1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 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 INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
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 the registrant, $3,355,317,342 on January 31, 1997.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JANUARY 31, 1997
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Common Stock, $10 Par Value 59,863,058
DOCUMENTS INCORPORATED BY REFERENCE
INFORMATION FROM THE FOLLOWING DOCUMENT HAS BEEN
INCORPORATED INTO THIS REPORT BY REFERENCE PARTS OF THIS REPORT INTO
TO THE EXTENT INDICATED IN THOSE PARTS WHICH INCORPORATED
------------------------------------------------ -------------------------
Proxy Statement for the Annual Meeting of Shareholders to be
held on April 16, 1997 III
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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 multi-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 four
affiliate financial institutions which operate general, commercial banking
businesses from 604 banking offices and facilities located in Michigan, Florida,
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, 1996, the Registrant had assets of $22.1 billion,
deposits of $17.6 billion and shareholders' equity of $1.8 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 12,148
full time equivalent employees. The operational responsibilities of each
affiliate rest with its officers and directors. The Registrant derives its
income principally from dividends upstreamed from its subsidiaries.
SUBSIDIARY BANKS
As of December 31, 1996, the Registrant had two wholly owned subsidiaries,
First of America Bank-Michigan, N.A. and First of America Bank-Illinois, N.A.
which met the conditions for "significant subsidiary." First of America
Bank-Michigan, N.A., is a general commercial bank based in Grand Rapids,
Michigan, and at December 31, 1996, had $12.7 billion in assets and $10.5
billion in deposits. First of America Bank-Illinois, N.A., is a general
commercial bank based in Bannockburn, Illinois, and at December 31, 1996, had
$6.5 billion in assets and $5.3 billion in deposits. Similar to all of the
Registrant's banking and thrift subsidiaries, these subsidiaries 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.
No material part of the business of the Registrant 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 -- Michigan, 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 -- Michigan, N.A. and 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 -- Michigan, N.A. It is a registered broker-dealer and
provides retail securities brokerage services through a clearing broker to
customers of the Registrant's affiliate banks and others.
First of America Investment Corporation is a wholly owned subsidiary of
First of America Bank -- Michigan, N.A. First of America Investment Corporation
is a registered investment adviser which provides comprehensive investment
advisory services to the trust 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.
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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.
New England Trust Company, based in Providence, Rhode Island, is a wholly
owned subsidiary of the Registrant and provides 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 -- Michigan, 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
Banking and related financial services are highly competitive businesses and
have become increasingly so during the past few years. The banking subsidiaries
of the Registrant 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.
Technological changes have resulted in computer and communication
applications intended to meet the needs of First of America's business and
consumer customers in a convenient, efficient and reliable manner. Affiliate
banks of the Registrant have 721 automated teller machines (ATM's) located on
bank premises to handle banking transactions 24 hours per day and on off-premise
sites located in high volume retail and service locations.
SUPERVISION AND REGULATION
The Registrant and its subsidiary banks and savings association are subject
to supervision, regulation and periodic examination by various federal and state
banking regulatory agencies, including, primarily, the Board of Governors of the
Federal Reserve Board (the "FRB"), the Office of the Comptroller of the Currency
(the "OCC"), the Federal Deposit Insurance Corporation (the "FDIC"), the Office
of Thrift Supervision (the "OTS") and the Indiana Department of Financial
Institutions.
The following is a summary of certain statutes and regulations affecting
First of America and its affiliate financial institutions. This summary is
qualified in its entirety by such statutes and regulations, which are subject to
change based on pending and future legislation and action 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
(the "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 geographic and product range of bank
holding companies by circumscribing the types and locations 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 (the "Interstate Act"), commencing on September 29, 1995, bank holding
companies are 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 will be permitted to merge across state lines
(thereby create interstate branches) commencing June 1, 1997. States are
permitted to "opt out" of
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the interstate branching authority by taking action prior to the commencement
date. States may also "opt in" early (i.e., prior to June 1, 1997) to the
interstate branching provisions. The States of Illinois, Indiana and Michigan
have each adopted legislation to opt in to the Interstate Act's provisions. The
Indiana and Michigan laws are currently effective and each is conditioned on the
existence of reciprocal legislation in the state of the bank wishing to
establish or acquire a branch in Indiana or Michigan. The Illinois legislation
takes effect on June 1, 1997.
SAVINGS AND LOAN HOLDING COMPANIES. Its acquisition and ownership of thrift
institutions subjects First of America to regulation as a savings and loan
holding company by the OTS. A savings and loan holding company that is also a
bank holding company may engage only in activities permissible for a bank
holding company, and may, in certain circumstances, be required to obtain
approval from the OTS, as well as the FRB, before acquiring new subsidiaries or
commencing new business activities. Further, a savings and loan holding
company's acquisitions of savings associations and other savings and loan
holding companies are subject to prior approval by the OTS comparable to the
extent to which bank holding company acquisitions of banks and other bank
holding companies are subject to the prior approval of the FRB.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), the OTS is granted broad power to impose restrictions on
savings and loan holding company activities, including the payment of dividends
to the holding company by and transactions with affiliated savings associations,
if the OTS determines that there is reasonable cause to believe that the
continuation by the holding company of any activity constitutes a serious risk
to the financial safety, soundness or stability of a subsidiary savings
association.
BANKS. First of America's affiliate banks are subject to regulation,
supervision and periodic examination by the bank regulatory agency of the state
under the laws of which the affiliate bank is chartered or, in the case of
national banks, the OCC. Additionally, its two affiliate national banks are
members of the Federal Reserve System, and as such are subject to applicable
provisions of the Federal Reserve Act and regulations thereunder. These
regulations relate to reserves and other aspects of banking operations. First of
America's one affiliate state bank that is not a member of the Federal Reserve
System is subject to federal regulation, supervision and examination by the
FDIC. Applicable federal and state law govern, among other things, the scope of
First of America's affiliate banks' businesses, maintenance of adequate capital,
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.
SAVINGS ASSOCIATIONS. First of America Bank -- Florida, F.S.B. is a
federally chartered savings association subject to regulation, supervision and
regular examination by the OTS. Federal law governs, among other things, the
scope of the savings association's business, required reserves against deposits,
the investments and loans the savings association may make, and transactions
with the savings association's affiliates. Deposits held by such savings
associations are insured, to the extent permitted by law, by the FDIC.
DEPOSIT INSURANCE ASSESSMENTS AND OTHER FEDERAL REGULATION. Deposits held by
First of America's financial institutions are insured, to the extent permitted
by law, by the Bank Insurance Fund ("BlF") and the Savings Association Insurance
Fund (the "SAIF ') of the FDIC.
A majority of the deposits of the Registrant's three commercial bank
subsidiaries is insured by the BIF, with a portion of each of those banks'
deposits insured by the SAIF. All of the deposits of the Registrant's one
savings association subsidiary are insured by the SAIF. All of the Registrant's
affiliate depository institutions are therefore subject to deposit insurance
assessments. Pursuant to FDIClA, 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 SAlFs 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. As of January 1, 1996, the effective BIF and SAIF
assessment rates range 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.
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FIRREA 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, a securities underwriter and investment advisers, each
registered and subject to regulation by the Securities and Exchange Commission
under federal securities laws. These 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 15 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Registrant, their ages and their positions for
the last five years are shown in the following table. There are no family
relationships between the executive officers or between the executive officers
and the Registrant's directors.
Name Age Position and Office
- ---------------------------------------------------------------------------------------------------
Richard F. Chormann............ 59 Chairman, President and Chief Executive Officer of the
Registrant; previously President and Chief Operating Officer
of the Registrant since 1985.
Donald J. Kenney............... 49 Executive Vice President of the Registrant since January
1994; previously Senior Vice President -- Automation,
Operations, Retail Credit and Mortgage since 1994; President
and Chief Executive Officer of First of America's former
subsidiary, Champion Federal Savings and Loan Association in
Bloomington, Illinois during 1992 and 1993; Senior Vice
President -- Automation and Operations since 1988.
Thomas W. Lambert.............. 55 Executive Vice President and Chief Financial Officer of the
Registrant
John B. Rapp................... 60 Executive Vice President of the Registrant.
David B. Wirt.................. 57 Executive Vice President of the Registrant.
Lee J. Cieslak................. 57 Chairman and Chief Executive Officer, First of America Bank
-- Florida, FSB since April 1994; previously President and
Chief Executive Officer of the former First of America Bank
-- Metro Southwest, N.A. since 1989.
William R. Cole................ 58 Chairman and Chief Executive Officer, First of America Bank
-- Michigan, N.A. since 1990 and the former First of America
Bank -- West Michigan since 1991.
Robert K. Kinning.............. 61 Chairman and Chief Executive Officer, First of America Bank
-- Illinois, N.A. since October 1994; previously President
and Chief Executive Officer of the former First of America
Bank -- Central since 1986.
Malcolm C. Pownall............. 53 Chairman and Chief Executive Officer, First of America Bank
-- Indiana since October 1994; previously President of First
of America Bank -- Indiana since 1990.
Richard R. Spears.............. 48 President and Chief Operating Officer, First of America Bank
-- Michigan, N.A. since 1994; previously, President and
Chief Executive Officer of the former First of America Bank
-- Southeast Michigan, N.A. since 1991.
Richard V. Washburn............ 57 Senior Vice President and Secretary of the Registrant since
1996; previously Senior Vice President of the Registrant
since 1990.
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ITEM 2. PROPERTIES
The Registrant is headquartered in Kalamazoo, Michigan.
The Registrant's subsidiaries operate a total of 604 offices, a majority of
which are owned by the respective banks with the remaining offices under lease
agreements. Reference is made to Note 9 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, 1996.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Registrant'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 1996 and 1995. The dividends declared per common share totaled $1.82
during 1996 and $1.72 during 1995. Restrictions on the Registrant's ability to
pay dividends are described in Note 11 in the paragraph beginning "The various
loan agreements" and in Note 14 of the Registrant's "Notes to Consolidated
Financial Statements" included under "Item 8. Financial Statements and
Supplementary Data" included later in this document.
On February 12, 1996, the Registrant issued 92,053 shares of its common
stock, par value $10.00 per share, to shareholders of Huttenlochers Kerns
Norvell, Inc. in connection with the Registrant's acquisition of that company
pursuant to a statutory share exchange. The Registrant's common stock was issued
in the transaction without registration under the Securities Act of 1933 in
reliance on Regulation D and Rule 505 under the Securities Act.
The number of record holders of the Registrant's common stock as of December
31, 1996 was 30,200.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to the following information included in "Item 7.
Management's Discussion and Analysis -- Table II" under the caption "Selected
Financial Data": the line items "Interest income" through earnings per share,
"Cash dividends declared per common share," "Total assets" and "Long-term debt"
for the years 1992 through 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following financial review discusses the performance of First of
America, on a consolidated basis, for the three years ended December 31, 1996,
and should be read in conjunction with the consolidated financial statements and
notes thereto.
MERGERS AND ACQUISITIONS
Table I below and Note 2 of the Notes to Consolidated Financial Statements,
included later in this document, summarize First of America's business
combinations for the past three years.
BUSINESS COMBINATIONS TABLE I
($ in thousands)
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1996 1995 1994
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Assets Assets Assets
Affiliate Acquired Affiliate Acquired Affiliate Acquired
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Huttenlochers Kerns New England Trust Presidential Holding
Norvell, Inc.......... $3,994 Company............... $1,576 Corporation........... $ 256,352
------
Underwriting F & C Bancshares,
Consultants, Inc. .... 1,255 Inc. ................. 379,791
First Park Ridge
Corp. ................ 327,391
West Suburban Financial LGF Bancorp, Inc........ 412,336
Corporation........... 12
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Goldome Federal
Branches(36).......... 376,858
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$3,994 $2,843 $1,752,728
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On February 12, 1996, First of America acquired Huttenlochers Kerns Norvell,
Inc., an insurance agency located in southeast Michigan. This acquisition
provides further opportunity to enhance this revenue source which increased $3.5
million for 1996 over 1995.
1996 HIGHLIGHTS
Net income for 1996 was $256.9 million, up 8.5 percent compared with the
$236.7 million earned in 1995, and earnings per share were $4.16 versus $3.73.
The current year's results reflected the impact of the Federal Deposit Insurance
Corporation's one-time assessment fee of $14.0 million (net of tax), or $0.22
per share, 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 1.16 percent for 1996 compared with 1.00
percent for 1995 and 0.98 percent for 1994. Return on average equity was up for
the year-over-year comparison, 14.39 percent compared with 13.89 percent. Return
on average equity was 14.44 percent in 1994.
Asset quality improved from the solid levels reported in 1995 and 1994.
Nonperforming assets were 0.52 percent of total assets, lower than the 0.63
percent and 0.57 percent reported at year-end 1995 and 1994, respectively. Net
charge-offs as a percent of average loans for 1996 was 0.53 percent, higher than
the 0.47 percent and 0.39 percent, respectively, for 1995 and 1994. The increase
in the ratio from 1995 to 1996 was primarily due to a decreasing loan portfolio,
which resulted from a planned balance sheet restructuring; the increase from
1994 to 1995 was the result of the higher charge-offs experienced industry-wide
in consumer loan portfolios. The allowance for loan losses as a percent of total
loans did increase, however, to 1.68 percent at year-end 1996 compared with 1.50
percent at year-end 1995, as the provision for loan loss expense covered net
charge-offs by 114 percent and total loans were $1.0 billion lower. The
allowance as a percent of total loans was 1.36 percent at December 31, 1994.
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Total assets were $22.1 billion at December 31, 1996, decreasing 6.5 percent
from the $23.6 billion reported at December 31, 1995, as a result of 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 $24.6 billion at December 31, 1994. The 1994 to 1995 decrease can also be
attributed to the restructuring of the balance sheet and to the June 1995
securitization of $500 million in credit card receivables. Total loans decreased
6.4 percent due to pricing strategies implemented to improve the profitability
of the installment and residential mortgage portfolios. The commercial and
commercial mortgage portfolios, however, experienced moderate growth during
1996, up 3.8 percent from 1995.
Total shareholders' equity remained level with a year ago at $1.8 billion
even with the 3.6 million shares repurchased in 1996. Book value per share
increased to $29.83 at December 31, 1996 compared with $28.89 and $25.12 for
year-ends 1995 and 1994. Discussion of an additional repurchase program is
presented in the Capital Strength section later in this document. The total
risk-based capital ratio of 13.19 percent at year-end 1996 was the highest
reported by First of America since it began computing risk-based ratios in 1989.
The regulatory requirement for this ratio is 8 percent.
In August 1996, the Board of Directors increased the cash dividend per
common share by 6.8 percent to $1.88 annually. This increase indicated the
Board's continued confidence in First of America's profitability and represents
the fourteenth year in a row that the dividend was increased. One indicator of
the Registrant's continuing progress is that First of America's stock reached
its highest closing price ever, $60.75, on November 29, 1996, and closed at
$60.125 on December 31, 1996 up 35.5 percent from 1995.
In November 1996, several organizational changes were announced, to be
completed in 1997, which are designed to continue the Registrant's efforts
towards a delivery system that revolves around customers' needs and is organized
by business lines. The changes will further realign the company from a
geographic focus; devote more resources to sales incentives and sales training;
reduce costs for delivery of products and services; and improve prospects for
increased profitability. The financial impact of these changes was partially
recognized in the fourth quarter of 1996 as noted previously.
An additional change announced in November is the Registrant's planned
mid-1997 consolidation of its four affiliate banks into one operating unit as
permitted under legislation which provides for full interstate banking at that
time. This change will not take the company away from its community banking
roots, but rather will serve to strengthen its commitment to those communities.
For example, community and regional presidents will continue to be actively
involved in the communities they serve, but they will also have business line
responsibilities.
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SELECTED FINANCIAL DATA TABLE II
($ in thousands, except per share data)
5 Year Year Ended December 31,
Compounded ----------------------------------------------------------------------------
Growth Rate 1996 1995 1994 1993 1992 1991
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SUMMARY OF OPERATIONS
Interest income................. 1.6% $ 1,663,554 1,796,524 1,600,877 1,510,966 1,596,127 1,537,861
Interest expense................ (0.7) 761,066 872,528 662,142 608,949 721,300 786,910
----------- ---------- ---------- ---------- ---------- ----------
Net interest income............. 3.7 902,488 923,996 938,735 902,017 874,827 750,951
Provision for loan losses....... 5.6 93,456 91,488 86,571 84,714 78,809 71,030
Total non-interest income....... 14.8 419,314 346,100 284,373 292,184 261,316 209,900
Total non-interest expense...... 4.9 845,003 815,271 813,418 763,528 796,348 665,732
Applicable income tax expense... 14.4 126,457 126,629 102,616 98,574 91,506 64,625
Extraordinary item, net of
tax........................... n/a -- -- -- -- (21,956) --
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Net income...................... 10.0% $ 256,886 236,708 220,503 247,385 147,524 159,464
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Net income applicable to common
stock......................... 12.3% $ 256,886 236,708 220,503 241,232 135,015 144,028
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EARNINGS PER SHARE OF COMMON
STOCK
Primary......................... 9.1% $ 4.16 3.73 3.69 4.20 2.46 2.69
Fully diluted................... 9.1 4.16 3.73 3.69 4.14 2.46 2.69
Average common shares
outstanding ("000")........... 2.9 61,755 63,501 59,812 57,417 54,842 53,536
Cash dividends declared per
common share.................. 8.0 $ 1.82 1.72 1.64 1.55 1.34 1.24
Primary book value per common
share......................... 7.7 29.83 28.89 25.12 25.60 22.12 20.58
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BALANCE SHEET SUMMARY
ASSETS:
Cash and due from banks......... 3.8% $ 1,205,962 1,207,062 1,060,788 903,517 918,960 1,000,578
Federal funds sold, resale
agreements and time
deposits...................... (8.5) 163,400 269,737 55,271 74,909 175,030 254,333
Securities:
Held to maturity.............. n/a -- -- 3,112,876 1,856,623 3,489,626 4,261,360
Available for sale............ n/a 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........................ 2.6 15,056,006 16,076,942 16,834,858 14,394,155 13,756,017 13,228,027
Allowance for loan losses....... 7.7 (252,846) (241,182) (228,115) (188,664) (176,793) (174,882)
Other assets.................... 8.1 1,327,276 1,226,790 1,145,398 928,450 846,507 900,552
- ---------------------------------------------------------------------------------------------------------------------------
Total assets.................... 2.5% $22,062,179 23,600,095 24,568,702 21,230,471 20,146,767 19,469,968
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY:
Deposits........................ 0.2% $17,619,296 19,342,467 20,200,266 18,243,703 18,035,553 17,483,232
Short term borrowings........... 45.5 1,837,990 1,649,965 1,882,739 994,578 338,023 282,225
Long term debt.................. 14.9 521,124 490,315 681,236 254,193 254,051 260,398
Other liabilities............... 11.1 299,571 289,367 225,573 214,560 183,649 176,745
Total shareholders' equity...... 7.1 1,784,198 1,827,981 1,578,888 1,523,437 1,335,491 1,267,368
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity.... 2.5% $22,062,179 23,600,095 24,568,702 21,230,471 20,146,767 19,469,968
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Return on average total
equity........................ 14.39% 13.89 14.44 17.50 11.38 13.07
Return on average assets........ 1.16 1.00 0.98 1.20 0.75 0.95
Net interest margin (a)......... 4.53 4.28 4.58 4.86 4.98 5.07
Total shareholders' equity to
assets at year-end............ 8.09 7.75 6.43 7.18 6.63 6.51
- ---------------------------------------------------------------------------------------------------------------------------
(a) Fully taxable equivalent based on a marginal federal income tax rate of 35%
for 1996, 1995, 1994 and 1993, and 34% for prior years.
10
11
INCOME ANALYSIS
NET INTEREST INCOME. Net interest income on a fully taxable equivalent (FTE)
basis was $920.0 million, down 2.1 percent from $940.0 million in 1995. The
higher net interest margin for 1996, 4.53 percent versus 4.28 percent, more than
offset a 7.5 percent decrease in average earning assets. First of America
completed the securitization of $500 million in credit card receivables during
mid-year 1995, shifting revenue from interest income to non-interest fee
revenue. If 1995 net interest income was restated for the impact of the
securitization, 1996's net interest income would have been level with last
year's. For 1995 compared with 1994, net interest income FTE decreased 2.0
percent primarily due to the impact of the credit card securitization.
Table III presents a summary of the changes in net interest income resulting
from changes in volumes and rates for 1996 and 1995. Net interest income,
average balance sheet amounts, and the corresponding yields and costs for the
years 1992 through 1996 are shown in Table IV.
Total interest income FTE declined 7.3 percent in 1996. As illustrated in
Table III, the decrease resulted mainly from a lower volume of earning assets.
On the other hand, interest expense was down 12.8 percent as a result of lower
rates on interest-bearing liabilities and a $1.7 billion decrease in average
interest bearing liabilities. The combination of these changes resulted in the
2.1 percent decrease in net interest income FTE.
VOLUME/RATE ANALYSIS TABLE III
($ in thousands)
1996 Change From 1995 Due To 1995 Change From 1994 Due To
- -----------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- -----------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans (FTE)......................... $ (95,181) (13,930) (109,111) 119,442 77,146 196,588
Taxable securities.................. (43,999) 11,697 (32,302) (12,571) 13,618 1,047
Tax exempt securities (FTE)......... 5,999 (591) 5,408 (7,188) 750 (6,438)
Money market investments............ 3,591 947 4,538 1,482 2,021 3,503
- -----------------------------------------------------------------------------------------------------------
Total interest income (FTE)......... $(129,590) (1,877) (131,467) 101,165 93,535 194,700
- -----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest bearing deposits........... $ (55,743) (23,423) (79,166) 16,197 141,030 157,227
Short term borrowings............... (11,837) (8,859) (20,696) 16,754 23,541 40,295
Long term debt...................... (13,408) 1,808 (11,600) 9,717 3,148 12,865
- -----------------------------------------------------------------------------------------------------------
Total interest expense.............. $ (80,988) (30,474) (111,462) 42,668 167,719 210,387
- -----------------------------------------------------------------------------------------------------------
Change in net interest income....... $ (48,602) 28,597 (20,005) 58,497 (74,184) (15,687)
- -----------------------------------------------------------------------------------------------------------
* 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.
11
12
- --------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES TABLE IV
($ in thousands)
Year Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Average Average
Interest Rate Interest Rate Interest
Average Income/ Earned/ Average Income/ Earned/ Average Income/
Balance Expense Paid Balance Expense Paid Balance Expense
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Money market investments........ $ 168,182 10,390 6.18% $ 108,480 5,852 5.39% $ 72,736 2,349
Investment securities:
U.S. Treasury, federal agencies
and other...................... 4,387,256 271,843 6.20 5,103,380 304,145 5.96 5,319,354 303,098
State and municipal
securities(1).................. 294,728 24,266 8.23 222,055 18,858 8.49 306,946 25,296
Total loans(1)(2)............... 15,463,335 1,374,598 8.89 16,532,752 1,483,709 8.97 15,172,618 1,287,121
----------- --------- ----------- --------- ----------- ---------
Total earnings assets/total
interest income (1)............ 20,313,501 1,681,097 8.28 21,966,667 1,812,564 8.25 20,871,654 1,617,864
----------- --------- ----------- --------- ----------- ---------
Less allowance for loan
losses......................... 249,833 234,933 206,703
Cash and due from banks......... 932,239 919,598 892,959
Other assets.................... 1,198,433 1,100,940 992,857
- ---------------------------------------------------------------------------------------------------------------------------------
Total........................... $22,194,340 $23,752,272 $22,550,767
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY:
Deposits:
Savings and NOW accounts(3)..... $ 3,843,700 80,490 2.09% 3,444,077 59,342 1.72% $ 3,948,604 59,476
Money market savings
accounts(3).................... 3,898,886 142,811 3.66 4,254,533 166,906 3.92 3,551,445 110,220
Time deposits................... 7,739,404 422,694 5.46 9,105,938 498,913 5.48 8,849,576 398,239
----------- --------- ----------- --------- ----------- ---------
Total interest-bearing
deposits....................... 15,481,990 645,995 4.17 16,804,548 725,161 4.32 16,349,625 567,935
Short term borrowings........... 1,443,047 79,988 5.54 1,647,634 100,684 6.11 1,325,584 60,389
Long term debt.................. 445,329 35,083 7.87 616,357 46,683 7.57 485,494 33,818
----------- --------- ----------- --------- ----------- ---------
Total interest-bearing liabili-
ties/total interest expense.... 17,370,366 761,066 4.38 19,068,539 872,528 4.58 18,160,703 662,142
----------- --------- ----------- --------- ----------- ---------
Demand deposits................. 2,790,118 2,710,566 2,665,183
Other liabilities............... 248,448 269,073 197,330
Non-redeemable
preferred/preference stock..... -- -- --
Common shareholders' equity..... 1,785,408 1,704,094 1,527,551
- ---------------------------------------------------------------------------------------------------------------------------------
Total........................... $22,194,340 $23,752,272 $22,550,767
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income/earning
assets......................... 8.28% 8.25%
Interest expense/earning
assets......................... 3.75 3.97
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest margin/earning
assets......................... 4.53% 4.28%
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Rate Interest Rate Interest Rate
Earned/ Average Income/ Earned/ Average Income/ Earned/
Paid Balance Expense Paid Balance Expense Paid
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Money market investments........ 3.23% $ 93,662 2,854 3.05% $ 233,757 9,090 3.89%
Investment securities:
U.S. Treasury, federal agencies
and other...................... 5.70 4,537,814 262,871 5.79 3,898,195 274,048 7.03
State and municipal
securities(1).................. 8.24 530,407 42,605 8.03 493,785 46,369 9.39
Total loans(1)(2)............... 8.48 13,875,584 1,225,736 8.83 13,435,991 1,291,724 9.61
----------- --------- ----------- ---------
Total earnings assets/total
interest income (1)............ 7.75 19,037,467 1,534,066 8.06 18,061,728 1,621,231 8.98
----------- --------- ----------- ---------
Less allowance for loan
losses......................... 182,594 176,595
Cash and due from banks......... 839,506 818,279
Other assets.................... 850,783 870,879
- ---------------------------------------------------------------------------------------------------------------------------------
Total........................... $20,545,162 $19,574,291
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY:
Deposits:
Savings and NOW accounts(3)..... 1.51% $ 3,980,815 82,664 2.08% $ 2,820,091 86,568 3.07%
Money market savings
accounts(3).................... 3.10 3,009,796 78,738 2.62 3,972,004 128,820 3.24
Time deposits................... 4.50 8,638,044 409,097 4.74 8,520,485 476,215 5.59
----------- --------- ----------- ---------
Total interest-bearing
deposits....................... 3.47 15,628,655 570,499 3.65 15,312,580 691,603 4.52
Short term borrowings........... 4.56 575,074 18,546 3.22 216,352 8,104 3.75
Long term debt.................. 6.97 272,297 19,904 7.31 248,032 21,593 8.71
----------- --------- ----------- ---------
Total interest-bearing liabili-
ties/total interest expense.... 3.65 16,476,026 608,949 3.70 15,776,964 721,300 4.57
----------- --------- ----------- ---------
Demand deposits................. 2,463,534 2,301,768
Other liabilities............... 191,922 198,633
Non-redeemable
preferred/preference stock..... 74,586 140,952
Common shareholders' equity..... 1,339,094 1,155,974
- ---------------------------------------------------------------------------------------------------------------------------------
Total........................... $20,545,162 $19,574,291
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income/earning
assets......................... 7.75% 8.06% 8.98%
Interest expense/earning
assets......................... 3.17 3.20 4.00
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest margin/earning
assets......................... 4.58% 4.86% 4.98%
- ---------------------------------------------------------------------------------------------------------------------------------
(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% for 1996, 1995, 1994 and 1993,
and 34% for 1992.
(2) Non-accrual loans are included in average loan balances.
(3) In 1996, 1995, 1994 and 1993, money market checking accounts are included in
"Savings and NOW accounts"; in 1992, they are included in "Money market savings
accounts."
12
13
NET INTEREST MARGIN. The net interest margin was 4.53 percent in 1996,
higher than the 4.28 percent reported in 1995, as a result of pricing strategies
implemented to improve the interest spread of certain loan products to achieve
the corporation's targeted return on equity and on improving the mix within
deposits and borrowings. The balance sheet restructuring completed in 1996
helped increase the net interest margin as less profitable earning assets and
deposits were sharply reduced, and targeted, more profitable loan portfolios and
deposit products increased. Especially affected were investments, which declined
by 9.9 percent and certificates of deposits, which were lower by 20.6 percent.
The net interest margin improved steadily throughout 1996, reaching 4.64
percent in the fourth quarter as a result of the actions taken. If 1995's net
interest margin was adjusted for the impact of the June 1995 credit card
securitization, the increase year over year 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 1996, the provision for loan losses was
increased 2.2 percent to $93.5 million from $91.5 million in 1995 to adequately
cover net charge-offs and the higher risk of loss being experienced in the
credit card and installment loan portfolios. The 1994 provision was $86.6
million. The 114 percent coverage of net charge-offs by the provision for loan
losses, the decrease in the loan portfolio due to the balance sheet
restructuring, and the 1995 securitization of $500 million in credit card
receivables contributed to the higher allowance as a percent of total loans
ratio which was 1.68 percent, up from 1.50 percent at December 31, 1995 and 1.36
percent at December 31, 1994.
As a percent of average assets, the 1996 provision was 0.42 percent compared
with the 0.39 percent and 0.38 percent reported for 1995 and 1994, respectively.
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 $419.3 million was up 21.2
percent over 1995. Excluding branch sale gains from both 1996 and 1995, total
non-interest revenue would have increased 18.1 percent over 1995. Non-interest
revenue totaled $346.1 million in 1995 and $284.4 million in 1994. Branch sale
gains of $16.3 million and $17.6 million in net servicing fees from the credit
card securitization were the primary reasons for the higher level of
non-interest revenue in 1995 compared with 1994. Table V presents the trends in
the major components of non-interest revenue from 1992 to 1996.
13
14
NON-INTEREST REVENUE AND NON-INTEREST EXPENSE TABLE V
($ in thousands)
Change
1996/1995
- ----------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 Amount Percent
- ----------------------------------------------------------------------------------------------------------------------
NON-INTEREST REVENUE
Service charges on deposits..................... $112,516 100,281 89,164 84,648 79,522 12,235 12.2%
Trust and financial services revenue............ 114,024 94,179 81,717 77,290 68,850 19,845 21.1
Investment securities transaction............... (515) 62 5,349 16,753 14,993 (577) nm
Other operating revenue......................... 193,289 151,578 108,143 113,493 97,951 41,711 27.5
- ----------------------------------------------------------------------------------------------------------------------
Total non-interest revenue...................... $419,314 346,100 284,373 292,184 261,316 73,214 21.2
- ----------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Personnel....................................... $454,170 430,977 430,563 403,119 410,854 23,193 5.4%
Occupancy, net.................................. 64,871 64,108 60,471 55,093 57,286 763 1.2
Equipment....................................... 58,462 59,322 56,111 53,376 63,134 (860) (1.4)
Data processing................................. 19,182 18,825 17,524 14,963 10,380 357 1.9
Amortization of intangibles..................... 23,355 21,146 16,577 8,902 38,336 2,209 10.4
FDIC premiums................................... 28,685 28,373 42,055 39,680 38,711 312 1.1
Other operating expense......................... 196,278 192,520 190,117 188,395 177,647 3,758 2.0
- ----------------------------------------------------------------------------------------------------------------------
Total non-interest expense...................... $845,003 815,271 813,418 763,528 796,348 29,732 3.6
- ----------------------------------------------------------------------------------------------------------------------
Non-interest revenue as a percent of
average assets................................ 1.89% 1.46 1.26 1.42 1.33
Non-interest expense as a percent of
average assets................................ 3.81 3.43 3.61 3.72 4.07
Burden ratio.................................... 1.92 1.97 2.35 2.30 2.74
Efficiency ratio................................ 63.09 63.39 65.59 62.72 68.58
Efficiency ratio, excluding FDIC premiums....... 60.95 61.18 62.20 59.46 65.24
- ----------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts remained a significant component of
non-interest revenue in 1996. New fee structures and a slightly higher volume of
non-interest transaction deposits accounted for the 12.2 percent increase over
1995.
In total, trust and financial services revenue was the largest component of
non-interest revenue for 1996, increasing 21.1 percent over a year ago.
Traditional trust fees increased 6.5 percent as assets under management
increased 28.8 percent. Other financial services fees, generated by cash
management, investment management, brokerage, securities trading and
underwriting along with insurance services, increased 55.5 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 $14.0 million compared with $9.6 million in 1995.
Insurance revenue for 1996 was $5.1 million compared to $1.6 million in 1995
reflecting the Registrant's expanding commitment to this product line.
Net losses on the sales of investment securities totaled $0.5 million
compared with gains of $0.1 million in 1995 and $5.3 million in 1994. 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 4 of the Notes to Consolidated Financial
Statements included later in this document. At December 31, 1996, the amortized
cost of Available for Sale securities totaled $4.5 billion and had a
corresponding market value of $4.6 billion compared to $5.0 billion and $5.1
billion, respectively, for 1995. The changes in the relative market value of
Available for Sale Securities resulted in an adjustment which decreased
shareholders' equity $17.5 million for 1996.
Bank card revenue totaled $73.9 million, up 22.4 percent over the $60.4
million earned in 1995. The 1995 total included $17.6 million in net fees from
the June 1995 credit card securitization while 1996 included $39.3 million of
securitization fees. Annualizing these 1995 net fees, bank card revenue would
have decreased in 1996 due to higher net charge-offs in the securitized
portfolio. The securitization shifted revenue from interest income to fee
revenue
14
15
but had minimal impact on net income; its benefit was that the funds it provided
allowed the company to reduce short-term borrowings, effectively lowering
interest expense. Bank card revenue totaled $43.2 million in 1994. The managed
credit card portfolio, which includes the $843 million in receivables remaining
on the balance sheet and the securitized receivables, was $1.3 billion at
December 31, 1996, level with a year ago.
Mortgage banking revenue of $28.5 million decreased 9.5 percent from the
$31.5 million for 1995. The main reasons for the decrease were a $1.1 million
increase in amortization of originated mortgage servicing rights and a $1.3
million decrease in mortgage appraisal revenue.
Other operating revenue increased 52.4 percent over 1995. The largest
component of this category, gains on branch sales, was $29.7 million for 1996
compared to $16.3 million for 1995. 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 at $15.1 million, up 42.1 percent;
letter of credit fees at $6.4 million, up 93.8 percent; and the increase in cash
surrender value of life insurance at $9.2 million.
NON-INTEREST EXPENSE. As detailed in Table V, non-interest expense was
$845.0 million, up 3.6 percent from 1995. 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 (1995 expense
included $13.2 million of restructuring charges) 1996 non-interest expense would
have increased only 1.2 percent over 1995. Non-interest expense was 3.43 percent
of average assets for 1995 and 3.61 percent for 1994.
Total personnel cost was $454.2 million in 1996 compared with $431.0 million
in 1995 and $430.6 million in 1994. Excluding severance charges, personnel cost
increased 6.6 percent as higher incentives for improved sales performance more
than offset the reduction in total personnel. Total full time equivalent
employees (FTEs) were 12,148 at December 31, 1996, and included 200 employees
who received notification that their positions were being eliminated as part of
the company's ongoing restructuring process. In addition, approximately 400
employees are expected to be notified by the end of the first quarter of 1997.
Total FTEs were 12,690 at December 31, 1995 and 14,500 in August 1994 when the
restructuring efforts began.
Two ratios which measure internal efficiencies are the number of FTEs per
one million dollars of average assets and net income per FTE. For 1996, there
were 0.56 FTEs per one million dollars of average assets compared with 0.53 a
year ago, and $21,146 of net income per FTE versus $18,653 a year ago. These
ratios were 0.56 and $16,570 for 1994.
Net occupancy and equipment costs were $123.3 million for 1996 and remained
level with 1995. 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 $196.3 million in 1996, up 2.0 percent
from 1995's total of $192.5 million. As a percent of average assets, other
operating expense was 0.88 percent compared with 0.81 percent in 1995 and 0.84
percent in 1994. The 1996 ratio increased as a combined result of the increase
in other operating expense and the decrease in average assets during 1996.
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 1996, the efficiency ratio was 63.09 percent down slightly
compared with 63.39 percent a year ago.
The burden ratio measures the relationship of non-interest income and
expense to average assets. The burden ratio has improved over the five year
period presented in Table V. The five basis point improvement in the 1996 burden
ratio compared with 1995 was a result of non-interest income increasing at a
faster rate than non-interest expense.
INCOME TAX EXPENSE. Income tax expense was $126.5 million in 1996 compared
with $126.6 million in 1995 and $102.6 million in 1994. A summary of significant
tax components is provided in Note 18 of the Notes to Consolidated Financial
Statements included later in this document.
15
16
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 18 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 $29.83 for year-end 1996, would be the equivalent of a reported
tangible book value per share. In fact, the tier I leverage ratio, the strictest
regulatory capital ratio, remains unchanged under these assumptions since it
already excludes intangibles from its computation.
($ in thousands) 1996 1995 1994
Net income.................................................. $276,762 255,131 235,093
Earnings per share.......................................... 4.48 4.02 3.93
Book value per share (year end)............................. 26.46 25.30 21.10
Return on average assets.................................... 1.26% 1.09 1.05
Return on total equity...................................... 17.65 17.43 17.77
Efficiency ratio............................................ 61.35 61.75 64.26
Tier one leverage ratio..................................... 7.15 6.70 5.81
16
17
LINE OF BUSINESS FINANCIAL PERFORMANCE TABLE VI
($ in thousands)
Trust & Corporate
For The Year Ended Community Bank Mortgage Financial Investments Consolidated
December 31, 1996 Banking Card Lending Services & Funding Results
- ----------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Net interest income (FTE)......... $765,817 82,041 65,436 6,720 22 920,036
Provision for loan losses......... 47,279 45,927 250 -- -- 93,456
Non-interest revenue.............. 160,350 75,885 29,048 114,169 8,808 388,260
Non-interest expense.............. 579,079 59,641 49,354 83,133 19,394 790,601
Corporate support................. 14,562 1,500 1,241 2,091 (19,394) --
Income tax expense (FTE).......... 97,394 17,365 14,900 12,177 3,016 144,852
----------------------------------------------------------------------
Income before goodwill and
one-time gains and charges...... $187,853 33,493 28,739 23,488 5,814 279,387
-------------------------------------------------------
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)........... 30.80% 32.20 46.19 29.50 -- 29.93
Efficiency ratio.................. 64.10 38.71 53.55 70.50 -- 63.09
Return on equity.................. 15.17 28.58 13.65 33.59 -- 14.39
- ----------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 1995
- ----------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Net interest income (FTE)......... $791,534 98,345 62,795 5,120 (17,602) 940,192
Provision for loan losses......... 43,460 48,748 (261) -- (459) 91,488
Non-interest revenue.............. 140,210 61,862 32,370 94,625 749 329,816
Non-interest expense.............. 585,395 58,379 54,005 66,955 16,165 780,899
Corporate support................. 12,374 1,234 1,142 1,415 (16,165) --
Income tax expense (FTE).......... 105,526 18,833 14,631 11,396 (5,955) 144,431
- ----------------------------------------------------------------------------------------------------------
Income before goodwill and
one-time gains and charges...... $184,989 33,013 25,648 19,979 (10,439) 253,190
-------------------------------------------------------
Gains from branch sales; severance
and other one-time charges (net
of tax)......................... 1,965
Goodwill (net of tax)............. (18,447)
--------
Net income........................ $236,708
- ----------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Profit margin (pre-tax)........... 31.18% 32.36 42.33 31.46 -- 29.50
Efficiency ratio.................. 64.16 37.21 57.95 68.54 -- 63.39
Return on equity.................. 14.53 29.06 10.38 41.79 -- 13.89
- ----------------------------------------------------------------------------------------------------------
17
18
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 --
community banking, bank card, mortgage lending and trust and financial services
- -- as well as the performance of certain product lines within those businesses.
A fifth category, corporate investments and funding, includes activities that
are not directly attributable to 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. Table VI
presents summarized income statements and performance ratios for 1996 and 1995
for the four business lines identified above. The results for 1995 have been
restated utilizing the revised methodology developed in 1996.
COMMUNITY BANKING. The community banking business line is responsible for
gathering and managing deposits, lending to commercial and consumer installment
customers, and managing the four state branch networks for the delivery of First
of America's products and services. It also provides customers with home equity
and student loans, international banking services and other general banking
services, such as ATM operations and safety deposit boxes.
Community banking is the core of First of America's business activities, and
its contribution to the consolidated net income is the largest of the business
lines. This business line reported income before goodwill and one-time charges
of $187.9 million for 1996 compared to $185.0 million for 1995. Return on equity
increased to 15.17 percent in 1996 from 14.53 percent in 1995. Investment in
Florida's physical franchise, advertising and other developmental activities
affected community banking's 1995 results; however, progress continues to be
made on re-mixing the Florida franchise's customer base, changing its product
offerings, and updating its delivery systems.
BANK CARD. Bank card is responsible for managing and servicing First of
America's $1.5 billion managed portfolio of both credit card and other revolving
loans, as well as the merchant services operation. In addition to the managed
portfolio of VISA/Mastercard credit cards, bank card manages affinity cards for
33 groups and offers a FirstAir card. The revolving portfolio remained
relatively level with 1995 as national promotions were not emphasized during
1996. In 1997, promotional emphasis will continue to target regional markets.
This business line continues to be a strong performer as net income for 1996
was $33.5 million and $33.0 million for 1995. The efficiency ratio was 38.71
percent and the return on allocated equity was 28.58 percent for 1996 compared
to 37.21 percent and 29.06 percent, respectively, for 1995. Credit quality
improved from 1995 and is reflected in the provision for loan losses of $45.9
million for 1996, down from $48.7 million reported last year.
MORTGAGE LENDING. Mortgage lending originates all residential mortgages
across First of America's four community banking states and in stand alone
origination offices in Arizona and North Carolina. The loans are originated both
for portfolio retention and sale to the secondary market. Mortgage lending also
provides servicing for First of America's entire portfolio and a $3.6 billion
portfolio for external investors. Since mortgage lending is responsible for
originating, servicing and managing First of America's residential loan
portfolio, the portfolio's interest income and related funds transfer charge are
included in mortgage lending's net income.
Mortgage lending earned the lowest return on equity of the four business
lines in 1996 and 1995. Its results can fluctuate substantially from period to
period since origination activity is rate-sensitive, and gains on loan sales
vary directly with the volume of originations. During the year, $1.2 billion of
mortgages were sold into the secondary market resulting in gains on the sale of
mortgages of $20.2 million compared with $18.2 million in 1995. Mortgage
lending's net income for 1996 was $28.7 million compared with $25.6 million in
1995.
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TRUST AND FINANCIAL SERVICES. Trust and financial services provides
traditional trust services to individuals and institutions, as well as
investment management,brokerage as well as trading and underwriting services. It
also manages First of America's proprietary mutual funds, The Parkstone Group of
Funds, along with insurance services and annuity products.
This business line earned the highest return on allocated equity at 33.59
percent for 1996, down from 41.79 percent for 1995. The nature of its business
activity -- fee generating and personnel intensive -- will generally result in
comparatively higher returns on equity and higher efficiency ratios. Net income
was $23.5 million for 1996, up from $20.0 million for 1995, primarily from
increased customer investment activity and the steadily increasing market value
of its managed assets upon which fees are assessed. Its managed assets totaled
$20.1 billion at year-end 1996 and $15.6 billion at year-end 1995.
The business line's efficiency ratio was 70.50 percent in 1996 and 68.54
percent in 1995. Revenue growth in 1996 has largely been in lower profit margin
products such as brokerage services and mutual fund sales while the increase in
non-interest expense was primarily due to higher incentive compensation and the
costs added by insurance agency acquisitions.
CORPORATE INVESTMENTS AND FUNDING. The corporate investments and funding
category includes activities relating to the management of the corporation's
liquidity needs. This includes the management of the corporation's investment
securities and borrowing portfolios, the net effect of funds transfer pricing,
eliminations of intercompany transactions, and long term benefits funding. The
$16.3 million change in income before goodwill and one-time items was mainly due
to a $9.2 million increase in the cash surrender value of life insurance for
1996 and the net effect of funds transfer pricing and intercompany eliminations.
Non-interest expense for the corporate support function was allocated from this
area to the four primary lines of business based on direct expenses.
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 1996, consumer installment and revolving loans totaled 25.1 percent of
the total portfolio, one-to-four family residential mortgages and home equity
loans accounted for 30.8 percent, commercial loans totaled 18.1 percent, and
commercial mortgages totaled 26.0 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 $15.1 billion at
year-end 1996, down 6.4 percent from $16.1 billion a year ago.
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COMPONENTS OF THE LOAN PORTFOLIO TABLE VII
($ in thousands)
December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
Consumer.................................. $ 3,774,803 4,504,255 5,799,025 5,062,173 4,288,431
Commercial, financial and agricultural.... 2,722,676 2,589,038 2,344,969 2,148,663 2,170,715
Real estate -- construction............... 597,726 514,612 438,067 252,839 300,954
Real estate -- mortgage................... 7,960,801 8,469,037 8,252,797 6,930,480 6,995,917
- -----------------------------------------------------------------------------------------------------------------
Total loans............................... $15,056,006 16,076,942 16,834,858 14,394,155 13,756,017
- -----------------------------------------------------------------------------------------------------------------
CONSUMER LOANS. First of America's consumer loan portfolio, which includes
indirect and direct installment loans, credit cards and other revolving loans,
declined 16.2 percent from 1995's level. The managed credit card portfolio at
$1.3 billion remained level with 1995. First of America offers its credit card
products in all fifty states; the largest portion of the portfolio, 58.6
percent, was to customers in its four operating states. As a percent of average
loans, the net charge-offs for the managed portfolio were 4.31 percent in 1996
compared with 3.23 percent in 1995.
The consumer installment portfolio was $2.8 billion at December 31, 1996,
down 21.5 percent from the previous year due to the combination of intense
competition within the industry and First of America's more stringent pricing
policies. First of America's consumer installment loans originate primarily from
its four state operating area. Net charge-offs as a percent of average consumer
installment loans were 1.12 percent in 1996 and 0.91 percent in 1995. Management
decreased the provision in 1996 due to the improved loan quality being observed
within the portfolio.
RESIDENTIAL MORTGAGE LOANS. At December 31, 1996, residential mortgage loans
totaled $4.6 billion compared with $5.2 billion at year-end 1995. Originations
of residential mortgage loans during 1996 were $1.5 billion compared with $1.6
billion in 1995. The average loan size in the balance sheet portfolio was
$58,400 and the loans in portfolio were originated within First of America's
four operating states as well as stand alone origination offices in other
states. First of America's portfolio continued to have excellent credit quality
measurements. Net charge-offs as a percent of average residential mortgage loans
were 0.02 percent in 1996 and 0.01 percent in 1995.
At December 31, 1996, residential mortgage loans held for sale totaled
$108.4 million with a market value of $110.0 million. These residential
mortgages are closed and therefore included in outstandings on the balance
sheet. In addition, First of America has entered into commitments to originate
residential mortgage loans, at prevailing market rates, totaling $64.9 million.
Mandatory commitments to deliver mortgage loans to investors, at prevailing
market rates, totaled $109.3 million as of December 31, 1996.
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 the local markets of its four operating states.
Evidence of this philosophy is the average loan size within this portfolio at
year-end which was $62,800 for commercial loans and $259,400 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. Maturity and rate
sensitivity of selected loan categories is presented in Table VIII.
First of America's commercial and commercial mortgages demonstrated the
highest growth of any of the portfolios during 1996. This portfolio grew 3.7
percent to $6.6 billion compared with $6.4 billion at year-end 1995. Total
non-performing commercial and commercial mortgage loans as a percent of
outstandings decreased to 1.03 percent from 1.38 percent a year ago, and net
charge-offs as a percent of average loans was 0.09, constant with 1995.
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MATURITY AND RATE SENSITIVITY OF SELECTED LOANS TABLE VIII
($ in thousands)
One year One year to After
December 31, 1996 or less five years five years Total
- ----------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural.................. $1,529,033 745,829 109,055 2,383,917
Commercial tax-exempt................................... 54,551 125,297 158,912 338,760
Real estate construction................................ 279,770 229,500 88,456 597,726
- ----------------------------------------------------------------------------------------------------------------
Total................................................... $1,863,354 1,100,626 356,423 3,320,403
- ----------------------------------------------------------------------------------------------------------------
TOTAL LOANS ABOVE DUE AFTER ONE YEAR:
With predetermined interest rate........................ $ 491,217 93,866 585,083
With floating or adjustable interest rates.............. 609,409 262,557 871,966
- ----------------------------------------------------------------------------------------------------------------
Total................................................... $1,100,626 356,423 1,457,049
- ----------------------------------------------------------------------------------------------------------------
ASSET QUALITY. Non-performing assets, including nonaccrual loans,
renegotiated loans and other real estate owned, totaled $114.8 million or 0.52
percent of total assets. Non-performing assets were 0.63 percent and 0.57
percent of total assets at year-end 1995 and 1994, respectively. Total
non-performing loans, other real estate owned and other loans of concern for the
past five years are detailed in Table IX.
RISK ELEMENTS IN THE LOAN PORTFOLIO TABLE IX
($ in thousands)
December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
Non-accrual loans....................................... $ 84,185 104,174 96,814 121,186 126,619
Restructured loans...................................... 6,414 12,327 4,852 10,879 20,669
Other real estate owned................................. 24,190 31,103 38,662 50,595 48,699
- ----------------------------------------------------------------------------------------------------------------
Non-performing assets................................. 114,789 147,604 140,328 182,660 195,987
Past due loans 90 days or more (excluding the above two
categories)........................................... 26,726 28,124 18,208 23,462 20,887
Other loans of concern.................................. 30,541 17,660 31,653 53,206 37,663
- ----------------------------------------------------------------------------------------------------------------
Total................................................... $172,056 193,388 190,189 259,328 254,537
- ----------------------------------------------------------------------------------------------------------------
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 $30.5
million at year-end 1996, an increase from 1995's year-end total, but below the
previous three years. While management has identified these loans as requiring
additional monitoring, they do not necessarily represent future nonperforming
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 1996 was 279.09
percent compared with 207.02 percent at year-end 1995 and 224.38 percent at
year-end 1994. 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, 1996 and 1995, respectively, First of America identified
$68.7 million and $88.6 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 1996, the allowance for impaired loan losses was
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$13.7 million compared to $17.6 million at year-end 1995. The 1995 adoption of
FAS 114 does not significantly impact the comparability of the allowance related
tables included in this report.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES TABLE X
($ in thousands)
December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Allowance Loans* Allowance Loans* Allowance Loans* Allowance Loans* Allowance Loans*
- ------------------------------------------------------------------------------------------------------------------------------
Commercial, financial
and agricultural.... $ 34,827 1.28% $ 37,133 1.43% $ 33,543 1.43% $ 39,231 1.83% $ 43,466 2.00%
Real estate........... 38,611 0.46 46,712 0.52 55,721 0.68 55,661 0.81 54,873 0.76
Consumer.............. 95,219 2.52 103,498 2.30 76,235 1.31 69,633 1.38 52,847 1.23
Unallocated........... 84,189 0.56 53,839 0.33 62,616 0.37 24,139 0.17 25,607 0.19
- ------------------------------------------------------------------------------------------------------------------------------
Total................. $252,846 $241,182 $228,115 $188,664 $176,793
- ------------------------------------------------------------------------------------------------------------------------------
Allowance to total
loans............... 1.68% 1.50 1.36 1.31 1.29
- ------------------------------------------------------------------------------------------------------------------------------
* Allowance as a percent of year-end loans outstanding by type. Unallocated
ratio is the unallocated portfolio allowance as a percent of total loans at
year-end.
SUMMARY OF LOAN LOSS EXPERIENCE TABLE XI
($ in thousands)
December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period............ $ 241,182 228,115 188,664 176,793 174,882
Provision charged against income.......... 93,456 91,488 86,571 84,714 78,809
Allowance for loan losses of
acquired/(sold) banks................... -- -- 11,420 50 (372)
RECOVERIES:
Commercial, financial and agricultural.... 5,087 5,757 7,277 8,692 7,215
Real estate -- construction............... -- 54 51 -- --
Real estate -- mortgage................... 4,166 3,896 2,404 2,615 2,112
Consumer loans............................ 52,996 47,231 28,402 24,556 24,313
----------- ---------- ---------- ---------- ----------
Total recoveries.......................... 62,249 56,938 38,134 35,863 33,640
----------- ---------- ---------- ---------- ----------
CHARGE-OFFS:
Commercial, financial and agricultural.... 8,964 7,007 13,621 19,764 22,558
Real estate -- construction............... -- 395 80 -- --
Real estate -- mortgage................... 7,248 7,777 8,825 10,539 10,588
Consumer loans............................ 127,829 120,180 74,148 78,453 77,020
----------- ---------- ---------- ---------- ----------
Total charge-offs......................... 144,041 135,359 96,674 108,756 110,166
----------- ---------- ---------- ---------- ----------
Net charge-offs........................... 81,792 78,421 58,540 72,893 76,526
- -----------------------------------------------------------------------------------------------------------------
Balance at end of period.................. $ 252,846 241,182 228,115 188,664 176,793
- -----------------------------------------------------------------------------------------------------------------
Average loans (net of unearned income).... $15,463,335 16,532,752 15,172,618 13,875,584 13,435,991
- -----------------------------------------------------------------------------------------------------------------
Earnings coverage of net losses........... 5.83x 5.80 7.00 5.91 4.44
Allowance to total end of period loans.... 1.68% 1.50 1.36 1.31 1.29
Net losses to end of period allowances.... 32.35 32.51 25.66 38.64 43.29
Recoveries to total charge-offs........... 43.22 42.06 39.45 32.98 30.54
Provision to average loans................ 0.60 0.55 0.57 0.61 0.59
Net charge-offs to average loans.......... 0.53 0.47 0.39 0.53 0.57
- -----------------------------------------------------------------------------------------------------------------
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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 95.7 percent at year-end 1996 and
95.5 percent at year-end 1995. 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, 1996, are presented in Table
XII. The maturity distribution of time deposits of $100,000 or more at year-end
1996 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, 1995 and 1996, there was no
outstanding balance under the Credit Agreement.
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, 1996, there was $54.0 million outstanding and $120.0 million
available on these agreements. There was no outstanding balance and $80.0
million 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, 1996 was $534.0
million, of which $55.0 million was included in long term debt.
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DEPOSITS TABLE XII
($ in thousands)
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------------
Non-interest bearing.......................... $ 2,790,118 -- $ 2,710,566 -- $ 2,665,183 --
Savings and NOW accounts...................... 3,843,700 2.09% 3,444,077 1.72% 3,948,604 1.51%
Money market savings.......................... 3,898,886 3.66 4,254,533 3.92 3,551,445 3.10
Time.......................................... 7,739,404 5.46 9,105,938 5.48 8,849,576 4.50
- ------------------------------------------------------------------------------------------------------------
Total......................................... $18,272,108 $19,515,114 $19,014,808
- ------------------------------------------------------------------------------------------------------------
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE TABLE XIII
($ in thousands)
Three Three Six
months months to months to After
or less six months one year one year Total
- -----------------------------------------------------------------------------------------------------------------
Certificates of deposit.......................... $688,010 247,284 134,361 147,660 1,217,315
Other time deposits.............................. 45,532 5,930 9,407 44,433 105,302
- -----------------------------------------------------------------------------------------------------------------
Total............................................ $733,542 253,214 143,768 192,093 1,322,617
- -----------------------------------------------------------------------------------------------------------------
INTEREST RATE RISK. First of America's interest rate risk policy is to
attempt to minimize the effect on net income resulting from a change in interest
rates through asset/liability management at all levels in the company. Each
quarter an interest rate sensitivity analysis is completed for each affiliate,
as well as the corporation as a whole, using an asset/liability management
model. Additional analysis is completed and reviewed each month related to the
interest rate sensitivity of the corporation. The Asset and Liability
Committees, which exist at each banking affiliate and at the corporate level,
review the analysis and as necessary, take appropriate action to ensure
compliance with policy and strategic objectives relating to prudent interest
rate risk management.
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 minimizes this risk by performing normal credit reviews of its
counterparties and collateralizing its exposure when it exceeds a predetermined
limit.
First of America had outstanding interest rate swap agreements at December
31, 1996, totaling $80.0 million in notional amounts versus $105.5 million at
December 31, 1995. This total included notional amounts of $50.0 million as a
hedge against the parent company's 8.50% Subordinated Notes Due February 1,
2004, and $30.0 million against various fixed rate bank notes.
The aggregate market value of interest rate swaps at year-end was a positive
$236 thousand. The full year 1996 impact from swap activity on net interest
income was a negative $0.2 million, the 1995 impact was a negative $4.0 million.
If interest rates increased one hundred basis points, First of America would
decrease net interest income $204 thousand over the next twelve months from its
current interest rate swap agreements. Note 20 of the Notes to Consolidated
Financial Statements included later in this document provides further detail on
First of America's interest rate swap agreements.
Interest rate sensitivity of assets and liabilities is represented in a Gap
report, Gap being the difference between rate sensitive assets and liabilities
and includes the impact of off-balance sheet interest rate swap and cap
agreements. Table XIV presents First of America's Gap position at December 31,
1996, for one year and shorter periods, and Table XV details the company's five
year Gap position. The Gap reports' reliability in measuring the risk to income
from a change in interest rates is tested through the use of simulation models.
At year-end 1996 simulation models showed that less than four percent of First
of America's annual net income was at risk if interest rates were to move up
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or down by one percent in a parallel fashion. However, changing economic
conditions affect results, therefore, the management of First of America's
interest rate sensitivity is an ongoing process. Management has determined that
the simulation models provide a more meaningful measurement of the company's
interest rate risk positions than the following Gap tables.
INTEREST RATE SENSITIVITY -- SHORT TERM TABLE XVI
($ in millions)
0 to 30 0 to 60 0 to 90 0 to 180 0 to 365
December 31, 1996 Days Days Days Days Days
- --------------------------------------------------------------------------------------------------------------------
ASSETS:
Other earning assets....................................... $ 237 237 237 237 237
Investment securities (1).................................. 182 281 376 702 1,229
Loans, net of unearned discount (2)........................ 5,233 5,695 6,519 7,603 9,336
- --------------------------------------------------------------------------------------------------------------------
Total rate sensitive assets (RSA).......................... $5,652 6,213 7,132 8,542 10,802
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES: (3)
Money market type deposits................................. $4,288 4,288 4,288 4,288 4,288
Other core savings and time deposits....................... 1,007 1,832 2,627 3,592 4,675
Negotiated deposits........................................ 356 482 558 675 737
Borrowings................................................. 981 1,283 1,413 1,582 1,767
Interest rate swap agreements (3) ......................... -- 50 50 50 25
- --------------------------------------------------------------------------------------------------------------------
Total rate sensitive liabilities (RSL)..................... $6,632 7,935 8,936 10,187 11,492
- --------------------------------------------------------------------------------------------------------------------
GAP (RSA - RSL)............................................ $ (980) (1,722) (1,804) (1,645) (690)
- --------------------------------------------------------------------------------------------------------------------
RSA divided by RSL......................................... 83.85% 93.99
GAP divided by total assets................................ (7.46) (3.13)
- --------------------------------------------------------------------------------------------------------------------
(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.
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INTEREST RATE SENSITIVITY -- LONG TERM TABLE XV
($ in thousands)
13 to 25 to 37 to 0 to 60
December 31, 1996 24 months 36 months 60 months months
- ------------------------------------------------------------------------------------------------------------
ASSETS:
Other earning assets.............................. $ -- -- -- 237
Investment securities (1)......................... 951 662 988 3,830
Loans, net of unearned discount (2)............... 2,312 1,230 1,357 14,235
- ------------------------------------------------------------------------------------------------------------
Total rate sensitive assets (RSA)................. $3,263 1,892 2,345 18,302
- ------------------------------------------------------------------------------------------------------------
LIABILITIES: (3)
Money market type deposits........................ $ -- -- -- 4,288
Other core savings and time deposits.............. 3,421 1,954 1,660 11,710
Negotiated deposits............................... 10 2 -- 749
Borrowings........................................ 175 2 -- 1,944
Interest rate swap agreements (3)................. (25) -- -- --
- ------------------------------------------------------------------------------------------------------------
Total rate sensitive liabilities (RSL)............ $3,581 1,958 1,660 18,691
- ------------------------------------------------------------------------------------------------------------
GAP (RSA - RSL)................................... $ (318) (66) 685 (389)
- ------------------------------------------------------------------------------------------------------------
RSA divided by RSL................................ 97.92%
GAP divided by total assets....................... (1.77)
- ------------------------------------------------------------------------------------------------------------
(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.
CAPITAL STRENGTH
REGULATORY REQUIREMENTS. First of America's capital policy is to maintain
its capital levels above minimum regulatory guidelines. At December 31, 1992,
the Federal Reserve required a tier I risk based capital ratio of 4.00 percent
and a total risk based capital ratio of 8.00 percent. In 1991, the Federal
Reserve also adopted a new leverage capital adequacy standard. This ratio
compares tier I capital to reported total assets and requires a minimum ratio of
4.00 percent in order to be categorized as adequately capitalized. As shown in
Table XVI, at December 31, 1996, First of America's capital ratios exceeded
required regulatory minimums with a tier I risk based ratio of 9.76 percent, a
total risk based ratio of 13.19 percent and a tier I leverage ratio of 7.15
percent. Capital ratios exclude the mark-to-market adjustment for Available for
Sale securities in accordance with the Federal Reserve's regulations.
The long term debt which qualified as tier II capital at December 31, 1996,
consisted of $150 million in 8.5% Subordinated Notes Due February 1, 2004, a
$10.0 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 11 of the Notes to Consolidated
Financial Statements included later in this document.
In January 1997, First of America privately placed $150 million of fixed
rate capital securities through First of America Capital Trust I, a newly formed
Delaware business trust, controlled by the Registrant. The 8.12% Capital
Securities of First of America Capital Trust I were priced at par. Cash
distributions are payable semi-annually on January 31 and July 31, beginning
July 31, 1997. The proceeds from the issuance will be used for general corporate
purposes and will further enhance the Registrant's strong capital position,
while reducing the cost of capital.
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RISK-BASED CAPITAL TABLE XVI
($ in thousands)
December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
TIER I CAPITAL:
Common shareholders' equity................................. $1,784,198 1,827,981 1,578,888
Less: Intangibles........................................... 202,336 227,303 252,979
Net unrealized gain (loss) on securities available for
sale.................................................... 8,438 25,939 (92,271)
Section 20 affiliate debt and equity...................... 11,826 12,500 --
- ----------------------------------------------------------------------------------------------------
Tier I capital.............................................. 1,561,598 1,562,239 1,418,180
- ----------------------------------------------------------------------------------------------------
TIER II CAPITAL:
Allowance for loan losses*.................................. 200,701 205,515 210,164
Qualifying long term debt................................... 360,000 360,000 361,867
Less: Section 20 affiliate debt and equity.................. 11,826 12,500 --
- ----------------------------------------------------------------------------------------------------
Tier II capital............................................. 548,875 553,015 572,031
- ----------------------------------------------------------------------------------------------------
Total capital............................................... $2,110,473 2,115,254 1,990,211
- ----------------------------------------------------------------------------------------------------
RISK-BASED CAPITAL RATIOS:
Tier I...................................................... 9.76% 9.52 8.44
Total....................................................... 13.19 12.89 11.85
Tier I leverage ratio....................................... 7.15 6.70 5.81
- ----------------------------------------------------------------------------------------------------
* Limited to 1.25% of total risk-weighted assets.
TOTAL SHAREHOLDERS' EQUITY. First of America's total shareholders' equity at
year-end 1996 remained level with a year ago at $1.8 billion as the earnings
retention for 1996 was offset by the impact of the stock repurchased during the
year.
In addition to the repurchase of the 3.6 million common shares completed in
1996, the Board of Directors, in January 1997, authorized the repurchase of up
to two million additional shares of First of America common stock. Any shares
repurchased under this authorization will be used for general corporate purposes
and may be available for reissuance in connection with the company's stock based
compensation plans, dividend reinvestment plan and employee savings plan.
IN CONCLUSION
First of America's management currently expects continued improvement in the
net interest margin and return on assets ratios in 1997 and 1998. The return on
equity for 1997 should be between 15 percent and 16 percent and for 1998,
between 16 percent and 17 percent. In addition, the efficiency ratio is
currently anticipated to be below 60 percent by the end of 1998. Management
believes the benefits of the company's move to a single operating unit along
with a focus on business lines, the internal restructuring effort, and the
emphasis on pricing products by market and customer type provide the
fundamentals for the achievement of these goals.
The foregoing management statements of expectations for future return on
equity and efficiency ratios are forward-looking statements. The achievement of
these expectations is uncertain, as First of America's actual performance and
financial results may differ from those anticipated as a result of a variety of
factors, including but not limited to assumed rates of revenue growth, expense
reductions, changes in the economy, competition and the implementation of
internal business plans.
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28
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.
Richard F. Chormann 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 five meetings
during fiscal year 1996.
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, 1996,
its duties, as indicated, were satisfactorily discharged and that First of
America's system of internal controls is adequate.
Robert L. Hetzler
Robert L. Hetzler
Chairman
Audit Committee
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29
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, 1996 and 1995
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, 1996. 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, 1996 and 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Chicago, Illinois
January 14, 1997
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30
CONSOLIDATED BALANCE SHEETS
($ in thousands)
December 31, 1996 1995
- --------------------------------------------------------------------------------------
ASSETS
Cash and due from banks..................................... $ 1,205,962 1,207,062
Bank time deposits.......................................... -- 49,349
Federal funds sold and resale agreements.................... 163,400 220,388
Securities available for sale, amortized cost of $4,549,383
at December 31, 1996 and $5,020,954 at December 31,
1995...................................................... 4,562,381 5,060,746
Loans, net of unearned income:
Consumer.................................................. 3,774,803 4,504,255
Commercial, financial and agricultural.................... 2,722,676 2,589,038
Commercial real estate.................................... 3,918,248 3,812,001
Residential real estate................................... 4,531,868 5,070,369
Loans held for sale, market value of $109,955 for 1996 and
$104,132 for 1995....................................... 108,411 101,279
----------- ----------
Total loans............................................. 15,056,006 16,076,942
Less: Allowance for loan losses......................... 252,846 241,182
----------- ----------
Net loans............................................... 14,803,160 15,835,760
Premises and equipment, net................................. 433,408 465,498
Other assets................................................ 893,868 761,292
- --------------------------------------------------------------------------------------
TOTAL ASSETS................................................ $22,062,179 23,600,095
- --------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing...................................... $ 3,009,252 2,925,679
Interest bearing.......................................... 14,610,044 16,416,788
----------- ----------
Total deposits.......................................... 17,619,296 19,342,467
Securities sold under repurchase agreements................. 493,556 429,483
Other short term borrowings................................. 1,344,434 1,220,482
Long term debt.............................................. 521,124 490,315
Other liabilities........................................... 299,571 289,367
----------- ----------
Total liabilities....................................... 20,277,981 21,772,114
----------- ----------
SHAREHOLDERS' EQUITY
Common stock-$10 par value:
Authorized Outstanding
1996 100,000,000 59,813,234
1995 100,000,000 63,283,857....................... 598,132 632,839
Capital surplus............................................. 145,950 283,409
Net unrealized gain on securities available for sale, net of
tax expense of $4,561 for 1996 and of $13,853 for 1995.... 8,438 25,939
Retained earnings........................................... 1,031,678 885,794
----------- ----------
Total shareholders' equity.............................. 1,784,198 1,827,981
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $22,062,179 23,600,095
- --------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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31
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
Year ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans and fees on loans..................................... $1,366,083 1,473,210 1,277,950
Securities:
Taxable income............................................ 270,647 304,145 303,098
Tax exempt income......................................... 16,434 13,317 17,480
Federal funds sold and resale agreements.................... 8,804 4,651 2,229
Bank time deposits.......................................... 1,586 1,201 120
---------- ---------- ----------
Total interest income....................................... 1,663,554 1,796,524 1,600,877
---------- ---------- ----------
INTEREST EXPENSE
Deposits.................................................... 645,995 725,161 567,935
Short term borrowings....................................... 79,988 100,684 60,389
Long term debt.............................................. 35,083 46,683 33,818
---------- ---------- ----------
Total interest expense...................................... 761,066 872,528 662,142
---------- ---------- ----------
NET INTEREST INCOME......................................... 902,488 923,996 938,735
Less: Provision for loan losses............................. 93,456 91,488 86,571
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 809,032 832,508 852,164
---------- ---------- ----------
NON-INTEREST REVENUE
Service charges on deposit accounts......................... 112,516 100,281 89,164
Trust and financial services revenue........................ 114,024 94,179 81,717
Investment securities transactions, net..................... (515) 62 5,349
Bank card revenue........................................... 73,900 60,449 43,216
Mortgage banking revenue.................................... 28,525 31,505 23,461
Other operating revenue..................................... 90,864 59,624 41,466
---------- ---------- ----------
Total non-interest revenue.................................. 419,314 346,100 284,373
---------- ---------- ----------
NON-INTEREST EXPENSE
Personnel................................................... 454,170 430,977 430,563
Occupancy, net.............................................. 64,871 64,108 60,471
Equipment................................................... 58,462 59,322 56,111
Outside data processing..................................... 19,182 18,825 17,524
Amortization of intangibles................................. 23,355 21,146 16,577
Other operating expenses.................................... 224,963 220,893 232,172
---------- ---------- ----------
Total non-interest expense.................................. 845,003 815,271 813,418
---------- ---------- ----------
Income before income taxes.................................. 383,343 363,337 323,119
Income taxes................................................ 126,457 126,629 102,616
- ----------------------------------------------------------------------------------------------------------
NET INCOME.................................................. $ 256,886 236,708 220,503
- ----------------------------------------------------------------------------------------------------------
Common and common equivalent earnings per share............. $ 4.16 3.73 3.69
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
($ in thousands except per share data)
Net Unrealized
Gain (Loss) on
Common Capital Securities Retained
Stock Surplus Available for Sale Earnings Total
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1994.................................... $595,207 265,596 31,531 631,103 1,523,437
Net Income.................................................. 220,503 220,503
Issuance of stock:
Acquisition of subsidiaries................................ 66,747 109,000 (1,929) 5,618 179,436
Stock Options Exercised.................................... 232 228 460
Other...................................................... (268) (268)
Repurchase and conversions.................................. (33,694) (89,679) (123,373)
Change in market value adjustment of securities available
for sale, net of tax benefit of $32,296.................... (121,873) (121,873)
Cash dividends declared on Common stock -- $1.64 per
share...................................................... (99,434) (99,434)
-------- -------- -------- -------- ---------
BALANCE, DECEMBER 31, 1994.................................. 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 -- $1.72 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 -- $1.82 per
share...................................................... (111,002) (111,002)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996.................................. $598,132 145,950 8,438 1,031,678 1,784,198
- -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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33
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income.................................................. $ 256,886 236,708 220,503
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 47,040 48,263 46,295
Provision for loan losses................................. 93,456 91,488 86,571
Provision for deferred taxes.............................. (155) (7,372) (4,974)
Amortization of intangibles............................... 23,355 21,146 16,577
(Gain) loss on sale of securities available for sale...... 514 (3,707) (5,349)
(Gain) loss on sale of mortgage loans held for sale....... (20,235) (19,627) (11,697)
(Gain) loss on sale of other assets....................... (28,829) (16,577) 625
Proceeds from the sales of mortgage loans held for sale... 1,215,172 959,721 953,310
Originations of mortgage loans held for sale, net......... (1,202,069) (1,011,177) (605,953)
Change in assets and liabilities net of acquisitions:
(Increase) decrease in interest and other income
receivable.............................................. 37,560 (81,195) (4,031)
(Increase) decrease in other assets....................... (81,475) (233,389) 42,044
Increase (decrease) in accrued expenses and other
liabilities............................................. 18,808 38,068 1,510
----------- ---------- ----------
Net cash from operating activities...................... 360,028 22,350 735,431
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the maturities of investment securities (held
to maturity).............................................. -- 368,738 448,395
Purchases of investment securities (held to maturity)....... -- (191,325) (1,718,714)
Proceeds from the sale of securities available for sale..... 1,065,313 785,239 1,776,724
Proceeds from the maturities of securities available for
sale...................................................... 1,107,359 518,927 843,109
Purchases of securities available for sale.................. (1,702,437) (698,163) (1,649,902)
Proceeds from the securitization of loans................... -- 498,588 --
Net other (increase) decrease in loans and leases........... 946,276 251,990 (2,039,577)
Premises and equipment purchased............................ (46,768) (63,485) (68,993)
Proceeds from the sale of premises and equipment............ 60,886 42,466 3,500
(Acquisition)sale of affiliates, net of cash acquired....... 944 (4,369) 352,131
----------- ---------- ----------
Net cash flows used in investing activities............. 1,431,573 1,508,606 (2,053,327)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short term deposits.............. 43,387 (164,820) 504,409
Net (decrease) in time deposits............................. (1,766,558) (692,979) (97,744)
Net increase (decrease) in short term borrowings............ 188,025 (232,774) 861,310
Proceeds from issuance of long term debt.................... 104,924 25,004 738,701
Repayments of long term debt................................ (74,115) (213,470) (311,658)
Net proceeds/(cost) from issuance of common stock........... (969) 2,105 460
Dividends paid.............................................. (110,810) (107,429) (96,670)
Payments for purchase and retirement of common stock........ (176,585) -- (123,373)
Other, net.................................................. -- (319) (268)
----------- ---------- ----------
Net cash provided by financing activities............... (1,792,701) (1,384,682) 1,475,167
----------- ---------- ----------
Net increase(decrease) in cash and cash equivalents......... (1,100) 146,274 157,271
Cash and cash equivalents at beginning of year.............. 1,207,062 1,060,788 903,517
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT YEAR END....................... $ 1,205,962 1,207,062 1,060,788
- -------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
33
34
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 multi-bank holding company
headquartered in Kalamazoo, Michigan and was incorporated as a Michigan
corporation in May 1971. Its principal activity consists of owning and
supervising four affiliate financial institutions which operate general,
commercial banking businesses from 604 banking offices and facilities located in
Michigan, Florida, 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,
1996, are 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 of 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,
34
35
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 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 meeting the definition of troubled debt
restructuring of Financial Accounting Standards Board 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.
Loans are considered to be renegotiated when concessions have been granted,
such as reduction of interest rates or deferral of interest or principal
payments, as a result of the borrower's financial condition.
Management has determined that First of America's non-accrual and
renegotiated commercial and commercial mortgage loans meet the definition for
impaired loans under 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 is recorded in
other assets at the lower of the amount of the loan balance plus unpaid accrued
interest or the current fair value. 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 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 by servicing type, 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.
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36
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF:
On January 1, 1996, First of America adopted Financial Accounting Standards
Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," which requires that long-lived assets
and certain identifiable intangibles be reviewed 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 to 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:
For each category of derivative financial instruments, an entity is required
to disclose the following: the face or contract amount and the nature and terms,
including, the credit and market risk, cash requirements and related accounting
policies. The corporation and its subsidiaries have entered into interest rate
caps and interest rate swaps as a hedge against certain deposit and debt
liabilities in an attempt to manage interest rate sensitivity.
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 Financial Accounting Standards Board 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. Further
disclosures are presented in Note 13: Stock Option Plans.
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37
RECENT ACCOUNTING PRONOUNCEMENT:
The Financial Accounting Standards Board has issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" which is effective, in part, for transactions occurring after
December 31, 1996. This statement was adopted by First of America on January 1,
1997, and it will not have a material effect on the financial condition or
results of operation.
NOTE 2: BUSINESS COMBINATIONS
Information relating to mergers and acquisitions for the three year period
ended December 31, 1996 follows.
Intangible
Financial Number of Assets
Date of Reporting Common Cash Paid/ Acquired at
Acquisition Value* Shares Issued Debt Issued Acquisition
- ----------------------------------------------------------------------------------------------------------------
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 -- **
Presidential Holding Corp. (Florida)... Dec. 31, 1994 6,714,000 704,515 -- **
F&C Bancshares, Inc. (Florida)......... Dec. 31, 1994 35,064,000 2,132,105 -- **
First Park Ridge Corp. (Illinois)...... Oct. 1, 1994 75,890,000 2,199,733 -- 40,461,000
LGF Bancorp, Inc. (Illinois)........... May 1, 1994 61,902,000 1,645,245 -- 25,664,000
Goldome Federal Branches (Florida)..... Apr. 15, 1994 60,015,000 -- 58,380,000 60,015,000
- ----------------------------------------------------------------------------------------------------------------
* 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, per Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," for permanent impairment using a discounted cash flow analysis.
At December 31, 1996, First of America recognized a $1.6 million charge to
earnings, net of tax, for goodwill impairment connected to the closing of 8
branches. Goodwill, which is included in other assets in the Consolidated
Balance Sheets, amounted to $201,631,000 at December 31, 1996 and $226,979,000
at December 31, 1995.
NOTE 3: 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 $289,899,000 and
$359,319,000 at December 31, 1996 and 1995, respectively.
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38
NOTE 4: CASH FLOW
For the purpose of reporting cash flows, cash and cash equivalents include
only cash and due from banks. The following schedule presents noncash investing
activities for the years 1996, 1995 and 1994.
Fair Value of
Noncash Assets Liabilities Common
($ in thousands) Acquired Assumed Stock Issued Net Cash Paid
- ---------------------------------------------------------------------------------------------------------------------
PURCHASE OF AFFILIATES
1996
Huttenlochers Kerns Norvell, Inc. ........... $ 5,094 2,126 3,912 (944)
1995
Gulfstream Global Investors.................. 4,742 -- -- 4,742
1994
Goldome Federal Branches..................... 59,204 378,064 -- (318,860)
LGF Bancorp, Inc. ........................... 425,819 365,695 61,902 (1,778)
First Park Ridge Corporation................. 352,077 291,563 75,890 (15,376)
- ---------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------
1996........................................ $ -- -- 788,875 120,643
1995........................................ 503,976 2,851,746 864,519 92,338
1994........................................ 38,838 -- 641,886 115,193
- ------------------------------------------------------------------------------------------------------------------------
In conjunction with the Financial Accounting Standards Board's ("FASB")
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 5: SECURITIES
The amortized cost and estimated market value of Securities Available for
Sale at December 31, 1996 and 1995 follow.
1996 1995
- --------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Amortized Market Average Amortized Market Average
($ in thousands) Cost Value Maturity Cost Value Maturity
- --------------------------------------------------------------------------------------------------------------------
U.S. government and agency
securities.......................... $3,483,720 3,494,016 2.6yrs $4,068,386 4,098,741 2.4yrs.
State and municipal securities........ 398,041 403,354 8.8 248,947 258,707 6.1
Collateralized mortgage obligations... 486,945 484,333 1.8 579,788 579,441 2.5
Other securities...................... 180,677 180,678 5.4 123,833 123,857 2.1
- --------------------------------------------------------------------------------------------------------------------
Total................................. $4,549,383 4,562,381 $5,020,954 5,060,746
- --------------------------------------------------------------------------------------------------------------------
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The following table details the gross unrealized gains and losses on
Securities Available for Sale at December 31, 1996 and 1995.
1996 1995
- -----------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
($ in thousands) Gains Losses Gains Losses
- -----------------------------------------------------------------------------------------------------------------
U.S. government and agency securities........... $10,296 -- 30,355 --
State and municipal securities.................. 5,314 -- 9,760 --
Collateralized mortgage obligations............. -- (2,613) -- 347
Other securities................................ 1 -- 24 --
- -----------------------------------------------------------------------------------------------------------------
Total........................................... $15,611 (2,613) 40,139 347
- -----------------------------------------------------------------------------------------------------------------
Except as indicated below, total securities of no individual state,
political subdivision or other issuer exceeded 10% of shareholders' equity at
December 31, 1996. At December 31, 1996 and 1995, the book value of securities
issued by the State of Michigan and all of its political subdivisions totaled
approximately $145,917,000 and $126,225,000, respectively, with a market value
of approximately $146,961,000 and $130,570,000, respectively. The securities at
December 31, 1996, 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 $1,569,685,000 at
December 31, 1996, and $1,516,639,000 at December 31, 1995, were pledged to
secure public deposits, exercise trust powers and for other purposes required or
permitted by law.
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SECURITIES AVAILABLE FOR SALE
MATURITY DISTRIBUTION AND PORTFOLIO YIELDS
($ in millions)
December 31, 1996 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..... $111.6 111.5 5.73% $548.2 541.7 6.30% $ -- -- --%
U.S. agency securities......... 13.2 13.2 6.55... 333.1 335.4 5.97 774.3 773.2 6.35
State and municipal
securities*................... 69.1 68.9 7.73 50.3 49.2 9.45 45.9 45.7 7.99
Collateralized mortgage
obligations................... 0.2 0.2 5.95 -- -- -- -- -- --
Other securities............... 106.8 106.8 7.03 34.1 34.1 8.07 11.9 11.9 7.09
- -----------------------------------------------------------------------------------------------------------------------
Total.......................... $300.9 300.6 6.69% $965.7 960.4 6.41% $832.1 830.8 6.45%
- -----------------------------------------------------------------------------------------------------------------------
Market value as a percent of
amortized cost................ 100.10% 100.55 100.16
- -----------------------------------------------------------------------------------------------------------------------
After ten years Total
- -----------------------------------------------------------------------------------------------------------------------
Market Amortized Market Amortized
Value Cost Yield Value Cost Yield
- -----------------------------------------------------------------------------------------------------------------------
U.S. government securities..... $ -- -- --% $ 659.8 653.2 6.20%
U.S. agency securities......... 1,713.6 1,708.8 6.75 2,834.2 2,830.6 6.55
State and municipal
securities*................... 238.1 234.2 8.22 403.4 398.0 8.26
Collateralized mortgage
obligations................... 484.1 486.7 6.48 484.3 486.9 6.48
Other securities............... 27.9 27.9 4.70 180.7 180.7 6.87
- -------------------------------
Total.......................... $2,463.7 2,457.6 6.81% $4,562.4 4,549.4 6.65%
- -----------------------------------------------------------------------------------------------------------------------
Market value as a percent of
amortized cost................ 100.24 100.29
- -----------------------------------------------------------------------------------------------------------------------
* Yields on state and political obligations have been adjusted to a taxable
equivalent basis using a 35% tax rate. Yields are calculated on the basis of
cost and weighted for the scheduled maturity and dollar amount of each issue.
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NOTE 6: RISK ELEMENTS IN THE LOAN PORTFOLIO AND OTHER REAL ESTATE OWNED
Assets earning at less than normal interest rates include (1) non-accrual
loans, (2) restructured loans (loans for which the interest rate or principal
balance has been reduced because of a borrower's financial difficulty) and (3)
other real estate owned which has been acquired in lieu of loan balances due.
Information concerning these assets, loans past due 90 days or more and other
loans of concern (loans where known information about possible credit problems
of borrowers causes management concern about the ability of such borrowers to
comply with the present loan terms) at December 31, 1996 and 1995 follows.
($ in thousands) 1996 1995
- --------------------------------------------------------------------------------
BALANCES OUTSTANDING:
Non-accrual loans........................................... $ 84,185 104,174
Restructured loans.......................................... 6,414 12,327
Past due 90 days or more.................................... 26,726 28,124
Other loans of concern...................................... 30,541 17,660
Other real estate owned (included in other assets).......... 24,190 31,103
- --------------------------------------------------------------------------------
Total....................................................... $172,056 193,388
- --------------------------------------------------------------------------------
Interest income of $6,481,000 and $3,052,000 during 1996 and 1995,
respectively, was recognized as income on non-accrual and restructured loans.
Had these loans been performing under the original contract terms, an additional
$7,732,000 and $10,090,000 of interest would have been reflected in interest
income during 1996 and 1995, respectively.
First of America does not have any concentrations of credit risk to any
specific borrower or within any geographic area.
NOTE 7: LOANS TO RELATED PARTIES
First of America's subsidiary banks have extended loans to directors and
executive officers of the corporation and their associates and to the directors
and executive officers of the corporation's significant subsidiaries 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 significant
subsidiaries which exceeded $60,000 during 1996 totaled less than 5 percent of
total shareholders' equity at year-end 1996. 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,
1996 only First of America Community Development Corporation had any borrowings
outstanding in the amount of $985,000. In conformance with First of America's
corporate policy and applicable law, such extensions of credit to subsidiaries
are made in accordance with sound banking practices and on non-preferential
terms and rates.
In the opinion of management, the amount and nature of these loans to
related parties and subsidiaries do not materially affect the financial
condition of First of America.
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NOTE 8: ALLOWANCE FOR LOAN LOSSES
An analysis of the transactions in the allowance for loan losses for 1996,
1995 and 1994 follows.
($ in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------
Balance, beginning of year.................................. $ 241,182 228,115 188,664
Additions: Provision charged against income................. 93,456 91,488 86,571
Allowance of acquired banks, net................. -- -- 11,420
Recoveries....................................... 62,249 56,938 38,134
- --------------------------------------------------------------------------------------------
396,887 376,541 324,789
Less: Loans charged off..................................... (144,041) (135,359) (96,674)
- --------------------------------------------------------------------------------------------
Balance, end of year........................................ $ 252,846 241,182 228,115
- --------------------------------------------------------------------------------------------
Management has evaluated the loan portfolio and determined 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, 1996 and 1995, respectively, the recorded investment in
loans considered to be impaired under Statement No. 114 as amended by Statement
No. 118 was $68.7 million and $88.6 million, with an average recorded investment
in impaired loans during 1996 and 1995 of approximately $80.3 million and $81.9
million, respectively. Included in the impaired loans total as of the same
year-end dates were $29.6 and $42.6 million of impaired loans for which the
related specific allowance for loan losses were $13.7 million and $17.6 million,
respectively. The remaining $39.1 million and $46.0 million of impaired loans
did not require a specific allowance for loan losses due to the net realizable
value of loan collateral, guarantees and other factors.
NOTE 9: PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1996 and 1995 follows.
($ in thousands) 1996 1995
- --------------------------------------------------------------------------------
Land........................................................ $ 79,713 78,326
Buildings and leasehold improvements........................ 444,805 446,721
Equipment................................................... 269,099 363,241
Capital leases.............................................. 3,587 24,115
-------- -------
797,204 912,403
Less:
Accumulated depreciation and amortization................... 363,796 446,905
- --------------------------------------------------------------------------------
Total....................................................... $433,408 465,498
- --------------------------------------------------------------------------------
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 all
operating leases was $16,364,000 in 1996, $17,554,000 in 1995, and $16,100,000
in 1994.
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43
The future minimum payments by year, and in the aggregate, under capital
leases and noncancelable operating leases with initial or remaining terms of one
year or more consisted of the following at December 31, 1996.
($ in thousands) Capital Leases Operating Leases
- -----------------------------------------------------------------------------------------------------
1997........................................................ $ 386 15,919
1998........................................................ 377 12,949
1999........................................................ 322 10,312
2000........................................................ 307 8,283
2001........................................................ 286 5,441
Thereafter.................................................. 3,524 28,834
------- -------
Total minimum lease payments................................ 5,202 81,738
Amounts representing interest............................... (3,174) --
- -----------------------------------------------------------------------------------------------------
Present value of net minimum lease payments................. $ 2,028 81,738
- -----------------------------------------------------------------------------------------------------
NOTE 10: LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with Financial Accounting Standards Board Statement No. 121,
in 1996, First of America recorded an impairment on long-lived assets to be
disposed of totaling $4.3 million. The assets to be disposed of include current
or former bank premises. It is expected that the impaired assets will be
disposed of in 1997.
The carrying value of the assets at December 31, 1996, is $6.8 million. Fair
value was determined based on a combination of independent appraisals, brokers'
opinions, and offers to purchase. Management does not currently anticipate that
the ultimate disposal of the assets in 1997 will have a material effect on the
financial position, results of operations or liquidity of First of America.
NOTE 11: LONG TERM DEBT
Information relating to long term debt at December 31, 1996 and 1995
follows.
($ in thousands) 1996 1995
- --------------------------------------------------------------------------------
PARENT COMPANY:
7.75% subordinated notes due July 15, 2004.................. $200,000 200,000
10.625% subordinated notes payable in equal annual
installments in 1990 through 1998, interest payable
semi-annually............................................. -- 3,111
8.50% subordinated notes due February 1, 2004............... 150,000 150,000
Revolving credit agreement.................................. -- --
6.35% subordinated debenture due December 31, 2007.......... 10,000 10,000
Capital lease obligations (Note 9).......................... 923 19,970
-------- -------
360,923 383,081
SUBSIDIARIES:
Bank notes, with interest rates ranging from 5.70% to 5.75%,
due through February 20, 1998............................. 54,992 104,971
Broker loan facilities...................................... 54,000 --
8.30% FHLB borrowing payable August, 1996................... -- 820
5.57% FHLB borrowing payable May 21, 1998................... 50,000 --
Mortgages and land contracts, payable in installments
through 1999 with interest rates ranging from 4.75% to
10.25%.................................................... 107 218
Capital lease obligations (Note 9).......................... 1,102 1,225
- --------------------------------------------------------------------------------
TOTAL LONG TERM DEBT........................................ $521,124 490,315
- --------------------------------------------------------------------------------
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
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44
America to borrow on a standby revolving credit basis and an uncommitted
competitive advance basis 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, 1996, there was $54.0 million outstanding and $120.0 million
available on these agreements. There was no outstanding balance and $80.0
million available at December 31, 1995.
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 $1,352,490,000. The indebtedness of subsidiary banks is
subordinated to the claims of their depositors and certain other creditors.
Management has determined that First of America is in compliance with all of its
loan covenants.
Maturities of outstanding indebtedness at December 31, 1996 follow.
Total Principal
($ in thousands) Amount Due
- -------------------------------------------------------------------------------
Year ending December 31,
1997........................................................ $ 84,160
1998........................................................ 75,174
1999........................................................ 131
2000........................................................ 127
2001........................................................ 92
Thereafter.................................................. 361,440
- -------------------------------------------------------------------------------
Total....................................................... $521,124
- -------------------------------------------------------------------------------
NOTE 12: 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.
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 13: STOCK OPTION PLANS
First of America maintains two stock option plans: the First of America Bank
Corporation Restated 1987 Stock Option Plan (the 1987 Plan) and the First of
America Bank Corporation Stock Compensation Plan (the 1996 Plan). The 1996 Plan
was approved at the Annual Shareholders meeting on April 17, 1996. The aggregate
number of shares of First of America Common Stock that may be issued, pursuant
to the exercise of options and restricted stock granted under the 1996 Plan,
will not exceed 3,000,000 shares. The 1987 Plan only provides for non-qualified
options.
44
45
Eligible participants may be granted incentive stock options, non-qualified
stock options or restricted stock under the 1996 Plan. The Nominating and
Compensation Committee has full and final authority in its discretion to
determine all matters relating to awards under each of the Plans. None of the
members of the Nominating and Compensation Committee are eligible to participate
in either of the Plans.
As of the 1996 Plan's effective date, February 21, 1996, no further options
will be granted under the 1987 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 and were granted at
prices not less than the fair market value on the date of grant.
The options granted under the 1996 Plan, at fair market value, will vest one
third upon the attainment of each of three market price targets. The options
have a ten year term and may be exercised on or after October 29, 1997.
A summary of the status of First of America's stock option transactions
under the Plans as of December 31, 1996, 1995 and 1994, and the changes during
the years ended on those dates is presented below:
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
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............. 1,456 $32.13 1,247 $28.34 954 $27.25
Granted*..................................... 506 54.47 325 43.25 296 33.00
Converted options from acquisition........... -- 0.00 -- 0.00 25 11.30
Exercised.................................... (195) 28.79 (102) 20.72 (23) 19.86
Forfeited.................................... (10) 40.88 (14) 35.29 (5) 35.93
----- ----- -----
Outstanding at end of year................... 1,757 38.88 1,456 32.13 1,247 28.34
- -----------------------------------------------------------------------------------------------------------
Exercisable at year end...................... 1,003 925 779
- -----------------------------------------------------------------------------------------------------------
Weighted-average exercise price of options
granted during the year.................... $54.47 43.25 33.00
- -----------------------------------------------------------------------------------------------------------
Weighted-average fair value of options
granted during the year.................... $11.18 7.88 7.34
- -----------------------------------------------------------------------------------------------------------
* All options granted during 1996, represent nonqualified stock options under
the Plan.
Under the 1996 Plan, First of America issued and had outstanding 62,000
shares of restricted stock as of December 31, 1996.
As of December 31, 1996, First of America adopted the disclosure provisions
of Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation." Accordingly, the Company is required to disclose pro
forma net income and earnings per share both for 1996 and 1995 as if
compensation expense relative to the fair value of options granted had been
included in earnings. The fair value of each option grant was estimated using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 1996, 1995 and 1994, respectively: a seven year expected life for all
years; expected volatility of 21.3 percent, 22.2 percent and 22.9 percent,
respectively; risk-free interest rates of 6.2 percent, 7.5 percent and 7.5
percent; and expected dividend yields of 8.0 percent, 8.4 percent and 8.7
percent. Had compensation cost for the Company's option plans been
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determined and recorded consistent with FASB Statement No. 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated in the following table:
($ in thousands) 1996 1995
- ---------------------------------------------------------------------------------
NET INCOME
As reported................................................. $256,886 236,708
Pro forma................................................... 255,249 236,197
- ---------------------------------------------------------------------------------
EARNINGS PER SHARE
As reported................................................. $4.16 3.73
Pro forma................................................... 4.13 3.72
- ---------------------------------------------------------------------------------
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------
Range Number Weighted-Avg. Number
of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
------------------------------------------------------------------------------------------------
$11.30 32 1.0 $11.30 32 $11.30
16.00 to 28.00 417,975 3.6 22.09 417,975 22.09
32.00 to 43.25 833,185 7.8 37.84 581,855 36.80
54.44 to 57.25 505,850 9.9 54.47 3,150 57.25
--------- ---------
1,757,042 7.4 38.88 1,003,012 28.79
------------------------------------------------------------------------------------------------
NOTE 14: DIVIDENDS FROM BANKING SUBSIDIARIES
Dividends paid to First of America by its bank subsidiaries amounted to
$357,800,000 in 1996, $337,407,000 in 1995 and $173,350,000 in 1994. Banking
regulations limit the amount of dividends that First of America's banking
subsidiaries can declare during 1997 to the 1997 net profits, as defined in the
Federal Reserve Act, plus retained net profits for 1996 and 1995. In recent
years, First of America requested and obtained regulatory approval to exceed
banking regulation limits for certain subsidiary banks, based largely on the
well capitalized position of those banks. As a result, the retained net profits
for 1996 and 1995 were a negative $111 million. Under the FDIC Improvement Act
of 1993, there are strong incentives to maintaining a bank's capital at the
"well capitalized" level.
NOTE 15: 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, 1996, 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 8 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
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47
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 3 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 3 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 remedies available to the
federal regulatory authorities. Under the prompt corrective action provisions of
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("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 FDlC,
and (in severe cases) the appointment of a conservator or receiver.
As of December 31, 1996, 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, 1996 and 1995:
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, 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-Michigan, 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-Michigan, 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-Michigan, 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
- ------------------------------------------------------------------------------------------------------------------
As of December 31, 1995:
Total Capital (to Risk-Weighted Assets):
First of America Bank Corporation.......... $2,115,254 12.89 $1,312,439 8.00 $1,640,549 10.00
First of America Bank-Michigan, N.A........ 1,044,830 11.29 740,051 8.00 925,064 10.00
First of America Bank-Illinois, N.A........ 569,208 11.27 404,041 8.00 505,051 10.00
Tier 1 Capital (to Risk-Weighted Assets):
First of America Bank Corporation.......... 1,562,239 9.52 656,220 4.00 934,329 6.00
First of America Bank-Michigan, N.A........ 928,242 10.04 370,026 4.00 555,038 6.00
First of America Bank-Illinois, N.A........ 506,077 10.02 202,020 4.00 303,031 6.00
Tier 1 Leverage Ratio:
First of America Bank Corporation.......... 1,562,239 6.70 932,812 4.00 1,166,015 5.00
First of America Bank-Michigan, N.A........ 928,242 7.00 530,642 4.00 663,303 5.00
First of America Bank-Illinois, N.A........ 506,077 7.11 284,657 4.00 355,822 5.00
- ------------------------------------------------------------------------------------------------------------------
47
48
NOTE 16: EMPLOYEE PENSION PLAN
First of America and its subsidiaries have a defined benefit pension plan
that covers substantially all of its salaried employees. Benefits are based on
years of service and the employee's compensation.
Pension costs for the years 1996 and 1995 were calculated based on Financial
Accounting Standards Board Statement No. 87 "Employers' Accounting for
Pensions." Pension costs for the years ended December 31, 1996, 1995, and 1994
equaled $2,794,000, $3,980,000 and $8,073,000, respectively.
The following table presents the plan's funded status and amounts recognized
in the consolidated balance sheets at December 31, 1996 and 1995.
December 31,
- --------------------------------------------------------------------------------
($ in thousands) 1996 1995
- --------------------------------------------------------------------------------
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS:
Accumulated benefit obligation, including vested benefits
of $303,786 for 1996 and $304,707 for 1995.............. $312,448 312,916
- --------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date... $376,764 379,131
Plan assets at fair value, primarily listed stocks and U.S.
Bonds..................................................... 513,864 438,752
-------- -------
Projected benefit obligation less than plan assets.......... 137,100 59,621
Unrecognized net (gain)/loss................................ (97,131) (33,192)
Unrecognized prior service cost............................. 18,832 21,367
Unrecognized net assets being recognized over 15 years...... (11,966) (13,953)
-------- -------
Prepaid pension............................................. $ 46,835 33,843
- --------------------------------------------------------------------------------
NET PENSION COST INCLUDED THE FOLLOWING COMPONENTS:
Service cost................................................ $ 15,868 11,426
Interest cost on projected benefit obligation............... 26,555 24,689
Actual return on plan assets................................ (75,333) (86,421)
Net amortization and deferral............................... 35,884 54,286
- --------------------------------------------------------------------------------
Net periodic pension cost................................... $ 2,974 3,980
- --------------------------------------------------------------------------------
First of America's weighted-average discount rate was 7.75 percent at
December 31, 1996 and 7.50 percent at December 31, 1995. The rate of increase in
future compensation levels used in determining the actuarial present value of
the projected benefit obligation was 5.75 percent at year-end 1996 and 5.50
percent at year-end 1995. The expected long term rate of return on assets was
9.50 percent at December 31, 1996 and 1995. The assumed rates in place at each
year-end are used to determine the net periodic pension cost for the following
year.
48
49
NOTE 17: 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, 1996 and 1995:
December 31,
- --------------------------------------------------------------------------------
($ in thousands) 1996 1995
- --------------------------------------------------------------------------------
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION:
Retirees.................................................... $(16,883) (17,932)
Fully eligible active plan participants..................... (6,801) (7,065)
Other active plan participants.............................. (10,151) (8,901)
-------- -------
(33,835) (33,898)
Plan assets at fair value................................... -- --
-------- -------
Accumulated postretirement benefit obligation in excess of
plan assets............................................... (33,835) (33,898)
Unrecognized prior service cost............................. (3,901) (4,700)
Unrecognized net (gain) loss................................ (1,306) (857)
- --------------------------------------------------------------------------------
Accrued postretirement benefit cost included in other
liabilities............................................... $(39,042) (39,455)
- --------------------------------------------------------------------------------
NET PERIOD POSTRETIREMENT BENEFIT COST FOR 1996 AND 1995
INCLUDE THE FOLLOWING COMPONENTS:
- --------------------------------------------------------------------------------
Service cost................................................ $ 977 1,092
Interest cost............................................... 2,517 2,992
Net amortization and deferral............................... (798) (524)
- --------------------------------------------------------------------------------
Net periodic postretirement benefit cost.................... $ 2,696 3,560
- --------------------------------------------------------------------------------
For measurement purposes of the accrued postretirement benefit cost included
in other liabilities, 9.52 percent and 10.03 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, 1996 and 1995, respectively; the 1996 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
7.75 percent at December 31, 1996 and 7.50 percent at December 31, 1995. To
determine First of America's net periodic postretirement benefit cost for 1996
and 1995, a weighted average discount rate of 7.50 percent and 8.00 percent,
respectively, and the health care trend rate of 10.03 percent and 10.36 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, 1996 by
2.80 percent and the aggregate of the service and interest cost components of
the net periodic postretirement benefit cost for the year ended December 31,
1996 by 2.10 percent.
49
50
NOTE 18: INCOME TAXES
($ in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------
Current:
U.S. Federal.............................................. $121,497 125,611 103,124
State and local........................................... 7,194 8,390 5,186
- ------------------------------------------------------------------------------------------
128,691 134,001 108,310
- ------------------------------------------------------------------------------------------
Deferred:
U.S. Federal.............................................. (2,943) (6,861) 95
State and local........................................... 709 (511) (5,789)
- ------------------------------------------------------------------------------------------
(2,234) (7,372) (5,694)
- ------------------------------------------------------------------------------------------
Income taxes attributable to income from continuing
operations................................................ 126,457 126,629 102,616
Shareholders' equity, for market value adjustments on
investment securities available for sale.................. (9,292) 28,885 (32,296)
- ------------------------------------------------------------------------------------------
Total income taxes.......................................... $117,165 155,514 70,320
- ------------------------------------------------------------------------------------------
As a result of the following, income tax expense attributable to income from
continuing operations differed from the "expected" amounts computed by applying
the U.S. federal income tax rate of 35 percent to pretax income from operations:
($ in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------
Computed "expected" tax expense............................. $134,170 127,168 113,092
Increase (reduction) in income taxes resulting from:
Tax exempt municipal obligations income................... (10,615) (9,277) (9,904)
Other, net*............................................... 2,902 8,738 (572)
- ------------------------------------------------------------------------------------------
Income taxes attributable to income from continuing
operations................................................ $126,457 126,629 102,616
- ------------------------------------------------------------------------------------------
* Other, net contains no single item that exceeds five percent of the amount
calculated by multiplying income before income taxes time 35 percent (the
current federal statutory rate).
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1995 are presented below:
December 31,
- --------------------------------------------------------------------------------
($ in thousands) 1996 1995
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Allowances for loan losses.................................. $ 88,496 83,846
Deferred compensation....................................... 9,141 8,135
Deferred loan fees.......................................... 7,974 9,392
Other....................................................... 19,049 25,109
-------- -------
Total gross deferred tax assets............................. 124,660 126,482
-------- -------
DEFERRED TAX LIABILITIES:
Premise and equipment, due to differences in depreciation... (8,605) (10,969)
Market value adjustment on securities available for sale.... (4,561) (13,853)
Tax loan loss reserve to be recaptured...................... (5,894) (11,698)
Other....................................................... (14,632) (10,520)
-------- -------
Total gross deferred liabilities............................ (33,692) (47,040)
- --------------------------------------------------------------------------------
Net deferred tax asset...................................... $ 90,968 79,442
- --------------------------------------------------------------------------------
50
51
NOTE 19: EARNINGS PER SHARE CALCULATION
The weighted average number of shares used in the determination of earnings
per share were:
1996 1995 1994
- ------------------------------------------------------------------------------------------------------
Common and common equivalents............................... 61,775,353 63,500,784 59,811,568
- ------------------------------------------------------------------------------------------------------
Common and common equivalents per share amounts were calculated by dividing
net income applicable to common shares by the weighted average number of common
shares outstanding during the respective periods adjusted for the portion of
stock options which were considered common equivalents, 412,585 in 1996, 279,856
in 1995 and 281,498 in 1994.
On December 31, 1996 and 1995, there were 59,813,234 and 63,283,857 common
shares outstanding, respectively. For the same dates, a maximum of 100,000,000
shares of $10 par value common stock was authorized.
NOTE 20: COMMITMENTS AND CONTINGENT LIABILITIES
First of America and its subsidiaries are routinely engaged in litigation,
both as plaintiff and defendant, which is incident to their business, and in
certain proceedings, claims or counter-claims have been asserted against the
Registrant's subsidiaries. Management, after consultation with legal counsel,
does not currently anticipate that the ultimate liability, if any, arising out
of such litigation and threats of litigation will have a material effect on the
financial position, results of operations or liquidity of the Registrant.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
In First of America's normal course of business, there are various
conditional obligations outstanding which are not reflected in the financial
statements. These financial instruments include commitments to extend credit,
standby letters of credit, commercial letters of credit, when issued securities,
securities lent and commitments to purchase foreign currency.
First of America's exposure to credit loss in the event of nonperformance by
other parties to the financial instruments with off-balance sheet risk is
represented by the contractual notional amount of these instruments. First of
America uses the same credit policies in making these commitments and
conditional obligations as it does for on-balance sheet instruments.
Unless noted otherwise, First of America does not require collateral or
other security to support financial instruments with off-balance sheet credit
risk.
A summary of the contract or notional amounts of these financial instruments
at December 31, is as follows:
($ in thousands) 1996 1995
- --------------------------------------------------------------------------------------
Commitments on unused credit card lines..................... $ 8,115,335 8,686,390
Other commitments to extend credit.......................... 3,410,017 2,930,624
Mortgages sold with recourse................................ 61,986 79,952
Mortgage loan sale commitments.............................. 133,727 125,000
Standby letters of credit................................... 584,408 366,829
Commercial letters of credit................................ 5,345 5,280
Foreign exchange contracts.................................. 6,685 17,248
Interest rate swaps......................................... 80,000 105,507
- --------------------------------------------------------------------------------------
Total....................................................... $12,397,503 12,316,830
- --------------------------------------------------------------------------------------
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, 1996, other commitments to extend
credit were comprised of $2,382,028,000 in unused commercial loan commitments,
$474,357,000 in commitments to fund commercial real estate, construction and
land development of which
51
52
$466,189,000 was secured by real estate, and $553,632,000 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 full
recourse. The total unpaid principal balances of these loans were $59.3 million
at December 31, 1996 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, 1995, First of America had interest rate swaps with a total
notional value of $105.5 million of which $8.5 million was a hedge against
certain certificates of deposit, $75.0 million as a hedge against long term debt
with the remainder as a hedge against certain other deposits and borrowings.
Although the notional amounts are often used to express the volume of these
transactions, the amounts potentially subject to credit risk are much smaller.
The company minimizes this risk by performing normal credit reviews of its
counterparties and collateralizing its exposure when it exceeds a predetermined
limit. The following table outlines First of America's interest rate caps and
interest rate swaps at December 31, 1996.
INTEREST RATE SWAPS AND INTEREST RATE CAPS
($ in thousands)
Net Interest
Weighted Income
Fair Average Average Average Impact
Notional Market Maturity Rate Received Rate Paid --------------
Hedged Asset/Liability Amount Value (Mos.) Variable/Fixed Variable/Fixed 1996 1995
- -------------------------------------------------------------------------------------------------------------
Interest Rate Swaps:
Rising Rate CDs........... $ -- -- -- --% --% $-- (1,158)
Market Rate CDs*.......... -- -- -- -- -- (65) (808)
FHLB advance.............. -- -- -- -- -- -- 25
FirstRate Fund deposits... -- -- -- -- -- (41) (9)
Bank notes................ 30,000 602 7.4 5.80/ 5.51/ (17) 24
fixed variable
Long term debt............ 50,000 (366) 13.0 5.60/ 5.60/ (47) (894)
fixed variable
Interest rate caps.......... -- -- -- -- -- -- (1,150)
- -------------------------------------------------------------------------------------------------------------
Total....................... $80,000 236 10.9 (170) (3,970)
- -------------------------------------------------------------------------------------------------------------
* This represents a basis swap.
At December 31, 1996, there were no deferred losses included in other assets
from the termination of interest rate swaps. Additionally, during 1996, no
losses were recognized in earnings related to interest rate swaps which were
marked-to-market.
52
53
Interest rate caps are agreements to make payments for interest rate
differentials between an index rate and a specified maximum rate, computed on
notional amounts. First of America utilized interest rate caps in an attempt to
manage its interest rate risk. As of December 31, 1996 and 1995, First of
America had no outstanding interest rate caps.
NOTE 21: 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.
53
54
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, 1996
and 1995 were as follows:
December 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------
Recorded Estimated Recorded Estimated
($ in millions) Book Value Fair Value Book Value Fair Value
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Securities, Available for Sale................ $ 4,562 4,562 5,061 5,061
Loans, net.................................... 14,695 14,682 15,734 15,825
Loans held for sale........................... 108 110 101 104
FINANCIAL LIABILITIES:
Deposits*..................................... (17,619) (17,635) (19,342) (19,422)
Long term borrowings.......................... (521) (542) (490) (520)
Off-balance sheet commitments................. -- 23 -- 18
- ------------------------------------------------------------------------------------------------------------------
* 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.
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55
NOTE 22: CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
The balance sheets for December 31, 1996 and 1995, and the statements of
income and statements of cash flows for the three years ended December 31, 1996
follow.
December 31,
- ------------------------------------------------------------------------------------
($ in thousands) 1996 1995
- ------------------------------------------------------------------------------------
BALANCE SHEETS
ASSETS
Cash and interest bearing deposits held by subsidiary
banks..................................................... $ 213,026 209,532
Investment in subsidiaries.................................. 1,825,862 1,918,540
Other assets................................................ 196,009 170,613
- ------------------------------------------------------------------------------------
Total assets................................................ $2,234,897 2,298,685
- ------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other liabilities...................... $ 90,699 87,623
Long term debt.............................................. 360,000 383,081
---------- ---------
Total liabilities........................................... 450,699 470,704
---------- ---------
SHAREHOLDERS' EQUITY
Common stock................................................ 598,132 632,839
Surplus..................................................... 145,950 283,409
Net unrealized gain on securities available for sale, net of
tax expense of $4,561 for 1996 and $13,853 for 1995....... 8,438 25,939
Retained earnings........................................... 1,031,678 885,794
---------- ---------
Total shareholders' equity.................................. 1,784,198 1,827,981
- ------------------------------------------------------------------------------------
Total liabilities and shareholders' equity.................. $2,234,897 2,298,685
- ------------------------------------------------------------------------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------------
($ in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------
STATEMENTS OF INCOME
INCOME
Dividends from subsidiaries................................. $360,800 337,407 175,350
Interest and other income................................... 361,985 339,863 262,615
-------- ------- -------
Total operating income...................................... 722,785 677,270 437,965
-------- ------- -------
EXPENSES
Interest on borrowed money.................................. 30,638 33,600 27,793
Salaries and employee benefits.............................. 180,682 159,461 151,766
Amortization of intangibles................................. 5,577 5,692 5,974
Other operating expenses.................................... 197,433 199,162 139,853
-------- ------- -------
Total operating expenses.................................... 414,330 397,915 325,386
-------- ------- -------
Income before income taxes and undistributed earnings of
subsidiaries.............................................. 308,455 279,355 112,579
Applicable income tax benefit............................... 18,150 19,291 22,609
-------- ------- -------
Net income before equity in undistributed earnings (losses)
of subsidiaries........................................... 326,605 298,646 135,188
Equity in undistributed earnings (losses) of subsidiaries... (69,719) (61,938) 85,315
- ------------------------------------------------------------------------------------------
Net income.................................................. $256,886 236,708 220,503
- ------------------------------------------------------------------------------------------
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56
($ in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOW
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 256,886 236,708 220,503
Adjustment to reconcile net income to net cash provided by
operating activities...................................... 69,084 113,558 (13,723)
--------- -------- --------
Net cash from operating activities.......................... 325,970 350,266 206,780
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Premises and equipment purchased............................ (12,215) (33,157) (24,845)
Proceeds from sale of premises & equipment.................. 5,467 8,444 4,974
(Acquisition)/sale of affiliates............................ -- -- --
Capital infusions, net of redemptions....................... (5,461) (31,797) (112,850)
--------- -------- --------
Net cash used in investing activities....................... (12,209) (56,510) (132,721)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long term debt.................... -- -- 438,000
Repayment of long term debt................................. (23,081) (33,339) (261,195)
Proceeds from issuance of common stock...................... (1,148) 2,105 460
Repurchase of common stock.................................. (175,228) -- (123,373)
Dividends paid.............................................. (110,810) (107,429) (96,670)
Other, net.................................................. -- (319) (268)
--------- -------- --------
Net cash provided by financing activities................... (310,267) (138,982) (43,046)
--------- -------- --------
Net increase in cash........................................ 3,494 154,774 31,013
Cash at beginning of year................................... 209,532 54,758 23,745
- ---------------------------------------------------------------------------------------------
Cash at year end............................................ $ 213,026 209,532 54,758
- ---------------------------------------------------------------------------------------------
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SUPPLEMENTAL INFORMATION (Unaudited)
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
STOCK DATA
Book value per common share:
Primary................................... $ 29.83 28.89 25.12 25.60 22.12
Fully Diluted............................. 29.83 28.89 25.12 25.60 22.49
Common shares outstanding:
Weighted average.......................... 61,775,353 63,500,784 59,811,568 57,416,771 54,841,762
Year end.................................. 59,813,234 63,283,857 62,849,209 59,520,710 57,014,244
Market price of Common Stock:
High...................................... $ 60.750 46.125 40.125 42.875 37.875
Low....................................... 41.375 29.500 29.750 36.500 29.000
Year end.................................. 60.125 44.375 30.000 39.250 37.875
Number of shares traded (in thousands).... 22,841 19,427 18,313 13,708 14,284
Price earnings ratio*..................... 14.5x 11.9 8.1 9.3 15.4
Dividend yield (at year end).............. 3.13% 3.97 5.60 4.08 3.70
Dividend payout ratio..................... 43.03 45.58 43.90 35.71 53.25
NON-FINANCIAL DATA
Number of common shareholders*............ 30,200 31,300 30,900 28,400 23,800
Number of banking subsidiaries*........... 4 4 8 20 23
Number of banking offices*................ 604 613 630 572 551
Number of employees (FTE)*................ 12,148 12,690 13,307 13,330 12,940
Number of automated teller machines*...... 721 675 647 546 498
RETURN ON EQUITY AND ASSETS
Return on average total assets............ 1.16% 1.00 0.98% 1.20 0.75
Return on average common shareholders'
equity.................................. 14.39 13.89 14.44 18.01 11.67
Return on average total shareholders'
equity.................................. 14.39 13.89 14.44 17.50 11.38
Average common shareholders' equity as a
percent of total average assets......... 8.04 7.17 6.77 6.52 5.91
Average shareholders' total equity as a
percent of total average assets......... 8.04 7.17 6.77 6.88 6.63
- -----------------------------------------------------------------------------------------------------------
* Prior years numbers not restated.
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QUARTERLY INFORMATION (Unaudited)
($ in millions except per share data)
1996 Quarters 1995 Quarters
- -----------------------------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
- -----------------------------------------------------------------------------------------------------------------
SUMMARY OF EARNINGS
Total interest income................ $409.0 412.1 415.4 427.0 437.5 442.0 460.6 456.4
Total interest expense............... 183.8 186.6 190.1 200.6 210.6 217.4 226.3 218.3
- -----------------------------------------------------------------------------------------------------------------
Net interest income.................. 225.2 225.5 225.3 226.4 226.9 224.6 234.3 238.1
Provision for loan losses............ 23.6 21.9 23.2 24.6 27.7 21.4 22.0 20.5
- -----------------------------------------------------------------------------------------------------------------
Net interest income after
provision.......................... 201.6 203.6 202.1 201.8 199.2 203.2 212.3 217.6
- -----------------------------------------------------------------------------------------------------------------
Non-interest income:
Service charges on deposit
accounts........................... 29.7 29.0 27.6 26.1 25.6 25.3 25.1 24.3
Trust income......................... 29.5 28.1 29.1 27.4 24.8 24.4 23.3 21.7
Investment securities transactions... 0.3 (0.1) (0.5) (0.3) 1.0 0.5 0.1 (1.5)
Other operating income............... 70.7 42.0 39.8 41.0 49.4 42.0 35.0 25.1
- -----------------------------------------------------------------------------------------------------------------
Total non-interest income............ 130.2 99.0 96.0 94.2 100.8 92.2 83.5 69.6
- -----------------------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and wages................... 97.0 96.5 93.6 90.5 85.9 86.3 90.9 93.2
Employee benefits.................... 19.9 17.6 18.2 20.8 16.2 16.4 19.9 22.2
- -----------------------------------------------------------------------------------------------------------------
Total personnel costs................ 116.9 114.1 111.8 111.3 102.1 102.7 10.8 115.4
Occupancy, net....................... 16.1 16.6 15.3 16.8 16.9 15.8 15.1 16.3
Equipment............................ 14.6 14.8 14.3 14.7 15.2 14.9 14.5 14.7
Data processing...................... 5.4 4.6 4.5 4.7 4.8 4.5 4.7 4.8
Amortization of intangibles.......... 7.6 5.3 5.2 5.2 5.3 5.3 5.4 5.3
Other operating expenses............. 47.8 72.5 52.2 52.8 54.1 50.1 58.5 58.1
- -----------------------------------------------------------------------------------------------------------------
Total non-interest expense........... 208.4 227.9 203.3 205.5 198.4 193.3 209.0 214.6
- -----------------------------------------------------------------------------------------------------------------
Income before income tax............. 123.4 74.7 94.8 90.5 101.6 102.1 86.8 72.6
Applicable income tax expense........ 39.4 23.7 32.5 30.9 35.6 35.4 30.3 25.3
- -----------------------------------------------------------------------------------------------------------------
Net income........................... $84.0 51.0 62.3 59.6 66.0 66.7 56.5 47.3
- -----------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE DATA
Earnings per common share............ $1.38 0.84 1.00 0.94 1.04 1.05 0.89 0.75
Common stock cash dividend paid...... 0.47 0.44 0.44 0.44 0.44 0.42 0.42 0.42
Market price of Common Stock:
High................................. 60.750 53.375 47.75 46.500 46.125 45.250 38.000 34.250
Low.................................. 51.625 43.625 43.750 41.375 41.750 36.375 33.125 29.500
Period-end........................... 60.125 52.625 44.750 46.375 44.375 42.875 37.125 33.625
- -----------------------------------------------------------------------------------------------------------------
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ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information under the headings "Election of
Directors" on pages 2 through 4 and "Other Matters" on page 30 of the
Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders
to be held in 1997. Such information is incorporated herein by reference. The
information concerning executive officers of the Registrant appears on page 6 in
Part I of this document.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to those portions of the information under the heading
"Executive Compensation," other than the "Compensation Committee Report on
Executive Compensation" and the "Performance Graph," on pages 6 through 21 of
the Registrant's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held in 1997. Such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information in the Registrant's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held in 1997 under the
headings "Principal Shareholders" on pages 1 and 2, and "Election of Directors"
on pages 2 through 4 regarding ownership of the Registrant's securities. Such
information in incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information under the heading "Interest of
Management in Certain Transactions" on page 21 of the Registrant's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held in 1997. Such
information in incorporated herein by reference.
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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, 1996 and 1995
Consolidated Statements of Income -- three years ended December 31,
1996
Consolidated Statements of Changes in Shareholders' Equity -- three
years ended December 31, 1996
Consolidated Statements of Cash Flows -- three years ended December
31, 1996
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.
Not applicable
(3) Articles of Incorporation and Bylaws
A. A copy of the Bylaws of the Registrant as currently in effect
was filed as Exhibit (3) to the Registrant's Quarterly Report on Form
10-Q (Commission File No. 1-10534) for the quarter ended March 31,
1996, and is incorporated herein by reference.
B. A copy of the Restated Articles of Incorporation of the
Registrant was filed as an Exhibit to the Registrant's Quarterly Report
on Form 10-Q (Commission File No. 1-10534) for the quarter ended
September 30, 1992, and is 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 -- Michigan, 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 is
incorporated herein by reference.
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
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* 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,
in which the Registrant's executive officers participate, 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 the 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.
C.* A copy of the Registrant's Excess Benefit Plan as restated,
effective January 1, 1994 and in which the Registrant's executive
officers participate is filed herewith.
D.* A copy of the Registrant's Supplemental Retirement Plan amended
to date and in which the Registrant's executive officers participate is
filed herewith.
E.* A copy of the Registrant's Supplemental Savings Plan as amended
and restated January 1, 1994, in which the Registrant's executive
officers participate is filed herewith.
F.* A copy of the Restated First of America Bank Corporation 1987
Stock Option Plan, as amended to date and in which the Registrant's
executive officers participate 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, in which the Registrant's executive officers
participate, 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 this document 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 is filed herewith.
I.* Copies of the composite forms of the Management Continuity
Agreements dated February 15, 1995, entered into by the Registrant or a
subsidiary and certain senior officers was filed as an Exhibit to the
Registrant's Annual Report on Form 10-K (Commission File No. 1-10534)
for the year ended December 31, 1994 and are incorporated herein by
reference.
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) is filed
herewith.
K.* A copy of First of America Bank Corporation Stock Compensation
Plan, as amended to date and in which the Registrant's executive
officers participate is filed herewith.
L.* A copy of the First of America Bank Corporation Director
Deferred Compensation Plan, effective April, 1996, 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, 1996, and is incorporated
herein by reference.
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M. A copy of the Clearing, Custody and Financing Agreement between
the Registrant and BankAmerica is filed herewith.
N. A copy of the General Loan and Collateral Agreement between the
Registrant and Chemical Bank is filed herewith.
O. A copy of the Broker Loan Pledge and Security Agreement between
the Registrant and First National Bank of Chicago is filed herewith.
(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 19 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.
(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 -- Indiana Indiana
First of America Bank -- Illinois, N.A. United States
First of America Bank -- Michigan, N.A. United States
First of America Bank -- Florida, FSB Florida
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
CNB Investment Company Michigan
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
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(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
No Reports on Form 8-K were filed by the Registrant during the three
months ended December 31, 1996.
(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.
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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, President and February 21, 1997
- --------------------------------------------------- Chief Executive Officer
Richard F. Chormann
/s/ THOMAS W. LAMBERT Executive Vice President and Chief February 21, 1997
- --------------------------------------------------- Financial Officer (Principal
Thomas W. Lambert Financial Officer and Principal
Accounting Officer)
*DIRECTORS
Jon E. Barfield Clifford L. Greenwalt Daniel R. Smith
John W. Brown Dorothy A. Johnson Ley S. Smith
Joseph J. Fitzsimmons Robert L. Hetzler James S. Ware
Joel N. Goldberg Martha M. Mertz
*By: /s/ THOMAS W. LAMBERT
- ---------------------------------------------------
Attorney in Fact
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EXHIBIT INDEX
Exhibit No.
10(C) Excess Benefit Plan as Restated, Effective January 1, 1994
10(D) Supplemental Retirement Plan amended to date
10(E) Supplemental Savings Plan as Amended & Restated
10(F) The Restated First of America Bank Corporation 1987 Stock
Option Plan as amended to date
10(H) Composite form of the Management Continuity Agreements dated
November 20, 1996
10(J) Executive Management Plans Trust Agreement between the
Registrant and Wachovia Bank of North Carolina N.A.
10(K) First of America Bank Corporation Stock Compensation Plan as
amended to date
10(M) Clearing Custody and Financing Agreement between the Registrant
and BankAmerica
10(N) General Loan and Collateral Agreement between the Registrant
and Chemical Bank
10(O) Broker Loan Pledge and Security Agreement between the
Registrant and First National Bank of Chicago
23 Consent of KPMG Peat Marwick LLP
24 Power of Attorney
27 Financial Data Schedule