, N.A. 439,531 6.77 259,838 4.00 324,797 5.00
NOTE 19: EMPLOYEE PENSION PLAN
First of America and its subsidiaries have a defined benefit
pension plan that covers substantially all of their salaried
employees. Benefits are based on years of service and the employee's
compensation.
Pension costs for the years ended December 31, 1997 were a
negative $4,387,000, 1996 and 1995 pension costs equaled $2,974,000
and $3,980,000, respectively.
The following table presents the plan's funded status and amounts
recognized in the consolidated balance sheets at December 31, 1997 and
1996.
December 31,
($ in thousands) 1997 1996
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS:
Accumulated benefit obligation, including vested benefits of
$319,697 for 1997 and $303,786 for 1996 $ 325,828 312,448
------- -------
Projected benefit obligation for service rendered to date $ 397,010 376,764
Plan assets at fair value, primarily listed stocks and U.S. Bonds 549,372 513,864
------- -------
Projected benefit obligation less than plan assets 152,362 137,100
Unrecognized net (gain)/loss (105,722) (97,131)
Unrecognized prior service cost 16,200 18,832
Unrecognized net assets being recognized over 15 years (9,921) (11,966)
------- -------
Prepaid pension included in other assets $ 52,919 46,835
======= ========
NET PENSION COST INCLUDED THE FOLLOWING COMPONENTS:
Service cost $ 15,617 15,868
Interest cost on projected benefit obligation 27,550 26,555
Actual return on plan assets (54,349) (75,333)
Net amortization and deferral 6,795 35,884
------- -------
Net periodic pension (benefit) costs $ (4,387) 2,974
======= ========
First of America's weighted-average discount rate was 7.50
percent at December 31, 1997 and 7.75 percent at December 31, 1996.
The rate of increase in future compensation levels used in determining
the actuarial present value of the projected benefit obligation was
5.50 percent at year-end 1997 and 5.75 percent at year-end 1996. The
expected long term rate of return on assets was 9.50 percent at
December 31, 1997 and 1996. The assumed rates in place at each year-
end are used to determine the net periodic pension cost for the
following year.
NOTE 20: OTHER POSTRETIREMENT BENEFITS
First of America and its subsidiaries have a Retiree Medical Plan
which provides a portion of retiree medical care premiums. First of
America's level of contribution is based on an age and service
formula.
The following table presents the plan's funded status reconciled
with amounts recognized in First of America's Consolidated Balance
Sheets for December 31, 1997 and 1996:
December 31,
($ in thousands) 1997 1996
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION:
Retirees $ (16,887) (16,883)
Fully eligible active plan participants (6,858) (6,801)
Other active plan participants (10,810) (10,151)
-------- --------
(34,555) (33,835)
Plan assets at fair value -- --
-------- --------
Accumulated postretirement benefit obligation in excess of plan assets (34,555) (33,835)
Unrecognized prior service cost (3,103) (3,901)
Unrecognized net (gain) loss (906) (1,306)
-------- --------
Accrued postretirement benefit cost included in other liabilities $ (38,564) (39,042)
======== ========
NET PERIOD POSTRETIREMENT BENEFIT COST FOR 1997 AND 1996 INCLUDE THE FOLLOWING COMPONENTS:
Service cost $ 940 977
Interest cost 2,583 2,517
Net amortization and deferral (798) (798)
-------- --------
Net periodic postretirement benefit cost $ 2,725 2,696
======== ========
For measurement purposes of the accrued postretirement benefit
cost included in other liabilities, 9.00 percent and 9.52 percent
annual rates of increase in the per capita cost of covered benefits
(i.e., health care cost trend rate) were assumed at December 31, 1997
and 1996, respectively; the 1997 rate was further assumed to decline
evenly to 6.00 percent by 2004. The weighted-average discount rate
used in determining the accumulated postretirement benefit obligation
was 7.50 percent at December 31, 1997 and 7.75 percent at December 31,
1996. To determine First of America's net periodic postretirement
benefit cost for 1997 and 1996, a weighted average discount rate of
7.75 percent and 7.50 percent, respectively, and the health care trend
rate of 9.00 percent and 9.52 percent, respectively, were used. The
health care cost trend rate assumption has a significant effect on the
amounts reported. For example, increasing the assumed health care
cost trend rates by one percentage point in each year would increase
the accumulated postretirement benefit obligation as of December 31,
1997 by 2.60 percent and the aggregate of the service and interest
cost components of the net periodic postretirement benefit cost for
the year ended December 31, 1997 by 2.00 percent.
NOTE 21: INCOME TAXES
Components of total income taxes include the following:
($ in thousands) 1997 1996 1995
Current:
U.S. Federal $ 148,975 121,497 125,611
State and local 8,689 7,194 8,390
--------------------------------------
157,664 128,691 134,001
======================================
Deferred:
U.S. Federal (1,537) (2,943) (6,861)
State and local 617 709 (511)
--------------------------------------
(920) (2,234) (7,372)
======================================
Income taxes attributable to income from continuing operations 156,744 126,457 126,629
Shareholders' equity:
Market value adjustments on securities
available for sale 12,721 (9,292) 28,885
Exercise of stock options (4,983) -- --
--------------------------------------
Total income taxes $ 164,482 117,165 155,514
======================================
As a result of the following, income tax expense attributable to
income from continuing operations differed from the "expected" amounts
computed by applying the U.S. federal income tax rate of 35 percent to
pretax income from operations:
($ in thousands) 1997 1996 1995
Computed "expected" tax expense $ 165,027 134,170 127,168
Increase (reduction) in income taxes resulting from:
Tax exempt municipal obligations income (14,685) (10,615) (9,277)
Other, net* 6,402 2,902 8,738
--------------------------------------
Income taxes attributable to income from continuing operations $ 156,744 126,457 126,629
======================================
* Other, net, contains no single item that exceeds five percent of
the amount calculated by multiplying income before income taxes time
35 percent (the current federal statutory rate).
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at
December 31, 1997 and 1996 are presented below:
December 31,
($ in thousands) 1997 1996
DEFERRED TAX ASSETS:
Allowances for loan losses $ 85,214 88,496
Deferred compensation 12,731 9,141
Deferred loan fees 7,902 7,974
Other 18,637 19,049
----------------------
Total gross deferred tax assets 124,484 124,660
----------------------
DEFERRED TAX LIABILITIES:
Premise and equipment, due to differences in depreciation (7,268) (8,605)
Market value adjustment on securities available for sale (17,282) (4,561)
Tax loan loss reserve to be recaptured (2,635) (5,894)
Other (18,132) (14,632)
----------------------
Total gross deferred liabilities (45,317) (33,692)
----------------------
Net deferred tax asset $ 79,167 90,968
======================
NOTE 22: EARNINGS PER SHARE CALCULATION
As of December 31, 1997, First of America adopted FASB Statement
No. 128, "Earnings Per Share." Accordingly, the reconciliation of the
numerators and denominators of the common and diluted earnings per
share computations for income from continuing operations follows:
Year ended December 31, 1997 1996
($ in thousands) Income Shares Per-share Income Shares Per-share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Income from continuing operations $ 314,761 $ 256,886
======= =======
Common earnings per share:
Income available to
common stockholders 314,761 88,170,047 $ 3.57 256,886 92,044,152 $ 2.79
===== ======
Effect of dilutive securities:
Options 1,032,203 618,878
---------- ----------
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $ 314,761 89,202,350 $ 3.53 $ 256,886 92,663,030 $ 2.77
=================================================================================
Year ended December 31, 1995
Income Shares Per-share
(Numerator) (Denominator) Amount
Income from continuing operations $ 236,708
=======
Common earnings per share:
Income available to
common stockholders 236,708 94,831,392 $ 2.50
======
Effect of dilutive securities:
Options -- 419,784
============================
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $ 236,708 95,251,176 $ 2.49
====================================
On December 31, 1997 and 1996, there were 87,166,376 and
89,719,851 common shares outstanding, respectively. For the same
dates, a maximum of 200,000,000 and 100,000,000 shares of $10 par
value common stock was authorized.
NOTE 23: COMMITMENTS AND CONTINGENT LIABILITIES
First of America and its subsidiaries are routinely engaged in
litigation, both as plaintiff and defendant, which is incident to
their business, and in certain proceedings, claims or counter-claims
have been asserted against First of America's subsidiaries.
Management, after consultation with legal counsel, does not currently
anticipate that the ultimate liability, if any, arising out of such
litigation and threats of litigation will have a material effect on
the financial position, results of operations or liquidity of the
First of America.
Financial Instruments with Off-Balance Sheet Risk:
In First of America's normal course of business, there are
various conditional obligations outstanding which are not reflected in
the financial statements. These financial instruments include
commitments to extend credit, standby letters of credit, commercial
letters of credit, when issued securities, securities lent and
commitments to purchase foreign currency.
First of America's exposure to credit loss in the event of
nonperformance by other parties to the financial instruments with off-
balance sheet risk is represented by the contractual notional amount
of these instruments. First of America uses the same credit policies
in making these commitments and conditional obligations as it does for
on-balance sheet instruments.
Unless noted otherwise, First of America does not require
collateral or other security to support financial instruments with
off-balance sheet credit risk.
A summary of the contract or notional amounts of these financial
instruments at December 31, is as follows:
($ in thousands) 1997 1996
Commitments on unused credit card lines $ 7,327,675 8,115,335
Other commitments to extend credit 5,925,457 3,410,017
Mortgages sold with recourse 47,359 61,986
Mortgage loan sale commitments 214,897 133,727
Standby letters of credit 968,683 584,408
Commercial letters of credit 4,299 5,345
Foreign exchange contracts 36,856 6,685
Interest rate swaps 25,000 80,000
-----------------------------
Total $ 14,550,226 12,397,503
=============================
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates and may
require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the commitment amount included in
the preceding table does not necessarily represent future cash
requirements. At December 31, 1997, other commitments to extend
credit were comprised of $4,461,442,000 in unused commercial loan
commitments, $829,747,000 in commitments to fund commercial real
estate, construction and land development of which $767,415,000 was
secured by real estate, and $634,268,000 in home equity lines of
credit. Collateral held on these instruments varies but may include
accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties.
First of America has sold mortgage loans to the Federal National
Mortgage Association (FNMA), Government National Mortgage Association
(GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and other
savings institutions with recourse. The total unpaid principal
balances of these loans were $47.4 million at December 31, 1997 and
are not included in the accompanying consolidated balance sheets.
Mortgage loan sale commitments represent agreements to deliver
mortgage loans to investors in future periods.
Standby letters of credit and commercial letters of credit are
conditional commitments issued to secure performance of a customer to
a third party and are subject to the same credit review and approval
process as loans. Losses to date have not been material.
Foreign exchange contracts are entered into for trading
activities which enable customers to transfer or reduce their foreign
exchange risk. Foreign exchange forward contracts represent First of
America's largest activity in this specialized area. Forward
contracts are commitments to buy or sell at a future date a currency
at a contracted price and are settled in cash or through delivery.
The risk in foreign exchange trading arises from the potential
inability of the counterparties to deliver under the terms of the
contract and the possibility that the value of a foreign currency
might change in relation to the U.S. Dollar. In the event of a
default by a counterparty, the cost to First of America would be the
replacement of the contract at the current market rate. Such credit
losses to date have not been material. The risk of loss from changes
in market rate is substantially lessened because First of America
limits its risk by entering into offsetting contracts.
At December 31, 1996, First of America had interest rate swaps
with a total notional value of $80.0 million of which $50.0 million
was a hedge against parent company debt, and $30.0 million as a hedge
against subsidiary bank debt. Although the notional amounts are often
used to express the volume of these transactions, the amounts
potentially subject to credit risk are much smaller. The company
minimizes this risk by performing normal credit reviews of its
counterparties and collateralizing its exposure when it exceeds a
predetermined limit. The following table outlines First of America's
interest rate swaps at December 31, 1997.
Interest Rate Swaps
($ in thousands)
Weighted Average Average Net Interest
Notional Fair Market Average Rate Received Rate Paid Income Impact
Hedged Asset/Liability Amount Value Maturity Variable/FixedVariable/Fixed 1997 1996
(Mos.)
Interest Rate Swaps:
Market Rate CDs * -- -- -- --% --% $ -- (65)
FirstRate Fund deposits -- -- -- -- -- -- (41)
Bank notes -- -- -- -- -- 35 (17)
Long term debt $ 25,000 (267) 7.0 5.60/Fixed 5.72/Variable (164) (47)
--------------------------------------------------------------------------------
Total $ 25,000 (267) 7.0 $ (129)(170)
================================================================================
* This represents a basis swap.
At December 31, 1997, there were no deferred losses included in
other assets from the termination of interest rate swaps.
Additionally, during 1997, no losses were recognized in earnings
related to interest rate swaps which were marked-to-market.
NOTE 24: FAIR VALUE DISCLOSURE
SFAS No. 107, "Disclosure about Fair Value of Financial
Instruments," requires disclosure of fair value information for
financial instruments, whether or not recognized in the balance sheet,
for which it is practicable to estimate that value. In cases where
quoted market prices were not available, fair values were based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used.
Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of these instruments.
For purposes of this disclosure, estimated fair value of
financial instruments with short-term maturities is assumed to equal
the recorded book value. These financial instruments include cash and
short term investments, accrued interest receivable and payable and
short term borrowings. Estimated fair value for other financial
instruments were determined as follows:
Securities:
Fair values for Available for Sale securities were based on
quoted market prices. If a quoted market price was not available,
fair value was estimated using quoted market prices for similar
securities.
Loans Receivable:
For variable rate loans that reprice frequently and for which
there has been no significant change in credit risk, fair values equal
carrying values. The fair values for fixed rate loans were based on
estimates using discounted cash flow analyses and current interest
rates being offered for loans with similar terms to borrowers of
similar credit quality.
Loans Held for Sale:
Fair value for loans held for sale were based on quoted market
prices. If a quoted market price was not available, fair value was
estimated using market prices for similar assets.
Deposit Liabilities:
The fair values disclosed for demand deposits with no stated
maturity (e.g., interest and non-interest checking, passbook savings
and certain types of money market accounts) were, by definition, equal
to the amount payable on demand at the reporting date. The carrying
amounts for variable rate, fixed-term money market accounts and
certificates of deposits with less than twelve months maturities
approximate their fair values at the reporting date. Fair values for
fixed-rate certificates of deposit with maturities greater than twelve
months are estimated using a discounted cash flow calculation that
applied interest rates being offered on the same or similar
certificates at the reporting date to a schedule of aggregated
expected maturities on the certificates of deposits.
Long Term Borrowings:
Fair values for First of America's long term debt (other than
deposits) was estimated based on the quoted market prices for the same
or similar issues or on the current rates offered to the company for
debt with the same remaining maturities.
Off Balance Sheet Instruments:
Fair values for unused commitments were estimated using the fees
charged to enter into similar agreements at the reporting date, taking
into account the remaining terms of the agreements and the present
credit worthiness of the counterparties. Fair values for guarantees
and letters of credit were based on fees charged for similar
agreements.
The fair value of forward delivery commitments, foreign exchange
contracts, interest rate swaps and interest rate caps is estimated,
using dealer quotes, as the amount that the corporation would receive
or pay to execute a new agreement with terms identical to those
remaining on the current agreement, considering current interest
rates.
The estimated fair values of First of America's financial
instruments for which the fair value differs from the recorded book
value for December 31, 1997 and 1996 follows:
December 31, 1997 December 31, 1996
Recorded Estimated Recorded Estimated
($ in millions) Book Value Fair Value Book Value Fair Value
FINANCIAL ASSETS:
Securities, Available for Sale $ 4,893 4,942 $ 4,549 4,562
Loans, net 13,426 13,679 14,695 14,682
Loans held for sale 119 122 108 110
FINANCIAL LIABILITIES:
Deposits* (15,759) (15,729) (17,619) (17,635)
Long term borrowings (1,337) (1,502) (521) (542)
Off-balance sheet commitments -- -- -- 23
* SFAS No. 107 defines the fair value of demand deposits as the
amount payable on demand and prohibits adjusting fair value for
any value derived from retaining those deposits for an expected
future period of time.
NOTE 25: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The balance sheets for December 31, 1997 and 1996, and the
statements of income and statements of cash flows for the three years
ended December 31, 1997 follow.
December 31,
($ in thousands) 1997 1996
BALANCE SHEETS
ASSETS
Cash and interest bearing deposits held by subsidiary banks $ 481,994 213,026
Investment in subsidiaries 1,832,582 1,825,862
Other assets 234,348 196,009
----------------------------
Total assets $ 2,548,924 2,234,897
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other liabilities $ 312,015 90,699
Long term debt 360,000 360,000
----------------------------
Total liabilities 672,015 450,699
----------------------------
SHAREHOLDERS' EQUITY
Common stock 871,664 598,132
Surplus 36,814 145,950
Net unrealized gain on securities available for sale, net of tax
expense of $17,282 for 1997 and $4,561 for 1996
32,125 8,438
Retained earnings 936,306 1,031,678
----------------------------
Total shareholders' equity 1,876,909 1,784,198
----------------------------
Total liabilities and shareholders' equity $ 2,548,924 2,234,897
============================
Year Ended December 31,
($ in thousands) 1997 1996 1995
STATEMENTS OF INCOME
Dividends from subsidiaries $ 242,348 360,800 337,407
Interest and other income 435,075 361,985 339,863
---------------------------------------------
Total operating income 677,423 722,785 677,270
---------------------------------------------
EXPENSES
Interest on borrowed money 41,705 30,638 33,600
Salaries and employee benefits 197,858 180,682 159,461
Amortization of intangibles 5,343 5,577 5,692
Other operating expenses 252,096 197,433 199,162
---------------------------------------------
Total operating expenses 497,002 414,330 397,915
---------------------------------------------
Income before income taxes and undistributed
earnings of subsidiaries 180,421 308,455 279,355
Applicable income tax benefit 21,669 18,150 19,291
---------------------------------------------
Net income before equity in undistributed
earnings (losses) of subsidiaries 202,090 326,605 298,646
Equity in undistributed earnings (losses)
of subsidiaries 112,671 (69,719) (61,938)
---------------------------------------------
Net income $ 314,761 256,886 236,708
=============================================
($ in thousands) 1997 1996 1995
STATEMENTS OF CASH FLOW
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 314,761 256,886 236,708
Adjustment to reconcile net income to net cash
provided by operating activities 226,244 69,084 113,558
------------------------------------------
Net cash from operating activities 541,005 325,970 350,266
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Premises and equipment purchased (12,677) (12,215) (33,157)
Proceeds from sale of premises & equipment 620 5,467 8,444
(Acquisition)/sale of affiliates 160,000 -- -
Capital infusions, net of redemptions (4,640) (5,461) (31,797)
------------------------------------------
Net cash used in investing activities 143,303 (12,209) (56,510)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long term debt (154,640) -- --
Repayment of long term debt (3,138) (23,081) (33,339)
Proceeds from issuance of common stock (4,739) (1,148) 2,105
Repurchase of common stock (138,677) (175,228) --
Dividends paid (114,146) (110,810) (107,429)
Other, net -- -- (319)
------------------------------------------
Net cash provided by financing activities (415,340) (310,267) (138,982)
------------------------------------------
Net increase in cash 268,968 3,494 154,774
Cash at beginning of year 213,026 209,532 54,758
------------------------------------------
Cash at year end 481,994 213,026 209,532
==========================================
SUPPLEMENTAL INFORMATION (UNAUDITED)
1997 1996 1995 1994 1993
STOCK DATA
Book value per share:
Common $ 21.52 19.89 19.26 16.75 17.07
Shares outstanding:
Weighted average 89,202,350 92,633,030 95,251,176 89,717,352 86,125,157
Year end 87,166,376 89,719,851 94,925,786 94,273,815 89,281,065
Market price of Common Stock:
High $ 77.125 40.500 30.750 26.750 28.583
Low 38.500 27.583 19.667 19.833 24.333
Year end 77.125 40.083 29.583 20.000 26.167
Number of shares traded (in thousands) 41,404 34,262 29,141 27,470 20,562
Price earnings ratio* 21.6 x 14.5 11.9 8.1 9.3
Dividend yield (at year end) 1.82 % 3.13 3.97 5.60 4.08
Dividend payout ratio 36.11 43.03 45.58 43.90 35.71
NON-FINANCIAL DATA
Number of common shareholders* 29,141 30,200 31,300 30,900 28,400
Number of banking subsidiaries* 2 4 4 8 20
Number of banking offices* 545 604 613 630 572
Number of employees (FTE)* 10,622 12,148 12,690 13,307 13,330
Number of automated teller machines* 714 721 675 647 546
RETURN ON EQUITY AND ASSETS
Return on average total assets 1.49 % 1.16 1.00 0.98 1.20
Return on average common shareholders' equity 17.41 14.39 13.89 14.44 18.01
Return on average total shareholders' equity 17.41 14.39 13.89 14.44 17.50
Average common shareholders' equity as a
percent of total average assets 8.56 8.04 7.17 6.77 6.52
Average shareholders' total equity as a
percent of total average assets 8.56 8.04 7.17 6.77 6.88
* Prior years numbers not restated.
Per share data has been restated to reflect a 3-for-2 stock split paid May 30, 1997.
/TABLE
QUARTERLY INFORMATION (UNAUDITED)
($ in millions except per share data)
1997 Quarters 1996 Quarters
Fourth Third Second * First * Fourth * Third * Second * First *
SUMMARY OF EARNINGS
Total interest income $ 387.1 405.4 399.7 398.5 409.0 412.1 415.4 427.0
Total interest expense 175.5 184.5 180.8 178.0 183.8 186.6 190.1 200.6
----------------------------------------------------------------------
Net interest income 211.6 220.9 218.9 220.5 225.2 225.5 225.3 226.4
Provision for loan losses 21.7 22.8 18.4 22.8 23.6 21.9 23.2 24.6
----------------------------------------------------------------------
Net interest income after
provision 189.9 198.1 200.5 197.7 201.6 203.6 202.1 201.8
----------------------------------------------------------------------
Non-interest income:
Service charges on deposit
accounts 29.1 30.0 29.5 28.4 29.7 29.0 27.6 26.1
Trust income 36.3 34.2 32.9 33.0 29.5 28.1 29.1 27.4
Investment securities transaction (0.1) (2.0) (0.6) (0.6) 0.3 (0.1) (0.5) (0.3)
Other operating income 69.1 53.2 48.5 66.2 70.7 42.0 39.8 41.0
----------------------------------------------------------------------
Total non-interest income 134.4 115.4 110.3 127.0 130.2 99.0 96.0 94.2
----------------------------------------------------------------------
Non-interest expense:
Salaries and wages 95.1 92.1 96.2 96.6 97.0 96.5 93.6 90.5
Employee benefits 22.2 17.5 18.6 21.4 19.9 17.6 18.2 20.8
----------------------------------------------------------------------
Total personnel costs 117.3 109.6 114.8 118.0 116.9 114.1 111.8 111.3
Occupancy, net 14.1 15.1 14.7 16.3 16.1 16.6 15.3 16.8
Equipment 13.7 13.8 14.3 14.4 14.6 14.8 14.3 14.7
Data processing 4.0 5.0 4.8 4.6 5.4 4.6 4.5 4.7
Amortization of intangibles 4.1 5.3 5.3 5.3 7.6 5.3 5.2 5.2
Other operating expenses 47.2 46.1 47.0 47.1 47.8 72.5 52.2 52.8
----------------------------------------------------------------------
Total non-interest expense 200.4 194.9 200.9 205.7 208.4 227.9 203.3 205.5
----------------------------------------------------------------------
Income before income tax 123.9 118.6 109.9 119.0 123.4 74.7 94.8 90.5
Applicable income tax expense 40.8 39.6 36.7 39.6 39.4 23.7 32.5 30.9
----------------------------------------------------------------------
Net income $ 83.1 79.0 73.2 79.4 84.0 51.0 62.3 59.6
======================================================================
Net income applicable to common
stock $ 83.1 79.0 73.2 79.4 84.0 51.0 62.3 59.6
EARNINGS PER SHARE DATA
Earnings per common share (1):
Common $ 0.95 0.90 0.83 0.89 0.93 0.56 0.68 0.62
Diluted 0.94 0.89 0.82 0.88 0.92 0.56 0.67 0.62
Common stock cash dividend paid 0.35 0.31 0.31 0.31 0.31 0.29 0.29 0.29
Market price of Common Stock:
High 77.125 55.500 48.750 45.083 40.500 35.583 31.833 31.000
Low 38.500 49.938 39.500 38.500 34.417 29.083 29.167 27.583
Period-end 77.125 53.688 45.750 39.833 40.083 35.083 29.833 30.917
* Per share data has been restated to reflect the 3-for-2 stock split paid on May 30, 1997.
(1) Restated to reflect the adaptation of FASB #128.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Registrant
Each director of the Registrant, his or her age (at date of this
report), term of office, any position or office held with the
Registrant, the year in which he or she became a director, and his or
her principal occupation and employment during the past five years are
shown in the following table. Since June 30, 1997, each director has
also served as a director of each of the Banks. There are no family
relationships between the directors or any of the directors and the
Registrant's executive officers.
Director Principal Occupation
Name Age Since and Employment
Directors Whose Terms End in 1998
John W. Brown 63 1992 Chairman, President, Chief Executive Officer, Stryker
Corporation, Kalamazoo, Michigan, a surgical and medical
products manufacturer
Clifford L. Greenwalt 65 1989 Retired; formerly Vice Chairman, Ameren, St. Louis,
Missouri, a utility holding company, and President and
Chief Executive Officer of its subsidiary Central
Illinois Public Service Company, Springfield, Illinois;
he continues as a Director of Ameren and Central Illinois
Public Service Company.
Dorothy A. Johnson 57 1985 President and Chief Executive Officer, Council of
Michigan Foundations, Grand Haven, Michigan, an
association of foundations and corporations making
charitable contributions
Martha Mayhood Mertz 55 1993 President, Mayhood/Mertz, Inc., Okemos, Michigan, a
commercial real estate development and property
management company
Directors Whose Terms End in 1999
Joseph J. Fitzsimmons 63 1991 Retired; formerly Vice President, Bell & Howell Company
and Chairman and Director, UMI, Inc., Ann Arbor,
Michigan, a division of Bell & Howell; Director of
Bartech, Inc. and Nematron.
Robert L. Hetzler 52 1987 President and Chief Executive Officer, Monitor Sugar
Company, Bay City, Michigan.
Daniel R. Smith 63 1982 Retired; formerly Chairman and Chief Executive Officer of
the Registrant until May 1996
Ley S. Smith 63 1996 Retired; formerly Executive Vice President of Pharmacia &
Upjohn, Inc., London, England, and President of its U.S.
Pharma Product Center, Kalamazoo, Michigan, a
manufacturer of pharmaceutical products until 1997;
President and Chief Operating Officer, The Upjohn
Company, Kalamazoo, Michigan, from April 1993 to November
1995; Vice Chairman, The Upjohn Company, January 1991 to
April 1993. Director of Multimedia Medical Systems;
Crescendo Pharmaceutical Corp.; and Glyco Design, Inc.
Directors Whose Terms End in 2000
Jon E. Barfield 46 1993 Chairman and Chief Executive Officer, Bartech, Inc.,
Livonia, Michigan, a provider of contract employment and
related staffing services; Director, Tecumseh Products
Company
Richard F. Chormann 60 1984 Chairman, President and Chief Executive Officer of the
Registrant since May 1996 and of the Banks since June
1997; formerly President and Chief Operating Officer of
the Registrant since 1984
Joel N. Goldberg 60 1985 President, Thomas Jewelry Company, Inc., Pontiac,
Michigan, a retail and wholesale jewelry company
James S. Ware 62 1991 Retired; formerly Chairman, President and Chief Executive
Officer of Durametallic Corporation, Kalamazoo, Michigan,
a manufacturer of seals for industrial machinery;
Director, Duriron Company, Inc.
Executive Officers of the Registrant
The executive officers of the Registrant, their ages (at date of
this report) and their positions and offices for the last five years
are shown in the following table. There are no family relationships
between the executive officers or any of the executive officers and
the Registrant's directors. In addition to the positions shown below,
Mr. Chormann is also Chairman, President and Chief Executive Officer
of each of the Banks, and each of the other persons named is also
Executive Vice President of each of the Banks.
Name Age Position/Office
Richard F. Chormann 60 Chairman, President and Chief Executive Officer since May 1996;
previously President and Chief Operating Officer
William R. Cole 59 Executive Vice President (Commercial Banking) since June 1997;
Chairman and Chief Executive Officer of the Registrant's former
subsidiaries First of America Bank-Michigan, N.A. since 1990 and of
First of America Bank-West Michigan since 1991
Donald J. Kenney 50 Executive Vice President (Consumer Finance, Mortgage Services,
Information Systems, and Operations) since January 1994; previously
Senior Vice President-Automation, Operations, Retail Credit and
Mortgage since 1994; President and Chief Executive Officer of the
Registrant's former subsidiary Champion Federal Savings and Loan
Association, Bloomington, Illinois during 1992 and 1993
Thomas W. Lambert 55 Executive Vice President (Finance, Audit, Loan Review, and
Compliance) and Chief Financial Officer
John B. Rapp 61 Executive Vice President (Trust & Financial Services)
Richard R. Spears 49 Executive Vice President (Retail Sales & Delivery); previously
President and Chief Operating Officer of the Registrant's former
subsidiary First of America Bank-Michigan, N.A. since 1994;
President and Chief Executive Officer of the Registrant's former
subsidiary First of America Bank-Southeast Michigan, N.A. since 1991
Richard V. Washburn 58 Executive Vice President (Human Resources) and Secretary since 1997;
previously Senior Vice President and Secretary since 1996; Senior
Vice President since 1990.
David B. Wirt 58 Executive Vice President (Administration)
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires
First of America's directors and certain officers, and persons who own
more than ten percent of a registered class of First of America's
equity securities, to file with the SEC and the New York Stock
Exchange initial reports of ownership and reports of changes in
ownership of First of America Common Stock and other equity securities
of First of America. These officers, directors and greater than
ten-percent shareholders are required by SEC regulation to furnish
First of America with copies of these reports.
To First of America's knowledge, based solely on review of the
copies of such reports furnished to First of America, during the
fiscal year ended December 31, 1997 all Section 16(a) filing
requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with, except that one
report relating to one transaction was not timely filed on behalf
of Ms. Mertz and information relating to Mr. Spears' holdings in
the First of America Supplemental Savings Plan were not timely filed
with his initial report. These inadvertent discrepancies were
corrected promptly upon being brought to their attention.
ITEM 11. EXECUTIVE COMPENSATION
To be filed by amendment.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information, as of
December 31, 1997 (except where otherwise noted), as to the beneficial
ownership of the Registrant's common stock, par value $10.00 per
share, by (i) each person known by the Registrant to be the beneficial
owner of more than five percent of its common stock, (ii) each
director of the Registrant, (iii) each Named Executive Officer, and
(iv) all directors and executive officers of the Registrant as a
group. The information is based in part on information supplied by
such persons. Except as noted, the beneficial owners exercise sole
voting and investment powers over all shares shown.
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership (1) Percent of Class
National City Corporation 17,343,561 (2) 19.90 (2)
1990 East Ninth Street
Cleveland, Ohio 44114
First of America Bank Corporation 5,102,941 (3) 5.85 (3)
Trust and Financial Service Division
211 South Rose Street
Kalamazoo, Michigan 49007
Jon E. Barfield (4) 6,472 (5)(6) *
John W. Brown (4) 5,873 *
Richard F. Chormann (4)(7) 139,727 (5)(8) *
Joseph J. Fitzsimmons (4) 3,460 *
Joel N. Goldberg (4) 174,402 (6) *
Clifford L. Greenwalt (4) 27,737 (5)(9) *
Robert L. Hetzler (4) 10,793 (9) *
Dorothy A. Johnson (4) 33,505 (8) *
Martha Mayhood Mertz (4) 3,632 *
Daniel R. Smith (4) 274,240 (5)(8) *
Ley S. Smith (4) 2,454 (5) *
James S. Ware (4) 8,496 *
William R. Cole (5) 84,733 (8) *
Donald J. Kenney (5) 63,891 (8)(9) *
Thomas W. Lambert (5) 68,216 (5)(8) *
John B. Rapp (5) 60,982 (8) *
Richard R. Spears (5) 39,428 (8)(9) *
Richard V. Washburn (5) 29,681 (5)(8) *
David B. Wirt (5) 59,395 (8)(9) *
All Directors and Executive Officers as a Group 1,097,117 (8) 1.26
(1) The numbers of shares presented include shares owned of record by
each person and shares which, under applicable regulations of the
Securities and Exchange Commission (the "Commission"), are deemed
to be beneficially owned by each person. Under these
regulations, a beneficial owner of a security includes any
person, who, directly or indirectly, through any contract,
arrangement, understanding, relationship, or otherwise has or
shares voting power or investment power with respect to the
security. Voting power includes the power to vote or to direct
the voting of the power with respect to the security. Voting
power includes the power to vote or to direct the voting of the
security. Investment power includes the power to dispose or to
direct the disposition of the security.
(2) Based on a Schedule 13D filed by NCC with the Commission on
December 9, 1997. NCC disclaimed beneficial ownership therein of
16,813,611 shares which are the subject of a Stock Option
Agreement, dated as of November 30, 1997, between it and the
Registrant (the "Option Agreement"). NCC's right to purchase the
shares covered by the Option Agreement is not currently
exercisable. The Option Agreement was entered into in connection
with the Merger Agreement pursuant to which the Registrant will
merge into NCC (see "Item 1. BUSINESS Merger Agreement").
(3) As of January 16, 1997, the shares shown were held in various
fiduciary capacities by First of America's affiliate banks and
trust companies. John B. Rapp, an executive of the Registrant,
serves as Chairman the Trust Oversight Committee of the
Registrant, which exercises oversight with respect to the trust
departments of First of America's affiliate banks and its
affiliate and trust companies. Shares as to which a First of
America affiliate has voting power are voted by a committee of
employees, none of whom are officers or directors of the
Registrant. The amount of the shares shown in which subsidiaries
with trust powers have sole voting power is 78,061 shares (0.09
percent of the outstanding common stock), sole investment power
is 3,551,228 shares (4.07 percent of the outstanding common
stock) and shared investment power is 1,551,713 shares (1.78
percent of the outstanding Common Stock). There was no shared
voting power.
(4) The person named is a director of the Registrant.
(5) The numbers shown include the following numbers of shares owned
by the named person's spouse (* denotes that the named person
disclaims beneficial ownership of the shares): Mr. Barfield, 376
shares*; Mr. Chormann, 5,204 shares*; Mr. Greenwalt, 11,245
shares*; Mr. D.R. Smith, 1,194 shares*; Mr. L.S. Smith, 2,250
shares*; Mr. Lambert, 5,000 shares; Mr. Washburn, 2,650 shares;
and Mr. Wirt, 78 shares*
(6) The numbers shown include the following numbers of shares owned
by the named person's immediate family members (other than
spouses; see note (5), above) (* denotes that the named person
disclaims beneficial ownership of the shares): Mr. Barfield, 50
shares; and Mr. Goldberg, 1,749 shares.
(7) The person named is an executive officer of the Registrant.
(8) The amounts shown include shares covered by currently exercisable
options held by the named person(s) as follows: Mr. Chormann,
85,175 shares; Ms. Johnson, 3,957 shares; Mr. D. R. Smith,
204,250 shares; Mr. Cole, 62,000 shares; Mr. Kenney, 49,125
shares; Mr. Lambert, 43,550 shares; Mr. Rapp, 32,750 shares; Mr.
Spears, 33,125 shares; Mr. Washburn, 23,075 shares; Mr. Wirt,
32,750 shares; and all directors and executive officers as a
group, 569,397 shares.
(9) The numbers shown include the following numbers of shares owned
jointly by the named person with another and for which voting and
investment power is shared: Mr. Greenwalt, 2,325 shares; Mr.
Hetzler, 9,443; Mr. Kenney, 8,317 shares; Mr. Spears, 6,258
shares; and Mr. Wirt, 26,568 shares.
* Less than one percent (1%)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Various of the directors and executive officers of First of
America and members of their families and organizations of which they
are executive officers or partners or in which they beneficially own
10 percent or more of the stock and trusts in which they have a
substantial beneficial interest or serve as trustee, are at present,
as in the past, customers of the subsidiaries of First of America. As
customers they were at various times during 1997 indebted to the
financial subsidiaries of First of America. All such indebtedness is
pursuant to loans which were made in the ordinary course of business
and on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with other persons and did not involve more than the
normal risk of collectability or present other unfavorable features.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets - December 31, 1997 and
1996
Consolidated Statements of Income - three years ended
December 31, 1997
Consolidated Statements of Changes in Shareholders'
Equity - three years ended December 31, 1997
Consolidated Statements of Cash Flows - three years
ended December 31, 1997
Notes to Consolidated Financial Statements
The above listed auditor's report, consolidated financial
statements and notes to consolidated financial statements
are included under "Item 8. Financial Statements and
Supplementary Data" of this document.
2. Financial statement schedules required by Article 9 of
Regulation S-X are inapplicable.
3. Exhibits required by Item 601 of Regulation S-K.
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession.
A copy of the Agreement and Plan of Merger, dated
as of November 30, 1997, by and between the
Registrant and National City Corporation (NCC) was
filed as Exhibit 2.1 to NCC's Current report on
Form 8-K (File No. 1-10074) filed with the
Commission on December 9, 1997 (the "NCC 8-K"),
and is incorporated herein by reference
(3) Articles of Incorporation and Bylaws
A. A copy of the Bylaws of the Registrant as
amended on November 30, 1997, and as
currently in effect is filed herewith.
B. Copies of the Restated Articles of
Incorporation of the Registrant and the
Certificate of Amendment thereto dated May
12, 1997, were filed as Exhibits (3)(i)(a)
and (b), respectively to the Registrant's
Registration Quarterly Report on Form 10-Q
(Commission File No. 1-10534) for the quarter
ended June 30, 1997, and are incorporated
herein by reference.
(4) Instruments defining the rights of security
holders, including indentures.
A. Instruments defining the rights of security
holders are included in the Registrant's
Articles of Incorporation and Bylaws. See
(3) A and B, above.
B. A copy of the Rights Agreement between the
Registrant and First of America Bank, N.A.,
as Rights Agent, dated as of July 18, 1990,
was filed as Exhibit (4) to the Registrant's
Current Report on Form 8-K (Commission File
No. 0-6469), dated July 18, 1990, and a copy
of the Amendment to Rights Agreement, dated
as of November 30, 1997, between the
Registrant and the Rights Agent was filed as
Exhibit 3 to Amendment No. 1 to the
Registrant's Registration Statement on Form
8-A under the Securities Exchange Act of 1934
filed with the Commission on December 12,
1997, and each is incorporated herein by
reference.
(a) 3. (4) C. A copy of the Subordinated Indenture between
the Registrant, as Issuer, and First Trust
National Association, as Trustee, dated as of
November 1, 1991, was filed as Exhibit (4)C
to the Registrant's Annual Report on Form 10-
K (Commission File No. 1-10534) for the year
ended December 31, 1991, and is incorporated
herein by reference, and a copy of the First
Supplemental Indenture dated as of July 1,
1994 was filed as Exhibit 99.3 to the
Registrant's Current Report on Form 8-K
(Commission File No. 1-10534) dated July 25,
1994, and is incorporated herein by
reference.
D. The Registrant is a party to various other
instruments defining the rights of holders of
long term debt, none of which authorizes
securities in excess of 10 percent of the
total assets of the Registrant and its
subsidiaries on a consolidated basis. None
of such instruments (except such as may be
filed under (10) Material Contracts) are
filed with this Report. The Registrant
hereby agrees to furnish a copy of any such
instrument to the Commission upon request.
(9) Voting trust agreement.
Not applicable.
(10) Material contracts
* Denotes management contracts and compensatory
arrangements required to be filed as Exhibits and
in which the Registrant's executive officers
participate.
A. A copy of the Three-Year Competitive Advance
and Revolving Credit Facility Agreement (the
"Credit Agreement") dated March 25, 1994,
among the Registrant and the several lenders
named therein was filed as Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q
(Commission File No. 1-10534) for the quarter
ended March 31, 1994 and is incorporated
herein by reference. The First Amendment
dated December 9, 1994, was filed as an
Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31,
1994 (Commission File No. 1-10534) and is
incorporated herein by reference. The Second
Amendment to the Credit Agreement dated
February 15, 1996, was filed as Exhibit (10)A
to the Registrant's Annual Report on Form 10-
K (Commission File No. 1-10534) for the year
ended December 31, 1995 and is incorporated
herein by reference.
B.* A copy of the First of America Bank
Corporation Annual Incentive Compensation
Plan for Key Corporate and Affiliate
Executives was filed as an Exhibit to the
Registrant's Annual Report on Form 10-K
(Commission File No. 0-6469) for the year
ended December 31, 1988 and is incorporated
herein by reference, and a copy of an
Amendment to this plan was filed as Exhibit
(10) to the Registrant's Quarterly Report on
Form 10-Q (Commission File No. 0-6469) dated
September 30, 1990, and is incorporated
herein by reference. A description of
amendments to the plan effective for 1997 is
filed herewith.
C.* A copy of the Registrant's Excess Benefit
Plan as restated, effective January 1, 1994,
was filed as Exhibit (10)C to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996, and is
incorporated herein by reference.
(a) 3. (10) D.* A copy of the Registrant's Supplemental
Retirement Plan, as amended to date, was
filed as Exhibit (10)D to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1996, and is incorporated herein
by reference.
E.* A copy of the Registrant's Supplemental
Savings Plans as amended and restated January
1, 1994, was filed as Exhibit (10)E to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996, and is
incorporated herein by reference.
F.* A copy of the Restated First of America Bank
Corporation 1987 Stock Option Plan was filed
as Exhibit (10)F to the Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1996 and is incorporated herein
by reference, and a copy of the Amendment to
the Plan adopted November 30, 1997 is filed
herewith.
G.* A copy of First of America's Long-Term
Incentive Plan as amended and restated for
performance periods commencing July 1, 1988,
and thereafter, was filed as Exhibit (10F) to
the Registrant's Registration Statement on
Form S-4 filed July 28, 1988 (Reg. No. 33-
23365) and is incorporated herein by
reference, and a copy of the Amendment to
Plan was filed as Exhibit (10) to the
Registrant's Quarterly Report on Form 10-Q
(Commission File No. 0-6469) dated September
30, 1990, and is incorporated herein by
reference.
H.* A copy of the composite form of the
Management Continuity Agreements dated
November 20, 1996, entered into by the
Registrant and its executive officers was
filed as Exhibit (10)H to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1996, and is incorporated herein
by reference.
I.* Copies of the composite forms of the
Management Continuity Agreements dated 1997
entered into by the Registrant or a
subsidiary and certain senior officers are
filed herewith.
J.* A copy of the Executive Management Plans
Trust Agreement dated July 19, 1995 between
the Registrant and Wachovia Bank of North
Carolina, N.A. intended to fund benefits
under the Management Continuity Agreements
(see Exhibits (10)H and (10)I above) was
filed as Exhibit (10)J to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1996, and is incorporated herein
by reference.
K.* A copy of the First of America Bank
Corporation Stock Compensation Plan, as
amended to date, was filed as Exhibit (10)K
to the Registrant's Annual Report on Form 10-
K for the year ended December 31, 1996, and
is incorporated herein by reference.
L.* A copy of the amended and restated First of
America Bank Corporation Director Stock
Compensation Plan, effective February 19,
1997, was filed as Exhibit (10) to the
Registrant's Quarterly Report on Form 10-Q
(Commission File No. 1-10534) for the quarter
ended March 31, 1997, and is incorporated
herein by reference.
M. A copy of the First of America Bank
Corporation Management Employee Severance Pay
Plan effective October 1, 1997, is filed
herewith.
N. A copy of the Clearing, Custody and Financing
Agreement between the Registrant and
BankAmerica was filed as Exhibit (10)M to the
Registrant's Annual Report on form 10-K for
the year ended December 31, 1996, and is
incorporated herein by reference.
O. A copy of the General Loan and Collateral
Agreement between the Registrant and Chemical
Bank was filed as Exhibit (10)N to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996, and is
incorporated herein by reference.
(a) 3. (10) P. A copy of the Broker Loan Pledge and Security
Agreement between the Registrant and First
National Bank of Chicago was filed as Exhibit
(10)O to the Registrant's Annual Report on
Form 10-K for the year ended December 31,
1996, and is incorporated herein by
reference.
Q. A copy of the Stock Option Agreement, dated
as of November 30, 1997, between NCC (as
Grantee) and the Registrant (as Issuer) was
filed as Exhibit 2.2 to the NCC 8-K, and is
incorporated herein by reference.
R. A copy of the Stock Option Agreement, dated
as of November 30, 1997, between NCC (as
Issuer) and the Registrant (as Grantee) was
filed as Exhibit 2.3 to the Registrant's
Current Report on Form 8-K (File No. 1-10534)
filed with the Commission on December 12,
1997, and is incorporated herein by
reference.
(11) Statement re computation of per share earnings
The computation of common and common equivalents
and fully diluted earnings per share is described
in Note 22 of the Registrant's Notes to
Consolidated Financial Statements included in
"Item 8. Financial Statements and Supplementary
Data" of this document.
(12) Statement re computation of ratios
Not applicable.
(13) Annual Report to Security Holders, Form 10-Q or
Quarterly Report to Security Holders.
Not applicable.
(16) Letter re change in certifying accountant
Not applicable.
(18) Letter re change in accounting principles
Not applicable.
(a) 3. (21) Subsidiaries of the Registrant
The subsidiaries of the Registrant as of the date
of this document are as follows:
Name Place of Incorporation
First of America Bank, N.A. United States
First of America Bank - Illinois, N.A. United States
First of America
Brokerage Service, Inc. Michigan
First of America
Community Development Corporation Michigan
First of America
Insurance Company Arizona
First of America
Loan Services, Inc. Michigan
First of America
Mortgage Company Michigan
First of America
Investment Corporation Michigan
First of America
Securities, Inc. Michigan
First of America
Trust Company Illinois
FOA Investco - Michigan, Inc. Michigan
Gulfstream Global Investors, Ltd. Texas
New England Trust Company Rhode Island
First of America
Insurance Group - Michigan, Inc. Michigan
First of America
Insurance Group - Illinois, Inc. Illinois
(22) Published report regarding matters submitted to a vote of
security holders.
Not applicable.
(23) Consents of experts
Consent of KPMG Peat Marwick LLP
(24) Power of Attorney
Power of Attorney signed by various directors of the Registrant
authorizing Richard F. Chormann or Thomas W. Lambert to sign this
Report on their behalf.
(27) Financial Data Schedule
Financial Data Schedule is filed herewith an Exhibit.
(99) Additional exhibits
Not applicable.
(b) Reports on Form 8-K
On October 1, 1997, the Registrant filed a Current Report on
Form 8-K regarding a press release announcing the Registrant's sale of
its Florida operations to Barnett Banks, Inc.
On October 1, 1997, the Registrant filed a Current Report on
Form 8-K regarding a proportionate increase made to the shares of
Common Stock related to the Shareholders Investment Plan.
On December 12, 1997, the Registrant filed a Current Report on
Form 8-K reporting its entry into the Merger Agreement with NCC.
(c) Exhibits
An Exhibit Index and Exhibits are attached to this Report.
(d) Financial Statement Schedules
Financial Statement Schedules are inapplicable. See Item 14 (a)
2 above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST OF AMERICA BANK CORPORATION
By: /S/ RICHARD F. CHORMANN
Richard F. Chormann
Chairman, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
/S/ RICHARD F. CHORMANN Director, Chairman, January 28, 1998
Richard F. Chormann President and Chief
Executive Officer
/S/ THOMAS W. LAMBERT Executive Vice January 28, 1998
Thomas W. Lambert President and Chief
Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
*DIRECTORS
Jon E. Barfield Clifford L. Daniel R. Smith
Joseph J. Greenwalt Ley S. Smith
Fitzsimmons Dorothy Johnson James S. Ware
Joel N. Goldberg Robert L. Hetzler
Martha M. Mertz
* By: /S/ THOMAS W. LAMBERT
Attorney in Fact
EXHIBIT INDEX
Number
(3)3 A copy of the Bylaws of the Registrant as amended on
November 30, 1997.
(10)B A copy of the description of the amendments, effective for
1997, to the First of America Bank Corporation Annual
Incentive Compensation Plan for Key Corporate and Affiliate
Executives.
(10)F A copy of the Amendment to the Restated First of America
Bank Corporation 1987 Stock Option Plan.
(10)I Copies of the composite forms of the Management Continuity
Agreements dated 1997.
(10)M A copy of the First of America Bank Corporation Management
Employee Severance Pay Plan effective October 1, 1997.
(23) Consent of KPMG Peat Marwick LLP.
(24) Power of Attorney signed by various directors.
(27) Financial Data Schedule.