<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 4, 1996
REGIONS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-6159 63-0589368
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
417 North 20th Street, Birmingham, Alabama 35203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (205) 326-7100
<PAGE> 2
Item 5. Other Events
(a) On March 1, 1996, Regions Financial Corporation ("Regions") effected a
combination with First National Bancorp, which was accounted for as a pooling
of interests. Audited supplemental financial statements restated to give
effect to this combination were filed by Regions as exhibit 99.c to Regions
Annual Report on Form 10-K for the year ended December 31, 1995. Regions is
filing this Current Report on Form 8-K to make publicly available (i) its
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included as exhibit 99.1 to this report, which gives effect to the
combination with First National Bancorp and which pertains to the restated
supplemental financial statements of Regions at and for the three-year period
ended December 31, 1995, and (ii) restated selected financial data which gives
effect to the combination with First National Bancorp, included as exhibit 99.2
to this report.
(b) Forward looking information.
This Current Report on Form 8-K, other periodic reports filed by
Regions under the Securities Exchange Act of 1934, as amended, and any other
written or oral statements made by or on behalf of Regions may include forward
looking statements which reflect Regions' current views with respect to future
events and financial performance. Such forward looking statements are based on
general assumptions and are subject to various risks, uncertainties, and other
factors that may cause actual results to differ materially from the views,
beliefs, and projections expressed in such statements. These risks,
uncertainties and other factors include, but are not limited to:
(1) Possible changes in economic and business conditions that may
affect the prevailing interest rates, the prevailing rates of inflation,
or the amount of growth, stagnation, or recession in the global, U.S., and
southeastern U.S. economies, the value of investments, collectability of
loans, and the profitability of business entities;
(2) Possible changes in monetary and fiscal policies, laws, and
regulations, and other activities of governments, agencies, and similar
organizations;
(3) The effects of easing of restrictions on participants in the
financial services industry, such as banks, securities brokers and dealers,
investment companies, and finance companies, and attendant changes in patterns
and effects of competition in the financial services industry;
(4) The cost and other effects of legal and administrative cases and
proceedings, claims, settlements, and judgments;
(5) The ability of Regions to achieve the earnings expectations
related to the acquired operations of recently-completed and pending
acquisitions, which depends on a variety of factors, including (i) the ability
of Regions to achieve the anticipated cost savings and revenue enhancements
with respect to the acquired operations, (ii) the assimilation of the acquired
operations to Regions' corporate culture, including the ability to instill
Regions' credit practices and efficient approach to the acquired operations,
(iii) the continued growth of the markets in which Regions operates consistent
with recent historical experience, (iv) the absence of material contingencies
related to the acquired operations, including asset quality and litigation
contingencies, and (v) Regions' ability to expand into new markets and to
maintain profit margins in the face of pricing pressures.
The words "believe", "expect", "anticipate", "project", and similar
expressions signify forward looking statements. Readers are cautioned not to
<PAGE> 3
place undue reliance on any forward looking statements made by or on behalf of
Regions. Any such statement speaks only as of the date the statement was made.
Regions undertakes no obligation to update or revise any forward looking
statements.
Item 7. Financial Statements and Exhibits.
(c) Exhibits. The exhibits listed in the exhibit index are filed as a part
of or incorporated by reference in this Current Report on Form 8-K.
<PAGE> 4
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 hereunto duly authorized.
Regions Financial Corporation (Registrant)
By: /s/ Robert P. Houston
Executive Vice President and Comptroller
Date: June 4, 1996
<PAGE> 5
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit Page No.
<S> <C>
99.1 Regions Financial Corporation Management's Discussion and Analysis of
Financial Condition and Results of Operations, giving effect to the
combination with First National Bancorp effected on March 1, 1996,
accounted for as a pooling of interests.
99.2 Restated Selected Financial Data, giving effect to the combination
with First National Bancorp effected on March 1, 1996, accounted for
as a pooling of interests.
</TABLE>
<PAGE> 1
EXHIBIT 99.1
Supplemental Management's Discussion and Analysis of
Financial Condition and Operating Results
INTRODUCTION
The following discussion and financial information is presented to aid in
understanding Regions Financial Corporation's (Regions or the Company)
financial position and results of operations. The emphasis of this discussion
will be on the years 1995, 1994 and 1993; however, financial information for
prior years will also be presented when appropriate.
On March 1, 1996, First National Bancorp (First National) of Gainesville,
Georgia, merged with and into Regions. The merger was accounted for as a
pooling of interests and, accordingly, financial information for all prior
periods has been restated to present the combined financial condition and
results of operations of both companies as if the merger had been in effect for
all periods presented.
Regions' primary business is banking. In 1995, Regions' banking affiliates
contributed approximately $196 million to consolidated net income. Selected
information as of December 31, 1995, on Regions' banking affiliates is as
follows:
<TABLE>
<CAPTION>
Full-
Service
Name of Affiliate Assets Loans Deposits Offices
- ------------------------------------------------------------------------------------------------------------------------
(dollar amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Alabama Bank $10,280,106 $7,151,050 $7,850,521 179
First National Bancorp 3,143,214 2,021,405 2,601,471 64
Regions Bank of Louisiana 2,148,256 1,464,821 1,619,793 41
Regions Bank of Florida 578,805 365,841 514,983 27
Regions Bank of Tennessee 481,463 396,467 430,016 23
Regions Bank of Georgia 110,733 31,310 97,295 4
Regions Bank of Rome(Georgia) 174,827 95,006 160,607 2
Regions Bank, FSB (Georgia) 389,583 323,814 351,640 5
</TABLE>
Supplementing the Company's banking operations are a mortgage banking
company, credit life insurance related companies, a registered broker/dealer
firm and a commercial accounts receivable financing, billing and collection
company. Regions has no foreign operations, although it maintains an
International Department to assist customers with their foreign transactions.
The mortgage banking company services approximately $10.6 billion in mortgage
loans and in 1995 contributed approximately $9.3 million to net income.
The Company's principal market areas are all of Alabama, northern Georgia,
parts of Louisiana, northwest and central Florida and middle Tennessee. In
addition, real estate mortgage loan origination offices are located in other
market areas in Tennessee, and in the states of Mississippi and South Carolina.
The acquisitions of other banks and related institutions have contributed
significantly to Regions' growth during the last three years. Regions has
expanded into new markets and strengthened its presence in existing markets.
In 1993, Regions entered the Louisiana banking market for the first time
through the acquisition of Secor Bank, Federal Savings Bank, which added $1.8
billion in assets. Secor's 15 offices in Louisiana, with approximately $789
million in deposits, provided Regions with a retail banking franchise in New
Orleans and northern Louisiana. Secor's
<PAGE> 2
banking offices in Alabama, with approximately $429 million in deposits,
strengthened Regions' market presence in several major Alabama market areas.
Also in 1993, Regions expanded its northwest Florida franchise through the
acquisition of two thrifts with $190 million in assets and expanded its
Tennessee franchise through the acquisition of the Franklin County Bank with
$68 million in assets.
First National expanded in northwestern Georgia in 1993 through the
acquisition of two banks with combined assets of $92 million.
During 1994, acquisitions strengthened Regions' franchise in Alabama,
Louisiana and Georgia. In Alabama, Regions added $494 million in assets
through two acquisitions--Union Bank & Trust Company and First Fayette
Bancshares, Inc. Louisiana acquisitions in Baton Rouge, New Roads and Monroe
added $626 million in assets. These banks, along with Secor Bank, were merged
to form state-chartered Regions Bank of Louisiana. In Georgia, the addition of
First Community Bancshares, Inc. (now Regions Bank of Rome) in September 1994
enabled Regions to establish a market presence in Rome, Georgia. In 1994,
First National entered into two new banking markets in Georgia, Winder and
Douglasville, adding $200 million in assets.
Regions' acquisition activity in 1995 included increasing its New Orleans
area presence through the purchase of First Commercial Bancshares, Inc. and its
affiliate bank, the First National Bank of St. Bernard Parish, which was merged
into Regions Bank of Louisiana. The addition of Fidelity Federal Savings Bank
of Dalton, Georgia and the Cartersville, Georgia office of Prudential Savings
Bank (both now Regions Bank, FSB) added $393 million in assets and enhanced
Regions' market coverage in northwestern Georgia.
In 1995 First National expanded into central Florida through the acquisition
of FF Bancorp, Inc. (FF Bancorp). FF Bancorp is the holding company of two
thrift institutions--First Federal Savings Bank of New Smyrna Beach, Florida,
and First Federal Savings Bank of Citrus County, Florida--and a commercial
bank, Key Bank of Tampa, Florida. The acquisition of FF Bancorp added
approximately $631 million in assets and nine offices.
Regions expanded its line of businesses in 1995 through the acquisition of
Interstate Billing Service, Inc., headquartered in Decatur, Alabama.
Interstate Billing factors commercial accounts receivables and performs billing
and collection services for its clients. Interstate Billing currently does
business in more than 25 states, primarily serving clients related to the
automotive service industry.
Regions' and First National's acquisitions over the last three years are
summarized in the following chart.
<TABLE>
<CAPTION>
TOTAL ASSETS ACCOUNTING
DATE COMPANY ACQUIRED HEADQUARTERS LOCATION (in thousands) TREATMENT
- --------------------------------------------------------------------------------------------------------------------------
1995
<S> <C> <C> <C> <C>
March First Commercial Chalmette, Louisiana $112,968 Purchase
Bancshares, Inc.
May Fidelity Federal Dalton, Georgia 333,336 Pooling
Savings Bank
July Interstate Billing Decatur, Alabama 30,521 Pooling
Service, Inc.
July FF Bancorp, Inc. New Smyrna Beach, Florida 631,168 Pooling
November Branch Office of Cartersville, Georgia 59,933 Purchase
Prudential Savings
Bank
1994
February Metro Bancorp, Inc. Douglasville, Georgia 145,482 Purchase
May Guaranty Bancorp Inc. Baton Rouge, Louisiana 186,879 Pooling
July First Fayette Fayette, Alabama 76,586 Purchase
Bancshares Inc.
July Barrow Bancshares, Inc. Winder, Georgia 54,687 Pooling
August BNR Bancshares Inc. New Roads, Louisiana 136,799 Pooling
September First Community Rome, Georgia 125,090 Pooling
Bancshares, Inc.
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C> <C> <C>
November American Bancshares, Monroe, Louisiana 302,674 Purchase
Inc.
December Union Bank & Trust Montgomery, Alabama 417,903 Purchase
Company
1993
May Villa Rica Bancorp, Inc. Villa Rica, Georgia 55,553 Pooling
June Franklin County Bank Winchester, Tennessee 68,034 Purchase
August The Community Bank of Carrollton, Georgia 36,503 Pooling
Carrollton
October First Federal Savings DeFuniak Springs, 89,295 Purchase
Bank of DeFuniak Florida
Springs
December First Federal Savings Marianna, Florida 101,084 Purchase
Bank
December Secor Bank, Federal Birmingham, Alabama 1,831,937 Purchase
Savings Bank
</TABLE>
As of December 31, 1995, Regions and First National had six pending
acquisitions, five in Georgia and one in Louisiana. These acquisitions have
combined assets of approximately $664 million and would increase Regions' asset
size to $17.5 billion. See Note Q to the supplemental consolidated financial
statements for additional information regarding pending acquisitions.
FINANCIAL CONDITION
Regions' financial condition depends primarily on the quality and nature of
its assets, liabilities and capital structure, the market and economic
conditions, and the quality of its personnel.
LOANS AND ALLOWANCE FOR LOAN LOSSES
As a financial institution, Regions' primary investment is loans. At December
31, 1995, loans represented 74% of Regions' earning assets.
Over the last four years loans increased a total of $5.8 billion, a compound
growth rate of 19%. Loans acquired in connection with acquisitions over the
last four years contributed $2.7 billion of this growth. The most significant
growth in the loan portfolio occurred in 1992, 1993 and 1994, with loans
increasing $931 million, $1.8 billion, and $2.4 billion, respectively.
Approximately $289 million of the 1992 growth resulted from the acquisition of
Security Federal (now Regions Bank of Tennessee), including $234 million in
single-family residential mortgage loans. The acquisitions of Secor Bank,
Franklin County Bank and the two Florida thrifts in 1993 added $1.2 billion in
loans. The acquisition of seven banks in 1994 added $744 million in loans and
the four acquisitions in 1995 added $443 million in loans.
During 1995, Regions securitized $396 million in single-family residential
mortgage loans. These assets were transferred from the loan portfolio to the
available for sale securities portfolio. The securitization of these loans
gives Regions additional flexibility for funding purposes and results in a
lower risk-weighted capital allocation for these assets. After adjusting for
the effect of the securitization, loans would have increased $1.1 billion or
10% in 1995.
All major categories of loans have shared in the growth in the loan
portfolio over the last four years, with the strongest growth occurring in real
estate mortgages (primarily single-family residential mortgages) and consumer
loans. Over the last four years, commercial, financial and agricultural loans
increased $789 million or 45%. Real estate construction loans increased $368
million or 140% over the same period. Real estate mortgage loans increased $3.2
billion or 142% and consumer loans increased $1.5 billion or 102% over the last
four years.
Regions' real estate mortgage portfolio includes $1.6 billion of mortgage
loans secured by single-family residences that were originated by Regions'
mortgage subsidiary. The majority of these loans are secured by homes in
Alabama, Georgia and Florida. These loans increased approximately $214 million
in 1993 and $982 million in 1994, accounting for
<PAGE> 4
approximately 12% and 41%, respectively, of the growth in total loans in 1993
and 1994. The securitization in 1995 of the $396 million in single-family
residential mortgages resulted in this portfolio declining $123 million in
1995. Eighty-six percent of the overall balance consists of adjustable-rate
mortgages (ARM's) that have rates approximately 275 basis points above one of
several money market indices when fully priced.
Regions' real estate portfolio also includes $647 million of single-family
mortgage loans obtained in the Secor Bank acquisition. Fixed-rate
single-family mortgages with original terms greater than 15 years comprise 36%
of the overall balance of these loans. Fixed-rate single-family mortgages with
original terms of 15 years or less comprise 31% of the overall balance of these
loans. Single-family ARM's, which have rates approximately 268 basis points
above one of several money market indices when fully priced, comprise the
remaining 33% of the overall balance of these loans.
A sound credit policy and careful, consistent credit review are vital to a
successful lending program. All affiliates of Regions operate under written
loan policies which attempt to maintain a consistent lending philosophy,
provide sound traditional credit decisions, provide an adequate return and
render service to the communities in which the banks are located. Regions'
lending policy generally confines loans to local customers or to national firms
doing business locally. Credit reviews and loan examinations help confirm that
affiliates are adhering to these loan policies.
Every loan carries some degree of credit risk. This risk is reflected in the
supplemental consolidated financial statements by the size of the allowance for
loan losses, the amount of loans charged off and the provision for loan losses
charged to operating expense. It is Regions' policy that when a loss is
identified, it is charged against the allowance for loan losses in the current
period. The policy regarding recognition of losses requires immediate
recognition of a loss if significant doubt exists as to principal repayment. In
addition, consumer installment credit is generally recognized as a loss when it
becomes 90 days or more past due, unless the underlying security or the
customer's financial position makes a loss improbable.
Regions' provision for loan losses is a reflection of actual losses
experienced during the year and management's judgment as to the adequacy of the
allowance for loan losses to absorb future losses. Some of the factors
considered by management in determining the amount of the provision and
resulting allowance include: (1) credit reviews of individual loans; (2) gross
and net loan charge-offs in the current year; (3) growth in the loan portfolio;
(4) the current level of the allowance in relation to total loans and to
historical loss levels; (5) past due and non-accruing loans; (6) collateral
values of properties securing loans; (7) the composition of the loan portfolio
(types of loans); and (8) management's estimate of future economic conditions
and the resulting impact on Regions.
<PAGE> 5
Lending at Regions is generally organized along three functional lines:
commercial loans (including industrial and agricultural), real estate loans,
and consumer loans. The composition of the portfolio by these major categories
is presented below (with real estate loans further broken down between
construction and mortgage loans):
<TABLE>
<CAPTION>
(in thousands, net of unearned income) DECEMBER 31
1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $2,559,974 $2,347,912 $1,911,222 $1,880,851 $1,770,954
Real estate-construction 629,888 493,027 362,063 326,210 262,157
Real estate-mortgage 5,380,815 5,384,341 4,054,316 2,756,011 2,221,007
Consumer 2,971,634 2,629,915 2,103,330 1,694,485 1,472,700
TOTAL $11,542,311 $10,855,195 $8,430,931 $6,657,557 $5,726,818
</TABLE>
The amounts of total gross loans (excluding residential mortgages on 1-4
family residences and consumer loans) outstanding at December 31, 1995, based
on remaining scheduled repayments of principal, due in (1) one year or less,
(2) more than one year but less than five years and (3) more than five years,
are shown in the following table. The amounts due after one year are classified
according to sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
(in thousands) LOANS MATURING
- ---------------------------------------------------------------------------------------------------------------------
AFTER ONE BUT
WITHIN WITHIN FIVE AFTER
ONE YEAR YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $1,305,464 $ 902,032 $ 361,536 $2,569,032
Real estate-construction 471,089 75,065 83,734 629,888
Real estate-mortgage 235,646 710,397 676,213 1,622,256
TOTAL $2,012,199 $1,687,494 $1,121,483 $4,821,176
</TABLE>
<TABLE>
<CAPTION>
(in thousands) SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES
- ------------------------------------------------------------------------------------------------------------------
PREDETERMINED VARIABLE
RATE RATE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due after one year but within five years $ 962,300 $ 725,194
Due after five years 418,996 702,487
$1,381,296 $1,427,681
</TABLE>
<PAGE> 6
A coordinated effort is undertaken to identify credit risks in the loan
portfolio for management purposes and to establish the loan loss provision and
resulting allowance for accounting purposes. A regular, formal and ongoing loan
review is conducted to identify loans with unusual risks or possible losses.
The primary responsibility for this review rests with the management of the
individual banking offices. Their work is supplemented with reviews by Regions'
internal audit staff and corporate loan examiners. Bank regulatory agencies and
the Company's independent auditors provide additional levels of review. This
process provides information which helps in assessing the quality of the
portfolio, assists in the prompt identification of problems and potential
problems and aids in deciding if a loan represents a probable loss which should
be recognized or a risk for which an allowance should be maintained.
If, as a result of Regions' loan review and evaluation procedures, it is
determined that payment of interest on a commercial or real estate loan is
questionable, it is Regions' policy to reverse interest previously accrued on
the loan against interest income. Interest on such loans is thereafter recorded
on a "cash basis" and is included in earnings only when actually received in
cash and when full payment of principal is no longer doubtful.
Although it is Regions' policy to immediately charge off as a loss all loan
amounts judged to be uncollectible, historical experience indicates that
certain losses exist in the loan portfolio which have not been specifically
identified. To anticipate and provide for these unidentifiable losses, the
allowance for loan losses is established by charging the provision for loan
losses expense against current earnings. No portion of the resulting allowance
is in any way allocated or restricted to any individual loan or group of loans.
The entire allowance is available to absorb losses from any and all loans.
The year-end allowance for loan losses as a percentage of loans ranged from a
low of 1.32% in 1994 to a high of 1.51% in 1992. At December 31, 1995, the
allowance for loan losses as a percentage of loans was 1.38%. The ratio of
non- performing assets (including loans past due 90 days or more and other real
estate) to loans and other real estate declined steadily from 1.74% at December
31, 1991 to 0.68% at December 31, 1995. Generally improving economic
conditions in Regions' markets during this period, partially offset by the
effect of non-performing assets added by certain acquisitions, resulted in the
declining trend in this ratio.
The allowance for loan losses as a percentage of non-performing loans
(including loans past due 90 days or more) was 232% at December 31, 1995,
compared to 209% at December 31, 1994, and to 157% at December 31, 1993.
Management considers the current level of the allowance for loan losses
adequate to absorb possible losses from loans in the portfolio. Management's
determination of the adequacy of the allowance for loan losses, which is based
on the factors and risk identification procedures previously discussed,
requires the use of judgments and estimations that may change in the future.
Unfavorable changes in the factors used by management to determine the adequacy
of the reserve, or the availability of new information, could cause the
allowance for loan losses to be increased or decreased in future periods. In
addition, bank regulatory agencies, as part of their examination process, may
require that additions be made to the allowance for loan losses based on their
judgments and estimates.
The analysis of loan loss experience (see chart following) shows that net
loan losses ranged from a high of $24.7 million in 1991 to a low of $15.9
million in 1993. Net loan losses were $19.0 million in 1995 and $18.0 million
in 1994. Over the last five years net loan losses averaged 0.25% of average
loans and were 0.17% in 1995. Regions' relatively low level of net loan losses
is due to favorable economic conditions relative to some other sections of the
country, quality control efforts in the underwriting and monitoring of loans, a
substantial amount of recoveries of previously charged- off loans, and an
increase in single-family residential mortgage loans as a percentage of the
loan portfolio, which historically have had lower net loan losses than other
categories of loans.
In order to assess the risk characteristics of the loan portfolio at December
31, 1995, it is appropriate to consider the three major categories of
loans--commercial, real estate and consumer.
Regions' commercial loan portfolio is highly diversified within the markets
served by the Company. Geographically, 18% of the portfolio is held by
<PAGE> 7
banking offices in the Birmingham MSA (metropolitan statistical area).
Approximately 11% is held within the Mobile MSA, 9% within the Montgomery MSA,
4% within the Tuscaloosa MSA and 3% within the Huntsville MSA. Regions' banking
offices in the northern part of Georgia hold approximately 20% of the
commercial loan portfolio. The remaining 35% of the portfolio is
geographically dispersed among the other offices. A small portion of these
loans is secured by properties outside Regions' banking market areas.
The Birmingham MSA, with civilian employment of approximately 448,000, is
Alabama's largest metropolitan area. Service industries, such as health care
and finance, and retail trade play a key role in the local economy. Steel, coal
and manufacturing are still important to the Birmingham economy, but service
industries have helped diversify the city's economic base.
The Mobile MSA, with civilian employment of approximately 262,000, is
diversified in heavy industry, forest products, shipbuilding, tourism, oil and
gas production, agriculture and international trade.
The Montgomery MSA, with civilian employment of approximately 154,000, is
stabilized by government and military payrolls. The business community in
Montgomery is diversified and consists mainly of light industry and facilities
specializing in transportation and distribution. The city is a retail trade
center for central and south Alabama and agriculture also plays an important
role in the economy.
The Tuscaloosa MSA, with civilian employment of approximately 78,000, is
diversified among education, health care and mining activities. Stability in
the Tuscaloosa market is provided by the large employment base of a state
university and two state hospitals, which are not as susceptible to economic
downturns as other industries. The construction of a Mercedes-Benz automobile
manufacturing facility between Birmingham and Tuscaloosa is having a favorable
impact on the economies of both areas.
The Huntsville MSA, with civilian employment of approximately 163,000, has a
large number of high technology companies. Government and military payrolls
related to the space program are also important.
The economy of north Georgia is diversified with a strong presence in poultry
production, carpet manufacturing, automotive manufacturing related industries,
tourism, and various service sector industries. A well developed
transportation system has contributed to growth in north Georgia. This area
has experienced rapid population growth and has very favorable household income
characteristics, relative to other parts of Georgia.
During the last five years, net losses on commercial loans ranged from a low
of 0.18% in 1995 to a high of 0.64% in 1992. Future losses are a function of
many variables, of which general economic conditions are the most important. If
economic conditions weaken in 1996, net commercial loan losses will likely
exceed the 1995 level. A continuation of moderate economic growth during 1996
in Regions' market areas could result in 1996 net commercial loan losses
approximating the 1995 level.
Regions' real estate loan portfolio consists of construction and land
development loans, loans to businesses for long- term financing of land and
buildings, loans on one-to-four family residential properties, loans to
mortgage banking companies (which are secured primarily by loans on one-to-four
family residential properties and are known as warehoused mortgage loans) and
various other loans secured by real estate.
Real estate construction loans increased $137 million in 1995 to $630
million. At December 31, 1995, these loans represented 5.5% of Regions' total
loan portfolio, compared to 4.6% at the end of 1991. Most of the construction
loans relate to shopping centers, apartment complexes, commercial buildings and
residential property development. These loans are normally secured by land and
buildings and are generally backed by commitments for long-term financing from
other financial institutions. Real estate construction loans are closely
monitored by management, since these loans are generally considered riskier
than other types of loans and are particularly vulnerable in economic downturns
and in periods of high interest rates. Regions has not been an active lender to
speculative real estate developers or to developers outside its market areas.
The loans to businesses for long-term financing of land and buildings are
primarily to commercial customers within Regions' markets. Total loans secured
by non-farm, non-residential properties totaled $1.6 billion at December 31,
1995. Although some risk is inherent in this type of lending, the Company
attempts to minimize this risk by generally
<PAGE> 8
making such loans only on owner-occupied properties, and by requiring
collateral values which exceed the loan amount, adequate cash flow to service
the debt, and in most cases, the personal guaranties of principals of the
borrowers.
Generally, Regions' most significant market areas have not experienced rapid
increases in real estate property values or significant overbuilding.
Therefore, in management's opinion, real estate loan collateral values in
Regions' market areas should not be as vulnerable to significant deterioration,
as would other market areas which have experienced rapidly increasing property
values and significant overbuilding. However, collateral values are difficult
to estimate and are subject to change depending on economic conditions, the
supply of and demand for properties and other factors. Regions attempts to
mitigate the risks of real estate lending by adhering to strict loan
underwriting policies and by diversifying the portfolio both geographically
within its market area and within industry groups.
Loans on one-to-four family residential properties, which total approximately
73% of Regions' real estate mortgage portfolio, are principally on
single-family residences. These loans are geographically dispersed throughout
the southeastern states and some are guaranteed by government agencies or
private mortgage insurers. Historically, this category of loans has not
produced sizable loan losses; however, it is subject to some of the same risks
as other real estate lending. Warehoused mortgage loans, since they are secured
primarily by loans on one-to-four family residential properties, are similar to
these loans in terms of risk.
During the past five years, real estate loan net losses ranged from a high of
0.22% of real estate loans in 1991, to a low of 0.05% of real estate loans in
1995. These losses depend, to a large degree, on the level of interest rates,
economic conditions and collateral values, and thus, are very difficult to
predict. Management's current estimate of 1996 net real estate loan losses
approximates the level experienced in 1992 through 1994.
Regions' consumer loan portfolio consists of $2.5 billion of consumer loans,
$333 million in personal lines of credit (including home equity loans) and $149
million in credit card loans. Consumer loans are primarily borrowings of
individuals for home improvements, automobiles and other personal and household
purposes. Regions' consumer loan portfolio includes $1.2 billion in indirect
installment loans at December 31, 1995, compared to $1.1 billion at December
31, 1994. Periods of economic recession tend to increase consumer loan losses.
During the past five years, the ratio of net consumer loan losses to consumer
loans ranged from a low of 0.26% in 1994 to a high of 0.68% in 1991. In 1995
net consumer loan losses were 0.41%. Management expects net consumer loan
losses in 1996 to be slightly higher than the 1995 level.
<PAGE> 9
<TABLE>
<CAPTION>
The following table presents information on non-performing loans and real estate acquired in settlement of loans:
NON-PERFORMING ASSETS
(dollar amounts in thousands)
DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Loans accounted for on a
non-accrual basis $54,132 $59,799 $62,063 $47,709 $59,312
Loans contractually past due 90
days or more as to principal or interest
payments (exclusive of non-accrual
loans) 10,238 5,843 13,280 6,272
6,502
Loans whose terms have been
renegotiated to provide a reduction
or deferral of interest or principal
because of a deterioration in the
financial position of the borrower
(exclusive of non-accrual loans and
loans past due 90 days or more) 4,234 2,863 4,533 5,422 1,613
Real estate acquired in settlement of
loans ("other real estate") 10,137 18,718 28,021 33,441 32,544
TOTAL $78,741 $87,223 $107,897 $92,844 $99,971
Non-performing assets as a percentage of
loans and other real estate 0.68% 0.80% 1.28% 1.39% 1.74%
</TABLE>
<PAGE> 10
The following analysis presents a five year history of the allowance for loan
losses and loan loss data:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of year $143,464 $125,027 $ 100,248 $76,742 $66,531
Loans charged off:
Commercial 11,399 12,199 9,239 15,099 12,799
Real estate 6,643 8,261 7,344 5,692 7,080
Installment 17,169 10,555 10,922 9,676 12,957
Total 35,211 31,015 27,505 30,467 32,836
Recoveries:
Commercial 7,053 5,084 4,755 3,914 3,376
Real estate 3,609 3,372 3,237 1,802 1,918
Installment 5,580 4,563 3,598 3,009 2,874
Total 16,242 13,019 11,590 8,725 8,168
Net loans charged off:
Commercial 4,346 7,115 4,484 11,185 9,423
Real estate 3,034 4,889 4,107 3,890 5,162
Installment 11,589 5,992 7,324 6,667 10,083
Total 18,969 17,996 15,915 21,742 24,668
Allowance of acquired banks 4,721 15,853 15,999 5,881 -0-
Provision charged to expense 30,271 20,580 24,695 39,367 34,879
Balance at end of year $159,487 $143,464 $125,027 $100,248 $76,742
Average loans outstanding:
Commercial $2,421,972 $2,147,183 $1,848,757 $1,752,448 $1,692,473
Real estate 6,130,853 4,880,319 3,259,040 2,632,640 2,353,502
Installment 2,860,075 2,325,354 1,863,813 1,603,586 1,486,944
Total $11,412,900 $9,352,856 $6,971,610 $5,988,674 $5,532,919
Net charge-offs as percent of
average loans outstanding:
Commercial .18% .33% .24% .64% .56%
Real estate .05 .10 .13 .15 .22
Installment .41 .26 .39 .42 .68
Total .17 .19 .23 .36 .45
Net charge-offs as percent
of:
Provision for loan losses 62.7% 87.4% 64.5% 55.2% 70.7%
Allowance for loan losses 11.9 12.5 12.7 21.7 32.1
Allowance as percentage of:
Loans, net of unearned income 1.38 1.32 1.48 1.51 1.34
Provision for loan losses
(net of tax effect) as
percentage of net income 9.6% 7.1% 10.5% 20.0% 21.8%
</TABLE>
<PAGE> 11
At December 31, 1995, non-accrual loans totaled $54.1 million or 0.47% of
loans, compared to $59.8 million or 0.55% of loans at December 31, 1994.
Commercial loans comprised $16.2 million of the 1995 total, with real estate
loans accounting for $31.3 million and consumer loans $6.6 million. The
following table on SIC Classification provides additional information on
non-accruing loans based on the customer's Standard Industrial Classification
Code.
Loans contractually past due 90 days or more were 0.09% of total loans at
December 31, 1995, compared to 0.05% of total loans at December 31, 1994. Loans
past due 90 days or more at December 31, 1995, consisted of $4.3 million in
commercial and real estate loans, $4.4 million in installment loans and $1.5
million in personal lines of credit and credit card loans.
Renegotiated loans were 0.04% of loans at December 31, 1995 and 0.03% of
loans at December 31, 1994. Renegotiated loans have remained at low levels over
the last five years, as a result of paydowns and payoffs on renegotiated loans
which were added by acquisitions.
Other real estate declined to $10.1 million at December 31, 1995, compared to
$18.7 million at December 31, 1994. Increased sales of parcels of other real
estate in 1995, combined with fewer additions, accounted for the decline in
other real estate in 1995. Other real estate is recorded at the lower of (1)
the recorded investment in the loan or (2) the estimated net realizable value
of the collateral. Although Regions does not anticipate material loss upon
disposition of other real estate, sustained periods of adverse economic
conditions, substantial declines in real estate values in Regions' markets,
actions by bank regulatory agencies, or other factors, could result in
additional loss from other real estate.
The amount of interest income earned in 1995 on the $54.1 million of
non-accruing loans outstanding at year end was approximately $2.5 million. If
these loans had been current in accordance with their original terms,
approximately $6.1 million would have been earned on these loans in 1995.
Approximately $337,000 in interest income would have been earned in 1995 under
the original terms of the $4.2 million in renegotiated loans outstanding at
December 31, 1995. Approximately $298,000 in interest income was actually
earned in 1995 on these loans.
In the normal course of business, Regions makes commitments under various
terms to lend funds to its customers. These commitments include (among others)
revolving credit agreements, term loan agreements and short-term borrowing
arrangements, which are usually for working capital needs. Letters of credit
are also issued, which under certain conditions could result in loans. See Note
L to the supplemental consolidated financial statements for additional
information on commitments.
<PAGE> 12
The commercial, real estate and consumer loan portfolios are highly
diversified in terms of industry concentrations. The following table shows the
largest concentrations in terms of the customer's Standard Industrial
Classification Code (SIC) at December 31, 1995:
<TABLE>
<CAPTION>
(dollar amounts in millions)
- ---------------------------------------------------------------------------------------
1995
- ---------------------------------------------------------------------------------------
% OF % NON-
SIC CLASSIFICATION AMOUNT TOTAL ACCRUAL
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Individuals $6,718.4 58.1% 0.5%
Services:
Physicians 60.2 0.5 0.0
Business services 45.9 0.4 0.0
Religious organizations 99.5 0.9 0.0
Legal services 44.4 0.4 0.0
All other services 596.4 5.1 0.3
Total services 846.4 7.3 0.3
Manufacturing:
Electrical equipment 39.0 0.3 0.0
Food and kindred products 77.6 0.7 0.1
Rubber and plastic products 17.7 0.2 0.0
Lumber and wood products 71.7 0.6 0.0
Fabricated metal products 63.5 0.5 0.1
All other manufacturing 296.5 2.6 0.1
Total manufacturing 566.0 4.9 0.3
Wholesale trade 262.8 2.3 0.1
Finance, insurance and real estate:
Real estate 527.1 4.6 0.2
Banks and credit agencies 89.1 0.8 0.0
All other finance, insurance
and real estate 135.0 1.1 0.1
Total finance, insurance
and real estate 751.2 6.5 0.3
Construction:
Residential building construction 185.9 1.6 0.1
General contractors and builders 88.9 0.7 0.0
All other construction 262.8 2.3 0.5
Total construction 537.6 4.6 0.6
Retail trade:
Automobile dealers 202.2 1.7 0.0
All other retail trade 262.0 2.3 0.3
Total retail trade 464.2 4.0 0.3
Agriculture, forestry and fishing 162.2 1.4 0.5
Transportation, communication,
electrical, gas and sanitary 162.8 1.4 0.6
Mining (including oil and gas
extraction) 13.8 0.1 0.0
Public administration 63.3 0.5 4.8
Revolving credit loans 437.3 3.8 0.0
Other 583.6 5.1 0.7
TOTAL $11,569.6 100.0% 0.5%
</TABLE>
<PAGE> 13
INTEREST-BEARING DEPOSITS IN OTHER BANKS
Interest-bearing deposits in other banks are used primarily as temporary
investments. These assets generally have short-term maturities. This category
of earning assets declined from $79.2 million at December 31, 1993, to $16.9
million at December 31, 1994, as alternative investments became more
attractive. Interest-bearing deposits in other banks, acquired in connection
with acquisitions in 1995, was the primary reason for this asset increasing to
$56.5 million at December 31, 1995.
Securities
Effective January 1, 1994, Regions adopted Statement of Financial
Accounting Standards no. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). SFAS 115 requires that debt securities, which
the Company has both the positive intent and ability to hold to maturity,
should be carried at amortized cost. These securities are classified as
investment securities in the supplemental consolidated financial statements.
Debt securities, which the Company does not have the positive intent and
ability to hold to maturity and all marketable equity securities, are carried
at estimated fair value and are included in securities available for sale in
the supplemental consolidated financial statements, exclusive of any such
securities that are included in trading securities. Unrealized holding gains
and losses on securities available for sale, net of taxes, are carried as a
separate component of stockholders' equity. The following table shows the
carrying values of securities as follows:
<TABLE>
<CAPTION>
(in thousands) December 31
- ---------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment securities:
U.S. Treasury & Federal agency securities $ 894,606 $ 903,390 $1,008,992
Obligations of states and political 425,456 410,673 365,738
subdivisions
Mortgage-backed securities 268,926 791,443 1,518,179
Other securities 118 736 49,952
Equity securities -0- -0- 50,556
TOTAL $1,589,106 $2,106,242 $2,993,417
Securities available for sale:
U.S. Treasury & Federal agency securities $ 799,190 $627,985
Obligations of states and political
subdivisions 20,219 3,482
Mortgage-backed securities 1,406,264 559,504
Other securities 15,092 10,626
Equity securities 33,910 38,452
TOTAL $2,274,675 $1,240,049
</TABLE>
In 1995, total securities increased $517 million or 15%. U. S. Treasury and
Federal agency securities accounted for $162 million of this increase, with
mortgage-backed securities increasing $324 million or 24%. During 1995, $396
million of single-family residential mortgage loans were securitized and
transferred from the loan portfolio to mortgage-backed securities in the
available for sale securities portfolio. Excluding the effect of
securitizations, mortgage-backed securities would have decreased $72 million in
1995, due to maturities and paydowns. Obligations of states and political
subdivisions increased $32 million or 8%.
In December 1995, regions reclassified $644 million of investment securities
to securities available for sale in accordance with the Financial Accounting
Standards Board Implementation Guide for SFAS 115. This reclassification gives
regions additional flexibility in managing its securities portfolios.
Total securities increased $353 million or 12% in 1994. U. S. Treasury and
Federal agency securities increased $522.4 million or 52%. Mortgage-backed
securities decreased
<PAGE> 14
$167.2 million or 11% due to maturities and paydowns. Obligations of states
and political subdivisions increased $48.4 million or 13%.
Regions' investment portfolio policy stresses quality and liquidity. at
December 31, 1995, the average maturity of U.S. Treasury and Federal agency
securities was 2.9 years and that of obligations of states and political
subdivisions was 9.0 years. The average maturity of mortgage-backed securities
was 15.6 years and other securities had an average maturity of 7.6 years.
Overall, the average maturity of the portfolio was 9.2 years using contractual
maturities and 4.2 years using expected maturities. Expected maturities differ
from contractual maturities because borrowers have the right to call or prepay
obligations with or without call or prepayment penalties. Securities purchased
during the last several years have primarily short to intermediate term
maturities.
The estimated fair market value of Regions' investment securities portfolio
at December 31, 1995, was 2.4% ($37.7 million) above the amount carried on
Regions' books. Regions' securities available for sale portfolio at December
31, 1995, included net unrealized gains of $24.1 million. Regions' investment
securities and securities available for sale portfolios included gross
unrealized gains of $73.0 million and gross unrealized losses of $11.2 million
at December 31, 1995. market values of these portfolios vary significantly as
interest rates change; however, management expects normal maturities from the
securities portfolios to meet liquidity needs.
Of regions' tax-free securities rated by Moody's Investors Service, Inc., 97%
are rated "A" or better. Thirteen percent of the tax-free bond portfolio is
non-rated. The portfolio is carefully monitored to assure no unreasonable
concentration of securities in the obligations of a single debtor and current
credit reviews are conducted on each security holding.
<PAGE> 15
The following table shows the maturities of securities (excluding equity
securities) at December 31, 1995, the weighted average yields and the taxable
equivalent adjustment used in calculating the yields:
<TABLE>
<CAPTION>
(in thousands) SECURITIES MATURING
- -----------------------------------------------------------------------------------------------------------------------------------
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. Treasury and Federal agency securities $152,343 $700,947 $ 41,316 $ -0- $ 894,606
Obligations of states and political
subdivisions 21,814 97,262 128,240 178,140 425,456
Mortgage-backed securities -0- 69,637 30,978 168,311 268,926
Other securities 100 -0- -0- 18 118
TOTAL $174,257 $867,846 $200,534 $346,469 $1,589,106
Weighted average yield 6.79% 7.57% 7.75% 7.08% 7.40%
Securities available for sale:
U.S. Treasury and Federal agency securities $344,476 $449,700 $ 5,014 $ -0- $ 799,190
Obligations of states and political
subdivisions 17,167 1,883 1,071 98 20,219
Mortgage-backed securities 249,972 168,398 207,910 779,984 1,406,264
Other securities 13,087 534 687 784 15,092
TOTAL $624,702 $620,515 $214,682 $780,866 $2,240,765
Weighted average yield 6.29% 6.65% 6.17% 6.46% 6.44%
Taxable equivalent adjustment for calculation
of yield $ 752 $ 3,446 $ 3,845 $ 4,913 $ 12,956
</TABLE>
Note: The weighted average yields are calculated on the basis of the yield
to maturity based on the book value of each security. Weighted average yields
on tax-exempt obligations have been computed on a fully taxable equivalent
basis using a tax rate of 35%. Yields on tax-exempt obligations have not been
adjusted for the non-deductible portion of interest expense used to finance the
purchase of tax-exempt obligations.
<PAGE> 16
LIQUIDITY
Liquidity is an important factor in the financial condition of Regions and
affects Regions' ability to meet the borrowing needs and deposit withdrawal
requirements of its customers. Assets, consisting principally of loans and
securities, are funded by customer deposits, purchased funds, borrowed funds
and stockholders' equity.
The securities portfolio is one of Regions' primary sources of liquidity.
Maturities of securities provide a constant flow of funds which are available
for cash needs (see table on Securities Maturing above). Maturities in the loan
portfolio also provide a steady flow of funds (see previous table on Loans
Maturing). At December 31, 1995, commercial loans, real estate construction
loans and commercial mortgage loans with an aggregate balance of $2.0 billion,
as well as securities of $799 million, were due to mature in one year or less.
Additional funds are provided from payments on consumer loans and one-to-four
family residential mortgage loans. Historically, the Company's high levels of
net operating earnings also contribute to cash flow. In addition, liquidity
needs can be met by the purchase of funds in state and national money markets.
Regions' liquidity also continues to be enhanced by a relatively stable deposit
base.
The loan to deposit ratio increased from 77.06% at December 31, 1993, to
86.32% at December 31, 1994, as earning asset growth outpaced the growth in
deposits, generating the need to increase purchased funds. At December 31,
1995, the loan to deposit ratio declined to 85.51%, primarily as a result of
the securitization of approximately $396 million in loans and the subsequent
transfer of these assets to the available for sale securities portfolio. The
securitization of these loans improved Regions' liquidity position, since these
assets are now more easily salable; however, Regions currently has no plans to
sell these securities. In addition, these securities can be used as collateral
for securitized borrowings.
As shown in the Supplemental Consolidated Statement of Cash Flows, operating
activities, provided significant levels of funds in all three years, due
primarily to high levels of net income. A decrease in mortgages held for sale
in 1994, resulted in a significant increase in cash provided by operating
activities in that year. Investing activities, primarily in loans and
securities, were a net user of funds in all three years. Strong loan growth
over the last three years, particularly in 1994, has required a significant
amount of funds for investing activities. Funds needed for investing activities
were provided primarily by deposits, purchased funds, and borrowings.
Financing activities provided more funds in 1994 due to more reliance on short-
and long-term borrowings. Increases in deposits provided more funds in 1993
and 1995. Cash dividends and the open-market purchase of the Company's common
stock, which was reissued in connection with specific purchase acquisitions,
also required funds in 1993, 1994 and 1995.
First Alabama Bank's short-term certificates of deposit are rated "A-1+" by
Standard & Poor's Corporation. This is the highest rating available for any
company. First Alabama Bank's long-term certificates of deposit are rated
"AA-", which is higher than any other Alabama bank and among the highest in the
Southeast.
Moody's Investors Service has also given similar quality ratings to First
Alabama Bank's short- and long-term debt and certificates of deposit.
Short-term debt and certificates of deposit are rated "P-1" and long-term debt
and certificates of deposit are rated "Aa2".
In addition, First Alabama Bank received the highest issuer rating available
("A") from the internationally recognized bank rating organization, Thomson
Bankwatch. This organization also assigned its highest short-term rating of
"TBW-1" to First Alabama Bank's certificates of deposit.
Regions Financial Corporation's (the parent company) commercial paper has
also been assigned a rating of "TBW-1" by Thomson Bankwatch. Regions Financial
Corporation has also received Thomson Bankwatch's highest issuer rating of "A".
The $200 million in subordinated debt issued by Regions is rated "A" by
Standard & Poor's Corporation, "A2" by Moody's Investors Service, and "AA-" by
Thomson Bankwatch.
Regions has a shelf-registration statement outstanding pursuant to which it
may offer up to an additional $200 million of its unsecured, subordinated
notes, debentures, bonds or other evidences of indebtedness. The proceeds from
any issuances of these securities can be used for general corporate purposes
and represents an additional funding source for Regions.
<PAGE> 17
Two of Regions' banking subsidiaries, First Alabama Bank and Regions Bank of
Louisiana, have taken the necessary steps for the possible issuance of up to
$250 million in bank notes to institutional investors. The notes can have
maturities ranging from 30 days to 30 years and fixed or variable interest
rates. The proceeds from issuance of the bank notes can be used in the
ordinary course of business and provide an additional source of funding. At
December 31, 1995, $75 million in senior bank notes, issued by Regions Bank of
Louisiana, were outstanding. First Alabama Bank's notes were rated "A-1+/AA-"
by Standard & Poor's Corporation and "P-1/Aa2" by Moody's Investors Service.
Regions Bank of Louisiana's notes were rated "A-1+/AA-" by Standard & Poor's
Corporation and "P-1/Aa3" by Moody's Investors Service.
Regions' and its banking subsidiaries' high quality ratings from nationally
recognized rating agencies enhance the Company's ability to raise funds in
national money markets. The high ratings also help to attract both loan and
deposit customers in local markets.
Historically, Regions has found short- and intermediate-term credit readily
available on reasonable terms from money center or regional banks. Regions'
management places constant emphasis on the maintenance of adequate liquidity to
meet conditions which might reasonably be expected to occur.
<PAGE> 18
DEPOSITS
Deposits are Regions' primary funding source. Deposits accounted for
89% of the funding for average earning assets in 1994 and 87% of the funding
for average earning assets in 1995. During the period 1991 through 1993,
interest rates dropped to historically low levels and pricing spreads (the
difference between rates paid on different deposit products) narrowed
considerably. Since very little pricing spread existed, rate sensitive
customers moved funds out of term deposits, such as certificates of deposits,
into liquid, short-term deposits. During 1994, interest rates increased rapidly
causing customers to take advantage of higher rates and resulting wider pricing
spreads by moving funds out of liquid, short-term deposits back into time
deposits. The rapid increase in interest rates was short-lived, as interest
rates peaked in early 1995 and moved lower for the remainder of the year. As
interest rates moved lower during 1995, pricing spreads remained fairly wide.
As a result, customers continued moving funds out of liquid, short-term
deposits into time deposits and money market accounts. Management expects a
continuation of this trend as long as pricing spreads remain wide. The trends
mentioned above can be seen by examining Regions' deposit composition and by
comparing the relative growth rates of Regions' deposit products over the last
three years.
During the last three years, average total deposits grew at a compound
annual rate of 21%. Average deposits grew $2.6 billion or 28% in 1994 and $1.6
billion or 13% in 1995. Acquisitions, net of branch sales, contributed average
deposit growth of $2.1 billion in 1994 and $848 million in 1995.
Savings account growth slowed considerably during 1995 because of the
trends mentioned above. Average savings accounts increased 30% in 1994 but
declined 1% in 1995. Since 1993, this category of deposits increased $220
million, at a compound annual growth rate of 13%. As mentioned above, growth in
1994 occurred as market interest rates fell, making the rates paid on these
accounts more attractive relative to other investment alternatives. During
1995, the rate paid on savings accounts became less attractive relative to
other investment alternatives. Management expects savings accounts to continue
growing slowly, as rate sensitive customers shift funds out of savings accounts
into money market accounts and time deposits. In 1995, savings accounts
accounted for 8% of average total deposits compared to 9% of average total
deposits in 1994.
Average interest-bearing transaction accounts increased 17% in 1994.
During 1995, Regions reclassified a portion of interest-bearing transaction
accounts to money market savings accounts, resulting in a 21% decline.
Nevertheless, interest-bearing transaction accounts continue to be an important
source of funds for Regions, accounting for 15% of average total deposits in
1994 but declining to 11% of average total deposits in 1995. Regions values
interest-bearing transaction accounts as a stable funding source. This is
evidenced by the introduction of an innovative interest-bearing transaction
product called Regions Management Account. Management
<PAGE> 19
regards the Regions Management Account, introduced in early 1995, as a highly
competitive product.
Money market savings products continue to be Regions' fastest growing
deposit products, increasing at a compound annual rate of 38% since 1993. As
market interest rates increased in 1994 and decreased in 1995, customers
responded to Regions' innovative, competitive money market savings products by
continuing to invest in these accounts, resulting in average balance increases
of 21% in 1994 and 57% in 1995. As mentioned above, a reclassification from
interest-bearing transaction accounts to money market savings inflated the 1995
money market savings growth rate. Money market savings products are a
significant funding source for Regions, accounting for 13% of average total
deposits in 1994 and 18% of average total deposits in 1995.
Average certificates of deposit of $100,000 or more increased 49% in
1994 and 38% in 1995, due to their increased use as a funding source. Since
1993, certificates of deposit of $100,000 or more have increased at a compound
annual rate of 43%, and in 1995 accounted for 12% of average total deposits, up
from a three year low of 9% in 1993.
Average other interest-bearing deposits (certificates of deposit of
less than $100,000 and time open accounts) increased 34% in 1994 and 10% in
1995. This category of deposits continues to be Regions' primary funding
source; it accounted for 38% of average total deposits in 1995, down from 39%
of average total deposits in 1994. Rising interest rates and wider pricing
spreads over the last two years have made this category of deposits attractive
relative to other investment alternatives. In addition, Regions has
successfully marketed a special certificate of deposit product that provides
customers with an attractive interest rate and an early redemption option. This
and other innovative deposit products have helped Regions continue to grow
deposits and maintain market share in the Company's major markets.
The sensitivity of Regions' deposits over the last three years to
changes in market interest rates is reflected in the Company's average interest
rate paid on interest-bearing deposits (see table following on Average Rates
Paid). The rate paid on interest-bearing deposits decreased to 3.54% in 1993,
increased to 3.71% in 1994 and to 4.66% in 1995.
A detail of interest-bearing deposit balances at December 31, 1995, and
1994, and the interest expense on these deposits for the three years ended
December 31, 1995, is presented in Note H to the supplemental consolidated
financial statements.
<PAGE> 20
The following table presents the detail of interest-bearing deposits and
maturities of the larger time deposits:
<TABLE>
<CAPTION>
(in thousands) December 31
1995 1994
<S> <C> <C>
Interest-bearing deposits of less than $100,000 $ 9,991,747 $ 8,844,428
Time certificates of deposit of $100,000 or more, maturing in:
3 months or less 603,110 719,724
over 3 through 6 months 200,619 160,020
over 6 through 12 months 239,474 124,805
over 12 months 340,646 385,466
----------- -----------
Total 1,383,849 1,390,015
Other time deposits of $100,000 or more maturing in 3 months or less 257,046 541,699
Total $11,632,642 $10,776,142
</TABLE>
The following table presents the average amounts of deposits outstanding by
category for the three years ended December 31, 1995:
<TABLE>
<CAPTION>
(in thousands) Average Amounts Outstanding
1995 1994 1993
<S> <C> <C> <C>
Non-interest-bearing demand deposits $ 1,748,647 $ 1,613,461 $1,340,625
Interest-bearing transaction accounts 1,428,900 1,805,640 1,545,462
Savings accounts 995,307 1,004,625 775,214
Money market savings accounts 2,450,687 1,557,413 1,287,717
Certificates of deposit of $100,000 or more 1,652,016 1,199,713 805,996
Other interest-bearing deposits 4,976,959 4,524,256 3,369,377
Total interest-bearing deposits 11,503,869 10,091,647 7,783,766
Total deposits $13,252,516 $11,705,108 $9,124,391
</TABLE>
<PAGE> 21
The following table presents the average rates paid on deposits by category for
the three years ended December 31, 1995:
<TABLE>
<CAPTION>
Average Rates Paid
1995 1994 1993
<S> <C> <C> <C>
Interest-bearing transaction accounts 2.86% 2.79% 2.53%
Savings accounts 2.75 2.86 2.85
Money market savings accounts 3.93 2.84 2.72
Certificates of deposit of $100,000 or more 5.03 3.91 3.58
Other interest-bearing deposits 5.79 4.51 4.46
Total interest-bearing deposits 4.66% 3.71% 3.54%
</TABLE>
<PAGE> 22
BORROWED FUNDS
Regions' short-term borrowings consist of federal funds purchased and
security repurchase agreements, commercial paper and other short-term
borrowings.
Federal funds purchased and security repurchase agreements are used to
satisfy daily funding needs and, when advantageous, for rate arbitrage. Federal
funds purchased and security repurchase agreements decreased from $1.1 billion
at December 31, 1994, to $1.0 billion at December 31, 1995. Balances in these
accounts can fluctuate significantly on a day-to-day basis. The average daily
balance of federal funds purchased and security repurchase agreements, net of
federal funds sold and security reverse repurchase agreements, increased $223.1
million in 1994 and $461.3 million in 1995. These increases resulted from
increased reliance on purchased funds to support earning asset growth and the
need to replace approximately $177 million in deposits sold in connection with
the sale of five branch offices in 1994. The higher level of net purchased
funds is expected to continue unless alternative funding sources are utilized
or unless earning assets grow slower than interest-bearing liabilities.
At December 31, 1995, $21.1 million in commercial paper was outstanding,
compared to $18.6 million at December 31, 1994. The Company issues commercial
paper through its private placement commercial paper program. The Company's
retail commercial paper program was discontinued in 1993 since the private
placement program was meeting the Company's needs at a lower cost. Company
policy limits total commercial paper outstanding, at any time, to $75 million.
The level of commercial paper outstanding depends on the funding requirements
of the Company and the cost of commercial paper compared to alternative
borrowing sources.
Other short-term borrowings increased $7.4 million from December 31, 1994
to December 31, 1995. At December 31, 1994, no borrowings were outstanding on
the Company's short-term borrowing arrangement with an unaffiliated bank,
compared to $10.0 million outstanding at December 31, 1995. The remaining
amount of other short-term borrowings consists of treasury tax and loan note
borrowings and a short sale liability at Regions' broker/dealer subsidiary.
Treasury tax and loan note borrowings represent short-term borrowing from the
U. S. Treasury, payable on demand. Short sales are frequently used by the
broker/dealer subsidiary to offset other market risks which are undertaken in
the normal course of business.
Regions' long-term borrowings consist primarily of subordinated notes,
Federal Home Loan Bank borrowings, senior bank notes and other long-term notes
payable.
Subordinated notes and debentures decreased $5.2 million in 1995, after
increasing $124.6 million in 1994. The decrease in 1995 resulted from the
early pay off of the parent company's 8.75% debentures, which were originally
issued in 1973. In 1994, Regions issued $125 million in subordinated notes,
which qualify as Tier 2 capital under Federal Reserve (Fed) guidelines. The
proceeds of these notes were used for general corporate purposes, including the
repurchase in the open market of shares of Regions' Common Stock, which were
issued in connection with specific acquisitions accounted for as purchases.
Issuance of the subordinated notes improved the Company's total capital ratios
and provided an additional source of financing growth of the Company. As
previously mentioned, Regions has a shelf-registration statement outstanding
which authorizes the issuance of up to an additional $200 million in
indebtedness.
<PAGE> 23
Federal Home Loan Bank borrowings decreased $23.2 million in 1995 and
$46.4 million in 1994, after increasing $351.5 million in 1993. The increase
in 1993 related to Federal Home Loan Bank borrowings assumed in connection with
the acquisition of Secor Bank at year-end 1993. As a portion of these
borrowings matured and were paid off in 1994 and 1995, the balance outstanding
on Federal Home Loan Bank borrowings declined. Membership in the Federal Home
Loan Bank system provides access to an additional source of lower-cost funds.
These borrowings can be used to partially hedge against the effect future
interest rate changes may have on the Company's real estate mortgage portfolio.
In April 1995, Regions Bank of Louisiana, Regions' Louisiana bank
subsidiary, issued $100 million in unsecured senior bank notes under its bank
note program. Currently, up to $250 million can be outstanding under this
program. The bank note program provides Regions with another source of funding
and offers flexibility in structuring the terms of the notes. Of the total
$100 million issued in 1995, $25 million matured prior to year end.
Other long-term notes payable consist of mortgages payable on certain of
the Company's buildings and low-income housing partnership investments, notes
issued to former stockholders of acquired banks and miscellaneous notes
payable. Other long-term borrowings declined $1.9 million in 1995, due to
scheduled maturities on these borrowings.
STOCKHOLDERS' EQUITY
Over the past three years, stockholders' equity has increased at a
compound annual growth rate of 17.3%. Stockholders' equity has grown from $886
million at the beginning of 1993 to $1.4 billion at year-end 1995. Internally
generated retained earnings contributed $349 million of this growth, equity
issued in connection with acquisitions accounted for $172 million, and $22
million was attributable to the exercise of stock options and to the issuance
of stock for dividend reinvestment plans and employee incentive plans. The
internal capital generation rate (net income less dividends as a percentage of
average stockholders' equity) was 8.7% in 1995, compared to 9.7% in 1994 and
10.2% in 1993.
Regions' ratio of stockholders' equity to total assets increased to 8.48%
at December 31, 1995, compared to 8.14% at December 31, 1994, and 8.40% at
December 31, 1993. Regions' capital level is a source of strength and provides
flexibility for future growth.
Regions and its subsidiaries are required to comply with capital adequacy
standards established by banking regulatory agencies. Currently, there are two
basic measures of capital adequacy: a risk-based measure and a leverage measure.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and
bank holding companies, to account for off-balance sheet exposure and to
minimize disincentives for holding liquid assets. Assets and off-balance sheet
items are assigned to broad risk categories, each with specified risk-weighting
factors. The resulting capital ratios represent capital as a percentage of
total risk-weighted assets and off-balance sheet items. The banking regulatory
agencies have adopted initiatives to begin considering interest rate risk in
computing risk-based capital ratios, although such requirements have not yet
been implemented.
The minimum standard for the ratio of total capital to risk-weighted
assets is 8%. At least 50% of that capital level must consist of common
equity, undivided profits and non-cumulative perpetual preferred stock, less
goodwill
<PAGE> 24
and certain other intangibles ("Tier 1 capital"). The remainder ("Tier 2
capital") may consist of a limited amount of other preferred stock, mandatory
convertible securities, subordinated debt and a limited amount of the allowance
for loan losses. The sum of Tier 1 capital and Tier 2 capital is "total
risk-based capital."
The banking regulatory agencies also have adopted regulations which
supplement the risk-based guidelines to include a minimum ratio of 3% of Tier 1
capital to average assets less goodwill (the "leverage ratio"). Depending upon
the risk profile of the institution and other factors, the regulatory agencies
may require a leverage ratio of 1% to 2% above the minimum 3% level.
The following chart summarizes the applicable bank regulatory capital
requirements. Regions' capital ratios at December 31, 1995, substantially
exceeded all regulatory requirements.
BANK REGULATORY CAPITAL REQUIREMENTS
<TABLE>
<CAPTION>
MINIMUM
REGULATORY REGIONS AT
REQUIREMENT DECEMBER 31, 1995
<S> <C> <C>
Tier 1 capital to risk-adjusted assets 4.00% 11.75%
Total risk-based capital to risk-adjusted assets 8.00 14.81
Tier 1 leverage ratio 3.00 7.77
</TABLE>
Total capital at the banking affiliates also has an important effect on
the amount of FDIC insurance premiums paid. Institutions not considered well
capitalized can be subject to higher rates for FDIC insurance. As of December
31, 1995, all of Regions' banking affiliate had the requisite capital levels to
qualify as well capitalized.
Regions attempts to balance the return to stockholders through the payment
of dividends, with the need to maintain strong capital levels for future growth
opportunities. In 1995, excluding the effect of the First National business
combination, Regions returned 35% of earnings to its stockholders in the form
of dividends. Total dividends declared by Regions in 1995, were $60.1 million
or $1.32 per share, an increase of 10% from the $1.20 per share in 1994.
In January 1996, the Board of Directors declared an increase in the
quarterly cash dividend from $.33 to $.35 per share, a 6% increase. This is
the twenty-fifth consecutive year that Regions has increased cash dividends.
<PAGE> 25
The following table shows the percentage distribution of Regions'
consolidated average balances of assets, liabilities and stockholders' equity
for the five years ended December 31, 1995:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Taxable securities 18.9% 20.2% 18.4% 20.0% 19.8%
Non-taxable securities 2.5 2.7 3.0 2.8 3.1
Federal funds sold 0.8 1.3 1.4 3.0 2.2
Loans (net of unearned income):
Commercial 14.8 15.2 17.4 18.3 19.4
Real estate 37.4 34.4 30.7 27.5 26.9
Installment 17.5 16.4 17.6 16.7 17.0
Total loans 69.7 66.0 65.7 62.5 63.3
Allowance for loan losses (0.9) (1.0) (1.0) (0.9) (0.8)
Net loans 68.8 65.0 64.7 61.6 62.5
Other earning assets 1.0 2.4 3.7 3.6 3.5
Total earning assets 92.0 91.6 91.2 91.0 91.1
Cash and due from banks 3.3 3.7 4.4 4.2 4.2
Other non-earning assets 4.7 4.7 4.4 4.8 4.7
Total assets 100.0% 100.0% 100.0% 100.0% 100.0%
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing 10.7% 11.4% 12.6% 12.1% 12.1%
Interest-bearing 70.1 71.2 73.4 75.2 75.5
Total deposits 80.8 82.6 86.0 87.3 87.6
Borrowed funds:
Short-term 5.5 3.4 2.1 2.2 2.3
Long-term 4.0 4.2 1.7 0.6 0.3
Total borrowed funds 9.5 7.6 3.8 2.8 2.6
Other liabilities 1.3 1.4 1.4 1.3 1.3
Total liabilities 91.6 91.6 91.2 91.4 91.5
Stockholders' equity 8.4 8.4 8.8 8.6 8.5
Total liabilities and
stockholders' equity 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
<PAGE> 26
Condensed average statements of condition, related interest income/expense and
applicable yields/rates for the last three years are shown below:
Average Balances, Interest, and Yields/Rates
<TABLE>
<CAPTION>
1995 1994
------------------------------------------- -------------------------------------------
AVERAGE TAXABLE EQUIVALENT YIELD/ AVERAGE TAXABLE EQUIVALENT YIELD/
BALANCES INTEREST RATE BALANCES INTEREST RATE
------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Taxable securities $ 3,106,739 $ 203,204 6.54% $ 2,854,715 $ 181,018 6.34%
Tax-exempt securities 410,765 36,958 9.00 382,583 37,350 9.76
Federal funds sold 131,862 7,761 5.89 177,642 7,016 3.95
Loans, net of unearned income 11,412,900 1,014,995 8.89 9,352,856 761,027 8.14
Mortgage loans held for sale 121,476 9,335 7.68 298,733 20,363 6.82
Other earning assets 49,808 4,347 8.73 47,923 1,970 4.11
------------------------------------------- -------------------------------------------
Total earning assets 15,233,550 1,276,600 8.38 13,114,452 1,008,744 7.69
Allowance for loan losses (154,170) (139,604)
Cash and due from banks 546,529 525,936
Other non-earning assets $ 775,125 663,403
------------------------------------------- -------------------------------------------
Total assets $16,401,034 $14,164,187
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 1,748,647 $ 1,613,461
Interest-bearing 11,503,869 535,880 4.66% 10,091,647 374,533 3.71%
------------------------------------------- -------------------------------------------
Total deposits 13,252,516 535,880 4.04 11,705,108 374,533 3.20
Borrowed funds:
Short-term 900,246 57,429 6.38 471,332 24,766 5.25
Long-term 652,520 42,027 6.44 601,781 36,858 6.12
------------------------------------------- -------------------------------------------
Total borrowed funds 1,552,766 99,456 6.41 1,073,113 61,624 5.74
Other liabilities 211,037 202,765
Total liabilities 15,016,319 12,980,986
Stockholders' equity 1,384,715 1,183,201
------------------------------------------- -------------------------------------------
Total liabilities and
stockholders' equity $16,401,034 $14,164,187
Taxable Equivalent Net interest income $ 641,264 $ 572,587
Average interest rate earned 8.38% 7.69%
Average interest rate paid 4.87% 3.91%
Interest spread 3.51% 3.78%
Net interest margin 4.21% 4.37%
------------------------------------------- -------------------------------------------
<CAPTION>
1993
-------------------------------------------
AVERAGE TAXABLE EQUIVALENT YIELD/
BALANCES INTEREST RATE
-------------------------------------------
<S> <C> <C> <C>
ASSETS
Earning assets:
Taxable securities $ 1,954,191 $ 136,038 6.96%
Tax-exempt securities 316,651 32,621 10.30
Federal funds sold 150,664 4,658 3.09
Loans, net of unearned income 6,971,610 564,298 8.09
Mortgage loans held for sale 310,710 22,205 7.15
Other earning assets 80,361 3,149 3.92
-------------------------------------------
Total earning assets 9,784,187 762,969 7.80
Allowance for loan losses (108,951)
Cash and due from banks 469,657
Other non-earning assets 458,743
-------------------------------------------
Total assets $10,603,636
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 1,340,625
Interest-bearing 7,783,766 275,455 3.54%
-------------------------------------------
Total deposits 9,124,391 275,455 3.02
Borrowed funds:
Short-term 217,703 7,859 3.61
Long-term 182,115 12,881 7.07
-------------------------------------------
Total borrowed funds 399,818 20,740 5.19
Other liabilities 150,107
Total liabilities 9,674,316
Stockholders' equity 929,320
-------------------------------------------
Total liabilities and
stockholders' equity $10,603,636
Taxable Equivalent Net interest income $ 466,774
Average interest rate earned 7.80%
Average interest rate paid 3.62%
Interest spread 4.18%
Net interest margin 4.77%
-------------------------------------------
</TABLE>
<PAGE> 27
OPERATING RESULTS
Net income increased 10% in 1995 and 23% in 1994. The accompanying table
presents the dollar amount and percentage change in the important components of
income that occurred in 1995 and 1994.
<TABLE>
<CAPTION>
SUMMARY OF CHANGES IN OPERATING RESULTS
(dollar amounts in thousands) Increase (Decrease)
1995 COMPARED 1994 Compared
TO 1994 to 1993
AMOUNT % Amount %
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INTEREST INCOME $68,728 12% $105,187 23%
Provision for loan losses 9,691 47 (4,115) (17)
Net interest income after
provision for loan losses 59,037 11 109,302 26
NON-INTEREST INCOME:
Trust department income 3,925 18 1,182 6
Service charges on deposit accounts 11,004 18 9,714 19
Mortgage servicing and origination fees (1,757) (4) (1,783) (4)
Securities transactions (768) (223) (487) (59)
Other 2,953 7 (6,726) (14)
Total non-interest income 15,357 9 1,900 1
NON-INTEREST EXPENSE:
Salaries and employee benefits 32,867 14 29,021 15
Net occupancy expense 1,793 7 6,422 31
Furniture and equipment expense 2,029 7 4,429 18
FDIC insurance expense (7,906) (30) 6,345 32
Other 16,302 12 13,029 11
Total non-interest expense 45,085 10 59,246 15
Income before income taxes 29,309 11 51,956 24
Applicable income taxes 12,000 14 17,940 27
NET INCOME $17,309 10% $34,016 23%
</TABLE>
<PAGE> 28
NET INTEREST INCOME
Net interest income (interest income less interest expense) is Regions'
principal source of income. Net interest income increased 12% in 1995 and 23%
in 1994. On a taxable equivalent basis, net interest income also increased
12% in 1995 and 23% in 1994. The table following provides additional
information to analyze the changes in net interest income.
In 1995, increases in the volume of interest-earning assets and
interest-bearing liabilities contributed to the increase in net interest
income. During 1995, average earning assets grew 16% and average
interest-bearing liabilities grew 17%. However, unfavorable changes in earning
asset yields and interest-bearing liability rates partially offset the increase
in net interest income attributable to volume changes. Volume increases in
earning assets typically increase net interest income due to the positive
spread between earning asset yields and interest-bearing liability rates.
In 1994, increases in the volume of interest-earning assets and
interest-bearing liabilities also contributed to the increase in net interest
income. During 1994, average earning assets grew 34% and average
interest-bearing liabilities grew 37%. As was the case in 1995, unfavorable
changes in earning asset yields and interest-bearing liability rates partially
offset the increase in net interest income attributable to volume changes.
Regions measures its ability to produce net interest income with a ratio
called the interest margin. The interest margin is net interest income (on a
taxable equivalent basis) as a percentage of earning assets. The interest
margin declined from 4.77% in 1993 to 4.37% in 1994 and to 4.21% in 1995.
Changes in the interest margin occur primarily due to four factors: (1) the
interest rate spread (taxable equivalent yield on earning assets less the rate
on interest-bearing liabilities), (2) the percentage of earning assets funded
by interest-bearing liabilities, (3) changes in market interest rates and (4)
changes in the statutory federal income tax rate. Year-to-year comparisons of
the interest margin ratio are affected by acquisitions that occurred in late
1993 and in late 1994. Even though these institutions added significantly to
net interest income, they generally had an adverse impact on the interest
margin ratio by negatively affecting items (1) and (2) above.
The first factor affecting Regions' interest margin is the interest rate
spread. Regions' average interest rate spread was 4.18% in 1993, 3.78% in 1994
and 3.51% in 1995. The interest rate spread contracted in 1995 because
interest-bearing liability rates increased 27 basis points more than did
earning asset yields. Recently, growth in Regions' earning asset portfolios has
come primarily from lower spread business. This is the result of both the
competitive financial services environment and a strategic decision to pursue
this type business. Although lower spread business reduces the average interest
rate spread, effectively managed it provides an efficient method of leveraging
the Company's capital base, thereby adding substantially to earnings per share
and return on stockholders' equity. With the rapid run-up in interest rates
that occurred during 1994, followed by the decline in interest rates during
1995, the average rate on the certificate of deposit (CD) portfolio remained
considerably above current market interest rates. The CD portfolio reprices to
prevailing market interest rates more gradually than do other interest-bearing
liabilities. As a result, the average rate paid on the CD portfolio did not
fall as fast as other interest-bearing liability rates, causing a reduction in
the interest rate spread. During 1995, Regions issued $100 million in senior
bank notes, of which $25 million matured by year-end 1995. Bank notes carry
higher interest rates and
<PAGE> 29
longer-terms than Regions' primary funding sources, resulting in an increase in
the average rate paid on interest-bearing liabilities and a reduction in the
interest rate spread. Regions also purchased a large block of securities and
funded the purchase with market rate borrowings. Although this transaction
created substantial earnings, it also reduced the interest rate spread.
The interest rate spread contracted in 1994 because earning asset yields
declined 11 basis points while interest-bearing liability rates increased 29
basis points. As mentioned above, 1994 earning asset yields and
interest-bearing liability rates were adversely affected by acquisitions.
During 1994, Regions added substantially to its adjustable rate mortgage (ARM)
portfolio. To attract borrowers, ARMs start with low initial rates.
Consequently, ARMs typically reduce the average earning asset yield during
their initial repricing period. Regions funded the ARM growth with relatively
expensive market rate funding. This had the effect of increasing the rates paid
on interest-bearing liabilities. During 1994, Regions also issued an additional
$125 million in subordinated notes (see Note I to the supplemental consolidated
financial statements). These notes typically carry higher rates and longer
maturities than Regions' primary funding sources. As a result, these notes have
the effect of increasing the average rate paid on interest-bearing liabilities.
The mix of earning assets can also affect the interest rate spread. During
1995, loans, which are typically Regions' highest yielding earning asset,
increased as a percentage of earning assets -- partially offsetting the effects
of contracting spreads. Average loans as a percentage of earning assets were
71% in 1994 and 75% in 1995.
The second factor affecting the interest margin is the percentage of
earning assets funded by interest-bearing liabilities. Funding for Regions'
earning assets comes from interest-bearing liabilities, non-interest-bearing
liabilities and stockholders' equity. The net spread on earning assets funded
by non-interest-bearing liabilities and stockholders' equity is higher than the
net spread on earning assets funded by interest-bearing liabilities. The
percentage of earning assets funded by interest-bearing liabilities increased
from 84% in 1993, to 85% in 1994 and to 86% in 1995. The changes in the
percentage of earning assets funded by interest-bearing liabilities had a
negative effect on net interest income in 1994 and 1995. The trend has been for
a greater percentage of new funding for earning assets to come from
interest-bearing sources. Management expects this trend to continue. As
mentioned above, during 1994, the percentage of earning assets funded by
interest-bearing liabilities increased, at least partially, as a result of
acquisitions that occurred late in 1993.
The third factor affecting the interest margin is market interest rates.
Market interest rates, both the level of rates and the slope of the yield curve
(the spread between short-term rates and longer-term rates), strongly influence
the pricing on most categories of Regions' earning assets and interest-bearing
liabilities. The level of market interest rates generally declined from 1990
through 1993, reaching historically low levels in late 1993. As a result of
declining market rates during this period, the yield on earning assets and the
rate on interest-bearing liabilities declined. Beginning in February 1994, the
Fed began to change interest rates significantly over a relatively short period
of time. In a series of six steps occurring over less than 12 months, the Fed
increased the Federal Funds rate 250 basis points from 3.00% to 5.50%. In
February 1995, the Fed increased the Fed Funds rate an additional 50 basis
points to 6.00% - making the total increase 300 basis points over 12 months. In
July 1995, the Fed
<PAGE> 30
reversed course and began lowering the Federal Funds rate. In two separate
moves, the Fed lowered the Federal Funds rate to 5.50%. As market rates moved
higher during 1994, Regions' earning asset yields and interest-bearing
liability rates reacted by also moving higher. However, the flattening yield
curve tended to cause interest-bearing liability rates to increase slightly
faster than earning asset yields. During the first half of 1995, earning asset
yields and interest-bearing liability rates continued to increase, with
interest-bearing liability rates increasing slightly faster than earning asset
yields. During the last half of 1995, with market interest rates falling,
earning asset yields and interest-bearing liability rates began to fall. During
this period, earning asset yields fell slightly faster than did
interest-bearing liability rates.
The last factor, changes in the statutory federal income tax rate,
affected the interest margin in 1993. The marginal federal tax rate was
constant at 34% from 1988 through 1992, but was increased to 35% in 1993.
Comparisons of the interest margin to years prior to 1993 are affected by the
change in this rate. The higher tax rate in 1993 increased the taxable
equivalent value of interest income on tax-free loans and securities and thus
increased the interest margin by 1 basis point in 1993. This increase is
"artificial" since it reflects increased tax expense resulting from the tax
rate change.
INTEREST RATE SENSITIVITY
The primary objective of Asset/Liability Management at Regions is to
achieve reasonable stability in net interest income throughout interest rate
cycles. This is achieved by maintaining the proper balance of rate sensitive
earning assets, rate sensitive liabilities and off-balance sheet interest rate
hedges. The relationship of rate sensitive earning assets to rate sensitive
liabilities, adjusted for the effect of off-balance sheet hedges, (interest
rate sensitivity) is the principal factor in determining the effect that
fluctuating interest rates will have on future net interest income. Rate
sensitive earning assets and interest-bearing liabilities are those that can be
repriced to current market rates within a relatively short time period.
Management monitors the rate sensitivity of earning assets and interest-bearing
liabilities over periods of up to ten years, but places particular emphasis on
the first year. At December 31, 1995, approximately 45% of earning assets and
70% of the funding for these earning assets were scheduled to be repriced to
current market rates at least once during 1996.
The accompanying table shows Regions' rate sensitive position at December
31, 1995, as measured by gap analysis (the difference between the earning asset
and interest-bearing liability amounts scheduled to be repriced to current
market rates in subsequent periods). Over the next 12 months approximately $3.9
billion more interest-bearing liabilities than earning assets can be repriced
to current market rates at least once. As a result, the one-year cumulative gap
(the ratio of rate sensitive assets to rate sensitive liabilities) at December
31, 1995, was 0.64, indicating a "liability sensitive" position. However, this
ratio is only one of the tools that management uses to measure rate sensitivity.
Historically, Regions has not experienced the level of net interest income
volatility indicated by gap analysis. The primary reason for the lack of
volatility is that Regions has a relatively large base of core deposit products
that do not reprice on a contractual basis. These deposit products include
regular savings, interest-bearing transaction accounts and a portion of money
market savings accounts. Balances for these accounts are reported in the one to
three month repricing category and comprise 26% of interest-bearing
<PAGE> 31
deposits. However, the rates paid on these accounts are typically not rate
sensitive and can be adjusted at management's discretion. Over the last five
years, Regions has used these accounts to effectively manage its interest rate
sensitivity.
Another reason for the lack of volatility in net interest income is that
Regions' loan and security portfolios contain fixed-rate mortgage-related
products, including whole loans, mortgage-backed securities and collateralized
mortgage obligations having amortization and cash flow characteristics that
vary with the level of market interest rates. These earning assets are
generally reported in the non-sensitive category. In fact, a significant
portion of these earning assets may pay-off within one year or less, because
their cash flow characteristics are materially impacted by mortgage refinancing
activity. If regular savings, a portion of money market savings and a portion
of interest-bearing transaction accounts were redistributed based on expected
cash flows and probable repricing intervals, Regions' one-year cumulative gap
ratio would be 0.89 -- indicating a significantly less "liability sensitive"
position than that reported above.
At December 31, 1995, Regions owned one interest rate swap with a $7.9
million notional principal amount, in which it is receiving a fixed interest
payment (see Note M to the supplemental consolidated financial statements).
This swap agreement was entered into by Secor Bank prior to its acquisition by
Regions. Secor Bank used this swap to control interest sensitivity. This swap
matures in May 1996, and has no material effect on Regions' rate sensitivity.
As mentioned above, Regions uses additional tools to monitor and manage
interest rate sensitivity. One of the primary tools used is simulation
analysis. Simulation analysis is the primary method of estimating future
earnings streams under varying interest rate conditions. Simulation analysis is
used to test the sensitivity of Regions' net interest income to both the level
of interest rates and the slope of the yield curve. Simulation analysis uses a
more detailed version of the information shown in the accompanying table that
includes adjustments for the expected timing and magnitude of asset and
liability cash flows, as well as the expected timing and magnitude of
repricings of deposits that do not reprice on a contractual basis. In addition,
simulation analysis includes adjustments for the lag between movements in
market interest rates and the movement of administered rates on prime rate
loans, interest-bearing transaction accounts, regular savings and money market
savings accounts. These adjustments are made to reflect more accurately
possible future cash flows, repricing behavior and ultimately net interest
income. Simulation analysis also indicates that Regions is slightly "liability
sensitive."
<PAGE> 32
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
December 31, 1995
(dollar amounts in millions) Rate Sensitive Period
1-3 4-6 7-12 OVER 1 YEAR OR
MONTHS MONTHS MONTHS TOTAL NON-SENSITIVE TOTAL
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans, net of unearned income $ 3,735.5 $ 655.0 $ 1,238.5 $ 5,629.0 $ 5,913.3 $11,542.3
Investment securities 196.2 237.1 124.4 557.7 1,031.4 1,589.1
Securities available for sale 219.1 140.4 278.7 638.2 1,636.5 2,274.7
Interest bearing deposits
in other banks 52.5 1.2 2.8 56.5 - 56.5
Federal funds sold and securities
purchased under agreements
to resell 66.3 - - 66.3 - 66.3
Mortgage loans held for sale 117.1 - - 117.1 - 117.1
Trading account assets 28.9 - - 28.9 - 28.9
Total earning assets $ 4,415.6 $ 1,033.7 $ 1,644.4 $ 7,093.7 $ 8,581.2 $15,674.9
Percent of total earning assets 28.2% 6.6% 10.5% 45.3% 54.7% 100.0%
FUNDING SOURCES:
Non-interest-bearing deposits -- - - - $ 1,865.0 $ 1,865.0
Savings deposits $ 980.4 - - $ 980.4 - 980.4
Other time deposits 5,874.4 $ 1,242.8 $ 1,637.3 8,754.5 1,897.7 10,652.2
Short-term borrowings 958.8 104.8 5.0 1,068.6 - 1,068.6
Long-term borrowings 125.3 56.2 19.2 200.7 431.3 632.0
Total interest-bearing liabilities 7,938.9 1,403.8 1,661.5 11,004.2 2,329.0 13,333.2
Stockholders' equity - - - - 476.7 476.7
Total funding sources $ 7,938.9 $ 1,403.8 $ 1,661.5 $11,004.2 $ 4,670.7 $15,674.9
Percent of total funding sources 50.7% 9.0% 10.6% 70.2% 29.8% 100.0%
Interest sensitive gap $(3,523.3) $ (370.1) $ (17.1) $(3,910.5) $ 3,910.5 -
Cumulative interest sensitive gap $(3,523.3) $(3,893.4) $(3,910.5) $(3,910.5) - -
As percent of total earning assets (22.5)% (24.8)% (25.0)% (25.0)% - -
Ratio of earning assets
to funding sources 0.56 0.74 0.99 0.64 1.84 1.00
Cumulative ratio 0.56 0.58 0.64 0.64 1.00 1.00
</TABLE>
<PAGE> 33
<TABLE>
<CAPTION>
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(in thousands) Year Ended December 31
1995 OVER 1994 1994 over 1993
VOLUME YIELD/RATE TOTAL Volume Yield/Rate Total
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN:
Interest income on:
Loans $177,660 $ 75,045 $252,705 $192,718 $ 4,510 $197,228
Federal funds sold (2,114) 2,859 745 925 1,433 2,358
Taxable securities 16,416 6,261 22,677 58,115 (12,605) 45,510
Non-taxable securities 1,738 (237) 1,501 4,144 (1,074) 3,070
Other earning assets (12,512) 2,791 (9,721) (2,855) (162) (3,017)
Total 181,188 86,719 267,907 253,047 (7,898) 245,149
Interest expense on:
Savings deposits (265) (1,116) (1,381) 6,562 105 6,667
Other interest-bearing deposits 58,827 103,901 162,728 77,475 14,936 92,411
Borrowed funds 28,328 9,504 37,832 37,983 2,901 40,884
Total 86,890 112,289 199,179 122,020 17,942 139,962
INCREASE IN NET INTEREST INCOME $ 94,298 $(25,570) $ 68,728 $131,027 $(25,840) $105,187
</TABLE>
Note: The change in interest due to both rate and volume has been allocated to
change due to volume and change due to rate in proportion to the absolute
dollar amounts of the change in each.
<PAGE> 34
PROVISION FOR LOAN LOSSES
This expense is used to fund the allowance for loan losses. Actual loan losses,
net of recoveries, are charged directly to the allowance. The expense recorded
each year is a reflection of actual losses experienced during the year and
management's judgment as to the adequacy of the allowance to absorb future
losses. For an analysis and discussion of the allowance for loan losses, refer
to the section entitled "Loans and Allowance for Loan Losses." In 1993 and
1994, the provision for loan losses was reduced to $24.7 million and $20.6
million, respectively, due primarily to improving economic conditions and to
improving loan portfolio quality indicators. In 1995, the provision for loan
losses was increased to $30.3 million due to internal growth in the loan
portfolio, growth in loans from acquisitions and the estimated impact on
Regions of higher consumer debt levels.
TRUST INCOME
Trust income increased 7% in 1993, 6% in 1994 and 18% in 1995. An aggressive
sales program has been an important means of increasing trust revenue. Combined
with employee incentives for referring trust business, the sales program has
produced good results over the last several years. In addition to increased
sales efforts, trust income is also affected by the securities markets, since
most trust fees are calculated as a percentage of trust asset values. The
strength of the securities markets in 1993 and 1995, had a more favorable
impact on trust income in those years than in 1994. Increased trust assets,
primarily due to acquisitions, also contributed to the higher growth rate in
trust income in 1995.
SERVICE CHARGES ON DEPOSIT ACCOUNTS
Service charge income increased 5% in 1993, 19% in 1994, and 18% in 1995, due
to increases in the number of deposit accounts, primarily because of
acquisitions, and changes in the pricing of certain deposit accounts and
related services.
MORTGAGE SERVICING AND ORIGINATION FEES
The primary source of this income is Regions' mortgage banking
affiliate--Regions Mortgage, Inc. (RMI). A division of First National, The
Mortgage Source, also contributed to mortgage servicing and origination fee
income. Subsequent to December 31, 1995, The Mortgage Source was merged into
RMI. RMI's primary business and source of income is the origination and
servicing of mortgage loans for long-term investors.
In 1995, mortgage servicing and origination fees decreased 4%, from $45.4
million in 1994 to $43.6 million in 1995. Origination fees decreased in 1995
due to a decline in the number and dollar amount of loans closed. An increase
in servicing fees partially offset the decline in origination fees. At December
31, 1995, Regions' servicing
<PAGE> 35
portfolio totaled $11.0 billion and included approximately 173,000 loans. At
December 31, 1994, the servicing portfolio totaled $10.6 billion, compared to
$9.6 billion at December 31, 1993. Growth in the servicing portfolio resulted
from retention of servicing on most mortgages originated in-house and the
purchase of servicing rights to mortgages originated by other companies,
partially offset by the sale in 1995 of servicing rights by First National on
$1.1 billion of mortgage loans.
Mortgage servicing and origination fees decreased $1.8 million or 4% in
1994. Origination fees decreased due to a decline in the number of loans
closed, primarily as a result of higher mortgage interest rates in 1994.
Servicing fees reflected only nominal growth in 1994. The reduced rate of
growth in servicing fees in 1994, resulted primarily from (1) a slower rate of
growth in the servicing portfolio than in prior years and (2) an increased
amount of mortgages in RMI's servicing portfolio owned by Regions' subsidiary
banks; servicing fees from these mortgages are eliminated in consolidation as
intercompany transactions.
In 1993, mortgage servicing and origination fees increased 17%. Servicing
fees increased due to increases in the dollar volume of loans serviced and in
the number of loans serviced. Origination fees also increased in 1993, due to
increases in the number and dollar amount of loans closed. Lower interest rates
in 1993 resulted in increased volumes for new loan closings and refinancings.
RMI, through its retail and wholesale operations, produced mortgage loans
totaling $954 million, $1.9 billion, and $1.9 billion in 1995, 1994 and 1993,
respectively. RMI produces loans from 26 offices in Alabama, Georgia, Florida,
Mississippi, Tennessee and South Carolina, and from other correspondent offices
located primarily in the Southeast. First National's mortgage division, The
Mortgage Source, produced mortgage loans totaling $306 million, $304 million
and $228 million in 1995, 1994 and 1993, respectively.
Purchased mortgage servicing rights, which are included in other assets in
the consolidated statement of condition, represent amounts paid, less
accumulated amortization and valuation adjustments, for the right to service
mortgage loans that are owned by other investors. An increase in prepayments
of these mortgages, due primarily to lower mortgage interest rates, resulted in
increased valuation adjustments in 1993. With higher mortgage interest rates
during most of 1994 and 1995, which resulted in prepayments returning to more
normal levels, no valuation adjustments were necessary in 1994 or 1995. An
increase in prepayments of mortgages in the servicing portfolio in the future
could result in additional valuation adjustments. An analysis of purchased
mortgage servicing rights is summarized as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $64,381 $60,410 $46,034
Net additions 11,465 17,157 31,819
Amortization (11,257) (11,934) (7,821)
Valuation adjustments (320) (1,252) (9,622)
Balance at end of year $64,269 $64,381 $60,410
</TABLE>
<PAGE> 36
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122 (Statement 122) "Accounting for Mortgage
Servicing Rights, an Amendment of FASB No. 65." Statement 122 requires
companies that originate mortgage loans to capitalize the cost of mortgage
servicing rights separate from the cost of originating the loan when a
definitive plan to sell or securitize those loans and retain the mortgage
servicing rights exist. Currently only mortgage servicing rights that are
purchased from other parties are capitalized and recorded as an asset.
Therefore, Statement 122 eliminates the accounting inconsistencies that
currently exist between mortgage servicing rights that are derived from loan
origination activities and those acquired through purchase transactions.
Statement 122 also requires that capitalized mortgage servicing rights be
assessed for impairment based on the fair value of those rights. Statement 122
is effective for fiscal years beginning after December 15, 1995, and the
Company adopted the statement in the first quarter of 1996. The adoption of
Statement 122 did not have a material impact on Regions' financial statements.
SECURITIES GAINS (LOSSES)
In 1993, net gains from the sale of investment securities were $831,000,
resulting from sales of securities due to credit quality concerns and sales of
small blocks of securities that were not consistent with overall portfolio
strategy.
The $344,000 net gain in 1994 from the sale of available for sale
securities resulted primarily from dispositions of small blocks of securities
acquired in connection with acquisitions, sales of several securities due to
credit quality concerns and management's decision to sell certain securities
and reinvest the proceeds in higher yielding alternative investments.
The $424,000 in net losses recognized in 1995 from the sale of available
for sale securities with a book value of $50.2 million resulted primarily from
sales of securities acquired in connection with acquisitions in which the
securities were not consistent with Regions' portfolio strategy and
management's decision to sell certain securities and reinvest the proceeds in
higher yielding securities.
OTHER INCOME
Refer to Note O to the supplemental consolidated financial statements for an
analysis of the significant components of other income. Increases in fee and
commission income over the last three years resulted primarily from revisions
in charges for certain services, an increased emphasis on charging customers
for services performed and an increased customer base due to internal growth
and acquisitions. Increases in safe deposit fees, international department
income, automated teller machine fees and other customer charges accounted for
growth in fees and commissions over the last three years.
<PAGE> 37
Insurance premium and commission income declined in 1995, after increasing
in 1994 and 1993. This income originates primarily from the sale of credit life
and accident and health insurance to consumer loan customers. Increased
consumer loan volumes resulted in increased income in 1993 and 1994. The
additional income associated with increased consumer loan volume in 1995, was
offset by decreased commissions from collateral protection insurance coverage,
resulting in a decline in insurance premium and commission income in 1995.
Trading account income decreased in 1995 and 1994, primarily because of
lower volumes and a decline in profits from trading in the portfolio. Trading
account income increased in 1993 due to increased fees from underwriting public
finance obligations and larger profits from trading in the portfolio.
Gains on the sale of mortgage servicing rights totaled $10.8 million in
1993, compared to $4.6 million in 1994 and $150,000 in 1995.
SALARIES AND EMPLOYEE BENEFITS
Total salaries and benefits increased 13% in 1993, 15% in 1994 and 14% in
1995. These increases resulted from normal merit and promotional adjustments,
increased incentive payments tied to performance, the effects of inflation,
higher benefit costs and increases in the number of employees due to increased
business activity and acquisitions.
At December 31, 1995, Regions had 7,707 full-time equivalent employees,
compared to 7,485 at December 31, 1994 and 6,769 at December 31, 1993.
Employees added as a result of acquisitions accounted for most of these
increases. The number of employees at RMI has declined from a high of 735 at
December 31, 1993 to 617 at December 31, 1995, primarily due to lower mortgage
origination activity over the last two years.
Salaries, excluding benefits, totaled $135.9 million in 1993, compared to
$163.2 million in 1994 and $184.3 million in 1995. These increases resulted
from increased employment levels, due to acquisitions and increased business
activity, and normal merit and promotional adjustments.
Regions provides employees who meet established employment requirements
with a benefits package which includes profit sharing, stock purchase, and
medical, life and disability insurance plans. Regions also provides a pension
plan for substantially all employees, except for substantially all employees
which joined the Company through the First National merger. The total cost to
Regions for fringe benefits, including payroll taxes, equals approximately 29%
of salaries.
The contribution to the profit sharing plan increased in each of the last
three years and was equal to approximately 9% of after-tax income in 1993, 8%
in 1994 and 9% in 1995.
The contribution to the employee stock ownership plan (ESOP) equaled
approximately 1% of after-tax income in each of the last three years.
Commissions and incentives expense decreased from $27.5 million in 1993,
to $21.0 million in 1994, and then increased to $23.9 million in 1995.
Incentives are being used increasingly to reward employees for
<PAGE> 38
selling products and services, for productivity improvements and for
achievement of other corporate goals. In 1991 Regions' stockholders approved a
long-term incentive plan that provides for the granting of stock options, stock
appreciation rights, restricted stock and performance shares. The long-term
incentive plan is intended to assist the Company in attracting, retaining,
motivating and rewarding employees who make a significant contribution to the
Company's long-term success, and to encourage employees to acquire and maintain
an equity interest in the Company. Regions also uses cash incentive plans to
reward employees for achievement of various goals.
Payroll taxes increased 13% in 1993, 19% in 1994 and 27% in 1995.
Increases in the Social Security tax rate and tax base, combined with increased
salary levels and additional employees due to growth and acquisitions, were the
primary reasons for increased payroll taxes.
Group insurance expense increased 12% in 1993, 16% in 1994 and 38% in 1995
primarily because of increases in medical claims due to increased employment
levels associated with increased business activity and acquisitions, and
continued rising health care costs.
NET OCCUPANCY EXPENSE
Net occupancy expense includes rents, depreciation and amortization, utilities,
maintenance, insurance, taxes and other expenses of premises occupied by
Regions and its affiliates. Regions' affiliates operate offices throughout
Alabama and parts of Louisiana, Florida, Georgia, Tennessee, Mississippi and
South Carolina.
Net occupancy expense increased 6% in 1993, 31% in 1994, and 7% in 1995
due to new and acquired branch offices, rising price levels, and increased
business activity. Increased acquisitions during 1993 and 1994 were the
primary reason for the larger 1994 increase.
FURNITURE AND EQUIPMENT EXPENSE
Furniture and equipment expense increased 9% in 1993, 18% in 1994, and 7%
in 1995. These increases resulted from acquisitions (particularly during 1993
and 1994) rising price levels, expenses related to equipment for new branch
offices, and increased depreciation and service contract expenses associated
with other new equipment.
FDIC INSURANCE EXPENSE
FDIC insurance expense decreased 30% in 1995, compared to 1994, due to
lower premium rates during the last seven months of 1995. For Bank Insurance
Fund (BIF) deposits, insurance premium rates were decreased from $0.23 per $100
of insured deposits to $0.04 per $100 of insured deposits. Savings Association
Insurance Fund (SAIF) deposits remained subject to the $0.23 rate.
Approximately 28% of Regions' assessable deposits are considered SAIF deposits.
FDIC insurance expense increased 4% in 1993 and 32% in 1994, as a result
of increased deposits from acquisitions and growth.
<PAGE> 39
Beginning in 1996, the FDIC announced that it would further reduce deposit
insurance premiums applicable to BIF deposits to $2,000 per year per
institution for institutions that are in the highest capital and supervisory
categories. If this reduced rate were applicable for a full year, Regions'
FDIC insurance expense would be reduced by approximately $3.0 million.
Furthermore, the U. S. Congress is considering enacting legislation to
recapitalize the SAIF through a special assessment applicable to SAIF deposits.
At this time, Regions is not able to predict the timing or exact amount of any
SAIF special assessment that might be required. However, if a 79 basis point
assessment were levied against Regions' SAIF deposits (with a 20% reduction for
SAIF deposits in institutions where SAIF deposits account for less than 50% of
total assessable deposits), Regions would incur a pre-tax charge of
approximately $26 million.
OTHER EXPENSES
Refer to Note O to the supplemental consolidated financial statements for
an analysis of the significant components of other expense. Increases in this
category of expense generally resulted from acquisitions, expanded programs,
increased business activity and rising price levels.
A recovery from a litigation matter resulted in lower non-credit losses in
1995. Higher miscellaneous losses in 1994, offset the benefit of lower
foreclosed property costs, resulting in higher non-credit losses for 1994.
Reductions in write-downs in the carrying values of foreclosed properties and
associated costs of these properties, contributed to the lower non-credit
losses in 1993.
Expansion of mortgage servicing activities, including additional purchased
servicing rights, and accelerated prepayments of mortgages in the servicing
portfolio in 1993, resulted in higher amortization of mortgage servicing rights
in 1993. As prepayment activity slowed in 1994 and 1995, amortization expense
was reduced accordingly.
Gains or losses on sales of mortgages result from changes in the fair
market value of mortgages held in inventory while awaiting sale to long-term
investors. Purchased commitments covering the sale of mortgages held in
inventory are used to mitigate market losses. (See Note M to the supplemental
consolidated financial statements for additional information.)
The increase in other miscellaneous expenses resulted primarily from
increases in amortization of excess purchase price, donations, and state shares
tax assessments.
APPLICABLE INCOME TAX
Regions' provision for income taxes increased 14% in 1995. This increase
was caused primarily by a 11% increase in income before taxes. Also
contributing to the larger provision for income taxes was a decline in Regions'
tax exempt income, as a percentage of total income. For 1993, 1994 and 1995,
the Company's tax exempt income as a percentage of
<PAGE> 40
income before income taxes was 14.2%, 12.0% and 11.2%, respectively.
Management expects this trend to continue. Federal income tax laws that limit
banks' deductions of interest expense related to carrying tax exempt assets
acquired after 1982 adversely affect yields on new tax exempt assets and are
the primary reason for the relative decline in Regions' tax exempt income.
Note P to the supplemental consolidated financial statements provides more
information about the provision for income taxes.
Federal income tax laws require corporations to pay a minimum level of
income tax on their economic income. Corporations must pay the greater of
their normal federal income tax or alternative minimum tax. Alternative
minimum tax is 20% of alternative minimum taxable income. Alternative minimum
taxable income is calculated by adding to taxable income certain tax preference
items which are deducted in calculating taxable income. Regions' regular
income taxes exceeded its alternative minimum taxes by $19.3 million, $25.7
million and $27.3 million in 1993, 1994 and 1995, respectively.
Management's determination of the realization of the deferred tax asset is
based upon management's judgment of various future events and uncertainties,
including the timing and amount of future income earned by certain subsidiaries
and the implementation of various tax planning strategies to maximize
realization of the deferred tax asset. Management believes that the
subsidiaries may be able to generate sufficient operating earnings to realize
the deferred tax benefits. In addition, a portion of the amount of the
deferred tax asset that can be realized in any year is subject to certain
statutory federal income tax limitations. Because of these uncertainties, a
valuation allowance has been established. Management evaluates the
realizability of the deferred tax asset and adjusts, if necessary, the
valuation allowance accordingly. In 1995 the valuation allowance was reduced
approximately $2 million, which had the effect of reducing income tax expense
by a like amount.
EFFECTS OF INFLATION
The majority of assets and liabilities of a financial institution are
monetary in nature; therefore, a financial institution differs greatly from
most commercial and industrial companies which have significant investments in
fixed assets or inventories. However, inflation does have an important impact
on the growth of total assets in the banking industry and the resulting need to
increase equity capital at higher than normal rates in order to maintain an
appropriate equity to assets ratio. Inflation also affects other expenses which
tend to rise during periods of general inflation.
Management believes the most significant impact of inflation on financial
results is the Company's ability to react to changes in interest rates. As
discussed previously, management is attempting to maintain an essentially
balanced position between rate sensitive assets and liabilities in order to
protect net interest income from being affected by wide interest rate
fluctuations.
<PAGE> 41
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS, COMMON STOCK MARKET PRICES AND
DIVIDENDS
<TABLE>
<CAPTION>
(in thousands, except per share amounts) THREE MONTHS ENDED
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
<S> <C> <C> <C> <C>
1995
TOTAL INTEREST INCOME $299,945 $314,141 $323,093 $322,421
TOTAL INTEREST EXPENSE 147,415 159,087 165,604 163,230
NET INTEREST INCOME 152,530 155,054 157,489 159,191
PROVISION FOR LOAN LOSSES 5,050 5,811 6,414 12,996
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 147,480 149,243 151,075 146,195
TOTAL NON-INTEREST INCOME, EXCLUDING
SECURITIES GAINS 43,912 45,675 48,713 49,530
SECURITIES GAINS 7 214 85 (730)
TOTAL NON-INTEREST EXPENSE 116,229 120,429 118,457 132,346
INCOME TAXES 24,920 24,802 27,617 18,770
NET INCOME $ 50,250 $ 49,901 $ 53,799 $ 43,879
PER SHARE:
NET INCOME $ .81 $ .81 $ .87 $ .71
CASH DIVIDENDS DECLARED .33 .33 .33 .33
MARKET PRICE:
LOW 31 34 1/2 36 7/8 39 5/8
HIGH 36 1/2 37 1/2 41 3/8 45
<CAPTION>
(in thousands, except per share amounts) Three Months Ended
Mar. 31 June 30 Sept. 30 Dec. 31
1994
Total interest income $225,765 $238,333 $255,349 $272,246
Total interest expense 96,198 100,484 112,074 127,401
Net interest income 129,567 137,849 143,275 144,845
Provision for loan losses 5,040 4,420 4,208 6,912
Net interest income after
provision for loan losses 124,527 133,429 139,067 137,933
Total non-interest income, excluding
securities gains 44,465 44,457 42,591 40,192
Securities gains 443 112 55 (266)
Total non-interest expense 106,386 109,716 111,612 114,662
Income taxes 20,055 22,059 23,237 18,758
Net income $ 42,994 $ 46,223 $ 46,864 $ 44,439
Per share:
Net income $ .74 $ .79 $ .81 $ .77
Cash dividends declared .30 .30 .30 .30
Market price:
Low 30 1/8 30 1/2 34 5/8 29 3/4
High 33 1/2 36 1/8 36 3/4 35
</TABLE>
<PAGE> 42
The Common Stock of Regions is traded on the NASDAQ National Market System. The
NASDAQ stock quotation symbol is RGBK. Market prices shown represent sales
prices as reported in the NASD Monthly Statistical Report. At December 31,
1995, there were 33,400 shareholders of record of Regions Financial Corporation
Common Stock.
<PAGE> 1
EXHIBIT 99.2
The following table presents certain selected financial information for
Regions. The data for Regions has been restated to give effect to the
combination with First National Bancorp consummated on March 1, 1996, which was
accounted for as a pooling of interests. The data should be read in conjunction
with the financial statements, related notes, and other financial information
concerning Regions.
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
--------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
INCOME STATEMENT DATA: (Amounts in thousands except per share data and ratios)
<S> <C> <C> <C> <C> <C>
TOTAL INTEREST INCOME........... $1,259,600 $991,693 $746,544 $737,094 $778,848
TOTAL INTEREST EXPENSE.......... 635,336 436,157 296,195 324,420 428,083
---------- -------- -------- -------- --------
NET INTEREST INCOME............. 624,264 555,536 450,349 412,674 350,765
PROVISION FOR LOAN LOSSES....... 30,271 20,580 24,695 39,367 34,879
---------- -------- -------- -------- --------
NET INTEREST INCOME AFTER
LOAN LOSS PROVISION.......... 593,993 534,956 425,654 373,307 315,886
TOTAL NON-INTEREST INCOME
EXCLUDING SECURITY GAINS
(LOSSES)..................... 187,830 171,705 169,318 148,007 129,232
SECURITY GAINS (LOSSES)......... (424) 344 831 2,353 (89)
TOTAL NON-INTEREST EXPENSE...... 487,461 442,376 383,130 343,279 302,795
INCOME TAX EXPENSE.............. 96,109 84,109 66,169 56,405 41,502
---------- -------- -------- -------- --------
NET INCOME...................... $ 197,829 $180,520 $146,504 $123,983 $100,732
===============================================================
PER SHARE :
NET INCOME...................... $ 3.21 $ 3.10 $ 2.81 $ 2.42 $ 2.01
CASH DIVIDEND................... $ 1.32 $ 1.20 $ 1.04 $ 0.91 $ 0.87
BOOK VALUE...................... $ 23.38 $ 21.26 $ 19.85 $ 17.13 $ 15.47
OTHER INFORMATION:
AVERAGE NUMBER OF SHARES
OUTSTANDING................... 61,670 58,206 52,153 51,192 50,192
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
-------------------------------------------------------------
PERIOD-END STATEMENT OF CONDITION DATA: 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
TOTAL ASSETS.................... $16,851,774 $15,810,076 $13,163,161 $10,457,676 $9,188,048
SECURITIES...................... 3,863,781 3,346,291 2,993,417 2,255,732 2,076,199
LOANS,NET OF UNEARNED INCOME.... 11,542,311 10,855,195 8,430,931 6,657,557 5,726,818
TOTAL DEPOSITS.................. 13,497,612 12,575,593 11,025,376 8,923,801 8,047,731
LONG-TERM DEBT.................. 632,019 599,476 525,820 151,460 24,461
STOCKHOLDERS' EQUITY............ 1,429,253 1,286,322 1,106,361 886,116 779,002
PERFORMANCE RATIOS:
RETURN ON AVERAGE ASSETS........ 1.21% 1.27% 1.38% 1.29% 1.15%
RETURN ON AVERAGE
STOCKHOLDERS' EQUITY........... 14.29 15.26 15.76 15.04 13.58
NET INTEREST MARGIN............. 4.21 4.37 4.77 4.85 4.58
EFFICIENCY...................(d) 58.79 59.44 60.23 59.62 60.92
DIVIDEND PAYOUT................. 41.12 38.71 37.01 37.60 43.28
ASSSET QUALITY RATIOS:
NET CHARGE OFFS TO AVERAGE
LOANS,NET OF UNEARNED INCOME 0.17 0.19 0.23 0.36 0.45
PROBLEM ASSETS TO NET LOANS
AND OTHER REAL ESTATE.......(a) 0.59 0.75 1.12 1.29 1.62
NON-PERFORMING ASSETS TO NET
LOANS AND OTHER REAL ESTATE.(b) 0.68 0.80 1.28 1.39 1.74
ALLOWANCE FOR LOAN LOSSES TO
LOANS,NET OF UNEARNED INCOME... 1.38 1.32 1.48 1.51 1.34
ALLOWANCE TO NONPERFORMING
ASSETS......................(b) 202.55 164.48 115.88 107.97 76.76
LIQUIDITY AND CAPITAL RATIOS:
AVERAGE STOCKHOLDERS' EQUITY
TO AVERAGE ASSETS.............. 8.44 8.35 8.76 8.60 8.49
AVERAGE LOANS TO AVERAGE
DEPOSITS....................... 86.12 79.90 76.41 71.59 72.34
TIER 1 risk-based capital....(c) 11.14 10.69 11.13 11.68 11.85
TOTAL risk based capital.....(c) 14.61 14.29 13.48 14.44 13.19
LEVERAGE ....................(c) 7.49 8.21 10.11 8.44 8.40
</TABLE>
<PAGE> 3
NOTES:
(a): Problem assets include loans on a nonaccrual basis, restructured loans
and foreclosed properties.
(b): Non-performing assets include loans on a nonaccrual basis,
restructured loans, loans 90 days or more past due, and foreclosed
properties.
(c): The required minimum Tier 1 and total capital ratios are 4% and 8%,
respectively. The minimum leverage ratio of Tier 1 capital to total
assets is 3% to 5%, depending on the risk profile of the institution
and other factors. The ratios have not been restated to reflect the
combination of First National with Regions, accounted for as a
pooling of interests.
(d): Noninterest expense divided by the sum of net interest income(tax
equivalent) and noninterest income net of gains (losses) from security
transactions.
