<PAGE> 1
UNITED STATES
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 September 30, 1995
Commission File No. 0-10657
FIRST NATIONAL BANCORP
----------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1415138
------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
303 Jesse Jewell Parkway, Suite 700
Gainesville, Georgia 30501
---------------------------
(Address of principal executive offices)
(770) 503-2000
--------------
(Registrant's telephone number)
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 twelve 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 / /
On November 7, 1995, 20,548,420 shares of Registrant's common stock, $1.00 par
value, were outstanding.
<PAGE> 2
FIRST NATIONAL BANCORP
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
<PAGE> 3
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
September 30 December 31 September 30
1995 1994 1994
----------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 98,244 $ 96,428 $ 95,916
Federal funds sold 91,652 117,789 97,073
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents 189,896 214,217 192,989
Interest-bearing deposits in other financial institutions 10,708 16,259 22,301
Investment securities available-for-sale
663,106 583,816 540,841
Investment securities held-to-maturity (market value
$156,931, $156,044 and $205,775, respectively) 152,312 157,567 201,084
Loans 1,970,654 1,857,097 1,825,127
Allowance for loan losses (26,016) (26,474) (26,979)
- ----------------------------------------------------------------------------------------------------------
Net loans 1,944,638 1,830,623 1,798,148
Premises and equipment, net 67,209 66,967 66,820
Other assets 84,006 101,659 89,666
- ----------------------------------------------------------------------------------------------------------
Total assets $3,111,875 $2,971,108 $2,911,849
==========================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand deposits $ 335,441 $ 349,121 $ 347,081
Interest-bearing checking deposits 221,907 249,113 223,335
Money market deposits 111,023 130,855 135,398
Certificates of deposit less than $100 887,347 749,312 722,867
Certificates of deposit greater than $100 261,954 225,240 219,763
Other interest-bearing deposits 769,451 778,817 789,450
- ----------------------------------------------------------------------------------------------------------
Total deposits 2,587,123 2,482,458 2,437,894
Federal funds purchased 32,092 44,485 23,731
Securities sold under agreements
to repurchase 51,817 54,216 43,062
Other short-term borrowings 11,173 6,427 8,632
Long-term debt 79,641 80,238 90,592
Other liabilities 45,763 30,479 34,497
- ----------------------------------------------------------------------------------------------------------
Total liabilities 2,807,609 2,698,304 2,638,408
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share, authorized
30,000,000 shares; issued and outstanding 20,529,193
20,425,181 and 20,349,722 shares, respectively 20,529 20,425 20,350
Additional paid-in capital 86,468 84,441 82,855
Retained earnings 194,731 181,395 178,075
Net unrealized holding losses on investment securities
available-for-sale 2,538 (13,723) (7,753)
Stock held by Management Recognition Plan - (86) (86)
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 304,266 272,453 273,441
- ----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $3,111,875 $2,971,108 $2,911,849
==========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
(unaudited) Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1995 1994 1995 1994
------------------ -----------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans (including fees) $47,057 $39,899 $135,131 $114,357
Interest-bearing deposits in other
financial institutions 215 413 689 1,485
Investment securities:
Tax-exempt 2,820 2,538 8,148 7,635
Taxable 10,452 8,812 30,224 24,229
Federal funds sold 1,558 1,269 5,528 3,383
- ------------------------------------------------------------------------ -------------------
Total interest income 62,102 52,931 179,720 151,089
- ------------------------------------------------------------------------ -------------------
INTEREST EXPENSE
Deposits, including interest expense on certificates
of deposit of $100 or more of $2,738, $1,833
$7,328 and $5,315, respectively. 27,781 19,765 77,180 57,135
Federal funds purchased and securities
sold under agreements to repurchase 1,204 845 4,190 2,201
Other short-term borrowings 118 39 274 156
Long-term debt 1,092 1,097 3,350 2,970
- ------------------------------------------------------------------------ -------------------
Total interest expense 30,195 21,746 84,994 62,462
- ------------------------------------------------------------------------ -------------------
NET INTEREST INCOME 31,907 31,185 94,726 88,627
Provision for loan losses 920 (159) 1,963 (136)
- ------------------------------------------------------------------------ -------------------
Net interest income after provision for loan losses 30,987 31,344 92,763 88,763
- ------------------------------------------------------------------------ -------------------
NONINTEREST INCOME
Service charges on deposit accounts 3,080 3,016 9,100 8,369
Mortgage loan and other related fees 1,290 1,249 3,945 5,037
Fees for trust services 591 591 1,766 1,746
Credit card fees 491 453 1,275 1,220
Insurance premiums and commissions 190 227 901 968
Net gain (loss) on sales of investment securities 69 (21) 291 166
Other noninterest income 1,745 1,725 4,513 5,059
- ------------------------------------------------------------------------ -------------------
Total noninterest income 7,456 7,240 21,791 22,565
- ------------------------------------------------------------------------ -------------------
NONINTEREST EXPENSE
Salaries and employee benefits 12,773 12,348 40,600 36,695
Furniture and equipment 1,567 1,631 4,735 4,883
Postage, telephone and stationary 1,534 1,344 4,543 4,133
Net occupancy 1,500 1,548 4,464 4,394
FDIC insurance premiums 113 1,416 2,979 4,082
Data processing 813 812 2,696 2,441
Promotional 703 557 2,044 1,742
Other noninterest expense 5,044 5,177 15,310 14,406
- ------------------------------------------------------------------------ -------------------
Total noninterest expense 24,047 24,833 77,371 72,776
- ------------------------------------------------------------------------ -------------------
Income before income taxes 14,396 13,751 37,183 38,552
Income tax expense 4,591 4,314 11,332 11,108
- ------------------------------------------------------------------------ -------------------
NET INCOME $ 9,805 $ 9,437 $ 25,851 $ 27,444
======================================================================== ===================
Weighted-average shares outstanding 20,497 20,303 20,465 20,053
Net income per share $ .48 $ .47 $ 1.26 $ 1.37
Dividends declared per share $ .2125 $ .1950 $ .6250 $ .5775
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
(unaudited) Nine Months Ended September 30
------------------------------
1995 1994
------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 25,851 $ 27,444
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan losses 1,963 (136)
Provision for other real estate losses 896 426
Depreciation 4,552 4,721
Amortization and accretion, net (5,577) (1,177)
Deferred income tax (benefit) expense 1,614 (6,280)
Losses (gains) on sales of investment securities (291) 65
Gains on sales of mortgage loan servicing rights (68) (2,295)
Gains on sales of assets acquired in
forclosure and equipment (973) (519)
Excess servicing fees receivable resulting from
first mortgage loan sales (1,158) (413)
(Increase) decrease in mortgage loans held-for-sale (11,576) 50,932
Other, net 14,527 6,426
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities 29,760 79,335
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales/calls of investment securities held-to-maturity 9,750 3,649
Proceeds from principal collections on and maturities of
investment securities held-to-maturity 3,450 9,766
Purchases of investment securities held-to-maturity (12,261) (18,780)
Proceeds from sales of investment securities available-for-sale 54,309 27,215
Proceeds from principal collections on and maturities of
investment securities available-for-sale 254,487 131,468
Purchases of investment securities available-for-sale (359,043) (260,429)
Net decrease in interest-bearing deposits in
other financial institutions 5,551 46,452
Net increase in loans (111,427) 72,169
Proceeds from sale of mortgage loan servicing rights 15,396 3,128
Purchases of mortgage loan servicing rights (1,575) (10,461)
Purchases of premises and equipment (5,710) (4,965)
Proceeds from sales of premises and equipment 759 138
Proceeds from sales of assets acquired in forclosure 7,340 7,519
Net cash and cash equivalents acquired in the
purchase of bank subsidiary --- 27,515
- ----------------------------------------------------------------------------------------
Net cash used in investing activities (138,974) 109,954
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 104,665 (12,450)
Net decrease in short-term borrowings (10,047) (1,815)
Proceeds from the issuance of long-term debt 10,000 33,000
Payments on long-term debt (10,597) (5,596)
Proceeds from issuance of common stock for stock options exercised 1,587 1,446
Issuance of additional shares in acquisition
Proceeds from issuance of common stock for dividend reinvest plan 511
Cash dividends paid on common stock (11,231) (9,245)
- ----------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 84,888 5,340
- ----------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (24,326) (25,279)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 214,222 218,268
- ----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 189,896 $ 192,981
========================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 84,016 $ 62,092
========================================================================================
Income taxes paid $ 7,920 $ 13,328
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the interim periods are not necessarily indicative of the
results that may be expected for the full year or any other interim period.
Certain reclassifications have been made to amounts previously presented to
conform with current period presentations. Such reclassifications had no
effect on net income. For further information, refer to the consolidated
financial statements and footnotes thereto incorporated by reference in
First National Bancorp's (the "Company") annual report on Form 10-K for the
year ended December 31, 1994 which have been subsequently restated and
refiled under Form 8-K during November 1995, to give effect to the
acquisition of FF Bancorp, Inc., on July 3, 1995.
2. BUSINESS COMBINATIONS
On October 22, 1995, the Company entered into an Agreement and Plan of
Reorganization ("the Agreement") whereby the Company will be acquired by
Regions Financial Corporation ("Regions"), headquartered in Birmingham,
Alabama. Under the terms of the Agreement, Regions will exchange .76 shares
of its common stock for each share of the Company. In connection with
executing the Agreement, the Company granted to Regions an option to
purchase up to 4,089,234 shares of the Company's common stock, at a
purchase price of $27.00 per share, upon certain terms and in accordance
with certain conditions. The transaction is subject to approval by the
shareholders of Regions and the Company, and various regulatory agencies,
and is anticipated to be consumated in the first quarter of 1996.
On July 25, 1995, the Company entered into a Letter of Intent, and on
August 3, 1995 signed an Agreement of Reorganization and Plan of Merger
("the Agreement"), to acquire The Bank of Heard County ("Heard"), a $40
million asset commercial bank located in Franklin County, Georgia. The
Agreement calls for the transaction to be structured as a tax-free exchange
of stock whereby the Company will exchange 325.58 shares of its common
stock for each of the 1,000 outstanding common shares of Heard. The merger
is subject to the approval of Heard shareholders and various regulatory
agencies.
On July 3, 1995, the Company completed its acquisition of FF Bancorp, Inc.
("FF Bancorp"), New Smyrna Beach, Florida. FF Bancorp was the holding
company of First Federal Savings Bank of New Smyrna, New Smyrna Beach,
Florida, a thrift institution, First Federal Savings Bank of Citrus County,
Florida, a thrift headquartered in Inverness, Florida, and Key Bank
of Florida, a commercial bank located in Tampa, Florida. The Company
exchanged 3,884,587 shares of its common stock for all of the 4,706,163
shares of FF Bancorp stock outstanding. No cash, except for fractional
shares, was paid in the transaction. The transaction was accounted for as
a pooling-of- interests and, accordingly, the consolidated financial
statements for all periods presented have been restated to include the
financial position and results of operations of FF Bancorp. Certain amounts
in the historical financial statements of FF Bancorp, Inc. have been
reclassified to conform with the basis of presentation of the Company. Such
reclassificationss had no effect on net income. The Company's Consolidated
financial data for the six months ended June 30, 1995 and the three and
nine month periods ended September 30, 1994 have been restated as follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
Six months ended Three months ended Nine months ended
6/30/95 9/30/94 9/30/94
------- ------- -------
<S> <C> <C> <C>
Net interest income:
First National Bancorp before acquisition $51,132 $25,207 $71,721
FF Bancorp 11,614 5,978 16,906
------- ------- -------
Total $62,746 $31,185 $88,627
======= ======= =======
Net Income:
First National Bancorp before acquisition $12,859 $ 7,237 $20,980
FF Bancorp 3,187 2,200 6,464
------- ------- -------
Total $16,046 $ 9,437 $27,444
======= ======= =======
Net Income per share:
First National Bancorp before acquisition $ .78 $ .44 $ 1.28
Effect of restatement for FF Bancorp -- .03 .09
------- ------- -------
Total $ .78 $ .47 $ 1.37
======= ======= =======
</TABLE>
3. LOANS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") 114, "Accounting by
Creditors for Impairment of a Loan." FAS 114 requires impaired loans to be
measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate, or at the loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent, beginning in 1995. In October 1994, the FASB issued
FAS 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures," which amends the requirements of FAS 114
regarding interest income recognition and related disclosure requirements.
On January 1, 1995, the Company adopted FAS 114 and FAS 118. At September
30, 1995, pursuant to the definitions within FAS 114, the Company had
approximately $20,224,000 of impaired loans, of which $19,129,000 are
classified as nonaccrual. A valuation reserve in the amount of $458,000
has been established for approximately $6,480,000 of these impaired loans.
4. MORTGAGE SERVICING RIGHTS
In May 1995, the FASB issued FAS 122, "Accounting for Mortgage
Servicing Rights and Excess Servicing Receivables and for Securitization of
Mortgage Loans," as an amendment to FAS 65, "Accounting for Certain
Mortgage Banking Activities." This statement is effective for fiscal years
beginning after December 15, 1995, however earlier adoption is permitted.
The Company adopted FAS 122 effective April 1, 1995. FAS 122 requires that
a mortgage banking enterprise recognize as separate assets, rights to
service mortgage loans for others regardless of whether such servicing
rights are acquired through either the purchase or
6
<PAGE> 7
origination of mortgage loans. The statement also requires that the mortgage
banking enterprise assess its capitalized mortgage servicing rights for
impairment based upon the fair value of those rights, including those rights
purchased before adoption of FAS 122. Impairment should be recognized through
a valuation allowance. As a result of the adoption of FAS 122, the Company
recognized additional earnings of $252,000 during the three month period ended
June 30, 1995 over the amount that would have been recognized under FAS 65.
During the three month period ended September 30, 1995, the Company capitalized
all mortgage servicing rights. At September 30, 1995, the fair value of the
Company's capitalized mortgage servicing rights was $4,024,000 and the
valuation allowance was $5,000. Fair value was estimated by determining the
present value of the estimated future cash flows using discount rates
commensurate with the risks involved. In determining the present value, the
Company stratifies its mortgage servicing rights based on risk characteristics
such as loan type, note rates, origination dates, and note term.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion will cover results of operations, asset quality,
financial position and capital resources. The information included in this
discussion is intended to assist readers in their analysis of, and should be
read in conjunction with, the consolidated financial statements presented
elsewhere in this report, and the financial statements and footnotes contained
in the Company's annual report on Form 10-K for the year ended December 31,
1994 which are being restated and filed in a Current Report on Form 8-K during
November 1995 to give effect to the acquisition of FF Bancorp, Inc., on July 3,
1995. The following discussions do not take into account any potential
restructuring charges which may or may not be taken by the Company as a result
of its previously announced merger with Regions Financial Corporation, since
these charges, if any, are not known at this time.
SELECTED FINANCIAL DATA
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1995 1994 Change Percent
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
QUARTER ENDED SEPTEMBER 30:
Net income $ 9,805 $ 9,437 $ 368 3.9 %
Net interest income 31,907 31,185 722 2.3
Net interest income-fully taxable equivalent 33,563 32,915 648 2.0
Noninterest income 7,456 7,240 216 3.0
Noninterest expense 24,047 24,833 (786) (3.2)
Provision for loan losses 920 (159) 1,079 678.6
- ---------------------------------------------------------------------------------------------------------------------
SHARE DATA:
Net income per share $ .48 $ .47 $ .01 2.1 %
Dividends declared per share .2125 .1950 .0175 9.0
Book value per share 14.82 13.44 1.38 10.3
Tangible book value per share 14.32 12.09 2.23 18.5
Weighted average shares outstanding 20,497 20,303
Shares outstanding at quarter-end 20,529 20,350
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS:
Return on average assets 1.26% 1.30%
Return on average shareholders' equity 13.04 13.78
Net interest margin 4.61 4.90
Primary capital to adjusted assets:
Including intangibles 10.52 10.22
Excluding intangibles 10.27 9.93
Allowance for loan losses to loans, net of unearned income:
Including mortgage loans held-for-sale 1.32 1.48
Excluding mortgage loans held-for-sale 1.34 1.49
- ---------------------------------------------------------------------------------------------------------------------
SELECTED BALANCES AS OF SEPTEMBER 30:
Total assets $3,111,875 $2,911,849 $200,026 6.9 %
Earning assets 2,888,432 2,686,426 202,006 7.5
Loans, net of unearned income:
Including mortgage loans held-for-sale 1,970,654 1,825,127 145,527 8.0
Excluding mortgage loans held-for-sale 1,945,559 1,810,698 134,861 7.4
Allowance for loan losses 26,016 26,979 (963) (3.6)
Investment securities 815,418 741,925 73,493 9.9
Deposits 2,587,123 2,437,894 149,229 6.1
Short-term borrowings 95,082 75,425 19,657 26.1
Long-term debt 79,641 90,592 (10,951) (12.1)
Shareholders' equity 304,266 273,441 30,825 11.3
- ---------------------------------------------------------------------------------------------------------------------
NINE MONTH PERIOD ENDED SEPTEMBER 30:
Net income $ 25,851 $27,444 $ (1,593) (5.8)%
Net income per share 1.26 1.37 (.11) (8.0)
Dividends declared per share .6250 0.5775 .0475 8.2
Weighted average shares outstanding 20,465 20,053
Return on average assets 1.14% 1.29%
Return on average shareholders'equity 12.06 13.54
Net interest margin 4.73 4.73
</TABLE>
8
<PAGE> 9
PERFORMANCE OVERVIEW
In the third quarter of 1995, the Company reported net income of $9,805,000, an
increase of $368,000, or 3.9%, from the $9,437,000 reported in the third
quarter of 1994. Earnings per share in the third quarter of 1995 were $.48,
compared with $.47 reported for the third quarter of 1994, an increase of 2.1%.
On a year-to-date basis, the Company reported net income of $25,851,000, a
decrease of $1,593,000, or 5.8%, from the $27,444,000 reported for the first
nine months of 1994. Earnings per share in 1995 were $1.26, compared with
$1.37 reported for the same period in 1994, a decrease of 8.0%.
Net income in the third quarter produced a return on average assets of 1.26%,
compared to the 1.30% reported for third quarter 1994. Return on average
equity was 13.04% for the three months ended September 30, 1995, compared to
13.78% for the same period in 1994.
Weighted average shares outstanding for the third quarter of 1995 increased to
20,497,000, compared with 20,303,000 reported in the third quarter of 1994.
For the first nine months of 1995, weighted average shares outstanding
increased to 20,465,000, compared with 20,053,000 for the same period in 1994.
A majority of the increase in average shares outstanding for the first nine
months of 1995 versus 1994 is the result of the 266,414 shares issued in the
acquisition of Metro Bancorp, Inc. ("Metro") on February 28, 1994.
Third quarter and year to date earnings were positively impacted by $1,100,000
of pre-tax, FDIC insurance premium refunds from the retroactive reduction in
FDIC premium rates. Year to date results were also negatively impacted by
$851,000 of nonrecurring expenses associated with the Company's mortgage
servicing portfolio business which were recognized during the second quarter.
The majority of the expenses were due to the recognition of impairment on the
recorded value of mortgage loan servicing rights. The Company considers such
expense non recurring, since in July 1995 it entered into a contract to sell
the portion of its servicing portfolio which comprised purchased loans,
retaining only local retail production. Additionally, in April 1995, Richard
A. McNeece, chairman and chief executive officer of the Company announced that
he would leave the Company on June 30, 1995. While recorded in the first
quarter of 1995, earnings for the first nine months of 1995 reflect the full
recognition of expenses related to Mr. McNeece's resignation. Additional
increases in income and expenses, including personnel related expenses in 1995,
when compared to 1994, are due to the 1994 acquisition of Metro. Metro was
acquired on February 28, 1994, and was accounted for under the purchase method
of accounting, thereby only including the results of Metro's operations from
March 1, 1994.
The remainder of this discussion provides a more detailed explanation of
factors affecting the change in results of operations and the change in
financial position of the Company for the reported periods.
NET INTEREST INCOME
Net interest income is the most significant component of earnings. For
analytical purposes, interest earned on tax exempt assets, such as industrial
development revenue bonds and state and municipal obligations, is adjusted to a
fully- taxable equivalent (FTE) basis. This adjustment is based upon the
federal corporate income tax rate, and any interest expense which is disallowed
as a deduction in connection with carrying tax exempt assets.
Net interest income on an FTE basis increased to $99,576,000 in the first nine
months of 1995, compared with $93,593,000 for the same period of 1994. The
increase in interest income (FTE) between periods was primarily volume driven,
as opposed to rate driven, as increases in interest rates on loans were offset
by increases in the costs of funding sources. The Company's net interest
margin for the nine months ended September 30, 1995, was 4.73% , flat from the
4.73% reported for the same period in 1994. Margin pressure continues to
impact rate spreads, since the first nine months of 1994 provided a rate
spread of 4.15%, but declined to 3.99% for the same period in 1995.
Comparing volume changes in average asset and liability balances for the first
nine months of 1995 to the first nine months of 1994, average loans increased
$112,354,000, or 6.3%, average investment securities increased $73,911,000, or
10.44% and federal funds sold increased $13,749,000, or 12.6%. The net result
was a $170,127,000 increase in average earning assets between periods. Average
interest-bearing funds increased $113,988,000 or 6.2%, and federal funds
purchased and securities sold under agreements to repurchase increased
$24,856,000, or 36.0%, resulting in a $139,616,000, or 6.2% increase in average
interest-bearing liabilities between the first nine months of 1995 and 1994.
9
<PAGE> 10
Management anticipates that loan volumes will continue to increase, while
interest rates remain at low levels. Provided the local economy remains
strong and stable, customers will continue to maintain their savings in higher
yielding deposit accounts. Current margin levels, while under significant
pressure, may be sustainable during the next few quarters, due to continued
improvements in asset quality, current loan pricing strategies and management's
emphasis in pursuing core asset growth.
The following table provides the sources of interest income and expenses
between the periods and the variances resulting from fluctuations in interest
rate (rate) and changes in the amount (volume) of earning assets and
interest-bearing liabilities.
CHANGES IN NET INTEREST INCOME - TAXABLE EQUIVALENT BASIS
(dollars in thousands)
<TABLE>
<CAPTION>
1995-1994
Average Balances Average Rates Interest ---------------------------------
------------------------------------------------------------------- Income
Nine Months Ended Nine Months Ended Nine Months Ended Expense Volume Rate
9/30/95 9/30/94 9/30/95 9/30/94 9/30/95 9/30/94 Variance Variance Variance
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net $1,896,170 $1,783,816 9.53% 8.57% $135,131 $114,357 $20,774 $ 7,493 $13,281
Interest-bearing
deposits in other
financial institutions 14,032 43,919 6.56% 4.52% 689 1,485 (796) (1,285) 489
Investment securities:
Tax-exempt 161,975 148,803 10.73% 11.19% 12,999 12,454 545 1,071 (526)
Taxable 620,143 559,404 6.52% 5.79% 30,224 24,229 5,995 2,784 3,211
Federal funds sold 123,291 109,542 5.99% 4.13% 5,528 3,383 2,145 466 1,679
------------------------------------------------------------------------------------------------------
Total earning assets 2,815,611 2,645,484 8.76% 7.88% 184,571 155,908 28,663 10,529 18,134
------------------------------------------------------------------------------------------------------
Allowance for loan losses (26,161) (28,491)
Cash and due from banks 79,105 78,250
Premises and equipment, net 67,061 64,445
Other assets 86,148 92,114
-----------------------
Total assets $3,021,764 $2,851,802
=======================
Savings, IMMA deposits $ 757,325 $ 807,534 2.91% 2.57% 16,495 15,533 962 (1,007) 1,969
Time deposits 1,440,501 1,276,304 5.63% 4.36% 60,685 41,602 19,083 5,830 13,253
Federal funds purchased
and securities sold under
agreements to repurchase 93,917 69,061 5.96% 4.26% 4,190 2,201 1,989 942 1,047
Other borrowed funds 88,969 88,197 5.45% 4.74% 3,624 3,126 498 28 470
------------------------------------------------------------------------------------------------------
Total interest-
bearing liabilities 2,380,712 2,241,096 4.77% 3.73% 84,994 62,462 22,532 5,793 16,739
------------------------------------------------------------------------------------------------------
Demand deposits 318,694 305,848
Other liabilities 35,809 33,802
Shareholders' equity 286,549 271,056
-----------------------
Total liabilities and
shareholders' equity $3,021,764 $2,851,802
=======================
Rate spread 3.99% 4.15%
=========================================================================
Net interest margin/revenue 4.73% 4.73% $ 99,577 $ 93,446 $ 6,131 $ 4,736 $ 1,395
-------------------------------------------------------------------------
</TABLE>
Changes in interest due to volume and rate were defined as follows: Volume
variance-change in average balance multiplied by prior year rate; Rate
variance-change in rate multiplied by prior year average balance. The change
in interest due to both rate and volume has been allocated proportionately to
volume variance and rate variance based on the relationship of the absolute
dollar change in each.
10
<PAGE> 11
NONINTEREST INCOME AND EXPENSE
Noninterest income increased $216,000, to $7,456,000, in the third quarter of
1995, from $7,240,000 for the third quarter of 1994. Income from mortgage
related activity increased $41,000 or 3.3% in the third quarter of 1995
compared with the third quarter of 1994. For the nine months ended September
30, 1995, noninterest income decreased $774,000, or 3.4% from the $22,565,000
reported for the nine months ended September 30, 1994. Service charges on
deposit accounts increased $731,000, or 8.7%, over the $8,369,000 reported for
the nine months ended September 30, 1994. The $1,092,000 decline in mortgage
loan related income during 1995 was due to the recognition of approximately
$2,200,000 of gains on the sale of certain mortgage servicing rights in the
second quarter of 1994. The Company continues to analyze opportunities
available through current fee structures, the expansion of trust, credit card,
and annuity products, as a source for generating additional noninterest income.
During the third quarter of 1995, the Company sold $1.1 billion of purchased
mortgage servicing rights. The sale will lower 1995 servicing income by $1.7
million and reduce amortization expense by $1.5 million. The sale had no
material effect on net income. In addition, this transaction will eliminate
future potential impairment and reduce the volatility of earnings from
mortgage operations. The Company intends to continue originating and selling
first mortgages but has decided to reduce the amount of mortgage servicing
rights held on its books. Consequently, on a periodic basis, the Company
intends to sell the rights to most non-originated mortgage loans and remove
the capitalized servicing rights from its books.
Noninterest expense decreased to $24,047,000 in the third quarter of 1995,
compared to $24,833,000 in the third quarter of 1994, a decrease of $786,000,
or 3.2%, driven by the previously mentioned FDIC insurance refund of
approximately $1,100,000 which helped offset small increases in other
categories of noninterest expense. Specific categories which increased in third
quarter 1995 over the same period in 1994 included personnel related expenses,
increasing $425,000, or 3.4% over the previous year, and increases of $146,000
in promotional expenses and increases in postage, stationary and supplies of
$190,000 over the same period in 1994. Year to date 1995 expenses were impacted
by $851,000 of pre-tax, expenses associated with the Company's mortgage
servicing business. Noninterest expense reported for the nine months ended
September 30, 1995, increased $4,595,000, or 6.3% over the $72,776,000
reported for the first nine months of 1994. Personnel related expenses, which
makes up the largest category of noninterest expense, increased $3,905,000, or
10.6%, between the first nine months of 1995 and the first nine months of 1994.
As described previously, this increase is the result of the first quarter 1994
acquisition of Metro, which is included for all nine months of 1995, but for
only seven months of 1994, and expenses related to the resignation of Mr.
McNeece.
The Company's efficiency ratio (noninterest expense as a percentage of total
FTE net interest income and noninterest income, excluding securities gains or
losses) was impacted by these changes in income and expenses between periods,
resulting in a significant decrease of 309 basis points, from 61.81% in third
quarter 1994 to 58.72% in the third quarter of 1995. The efficiency ratio for
the first nine months of 1995 decreased 292 basis points, from the 66.82%
reported for the first nine months of 1994 to 63.90%.
Management continues to evaluate its options for lowering expenses in its
effort to be a low cost provider of financial services in the communities its
affiliates operate. As part of its strategic evaluation of current operations
and future opportunities, management has been involved in a long-term project
to analyze its fee income opportunities. The impact of these evaluations are
expected to become evident by the fourth quarter of 1995.
Legislation is currently being proposed in the United States Congress, which
among other things, would require members of the Savings Association Insurance
Fund (SAIF) to pay a special assessment to recapitalize the fund and thereafter
merge the SAIF into the Bank Insurance Fund (BIF). While negotiation of
specific provisions of the proposed legislation is ongoing between the House
and Senate Banking Committees, it is anticipated that the SAIF recapitalization
will occur in early 1996. Under the proposed legislation, SAIF members will
pay the special assessment to recapitalize their fund based on their insured
deposits held on March 31, 1995. The amount of the assessment is to be
determined by the Federal Deposit Insurance Corporation and is expected to be
approximately 85 basis points per $100 of SAIF insured deposits. Based on the
proposed legislation, the Company anticipates a charge against earnings of
approximately $4 million for the special assessment. Such charge will be
recorded as determined by the final legislation.
INCOME TAXES
Income tax expense was $4,591,000 for the third quarter of 1995, an increase of
$277,000, or 6.4%, over the same period in 1994. For the first nine months of
1995, income tax expense was $11,332,000, an increase of $224,000 over the
$11,108,000 reported for the first nine months of 1994. The effective tax rate
for the nine months ended September 30, 1995 on a tax equivalent basis was
26.96%, an increase over the 25.61% reported in 1994. This year to date
increase was due primarily to deferred tax benefits recorded in 1994, which
were not available in 1995.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
One of the more significant risks of loss of any financial institution is
derived from its loan portfolio. The Company manages its loan portfolio to
limit risk through initial review of credit applications, approval of loans by
experienced and trained personnel, loan documentation and compliance
procedures. The Company's loan portfolio is well diversified with no excessive
concentration in any one industry. In accordance with regulatory standards,
loans are placed in nonaccrual status when they reach a prescribed
11
<PAGE> 12
delinquency stage, generally when payments are 90 days past due or when other
events occur which make the collection of all principal and interest on the
loan questionable.
As the following table indicates, the Company has had significant success in
improving core asset quality since September 30, 1994, and these improvements
in asset quality are expected to continue. Since management has placed
emphasis on asset quality procedures and training, the level of nonperforming
loans and assets has shown improvement. Continued improvement will be largely
dependent on the continuing economic strength in the markets the Company
serves. Management anticipates a continuation of a relatively strong economy,
and due to continued problem asset remediation, expects continued improvement
in nonperforming loans, assets, and applicable asset quality ratios for the
remainder of 1995.
RISK ELEMENTS
(dollars in thousands)
<TABLE>
<CAPTION>
9/30/95 12/31/94 9/30/94
-------------------------------------
<S> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans $ 19,129 $ 18,936 $ 24,932
Renegotiated loans 1,095 45 368
-------------------------------------
Total nonperforming loans 20,224 18,981 25,300
Other real estate 9,138 9,813 16,645
-------------------------------------
Total nonperforming assets $ 29,362 $ 28,794 $ 41,945
=====================================
Loans past due 90 days or more $ 373 $ 214 $ 291
=====================================
Nonperforming loans as a percentage
of loans, net of unearned income 1.03% 1.02% 1.39%
Nonperforming assets as a percentage
of loans, net of unearned income, plus
other real estate owned 1.48% 1.54% 2.28%
Allowance for loan losses as a
percentage of nonperforming loans 128.64% 139.48% 106.64%
Allowance for loan losses as a
percentage of nonperforming assets
and loans past due 90 days or more 87.49% 91.26% 63.88%
</TABLE>
During 1995, the Company has reduced its level of loan loss reserves from
levels seen in 1994 as justified by the improvement in asset quality. This
reduction was due to the impact of $2,423,000 in net charge offs, offset by a
$1,963,000 provision expense. The current level of provision expense has been
warranted by increased loan volumes and a return to normalized provision levels
from previous quarters. Improvement in asset quality since 1993 contributed to
the record low charge-off ratios. Activity in the allowance for loan losses,
including the contribution from the acquisition of Metro during the first
quarter of 1994, is provided below.
LOAN CHARGE-OFF ANALYSIS
(dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
9/30/95 9/30/94 9/30/95 9/30/94
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Allowance for loan losses, beginning of the period $25,581 $28,849 $26,476 $24,269
Charge-offs 1,069 2,423 4,075 5,071
Recoveries on loans charged-off 584 712 1,652 2,020
----------------------------------------------------
Net charge-offs 485 1,711 2,423 3,051
Provision for loan losses 920 (159) 1,963 (136)
Allowance of subsidiary banks acquired --- --- --- 5,897
----------------------------------------------------
Allowance for loan losses, end of the period $26,016 $26,979 $26,016 $26,979
====================================================
Net loans charged off as a percentage
of average loans, net of unearned
income (annualized) .10% .38% .17% .23%
</TABLE>
12
<PAGE> 13
EARNING ASSETS AND FUNDING SOURCES
Management classifies earning assets into two categories, core and incremental.
Core earning assets are defined as loans relative to the business of banking,
while incremental earning assets are all other earning assets, including
mortgage loans held-for-sale, investments, and interest-bearing deposits with
other financial institutions. The following table provides the Company's
allocation between these categories and the changes between each category for
the periods presented.
ANALYSIS OF PERIOD END BALANCE SHEET CHANGES
(dollars in thousands)
<TABLE>
<CAPTION>
Change From Change From
---------------------------------------
12/31/94 to 9/30/95 9/30/94 to 9/30/95
---------------------------------------
9/30/95 12/31/94 9/30/94 $ % $ %
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Core earning assets:
Commercial loans $1,175,453 $1,102,088 $1,095,669 73,365 6.7 79,784 7.3
Retail loans 712,374 695,382 683,180 16,992 2.4 29,194 4.3
Other core loans 57,732 39,923 31,849 17,809 44.6 25,883 81.3
----------------------------------------------- -------
Total core earning assets 1,945,559 1,837,393 1,810,698 108,166 5.9 134,861 7.4
----------------------------------------------- -------
Incremental earning assets:
Mortgage loans held-for-sale 25,095 13,519 14,429 11,576 85.6 10,666 73.9
Investment securities 815,418 737,103 741,925 78,315 10.6 73,493 9.9
Interest-bearing deposits
with financial institutions 10,708 16,259 22,301 (5,551) (34.1) (11,593) (52.0)
Federal funds sold 91,652 117,789 97,073 (26,137) (22.2) (5,421) (5.6)
----------------------------------------------- -------
Total incremental
earning assets 942,873 884,670 875,728 58,203 6.6 67,145 7.7
----------------------------------------------- -------
Total earning assets $2,888,432 $2,722,063 $2,686,426 166,369 6.1 202,006 7.5
=============================================== =======
Deposits and Funds:
Core funds:
Demand deposits $ 335,441 $ 349,121 $ 347,081 (13,680) (3.9) (11,640) (3.4)
Interest-bearing checking 221,907 249,113 223,335 (27,206) (10.9) (1,428) (0.6)
Century Service and IMMA 337,681 358,896 373,623 (21,215) (5.9) (35,942) (9.6)
Statement savings 180,769 202,221 211,212 (21,452) (10.6) (30,443) (14.4)
Certificates less than
$100 and IRAs 1,091,057 936,396 908,704 154,661 16.5 182,353 20.1
----------------------------------------------- -------
Total core funds 2,166,855 2,095,747 2,063,955 71,108 3.4 102,900 5.0
----------------------------------------------- -------
Incremental funds:
Certificates over $100 261,954 225,240 219,763 36,714 16.3 42,191 19.2
Other large deposits 158,313 163,498 154,176 (5,185) (3.2) 4,137 2.7
Federal funds purchased 32,092 44,485 23,731 (12,393) (27.9) 8,361 35.2
Repurchase agreements 51,817 54,217 43,062 (2,400) (4.4) 8,755 20.3
Other short-term borrowings 11,173 6,427 8,632 4,746 73.8 2,541 29.4
Long-term debt 79,641 80,238 90,592 (597) (0.7) (10,951) (12.1)
----------------------------------------------- -------
Total incremental funds 594,990 574,105 539,956 20,885 3.6 55,034 10.2
----------------------------------------------- -------
Total funds $2,761,845 $2,669,852 $2,603,911 91,993 3.4 157,934 6.1
=============================================== =======
</TABLE>
Total earning assets at September 30, 1995, were $2,888,432,000, up 6.1% from
the $2,722,063,000 at December 31, 1994, and up 7.5% from $2,686,426,000 at
September 30, 1994. Total core earning assets increased 5.9% to $1,945,559,000
over the $1,837,393,000 reported at December 31, 1994 and 7.4% over the
$1,810,698,000 reported at September 30, 1994. Incremental earning assets
increased 6.6% to $942,873,000, from $884,670,000 reported at December 31,
1994, and increased 7.7% from the $875,728,000 at September 30, 1994. The
most significant increase from December 31, 1994 and September 30, 1994 can be
attributed to the increase in investment securities. Investment securities
increased $78,315,000, or 10.6% since December 31, 1994,
13
<PAGE> 14
of which approximately $23,240,000, or 29.7% of the increase, is related to the
gross impact of unrealized gains on securities available-for-sale since
December 31, 1994.
Federal funds sold, interest-bearing deposits with financial institutions, and
short-term U.S. Treasury and federal agency securities are held primarily for
liquidity purposes while mortgage-backed securities are held for income
purposes. The amortized cost and fair value of securities at September 30,
1995, are summarized as follows.
SECURITIES - AMORTIZED COST AND FAIR VALUE
(in thousands)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities
available-for-sale:
U.S. Treasury and U.S.
Government Agencies $ 230,901 $ 962 $ 1,494 $ 230,369
Mortgage-backed securities 397,020 6,308 3,470 399,858
State and municipal-taxable 17,747 33 6 17,774
Other investments 13,438 1,756 89 15,105
--------------------------------------------------------
Total $ 659,106 $ 9,059 $ 5,059 $ 663,106
========================================================
Investment securities
held-to-maturity:
State an municipal-tax exempt $ 152,312 $ 5,584 $ 965 $ 156,931
========================================================
</TABLE>
Similar to earning assets, management classifies funding sources into core and
incremental categories. Core funding sources are primarily deposits held,
including demand deposits, but excluding certificates of deposit greater than
$100,000 and other large deposits. Incremental funds are defined as all other
funding sources, including federal funds purchased and other borrowings.
Total funds at September 30, 1995, were $2,761,845,000, up 3.4% from the
$2,669,852,000 at December 31, 1994, and up 6.1% from the $2,603,911,000 at
September 30, 1994. Total core funds increased to $2,166,855,000, or 3.4%, at
September 30, 1995 from the $2,095,747,000 reported at December 31, 1994, and
increased 5.0% from the $2,063,955,000 reported at September 30, 1994. Total
incremental funds increased 3.6%, or $20,885,000, to $594,990,000 at September
30, 1995, from the $574,105,000 reported at December 31, 1994. Incremental
funds increased $55,034,000, or 10.2% between September 30, 1994 and September
30, 1995, with the largest increase the result of increases in short-term
borrowings, securities sold under agreements to repurchase and certificates of
deposits greater than $100,000. Interest rates on deposits, although
stabilizing, have provided customers opportunities to obtain higher rates on
deposits by moving balances from lower earning savings accounts to higher
yielding certificates of deposit.
LIQUIDITY
The Company manages its liquidity position to ensure sufficient cash to service
net new loan demand and potential deposit and funds withdrawals. In this
regard, the composition and maturity structure of earning assets and funding is
evaluated by the asset liability management committee as is the availability of
off-balance-sheet funding sources and the potential for liquidation of selected
earning assets without a significant short or longer-term negative impact to
profitability. Although numerous standards are applied, the Company measures
and manages its liquidity profile based on core funding and incremental funding
objectives.
It is also the Company's objective for core liabilities to equal at least 100%
of core earning assets and incremental funds not to exceed 40% of total
funding. These objectives may be changed depending on management's evaluation
of the maturity distribution of funding and earning assets and the nature of
those assets and funding. At September 30, 1995, core funding to core earning
assets equaled 111.37%, down from the 113.65% reported at December 31, 1994,
and from the 114.06% reported at September 30, 1994. Incremental funding to
total funding equaled 21.54% at September 30, 1995, up slightly from the 21.51%
at December 31, 1994, and 20.74% at September 30, 1994. These ratios are all
well below the Company's maximum tolerance.
Through its lead affiliate bank, the Company maintains upstream overnight
federal funds lines of credit of $80,000,000. These lines have occasionally
been used to fund peak balances in mortgage loans held-for-sale. In September
1992, the parent Company secured
14
<PAGE> 15
a revolving line of credit totaling $3,000,000. Management knows of no
demands, commitments or events that will result in, or that are likely to
result in, the Company's liquidity increasing or decreasing in any material
way.
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity is defined as the exposure to variability in net
interest income resulting from changes in market-based interest rates. It is
the Company's philosophy to protect net interest income against unexpected
changes in interest rates through a controlled assumption of interest rate risk
for profit. This potential variability is closely monitored by the Company's
traditional and beta adjusted gap positions. Since all interest rates and
yields do not adjust in the same degree, the traditional and beta adjusted gap
analysis is only a general indicator of rate sensitivity and net interest
income volatility. Consequently, the Company relies heavily on simulation
analysis and modeling of the Company's balance sheet in varying interest rate
environments to gauge net income volatility and develop appropriate balance
sheet strategies to assure attainment of the Company's objective. The
Company's interest rate sensitivity at September 30, 1995, is as follows:
INTEREST RATE SENSITIVITY
(dollars in thousands)
<TABLE>
<CAPTION>
Assets and Liabilities Repricing Within
------------------------------------------------------------
0-3 4-12 1-5 Over 5
Months Months Years Years Total
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned income $ 708,147 $ 330,429 $730,206 $201,872 $1,970,654
Investment securities available-for-sale 145,708 293,335 158,833 65,230 663,106
Investment securities held-to-maturity 13,195 11,365 45,968 81,784 152,312
Interest-bearing deposits in
other financial institutions 1,882 8,331 495 --- 10,708
Federal funds sold and securities
purchased under agreements to resell 91,652 --- --- --- 91,652
------------------------------------------------------------
Total interest-earning assets $ 960,584 $ 643,460 $935,502 $348,886 $2,888,432
============================================================
Interest-bearing liabilities:
IMMA, interest bearing checking and savings deposits $ 740,357 $ --- $ --- --- $ 740,357
Time deposits 262,329 718,860 527,569 2,567 1,511,325
Federal funds purchased and securities
sold under agreements to repurchase 58,007 23,079 1,919 904 83,909
Other borrowings 11,594 20,420 52,100 6,700 90,814
------------------------------------------------------------
Total interest-bearing liabilities $1,072,287 $ 762,359 $581,588 $ 10,171 $2,426,405
============================================================
Interest sensitive gap ($111,703) $(118,899) $353,914 $338,715 $ 462,027
Cumulative interest sensitive gap ($111,703) $(230,602) $123,312 $462,027 $ 462,027
Cumulative interest sensitivity gap as a
percentage of interest sensitive assets (%) (3.87) (7.98) 4.27 16.00
</TABLE>
Management is of the opinion that the current rate sensitivity profile meets
the Company's objectives. No material changes in the interest rate sensitivity
profile are anticipated during the remainder of 1995.
15
<PAGE> 16
CAPITAL RESOURCES AND ADEQUACY
It is the Company's risk management policy to maintain a capital base
sufficient to support anticipated asset growth, merger activity and
management's estimation of long-term earnings risk. Capital standards assume
that the Company's risk profiles in liquidity, rate sensitivity and asset
quality are in line with internal risk management objectives. The Company's
risk-based capital position is well in excess of minimum regulatory standards.
Consequently, management anticipates no change in asset allocation strategies
to complement risk-based capital requirements. Additionally, the Company's
leverage capital position is well in excess of the regulatory requirements.
The Company's standards and capital levels at September 30, 1995, are provided
below:
ANALYSIS OF CAPITAL ADEQUACY
(dollars in thousands)
<TABLE>
<CAPTION>
Regulatory Internal
9/30/95 Guidelines Standards
---------- ---------- ----------------
<S> <C> <C> <C> <C>
Risk-based capital ratios:
Tier 1 capital to risk-adjusted assets 14.37% 4.00% 9.00% (minimum)
Tier 2 capital to risk-adjusted assets 1.25 4.00 2.00 (maximum)
----------
Total capital to risk-adjusted assets 15.62 8.00 9.00 (minimum)
==========
Leverage ratios:
Capital to assets 9.78% 6.50 (minimum)
Primary capital to adjusted assets 10.53 5.50% 8.00% (minimum)
Primary tangible capital to adjusted assets 10.27 6.00 (minimum)
Risk-based capital:
Tier 1 capital $ 292,641
Tier 2 capital 25,461
----------
Total capital $ 318,102
==========
Risk-adjusted assets $2,036,915
==========
</TABLE>
Management anticipates that risk-based and leverage ratios will remain above
minimum regulatory standards. The Company has met all of its capital
requirements through retained earnings while steadily increasing regulatory and
internally defined capital ratio objectives.
The Company's internal capital generation and the factors that influence it are
provided below:
INTERNAL CAPITAL GENERATION RATE
<TABLE>
<CAPTION>
For the Nine Months
----------------------------------
9/30/95 9/30/94
----------------------------------
<S> <C> <C> <C>
Return on average assets 1.14% 1.29%
- -----------------------------------------------------------------------------------------------
divided by
Average equity as a % of average assets 9.48 9.50
- -----------------------------------------------------------------------------------------------
equals
Return on average equity 12.06 13.54
- -----------------------------------------------------------------------------------------------
times
Earnings retained 50.40 57.85
- -----------------------------------------------------------------------------------------------
equals
Internal capital growth 6.08 7.83
===============================================================================================
</TABLE>
Cash dividends declared for the third quarter of 1995 equaled $.2125, a 9.0%
increase over the $.1950 declared for the third quarter of 1994. For the nine
months ended September 30, 1995, dividends totaled $.6250, compared to the
$.5775 declared for the nine months ended September 30, 1994. Management is of
the opinion that, given the Company's dividend policy, asset growth can be
funded internally while maintaining the integrity of the Company's capital
position.
16
<PAGE> 17
The following table presents a summary of average balances for the quarters
ended September 30, 1995 and 1994 along with interest earned and paid during
each quarter and average rates by category.
QUARTERLY AVERAGES, MIX, INTEREST AND RATES
(dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
------------------------------------------------------
9/30/95 9/30/94
------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Net loans $1,943,469 $47,057 9.61% $1,812,664 $39,899 8.75%
Interest-bearing deposits
other financial institutions 12,543 215 6.80 27,503 414 5.97
Investment securities, taxable 647,342 10,452 6.41 582,255 8,812 6.00
Investment securities, non-taxable 169,005 4,476 10.51 148,041 4,268 11.44
Federal funds sold 115,169 1,558 5.37 97,432 1,269 4.99
------------------ ------------------
Total earning assets 2,887,527 63,758 8.76 2,667,895 54,702 8.13
------------------ ------------------
Other assets 81,960 95,062
Cash and due from banks 81,364 79,572
Premises and equipment, net 67,127 66,140
Less allowance for loan losses (25,855) (28,551)
---------- ----------
Total assets $3,092,124 $2,880,119
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings and IMMA accounts $738,452 5,348 2.87 $814,692 5,466 2.66
Time deposits 1,502,046 22,433 5.93 1,266,126 14,299 4.48
Federal funds purchased
and securities sold under
agreements to repurchase 91,929 1,204 5.20 69,367 845 4.83
Other borrowed funds 87,161 1,210 5.51 95,765 1,136 4.71
------------------ ------------------
Total interest-
bearing liabilities 2,419,587 30,195 4.95 2,245,951 21,746 3.84
------------------ ------------------
Noninterest-bearing
demand deposits 332,657 326,863
Other liabilities 41,621 35,426
---------- ----------
Total liabilities 2,793,865 2,608,240
---------- ----------
Total shareholders' equity 298,259 271,879
---------- ----------
Total liabilities and
shareholders' equity $3,092,124 $2,880,119
========== ==========
Net interest income $33,563 $32,915
======= =======
Interest spread 3.81% 4.29%
===== =====
Net interest margin 4.61% 4.90%
===== =====
</TABLE>
17
<PAGE> 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Number Description of Exhibits
2.1 Agreement and Plan of Reorganization, dated October 22,
1995 by and between the Company and Regions Financial
Corporation (incorporated herein by reference to such
document filed as Exhibit 2.1 of the Company's Current
Report on Form 8-K dated October 22, 1995 and
filed October 25, 1995).
2.2 Stock Option Agreement, dated as of October 22, 1995 by
and between the Company and Regions Financial Corporation
(incorporated herein by reference to such docment filed
as Exhibit 2.1 of the Company's Current Repot on Form 8-K
dated October 22, 1995 and filed October 25, 1995).
11.1 Statement Re Computation of Per Share Earnings
27.1 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
Dated and filed on July 5, 1995, a Form 8-K was filed pursuant to the
completion of the previously announced acquisition of FF Bancorp,
Inc., as a pooling of interests.
Dated and filed on July 19, 1995, a Form 8-K was filed, announcing the
election of Mr. Charles H. Byrd and Mr. Tildon A. Smith to the
Registrant's Board of Directors.
Dated and filed on July 25, 1995, a Form 8-K was filed, announcing the
signing of a Letter of Intent between the Registrant and The Bank of
Heard County, Franklin, Georgia, whereby the Registrant would acquire
all of the outstanding stock of the $40 million asset Bank of Heard
County in a tax free exchange of stock.
Dated August 3, 1995 and filed August 28, 1995, a Form 8-K was filed
as an update to the event reported July 25, 1995 announcing that the
parties had signed an Agreement of Reorganization and Plan of Merger
whereby The Bank of Heard County would be merged into Interim Heard
Corporation, a wholly owned subsidiary of the Registrant.
Dated and filed on August 16, 1995, a Form 8-K was filed, publishing
financial results as of July 31, 1995, and for the seven months ended
July 31, 1995 and 1994, including thirty days of combined operations
following the consummation of the merger of FF Bancorp, Inc. with the
Registrant.
Dated October 22, 1995 and filed October 25, 1995, a Form 8-K was
filed, announcing that the Registrant had entered into an Agreement
and Plan of Reorganization, whereby the Registrant would be acquired
by Regions Financial Corporation headquartered in Birmingham, Alabama.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST NATIONAL BANCORP
Dated: November 13, 1995
By: /s/ Peter D. Miller
--------------------------------------
Peter D. Miller
President, Chief Administrative,
and Chief Financial Officer
By: /s/ J. Reid Moore
--------------------------------------
J. Reid Moore
Group Vice President and Controller
19
<PAGE> 1
EXHIBIT 11.1
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30 September 30 September 30 September 30
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE
Weighted average shares outstanding 20,497,109 20,302,920 20,464,887 20,052,651
=========== =========== =========== ===========
Net income per share $ 0.48 $ 0.47 $ 1.26 $ 1.37
=========== =========== =========== ===========
PRIMARY EARNINGS PER SHARE
Weighted average shares outstanding 20,497,109 20,302,920 20,464,887 20,052,651
Dilutive stock options 230,285 174,384 205,642 203,062
----------- ----------- ----------- -----------
20,727,394 20,477,304 20,670,529 20,255,713
=========== =========== =========== ===========
Net income per share $ 0.47 $ 0.46 $ 1.25 $ 1.36
=========== =========== =========== ===========
FULLY DILUTED EARNINGS PER SHARE
Weighted average shares outstanding 20,497,109 20,302,920 20,464,887 20,052,651
Dilutive stock options 285,590 186,797 299,837 209,251
----------- ----------- ----------- -----------
20,782,699 20,489,717 20,764,724 20,261,902
=========== =========== =========== ===========
Net income per share $ 0.47 $ 0.46 $ 1.25 $ 1.35
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM REGISTRANT'S
SEPTEMBER 30, 1995 QUARTERLY REPORT, AS FILED ON FORM 10-Q WITH THE SECURITIES
AND EXCHANGE COMMISSION, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 98,244
<INT-BEARING-DEPOSITS> 10,708
<FED-FUNDS-SOLD> 91,652
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 663,106
<INVESTMENTS-CARRYING> 152,312
<INVESTMENTS-MARKET> 156,931
<LOANS> 1,970,654
<ALLOWANCE> 26,016
<TOTAL-ASSETS> 3,111,875
<DEPOSITS> 2,587,123
<SHORT-TERM> 95,082
<LIABILITIES-OTHER> 45,763
<LONG-TERM> 79,641
<COMMON> 20,529
0
0
<OTHER-SE> 281,199
<TOTAL-LIABILITIES-AND-EQUITY> 3,111,875
<INTEREST-LOAN> 135,131
<INTEREST-INVEST> 38,372
<INTEREST-OTHER> 6,217
<INTEREST-TOTAL> 179,720
<INTEREST-DEPOSIT> 77,180
<INTEREST-EXPENSE> 84,994
<INTEREST-INCOME-NET> 94,726
<LOAN-LOSSES> 1,963
<SECURITIES-GAINS> 291
<EXPENSE-OTHER> 77,371
<INCOME-PRETAX> 37,183
<INCOME-PRE-EXTRAORDINARY> 37,183
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,851
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.26
<YIELD-ACTUAL> 8.76
<LOANS-NON> 19,129
<LOANS-PAST> 373
<LOANS-TROUBLED> 1,095
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 26,475
<CHARGE-OFFS> 4,075
<RECOVERIES> 1,691
<ALLOWANCE-CLOSE> 26,016
<ALLOWANCE-DOMESTIC> 26,016
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
