SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2005
Commission file number 1-7476
AmSouth Bancorporation
(Exact Name of registrant as specified in its charter)
Delaware | 63-0591257 | |
(State or other jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
AmSouth Center 1900 Fifth Avenue North Birmingham, Alabama |
35203 | |
(Address of principal executive offices) | (Zip Code) |
(205) 320-7151
(Registrants telephone number, including area code)
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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
As of July 29, 2005, AmSouth Bancorporation had 350,438,000 shares of common stock outstanding.
FORM 10-Q
INDEX
Page | ||||||
Part I. |
Financial Information | |||||
Item 1. | Financial Statements (Unaudited) |
|||||
Consolidated Balance Sheets June 30, 2005, December 31, 2004 and June 30, 2004 |
3 | |||||
Consolidated Statements of Earnings Three months and six months ended June 30, 2005 and 2004 |
4 | |||||
Consolidated Statements of Shareholders Equity Six months ended June 30, |
5 | |||||
Consolidated Statements of Cash Flows Six months ended June 30, 2005 and |
6 | |||||
7 | ||||||
16 | ||||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
17 | ||||
Item 3. | 32 | |||||
Item 4. | 32 | |||||
Part II. | Other Information | |||||
Item 1. | 32 | |||||
Item 2. | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
33 | ||||
Item 4. | 33 | |||||
Item 6. | 33 | |||||
34 | ||||||
35 |
Forward-Looking Statements
Statements made in this document which are not purely historical are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of Managements plans, objectives or goals for future operations, products or services, and forecasts of its revenues, earnings or other measures of performance.
Forward-looking statements are based on current Management expectations and, by their nature, are subject to risks and uncertainties. A number of factors many of which are beyond AmSouths control could cause actual conditions, events or results to differ materially from those described in the forward-looking statements. Such factors include, but are not limited to: the effects of previously disclosed regulatory settlements on AmSouths branch expansion plans; the successful completion of the sale of AmSouths mutual fund advisory business; the execution of AmSouths strategic initiatives; legislation and regulation; general economic conditions, especially in the Southeast; the performance of the stock and bond markets; changes in interest rates, yield curves and interest rate spread relationships; prepayment speeds within the loan and investment security portfolios; deposit flows; the cost of funds; cost of federal deposit insurance premiums; demand for loan products; demand for financial services; competition, including a continued consolidation in the financial services industry; changes in the quality or composition of AmSouths loan and investment portfolios including capital market inefficiencies that may affect the marketability and valuation of available-for-sale securities; changes in consumer spending and saving habits; technological changes; adverse changes in the financial performance and/or condition of AmSouths borrowers, which could impact the repayment of such borrowers outstanding loans; changes in accounting and tax principles, policies or guidelines and in tax laws; other economic, competitive, governmental and regulatory factors affecting AmSouths operations, products, services and prices; the effects of weather and natural disasters such as hurricanes; unexpected judicial actions and developments; results of investigations, examinations and reviews of regulatory and law enforcement authorities; the outcome of litigation, which is inherently uncertain and depends on the findings of judges and juries; the impact on AmSouths businesses, as well as the risks set forth above, of various domestic or international military or terrorist activities or conflicts; and AmSouths success at managing the risks involved in the foregoing.
Forward-looking statements speak only as of the date they are made. AmSouth does not undertake a duty to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.
2
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
AMSOUTH BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30 2005 |
December 31 2004 |
June 30 2004 |
||||||||||
(Dollars in thousands) | ||||||||||||
ASSETS |
||||||||||||
Cash and due from banks |
$ | 1,167,313 | $ | 966,993 | $ | 1,055,370 | ||||||
Trading securities |
39,404 | 1,883 | 11,092 | |||||||||
Available-for-sale securities |
6,172,833 | 6,322,665 | 6,586,697 | |||||||||
Held-to-maturity securities (market value of $6,067,126, $6,199,451 and |
6,072,898 | 6,188,010 | 6,004,032 | |||||||||
Loans held for sale |
323,017 | 103,273 | 261,968 | |||||||||
Loans |
34,205,624 | 33,512,398 | 32,037,283 | |||||||||
Less: Allowance for loan losses |
365,626 | 366,774 | 382,482 | |||||||||
Unearned income |
672,242 | 711,061 | 685,786 | |||||||||
Net loans |
33,167,756 | 32,434,563 | 30,969,015 | |||||||||
Other interest-earning assets |
49,599 | 36,149 | 98,813 | |||||||||
Premises and equipment, net |
1,087,201 | 1,060,574 | 1,020,033 | |||||||||
Cash surrender valuebank owned life insurance |
1,133,539 | 1,111,934 | 1,089,445 | |||||||||
Accrued interest receivable and other assets |
1,333,271 | 1,322,327 | 1,199,348 | |||||||||
$ | 50,546,831 | $ | 49,548,371 | $ | 48,295,813 | |||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||
Deposits and interest-bearing liabilities: |
||||||||||||
Deposits: |
||||||||||||
Noninterest-bearing demand |
$ | 7,687,525 | $ | 7,182,806 | $ | 6,636,325 | ||||||
Interest-bearing demand |
6,962,855 | 7,115,545 | 6,809,885 | |||||||||
Money market and savings |
10,005,039 | 8,810,972 | 7,827,390 | |||||||||
Time |
9,062,959 | 9,476,075 | 9,262,403 | |||||||||
Foreign |
1,595,330 | 1,647,381 | 1,603,241 | |||||||||
Total deposits |
35,313,708 | 34,232,779 | 32,139,244 | |||||||||
Federal funds purchased and securities sold under agreements to repurchase |
2,842,751 | 2,291,988 | 2,145,521 | |||||||||
Other borrowed funds |
473,010 | 429,098 | 1,370,893 | |||||||||
Long-term Federal Home Loan Bank advances |
3,238,993 | 4,371,745 | 5,779,709 | |||||||||
Other long-term debt |
3,359,173 | 2,899,773 | 2,084,213 | |||||||||
Total deposits and interest-bearing liabilities |
45,227,635 | 44,225,383 | 43,519,580 | |||||||||
Accrued expenses and other liabilities |
1,680,971 | 1,754,147 | 1,480,755 | |||||||||
Total liabilities |
46,908,606 | 45,979,530 | 45,000,335 | |||||||||
Shareholders equity: |
||||||||||||
Preferred stock no par value: |
||||||||||||
Authorized 2,000,000 shares Issued and outstanding none |
-0- | -0- | -0- | |||||||||
Common stock par value $1 a share: |
||||||||||||
Authorized 750,000,000 shares Issued 416,732,000, 416,748,000 and 416,768,000 shares, respectively |
416,732 | 416,748 | 416,768 | |||||||||
Additional paid-in capital |
731,383 | 726,411 | 714,134 | |||||||||
Retained earnings |
3,672,524 | 3,492,873 | 3,372,672 | |||||||||
Cost of common stock in treasury 64,383,000, 60,438,000 and 63,353,000 shares, respectively |
(1,093,405 | ) | (986,510 | ) | (1,043,783 | ) | ||||||
Deferred compensation on restricted stock |
(15,208 | ) | (12,947 | ) | (14,496 | ) | ||||||
Accumulated other comprehensive loss |
(73,801 | ) | (67,734 | ) | (149,817 | ) | ||||||
Total shareholders equity |
3,638,225 | 3,568,841 | 3,295,478 | |||||||||
$ | 50,546,831 | $ | 49,548,371 | $ | 48,295,813 | |||||||
See notes to consolidated financial statements.
3
AMSOUTH BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended June 30 |
Six Months Ended June 30 | |||||||||||
2005 |
2004 |
2005 |
2004 | |||||||||
(In thousands except per share data) | ||||||||||||
INTEREST INCOME |
||||||||||||
Loans |
$ | 454,169 | $ | 376,602 | $ | 885,544 | $ | 752,317 | ||||
Available-for-sale securities |
74,073 | 80,577 | 149,864 | 163,996 | ||||||||
Held-to-maturity securities |
71,082 | 63,934 | 143,178 | 126,527 | ||||||||
Trading securities |
218 | 25 | 377 | 97 | ||||||||
Loans held for sale |
2,614 | 3,270 | 4,112 | 5,897 | ||||||||
Other interest-earning assets |
356 | 236 | 611 | 446 | ||||||||
Total interest income |
602,512 | 524,644 | 1,183,686 | 1,049,280 | ||||||||
INTEREST EXPENSE |
||||||||||||
Interest-bearing demand deposits |
20,356 | 8,640 | 36,701 | 15,986 | ||||||||
Money market and savings deposits |
36,956 | 9,688 | 66,324 | 19,003 | ||||||||
Time deposits |
68,855 | 57,712 | 134,134 | 119,760 | ||||||||
Foreign deposits |
6,697 | 3,598 | 13,500 | 6,187 | ||||||||
Federal funds purchased and securities sold under agreements to repurchase |
17,507 | 8,185 | 33,861 | 14,830 | ||||||||
Other borrowed funds |
2,129 | 1,905 | 4,057 | 3,886 | ||||||||
Long-term Federal Home Loan Bank advances |
38,633 | 60,475 | 78,832 | 120,944 | ||||||||
Other long-term debt |
32,736 | 13,031 | 57,886 | 27,777 | ||||||||
Total interest expense |
223,869 | 163,234 | 425,295 | 328,373 | ||||||||
NET INTEREST INCOME |
378,643 | 361,410 | 758,391 | 720,907 | ||||||||
Provision for loan losses |
17,700 | 26,600 | 38,300 | 54,700 | ||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
360,943 | 334,810 | 720,091 | 666,207 | ||||||||
NONINTEREST REVENUES |
||||||||||||
Service charges on deposit accounts |
91,485 | 94,377 | 176,519 | 187,592 | ||||||||
Trust income |
30,010 | 29,935 | 60,363 | 58,815 | ||||||||
Consumer investment services income |
18,875 | 21,930 | 38,907 | 42,341 | ||||||||
Interchange income |
22,731 | 20,628 | 43,909 | 36,927 | ||||||||
Commercial credit fee income |
13,901 | 11,088 | 24,841 | 21,674 | ||||||||
Bank owned life insurance policies |
10,582 | 11,610 | 21,093 | 23,279 | ||||||||
Bankcard income |
6,575 | 7,509 | 12,315 | 14,365 | ||||||||
Mortgage income |
4,796 | 3,889 | 8,782 | 11,401 | ||||||||
Portfolio income |
3,150 | 8,145 | 4,432 | 17,812 | ||||||||
Other noninterest revenues |
21,046 | 9,141 | 47,426 | 24,476 | ||||||||
Total noninterest revenues |
223,151 | 218,252 | 438,587 | 438,682 | ||||||||
NONINTEREST EXPENSES |
||||||||||||
Salaries and employee benefits |
172,955 | 167,511 | 351,610 | 341,217 | ||||||||
Net occupancy |
38,430 | 36,326 | 75,287 | 71,578 | ||||||||
Equipment |
32,624 | 30,968 | 63,710 | 61,512 | ||||||||
Postage and office supplies |
10,080 | 10,997 | 20,773 | 23,955 | ||||||||
Marketing |
7,168 | 9,249 | 16,939 | 20,995 | ||||||||
Professional fees |
7,759 | 9,699 | 15,248 | 18,029 | ||||||||
Other noninterest expenses |
45,926 | 47,020 | 90,892 | 96,758 | ||||||||
Total noninterest expenses |
314,942 | 311,770 | 634,459 | 634,044 | ||||||||
INCOME BEFORE INCOME TAXES |
269,152 | 241,292 | 524,219 | 470,845 | ||||||||
Income taxes |
84,553 | 74,329 | 160,975 | 143,783 | ||||||||
NET INCOME |
$ | 184,599 | $ | 166,963 | $ | 363,244 | $ | 327,062 | ||||
Average common shares outstanding basic |
352,054 | 351,602 | 353,170 | 351,399 | ||||||||
Earnings per common share basic |
$ | 0.52 | $ | 0.47 | $ | 1.03 | $ | 0.93 | ||||
Average common shares outstanding diluted |
357,026 | 356,314 | 357,914 | 356,611 | ||||||||
Earnings per common share diluted |
$ | 0.52 | $ | 0.47 | $ | 1.01 | $ | 0.92 |
See notes to consolidated financial statements.
4
AMSOUTH BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited)
Common Stock |
Additional Capital |
Retained Earnings |
Treasury Stock |
Deferred Stock |
Accumulated Loss |
Total |
|||||||||||||||||||||||||
Shares |
Amount |
||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||
BALANCE AT JANUARY 1, 2004 |
351,891 | $ | 416,878 | $ | 715,663 | $ | 3,228,533 | $ | (1,076,644 | ) | $ | (14,501 | ) | $ | (40,260 | ) | $ | 3,229,669 | |||||||||||||
Comprehensive income: |
|||||||||||||||||||||||||||||||
Net income |
-0- | -0- | -0- | 327,062 | -0- | -0- | -0- | 327,062 | |||||||||||||||||||||||
Other comprehensive income, net of tax: |
|||||||||||||||||||||||||||||||
Net change in unrealized gains and losses on available-for-sale securities* |
-0- | -0- | -0- | -0- | -0- | -0- | (96,334 | ) | (96,334 | ) | |||||||||||||||||||||
Net change in unrealized gains and losses on derivative instruments* |
-0- | -0- | -0- | -0- | -0- | -0- | (13,084 | ) | (13,084 | ) | |||||||||||||||||||||
Additional minimum pension liability adjustment |
-0- | -0- | -0- | -0- | -0- | -0- | (139 | ) | (139 | ) | |||||||||||||||||||||
Comprehensive income |
217,505 | ||||||||||||||||||||||||||||||
Cash dividends declared ($0.48 per share) |
-0- | -0- | -0- | (171,500 | ) | -0- | -0- | -0- | (171,500 | ) | |||||||||||||||||||||
Common stock transactions: |
|||||||||||||||||||||||||||||||
Purchase of common stock |
(2,054 | ) | -0- | -0- | -0- | (48,920 | ) | -0- | -0- | (48,920 | ) | ||||||||||||||||||||
Employee stock plans |
3,311 | (110 | ) | (2,075 | ) | (11,421 | ) | 75,949 | 5 | -0- | 62,348 | ||||||||||||||||||||
Direct stock purchase and dividend reinvestment plan |
266 | -0- | 546 | (2 | ) | 5,832 | -0- | -0- | 6,376 | ||||||||||||||||||||||
BALANCE AT JUNE 30, 2004 |
353,414 | $ | 416,768 | $ | 714,134 | $ | 3,372,672 | $ | (1,043,783 | ) | $ | (14,496 | ) | $ | (149,817 | ) | $ | 3,295,478 | |||||||||||||
BALANCE AT JANUARY 1, 2005 |
356,310 | $ | 416,748 | $ | 726,411 | $ | 3,492,873 | $ | (986,510 | ) | $ | (12,947 | ) | $ | (67,734 | ) | $ | 3,568,841 | |||||||||||||
Comprehensive income: |
|||||||||||||||||||||||||||||||
Net income |
-0- | -0- | -0- | 363,244 | -0- | -0- | -0- | 363,244 | |||||||||||||||||||||||
Other comprehensive income, net of tax: |
|||||||||||||||||||||||||||||||
Net change in unrealized gains and losses on available-for-sale securities* |
-0- | -0- | -0- | -0- | -0- | -0- | (8,689 | ) | (8,689 | ) | |||||||||||||||||||||
Net change in unrealized gains and losses on derivative instruments* |
-0- | -0- | -0- | -0- | -0- | -0- | 2,622 | 2,622 | |||||||||||||||||||||||
Comprehensive income |
357,177 | ||||||||||||||||||||||||||||||
Cash dividends declared ($0.50 per share) |
-0- | -0- | -0- | (175,174 | ) | -0- | -0- | -0- | (175,174 | ) | |||||||||||||||||||||
Common stock transactions: |
|||||||||||||||||||||||||||||||
Purchase of common stock |
(7,045 | ) | -0- | -0- | -0- | (180,865 | ) | -0- | -0- | (180,865 | ) | ||||||||||||||||||||
Employee stock plans |
2,861 | (16 | ) | 4,189 | (8,419 | ) | 68,984 | (2,261 | ) | -0- | 62,477 | ||||||||||||||||||||
Direct stock purchase and dividend reinvestment plan |
223 | -0- | 783 | -0- | 4,986 | -0- | -0- | 5,769 | |||||||||||||||||||||||
BALANCE AT JUNE 30, 2005 |
352,349 | $ | 416,732 | $ | 731,383 | $ | 3,672,524 | $ | (1,093,405 | ) | $ | (15,208 | ) | $ | (73,801 | ) | $ | 3,638,225 | |||||||||||||
* | See disclosure of reclassification adjustment amount and tax effect, as applicable, in notes to consolidated financial statements. |
See notes to consolidated financial statements.
5
AMSOUTH BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30 |
||||||||
2005 |
2004 |
|||||||
(In thousands) | ||||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 363,244 | $ | 327,062 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
38,300 | 54,700 | ||||||
Depreciation and amortization of premises and equipment |
57,947 | 53,663 | ||||||
Amortization of premiums and discounts on held-to-maturity securities and available-for-sale securities |
12,453 | 23,531 | ||||||
Originations and purchases of loans held for sale |
(698,176 | ) | (758,742 | ) | ||||
Proceeds from sales of loans held for sale |
511,423 | 605,216 | ||||||
Net gains on sales of available-for-sale securities |
(3,899 | ) | (16,203 | ) | ||||
Net gains on sales of loans held for sale and mortgage loans |
(8,546 | ) | (7,795 | ) | ||||
Net gain on sales of home equity loans |
(6,824 | ) | (4,884 | ) | ||||
Net gains on sales of student loans |
(2,124 | ) | (858 | ) | ||||
Net increase in trading securities |
(37,521 | ) | (8,361 | ) | ||||
Net decrease (increase) in accrued interest receivable, bank-owned life insurance and other assets |
11,458 | (3,523 | ) | |||||
Net decrease in accrued expenses and other liabilities |
(68,169 | ) | (93,985 | ) | ||||
Provision for deferred income taxes |
66,253 | 61,683 | ||||||
Amortization of intangible assets |
1,332 | 2,326 | ||||||
Net gain on prepayment of Federal Home Loan Bank advances |
(7,992 | ) | -0- | |||||
Other operating activities, net |
59,991 | 58,351 | ||||||
Net cash provided by operating activities |
289,150 | 292,181 | ||||||
INVESTING ACTIVITIES |
||||||||
Proceeds from maturities and prepayments of available-for-sale securities |
455,381 | 679,152 | ||||||
Proceeds from sales of available-for-sale securities |
453,787 | 1,211,887 | ||||||
Purchases of available-for-sale securities |
(850,250 | ) | (1,533,646 | ) | ||||
Proceeds from maturities, prepayments and calls of held-to-maturity securities |
570,201 | 952,974 | ||||||
Purchases of held-to-maturity securities |
(473,722 | ) | (2,141,754 | ) | ||||
Net increase in other interest-earning assets |
(13,450 | ) | (58,595 | ) | ||||
Net increase in loans, excluding guaranteed mortgage loan securitizations and sales of loans |
(1,938,886 | ) | (2,540,877 | ) | ||||
Proceeds from sales of mortgage loans |
395,109 | 154,844 | ||||||
Proceeds from sales of home equity loans |
460,124 | 156,552 | ||||||
Proceeds from sales of student loans |
215,123 | 91,557 | ||||||
Net purchases of premises and equipment |
(84,574 | ) | (109,004 | ) | ||||
Net cash used in investing activities |
(811,157 | ) | (3,136,910 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Net increase in deposits |
1,081,071 | 1,699,353 | ||||||
Net increase in federal funds purchased and securities sold under agreements to repurchase |
550,763 | 119,268 | ||||||
Net increase in other borrowed funds |
43,912 | 1,027,691 | ||||||
Proceeds from issuance of long-term Federal Home Loan Bank advances and other long-term debt |
470,092 | 300,487 | ||||||
Payments for maturing Federal Home Loan Bank advances and other long-term debt |
(211,506 | ) | (258,841 | ) | ||||
Payments for prepayment of Federal Home Loan Bank advances |
(917,008 | ) | -0- | |||||
Cash dividends paid |
(178,306 | ) | (169,483 | ) | ||||
Proceeds from employee stock plans, direct stock purchase and dividend reinvestment plan |
64,174 | 66,558 | ||||||
Purchase of common stock |
(180,865 | ) | (48,920 | ) | ||||
Net cash provided by financing activities |
722,327 | 2,736,113 | ||||||
Increase (Decrease) in cash and cash equivalents |
200,320 | (108,616 | ) | |||||
Cash and cash equivalents at beginning of period |
966,993 | 1,163,986 | ||||||
Cash and cash equivalents at end of period |
$ | 1,167,313 | $ | 1,055,370 | ||||
See notes to consolidated financial statements.
6
AMSOUTH BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six months ended June 30, 2005 and 2004
Note 1 Basis of Presentation The consolidated financial statements conform to accounting principles generally accepted in the United States of America. The accompanying interim financial statements are unaudited; however, in the opinion of Management, all adjustments necessary for the fair presentation of the consolidated financial statements have been included. All such adjustments are of a normal recurring nature. Certain amounts in the prior periods financial statements have been reclassified to conform to the 2005 presentation. These reclassifications had no effect on net income, total assets or shareholders equity. The notes included herein should be read in conjunction with the notes to consolidated financial statements included in AmSouth Bancorporations (AmSouth) 2004 annual report on Form 10-K. The accounting policies employed are the same as those shown in Note 1 to the Consolidated Financial Statements on Form 10-K.
The consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The consolidated financial statements include the accounts of AmSouth and its subsidiaries (all of which are wholly owned) and certain variable interest entities. All significant intercompany balances and transactions have been eliminated.
Note 2 Recent Accounting Developments In December 2004, the Financial Accounting Standards Board (FASB) issued revised Statement of Financial Accounting Standards No. 123, Share-Based Payment (Statement 123R). Statement 123R requires companies to recognize in their financial statements the cost resulting from all share-based payment transactions using a fair value-based measurement model. Share-based payment transactions include transactions in which the entity issues stock, share options or other equity instruments in exchange for goods or services. A fair value-based measurement model requires the fair value of share-based payments issued to nonemployees to be recorded at the fair value of the goods or services received. For payments to employees, Statement 123R requires that share-based payments be recorded at their fair value and be classified as either a liability or equity. Entities are required to estimate the fair value of share-based payments to employees using a mathematical model that reflects the most accurate valuation given the information available and incorporates various factors, including exercise price of the option, expected volatility of the entitys stock, expected term of the award, performance/service/market conditions, expected dividends, the risk-free rate, and grant date share price. Payments classified as liabilities are required to be remeasured at the end of each reporting period. The fair value of awards classified as equity is required to be recognized over the requisite service period or the period during which the employee is expected to provide service to earn the award. Statement 123R replaces Statement 123 and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Statement 123R will become effective for AmSouth in annual reporting periods beginning after June 15, 2005, requiring all share-based payments granted or modified subsequent to the implementation date to be accounted for under Statement 123R. AmSouth expects to record annual compensation expense of approximately $0.05 to $0.06 per share as a result of the adoption of Statement 123R and the transition method is expected to be the modified prospective method. During full implementation, AmSouth will be performing additional analyses to validate the various factors used in the valuation model as a result of the enhanced requirements of Statement 123R.
In the first quarter of 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB 107). SAB 107 addresses the interaction between Statement 123R and certain SEC rules and regulations and provides the SEC staffs views regarding the valuation of share-based payment arrangements for public companies. Also, the United States House of Representatives has passed the Stock Option Accounting Reform Act (the Bill) that requires public companies to expense only the stock options granted to certain highly compensated individuals. The Bill is currently before the United States Senate. AmSouth will continue to monitor the outcome of the Bill and its potential impact to its consolidated financial statements.
7
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29 (Statement 153). Statement 153 amends Accounting Principles Board Opinion No. 29, Accounting for Nonmonetary Transactions (APB 29) to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of Statement 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of Statement 153 to have a material effect on the consolidated financial statements.
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3 (Statement 154). Statement 154 changes the requirements for the accounting for and reporting of a change in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. Statement 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of Statement 154 to have a material effect on the consolidated financial statements.
Note 3 Cash Flows The following table summarizes supplemental cash flow information for the six months ended June 30:
(In thousands) |
2005 |
2004 | ||||
Cash paid during the period for: |
||||||
Interest |
$ | 410,572 | $ | 333,370 | ||
Income taxes |
155,329 | 159,176 | ||||
Transfers from loans to foreclosed properties |
21,528 | 24,463 | ||||
Transfers from foreclosed properties to loans |
86 | 552 |
Note 4 Stock-Based Compensation AmSouth has long-term incentive compensation plans which permit the granting of incentive awards in the form of stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance shares, and performance units. Generally, the terms of these plans stipulate that the exercise price of options may not be less than the fair market value of AmSouths common stock at the date the options are granted. Options granted generally vest between one and three years from the date of grant, with substantially all of the 2005 and 2004 option grants vesting ratably over three years. All of the options granted during the first six months of 2005 and 2004 expire ten years from the date of grant. All other options outstanding generally expire not later than ten years from the date of grant.
AmSouth has adopted the disclosure-only provisions of Statement 123, which allows an entity to continue to measure compensation costs for those plans using the intrinsic value-based method of accounting prescribed by APB 25. AmSouth has elected to follow APB 25 and related interpretations in accounting for its employee stock options. Compensation cost for fixed and variable stock-based awards is measured by the excess, if any, of the fair market price of the underlying stock over the amount the individual is required to pay. Compensation cost for fixed awards is measured at the grant date. No option-based employee compensation cost is currently reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Compensation expense related to restricted stock is reflected in the table below. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period.
8
AmSouths pro forma information is as follows:
Three months ended June 30 |
Six months ended June 30 |
|||||||||||||||
(In thousands, except per share data) |
2005 |
2004 |
2005 |
2004 |
||||||||||||
Net income: |
||||||||||||||||
As reported |
$ | 184,599 | $ | 166,963 | $ | 363,244 | $ | 327,062 | ||||||||
Add: Stock-based compensation expense included in reported net income, net of tax |
657 | 625 | 1,200 | 823 | ||||||||||||
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax |
(6,829 | ) | (8,606 | ) | (13,740 | ) | (16,300 | ) | ||||||||
Pro forma |
$ | 178,427 | $ | 158,982 | $ | 350,704 | $ | 311,585 | ||||||||
Earnings per common share: |
||||||||||||||||
As reported |
$ | 0.52 | $ | 0.47 | $ | 1.03 | $ | 0.93 | ||||||||
Pro forma |
0.51 | 0.45 | 0.99 | 0.89 | ||||||||||||
Diluted earnings per common share: |
||||||||||||||||
As reported |
$ | 0.52 | $ | 0.47 | $ | 1.01 | $ | 0.92 | ||||||||
Pro forma |
0.50 | 0.45 | 0.98 | 0.88 |
This pro-forma information includes expenses related to all stock options granted during the second quarter and first six months of 2005 and 2004, as well as the expense related to the unvested portion of prior years grants and assumes that the fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model. The estimated fair value of the options is then amortized over the options vesting period to determine the pro-forma expense for the periods.
AmSouths stock option and restricted stock grants have accelerated vesting provisions that take effect when an employee retires. AmSouth has recognized the effect of these acceleration provisions on the date the employee actually retires (the explicit service period). Upon adoption of Statement 123R, AmSouth will be required to recognize the effect of these acceleration provisions when an employee becomes retirement-eligible. AmSouth will continue to recognize pro-forma compensation cost over the explicit service period for awards granted prior to the adoption of Statement 123R. Had AmSouth recognized the pro forma expense on the date an employee became retirement-eligible, the stock-based compensation expense disclosed above for 2005 would be higher by approximately $8 million, the impact of which would be one-time only.
The following table details the weighted-average assumptions used and estimated fair value:
Three months ended June 30 |
Six months ended June 30 |
|||||||||||||||
2005 |
2004 |
2005 |
2004 |
|||||||||||||
Risk-free interest rate |
3.82 | % | 4.50 | % | 3.61 | % | 3.92 | % | ||||||||
Dividend yield |
3.86 | 4.21 | 3.95 | 3.99 | ||||||||||||
Volatility factor |
20.29 | 30.71 | 21.59 | 30.89 | ||||||||||||
Weighted-average expected life |
4.2 | yrs | 7.0 | yrs | 4.2 | yrs | 7.0 | yrs | ||||||||
Estimated fair value |
$ | 3.61 | $ | 5.49 | $ | 3.60 | $ | 5.69 |
9
Note 5 Pension Net periodic benefit cost includes the following components for the three months ended June 30:
Retirement Plans |
Other Postretirement Benefits |
|||||||||||||||
(In thousands) |
2005 |
2004 |
2005 |
2004 |
||||||||||||
Service cost |
$ | 6,700 | $ | 5,368 | $ | 258 | $ | 218 | ||||||||
Interest cost |
11,570 | 10,517 | 570 | 602 | ||||||||||||
Expected return on plan assets |
(16,463 | ) | (16,199 | ) | (51 | ) | (55 | ) | ||||||||
Amortization of prior service cost/(credit) |
36 | 26 | (218 | ) | (217 | ) | ||||||||||
Amortization of transitional obligation |
48 | 47 | 11 | 11 | ||||||||||||
Recognized actuarial loss |
6,764 | 4,003 | 245 | 303 | ||||||||||||
Net periodic benefit cost |
$ | 8,655 | $ | 3,762 | $ | 815 | $ | 862 | ||||||||
Net periodic benefit cost includes the following components for the six months ended June 30:
Retirement Plans |
Other Postretirement Benefits |
|||||||||||||||
(In thousands) |
2005 |
2004 |
2005 |
2004 |
||||||||||||
Service cost |
$ | 13,400 | $ | 10,717 | $ | 516 | $ | 436 | ||||||||
Interest cost |
23,140 | 21,028 | 1,140 | 1,203 | ||||||||||||
Expected return on plan assets |
(32,926 | ) | (32,397 | ) | (102 | ) | (109 | ) | ||||||||
Amortization of prior service cost/(credit) |
72 | 23 | (436 | ) | (435 | ) | ||||||||||
Amortization of transitional obligation |
96 | 96 | 22 | 22 | ||||||||||||
Recognized actuarial loss |
13,528 | 8,057 | 490 | 607 | ||||||||||||
Net periodic benefit cost |
$ | 17,310 | $ | 7,524 | $ | 1,630 | $ | 1,724 | ||||||||
AmSouth does not expect to make any contributions to its retirement plans or other postretirement plans in 2005.
On December 8, 2003, the President signed the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act) into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The assumptions and measures contained in this note relating to the postretirement benefit plans do not reflect any amount associated with the subsidy because AmSouth has not yet concluded whether the benefits provided by the plans are actuarially equivalent to Medicare Part D under the Act.
Note 6 Contingencies Various legal proceedings are pending against AmSouth and its subsidiaries. Some of these proceedings seek relief or allege damages that are substantial. The actions arise in the ordinary course of AmSouths business and include actions relating to its imposition of certain fees, lending, collections, loan servicing, deposit taking, investment, trust and other activities. It may take a number of years to finally resolve some of these actions because of their complexity as well as other reasons. Additionally, AmSouth and certain of its subsidiaries, which are regulated by one or more federal and state authorities, are the subject of regularly scheduled and special examinations, reviews and investigations conducted by such regulatory authorities and by law enforcement agencies resulting from these examinations, reviews and investigations. Although it is not possible to determine with certainty AmSouths potential exposure from these proceedings, based upon legal counsels opinion, Management considers that any liability resulting from the proceedings would not have a material impact on the financial condition or results of operations of AmSouth.
10
AmSouths federal and state income tax returns are subject to review and examination by government authorities. In the normal course of these examinations, AmSouth is subject to challenges from federal and state authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. AmSouth is currently under examination by a number of the states in which it does business. AmSouth is also under examination by the Internal Revenue Service (IRS) for the years ended December 31, 2000 through December 31, 2002. AmSouth is currently at IRS Appeals on the issues raised in the IRS examination for the years ended December 31, 1998, September 30, 1999 and December 31, 1999 related to leveraged leasing transactions.
AmSouth has certain leasing investments that are accounted for as leveraged leases under the guidance of Statement of Financial Accounting Standards No. 13, Accounting for Leases (Statement 13). Under Statement 13, the net investment recorded for leveraged leases on the consolidated balance sheet represents the present value of the net cash flows from the leases, including those that are tax related. Total income is recognized proportionately over the term of a leveraged lease in each year in which the net investment in the lease is positive. In connection with the IRS examination mentioned above, the IRS issued Notices of Proposed Adjustments with respect to AmSouths tax treatment of certain leveraged lease transactions that were entered into during the years under examination. Management believes that AmSouths treatment of these leveraged lease transactions was in compliance with existing tax case law, applicable statutes and regulations in effect at the time these transactions were entered into and intends to vigorously defend its position.
If AmSouth were to settle with the IRS on these Proposed Adjustments, such a settlement would not have a material impact to the consolidated financial statements based upon accounting guidance currently in effect. Under Statement 13, any changes in estimates or assumptions that do not affect total net income for a lease do not affect the timing of income recognition. However, the FASB has recently issued two proposals that, if adopted as currently drafted, would change current accounting guidance.
On July 14, 2005, the FASB issued an Exposure Draft of a proposed Interpretation, Accounting for Uncertain Tax Positions an interpretation of FASB Statement No. 109, proposing guidance on the recognition and measurement of certain positions taken in tax return filings as well as the related accrual of interest and penalties and classification of liabilities resulting from these positions. Concurrently, the FASB issued an Exposure Draft of a proposed Staff Position, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease. This Exposure Draft, which specifies that a change or projected change in the timing of cash flows related to a leveraged lease transaction, will result in a recomputation of the income recognition pattern by a lessor for that lease. These changes include taxes, interest, and penalties paid as a result of an actual or expected settlement with the IRS. However, an amount approximating the impact would then be recognized into income over the remaining terms of the leases so that the ultimate income would approximate original expectations, net of any interest and penalties. Both proposals are subject to comment periods before their final adoption, anticipated to be fiscal years ending after December 15, 2005. AmSouth is currently reviewing the potential impact of their adoption, and adoption under the guidance as currently proposed may have a material impact to the consolidated financial statements at the effective date of adoption. Both proposals would require that any impact to the consolidated financial statements upon adoption would be recognized as a cumulative effect of a change in accounting principle.
11
Note 7 Earnings Per Common Share The following table sets forth the computation of basic earnings per common share and diluted earnings per common share:
Three Months Ended June 30 |
Six Months Ended June 30 | |||||||||||
(In thousands except per share data) |
2005 |
2004 |
2005 |
2004 | ||||||||
Basic earnings per common share computation: |
||||||||||||
Numerator: |
||||||||||||
Net Income |
$ | 184,599 | $ | 166,963 | $ | 363,244 | $ | 327,062 | ||||
Denominator: |
||||||||||||
Average common shares outstanding |
351,493 | 351,602 | 352,597 | 351,399 | ||||||||
Shares issuable under deferred compensation arrangements |
561 | -0- | 573 | -0- | ||||||||
Average common shares outstanding basic |
352,054 | 351,602 | 353,170 | 351,399 | ||||||||
Basic earnings per common share |
$ | 0.52 | $ | 0.47 | $ | 1.03 | $ | 0.93 | ||||
Diluted earnings per common share computation: |
||||||||||||
Numerator: |
||||||||||||
Net Income |
$ | 184,599 | $ | 166,963 | $ | 363,244 | $ | 327,062 | ||||
Denominator: |
||||||||||||
Average common shares outstanding |
351,493 | 351,602 | 352,597 | 351,399 | ||||||||
Shares issuable under deferred compensation arrangements |
561 | -0- | 573 | -0- | ||||||||
Dilutive effect of options issued |
4,972 | 4,712 | 4,744 | 5,212 | ||||||||
Average common shares outstanding diluted |
357,026 | 356,314 | 357,914 | 356,611 | ||||||||
Diluted earnings per common share |
$ | 0.52 | $ | 0.47 | $ | 1.01 | $ | 0.92 |
12
Note 8 Comprehensive Income Total comprehensive income consists of net income, the change in the unrealized gains or losses on AmSouths available-for-sale securities portfolio arising during the period, the change in the effective portion of cash flow hedges marked to market, and a minimum pension liability related to an unfunded pension liability. In the calculation of comprehensive income, certain reclassification adjustments are made to avoid double counting items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income in that period or earlier periods.
The following tables detail the components of comprehensive income, including reclassification adjustments:
Three Months Ended June 30 |
||||||||||||||||||||||||
2005 |
2004 |
|||||||||||||||||||||||
(Dollars in thousands) |
Before Tax |
Tax Effect |
Net of Tax |
Before Tax |
Tax Effect |
Net of Tax |
||||||||||||||||||
Net income |
$ | 269,152 | $ | (84,553 | ) | $ | 184,599 | $ | 241,292 | $ | (74,329 | ) | $ | 166,963 | ||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Unrealized holding gains and losses on available-for-sale securities arising during the period |
105,817 | (39,925 | ) | 65,892 | (215,796 | ) | 81,842 | (133,954 | ) | |||||||||||||||
Less: reclassification adjustment for net securities gains realized in net income |
2,771 | (1,042 | ) | 1,729 | 7,709 | (2,898 | ) | 4,811 | ||||||||||||||||
Net change in unrealized gains and losses on available-for-sale securities |
103,046 | (38,883 | ) | 64,163 | (223,505 | ) | 84,740 | (138,765 | ) | |||||||||||||||
Unrealized holding gains and losses on derivatives arising during the period |
8,838 | (3,067 | ) | 5,771 | (35,098 | ) | 12,166 | (22,932 | ) | |||||||||||||||
Less: reclassification adjustment for (losses) gains realized in net income |
(991 | ) | 373 | (618 | ) | 4,545 | (1,709 | ) | 2,836 | |||||||||||||||
Net change in unrealized gains and losses on derivative instruments |
9,829 | (3,440 | ) | 6,389 | (39,643 | ) | 13,875 | (25,768 | ) | |||||||||||||||
Additional minimum benefit liability adjustment |
| | | (223 | ) | 84 | (139 | ) | ||||||||||||||||
Comprehensive income |
$ | 382,027 | $ | (126,876 | ) | $ | 255,151 | $ | (22,079 | ) | $ | 24,370 | $ | 2,291 | ||||||||||
Six Months Ended June 30 |
||||||||||||||||||||||||
2005 |
2004 |
|||||||||||||||||||||||
(Dollars in thousands) |
Before Tax |
Tax Effect |
Net of Tax |
Before Tax |
Tax Effect |
Net of Tax |
||||||||||||||||||
Net income |
$ | 524,219 | $ | (160,975 | ) | $ | 363,244 | $ | 470,845 | $ | (143,783 | ) | $ | 327,062 | ||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Unrealized holding gains and losses on available-for-sale securities arising during the period |
(10,288 | ) | 4,032 | (6,256 | ) | (139,481 | ) | 53,258 | (86,223 | ) | ||||||||||||||
Less: reclassification adjustment for net securities gains realized in net income |
3,899 | (1,466 | ) | 2,433 | 16,203 | (6,092 | ) | 10,111 | ||||||||||||||||
Net change in unrealized gains and losses on available-for-sale securities |
(14,187 | ) | 5,498 | (8,689 | ) | (155,684 | ) | 59,350 | (96,334 | ) | ||||||||||||||
Unrealized holding gains and losses on derivatives arising during the period |
2,286 | (754 | ) | 1,532 | (10,791 | ) | 3,534 | (7,257 | ) | |||||||||||||||
Less: reclassification adjustment for (losses) gains realized in net income |
(1,747 | ) | 657 | (1,090 | ) | 9,338 | (3,511 | ) | 5,827 | |||||||||||||||
Net change in unrealized gains and losses on derivative instruments |
4,033 | (1,411 | ) | 2,622 | (20,129 | ) | 7,045 | (13,084 | ) | |||||||||||||||
Additional minimum benefit liability adjustment |
| | | (223 | ) | 84 | (139 | ) | ||||||||||||||||
Comprehensive income |
$ | 514,065 | $ | (156,888 | ) | $ | 357,177 | $ | 294,809 | $ | (77,304 | ) | $ | 217,505 | ||||||||||
13
Note 9 Shareholders Equity On April 17, 2003, AmSouths Board of Directors approved a plan to repurchase up to 25 million shares of the companys outstanding common stock. The common shares may be repurchased in the open market or in privately negotiated transactions. The reacquired common shares will be held as treasury shares and may be reissued for various corporate purposes, including employee benefit programs. During the six month periods ended June 30, 2005 and 2004, AmSouth repurchased 7.0 million and 2.1 million shares, respectively, primarily under this authorization at a cost of $180.9 million and $48.9 million, respectively. Cash dividends of $0.50 per common share were declared in the first six months of 2005.
Note 10 Business Segment Information AmSouth has three reportable segments: Consumer Banking, Commercial Banking and Wealth Management. Treasury & Other includes balance sheet management activities that include the investment portfolio, non-deposit funding and the impact of derivatives used in asset/liability management. Income from bank owned life insurance policies, gains and losses related to the ineffective portion of derivative hedging instruments, net gains and losses on sales of fixed assets and other assets, taxable-equivalent adjustments associated with lease residual option benefits, the amortization of deposit intangibles, and corporate expenses such as corporate overhead are also shown in Treasury & Other. In addition, Treasury & Other includes the reversal of revenues and expenses associated with Private Client Service (PCS) customers loans and deposit balances to eliminate any double counting which occurs as a result of including these revenues and expenses in the Wealth Management segment as well as in either the Commercial or Consumer segments.
The following is a summary of the segment performance for the three and six months ended June 30:
(In thousands) |
Consumer Banking |
Commercial Banking |
Wealth Management |
Treasury & Other |
Total | |||||||||||||
Three Months Ended June 30, 2005 |
||||||||||||||||||
Net interest income before internal funding |
$ | 196,078 | $ | 142,924 | $ | 46,529 | $ | (6,888 | ) | $ | 378,643 | |||||||
Internal funding |
77,011 | (33,259 | ) | 751 | (44,503 | ) | -0- | |||||||||||
Net interest income/(expense) |
273,089 | 109,665 | 47,280 | (51,391 | ) | 378,643 | ||||||||||||
Noninterest revenues |
124,399 | 37,823 | 50,163 | 10,766 | 223,151 | |||||||||||||
Total revenues |
397,488 | 147,488 | 97,443 | (40,625 | ) | 601,794 | ||||||||||||
Provision for loan losses |
10,366 | 4,413 | 432 | 2,489 | 17,700 | |||||||||||||
Noninterest expenses |
189,850 | 47,289 | 52,043 | 25,760 | 314,942 | |||||||||||||
Income/(Loss) before income taxes |
197,272 | 95,786 | 44,968 | (68,874 | ) | 269,152 | ||||||||||||
Income taxes/(benefits) |
74,174 | 36,015 | 16,908 | (42,544 | ) | 84,553 | ||||||||||||
Segment net income/(loss) |
$ | 123,098 | $ | 59,771 | $ | 28,060 | $ | (26,330 | ) | $ | 184,599 | |||||||
Revenues from external customers |
$ | 320,477 | $ | 180,747 | $ | 44,683 | $ | 55,887 | $ | 601,794 | ||||||||
Ending assets |
21,843,982 | 14,110,890 | 5,977,387 | 8,614,572 | 50,546,831 | |||||||||||||
Average assets |
22,026,307 | 13,961,059 | 5,879,326 | 8,474,605 | 50,341,297 | |||||||||||||
Average loans |
20,430,032 | 12,927,490 | 5,819,667 | (5,815,667 | ) | 33,361,522 | ||||||||||||
Average deposits |
25,221,959 | 8,294,430 | 4,156,367 | (2,814,816 | ) | 34,857,940 | ||||||||||||
Three Months Ended June 30, 2004 |
||||||||||||||||||
Net interest income before internal funding |
$ | 196,912 | $ | 111,982 | $ | 39,596 | $ | 12,920 | $ | 361,410 | ||||||||
Internal funding |
81,167 | (6,989 | ) | (139 | ) | (74,039 | ) | -0- | ||||||||||
Net interest income/(expense) |
278,079 | 104,993 | 39,457 | (61,119 | ) | 361,410 | ||||||||||||
Noninterest revenues |
117,801 | 34,933 | 53,344 | 12,174 | 218,252 | |||||||||||||
Total revenues |
395,880 | 139,926 | 92,801 | (48,945 | ) | 579,662 | ||||||||||||
Provision for loan losses |
21,862 | 2,725 | 344 | 1,669 | 26,600 | |||||||||||||
Noninterest expenses |
189,862 | 46,004 | 55,144 | 20,760 | 311,770 | |||||||||||||
Income/(Loss) before income taxes |
184,156 | 91,197 | 37,313 | (71,374 | ) | 241,292 | ||||||||||||
Income taxes/(benefits) |
69,243 | 34,289 | 14,030 | (43,233 | ) | 74,329 | ||||||||||||
Segment net income/(loss) |
$ | 114,913 | $ | 56,908 | $ | 23,283 | $ | (28,141 | ) | $ | 166,963 | |||||||
14
(In thousands) |
Consumer Banking |
Commercial Banking |
Wealth Management |
Treasury & Other |
Total | |||||||||||||
Revenues from external customers |
$ | 314,713 | $ | 146,915 | $ | 50,791 | $ | 67,243 | $ | 579,662 | ||||||||
Ending assets |
21,057,205 | 12,273,564 | 4,877,992 | 10,087,052 | 48,295,813 | |||||||||||||
Average assets |
20,810,296 | 12,326,962 | 4,750,494 | 9,854,539 | 47,742,291 | |||||||||||||
Average loans |
19,303,375 | 11,322,278 | 4,718,227 | (4,710,251 | ) | 30,633,629 | ||||||||||||
Average deposits |
22,972,481 | 7,312,929 | 3,540,937 | (1,971,447 | ) | 31,854,900 | ||||||||||||
Six Months Ended June 30, 2005 |
||||||||||||||||||
Net interest income before internal funding |
$ | 394,346 | $ | 276,662 | $ | 94,401 | $ | (7,018 | ) | $ | 758,391 | |||||||
Internal funding |
148,670 | (59,639 | ) | 493 | (89,524 | ) | -0- | |||||||||||
Net interest income/(expense) |
543,016 | 217,023 | 94,894 | (96,542 | ) | 758,391 | ||||||||||||
Noninterest revenues |
238,208 | 72,148 | 101,845 | 26,386 | 438,587 | |||||||||||||
Total revenues |
781,224 | 289,171 | 196,739 | (70,156 | ) | 1,196,978 | ||||||||||||
Provision for loan losses |
25,682 | 7,063 | 846 | 4,709 | 38,300 | |||||||||||||
Noninterest expenses |
382,015 | 94,788 | 107,032 | 50,624 | 634,459 | |||||||||||||
Income/(Loss) before income taxes |
373,527 | 187,320 | 88,861 | (125,489 | ) | 524,219 | ||||||||||||
Income taxes/(benefits) |
140,446 | 70,432 | 33,412 | (83,315 | ) | 160,975 | ||||||||||||
Segment net income/(loss) |
$ | 233,081 | $ | 116,888 | $ | 55,449 | $ | (42,174 | ) | $ | 363,244 | |||||||
Revenues from external customers |
$ | 632,554 | $ | 348,810 | $ | 91,637 | $ | 123,977 | $ | 1,196,978 | ||||||||
Ending assets |
21,843,982 | 14,110,890 | 5,977,387 | 8,614,572 | 50,546,831 | |||||||||||||
Average assets |
21,981,904 | 13,907,844 | 5,718,118 | 8,710,962 | 50,318,828 | |||||||||||||
Average loans |
20,434,793 | 12,846,507 | 5,675,248 | (5,671,090 | ) | 33,285,458 | ||||||||||||
Average deposits |
24,852,329 | 8,354,747 | 4,128,732 | (2,550,136 | ) | 34,785,672 | ||||||||||||
Six Months Ended June 30, 2004 |
||||||||||||||||||
Net interest income before internal funding |
$ | 389,573 | $ | 223,619 | $ | 75,574 | $ | 32,141 | $ | 720,907 | ||||||||
Internal funding |
159,960 | (15,186 | ) | (204 | ) | (144,570 | ) | -0- | ||||||||||
Net interest income/(expense) |
549,533 | 208,433 | 75,370 | (112,429 | ) | 720,907 | ||||||||||||
Noninterest revenues |
235,029 | 72,366 | 104,034 | 27,253 | 438,682 | |||||||||||||
Total revenues |
784,562 | 280,799 | 179,404 | (85,176 | ) | 1,159,589 | ||||||||||||
Provision for loan losses |
48,430 | 2,435 | 661 | 3,174 | 54,700 | |||||||||||||
Noninterest expenses |
383,592 | 93,793 | 109,589 | 47,070 | 634,044 | |||||||||||||
Income/(Loss) before income taxes |
352,540 | 184,571 | 69,154 | (135,420 | ) | 470,845 | ||||||||||||
Income taxes/(benefits) |
132,555 | 69,398 | 26,002 | (84,172 | ) | 143,783 | ||||||||||||
Segment net income/(loss) |
$ | 219,985 | $ | 115,173 | $ | 43,152 | $ | (51,248 | ) | $ | 327,062 | |||||||
Revenues from external customers |
$ | 624,602 | $ | 295,985 | $ | 98,842 | $ | 140,160 | $ | 1,159,589 | ||||||||
Ending assets |
21,057,205 | 12,273,564 | 4,877,992 | 10,087,052 | 48,295,813 | |||||||||||||
Average assets |
20,500,828 | 12,120,164 | 4,534,820 | 9,691,880 | 46,847,692 | |||||||||||||
Average loans |
19,063,396 | 11,097,248 | 4,506,451 | (4,497,409 | ) | 30,169,686 | ||||||||||||
Average deposits |
22,893,553 | 7,051,536 | 3,506,033 | (2,281,447 | ) | 31,169,675 |
Note 11 Sale of Mutual Fund Management Business On June 27, 2005, AmSouth and Pioneer Investment Management, Inc. (Pioneer) signed a definitive agreement pursuant to which Pioneer will acquire AmSouths mutual fund management business, subject to fund shareholder and regulatory approval. The AmSouth Funds comprise 23 mutual funds with $5.5 billion in assets under management. AmSouth anticipates a pre-tax gain of approximately $50 million upon completion of the transaction, which is expected to take place late in the third quarter of 2005. AmSouth is evaluating alternatives to redeploy the proceeds of the transaction, including share repurchases, debt repayment or other actions.
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Report of Independent Registered Public Accounting Firm
The Board of Directors
AmSouth Bancorporation
We have reviewed the consolidated balance sheets of AmSouth Bancorporation and subsidiaries as of June 30, 2005 and 2004, and the related consolidated statements of earnings for the three-month and six-month periods ended June 30, 2005 and 2004, and the consolidated statements of shareholders equity and cash flows for the six-month periods ended June 30, 2005 and 2004. These financial statements are the responsibility of the Companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of AmSouth Bancorporation and subsidiaries as of December 31, 2004, and the related consolidated statements of earnings, shareholders equity, and cash flows for the year then ended not presented herein, and in our report dated March 10, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Birmingham, Alabama
August 2, 2005
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Introduction
This discussion and analysis is part of AmSouth Bancorporations (AmSouth) Quarterly Report on Form 10-Q to the Securities and Exchange Commission (SEC) and updates AmSouths Annual Report on Form 10-K for the year ended December 31, 2004, which was previously filed with the SEC. This information should be read together with the financial information contained in the Form 10-K. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications.
AmSouth is a regional bank holding company headquartered in Birmingham, Alabama, with over $50 billion in assets, more than 685 branch banking offices and over 1,200 ATMs. AmSouth operates in Alabama, Florida, Tennessee, Mississippi, Louisiana, and Georgia. AmSouth is a leader among regional banks in the Southeast and has three principal business segments. Consumer Banking delivers a full range of financial services to individuals and small businesses, including loan products such as residential mortgages, equity lending, credit cards, and loans for automobile and other personal financing needs, and various products designed to meet the credit needs of small businesses. Consumer Banking also offers various deposit products to meet customers savings and transaction needs. Commercial Banking meets the requirements of corporate and middle market customers with a comprehensive array of credit, treasury management, international and capital markets services. Included among these are several specialty services such as real estate finance, asset based lending and commercial leasing. Wealth Management is comprised of trust, institutional, retirement, private client services and broker-dealer services. This area includes traditional trust services as well as a substantial selection of investment management services. AmSouth also offers a complete listing of banking products and services at its web site, www.amsouth.com.
The preparation of AmSouths financial statements requires Management to make subjective and sometimes complex judgments in the application of certain of its accounting policies that involve significant estimates and assumptions about the effect of matters that are inherently uncertain. These estimates and assumptions are based on information available as of the date of the financial statements, and may materially impact the reported amounts of certain assets, liabilities, revenues and expenses as the information changes over time. Accordingly, different amounts could be reported as a result of the use of revised estimates and assumptions in the application of these accounting policies.
Accounting policies considered relatively more critical due to either the subjectivity involved in the estimate and/or the potential impact that changes in the estimate can have on the reported financial results include the accounting for the allowance for loan losses, pensions, derivatives and hedging activities, and income taxes. Information concerning these policies is included in the Critical Accounting Estimates section of Managements Discussion and Analysis in AmSouths 2004 Form 10-K. There were no significant changes in these accounting policies during the first six months of 2005.
This discussion and analysis contains statements that are considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. See page 2 for additional information regarding forward-looking statements.
Second Quarter and First Six Months Overview
AmSouth reported net income of $185 million for the second quarter of 2005, an increase of 10.6 percent over net income of $167 million during the second quarter of 2004. For the first six months of 2005, net income was $363 million compared to net income of $327 million during the same period in 2004, an increase of 11.1 percent. Diluted earnings per share for the second quarter of 2005 was $0.52, an increase of 10.6 percent over the $0.47 per share for the same period of 2004. Diluted earnings per share for the six months ended June 30, 2005 was $1.01 per share, an increase of 9.8 percent over the $0.92 per share for the same period in 2004.
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For the three months ended June 30, 2005 and 2004, AmSouths return on average assets (ROA) was 1.47 percent and 1.41 percent, respectively. Return on average equity (ROE) was 20.92 percent for the second quarter of 2005 compared to 20.31 percent for the same quarter of 2004. For the six months ended June 30, 2005 and 2004, AmSouths ROA was 1.46 percent and 1.40 percent, respectively. ROE was 20.70 percent for the first six months of 2005 compared to 20.04 percent for the same period last year. The results during the second quarter and first six months of 2005 were driven by strong growth in low-cost deposits, solid loan growth, excellent credit quality and disciplined expense management.
Average low-cost deposit balances during the second quarter of 2005 increased $3.2 billion from the second quarter of 2004. Loan balances on average for this period increased $2.7 billion, with growth primarily in commercial, commercial real estate and residential first mortgages. These factors resulted in an increase in net interest income of $17.2 million or 4.8 percent during the second quarter of 2005 compared to the same period in 2004.
Credit quality also contributed to earnings growth during the second quarter and first six months of 2005. Net charge-offs for the second quarter of 2005 declined $8.9 million, or 14 basis points, from the second quarter of 2004. For the first six months of 2005, net charge-offs were $17.9 million lower when compared to the same period in 2004. The provision for loan losses for the second quarter and first six months of 2005 was $17.7 million and $38.3 million, respectively, compared to $26.6 million and $54.7 million for the corresponding year-earlier periods.
Balance Sheet Analysis
Total assets at June 30, 2005 were $50.5 billion, up 2.0 percent from $49.5 billion at December 31, 2004. This $1.0 billion increase in total assets was primarily the result of increases in AmSouths loan portfolio. Loan production continued to be strong, but has been muted by unusually high payoffs due to the current interest rate environment. Loans net of unearned income at June 30, 2005 increased $732 million compared to year-end. This increase was attributable to $829 million of growth in commercial and commercial real estate loans, offset by a $97 million decline in consumer loans. Also contributing to total asset growth, loans held for sale increased $220 million from December 31, 2004 to June 30, 2005, while cash and due from banks at June 30, 2005 increased $200 million compared to December 31, 2004. Offsetting these increases, total available-for-sale and held-to-maturity securities decreased $265 million from December 31, 2004 to June 30, 2005.
The increase in commercial loans was broad-based across most categories led by growth in commercial and industrial lending, real estate construction, and commercial real estate mortgages. These increases were driven by new business generation reflecting the benefits of sales calling efforts and continued growth and strength in the economy as a whole. The decrease in consumer loans resulted primarily from the sale of approximately $455 million of fixed-rate home equity loans and approximately $212 million of student loans during the first six months of 2005. The home equity loans sold were from portfolio vintages containing higher risk, fixed-rate loans. Also, AmSouth sells student loans periodically whenever there is sufficient volume. Offsetting the decrease was an increase in residential first mortgages.
The decrease in available-for-sale and held-to-maturity securities reflects AmSouths decision to limit reinvestment of cash flows into securities at yields that have currently been available.
On the liability side of the balance sheet, total deposits at June 30, 2005 increased by $1.1 billion compared to December 31, 2004. Low-cost deposits, which include noninterest-bearing and interest-bearing checking, money market and savings accounts, increased by $1.5 billion. The growth in low-cost deposits reflects broad based sales efforts, the continuing effect of AmSouths money market campaign, household growth and the new branches opened in recent years. In particular, money market deposits increased $1.2 billion during the first six months of 2005, due to the continued success of a new product offering that was introduced in the latter part of 2004.
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The increased funding from low-cost deposits allowed the Company to forego the replacement of higher cost time deposits and pay down long-term debt. In particular, other time deposits decreased $466 million from December 31, 2004 to June 30, 2005. Also, long-term Federal Home Loan Bank (FHLB) advances decreased $1.1 billion from December 31, 2004 to June 30, 2005 due to prepayments of FHLB advances totaling $925 million.
Other long-term debt increased $459 million as a result of AmSouth Banks issuance of $350 million in subordinated debt and $120 million of long-term securities sold under agreements to repurchase during March 2005.
Net Interest Income and Margin
Net interest income on a fully taxable equivalent basis for the three and six months ended June 30, 2005 was $389.5 million and $780.1 million, respectively, up $17.6 million, or 4.7 percent compared to the same quarter last year and up $38.1 million, or 5.1 percent on a year-to-date basis. The increase in net interest income reflected strong loan growth, which was funded by low-cost deposit growth. Average loans net of unearned income for the three and six month periods ended June 30, 2005 were $33.4 billion and $33.3 billion, respectively. This represents an increase of $2.7 billion and $3.1 billion from the three and six month periods ended June 30, 2004, respectively. These increases were driven by commercial lending, residential mortgage production and equity lending. Low-cost deposits on average were $24.4 billion and $24.1 billion for the second quarter and six months ended June 30, 2005, respectively. These balances increased $3.2 billion and $3.4 billion when compared to the second quarter and first six months of 2004, respectively.
The net interest margin was 3.40 percent and 3.42 percent for the second quarter and first six months of 2005, respectively, which is down 4 basis points and 8 basis points from second quarter and first six months of 2004, respectively. The decline in the net interest margin can be largely attributed to a decline in net interest spread, which was a result of earning asset yields moving up more slowly than the cost of interest bearing liabilities at least partially attributable to the mix of new businesses. Even though the Federal Reserve has raised short-term interest rates nine times over the past twelve months, for a total of 225 basis points, the impact on long-term earning asset yields has not been as significant. However, despite the increases in short-term interest rates and the resulting flattening of the yield curve, the second quarter 2005 net interest margin has declined only 4 basis points compared to the second quarter 2004, reflecting efforts to structure the balance sheet and loan and deposit pricing decisions to neutralize the impact that changes in market interest rates might have on earnings. AmSouth remains essentially neutral in terms of interest rate risk, which is discussed in the next section of this report.
Asset and Liability Management
AmSouth maintains a formal asset and liability management process to quantify, monitor and control interest rate risk and to assist Management in minimizing the income impact of changes in the level and direction of interest rates on net interest income. This is accomplished through the development and implementation of lending, funding, pricing and hedging strategies designed to achieve net interest income performance goals while minimizing the potential variation of net interest income under different interest rate scenarios.
AmSouth regularly evaluates net interest income under various balance sheet and interest rate scenarios, using an income simulation model as its principal risk management tool. Management evaluates base net interest income under what is believed to be the most likely twelve-month asset/liability mix, growth scenario and interest rate environment. This base case is then evaluated against various interest rate scenarios. Assumptions for asset prepayment levels, yield curves and asset and liability replacement rates are adjusted to be consistent with each interest rate scenario. Worst case scenarios are also tested to better understand the full range of net interest income exposure.
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Key assumptions in the model include the magnitude and timing of Federal Reserve rate changes and the associated impact on the change in financial market rates across the maturity spectrum; prepayment speeds on mortgage-related assets; cash flows and maturities of derivatives and other financial instruments held for purposes other than trading; changes in market conditions, loan volumes and pricing; deposit balances and rate sensitivities; customer preferences; and Managements financial and capital plans. These assumptions are inherently uncertain and as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. However, the model can indicate the likely direction of change. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions, customer behavior and Managements strategies, among other factors.
Currently, AmSouth is essentially neutral, meaning that parallel shifts in the yield curve do not have a significant impact on net interest income over a twelve-month forecast horizon. The table below illustrates the impact of a gradual 100 basis point increase or decrease from the then-current rates on net interest income. This modeling assumes a simultaneous proportional shift in market rates.
Interest Rate Sensitivity
(Dollars in millions)
June 30 |
Policy | |||||||||||
2005 |
2004 |
|||||||||||
% Change |
$ Change |
% Change |
$ Change |
|||||||||
+100bp |
0.37% | $5.8 | 0.27% | $4.2 | +/- 2.5% | |||||||
-100bp |
(1.16%) | ($ | 18.0) | (0.84%) | ($ | 13.0) | +/- 2.5% |
The changes shown indicate a level of interest rate risk that is well within AmSouths policy guidelines. Current policy states that net interest income should not fluctuate more than 2.5 percent in the event that interest rates gradually increase or decrease 100 basis points over a period of twelve months. In analyzing its interest rate risk, AmSouth also runs a multitude of additional scenarios to stress the assumptions used in the analysis above. For example, the simulations above are based on a parallel shift in the yield curve for U.S. Treasury securities occurring gradually over a 12-month time period. AmSouth, however, recognizes that changes in the yield curve shape can also affect net interest income even if Federal Reserve-set short term rates remain unchanged. Net interest income at AmSouth, as at most other banks, is affected if long term rates rise or fall more rapidly than short term rates, and thereby cause the slope of the yield curve to change. For example, if long term rates were to fall faster than short term rates, thereby causing a flattening in the slope of the yield curve, this would negatively affect net interest income as mortgage-related and other fixed rate loans and securities, which are priced based on long term rates, would most likely be prepaid while the proceeds from such prepayments could likely not be reinvested at comparable rates.
Thus far, AmSouth has been successful in managing the timing and magnitude of loan and deposit pricing as market and Federal Reserve-set interest rates change and does not expect further moderate Federal Reserve rate increases to adversely impact near-term net interest income.
Derivative Instruments
As part of its activities to manage interest rate risk, AmSouth utilizes various derivative instruments such as interest rate swaps to hedge its interest rate risk. At June 30, 2005, AmSouth had interest rate swaps in the notional amount of approximately $3.5 billion, of which $2.3 billion were receive fixed/pay floating rate swaps and $1.2 billion were pay fixed/receive floating. AmSouth began entering into pay fixed/receive floating rate swaps during the fourth quarter of 2003 in anticipation of a rising interest rate cycle. Consistent with AmSouths overall asset/liability management process, pay fixed/receive floating rate swaps and additional long-term
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funding were put in place to achieve the desired interest rate risk profile. Of all swaps, $1.3 billion of notional value was used to hedge the cash flows of variable-rate commercial loans, $200 million was used to hedge the cash flows associated with variable rate bank notes, $1.0 billion was used to hedge the anticipated reissuance of Federal funds purchased, $1.0 billion was used to hedge the fair value of corporate and bank debt, and $33 million was used to hedge the fair value of a fixed-rate certificate of deposit. During the remainder of 2005, $450 million of notional value in interest rate swaps is scheduled to mature.
While not significant to the consolidated financial statements, AmSouth also utilizes forward contracts to protect against changes in interest rates and prices of its mortgage loans held for sale and mortgage pipeline designated for future sale, also referred to as interest rate lock commitments. A portion of these forward contracts is designated as fair value hedges of mortgage loans held for sale. The remaining forward contracts are not designated as hedging instruments but do provide some economic hedging of the mortgage pipeline.
In addition to using derivative instruments as an interest rate risk management tool, AmSouth also utilizes derivatives such as interest rate swaps, caps, floors, and foreign exchange contracts in its capacity as an intermediary on behalf of its customers. AmSouth minimizes its market and liquidity risks by taking offsetting positions. AmSouth manages its credit risk, or potential risk of loss from default by counterparties, through credit limit approval and monitoring procedures. Market value changes on intermediated swaps and other derivatives are recognized in income in the period of change. At June 30, 2005, AmSouth had $50.4 million of assets and $50.2 million of liabilities associated with $2.5 billion notional amount of interest rate contracts with corporate customers and $2.5 billion notional amount of offsetting interest rate contracts with other financial institutions to mitigate AmSouths rate exposure on its corporate customers contracts.
Credit Quality
The allowance for loan losses is maintained at a level that is considered to be adequate to reflect estimated probable credit losses for specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan portfolio at the balance sheet date. Actual losses can vary from Managements estimates. A formal review of the allowance for loan losses is prepared quarterly to assess the risk in the portfolio and to determine the adequacy of the allowance for loan losses. In determining the appropriate level for the allowance, Management ensures that the overall allowance appropriately reflects the current macroeconomic conditions, industry exposure, and a margin for the imprecision inherent in the estimates of expected credit losses. The review includes analyses of historical performance, the level of nonperforming and adversely rated loans, specific analyses of certain problem loans, loan activity since the previous quarter, reports prepared by the Credit Review Department, consideration of current economic conditions, and other pertinent information. The level of allowance to net loans outstanding will vary depending on the overall results of this quarterly review. The review is presented to and subsequently approved by Senior Management and reviewed by the Risk Committee of the Board of Directors.
At June 30, 2005, the allowance for loan losses was $365.6 million, or 1.09 percent of loans net of unearned income, compared to $366.8 million, or 1.12 percent, at December 31, 2004 and $382.5 million, or 1.22 percent, at June 30, 2004. This reduction in the amount of allowance from June 30, 2004 to June 30, 2005 reflects the benefits of stricter underwriting standards on the consumer portfolios implemented several years ago, the sale of the credit card portfolio in the fourth quarter of 2004, a shift in the mix of the portfolio to products/customers that have lower credit risk characteristics, and improved general economic conditions. The level of allowance is relatively flat from December 31, 2004 to June 30, 2005. Economic risks identified at the end of 2004, including higher and more volatile energy prices, increases in short-term interest rates, and higher commodity prices, all remain a concern at the end of the second quarter. The ending balance at June 30, 2005 reflects a reduction in the allowance of $2.7 million related to the sale of $530 million in equity loans during the first six months of 2005. Table 5 presents a five-quarter analysis of the allowance for loan losses.
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Net charge-offs for the quarter ended June 30, 2005, were $17.6 million, or 0.21 percent of average loans on an annualized basis, a decrease of $9.0 million from the $26.6 million, or 0.35 percent of average loans, reported in the same period a year earlier. For the six months ended June 30, 2005, net charge-offs were $36.7 million, or 0.22 percent, compared to $54.6 million, or 0.36 percent, for the same period of 2004. The decrease in net charge-offs is consistent with the positive current economy and was primarily the result of a decrease in consumer net charge-offs. AmSouth sold its $550 million credit card portfolio during the fourth quarter of 2004, which resulted in a shift in the mix of the loan portfolio to include a larger proportion of consumer loans secured by real estate. The decrease in consumer net charge-offs was somewhat offset by an increase in commercial and commercial real estate net charge-offs.
In the second quarter of 2005, consumer net charge-offs decreased $8.6 million compared to the same period a year earlier and decreased $20.0 million for the first six months of 2005 compared to the same period in 2004. The decreases, both quarterly and year-to-date, occurred in most categories of consumer loans. Net charge-offs for the revolving credit portfolio were down $4.6 million in the second quarter of 2005 and $9.0 million for the first six months of 2005, when compared to the same periods in 2004. The decrease reflects the sale of AmSouths $550 million credit card portfolio during the fourth quarter of 2004.
Net charge-offs in the dealer indirect portfolio were $1.1 million for the second quarter of 2005 and $4.4 million for the first six months of 2005, a decrease of $2.6 million and $5.4 million, respectively, from the corresponding periods in 2004. The decrease in dealer indirect net charge-offs reflected higher-quality underwriting coupled with the runoff of older higher-risk vintages, as well as strengthening used car auction prices and enhanced collection procedures.
Net charge-offs in the equity loans and lines portfolio were $3.6 million for the second quarter of 2005 and $7.5 million for the first six months of 2005, a decrease of $2.0 million and $5.3 million, respectively, from the corresponding periods in 2004. The decrease in equity loan and line net charge-offs reflected higher-quality underwriting, enhanced collection procedures, and runoff or sale of older higher-risk vintages. In addition, beginning in late 2003, AmSouth began purchasing insurance to protect against the credit risk for certain originated equity loans and lines with loan-to-value ratios up to 100 percent. The insurance policy provides for the sale of the loan or line, at par, to the insurance company when the loan or line becomes 120 days delinquent. AmSouths policy is to charge down equity loans and lines to net realizable value when they become 180 days delinquent. Therefore, there are no material losses on these loans and lines expected in the future. The insurance premiums are paid monthly based on a percentage of the outstanding balances of the funded loans and lines. As of June 30, 2005, approximately $266.9 million of loans and lines were insured. Included in noninterest expense for the six months ended June 30, 2005 is approximately $1.4 million in insurance premiums. Given the volume and premium levels to date, the impact on the provision and the allowance for loan losses has not been material. The reduced risk exposure is considered in the calculation of the allowance for loan losses.
During the second quarter and first six months of 2005, commercial and commercial real estate net charge-offs decreased $0.3 million and increased $2.1 million, respectively, compared to the same periods a year earlier. The year-to-date increase in commercial and commercial real estate net charge-offs primarily reflected a return to more normal recovery levels during the first six months of 2005 compared to the same period in 2004.
The provision for loan losses for the second quarter and first six months of 2005 was $17.7 million and $38.3 million, respectively, compared to $26.6 million and $54.7 million for the corresponding year-earlier periods.
At June 30, 2005, nonperforming assets decreased $20.6 million compared to year-end 2004 due to the combined results of an $18.1 million decline in nonaccrual loans, a $1.8 million decline in foreclosed properties and a $743 thousand decline in repossessions. Nonperforming assets as a percentage of loans net of unearned income, foreclosed properties and repossessions decreased 16 basis points to 0.27 percent compared to 0.43 percent at June 30, 2004, reflecting a $45.6 million decrease in nonperforming assets. The coverage ratio of the
22
allowance for loan losses to nonperforming loans was 519 percent at June 30, 2005, an increase of 147 percentage points from the June 30, 2004 ratio. Table 6 presents a five-quarter comparison of the components of nonperforming assets.
The decrease in nonaccrual loans from December 31, 2004 reflects a $12.4 million decrease in nonaccrual consumer loans and a $5.7 million decrease in nonaccrual commercial and commercial real estate loans. The decrease in total nonaccruing loans is reflective of improved portfolio quality. AmSouth had no nonperforming assets considered troubled debt restructured loans at June 30, 2005 and 2004. The decrease in foreclosed properties was primarily the result of one commercial real estate property that was sold in the second quarter of 2005.
Included in nonperforming assets at June 30, 2005 and 2004, was $15.1 million and $46.8 million, respectively, of loans that were considered to be impaired, substantially all of which were on a nonaccrual basis. At June 30, 2005 and 2004, there was $5.1 million and $11.1 million, respectively, in the allowance for loan losses specifically allocated to $12.3 million and $25.9 million, respectively, of impaired loans. No specific reserves were required for $2.8 million and $20.9 million of impaired loans at June 30, 2005 and 2004, respectively. The average balance in impaired loans for the three months ended June 30, 2005 and 2004 was $20.1 million and $44.6 million, respectively, and $28.9 million and $46.7 million, respectively, for the six months ended June 30, 2005 and 2004. AmSouth recorded no material interest income on its impaired loans during the six months ended June 30, 2005. At June 30, 2005 and 2004, AmSouth had approximately $5.7 million and $23.3 million, respectively, of potential problem commercial loans which were not included in the nonaccrual loans or in the 90 days past due categories at quarter-end but for which Management had concerns as to the ability of such borrowers to comply with their present loan repayment terms. Of the $23.3 million in 2004, only $3.5 million remained categorized as potential problem loans at June 30, 2005. The remaining balances either migrated to nonperforming status or were no longer considered potential problem loans at June 30, 2005. The lower level of potential problem loans at June 30, 2005 is reflective of the current economy and AmSouths underwriting discipline, both of which have contributed to the credit performance in the commercial portfolio.
Noninterest Revenues
Noninterest revenues were $223.2 million during the second quarter of 2005, a 2.2 percent increase from the second quarter of 2004. For the first six months of 2005, noninterest revenues were $438.6 million, relatively stable when compared with the same period in 2004. The changes in noninterest revenues were driven by various categories and factors discussed below.
Service charge revenues for the three months and six months ended June 30, 2005 decreased $2.9 million or 3.1 percent, and $11.1 million or 5.9 percent, respectively, compared to the corresponding period in 2004. The decrease in service charges reflects the overall increase in commercial deposit balances experienced in the second quarter and first six months of 2005 when compared to the same periods in 2004. These higher balances, which also have a higher earnings credit rate credited against fees, are being used to pay for services in lieu of hard dollar charges. In addition, the decrease in commercial service charges reflects a shift in the mix of transactions being processed. Electronic transactions, which carry lower processing fees, are becoming a larger percentage of all transactions processed. These trends in commercial service charges are expected to continue throughout 2005.
Consumer investment services income for the second quarter of 2005 decreased $3.1 million or 13.9 percent compared to the second quarter of 2004. On a year-to-date basis, consumer investment services income declined $3.4 million or 8.1 percent during 2005 when compared to 2004. These decreases reflect lower sales of fixed-rate annuities resulting from a flattening of the yield curve.
Interchange income grew $2.1 million and $7.0 million for the three months and six months ended June 30, 2005 or 10.2 percent and 18.9 percent compared to the corresponding periods in 2004. This increase was primarily due to increases in transaction volumes. AmSouth has 1.7 million checkcards and more than 1,200 ATMs generating interchange fees.
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The increase in commercial credit fee income of $2.8 million or 25.4 percent and $3.2 million or 14.6 percent for the three and six months periods ended June 30, 2005 compared to the same periods in 2004 was driven by higher demand from commercial customers for interest rate swaps to lock in their long-term financing costs.
In addition, there was a decrease in portfolio income and bank owned life insurance (BOLI) income during the second quarter and first six months of 2005 compared to the same periods in 2004. The decline in portfolio income was due to lower gains on sales of securities in 2005 compared to 2004, reflecting changes in market rates. The decrease in BOLI income was primarily the result of lower rates and benefit payments during 2005 when compared to 2004.
For the second quarter of 2005, other noninterest revenues increased $11.9 million compared to the same period in 2004. On a year-to-date basis, other noninterest revenues increased $23.0 million. The year-to-date increase reflects the following transactions during the first six months of 2005. A $6.9 million gain was realized on the sale of approximately $455 million of fixed-rate home equity loans. A $2.2 million gain was realized from the sale of approximately $212 million of student loans. AmSouth also recognized an $8.0 million gain from the prepayment of approximately $925 million of Federal Home Loan Bank advances that were subject to being called in the near future. AmSouth recognized $3.7 million in derivative income in March 2005 related to market valuation adjustments after the termination of a hedge. Finally, a $3.0 million gain was realized from the sale of a small equity interest in an ATM network which occurred during the first quarter of 2005.
Noninterest Expenses
Noninterest expenses for the second quarter of 2005 rose $3.2 million or 1.0 percent compared to the same period in 2004 and remained relatively stable for the first six months of 2005 compared to the corresponding period in 2004. The modest increase in noninterest expenses was primarily related to increases in salaries and employee benefits, net occupancy and equipment expenses, which were offset by decreases in postage and office supplies, marketing, professional fees, and other expenses.
The increase in salaries and employee benefits during the first six months of 2005 reflects merit increases, higher production-based incentives and pension costs. The increase in net occupancy and equipment expenses relate to continued investment in new branches throughout 2004. The decrease in postage and supplies is due to increased management focus in gaining operating efficiencies. The decrease in marketing expense was a result of higher costs to support initiatives to attract new business and various other marketing campaigns during 2004. The decrease in professional fees reflects higher expenses to support revenue initiatives in 2004 when compared to 2005.
Liquidity and Off-Balance Sheet Arrangements
AmSouths goal in liquidity management is to satisfy the cash flow requirements of depositors and borrowers, while at the same time meeting its cash flow needs. This is accomplished through the active management of both the asset and liability sides of the balance sheet. The liquidity position of AmSouth is monitored on a daily basis by AmSouths Treasury Division. In addition, the Asset and Liability Committee, which consists of members of AmSouths Senior Management team, reviews liquidity on a regular basis and approves any changes in strategy that are necessary as a result of asset/liability composition or anticipated cash flow changes. Management also compares AmSouths liquidity position to established corporate liquidity policies on a monthly basis. At June 30, 2005, AmSouth was within all of the Companys established liquidity policies.
For AmSouth Bank, the primary sources of liquidity on the asset side of the balance sheet are maturities and cash flows from loans and investments as well as the ability to securitize, pledge or sell certain loans and investments. Liquidity on the liability side is generated primarily through growth in low-cost deposits and the ability to obtain economical wholesale funding in national and regional markets through a variety of sources.
24
As an additional source of liquidity, AmSouth periodically sells commercial loans to qualifying special purpose entities called conduits in securitization transactions. The conduits are financed by the issuance of securities to asset-backed commercial paper issuers. The transactions are accounted for as sales and allow AmSouth to utilize its asset capacity and capital for higher yielding, interest-earning assets, while continuing to manage the customer relationship. At June 30, 2005, the outstanding balance of commercial loans sold to conduits was $618 million. While no longer utilized as a source of funding, AmSouth, in prior years, also sold residential mortgages to third-party conduits. The remaining outstanding balances associated with these transactions were $509 million at June 30, 2005. These balances decreased from $1.2 billion in outstanding loan balances in both conduits at December 31, 2004. While the conduit transactions have been a source of funding, these off-balance sheet arrangements have the potential to require AmSouth to provide funding to the conduits in the event of a liquidity shortage. AmSouth provides credit enhancements to these securitizations by providing standby letters of credit, which create exposure to credit risk to the extent of the letters of credit. At June 30, 2005, AmSouth had $75.4 million of letters of credit supporting the conduit sales. This credit risk is reviewed quarterly, and a reserve for loss exposure is maintained in other liabilities on the consolidated balance sheets.
AmSouth also provides liquidity lines of credit to support the issuance of commercial paper under 364-day commitments. These liquidity lines can be drawn upon in the unlikely event of a commercial paper market disruption or other factors, such as credit rating downgrades of one of the asset-backed commercial paper issuers or of AmSouth (as the provider of the credit support), which could prevent the asset-backed commercial paper issuers from being able to issue commercial paper. At June 30, 2005, AmSouth had liquidity lines of credit supporting these transactions of $1.1 billion. To date, there have been no drawdowns of the liquidity lines; however, AmSouth includes this liquidity risk in its monthly liquidity risk analysis to ensure that sufficient sources of liquidity are available to meet demand. AmSouth also reviews the impact of drawdowns of these liquidity lines on its regulatory capital requirements. As of June 30, 2005, this analysis showed that AmSouth would retain a well-capitalized position even if the liquidity lines were completely drawn.
Capital Adequacy
At June 30, 2005, shareholders equity totaled $3.6 billion or 7.20 percent of total assets while average equity as a percentage of average assets for the three month and six month periods ended June 30, 2005 was 7.03 percent for both periods. Since December 31, 2004, shareholders equity increased $69.4 million. Net income for the first six months of 2005 was $363.2 million and was largely offset by the declaration of dividends of $175.2 million and the purchase of 7.0 million shares of AmSouth common stock for $180.9 million during the first six months of 2005. The effects of derivatives and available-for-sale securities were not significant. Employee stock plans, direct stock purchases and dividend reinvestment contributed to the remaining increase to shareholders equity.
Table 9 presents the capital amounts and risk-adjusted capital ratios for AmSouth and AmSouth Bank at June 30, 2005 and 2004. At June 30, 2005, AmSouth exceeded the regulatory minimum required risk-adjusted Tier 1 Capital Ratio of 4.00% and risk-adjusted Total Capital Ratio of 8.00%. In addition, the risk-adjusted capital ratios for AmSouth Bank were above the regulatory minimums, and the Bank was well capitalized at June 30, 2005.
Sale of Mutual Fund Management Business
On June 27, 2005, AmSouth and Pioneer Investment Management, Inc. (Pioneer) signed a definitive agreement pursuant to which Pioneer will acquire AmSouths mutual fund management business, subject to fund shareholder and regulatory approval. The AmSouth Funds comprise 23 mutual funds with $5.5 billion in assets under management. AmSouth anticipates a pre-tax gain of approximately $50 million upon completion of the transaction, which is expected to take place late in the third quarter of 2005. AmSouth is evaluating alternatives to redeploy the proceeds of the transaction, including share repurchases, debt repayment or other actions.
25
Earnings Outlook
AmSouth expects diluted earnings per share to be in a range of $2.00 to $2.06 for the full year, excluding any impact from the gain and possible redeployment of the proceeds from the sale of AmSouths mutual fund management business.
See the discussion of Forward-Looking Statements on page 2 for a discussion of factors that could affect AmSouths earnings outlook.
Table 1 - Financial Summary
June 30 |
% Change |
||||||||
2005 |
2004 |
||||||||
(In thousands) | |||||||||
Balance sheet summary |
|||||||||
End-of-period balances: |
|||||||||
Loans net of unearned income |
$ | 33,533,382 | $ | 31,351,497 | 7.0 | % | |||
Interest-earning assets |
46,191,133 | 44,314,099 | 4.2 | ||||||
Total assets |
50,546,831 | 48,295,813 | 4.7 | ||||||
Total deposits |
35,313,708 | 32,139,244 | 9.9 | ||||||
Shareholders equity |
3,638,225 | 3,295,478 | 10.4 | ||||||
Year-to-date average balances: |
|||||||||
Loans net of unearned income |
$ | 33,285,458 | $ | 30,169,686 | 10.3 | % | |||
Interest-earning assets* |
45,968,517 | 42,635,928 | 7.8 | ||||||
Total assets |
50,318,828 | 46,847,692 | 7.4 | ||||||
Total deposits** |
34,785,672 | 31,169,675 | 11.6 | ||||||
Shareholders equity |
3,539,233 | 3,281,997 | 7.8 |
* | Excludes adjustment for market valuation on available-for-sale securities and certain noninterest-earning marketable equity securities. |
** | Statement 133 valuation adjustments related to time deposits are included in other liabilities. |
Three Months Ended June 30 |
% Change |
Six Months Ended June 30 |
% |
|||||||||||||||||||
2005 |
2004 |
2005 |
2004 |
|||||||||||||||||||
(In thousands except per share data) |
(In thousands except per share data) |
|||||||||||||||||||||
Earnings summary |
||||||||||||||||||||||
Net income |
$ | 184,599 | $ | 166,963 | 10.6 | % | $ | 363,244 | $ | 327,062 | 11.1 | % | ||||||||||
Earnings per common share basic |
0.52 | 0.47 | 10.6 | 1.03 | 0.93 | 10.8 | ||||||||||||||||
Earnings per common share diluted |
0.52 | 0.47 | 10.6 | 1.01 | 0.92 | 9.8 | ||||||||||||||||
Return on average assets (annualized) |
1.47 | % | 1.41 | % | 1.46 | % | 1.40 | % | ||||||||||||||
Return on average equity (annualized) |
20.92 | 20.31 | 20.70 | 20.04 | ||||||||||||||||||
Operating efficiency |
51.41 | 52.83 | 52.06 | 53.70 | ||||||||||||||||||
Selected ratios |
||||||||||||||||||||||
Average equity to assets |
7.03 | % | 6.92 | % | 7.03 | % | 7.01 | % | ||||||||||||||
End-of-period equity to assets |
7.20 | 6.82 | 7.20 | 6.82 | ||||||||||||||||||
End-of-period tangible equity to assets |
6.65 | 6.23 | 6.65 | 6.23 | ||||||||||||||||||
Allowance for loan losses to loans net of unearned income |
1.09 | 1.22 | 1.09 | 1.22 | ||||||||||||||||||
Common stock data |
||||||||||||||||||||||
Cash dividends declared |
$ | 0.25 | $ | 0.24 | $ | 0.50 | $ | 0.48 | ||||||||||||||
Book value at end of period |
10.33 | 9.32 | 10.33 | 9.32 | ||||||||||||||||||
Market value at end of period |
26.00 | 25.47 | 26.00 | 25.47 | ||||||||||||||||||
Average common shares |
352,054 | 351,602 | 353,170 | 351,399 | ||||||||||||||||||
Average common shares |
357,026 | 356,314 | 357,914 | 356,611 |
26
Table 2 - Quarterly Yields Earned on Average Interest-Earning Assets and Rates Paid on Average Interest-Bearing Liabilities
2005 |
2004 |
|||||||||||||||||||||||||||||||||||||||||||||||||
Second Quarter |
First Quarter |
Fourth Quarter |
Third Quarter |
Second Quarter |
||||||||||||||||||||||||||||||||||||||||||||||
Average Balance |
Revenue/ Expense |
Yield/ Rate |
Average Balance |
Revenue/ Expense |
Yield/ Rate |
Average Balance |
Revenue/ Expense |
Yield/ Rate |
Average Balance |
Revenue/ Expense |
Yield/ Rate |
Average Balance |
Revenue/ Expense |
Yield/ Rate |
||||||||||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||||||||||||||||||||||||||||
Loans net of unearned income (1) (2) |
$ | 33,361,522 | $ | 460,473 | 5.54 | % | $ | 33,208,549 | $ | 437,686 | 5.35 | % | $ | 32,525,563 | $ | 421,074 | 5.15 | % | $ | 32,079,701 | $ | 405,127 | 5.02 | % | $ | 30,633,629 | $ | 382,677 | 5.02 | % | ||||||||||||||||||||
Available-for-sale securities, amortized cost |
6,322,703 | 74,597 | 4.73 | 6,385,445 | 76,355 | 4.85 | 6,369,885 | 77,107 | 4.82 | 6,508,524 | 81,785 | 5.00 | 6,559,420 | 81,249 | 4.98 | |||||||||||||||||||||||||||||||||||
Market valuation on available-for-sale securities |
(87,157 | ) | (41,821 | ) | (25,440 | ) | (92,985 | ) | (45,289 | ) | ||||||||||||||||||||||||||||||||||||||||
Total available-for-sale securities (3) |
6,235,546 | 6,343,624 | 6,344,445 | 6,415,539 | 6,514,131 | |||||||||||||||||||||||||||||||||||||||||||||
Held-to-maturity securities |
6,052,066 | 75,081 | 4.98 | 6,145,136 | 76,115 | 5.02 | 6,043,965 | 73,896 | 4.86 | 5,865,560 | 70,976 | 4.81 | 5,929,467 | 67,685 | 4.59 | |||||||||||||||||||||||||||||||||||
Total investment securities (4) |
12,287,612 | 149,678 | 4.85 | 12,488,760 | 152,470 | 4.93 | 12,388,410 | 151,003 | 4.84 | 12,281,099 | 152,761 | 4.91 | 12,443,598 | 148,934 | 4.80 | |||||||||||||||||||||||||||||||||||
Other interest-earning assets |
271,607 | 3,188 | 4.71 | 189,569 | 1,917 | 4.10 | 285,158 | 4,810 | 6.71 | 231,207 | 3,035 | 5.22 | 378,235 | 3,531 | 3.75 | |||||||||||||||||||||||||||||||||||
Total interest-earning assets (4) |
45,920,741 | 613,339 | 5.35 | 45,886,878 | 592,073 | 5.23 | 45,199,131 | 576,887 | 5.07 | 44,592,007 | 560,923 | 4.99 | 43,455,462 | 535,142 | 4.95 | |||||||||||||||||||||||||||||||||||
Cash and other assets |
4,788,931 | 4,777,741 | 4,706,442 | 4,575,623 | 4,672,343 | |||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses |
(368,375 | ) | (368,509 | ) | (370,052 | ) | (381,316 | ) | (385,514 | ) | ||||||||||||||||||||||||||||||||||||||||
$ | 50,341,297 | $ | 50,296,110 | $ | 49,535,521 | $ | 48,786,314 | $ | 47,742,291 | |||||||||||||||||||||||||||||||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits |
$ | 6,957,590 | 20,356 | 1.17 | $ | 6,979,278 | 16,345 | 0.95 | $ | 6,808,245 | 12,369 | 0.72 | $ | 6,865,461 | 10,237 | 0.59 | $ | 6,829,555 | 8,640 | 0.51 | ||||||||||||||||||||||||||||||
Money market and savings deposits |
9,974,400 | 36,956 | 1.49 | 9,512,976 | 29,368 | 1.25 | 8,306,523 | 17,376 | 0.83 | 7,875,270 | 10,599 | 0.54 | 7,847,980 | 9,688 | 0.50 | |||||||||||||||||||||||||||||||||||
Time deposits (5) |
9,215,524 | 68,855 | 3.00 | 9,457,697 | 65,279 | 2.80 | 9,574,231 | 63,827 | 2.65 | 9,383,477 | 59,636 | 2.53 | 9,133,052 | 57,712 | 2.54 | |||||||||||||||||||||||||||||||||||
Foreign deposits |
1,256,394 | 6,697 | 2.14 | 1,537,030 | 6,803 | 1.80 | 1,655,500 | 6,063 | 1.46 | 1,611,387 | 4,361 | 1.08 | 1,527,336 | 3,598 | 0.95 | |||||||||||||||||||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
2,866,029 | 17,507 | 2.45 | 3,022,943 | 16,354 | 2.19 | 3,394,875 | 15,246 | 1.79 | 3,338,866 | 11,707 | 1.39 | 2,837,459 | 8,185 | 1.16 | |||||||||||||||||||||||||||||||||||
Other interest-bearing liabilities (5) |
7,441,068 | 73,498 | 3.96 | 7,355,899 | 67,277 | 3.71 | 7,682,934 | 72,015 | 3.73 | 8,165,955 | 77,827 | 3.79 | 8,163,063 | 75,411 | 3.72 | |||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities |
37,711,005 | 223,869 | 2.38 | 37,865,823 | 201,426 | 2.16 | 37,422,308 | 186,896 | 1.99 | 37,240,416 | 174,367 | 1.86 | 36,338,445 | 163,234 | 1.81 | |||||||||||||||||||||||||||||||||||
Net interest spread (4) |
2.97 | % | 3.07 | % | 3.08 | % | 3.13 | % | 3.14 | % | ||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing demand deposits |
7,454,032 | 7,225,621 | 6,978,442 | 6,643,642 | 6,516,977 | |||||||||||||||||||||||||||||||||||||||||||||
Other liabilities (5) |
1,636,182 | 1,666,288 | 1,643,590 | 1,551,933 | 1,581,233 | |||||||||||||||||||||||||||||||||||||||||||||
Shareholders equity |
3,540,078 | 3,538,378 | 3,491,181 | 3,350,323 | 3,305,636 | |||||||||||||||||||||||||||||||||||||||||||||
$ | 50,341,297 | $ | 50,296,110 | $ | 49,535,521 | $ | 48,786,314 | $ | 47,742,291 | |||||||||||||||||||||||||||||||||||||||||
Net interest income/margin on a taxable equivalent basis (4) |
389,470 | 3.40 | % | 390,647 | 3.45 | % | 389,991 | 3.43 | % | 386,556 | 3.44 | % | 371,908 | 3.44 | % | |||||||||||||||||||||||||||||||||||
Taxable equivalent adjustment: (6) |
||||||||||||||||||||||||||||||||||||||||||||||||||
Loans |
6,304 | 6,311 | 6,244 | 6,097 | 6,075 | |||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale securities |
524 | 564 | 589 | 607 | 672 | |||||||||||||||||||||||||||||||||||||||||||||
Held-to-maturity securities |
3,999 | 4,019 | 3,946 | 3,946 | 3,751 | |||||||||||||||||||||||||||||||||||||||||||||
Trading securities |
-0- | 5 | -0- | -0- | -0- | |||||||||||||||||||||||||||||||||||||||||||||
Total taxable equivalent adjustment |
10,827 | 10,899 | 10,779 | 10,650 | 10,498 | |||||||||||||||||||||||||||||||||||||||||||||
Net interest income |
$ | 378,643 | $ | 379,748 | $ | 379,212 | $ | 375,906 | $ | 361,410 | ||||||||||||||||||||||||||||||||||||||||
NOTES:
(1) | Loans net of unearned income includes nonaccrual loans for all periods presented. |
(2) | Interest income includes loan fees of $2,774,000, $2,327,000, $4,780,000, $6,741,000 and $9,647,000, for the three months ended June 30, 2005, March 31, 2005, December 31 2004, September 30, 2004 and June 30, 2004, respectively. |
(3) | Available-for-sale securities excludes certain noninterest-earning, marketable equity securities. |
(4) | The yield calculation for total available-for-sale securities, total investment securities, total interest-earning assets, net interest spread and net interest margin excludes the market valuation on available-for-sale securities. |
(5) | Statement 133 valuation adjustments related to time deposits and other interest-bearing liabilities are included in other liabilities. |
(6) | The taxable equivalent adjustment has been computed using a federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit. |
27
Table 3-Year-to-Date Yields Earned on Average Interest-Earning Assets and Rates Paid on Average Interest-Bearing Liabilities
2005 |
2004 |
|||||||||||||||||||
Six Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||||||
Average Balance |
Revenue/ Expense |
Yield/ Rate |
Average Balance |
Revenue/ Expense |
Yield/ Rate |
|||||||||||||||
(Taxable equivalent basis-dollars in thousands) | ||||||||||||||||||||
Assets |
||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||
Loans net of unearned income (1) (2) |
$ | 33,285,458 | $ | 898,159 | 5.44 | % | $ | 30,169,686 | $ | 764,634 | 5.10 | % | ||||||||
Available-for-sale securities, amortized cost |
6,353,901 | 150,952 | 4.79 | 6,531,439 | 165,329 | 5.09 | ||||||||||||||
Market valuation on available-for-sale securities |
(64,615 | ) | (9,300 | ) | ||||||||||||||||
Total available-for-sale securities (3) |
6,289,286 | 6,522,139 | ||||||||||||||||||
Held-to-maturity securities |
6,098,344 | 151,196 | 5.00 | 5,602,744 | 134,018 | 4.81 | ||||||||||||||
Total investment securities (4) |
12,387,630 | 302,148 | 4.89 | 12,124,883 | 299,347 | 4.96 | ||||||||||||||
Other interest-earning assets |
230,814 | 5,105 | 4.46 | 332,059 | 6,440 | 3.90 | ||||||||||||||
Total interest-earning assets (4) |
45,903,902 | 1,205,412 | 5.29 | 42,626,628 | 1,070,421 | 5.05 | ||||||||||||||
Cash and other assets |
4,783,368 | 4,607,287 | ||||||||||||||||||
Allowance for loan losses |
(368,442 | ) | (386,223 | ) | ||||||||||||||||
$ | 50,318,828 | $ | 46,847,692 | |||||||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||
Interest-bearing demand deposits |
$ | 6,968,374 | 36,701 | 1.06 | $ | 6,582,112 | 15,986 | 0.49 | ||||||||||||
Money market and savings deposits |
9,744,963 | 66,324 | 1.37 | 7,761,363 | 19,003 | 0.49 | ||||||||||||||
Time deposits (5) |
9,335,941 | 134,134 | 2.90 | 9,149,917 | 119,760 | 2.63 | ||||||||||||||
Foreign deposits |
1,395,937 | 13,500 | 1.95 | 1,366,187 | 6,187 | 0.91 | ||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
2,944,052 | 33,861 | 2.32 | 2,607,838 | 14,830 | 1.14 | ||||||||||||||
Other interest-bearing liabilities |
7,398,719 | 140,775 | 3.84 | 8,175,212 | 152,607 | 3.75 | ||||||||||||||
Total interest-bearing liabilities |
37,787,986 | 425,295 | 2.27 | 35,642,629 | 328,373 | 1.85 | ||||||||||||||
Net interest spread (4) |
3.02 | % | 3.20 | % | ||||||||||||||||
Noninterest-bearing demand deposits |
7,340,457 | 6,310,096 | ||||||||||||||||||
Other liabilities (5) |
1,651,152 | 1,612,970 | ||||||||||||||||||
Shareholders equity |
3,539,233 | 3,281,997 | ||||||||||||||||||
$ | 50,318,828 | $ | 46,847,692 | |||||||||||||||||
Net interest income/margin on a taxable equivalent basis (4) |
780,117 | 3.42 | % | 742,048 | 3.50 | % | ||||||||||||||
Taxable equivalent adjustment: (6) |
||||||||||||||||||||
Loans |
12,615 | 12,317 | ||||||||||||||||||
Available-for-sale securities |
1,088 | 1,333 | ||||||||||||||||||
Held-to-maturity securities |
8,018 | 7,491 | ||||||||||||||||||
Trading securities |
5 | -0- | ||||||||||||||||||
Total taxable equivalent adjustment |
21,726 | 21,141 | ||||||||||||||||||
Net interest income |
$ | 758,391 | $ | 720,907 | ||||||||||||||||
NOTES:
(1) | Loans net of unearned income includes nonaccrual loans for all periods presented. |
(2) | Interest income includes loan fees of $5,101,000 and $18,274,000, for the six months ended June 30, 2005 and 2004, respectively. |
(3) | Available-for-sale securities excludes certain noninterest-earning, marketable equity securities. |
(4) | The yield calculation for the total investment securities and total interest-earning assets excludes the market valuation on available-for-sale securities. |
(5) | Statement 133 valuation adjustments related to time deposits and other interest-bearing liabilities are included in other liabilities. |
(6) | The taxable equivalent adjustment has been computed using a federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit. |
28
Table 4 - Loans and Credit Quality
Loans* June 30 |
Nonperforming Loans** June 30 |
Net Charge-offs Six Months Ended June 30 |
|||||||||||||||||
2005 |
2004 |
2005 |
2004 |
2005 |
2004 |
||||||||||||||
(In thousands) | |||||||||||||||||||
Commercial: |
|||||||||||||||||||
Commercial & industrial |
$ | 5,961,937 | $ | 5,515,740 | $ | 35,299 | $ | 45,275 | $ | 14,145 | $ | 13,560 | |||||||
Commercial loans - secured by real estate |
2,381,944 | 2,197,646 | 15,395 | 21,356 | 937 | 588 | |||||||||||||
Commercial leases |
2,239,314 | 1,974,396 | 1,656 | 2,899 | 182 | (297 | ) | ||||||||||||
Total commercial |
10,583,195 | 9,687,782 | 52,350 | 69,530 | 15,264 | 13,851 | |||||||||||||
Commercial real estate: |
|||||||||||||||||||
Commercial real estate mortgages |
2,922,692 | 2,642,411 | 2,738 | 3,670 | 730 | (301 | ) | ||||||||||||
Real estate construction |
3,364,146 | 2,568,776 | 1,837 | 2,912 | 1,321 | 1,630 | |||||||||||||
Total commercial real estate |
6,286,838 | 5,211,187 | 4,575 | 6,582 | 2,051 | 1,329 | |||||||||||||
Consumer: |
|||||||||||||||||||
Residential first mortgages |
5,692,014 | 4,189,126 | 11,649 | 18,393 | 1,722 | 1,443 | |||||||||||||
Equity loans and lines |
7,427,904 | 7,514,199 | 1,588 | 8,057 | 7,451 | 12,796 | |||||||||||||
Dealer indirect |
3,087,815 | 3,627,608 | 17 | 23 | 4,444 | 9,873 | |||||||||||||
Revolving credit |
23,538 | 555,763 | -0- | -0- | 964 | 9,965 | |||||||||||||
Other consumer |
432,078 | 565,832 | 242 | 85 | 4,827 | 5,317 | |||||||||||||
Total consumer |
16,663,349 | 16,452,528 | 13,496 | 26,558 | 19,408 | 39,394 | |||||||||||||
$ | 33,533,382 | $ | 31,351,497 | $ | 70,421 | $ | 102,670 | $ | 36,723 | $ | 54,574 | ||||||||
* | Net of unearned income. |
** | Exclusive of accruing loans 90 days past due. |
Table 5 - Allowance for Loan Losses
2005 |
2004 |
|||||||||||||||||||
2nd Quarter |
1st Quarter |
4th Quarter |
3rd Quarter |
2nd Quarter |
||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Balance at beginning of period |
$ | 366,836 | $ | 366,774 | $ | 381,255 | $ | 382,482 | $ | 382,450 | ||||||||||
Loans charged off |
(27,170 | ) | (29,679 | ) | (44,277 | ) | (39,799 | ) | (38,202 | ) | ||||||||||
Recoveries of loans previously charged off |
9,528 | 10,598 | 11,146 | 11,062 | 11,634 | |||||||||||||||
Net charge-offs |
(17,642 | ) | (19,081 | ) | (33,131 | ) | (28,737 | ) | (26,568 | ) | ||||||||||
Addition to allowance charged to expense |
17,700 | 20,600 | 44,250 | 28,800 | 26,600 | |||||||||||||||
Allowance sold |
(1,268 | ) | (1,457 | ) | (25,600 | ) | (1,290 | ) | -0- | |||||||||||
Balance at end of period |
$ | 365,626 | $ | 366,836 | $ | 366,774 | $ | 381,255 | $ | 382,482 | ||||||||||
Allowance for loan losses to loans net of unearned income |
1.09 | % | 1.11 | % | 1.12 | % | 1.17 | % | 1.22 | % | ||||||||||
Net charge-offs to average loans net of unearned income (annualized) |
0.21 | % | 0.23 | % | 0.41 | % | 0.36 | % | 0.35 | % | ||||||||||
Allowance for loan losses to nonperforming loans* |
519.20 | % | 420.42 | % | 414.49 | % | 410.14 | % | 372.54 | % | ||||||||||
Allowance for loan losses to nonperforming assets* |
406.40 | % | 325.44 | % | 331.64 | % | 319.76 | % | 282.17 | % |
* | Exclusive of accruing loans 90 days past due. |
29
Table 6 - Nonperforming Assets
2005 |
2004 |
|||||||||||||||||||
June 30 |
March 31 |
December 31 |
September 30 |
June 30 |
||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Nonaccrual loans* |
$ | 70,421 | $ | 87,255 | $ | 88,488 | $ | 92,958 | $ | 102,670 | ||||||||||
Foreclosed properties |
17,791 | 23,258 | 19,609 | 23,043 | 29,586 | |||||||||||||||
Repossessions |
1,755 | 2,208 | 2,498 | 3,231 | 3,295 | |||||||||||||||
Total nonperforming assets* |
$ | 89,967 | $ | 112,721 | $ | 110,595 | $ | 119,232 | $ | 135,551 | ||||||||||