<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): November 6, 1998
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
On July 31, 1998, Regions Financial Corporation ("Regions") effected a
combination with First Commercial Corporation, which was accounted for as a
pooling of interests. Additionally, during the first quarter of 1998, PALFED,
Inc., First United Bancorporation, and First State Corporation merged with and
into Regions, all of which transactions were accounted for as poolings of
interests. Regions is filing this Current Report on Form 8-K to make publicly
available (i) its audited supplemental financial statements at and for the
three-year period ended December 31, 1997, included as exhibit 99.1 to this
report, which give effect to the combininations with First Commercial
Corporation, PALFED, Inc., First United Bancorporation, and First State
Corporation, (ii) its Supplemental Management's Discussion and Analysis of
Financial Condition and Operating Results, included as exhibit 99.2 to this
report, which gives effect to the combinations with First Commercial
Corporation, PALFED, Inc., First United Bancorporation, and First State
Corporation, and which pertains to the restated supplemental consolidated
financial statements of Regions at and for the three-year period ended December
31, 1997, and (iii) its Supplemental Historical Financial Summary which gives
effect to the combinations with First Commercial Corporation, PALFED, Inc.,
First United Bancorporation, and First State Corporation, included as exhibit
99.3 to this report. During 1998 Regions has effected other business
combinations accounted for as poolings of interest; however, such transactions
are not reflected in the accompanying financial presentations because the
individual and cumulative effect of such transactions is not material.
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> 3
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: November 6, 1998
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit Page No.
<S> <C>
Exhibit 23 Consent of Independent Auditors
Exhibit 99.1 Supplemental Financial Statements and Notes
Exhibit 99.2 Supplemental Management's Discussion and Analysis of Financial
Condition and Operating Results
Exhibit 99.3 Supplemental Historical Financial Summary
</TABLE>
<PAGE> 1
EXHIBIT 23-CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated July 31, 1998,
except for Note Q as to which the date is November 3, 1998, with respect to the
supplemental consolidated financial statements of Regions Financial Corporation
and subsidiaries in the Current Report (Form 8-K) dated November 6, 1998 in the
following Registration Statements and in the related Prospectuses:
Form S-8 No. 2-95291 pertaining to the 1983 Stock Option Plan;
Form S-8 No. 33-24370 pertaining to the 1988 Stock Option Plan;
Form S-8 No. 33-40728 pertaining to the 1991 Long-Term Incentive Plan;
Form S-8 No. 33-58469 pertaining to the Stock Options Assumed in the
acquisition of First Community Bancshares, Inc. and the Stock Options
Assumed in the acquisition of Union Bank and Trust Company;
Form S-8 No. 33-58979 pertaining to the 1991 Long-term Incentive Plan;
Form S-3 No. 33-59735 pertaining to the registration of $200,000,000
Subordinated Debt Securities;
Form S-8 No. 333-05281 pertaining to the Stock Options Assumed in
Acquisition of Metro Financial Corporation;
Form S-8 No. 333-05335 pertaining to the Stock Options Assumed in
Combination with First National Bancorp;
Form S-8 No. 333-10701 pertaining to the Stock Options Assumed in
Acquisition of First Gwinnett Bancshares, Inc.;
Form S-8 No. 333-10683 pertaining to the Stock Options Assumed in
Acquisition of Rockdale Community Bank;
Form S-8 No. 333-21651 pertaining to the Stock Options Assumed in
Acquisition of Florida First Bancorp, Inc.;
Form S-8 No. 333-24265 pertaining to the Regions Financial Corporation
Profit Sharing Plan;
Form S-8 No. 333-28091 pertaining to the Stock Options Assumed in
Acquisition of First Mercantile National Bank;
Form S-8 No. 333-28089 pertaining to the Stock Options Assumed in
Acquisition of West Carroll Bancshares, Inc.;
Form S-8 No. 333-29685 pertaining to the Stock Options Assumed in
Acquisition of First Bankshares, Inc.;
Form S-8 No. 333-30643 pertaining to the Stock Options Assumed in
Acquisition of The New Iberia Bancorp, Inc.
Form S-8 No. 333-43675 pertaining to the Regions Financial Corporation
Directors' Stock Investment Plan;
Form S-8 No. 333-43677 pertaining to the Regions Financial Corporation
Employee Stock Purchase Plan;
Form S-8 No. 333-43943 pertaining to the Stock Options Assumed in
Acquisition of GF Bancshares, Inc.;
Form S-8 No. 333-49909 pertaining to the Stock Options Assumed in
Acquisition of Greenville Financial Corporation;
Form S-8 No. 333-50665 pertaining to the Stock Options Assumed in
Acquisition of PALFED, Inc.;
Form S-8 No. 333-53019 pertaining to the Stock Options Assumed in
Acquisition of First State Corporation;
Form S-8 No. 333-53021 pertaining to the Stock Options Assumed in
Acquisition of First United Bancorporation; and
Form S-8 No. 333-60497 pertaining to the Stock Options Assumed in
Combination with First Commercial Corporation
/s/ Ernst & Young LLP
- -------------------------
Birmingham, Alabama
November 4, 1998
<PAGE> 1
Exhibit 99.1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Regions Financial Corporation
We have audited the supplemental consolidated statements of condition of Regions
Financial Corporation (formed as a result of the consolidation of Regions
Financial Corporation, First Commercial Corporation, PALFED, Inc., First United
Bancorporation and First State Corporation) as of December 31, 1997 and 1996 and
the related supplemental consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. The supplemental consolidated financial statements give
retroactive effect to the mergers of Regions Financial Corporation and First
Commercial Corporation on July 31, 1998, PALFED, Inc. on February 13, 1998,
First United Bancorporation on March 14, 1998 and First State Corporation on
March 31, 1998 which have been accounted for using the pooling of interests
method as described in the notes to the supplemental consolidated financial
statements. These supplemental financial statements are the responsibility of
the management of Regions Financial Corporation. Our responsibility is to
express an opinion on these supplemental financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amount and disclosures in financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits, the supplemental financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of Regions Financial Corporation at December 31, 1997 and
1996, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, after giving
retroactive effect to the mergers of First Commercial Corporation, PALFED, Inc.,
First United Bancorporation and First State Corporation, as described in the
notes to the supplemental consolidated financial statements, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Birmingham, Alabama
July 31, 1998,
except for Note Q
as to which the date
is November 3, 1998
<PAGE> 2
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS & NOTES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CONDITION
Regions Financial Corporation & Subsidiaries
<TABLE>
<CAPTION>
(dollar amounts in thousands, except share data) DECEMBER 31
- ------------------------------------------------------------------------------------------------
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 1,177,564 $ 1,198,319
Interest-bearing deposits in other banks 48,162 42,954
Investment securities (aggregate estimated
market value of $3,372,494 in 1997 and
$2,729,678 in 1996) 3,338,279 2,716,601
Securities available for sale 2,977,644 3,025,774
Trading account assets 50,825 29,844
Mortgage loans held for sale 383,924 181,102
Federal funds sold and securities purchased
under agreements to resell 292,189 321,998
Loans 21,952,280 18,466,189
Unearned income (71,157) (70,637)
Loans, net of unearned income 21,881,123 18,395,552
Allowance for loan losses (304,223) (253,248)
Net loans 21,576,900 18,142,304
Premises and equipment 458,792 427,480
Interest receivable 231,947 198,323
Due from customers on acceptances 157,262 78,108
Other assets 720,570 630,537
$31,414,058 $26,993,344
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 3,744,198 $ 3,143,968
Interest-bearing 21,266,823 18,875,444
Total deposits 25,011,021 22,019,412
Borrowed funds:
Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 2,128,826 1,702,456
Commercial paper 52,750 40,367
Other short-term borrowings 525,775 80,983
Total short-term borrowings 2,707,351 1,823,806
Long-term borrowings 445,529 570,545
Total borrowed funds 3,152,880 2,394,351
Bank acceptances outstanding 157,262 78,108
Other liabilities 413,074 226,910
Total liabilities
28,734,237 24,718,781
Stockholders' equity:
Preferred stock, par value $1.00 a share:
Authorized 5,000,000 shares 0 0
Common stock, par value $.625 a share:
Authorized 500,000,000 shares
Issued, 210,596,519 shares in 1997
and 129,989,936 shares in 1996 131,623 81,244
Surplus 1,089,089 901,880
Undivided profits 1,466,431 1,303,895
Treasury stock, at cost-363,279 shares
in 1997 and 260,000 shares in 1996 (13,855) (12,356)
Unearned restricted stock (9,410) (4,249)
Unrealized gain on securities
available for sale, net of taxes 15,943 4,149
Total stockholders' equity 2,679,821 2,274,563
$31,414,058 $26,993,344
</TABLE>
See notes to supplemental consolidated financial statements
() Indicates deduction.
2
<PAGE> 3
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
Regions Financial Corporation & Subsidiaries
<TABLE>
<CAPTION>
(amounts in thousands, except per share data) YEAR ENDED DECEMBER 31
- -------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $1,837,392 $1,554,478 $ 1,394,937
Interest on securities:
Taxable interest income 355,591 331,895 292,459
Tax-exempt interest income 42,836 34,536 36,421
Total interest on securities 398,427 366,431 328,880
Interest on mortgage loans held for sale 20,218 15,286 9,335
Income on federal funds sold and
securities purchased under agreements
to resell 16,882 11,060 13,462
Interest on time deposits in other banks 2,870 5,699 3,337
Interest on trading account assets 795 1,329 476
Total interest income 2,276,584 1,954,283 1,750,427
Interest expense:
Interest on deposits 954,782 826,844 740,033
Interest on short-term borrowings 108,617 75,827 69,056
Interest on long-term borrowings 33,977 39,788 52,153
Total interest expense 1,097,376 942,459 861,242
Net interest income 1,179,208 1,011,824 889,185
Provision for loan losses 89,663 46,026 37,493
Net interest income after
provision for loan losses 1,089,545 965,798 851,692
Non-interest income:
Trust department income 44,227 41,660 38,328
Service charges on deposit accounts 151,618 124,960 105,207
Mortgage servicing and origination fees 93,327 92,757 65,920
Securities gains (losses) 498 3,311 (697)
Other 92,228 82,415 71,379
Total non-interest income 381,898 345,103 280,137
Non-interest expense:
Salaries and employee benefits 480,842 413,768 373,754
Net occupancy expense 61,933 55,163 48,724
Furniture and equipment expense 56,304 49,971 41,719
FDIC insurance expense 5,122 9,533 28,484
SAIF assessment and merger expenses -0- 33,777 -0-
Other 297,575 274,822 228,144
Total non-interest expense 901,776 837,034 720,825
Income before income taxes and extraordinary item 569,667 473,867 411,004
Applicable income taxes 187,563 156,008 134,529
Income before extraordinary item 382,104 317,859 276,475
Extraordinary gain, net of taxes 15,425 -0- -0-
Net income $ 397,529 $ 317,859 $ 276,475
Average number of shares outstanding 209,781 194,241 190,896
Average number of shares outstanding, diluted 213,750 197,751 193,579
Per share:
Income before extraordinary item $ 1.82 $ 1.64 $ 1.45
Net income 1.89 1.64 1.45
Income before extraordinary item, diluted 1.79 1.61 1.43
Net income, diluted 1.86 1.61 1.43
Cash dividends declared 0.80 0.70 0.66
</TABLE>
See notes to supplemental consolidated financial statements.
3
<PAGE> 4
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
Regions Financial Corporation & Subsidiaries
<TABLE>
<CAPTION>
(amounts in thousands) YEAR ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 397,529 $ 317,859 $ 276,475
Adjustments to reconcile net cash provided by
operating activities:
Extraordinary gain on sale of institutions (25,084) -0- -0-
Depreciation and amortization of premises and
equipment 67,925 67,662 49,874
Provision for loan losses 89,663 46,026 37,493
Net amortization (accretion) of securities 4,944 (1,677) (6,644)
Amortization of loans and other assets 31,582 27,269 21,073
Amortization of deposits and borrowings (1,642) (1,643) (5,643)
Provision for losses on other real estate 5,343 1,322 4,317
Deferred income taxes 2,861 153 11,712
Loss (gain) on sale of premises and equipment 510 (868) (415)
Realized security (gains) losses (498) (3,311) 697
Decrease in trading account assets 26,991 27,616 21,033
(Increase) decrease in mortgages held for sale (196,344) 29,219 (123,981)
(Increase) in interest receivable (26,808) (18,526) (31,530)
(Increase) in other assets (83,811) (113,280) (77,837)
Increase (decrease) in other liabilities 140,791 (30,969) 44,365
Stock issued to employees under incentive plan 10,122 3,058 601
Other 2,410 4,944 16,458
Net cash provided by operating activities 446,484 354,854 238,048
Investing activities:
Net (increase) in loans (2,457,048) (1,741,312) (801,164)
Proceeds from sale of securities available for sale 71,113 337,448 218,044
Proceeds from maturity of investment securities 1,555,319 1,012,121 1,092,994
Proceeds from maturity of securities available for
sale 1,528,476 1,475,933 856,144
Purchase of investment securities (1,974,755) (1,063,419) (871,614)
Purchase of securities available for sale (1,229,219) (1,670,505) (1,502,232)
Net decrease (increase) in interest-bearing
deposits in other banks 37,452 39,447 (40,884)
Proceeds from sale of premises and equipment 11,702 18,390 7,896
Purchase of premises and equipment (63,053) (67,985) (66,644)
Net (increase) decrease in customers' acceptance
liability (79,154) (26,822) 59,234
Net cash received in acquisitions 191,410 197,431 89,288
Net cash (used) by investing activities (2,407,757) (1,489,273) (958,938)
Financing activities:
Net increase in deposits 1,339,369 1,238,304 1,032,792
Net increase (decrease) in short-term borrowings 839,325 503,105 (27,521)
Proceeds from long-term borrowings 121,535 209,703 232,422
Payments on long-term borrowings (279,582) (406,988) (246,898)
Net increase (decrease) in bank acceptance liability 79,154 26,822 (59,234)
Cash dividends (149,447) (116,493) (101,057)
Purchase of treasury stock (45,224) (111,225) (67,127)
Sale of treasury stock by pooled company -0- 526 -0-
Issuance of common stock by pooled company 43 1,368 7,558
Proceeds from exercise of stock options 5,536 6,152 3,687
Net cash provided by financing activities 1,910,709 1,351,274 774,622
(Decrease) increase in cash and cash equivalents (50,564) 216,855 53,732
Cash and cash equivalents at beginning of year 1,520,317 1,303,462 1,249,730
Cash and cash equivalents at end of year $ 1,469,753 $ 1,520,317 $ 1,303,462
</TABLE>
See notes to supplemental consolidated financial statements.
4
<PAGE> 5
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Regions Financial Corporation & Subsidiaries
<TABLE>
<CAPTION>
(amounts in thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------------------
UNREALIZED
GAIN(LOSS)
ON
SECURITIES TREASURY UNEARNED
COMMON UNDIVIDED AVAILABLE STOCK, RESTRICTED
STOCK SURPLUS PROFITS FOR SALE AT COST STOCK
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 $ 74,274 $ 765,165 $ 1,009,963 $(37,026) $(26,299) $ (1,052)
Equity from immaterial
acquisitions accounted
for as poolings of
interests 1,668 8,934 20,833 (260)
Change in unrealized gains
and (losses), net of
income taxes of $21,962 53,746
Net income for the year 276,475
Cash dividends declared:
Regions-$.66 per share (60,075)
Pooled companies (40,982)
Stock dividend of pooled
company 2,221 66,209 (68,483)
Purchase of treasury stock (67,127)
Treasury stock retired and
reissued relating to
acquisitions accounted
for as purchases (408) (22,236) 36,797
Issuance of treasury stock
by pooled company (34) 177
Retirement of treasury
stock purchased in
prior years (922) (11,519) 12,441
Stock issued for
acquisition 1,152 34,590 5,245
Stock issued to employees
under incentive plan 32 1,961 238 (1,630)
Stock options exercised 196 3,491
Issuance of common stock
by pooled company 552 7,006
Amortization of unearned
restricted stock 1,100
Issuance of common stock
by pooled company for
dividend reinvestment
plan 20 965
BALANCE AT DECEMBER 31, 1995 78,785 854,532 1,137,969 16,460 (38,766) (1,582)
Equity from immaterial
aquisitions accounted
for as poolings of
interests 575 (167) 13,898 (12)
Change in unrealized gains
and (losses), net of
income taxes of($2,251) (12,299)
Net income for the year 317,859
Cash dividends declared:
Regions-$.70 per share (87,466)
Pooled companies (29,027)
Stock dividend of pooled
company 1,347 41,841 (49,337) 6,099
Three-for-two stock split
of pooled company 800 (800) (1)
Purchase of treasury stock (111,225)
Treasury stock retired and
reissued relating to
acquisitions accounted
for as purchases (384) (26,867) 117,017
Sale of treasury stock by
pooled company 526
Retirement of treasury
stock by pooled company (810) (13,137) 13,947
Stock issued for
acquisitions 476 31,922
Stock issued to employees
under incentive plan 111 7,332 (4,385)
Stock options exercised 302 5,844 6
Issuance of common stock
by pooled company 42 1,286 40
Amortization of unearned
restricted stock 94 1,718
BALANCE AT DECEMBER 31,
1996 81,244 901,880 1,303,895 4,149 (12,356) (4,249)
Equity from immaterial
acquisitions accounted
for as poolings of
interest 5,250 81,625 55,524 214
Change in unrealized gains
and (losses), net of
income taxes of $6,659 11,580
Net income for the year 397,529
Cash dividends declared:
Regions-$.80 per share (108,980)
Pooled companies (40,467)
Stock dividend of pooled
company 1,899 97,991 (99,976)
Two-for-one stock split 42,699 (42,699)
Purchase of treasury stock (45,224)
Treasury stock retired and
reissued relating to
acquisitions accounted
for as purchases (626) (43,097) 43,722
Stock issued for
acquisitions 414 29,195
Stock issued to employees
under incentive plan 220 16,442 1,605 (8,145)
Stock options exercised 522 5,014
Issuance of common stock by
pooled company 1 39 3
Amortization of unearned
restricted stock 2,984
BALANCE AT DECEMBER 31, 1997 $ 131,623 $ 1,089,089 $ 1,466,431 $ 15,943 $ (13,855) $ (9,410)
</TABLE>
See notes to supplemental consolidated financial statements.
( ) Indicates deduction.
5
<PAGE> 6
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Regions Financial Corporation
(Regions or the Company), conform with generally accepted accounting principles
and with general financial service industry practices. Regions provides a full
range of banking and bank-related services to individual and corporate customers
through its subsidiaries and branch offices located primarily in Alabama,
Arkansas, Florida, Georgia, Louisiana, South Carolina, Tennessee and Texas. The
Company is subject to intense competition from other financial institutions and
is also subject to the regulations of certain government agencies and undergoes
periodic examinations by those regulatory authorities.
On July 31, 1998, First Commercial Corporation (First Commercial), merged
with and into Regions. Additionally, during the first quarter of 1998, PALFED,
Inc., First United Bancorporation, and First State Corporation merged with and
into Regions. All of these transactions were accounted for as poolings of
interest and, accordingly, financial information for all prior periods has been
restated to present the combined financial condition and results of operations
of all companies as if the transactions had been in effect for all periods
presented. Further details of these transactions are presented in Note Q
Business Combinations.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The supplemental consolidated financial statements include the accounts of
Regions and its subsidiaries. Significant intercompany balances and transactions
have been eliminated. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the statement of condition dates and revenues and
expenses for the periods shown. Actual results could differ from the estimates
and assumptions used in the supplemental consolidated financial statements.
Certain amounts in prior year financial statements have been reclassified
to conform to the current year presentation.
SECURITIES
The Company's policies for investments in debt and equity securities are as
follows. Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designations as of the
date of each statement of condition.
Debt securities are classified as investment securities when the Company
has the positive intent and ability to hold the securities to maturity.
Investment securities are stated at amortized cost.
Debt securities not classified as investment securities or trading account
assets, and marketable equity securities not classified as trading account
assets, are classified as securities available for sale. Securities available
for sale are stated at estimated fair value, with unrealized gains and losses,
net of taxes, reported as a separate component of stockholders' equity.
The amortized cost of debt securities classified as investment securities
or securities available for sale is adjusted for amortization of premiums and
accretion of discounts to maturity, or in the case of mortgage-backed
securities, over the estimated life of the security, using the effective yield
method. Such amortization or accretion is included in interest on securities.
Realized gains and losses are included in securities gains (losses). The cost of
the securities sold is based on the specific identification method.
Trading account assets, which are held for the purpose of selling at a
profit, consist of debt and marketable equity securities and are carried at
6
<PAGE> 7
estimated market value. Gains and losses, both realized and unrealized, are
included in other income.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost or
estimated market value. Gains and losses on mortgages held for sale are included
in other expense.
LOANS
Interest on loans is accrued based upon the principal amount outstanding
except for interest on discounted installment loans and leases, which is
generally credited to income based upon the sum-of-the-digits method and
generally approximates the interest method of income recognition.
Through provisions charged directly to operating expense, Regions has
established an allowance for loan losses. This allowance is reduced by actual
loan losses and increased by subsequent recoveries, if any.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, historical loan loss experience, current economic conditions,
collateral values of properties securing loans, volume, growth, quality and
composition of the loan portfolio and other relevant factors. Unfavorable
changes in any of these, or other factors, or the availability of new
information, could require that the allowance for loan losses be increased in
future periods.
On loans which are considered impaired, 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.
PREMISES AND EQUIPMENT
Premises and equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. The provision for depreciation is
computed using the straight-line and declining-balance methods over the
estimated useful lives of the assets. Leasehold improvements are amortized using
the straight-line method over the estimated useful lives of the improvements (or
the terms of the leases if shorter).
Estimated useful lives generally are as follows:
Premises and leasehold improvements 10-40 years
Furniture and equipment 3-12 years
INTANGIBLE ASSETS
Intangible assets, consisting of (1) the excess of cost over the fair value
of net assets of acquired businesses and (2) amounts capitalized for the right
to service mortgage loans, are included in other assets. The excess of cost over
the fair value of net assets of acquired businesses, which totaled $250,167,000
at December 31, 1997, and $211,165,000 at December 31, 1996, is being amortized
over periods of 12 to 25 years, principally using the straight-line method of
amortization. Amounts capitalized for the right to service mortgage loans, which
totaled $124,087,000 at December 31, 1997 and $118,075,000 at December 31, 1996,
are being amortized over the estimated remaining servicing life of the loans,
considering appropriate prepayment assumptions. The estimated fair value of
capitalized mortgage servicing rights were $198 million and $200 million at
December 31, 1997 and 1996, respectively. The fair value of mortgage servicing
rights is calculated by discounting estimated future cash flows from the
servicing assets, using market discount rates, and using expected future
prepayment rates. In 1997 and 1996, Regions' amortization of mortgage servicing
rights was $25.9 million and $33.7 million, respectively. Intangible assets are
evaluated periodically for impairment.
7
<PAGE> 8
In 1996, Regions adopted Statement of Financial Accounting Standards No.
122 "Accounting for Mortgage Servicing Rights, an Amendment of FASB No. 65"
(Statement 122). 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 exists. Prior to the adoption of
Statement 122, only mortgage servicing rights that were purchased from other
parties were capitalized and recorded as an asset. Therefore, Statement 122
eliminated the accounting inconsistencies that existed between mortgage
servicing rights that were derived from loan origination activities and those
acquired through purchase transactions. In 1997 and 1996, Regions capitalized
$31.9 million and $30.1 million in mortgage servicing rights, respectively.
Statement 122 also requires that capitalized mortgage servicing rights be
assessed for impairment based on the fair value of those rights. For purposes of
evaluating impairment, the Company stratifies its mortgage servicing portfolio
on the basis of certain risk characteristics including loan type and note rate.
The adoption of Statement 122 did not have a material impact on Regions'
financial statements, and in accordance with Statement 122, prior year financial
statements were not restated to reflect the implementation of Statement 122.
On January 1, 1997, Regions adopted Statement of Financial Accounting
Standards No. 125 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities" (Statement 125), which superseded Statement
122. Statement 125 retained most of the provisions of Statement 122, and it
modified existing provisions affecting servicing right impairment evaluation,
and income from servicing in excess of contractually-stated amounts. The impact
of Statement 125 was not material to Regions' financial condition or results of
operations.
PENSION, PROFIT-SHARING AND EMPLOYEE STOCK OWNERSHIP PLANS
Regions has pension, profit-sharing and employee stock ownership plans
covering substantially all employees. Annual contributions to the profit-sharing
and employee stock ownership plans are determined at the discretion of the Board
of Directors. Pension expense is computed using the projected unit credit
(service prorate) actuarial cost method and the pension plan is funded using the
aggregate actuarial cost method. Annual contributions to all the plans do not
exceed the maximum amounts allowable for federal income tax purposes.
INCOME TAXES
Regions and its subsidiaries file a consolidated federal income tax return.
The consolidated financial statements (including the provision for income taxes)
are prepared on the accrual basis. Regions accounts for income taxes using the
liability method pursuant to Financial Accounting Standards Board Statement 109,
"Accounting for Income Taxes." Under this method, the Company's deferred tax
assets and liabilities were determined by applying federal and state tax rates
currently in effect to its cumulative temporary book/tax differences. Temporary
differences occur when income and expenses are recognized in different periods
for financial reporting purposes and for purposes of computing income taxes
currently payable. Deferred taxes are provided as a result of such temporary
differences.
PER SHARE AMOUNTS
Earnings per share computations are based upon the weighted average number
of shares outstanding during the periods. Diluted earnings per share
computations are based upon the weighted average number of shares outstanding
during the period plus the dilutive effect of outstanding stock options and
stock performance awards. All per share amounts have been restated to reflect
the two-for-one stock split in 1997 and Financial Accounting Standards Board
Statement No. 128 "Earnings Per Share".
8
<PAGE> 9
TREASURY STOCK
The purchase of the Company's common stock is recorded at cost. At the date
of retirement or subsequent reissue, the treasury stock account is reduced by
the cost of such stock.
INSURANCE SUBSIDIARIES
Insurance premium and commission income and acquisition costs are
recognized over the terms of the related policies. Losses are recognized as
incurred.
STATEMENT OF CASH FLOWS
Cash equivalents include cash and due from banks and federal funds sold and
securities purchased under agreements to resell. Regions paid $1.1 billion in
1997, $934 million in 1996, and $836 million in 1995 for interest on deposits
and borrowings. Income tax payments totaled $147 million for 1997, $166 million
for 1996, and $124 million for 1995. Loans transferred to other real estate
totaled $26 million in 1997, $22 million in 1996, and $25 million in 1995.
During 1995 investment securities of $1.0 billion were transferred to securities
available for sale, as permitted by the Financial Accounting Standard Board's
November 1995 Special Report. The securitization of loans during 1995 resulted
in the transfer of $396.1 million from loans to securities available for sale.
In 1997, a pooled subsidiary securitized $47.5 million of mortgage loans, which
were transferred to trading account assets.
9
<PAGE> 10
NOTE B. RESTRICTIONS ON CASH AND DUE FROM BANKS
Regions' subsidiary banks are required to maintain reserve balances with
the Federal Reserve Bank. The average amount of the reserve balances maintained
for the year ended December 31, 1997 was approximately $96,109,000.
NOTE C. SECURITIES
The amortized cost and estimated fair value of investment securities and
securities available for sale at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES:
U.S. Treasury
and Federal
agency
securities $2,356,320 $ 12,768 $ (1,724) $2,367,364
Obligations
of states
and political
subdivisions 571,503 24,164 (828) 594,839
Mortgage backed
securities 408,012 2,420 (2,586) 407,846
Other securities 2,444 13 (12) 2,445
TOTAL $3,338,279 $ 39,365 $ (5,150) $3,372,494
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury
and Federal
agency
securities $1,255,980 $ 7,184 $ (1,282) $1,261,882
Obligations
of states
and political
subdivisions 214,233 5,935 (276) 219,892
Mortgage backed
securities 1,379,301 20,698 (6,305) 1,393,694
Other securities 38,380 206 (208) 38,378
Equity securities 63,776 22 -0- 63,798
TOTAL $2,951,670 $34,045 $ (8,071) $2,977,644
</TABLE>
The cost and estimated fair value of investment securities and securities
available for sale at December 31, 1997 by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
10
<PAGE> 11
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------
ESTIMATED
FAIR
COST VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT SECURITIES:
Due in one year or less $ 596,044 $ 598,228
Due after one year through
five years 1,326,767 1,339,202
Due after five years through
ten years 905,749 920,428
Due after ten years 101,707 106,790
Mortgage backed
securities 408,012 407,846
TOTAL $3,338,279 $3,372,494
<CAPTION>
(in thousands) DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------
ESTIMATED
FAIR
COST VALUE
- --------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE:
Due in one year or less $ 745,327 $ 745,596
Due after one year through
five years 619,336 626,647
Due after five years through
ten years 89,636 92,420
Due after ten years 54,303 55,499
Mortgage backed
securities 1,379,292 1,393,684
Equity securities 63,776 63,798
TOTAL $2,951,670 $2,977,644
</TABLE>
Proceeds from sales of securities available for sale in 1997, were $71.1
million. Gross realized gains and losses were $604,000 and $106,000,
respectively. Proceeds from sales of securities available for sale in 1996 were
$337.4 million, with gross realized gains and losses of $4.9 million and $1.6
million, respectively. Proceeds from sales of securities available for sale in
1995 were $218.0 million with gross realized gains and losses of $1.2 million
and $1.9 million, respectively.
11
<PAGE> 12
The amortized cost and estimated fair value of investment securities and
securities available for sale at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES:
U.S. Treasury
and Federal
agency
securities $1,616,912 $13,529 $ (7,461) $1,622,980
Obligations
of states
and political
subdivisions 553,067 12,951 (2,314) 563,704
Mortgage-backed
securities 542,089 2,174 (5,798) 538,465
Other securities 4,533 22 (26) 4,529
TOTAL $2,716,601 $28,676 $(15,599) $2,729,678
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury
and Federal
agency
securities $1,277,966 $10,466 $ (3,403) $1,285,029
Obligations
of states
and political
subdivisions 161,214 2,301 (573) 162,942
Mortgage backed
securities 1,479,722 1,955 (3,031) 1,478,646
Other securities 45,772 278 (258) 45,792
Equity securities 53,365 -0- -0- 53,365
TOTAL $3,018,039 $15,000 $ (7,265) $3,025,774
</TABLE>
Securities with carrying values of $3,334,555,000 and $2,596,099,000 at
December 31, 1997, and 1996, respectively, were pledged to secure public funds,
trust deposits and certain borrowing arrangements.
12
<PAGE> 13
NOTE D. LOANS
The loan portfolio at December 31, 1997 and 1996, consisted of the
following:
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31
- -----------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Commercial $5,096,776 $3,957,888
Real estate-construction 1,585,118 1,225,273
Real estate-mortgage 10,107,094 8,544,509
Consumer 5,163,292 4,738,519
21,952,280 18,466,189
Unearned income (71,157) (70,637)
Total $21,881,123 $18,395,552
</TABLE>
Directors and executive officers of Regions and its principal subsidiaries,
including the directors' and officers' families and affiliated companies, are
loan and deposit customers and have other transactions with Regions in the
ordinary course of business. Total loans to these persons (excluding loans
which in the aggregate do not exceed $60,000 to any such person) at December
31, 1997, and 1996, were approximately $294 million and $254 million
respectively. During 1997, $444 million of new loans were made, repayments
totaled $409 million and increases for changes in the composition of related
parties totaled $5 million. These loans were made in the ordinary course of
business and on substantially the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other persons and involve no unusual risk of collectibility.
Loans sold with recourse totaled $641.0 million and $660.3 million at
December 31, 1997, and 1996, respectively.
The loan portfolio is diversified geographically, primarily within Alabama,
Arkansas, Louisiana, Georgia, South Carolina, northwest and central Florida,
eastern Texas, and western and middle Tennessee.
The recorded investment in impaired loans was $57 million at December 31,
1997, and $46 million at December, 31, 1996.
13
<PAGE> 14
NOTE E. ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 253,248 $ 231,390 $ 207,272
Allowance of purchased
institutions at acquisition
date 17,420 6,270 9,795
Provision charged to
operating expense 89,663 46,026 37,493
Loan losses:
Charge-offs (88,279) (51,976) (44,558)
Recoveries 32,171 21,538 21,388
--------- --------- ---------
Net loan losses (56,108) (30,438) (23,170)
--------- --------- ---------
Balance at end of year $ 304,223 $ 253,248 $ 231,390
========= ========= =========
</TABLE>
NOTE F. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31
- -----------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Land $ 88,710 $ 79,002
Premises 446,566 412,365
Furniture and equipment 348,844 322,973
Leasehold improvements 46,760 43,356
930,880 857,696
Allowances for depreciation
and amortization (472,088) (430,216)
TOTAL $ 458,792 $ 427,480
</TABLE>
Net occupancy expense is summarized as follows:
<TABLE>
<CAPTION>
(in thousands) YEAR ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross occupancy expense $65,117 $58,644 $52,379
Less rental income 3,184 3,481 3,655
Net occupancy expense $61,933 $55,163 $48,724
=========================================================================================
</TABLE>
NOTE G. OTHER REAL ESTATE
Other real estate acquired in satisfaction of indebtedness ("foreclosure")
is carried in other assets at the lower of the recorded investment in the loan
or the estimated net realizable value of the collateral. Other real estate
totaled $20,511,000 at December 31, 1997, and $21,099,000 at December 31, 1996.
Gain or loss on the sale of other real estate is included in other expense.
14
<PAGE> 15
NOTE H. DEPOSITS
The following schedule presents the detail of interest-bearing deposits:
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31
- ------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest-bearing
transaction accounts $1,333,955 $1,014,587
Interest-bearing accounts
in foreign office 713,944 603,861
Savings accounts 1,499,042 1,474,217
Money market savings
accounts 5,235,921 4,605,078
Certificates of deposit
($100,000 or more) 3,425,259 3,154,000
Time deposits
($100,000 or more) 284,888 191,222
Other interest-bearing
deposits 8,773,814 7,832,479
Total $21,266,823 $18,875,444
</TABLE>
The following schedule details interest expense on deposits:
<TABLE>
<CAPTION>
(in thousands) YEAR ENDED DECEMBER 31
- ------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-bearing
transaction accounts $ 26,878 $ 24,345 $ 53,909
Interest-bearing accounts
in foreign office 30,888 22,145 18,107
Savings accounts 36,675 37,457 38,329
Money market savings
accounts 170,667 142,133 106,518
Certificates of deposit
($100,000 or more) 197,165 161,230 117,227
Other interest-bearing
deposits 492,509 439,534 405,943
Total $954,782 $826,844 $740,033
</TABLE>
The aggregate amount of maturities of all time deposits in each of the next
five years is as follows: 1998-$7.9 billion; 1999-$1.7 billion; 2000-$2.2
billion; 2001-$211 million; and 2002-$270 million.
15
<PAGE> 16
NOTE I. BORROWED FUNDS
Following is a summary of short-term borrowings:
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31
- -------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased $1,686,094 $1,334,896 $ 729,935
Securities sold
under agreements
to repurchase 442,732 367,560 487,156
Federal Home Loan Bank
structured notes 500,000 -0- -0-
Commercial paper 52,750 40,367 21,100
Notes payable to
unaffiliated banks -0- 53,350 48,596
Treasury tax and loan note 14,657 18,027 16,940
Short sale liability 2,834 231 109
Federal Home Loan Bank notes 8,284 9,375 6,710
Total $2,707,351 $1,823,806 $1,310,546
<CAPTION>
(in thousands) DECEMBER 31
- -------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount
outstanding at any
month-end:
Federal funds
purchased and
securities sold
under agreements
to repurchase $2,231,387 $1,746,014 $1,607,256
Aggregate short-
term borrowings 2,709,309 1,867,364 1,722,071
Average amount
outstanding (based
on average of daily
balances) 1,876,871 1,340,288 1,103,530
Weighted average
interest rate
at year end 4.8% 6.0% 5.5%
Weighted average interest
rate on amounts
outstanding during
the year (based on
average of daily balances) 5.7% 5.4% 6.3%
</TABLE>
Federal funds purchased and securities sold under agreements to repurchase
had weighted average maturities of seven, ten and eight days at December 31,
1997, 1996 and 1995, respectively. Weighted average rates on these dates were
4.8%, 6.0% and 5.5%, respectively.
Federal Home Loan Bank structured notes have a ten year maturity, but are
callable within three months. The structured notes had a weighted average rate
of 4.9% at December 31, 1997.
Commercial paper maturities ranged from 257 to 581 days at December 31,
1997, from 3 to 715 days at December 31, 1996 and from 4 to 166 days at
December 31, 1995. Weighted average maturities were 329, 372 and 113 days at
December 31, 1997, 1996 and 1995, respectively. The weighted average interest
rates on these dates were 6.3%, 5.8% and 5.7%, respectively.
Regions has an unsecured short-term credit agreement with an unaffiliated
bank that provides for maximum borrowings of $100 million. No borrowings were
16
<PAGE> 17
outstanding under this agreement at December 31, 1997 and 1996. No compensating
balances or commitment fees are required by this agreement. In addition to this
short-term credit agreement, a subsidiary of Regions has a $50 million
revolving credit line with an unaffiliated bank that requires a $10,000
compensating balance. At December 31, 1997, no borrowings were outstanding
under this agreement. On December 31, 1996, $21.6 million was outstanding. In
addition, one of the pooled subsidiaries has a $30 million and a $50 million
line of credit from two unaffiliated banks. As of December 31, 1997 no balances
were outstanding under these agreements
The short-sale liability represents Regions' trading obligation to deliver
certain government securities at a predetermined date and price. These
securities had weighted average interest rates of 6.3%, 6.5% and 6.9% at
December 31, 1997, 1996 and 1995, respectively.
The Federal Home Loan Bank notes represent borrowings of pooled subsidiaries
with original stated maturities of less than one year. These notes had weighted
average interest rates on December 31, 1997, 1996, and 1995, of 5.8%, 5.5%, and
6.1%, respectively.
Long-term borrowings consist of the following:
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31
- ------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
7.80% subordinated notes $ 75,000 $ 75,000
7.65% subordinated notes 25,000 25,000
7.75% subordinated notes 100,000 100,000
Other subordinated notes 900 800
Federal Home Loan Bank notes 203,637 279,521
Senior bank notes -0- 40,000
Mortgage notes payable 2,617 3,155
Industrial development revenue bonds 3,200 3,300
Notes payable to unaffiliated banks 10,050 20,600
Other notes payable 25,125 23,169
Total $445,529 $570,545
</TABLE>
In July 1994, Regions issued $25 million of 7.65% subordinated notes, due
August 15, 2001, and in September 1994, Regions issued $100 million of 7.75%
subordinated notes, due September 15, 2024. The $100 million of 7.75%
subordinated notes may be redeemed in whole or in part at the option of the
holders thereof on September 15, 2004, at 100% of the principal amount to be
redeemed, together with accrued interest. In December 1992, Regions issued $75
million of 7.80% subordinated notes, due December 1, 2002. All issues of these
notes are subordinated and subject in right of payment of principal and
interest to the prior payment in full of all senior indebtedness of the
Company, generally defined as all indebtedness and other obligations of the
Company to its creditors, except subordinated indebtedness. Payment of the
principal of the notes may be accelerated only in the case of certain events
involving bankruptcy, insolvency proceedings or reorganization of the Company.
The subordinated notes described above, qualify as "Tier 2 capital" under
Federal Reserve guidelines.
Pooled subsidiaries had outstanding $900,000 and $800,000 in subordinated
notes as of December 31, 1997 and 1996, respectively. These borrowings have
interest rates ranging from 8.25% to 10.25% and mature during 1998 and 1999.
Federal Home Loan Bank notes represent borrowings from Federal Home Loan
Banks. Interest on these borrowings is at fixed rates ranging from 5.5% to
7.9%, with maturities of one to twenty years. These borrowings are secured by
Federal Home Loan Bank stock (carried at cost of $66.5 million) and by first
mortgage loans on one-to-four family dwellings held by certain banking
subsidiaries (approximately $6.6 billion at December 31, 1997). The maximum
amount that could be borrowed from Federal Home Loan Banks under the current
17
<PAGE> 18
borrowing agreements and without further investment in Federal Home Loan Bank
stock is approximately $590 million.
As of December 31, 1997, no senior bank notes remained outstanding. At
December 31, 1996, Regions Bank had outstanding $40 million in senior bank
notes with an interest rate of 7.06%. These notes were unsecured and matured in
1997. Regions' Bank is currently authorized to issue up to $250 million in bank
notes to institutional investors.
The mortgage notes payable at December 31, 1997, had a weighted average
interest rate of 8.7% and were collateralized by premises and equipment carried
at $7,949,000.
The industrial development revenue bonds mature on July 1, 2008, with
principal of $100,000 payable annually and interest at a tax effected prime
rate payable monthly.
Notes payable to unaffiliated banks represents revolving credit agreements
with unaffiliated banks entered into by pooled subsidiaries. These agreements
have interest rates that range from 7.4% to 9.6% and mature in 1998 and 1999.
Other notes payable at December 31, 1997, had a weighted average interest
rate of 5.4% and a weighted average maturity of 7.1 years.
The aggregate amount of maturities of all long-term debt in each of the next
five years is as follows: 1998-$88,067,000; 1999-$40,486,000; 2000-$41,313,000;
2001-$32,222,000; 2002-$81,421,000.
Substantially all of the consolidated net assets are owned by the
subsidiaries and dividends paid by Regions are substantially provided by
dividends from the subsidiaries. Statutory limits are placed on the amount of
dividends the subsidiary banks can pay without prior regulatory approval. In
addition, regulatory authorities require the maintenance of minimum capital to
asset ratios at banking subsidiaries. At December 31, 1997, the banking
subsidiaries could pay approximately $254 million in dividends without prior
approval.
Management believes that none of these dividend restrictions will materially
affect Regions' dividend policy. In addition to dividend restrictions, federal
statutes also prohibit unsecured loans from banking subsidiaries to the parent
company. Because of these limitations, substantially all of the net assets of
Regions' subsidiaries are restricted, except for the amount which can be paid
to the parent in the form of dividends.
18
<PAGE> 19
NOTE J. EMPLOYEE BENEFIT PLANS
Regions has a defined benefit pension plan covering substantially all
employees, except for substantially all employees which joined the Company
through the First Commercial, PALFED, Inc., First State Corporation, and First
United Bancorporation mergers. The benefits are based on years of service and
the employee's highest five years of compensation during the last ten years of
employment. Regions' funding policy is to contribute annually at least the
amount required by IRS minimum funding standards. Contributions are intended to
provide not only for benefits attributed to service to date, but also for those
expected to be earned in the future.
The following table sets forth the plan's funded status and amounts
recognized in the consolidated statement of condition:
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31
- ------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation,
including vested benefits
of $102,461 in 1997 and
$86,395 in 1996 $ (103,851) $ (87,579)
Projected benefit obligation for
service rendered to date (122,594) (103,509)
Plan assets at fair value, primarily
listed stocks and bonds, and U.S.
Treasury and agency obligations 132,463 112,915
Plan assets in excess of projected
benefit obligation 9,869 9,406
Unrecognized net loss from
past experience different
from that assumed 3,461 5,178
Unrecognized prior service cost (2,239) (1,376)
Prepaid pension cost
included in other assets $ 11,091 $ 13,208
</TABLE>
19
<PAGE> 20
Net pension cost included the following components:
<TABLE>
<CAPTION>
(in thousands) YEAR ENDED DECEMBER 31
- -------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits
earned during the
period $ 5,098 $ 4,339 $ 3,501
Interest cost on projected
benefit obligation 8,300 7,430 6,411
Actual (return) on
plan assets (18,904) (14,897) (16,577)
Net amortization and
deferral 8,317 4,467 6,323
Net periodic pension
expense (income) $ 2,811 $ 1,339 $ (342)
</TABLE>
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.50% and 4.50%, respectively, at December
31, 1997; 7.75% and 4.50%, respectively, at December 31, 1996; and 7.25% and
4.50%, respectively, at December 31, 1995. The expected long-term rate of
return on plan assets was 9% in all years.
The Company also sponsors a supplemental executive retirement program, which
is a non-qualified plan that provides certain senior executive officers defined
pension benefits in relation to their compensation, as is provided to other
employees by the qualified pension plan. The projected benefit obligation for
this plan totaled $5,652,000 at December 31, 1997, and $5,229,000 at December
31, 1996. The accumulated benefit obligation, all of which was vested and
accrued at December 31, 1997 and 1996, totaled $5,208,000 and $4,526,000,
respectively. Pension expense for this plan totaled $480,000 in 1997 and 1996,
and $440,000 in 1995.
Contributions to employee profit sharing plans totaled $21,016,000,
$16,202,000 and $17,084,000 for 1997, 1996 and 1995, respectively.
The 1997 contribution to the employee stock ownership plan totaled
$2,950,000, compared to $1,863,000 in 1996, and $1,690,000 in 1995.
Contributions are used to purchase Regions common stock for the benefit of
participating employees.
Contributions to the employee stock purchase plan in 1997, 1996 and 1995 were
$1,516,000, $1,479,000 and $1,472,000, respectively.
Regions sponsors a defined benefit postretirement health care plan that
covers certain retired employees. Currently the Company pays a portion of the
costs of certain health care benefits for all eligible employees that retired
before January 1, 1989. No health care benefits are provided for employees
retiring at normal retirement age after December 31, 1988. For employees
retiring before normal retirement age, the Company currently pays a portion
(based upon length of active service at the time of retirement) of the costs of
certain health care benefits until the retired employee becomes eligible for
Medicare. The plan is contributory and contains other cost-sharing features such
as deductibles and co-payments. Retiree health care benefits, as well as similar
benefits for active employees, are provided through a group insurance program in
which premiums are based on the amount of benefits paid. The Company's policy is
to fund the Company's share of the cost of health care benefits in amounts
determined at the discretion of management.
20
<PAGE> 21
The following table sets forth the plan's funded status and amounts
recognized in the consolidated statement of condition:
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31
- -----------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation,
including retiree benefits
of $4,855 in 1997 and $5,640
in 1996 $(9,803) $(11,949)
Unrecognized transition
obligation 8,857 9,661
Unrecognized net (gain) from
past experience different
from that assumed (5,500) (3,350)
Accrued postretirement benefit
obligation $(6,446) $ (5,638)
</TABLE>
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
(in thousands) YEAR ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits
earned during the
period $ 381 $ 544 $ 373
Interest cost on
benefit obligation 681 833 622
Net amortization and
deferral 590 605 486
Unrecognized (gain) (324) (158) (205)
Net periodic postretirement
benefit cost $1,328 $1,824 $1,276
</TABLE>
The assumed health care cost trend rate was 10% for 1997 and is assumed to
decrease gradually to 5% by 2007 and remain at that level thereafter.
Increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation at
December 31, 1997, by $931,000 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for 1997 by
$132,000. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.50% at December 31, 1997,
and 7.75% at December 31, 1996.
First Commercial Corporation (FCC), which merged with Regions on July 31,
1998, has a salary deferral retirement savings plan qualified under Section
401(k) of the Internal Revenue Code for the benefit of all qualifying employees
who have completed one year of service. Participants in the Plan may make
deferral contributions to the Plan which are 100% vested at all times. FCC
matches a minimum of 30% of the employee's contributions up to 6% of salary.
After five years of service, FCC matches 40% of the employee's contributions up
to 6% of salary. Company-matching contributions are fully vested after five
years of service. In 1997, 1996, and 1995, FCC made contributions of $1.6
million, $1.5 million and $1.1 million respectively, to the 401(k) Plan.
21
<PAGE> 22
On December 16, 1997, FCC granted a total of 100,295 stock unit awards to
certain employees. Each unit award is based on the valuation of one share of
FCC's common stock, and vests over five years. Cash payments of one-third of
the vested amount will be made at the end of years three, four and five, based
on the market value of FCC's common stock on the anniversary dates. Upon change
of control of FCC, all nonvested units will vest 100% and be payable as of the
closing date of the control change.
Compensation expense will be accrued over the five-year vesting period,
adjusted for changes in the value of FCC's common stock, unless change of
control occurs at which time total expense would be accrued.
FCC has defined benefit pension plans which provide benefits to
substantially all employees. Benefits under these plans generally are based on
the employee's years of service and compensation during the years immediately
preceding retirement. FCC's general funding policy is to contribute amounts
deductible for Federal income tax purposes. Pension (cost) benefit is
summarized as follows:
<TABLE>
<CAPTION>
(in thousands) YEAR ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $(2,532) $(2,198) $(1,723)
Interest cost (3,227) (2,656) (2,240)
Actual return on plan
assets 12,480 6,395 10,201
Net amortization and
deferral (6,718) (958) (5,057)
Total pension benefit $ 3 $ 583 $ 1,181
</TABLE>
The status of the defined First Commercial Corporation benefit plans at
December 31 is as follows:
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31
- --------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefits $ 35,969 $ 32,518 $ 26,975
Nonvested benefits 2,499 2,151 2,494
$ 38,468 $ 34,669 $ 29,469
Fair value of plan assets $ 70,315 $ 58,192 $ 52,514
Projected benefit
obligation (45,002) (40,371) (33,701)
Plan assets in excess of
projected benefit
obligation 25,313 17,821 18,813
Unrecognized net (gain) loss (6,277) 946 (511)
Unrecognized net transition
asset (2,753) (3,566) (4,294)
Prepaid pension costs $ 16,283 $ 15,201 $ 14,008
</TABLE>
The expected long-term rate of return on the plans' assets was 9.0% for 1997,
1996, and 1995. The discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 8.0% and 4.5%, respectively, at December 31,
22
<PAGE> 23
1997, 1996 and 1995. The plans' assets are invested in diversified portfolios
that primarily consist of equity and debt securities of which 143,896 shares,
218,629 shares and 249,856 shares at December 31, 1997, 1996, and 1995,
respectively, were in FCC's common stock. The fair value of these shares at
December 31, 1997, was $8.4 million and the cash dividends paid on these shares
during 1997 were $193,000. Also included in these securities were
investments in various common trust funds administered by First Commercial
Trust Company, a subsidiary of FCC, of 936,798 shares, 799,484 shares, and
568,308 shares at December 31, 1997, 1996, and 1995, respectively.
Three of the pooled subsidiaries sponsored various defined benefit pension
plans, defined contribution plans and incentive plans. The expense associated
with these plans is not material.
23
<PAGE> 24
NOTE K. LEASES
Rental expense for all leases amounted to approximately $14,828,000,
$12,718,000 and $10,839,000 for 1997, 1996 and 1995, respectively. The
approximate future minimum rental commitments as of December 31, 1997, for all
noncancelable leases with initial or remaining terms of one year or more are
shown in the following table. Included in these amounts are all renewal options
reasonably assured of being exercised.
<TABLE>
<CAPTION>
(in thousands) Equipment Premises Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 $266 $ 9,219 $ 9,485
1999 203 8,078 8,281
2000 162 6,748 6,910
2001 54 5,137 5,191
2002 37 4,295 4,332
2003-2007 7 13,866 13,873
2008-2012 0 4,932 4,932
2013-2017 0 1,833 1,833
2018-End 0 707 707
TOTAL $729 $54,815 $55,544
</TABLE>
NOTE L. COMMITMENTS AND CONTINGENCIES
To accommodate the financial needs of its customers, Regions makes
commitments under various terms to lend funds to consumers, businesses and
other entities. These commitments include (among others) revolving credit
agreements, term loan commitments and short-term borrowing agreements. Many of
these loan commitments have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of these commitments are expected
to expire without being funded, the total commitment amounts do not necessarily
represent future liquidity requirements. Standby letters of credit are also
issued, which commit Regions to make payments on behalf of customers if certain
specified future events occur. Historically, a large percentage of standby
letters of credit also expire without being funded.
Both loan commitments and standby letters of credit have credit risk
essentially the same as that involved in extending loans to customers and are
subject to normal credit approval procedures and policies. Collateral is
obtained based on management's assessment of the customer's credit.
Loan commitments totaled $4.9 billion at December 31, 1997, and $4.4 billion
at December 31, 1996. Standby letters of credit were $498.3 million at December
31, 1997, and $485.8 million at December 31, 1996. Commitments under commercial
letters of credit used to facilitate customers' trade transactions were $24.0
million at December 31, 1997, and $35.6 million at December 31, 1996.
The Company and its affiliates are defendants in litigation and claims
arising from the normal course of business. Based on consultation with legal
counsel, management is of the opinion that the outcome of pending and
threatened litigation will not have a material effect on Regions' consolidated
financial statements.
NOTE M. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the normal course of business, Regions enters into financial instrument
transactions with off-balance sheet risk. These financial instrument agreements
help the Company manage its exposure to interest rate fluctuations and help
customers manage exposure to foreign currency fluctuations.
Forward contracts represent commitments to sell money market instruments at
a future date at a specified price or yield. These contracts are utilized by
the Company to hedge interest rate risk positions associated with the
origination of mortgage loans held for sale. The amount of hedging gains and
24
<PAGE> 25
losses deferred, which is reflected in gains and losses on mortgage loans held
for sale as realized, was not material to the results of operations for the
years ended December 31, 1997, 1996 or 1995. The Company is subject to the
market risk associated with changes in the value of the underlying financial
instrument as well as the risk that the other party will fail to perform. The
gross contract amount of forward contracts, which totaled $126 million and $79
million at December 31, 1997, and 1996, respectively, represents the extent of
Regions' involvement. However, those amounts significantly exceed the future
cash requirements, as the Company intends to close out open positions prior to
settlement, and thus is subject only to the change in the value of the
instruments. The gross amount of contracts represents the Company's maximum
exposure to credit risk.
The Company utilizes put and call option contracts to hedge mortgage loan
originations in process. Option contracts represent rights to purchase or sell
securities or other money market instruments at a specified price and within a
specified period of time at the option of the holder. There were no option
contracts outstanding as of December 31, 1997 or December 31, 1996. The
commitment fees paid for option contracts reflect the maximum exposure to the
Company.
Foreign currency exchange contracts involve the trading of one currency for
another on a specified date and at a specified rate. These contracts are
executed on behalf of the Company's customers and are used to facilitate the
management of fluctuations in foreign exchange rates. The notional amount of
forward foreign exchange contracts totaled $31 million and $24 million at
December 31, 1997 and 1996, respectively. The Company is subject to the risk
that another party will fail to perform and the gross amount of the contracts
represents the Company's maximum exposure to credit risk.
Regions operates a broker-dealer subsidiary, which in the normal course of
trading inventory and clearing customers' securities transactions, is a party to
certain financial instruments with off-balance-sheet risk. The aggregate
off-balance-sheet risk from these financial instruments is not material to the
consolidated financial statements.
NOTE N. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
CASH AND CASH EQUIVALENTS: The carrying amount reported in the supplemental
consolidated statements of condition and cash flows approximates the estimated
fair value.
INTEREST-BEARING DEPOSITS IN OTHER BANKS: The carrying amount reported in
the supplemental consolidated statement of condition approximates the estimated
fair value.
INVESTMENT SECURITIES: Estimated fair values are based on quoted market
prices, where available. If quoted market prices are not available, estimated
fair values are based on quoted market prices of comparable instruments.
SECURITIES AVAILABLE FOR SALE: Estimated fair values, which are the amounts
recognized in the supplemental consolidated statements of condition, are based
on quoted market prices, where available. If quoted market prices are not
available, estimated fair values are based on quoted market prices of
comparable instruments.
TRADING ACCOUNT ASSETS: Estimated fair values, which are the amounts
recognized in the supplemental consolidated statements of conditions, are based
on quoted market prices, where available. If quoted market prices are not
available, estimated fair values are based on quoted market prices of
comparable instruments.
MORTGAGE LOANS HELD FOR SALE: Estimated fair values, which are the amounts
recognized in the supplemental consolidated statements of condition, are based
on quoted market prices of comparable instruments.
LOANS: Estimated fair values for variable rate loans, which reprice
frequently and have no significant credit risk, are based on carrying value.
Estimated fair values for all other loans are estimated using discounted cash
25
<PAGE> 26
flow analyses, based on interest rates currently offered on loans with similar
terms to borrowers of similar credit quality. The carrying amount of accrued
interest reported in the supplemental consolidated statements of condition
approximates the fair value.
DEPOSIT LIABILITIES: The fair value of non-interest bearing demand accounts,
interest-bearing transaction accounts, savings accounts, money market accounts
and certain other time open accounts is the amount payable on demand at the
reporting date (i.e., the carrying amount). Fair values for certificates of
deposit are estimated by using discounted cash flow analyses, using the
interest rates currently offered for deposits of similar maturities.
SHORT-TERM BORROWINGS: The carrying amount reported in the supplemental
consolidated statements of condition approximates the estimated fair value.
LONG-TERM BORROWINGS: Fair values are estimated using discounted cash flow
analyses, based on the current rates offered for similar borrowing arrangements.
LOAN COMMITMENTS, STANDBY AND COMMERCIAL LETTERS OF CREDIT: Estimated fair
values for these off-balance-sheet instruments are based on standard fees
currently charged to enter into similar agreements.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31, 1997 DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 1,469,753 $ 1,469,753 $ 1,520,317 $ 1,520,317
Interest-bearing deposits
in other banks 48,162 48,162 42,954 42,954
Investment securities 3,338,279 3,372,494 2,716,601 2,729,678
Securities available for sale 2,977,644 2,977,644 3,025,774 3,025,774
Trading account assets 50,825 50,825 29,844 29,844
Mortgage loans held for sale 383,924 383,924 181,102 181,102
Loans, net (excluding leases) 21,358,956 21,734,678 17,960,183 18,126,012
Financial liabilities:
Deposits 25,011,021 25,149,732 22,019,412 22,047,492
Short-term borrowings 2,707,351 2,707,351 1,823,806 1,823,806
Long-term borrowings 445,529 460,570 570,545 557,781
Off-balance-sheet instruments:
Loan commitments -0- (33,019) - 0 - (30,653)
Standby letters of credit -0- (6,666) - 0 - (6,697)
Commercial letters of credit -0- (52) - 0 - (81)
</TABLE>
26
<PAGE> 27
NOTE O. OTHER INCOME AND EXPENSE
Other income consists of the following:
<TABLE>
<CAPTION>
(in thousands) YEAR ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fees and commissions $48,722 $41,232 $34,282
Insurance premiums
and commissions 6,533 6,514 5,686
Trading account income 14,069 10,890 7,070
Gain on sale of mortgage
servicing rights -0- -0- 150
Other miscellaneous income 22,904 23,779 24,191
Total $92,228 $82,415 $71,379
Other expense consists of the following:
<CAPTION>
(in thousands) YEAR ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stationery, printing
and supplies $ 10,597 $ 13,559 $11,328
Advertising and business
development 14,560 13,593 12,013
Postage and freight 15,372 13,848 14,011
Telephone 14,321 12,918 11,739
Legal and other
professional fees 15,804 16,026 14,783
Other non-credit losses 13,727 10,653 8,006
Outside computer services 11,225 14,708 11,154
Amortization of mortgage
servicing rights 25,923 33,650 19,492
Loss on sale of
mortgages by affiliate
mortgage companies 2,892 5,592 1,093
Other miscellaneous
expenses 173,154 140,275 124,525
Total $297,575 $274,822 $228,144
</TABLE>
NOTE P. INCOME TAXES
At December 31, 1997, Regions has net operating loss carryforwards for
federal tax purposes of $24.0 million that expire in years 2003 through 2011.
These carryforwards resulted from the Company's acquisition of Secor Bank on
December 31, 1993 and the acquisition of other financial institutions on
various dates. For financial reporting purposes, a valuation allowance of
approximately $11.2 million has been recognized to offset a portion of the
deferred tax assets related to those carryforwards and certain temporary
differences.
27
<PAGE> 28
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Regions' deferred tax assets and liabilities as of December 31, 1997 and 1996
are listed below.
<TABLE>
<CAPTION>
(in thousands) December 31
- ------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loan loss allowance $ 96,588 $ 81,118
Net operating loss
carryforwards 19,390 15,168
Other 54,711 54,772
Total deferred tax assets 170,689 151,058
Deferred tax liabilities:
Tax over book depreciation 4,948 5,459
Accretion of bond discount 4,123 3,479
Direct lease financing 23,796 22,795
Pension 10,154 10,429
Originated mortgage
servicing rights 8,094 3,055
Other 34,447 26,990
Total deferred tax liabilities 85,562 72,207
Net deferred tax assets
before valuation allowance 85,127 78,851
Valuation allowance (11,224) (17,864)
Net deferred tax asset $ 73,903 $ 60,987
</TABLE>
The valuation allowance for net deferred tax assets decreased by $6.6
million in 1997. The decrease was due to a reassessment of the Company's
ability to realize the benefit of certain net operating loss carryforwards.
Applicable income taxes for financial reporting purposes differs from the
amount computed by applying the statutory federal income tax rate of 35% for
the reasons below:
<TABLE>
<CAPTION>
(in thousands) Year Ended December 31
- ----------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax on income before extraordinary item
computed at statutory federal income
tax rate $199,383 $165,853 $143,851
Increases (decreases) in taxes resulting from:
Obligations of states and political subdivisions:
Tax exempt income (17,007) (14,690) (15,172)
Tax on preference item 2,295 1,859 1,353
State income tax, net
of federal tax benefit 7,662 3,395 6,959
Subsidiary purchase
accounting adjustments (57) (54) (51)
Other, net (4,713) (355) (2,411)
Total $187,563 $156,008 $134,529
Effective Tax Rate 32.9% 32.9% 32.7%
</TABLE>
28
<PAGE> 29
The provisions for income taxes applicable to income before extraordinary
item in the supplemental consolidated statements of income are summarized below.
Included in these amounts are income taxes of $187,000, $1,159,000, and
$(240,000) in 1997, 1996 and 1995, respectively, related to securities
transactions.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
(in thousands) Current Deferred Total
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Federal $177,855 $ (1,983) $175,872
State 12,569 (878) 11,691
Total $190,424 $ (2,861) $187,563
1996
Federal $149,323 $ 1,174 $150,497
State 6,532 (1,021) 5,511
Total $155,855 $ 153 $156,008
1995
Federal $111,361 $ 11,932 $123,293
State 11,456 (220) 11,236
Total $122,817 $ 11,712 $134,529
</TABLE>
A pooled company also recorded taxes of $9.7 million associated with gain on
sale of two banking affiliates as required by the regulatory authorities. The
gain on sale was reported as an extraordinary item.
29
<PAGE> 30
NOTE Q. BUSINESS COMBINATIONS
On July 31, 1998, First Commercial Corporation of Little Rock, Arkansas,
with approximately $7.3 billion in assets merged with and into Regions. Under
the terms of the transaction, Regions issued 64,120,031 shares of its common
stock for all of First Commercial's outstanding common stock (based on an
exchange ratio of 1.7 shares of Regions common stock for each share of First
Commercial common stock).
On March 31, 1998, First State Corporation of Albany, Georgia, (First
State) with approximately $536 million in assets merged with and into Regions.
Under the terms of the transaction, Regions issued 3,853,298 shares of its
common stock for all of First State's outstanding common stock (based on an
exchange ratio of .56 of a share of Regions common stock for each share of
First State common stock).
On March 14, 1998, First United Bancorporation of Anderson, South
Carolina, (First United) with approximately $305 million in assets merged with
and into Regions. Under the terms of the transaction, Regions issued 2,148,950
shares of its common stock for all of First United's outstanding common stock
(based on an exchange ratio of .5173 of a share of Regions common stock for
each share of First United common stock).
On February 13, 1998, PALFED, Inc., of Aiken, South Carolina, (PALFED)
with approximately $665 million in assets merged with and into Regions. Under
the terms of the transaction, Regions issued 3,790,747 shares of its common
stock for all of PALFED's outstanding common stock (based on an exchange ratio
of .7 of a share of Regions common stock for each share of PALFED common
stock).
On March 1, 1996, First National Bancorp of Gainesville, Georgia, with
approximately $3.2 billion in assets merged with and into Regions. Under the
terms of the transaction, Regions issued 31,840,216 shares of its common stock
for all of First National's outstanding common stock (based on an exchange
ratio of .76 of a share of Regions common stock for each share of First
National common stock).
These transactions were accounted for as poolings of interests and
accordingly, all prior period financial statements were restated to include the
effect of these transactions.
The following table presents financial information as reported by Regions,
First Commercial, First National, and the other pooled companies (First
State, First United, and PALFED) and on a combined basis.
<TABLE>
<CAPTION>
(in thousands, except per share data) Year Ended December 31
- -------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income:
Regions $ 828,881 $ 700,443 $497,324
First Commercial 282,968 251,906 210,274
Other pooled companies 67,359 59,452 54,647
First National -- 23 126,940
Combined $1,179,208 $1,011,824 $889,185
Net income:
Regions $ 299,692 $ 229,678 $172,824
First Commercial 100,059 78,554 65,234
Other pooled companies (2,222) 9,619 13,412
First National -- 8 25,005
Combined $ 397,529 $ 317,859 $276,475
Net income per common share:
Regions $ 2.20 $ 1.85 $ 1.87
Combined 1.89 1.64 1.45
Net income per common share - diluted:
Regions $ 2.15 $ 1.81 $ 1.84
Combined 1.86 1.61 1.43
</TABLE>
30
<PAGE> 31
The following table presents recent acquisitions of the pooled companies:
<TABLE>
<CAPTION>
Total Assets Accounting
Date Company Headquarters Location (in thousands) Treatment
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
October 1997 First Charter Searcy, Arkansas $ 74,605 Pooling
Bancshares, Inc.
April 1997 City National Bank Whitehouse, Texas 38,706 Pooling
February 1997 W.B.T. Holding Company Memphis, Tennessee 267,131 Pooling
November 1996 Security National Bank Nocogdoches, Texas 35,060 Pooling
August 1996 Branches of First Union National Albany, Georgia 82,458 Purchase
Bank of Georgia, N.A.
During 1997 Regions completed the following business combinations:
<CAPTION>
Total Assets Accounting
Date Company Headquarters Location (in thousands) Treatment
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
January Florida First Panama City, Florida $286,515 Purchase
Bancorp, Inc.
January Allied Bankshares, Inc. Thomson, Georgia 559,815 Pooling
March West Carroll Oak Grove, Louisiana 127,145 Pooling
Bancshares, Inc.
April Gulf South Bancshares, Inc. Gretna, Louisiana 55,363 Purchase
May First Mercantile Longwood, Florida 157,434 Purchase
National Bank
May The New Iberia Bancorp, Inc. New Iberia, Louisiana 313,494 Pooling
June First Bankshares, Inc. Hapeville, Georgia 126,826 Pooling
June SB&T Corporation Smyrna, Georgia 147,709 Pooling
December GF Bancshares, Inc. Griffin, Georgia 99,446 Purchase
</TABLE>
The total consideration paid for all the 1997 business combinations was
approximately $58 million in cash and 11.6 million shares of Regions' common
stock (including treasury stock reissued) valued at $342 million. Total
intangible assets recorded in connection with the purchase transactions totaled
approximately $42 million.
During 1996 Regions completed the following business combinations:
<TABLE>
<CAPTION>
Total Assets Accounting
Date Company Headquarters Location (in thousands) Treatment
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
January Metro Financial
Corporation Atlanta, Georgia $ 210,487 Purchase
February The Enterprise National Bank of
Atlanta Atlanta, Georgia 54,263 Purchase
April First Federal Bank of Northwest
Georgia, Federal Savings Bank Cedartown, Georgia 93,381 Pooling
August Delta Bank & Trust Company Belle Chasse, Louisiana 190,547 Purchase
August First Gwinnett Bancshares, Inc. Atlanta, Georgia 68,364 Purchase
August Rockdale Community Bank Conyers, Georgia 47,457 Purchase
September American Bancshares of Houma,
Inc. Houma, Louisiana 88,742 Purchase
</TABLE>
31
<PAGE> 32
Because certain of the 1997 and 1996 business combinations were accounted for
as purchases, Regions' supplemental consolidated financial statements include
the results of operations of those companies only from their respective dates of
acquisition. The following unaudited summary information presents the
consolidated results of operations of Regions on a pro forma basis, as if all
the above companies had been acquired on January 1, 1996. The pro forma summary
information does not necessarily reflect the results of operations that would
have occurred, if the acquisitions had occurred at the beginning of the periods
presented, or of results which may occur in the future.
<TABLE>
<CAPTION>
(in thousands, except per share data) Year Ended December 31
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Interest income $2,285,618 $2,133,874
Interest expense 1,102,727 1,026,662
---------- ----------
Net interest income 1,182,891 1,107,212
Provision for loan losses 89,940 60,646
Non-interest income 388,020 371,786
Non-interest expense 910,726 935,626
---------- ----------
Income before income taxes and
extraordinary item 570,245 482,726
Applicable income taxes 188,037 161,350
---------- ----------
Income before extraordinary item 382,208 321,376
Extraordinary item 15,425 0
---------- ----------
Net income $ 397,633 $ 321,376
Income before extraordinary item per share 1.82 1.55
Net income per share 1.89 1.55
Income before extraordinary item per share,
diluted 1.79 1.53
Net income per share, diluted 1.86 1.53
</TABLE>
The following chart summarizes the assets acquired and liabilities assumed
in connection with business combinations, excluding the First Commercial, First
National and other pooled companies business combinations, in 1997 and 1996.
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 206,330 $139,612
Investment securities 254,308 47,747
Securities available for sale 335,494 161,158
Loans, net 1,269,222 485,182
Other assets 187,089 35,474
Deposits 1,896,144 791,539
Borrowings 94,684 3,684
Other liabilities 43,427 4,241
</TABLE>
32
<PAGE> 33
Regions' and the pooled subsidiaries' business combinations pending as of
December 31, 1997, or announced thereafter, are as follows:
<TABLE>
<CAPTION>
Approximate Anticipated
(In millions) Consider- Accounting
Asset ------------- ation Treatment
Institution Size Value(1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Savings Bank subsidiary of Kemmons Wilson $488 $62 First Purchase
Inc. located in Rogersville, Arkansas Commercial
Common Stock
converted into
1.7 shares of
Regions
Common
Stock
Greenville Financial Corporation, located in 134 34 Regions Pooling
Greenville, South Carolina Common
Stock
St. Mary Holding Corporation, located in Franklin, 113 31 Regions Pooling
Louisiana Common
Stock
Key Florida Bancorp, Inc., located in Bradenton, 212 39 Regions Pooling
Florida Common
Stock
Etowah Bank, located in Canton, Georgia 432 117 Regions Pooling
Common
Stock
First Community Banking Services, Inc., located in 131 33 Regions Pooling
Peachtree City, Georgia Common
Stock
Jacobs Bank, located in Scottsboro, Alabama 190 53 Regions Pooling
Common
Stock
Village Bankshares, Inc., located in Tampa, Florida 199 55 Regions Pooling
Common
Stock
VB&T Bancshares Corporation, located in Valdosta, 75 18 Regions Pooling
Georgia Common
Stock
Meigs County Bancshares, Inc., located in Decatur, 103 19 Regions Pooling
Tennessee Common
Stock
Bullsboro BancShares, Inc., located in Newnan, 108 35 Regions Pooling
Georgia Common
Stock
St. James Bancorporation, Inc., located in Lutcher, 152 43 Regions Purchase
Louisiana Common
Stock
Arkansas Banking Company, located in Jonesboro, 343 63 Regions Purchase
Arkansas Common
Stock
</TABLE>
(1) Computed as of the date of announcement of each transaction.
33
<PAGE> 34
NOTE R. STOCK OPTION AND LONG-TERM INCENTIVE PLANS
Regions has stock option plans for certain key employees that provide for
the granting of options to purchase up to 5,720,000 (excluding options assumed
in connection with acquisitions) shares of Regions' common stock. The terms of
options granted are determined by the personnel committee of the Board of
Directors; however, no options may be granted after ten years from the plans'
adoption and no options may be exercised beyond ten years from the date granted.
The option price per share of incentive stock options can not be less than the
fair market value of the common stock on the date of the grant; however, the
option price of non-qualified options may be less than the fair market value of
the common stock on the date of the grant. The plans also permit the granting of
stock appreciation rights to holders of stock options. Stock appreciation rights
were attached to 134,956; 180,228 and 333,950 of the shares under option at
December 31, 1997, 1996 and 1995, respectively.
Regions' long-term incentive plan provides for the granting of up to
10,000,000 shares of common stock in the form of stock options, stock
appreciation rights, performance awards or restricted stock awards. The terms of
stock options granted under the long-term incentive plan are generally subject
to the same terms as options granted under Regions' stock option plans. A
maximum of 3,000,000 shares of restricted stock and 5,000,000 shares of
performance awards may be granted. During 1997 and 1996, Regions granted
236,469 and 154,442 shares, respectively, as restricted stock and during 1997,
1996, and 1995, granted 211,350; 277,600 and 263,800 shares, respectively, as
performance awards. Grantees of restricted stock must remain employed with
Regions for certain periods from the date of the grant at the same or a higher
level in order for the shares to be released. However, during this period the
grantee is eligible to receive dividends and exercise voting privileges on such
restricted shares. In 1997, 1996, and 1995, 179,314; 11,552 and 8,650 restricted
shares, respectively, were released. Issuance of performance shares is dependent
upon achievement of certain performance criteria and is, therefore, deferred
until the end of the performance period. In 1997 and 1996, 629,150 and 491,280
performance shares, respectively, were issued. Total expense for restricted
stock was $2,968,625 in 1997, $1,507,000 in 1996, and $1,074,000 in 1995. Total
expense for performance shares was $20,927,000 in 1997, $9,261,000 in 1996, and
$9,118,000 in 1995.
In connection with the business combinations with Florida First , New
Iberia, West Carroll, First Bankshares, and First Mercantile, Regions assumed
stock options, which were previously granted by those companies and converted
those options, based on the appropriate exchange ratio, into options to acquire
Regions' common stock. The common stock for such options has been registered
under the Securities Act of 1933 by Regions and is not included in the maximum
number of shares that may be granted by Regions under its existing stock option
plans.
34
<PAGE> 35
Stock option activity (including assumed options) over the last three years
is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Option Average
Shares Under Price Exercise
Option Per Share Prices
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at
January 1,
1995 5,372,583 $ 3.31 - $17.72
Granted 1,876,010 3.02 - 18.00
Exercised (601,325) 3.31 - 16.35
Canceled (105,019) 7.50 - 15.94
Outstanding at
December 31,
1995 6,542,249 3.02 - 18.00 $ 12.82
Granted 1,575,558 4.35 - 19.64 22.44
Exercised (1,308,913) 3.02 - 10.86 16.35
Canceled (84,146) 6.21 - 12.81 20.85
Outstanding at
December 31,
1996 6,724,748 3.31 - 22.44 $ 14.37
Options assumed
through
acquisitions 417,873 2.64 - 20.31 9.73
Granted 975,538 22.94 - 38.75 33.71
Exercised (1,453,529) 2.64 - 22.44 11.05
Canceled (81,954) 7.43 - 26.06 15.10
Outstanding at
December 31,
1997 6,582,676 $ 3.39 - $38.75 $17.44
Exercisable at
December 31,
1997 4,993,720 $ 3.39 - $22.44 $14.85
</TABLE>
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting and Disclosure of Stock-Based Compensation"
(Statement 123). Statement 123 is effective for fiscal years beginning after
December 15, 1995, and allows for the option of continuing to follow Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees", and the related Interpretations, or selecting the fair value method
of expense recognition as described in Statement 123. The Company has elected
to follow APB 25 in accounting for its employee stock options. Pro forma net
income and net income per share data as if the fair-value method had been
applied in measuring compensation costs is presented below for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C> <C>
Pro forma net income ($000's) $395,171 $313,719 $273,507
Pro forma net income per share 1.88 1.62 1.43
Pro forma net income per
share, diluted 1.85 1.59 1.41
</TABLE>
Regions' options outstanding have a weighted average contractual life of
6.8 years. The weighted average fair value of options granted was $7.82 in
35
<PAGE> 36
1997, $4.78 in 1996 and $3.21 in 1995. The fair value of each grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions used for grants in 1997: expected dividend yield
of 2.2%; expected option life of 5 years; expected volatility of 19.7%; and a
risk free interest rate of 5.7%. The 1996 and 1995 assumptions were: expected
dividend yield of 2.7%; expected option life of 5 years; expected volatility of
19.2%; and a risk free interest rate of 6.0%.
Since the exercise price of the Company's employee incentive stock
options equals the market price of underlying stock on the date of grant, no
compensation expense is recognized.
The effects of applying Statement 123 for providing pro forma disclosures
are not likely to be representative of the effects on reported net income for
future years.
NOTE S. PARENT COMPANY ONLY FINANCIAL STATEMENTS
Presented below are condensed financial statements of Regions Financial
Corporation:
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31
- -------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash due from banks $ 18,302 $ 16,709
Securities purchased under
agreements to resell -0- 10,000
Loans to subsidiaries 59,997 59,215
Investment securities 38,448 7,609
Premises and equipment 17,320 17,360
Investment in subsidiaries:
Banks 2,756,301 2,393,388
Non-banks 109,896 116,090
2,866,197 2,509,478
Other assets 42,281 35,366
$3,042,545 $2,655,737
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper $ 52,750 $ 72,117
Long-term borrowings 225,793 233,641
Other liabilities 84,181 75,416
Total liabilities 362,724 381,174
Stockholders' Equity:
Common stock 131,623 81,244
Surplus 1,089,089 901,880
Undivided profits 1,482,374 1,308,044
Treasury stock (13,855) (12,356)
Unearned restricted stock (9,410) (4,249)
Total stockholders' equity 2,679,821 2,274,563
$3,042,545 $2,655,737
</TABLE>
36
<PAGE> 37
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(in thousands) YEAR ENDED DECEMBER 31
- -------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends received
from subsidiaries:
Banks $290,902 $283,764 $189,033
Non-banks 3,000 -0- -0-
293,902 283,764 189,033
Service fees from
subsidiaries 46,847 31,661 27,321
Interest from
subsidiaries 5,158 3,891 2,590
Other 561 4,953 918
346,468 324,269 219,862
Expenses:
Salaries and employee
benefits 34,706 26,099 18,889
Interest 23,829 24,492 22,558
Net occupancy expense 857 1,012 647
Furniture and equipment
expense 654 972 364
Legal and other
professional fees 3,526 5,855 2,510
Amortization of excess
purchase price 10,892 8,375 5,505
Other expenses 27,372 25,804 17,550
101,836 92,609 68,023
Income before income
taxes and equity in
undistributed earnings
of subsidiaries 244,632 231,660 151,839
Applicable income taxes
(credit) (12,813) (15,616) (12,231)
Income before equity
in undistributed earnings
of subsidiaries 257,445 247,276 164,070
Equity in undistributed earnings of subsidiaries:
Banks 119,141 77,008 104,340
Non-banks 5,518 (6,425) 8,065
124,659 70,583 112,405
Income before extraordinary
item 382,104 317,859 276,475
Extraordinary item, net of tax 15,425 -0- -0-
NET INCOME $397,529 $317,859 $276,475
</TABLE>
Aggregate maturities of long-term borrowings in each of the next five years
for the parent company only are as follows: $5,820,000 in 1998; $5,870,000 in
1999; $630,000 in 2000; $25,660,000 in 2001; and $75,690,000 in 2002. Standby
letters of credit issued by the parent company totaled $8.9 million at December
31, 1997. This amount is included in total standby letters of credit disclosed
in Note L.
37
<PAGE> 38
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 397,529 $ 317,859 $ 276,475
Adjustments to reconcile
net cash provided by
operating activities:
Equity in undistributed
earnings of subsidiaries (124,659) (70,583) (112,405)
Provision for depreciation
and amortization 16,551 13,882 9,400
Increase in other
liabilities 5,944 12,267 9,474
Decrease (increase) in dividends
receivable from subsidiaries -0- 30,000 (30,000)
(Increase) in other assets (18,842) (3,393) (3,489)
Stock issued to employees under
incentive plan 10,971 4,333 253
Other 588 (1,324) 403
Net cash provided by
operating activities 288,082 303,041 150,111
Investing activities:
Investment in subsidiaries (72,480) (41,041) (18,239)
Principal payments (advances) on
loans to subsidiaries 508 (27,003) (28,054)
Sale (purchase) of subsidiaries 26,127 3,610 (6,122)
Purchases and sales of
premises and equipment (3,437) (8,450) (3,284)
(Purchase) maturity of investment
securities (30,802) (2,234) 350
Net cash (used) by investing activities (80,084) (75,118) (55,349)
Financing activities:
Increase in
commercial paper borrowings 12,383 19,267 2,500
Cash dividends (149,533) (116,544) (84,164)
Purchase of treasury stock (45,224) (111,225) (67,127)
Proceeds from long-term borrowings 8,743 50,098 18,140
Principal payments on
long-term borrowings (16,491) (50,032) (11,521)
Net (decrease) increase in short-term
borrowings (31,850) (17,481) 5,571
Proceeds from issuance of common stock 2,417 285 7,655
Exercise of
stock options 3,150 5,974 1,971
Net cash (used) by
financing activities (216,405) (219,658) (126,975)
(Decrease) increase in cash and cash (8,407) 8,265 (32,213)
equivalents
Cash and cash equivalents at
beginning of year 26,709 18,444 50,657
Cash and cash equivalents at
end of year $ 18,302 $ 26,709 $ 18,444
</TABLE>
38
<PAGE> 39
NOTE T. REGULATORY CAPITAL REQUIREMENTS
Regions and its banking subsidiaries are subject to regulatory capital
requirements administered by federal banking agencies. These regulatory capital
requirements involve quantitative measures of the Company's assets, liabilities
and certain off-balance sheet items, and also qualitative judgments by the
regulators. Failure to meet minimum capital requirements can subject the Company
to a series of increasingly restrictive regulatory actions. As of December 31,
1997, the most recent notification from federal banking agencies categorized
Regions and its significant subsidiaries as "well capitalized" under the
regulatory framework.
Minimum capital requirements for all banks are Tier 1 Capital of at least
4% of risk-weighted assets, Total Capital of at least 8% of risk-weighted assets
and a Leverage Ratio of 3%, plus an additional 100 to 200 basis point cushion in
certain circumstances, of adjusted quarterly average assets. Tier 1 Capital
consists principally of stockholders' equity, excluding unrealized gains and
losses on securities available for sale, less excess purchase price and certain
other intangibles. Total Capital consists of Tier 1 Capital plus certain debt
instruments and the allowance for loan losses, subject to limitation.
Regions' and its most significant subsidiaries' capital levels at December
31, 1997 and 1996, exceeded the "well capitalized" levels, as shown below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 TO BE WELL
(IN THOUSANDS) AMOUNT RATIO CAPITALIZED
------ ----- -----------
<S> <C> <C> <C>
TIER I CAPITAL:
REGIONS FINANCIAL CORPORATION $2,407,203 11.08% 6.00%
REGIONS BANK (ALABAMA) 1,334,111 10.47 6.00
REGIONS BANK (GEORGIA) 367,334 12.95 6.00
FIRST COMMERCIAL CORPORATION 604,781 13.36 6.00
TOTAL CAPITAL:
REGIONS FINANCIAL CORPORATION $2,854,011 13.13% 10.00%
REGIONS BANK (ALABAMA) 1,478,543 11.60 10.00
REGIONS BANK (GEORGIA) 402,699 14.20 10.00
FIRST COMMERCIAL CORPORATION 644,551 14.24 10.00
LEVERAGE:
REGIONS FINANCIAL CORPORATION $2,407,203 7.86% 5.00%
REGIONS BANK (ALABAMA) 1,334,111 7.57 5.00
REGIONS BANK (GEORGIA) 367,334 10.83 5.00
FIRST COMMERCIAL CORPORATION 604,781 9.05 5.00
<CAPTION>
December 31, 1996 To Be Well
(in thousands) Amount Ratio Capitalized
------ ----- -----------
<S> <C> <C> <C>
Tier I Capital:
Regions Financial Corporation $1,949,169 10.99% 6.00%
Regions Bank (Alabama) 860,105 10.55 6.00
Regions Bank (Georgia) 332,264 13.49 6.00
Regions Bank of Louisiana 214,018 14.47 6.00
</TABLE>
39
<PAGE> 40
<TABLE>
<S> <C> <C> <C>
Total Capital:
Regions Financial Corporation $2,354,002 13.28% 10.00%
Regions Bank (Alabama) 959,589 11.77 10.00
Regions Bank (Georgia) 363,131 14.75 10.00
Regions Bank of Louisiana 232,536 15.72 10.00
First Commercial Corporation 459,940 12.61 10.00
Leverage:
Regions Financial Corporation $1,949,169 7.57% 5.00%
Regions Bank (Alabama) 860,105 7.20 5.00
Regions Bank (Georgia) 332,264 9.94 5.00
Regions Bank of Louisiana 214,018 10.02 5.00
First Commercial Corporation 430,442 8.13 5.00
</TABLE>
NOTE U. SAIF ASSESSMENT AND MERGER EXPENSES
On September 30, 1996, legislation to recapitalize the SAIF became
effective. This legislation required Regions, and all other depository
institutions having SAIF-insured deposits, to pay a one-time, special
assessment. This resulted in a pre-tax expense of $25.0, which was recognized
primarily in the third quarter of 1996.
In the first quarter of 1996, Regions incurred a pre-tax, non-recurring
merger charge of $8.8 million related to the merger of First National Bancorp
with Regions. This charge consisted primarily of investment banking and other
professional fees, severance costs, data processing contract buyouts and
obsolete equipment write-downs.
Subsequent to year end and in the third quarter of 1998, Regions incurred
a pre-tax, non-recurring merger and restructuring charge of $114.7 million
related to the merger of First Commercial and four other institutions with
Regions. The charge consisted primarily of employee-related obligations,
elimination of duplicate facilities, contract terminations, conversion expenses
and professional fees associated with the mergers.
NOTE V. EXTRAORDINARY GAIN
The extraordinary gain in 1997 resulted from the divestiture of two banks
by one of the pooled companies, First Commercial. The divestiture was required
by regulatory authorities in connection with First Commercial's business
combination with Southwest Bancshares, Inc.
40
<PAGE> 41
NOTE W. EARNINGS PER SHARE
The following table sets forth the computation of basic net income per
share and diluted net income per share. (in thousands except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Numerator:
For basic net income per share
And diluted net income per share,
net income $397,529 $317,859 $276,475
======== ======== ========
Denominator:
For basic net income per share -
weighted shares outstanding 209,781 194,241 190,896
Effect of dilutive
securities:
Stock options 3,023 2,299 1,384
Performance shares 946 1,211 1,299
-------- ------- --------
3,969 3,510 2,683
For diluted net income per
share 213,750 197,751 193,579
======== ======== ========
Basic net income per share $ 1.89 $ 1.64 $ 1.45
======== ======== ========
Diluted net income per
share $ 1.86 $ 1.61 $ 1.43
======== ======== ========
</TABLE>
NOTE X. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 127, "Deferral of the
Effective Date of Certain Provision of Financial Accounting Standards Board No.
125" (Statement 127), amended Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", and delayed until 1998 certain provisions that
deal with securities lending, repurchase and dollar agreements, and the
recognition of collateral. The Company will adopt Statement 127 in 1998 and does
not believe the effect of adoption will be material.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," (Statement 130). Statement 130
establishes standards for reporting the components of comprehensive income and
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be included in a financial
statement that is displayed with the same prominence as other financial
statements. The provisions of this statement are effective beginning with
interim reporting beginning after December 15, 1997. These disclosure
requirements will have no impact on financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information,"
(Statement 131). Statement 131 requires disclosure of financial and descriptive
information about an enterprise's operating segments in annual and interim
reports issued to shareholders. Statement 131 defines an operating segment as a
component of an enterprise that engages in business activity, generates revenue
and incurs expenses, whose operating results are reviewed by the chief operating
decision maker in the determination of resource allocation and performance, and
for which discrete financial information is available. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. Statement 131 is effective for fiscal years beginning after
December 15, 1997. Regions is currently evaluating the impact of Statement 131
on the disclosures included in its financial statements.
41
<PAGE> 1
EXHIBIT 99.2
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, 1996 and 1997; however, financial information for
prior years will also be presented when appropriate.
On July 31, 1998, First Commercial Corporation of Little Rock,
Arkansas, with approximately $7.3 billion in assets, merged with and into
Regions. On March 31, 1998, First State Corporation of Albany, Georgia, with
approximately $536 million in assets, merged with and into Regions. On March 14,
1998, First United Bancorporation of Anderson, South Carolina, with
approximately $305 million in assets, merged with and into Regions. On February
13, 1998, PALFED, Inc., of Aiken, South Carolina, with approximately $665
million in assets, merged with and into Regions. On March 1, 1996, First
National Bancorp of Gainesville, Georgia, with approximately $3.2 billion in
assets, merged with and into Regions. These transactions were accounted for as
poolings of interests and accordingly, financial information for all prior
periods has been restated to present the combined financial condition and
results of operations of all companies as if these transactions had been in
effect for all periods presented.
Regions' primary business is banking. In 1997, Regions' banking
affiliates contributed approximately $390 million to consolidated net income.
During 1997 and early 1998, Regions individual banking affiliates in each state
(except for recently acquired banks) were merged into one state-chartered
(Alabama) bank. Selected information as of December 31, 1997, on Regions'
banking operations, by state, is as follows:
<TABLE>
<CAPTION>
Full-
Service
Assets Loans Deposits Offices
- ---------------------------------------------------------------------------------------------------
(dollar amounts in millions)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alabama $9,075 $6,585 $8,229 183
Arkansas 4,991 3,480 4,672 120
Georgia 4,895 3,825 4,340 121
Louisiana 2,400 1,768 2,340 78
Florida 1,626 1,137 1,518 46
Texas 1,151 671 1,008 17
South Carolina 970 792 847 31
Tennessee 929 669 824 34
Unallocated (1) 4,353 4,353 1,365
</TABLE>
(1) - Represents indirect mortgage loans, indirect auto loans, and
credit card loans of $2.7 billion, $1.5 billion, and $184 million, respectively
and negotiable certificates of deposit and certain trust and other deposits,
which in aggregate approximate $1.4 billion.
<PAGE> 2
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 $20.4 billion in mortgage
loans and in 1997 contributed approximately $20.9 million to net income.
The Company's principal market areas are all of Alabama and Arkansas,
north and west Georgia, east Texas, parts of Louisiana, northwest and central
Florida, middle and west Tennessee and parts of South Carolina. In addition,
real estate mortgage loan origination offices are located in other market areas
in Tennessee 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 1995, Regions' acquisition activity 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 in Louisiana. The addition of Fidelity Federal Savings
Bank of Dalton, Georgia, and the Cartersville, Georgia, office of Prudential
Savings Bank (both now a part of Regions Bank in Georgia) 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 was 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, The 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 receivable 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.
Acquisition activity in 1996 was centered primarily in Georgia and
Louisiana. In early 1996, Regions acquired two suburban, Atlanta-area banks,
Metro Financial Corporation and The Enterprise National Bank of Atlanta, which
combined added $265 million in assets. Prior to its merger with Regions in March
1996, First National acquired The Bank of Heard County, which added another $42
million in assets. Further expansion in the northern half of Georgia continued
in 1996 through the acquisitions of First Federal Bank of Northwest Georgia,
First Gwinnett Bancshares, Inc. and Rockdale Community Bank. All of these banks,
including First National's 18 separate Georgia banks and Regions' banks in Rome
and Dalton, were merged into Regions Bank in Georgia in 1996. All operating
systems of these banks were converted to Regions' standard processing systems,
which enabled Regions to reduce the level of operating expenses in the Georgia
franchise.
Expansion activity in Louisiana in 1996 occurred in the southern part
of the state. Delta Bank & Trust Company, with $191 million in assets, was
acquired in August and American Bancshares of Houma, Inc., added another $89
million in assets in September. Both banks acquired in these transactions were
merged into Regions Bank in Louisiana.
In 1996 First Commercial acquired Security National Bank in
Nacogdoches, Texas. This transaction added $35 million in assets.
Also in 1996, First State Corporation purchased two branches and $82
million in deposits from First Union National Bank in Albany, Georgia.
In 1997, Regions continued to strengthen its presence in Florida,
Georgia and Louisiana, through nine acquisitions, which combined added $1.9
billion in assets, $1.0 billion in loans and $1.6 billion in deposits.
Regions expanded its Florida presence in Panama City and Longwood
through the acquisition of Florida First Bancorp, Inc. and First Mercantile
National Bank with $287 million and $157 million in assets, respectively.
2
<PAGE> 3
In Georgia, Regions continued to expand its market presence through the
acquisition of four institutions: Allied Bancshares, Inc. of Thomson with assets
of $560 million; First Bankshares Inc. of Hapeville with $127 million in assets;
SB&T Corporation of Smyrna with $148 million in assets; and GF Bancshares, Inc.
of Griffin with $99 million in assets.
Regions expansion in Louisiana consisted of three institutions; West
Carroll Bancshares, Inc. of Oak Grove with assets of $127 million in the
northern part of the state and Gulf South Bancshares, Inc. of Gretna with assets
of $55 million and The New Iberia Bancorp, Inc. of New Iberia with assets of
$313 million in the southern part of Louisiana.
In Arkansas, First Commercial acquired First Charter Bancshares, Inc.
located in Searcy, Arkansas, First Central Corporation located in Searcy,
Arkansas, and Southwest Bancshares, Inc. located in Jonesboro, Arkansas. These
transactions added $1.2 billion in assets.
First Commercial also acquired City National Bank of Whitehouse, Texas,
adding assets of $39 million.
In Tennessee, First Commercial expanded into Memphis through the
acquisition of W.B.T. Holding Company with assets of $267 million.
Regions' and the pooled companies' business combinations over the last
three years are summarized in the following chart.
<TABLE>
<CAPTION>
TOTAL ASSETS ACCOUNTING
DATE COMPANY HEADQUARTERS LOCATION (in thousands) TREATMENT
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
January Florida First Bancorp, Panama City, Florida $ 286,515 Purchase
Inc.
January Allied Bankshares, Thomson, Georgia 559,815 Pooling
Inc.
February W.B.T. Holding Company Memphis, Tennessee 267,131 Pooling
March West Carroll Oak Grove, Louisiana 127,145 Pooling
Bancshares, Inc.
April Gulf South Bancshares, Gretna, Louisiana 55,363 Purchase
Inc.
April City National Bank Whitehouse, Texas 38,706 Pooling
May First Mercantile Longwood, Florida 157,434 Purchase
National Bank
May The New Iberia New Iberia, Louisiana 313,494 Pooling
Bancorp, Inc.
May Southwest Bancshares, Inc. Jonesboro, Arkansas 847,000 Pooling
June First Bankshares, Inc. Hapeville, Georgia 126,826 Pooling
June SB&T Corporation Smyrna, Georgia 147,709 Pooling
July First Central Corporation Searcy, Arkansas 269,000 Pooling
October First Charter Bancshares, Inc. Searcy, Arkansas 74,605 Pooling
December GF Bancshares, Inc. Griffin, Georgia 99,446 Purchase
1996
January Metro Financial Atlanta, Georgia 210,487 Purchase
Corporation
February The Enterprise Atlanta, Georgia 54,263 Purchase
National Bank of
Atlanta
February The Bank of Heard Franklin, Georgia 41,872 Pooling
County
April First Federal Bank of Cedartown, Georgia 93,381 Pooling
Northwest Georgia,
Federal Savings Bank
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
TOTAL ASSETS ACCOUNTING
DATE COMPANY HEADQUARTERS LOCATION (in thousands) TREATMENT
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
August First Gwinnett Norcross, Georgia $ 68,364 Purchase
Bancshares, Inc.
August Rockdale Community Conyers, Georgia 47,457 Purchase
Bank
August Delta Bank & Trust Belle Chasse, Louisiana 190,547 Purchase
Company
August Branches of First Union National Albany, Georgia 82,458 Purchase
Bank
September American Bancshares of Houma, Houma, Louisiana 88,742 Purchase
Inc.
November Security National Bank Nacogdoches, Texas 35,060 Pooling
1995
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
</TABLE>
As of December 31, 1997, Regions and the pooled companies had four
pending acquisitions, one in each of the states of South Carolina, Florida,
Arkansas and Louisiana. These institutions have combined assets of approximately
$947 million.
Subsequent to year end, Regions and the pooled companies reached
agreements with nine other institutions; four in Georgia and one each in
Alabama, Arkansas, Florida, Tennessee, and Louisiana. These institutions have
combined assets of approximately $1.7 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, 1997, loans represented 76% of Regions' earning assets.
Over the last four years loans increased a total of $10.1 billion, a
compound growth rate of 17%. Loans acquired in connection with acquisitions over
the last four years contributed $3.0 billion of this growth. The most
significant growth in the loan portfolio occurred in 1994, 1996 and 1997, with
loans increasing $2.9 billion, $2.2 billion and $3.5 billion, respectively. The
acquisition of seven banks in 1994 added $744 million in loans, the four
acquisitions in 1995 added $443 million in loans and the nine acquisitions in
1996 added $492 million. In 1997, acquisitions added $1.3 billion 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 $1.8
billion or 12% 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
4
<PAGE> 5
single-family residential mortgages) and consumer loans. Over the last four
years, commercial, financial and agricultural loans increased $2.4 billion or
91%. Real estate construction loans increased $1.1 billion or 218% over the same
period. Real estate mortgage loans increased $4.2 billion or 73% and consumer
loans increased $2.3 billion or 83% over the last four years.
Regions' real estate mortgage portfolio includes $2.8 billion of
mortgage loans secured by single-family residences that were originated by
Regions' mortgage subsidiary, excluding the effect of the pooled mortgage
subsidiaries. The majority of these loans are secured by homes in Alabama,
Georgia and Florida. These loans increased approximately $982 million in 1994,
$424 million in 1996 and $655 million in 1997, accounting for approximately 41%,
24% and 21%, respectively, of the growth in total loans in 1994, 1996 and 1997.
The securitization in 1995 of the $396 million in single-family residential
mortgages resulted in this portfolio declining $123 million in 1995.
Eighty-seven 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.
Additionally, Regions' mortgage loan portfolio includes $1.2 billion of
mortgage loans from a pooled subsidiary. The majority of these loans are secured
by single family-residences in Arkansas and East Texas.
Regions' real estate portfolio also includes $1.4 billion of
single-family mortgage loans obtained in various acquisitions, which are being
serviced by Regions' mortgage subsidiary. Fixed-rate single-family mortgages
with a weighted average interest rate of 8.12% and a weighted average remaining
term of 16.3 years comprise 60% of this portfolio. Single-family ARM's, which
have rates approximately 250 to 275 basis points above one of several money
market indices when fully priced, comprise the remaining 40% 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 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.
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.
5
<PAGE> 6
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 DECEMBER 31
income) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 5,073,698 $ 3,951,766 $ 3,514,693 $ 3,175,292 $ 2,650,680
Real estate-construction 1,582,706 1,222,519 831,694 677,276 496,957
Real estate-mortgage 10,072,195 8,496,603 7,869,988 7,375,198 5,831,874
Consumer 5,152,524 4,724,664 3,939,757 3,498,883 2,812,045
TOTAL $21,881,123 $18,395,552 $16,156,132 $14,726,649 $11,791,556
</TABLE>
The amounts of total gross loans (excluding residential mortgages on
1-4 family residences and consumer loans) outstanding at December 31, 1997,
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 $2,711,971 $1,711,080 $ 673,725 $ 5,096,776
Real estate-construction 983,921 430,966 170,231 1,585,118
Real estate-mortgage 1,019,816 1,386,443 1,278,353 3,684,612
TOTAL $4,715,708 $3,528,489 $2,122,309 $10,366,506
</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 $2,289,716 $ 1,238,773
Due after five years 887,871 1,234,438
TOTAL $3,177,587 $ 2,473,211
</TABLE>
6
<PAGE> 7
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 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.
Over the last five years, the year-end allowance for loan losses as a
percentage of loans ranged from a low of 1.39% in 1997 to a high of 1.62% in
1993. Although this ratio is important, it is only one of the factors considered
by management in determining the adequacy of the allowance for loan losses.
Management does not attempt to maintain the allowance for loan losses at a
certain percentage of loans. As previously discussed, the adequacy of the
allowance for loan losses is based on management's evaluation of various
factors.
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 1.59% at December 31, 1993 to 0.78% at December 31, 1995 and 1996.
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 ratio of
non-performing assets (including loans past due 90 days or more and other real
estate) to loans and other real estate increased to 0.83% at December 31, 1997,
due primarily to increases in consumer loan delinquencies.
The allowance for loan losses as a percentage of non-performing loans
(including loans past due 90 days or more) was 169% at December 31, 1997,
compared to 193% at December 31, 1996, and to 212% at December 31, 1995. The
coverage ratio has declined as the mix of non-performing loans has changed to
include more loans with historically lower risk characteristics. 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,
including increased consumer loan delinquencies and subsequent charge-offs, 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, over the last five years, ranged from a high of $56.1 million
in 1997 to a low of $23.2 million in 1995. Net loan losses were $30.4 million in
1996, $23.7 million in 1994 and $24.2 million in 1993. Over the last five years,
net loan losses averaged 0.21% of average loans and were 0.27% in 1997. Regions'
relatively low level of net loan losses is due to favorable economic conditions,
quality control efforts in the underwriting and monitoring of loans, a
substantial amount of recoveries of previously charged-off loans, and an
7
<PAGE> 8
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, 1997, 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, the largest concentration is the
44% of the portfolio held by banking offices in the state of Alabama. Banking
offices in Georgia hold 20% of the commercial loan portfolio, followed by
Arkansas with 13%, Louisiana with 9%, South Carolina with 5%, Tennessee with 4%,
Texas with 3%, and Florida with 2%. A small portion of these loans is secured by
properties outside Regions' banking market areas.
The Alabama economy has experienced relatively stable growth over the
last several years. Industries important in the Alabama economy include vehicle
and vehicle parts manufacturing and assembly, lumber and wood products, and
steel production. High technology industries are important in the northern part
of the state. Service and health care industries have increased in importance
and are predicted to continue growing. Agriculture, particularly poultry, beef
cattle and cotton, are important to the state's economy.
The economy of the northern two-thirds of 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 many of Regions' other
markets. Prospects are good for continued strong growth in this area.
The Arkansas economy is supported in part by the forest products
industry due to the abundance of corporate owned forests and public lands. In
recent years, steel production has become increasingly important to the state's
economy.
Natural resources are very important to the Louisiana economy. Energy
and petrochemical industries play a significant role in the economy. Shipping,
shipbuilding, and other transportation equipment industries are strong in the
state's durable goods industries. Tourism, amusement and recreation, service,
and health care industries are becoming increasingly important to the Louisiana
economy. Cotton, rice and sugarcane are among Louisiana's most important
agricultural commodities.
The economy along the I-85 corridor in South Carolina is among the
fastest growing in the country. This area is home to numerous multinational
manufacturers. More than 230 international firms from 18 nations have operations
in this area, resulting in the highest per capita foreign investment in the
nation.
Tennessee's economy is heavily influenced by automobile manufacturing,
tourism, entertainment and recreation, health care and other service industries.
With one out of four Tennesseeans employed in service industries, the state's
economy is very dependent on this sector for continued good economic
performance.
The economy of the eastern portion of Texas remains healthy. Expansion
of a major distribution center and announcement of a new telemarketing service
center bode well for the Tyler market while the Longview and Marshall areas will
benefit from manufacturing expansion and a new medical claims service center.
The northwestern part of Florida and the central Florida area have also
experienced excellent economic growth during the last several years. Tourism is
very important to the Florida economy, and military payrolls are significant in
the panhandle area. Florida has experienced strong in-migration, contributing to
strong construction activity and a growing retirement-age population. Citrus
fruit production is also important in the state.
From 1993 to 1997, net losses on commercial loans ranged from a low of
0.03% in 1997 to a high of 0.25% in 1994. Future losses are a function of many
variables, of which general economic conditions are the most important. If
economic conditions weaken in 1998, net commercial loan losses will likely be
near the mid-point of the 1993 to 1996 range. A continuation of moderate
economic growth during 1998 in Regions' market areas could result in 1998 net
commercial loan losses in the lower-end of this range.
8
<PAGE> 9
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 $360 million in 1997 to $1.6
billion. At December 31, 1997, these loans represented 7.2% of Regions' total
loan portfolio, compared to 4.2% at the end of 1993. Strong economic growth and
new development in Regions' market areas have enabled Regions to steadily
increase construction loans. 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 $3.3 billion at December
31, 1997. Although some risk is inherent in this type of lending, the Company
attempts to minimize this risk by generally 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 63% 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.
From 1993 to 1997, net losses on real estate loans ranged from a high
of 0.17% of real estate loans in 1993, to a low of 0.01% of real estate loans in
1996. 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 1998 net real estate loan losses
approximates the level experienced in 1993 through 1997.
Regions' consumer loan portfolio consists of $4.4 billion in consumer
loans, $518 million in personal lines of credit (including home equity loans)
and $224 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 $1.9 billion in
indirect installment loans at December 31, 1997. 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 0.28% in 1994 to
a high of 0.99% in 1997. Higher levels of personal bankruptcies in Regions'
market areas contributed to the higher net consumer loan losses in 1997.
Management expects net consumer loan losses in 1998 to be near the 1997 level.
9
<PAGE> 10
The following table presents information on non-performing loans and
real estate acquired in settlement of loans:
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
(dollar amounts in thousands) DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Loans accounted for on a
non-accrual basis $138,149 $ 84,219 $ 73,990 $ 83,399 $ 99,001
Loans contractually past due 90
days or more as to principal or interest
payments (exclusive of non-accrual
loans) 29,020 35,831 18,315 10,042 17,428
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) 12,616 11,032 16,614 19,661 22,211
Real estate acquired in settlement of
loans ("other real estate") 20,511 21,099 21,421 30,794 49,801
TOTAL $200,296 $152,181 $130,340 $143,896 $188,441
Non-performing assets as a percentage of
loans and other real estate 0.91% 0.83% 0.81% 0.98% 1.59%
</TABLE>
10
<PAGE> 11
The following analysis presents a five year history of the allowance
for loan losses and loan loss data:
<TABLE>
<CAPTION>
(dollar amounts in thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of year $ 253,248 $ 231,390 $ 207,272 $ 191,570 $ 153,578
Loans charged off:
Commercial 15,534 9,561 12,790 13,849 12,176
Real estate 7,174 4,217 9,607 12,777 13,421
Installment 65,571 38,198 22,161 14,359 14,851
Total 88,279 51,976 44,558 40,985 40,448
Recoveries:
Commercial 14,265 8,121 9,418 6,938 7,270
Real estate 3,879 3,484 5,031 4,577 4,391
Installment 14,027 9,933 6,939 5,808 4,610
Total 32,171 21,538 21,388 17,323 16,271
Net loans charged off (recovered):
Commercial 1,269 1,440 3,372 6,911 4,906
Real estate 3,295 733 4,576 8,200 9,030
Installment 51,544 28,265 15,222 8,551 10,241
Total 56,108 30,438 23,170 23,662 24,177
Allowance of acquired banks 17,420 6,270 9,795 17,306 24,152
Provision charged to expense 89,663 46,026 37,493 22,058 38,017
Balance at end of year $ 304,223 $ 253,248 $ 231,390 $ 207,272 $ 191,570
Average loans outstanding:
Commercial $ 4,536,710 $ 3,583,628 $ 3,198,594 $ 2,805,511 $ 2,414,679
Real estate 10,768,271 9,318,457 8,735,992 7,046,582 5,162,752
Installment 5,231,008 4,427,377 3,731,979 3,060,692 2,489,646
Total $20,535,989 $17,329,462 $15,666,565 $12,912,785 $10,067,077
Net charge-offs (recoveries)
as percent of average loans
outstanding:
Commercial .03% .04% .11% .25% .20%
Real estate .03 .01 .05 .12 .17
Installment .99 .64 .41 .28 .41
Total .27 .18 .15 .18 .24
Net charge-offs as percent
of:
Provision for loan losses 62.6% 66.1% 61.8% 107.3% 63.6%
Allowance for loan losses 18.4 12.0 10.0 11.4 12.6
Allowance as percentage of
Loans, net of unearned
income 1.39% 1.38% 1.43% 1.41% 1.62%
Provision for loan losses
(net of tax effect) as
percentage of net income 14.1% 9.0% 8.5% 5.5% 12.4%
</TABLE>
11
<PAGE> 12
At December 31, 1997, non-accrual loans totaled $138.1 million or 0.63%
of loans, compared to $84.2 million or 0.46% of loans at December 31, 1996. The
increase in the dollar amount of non-accrual loans at December 31, 1997,
resulted from increases in real estate and consumer non-accruing loans,
partially offset by a decline in commercial non-accruing loans. Commercial loans
comprised $33.7 million of the 1997 total, with real estate loans accounting for
$64.6 million and consumer loans $39.8 million.
Loans contractually past due 90 days or more were 0.13% of total loans
at December 31, 1997, compared to 0.19% of total loans at December 31, 1996.
Decreased levels of past due consumer and commercial loans accounted for the
decrease in total loans past due 90 days or more since December 31, 1996. Loans
past due 90 days or more at December 31, 1997, consisted of $20.2 million in
commercial and real estate loans, $4.7 million in installment loans and $4.1
million in personal lines of credit and credit card loans.
Renegotiated loans were 0.06% of loans at December 31, 1997 and 1996.
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 has been stable during the last two years and totaled
$20.5 million at December 31, 1997, compared to $21.1 million at December 31,
1996. Other real estate added by acquisitions in 1997, were offset by sales of
other real estate. From 1993 through 1995, other real estate declined due to
increased sales of parcels of other real estate, combined with fewer additions.
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 1997 on the $138.1 million of
non-accruing loans outstanding at year end was approximately $4.3 million. If
these loans had been current in accordance with their original terms,
approximately $11.7 million would have been earned on these loans in 1997.
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.
12
<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 $56.5 million at December 31, 1995 to
$43.0 million at December 31, 1996 as maturities from a portion of these assets
were reinvested in alternative investments. In 1997, due to favorable rates,
additional funds were invested in this category of earning assets increasing the
balance to $48.2 million.
SECURITIES
The following table shows the carrying values of securities as follows:
<TABLE>
<CAPTION>
(in thousands) December 31
- -------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment securities:
U.S. Treasury & Federal agency securities $2,356,320 $1,616,912 $1,216,001
Obligations of states and political
subdivisions 571,503 553,067 550,057
Mortgage-backed securities 408,012 542,089 426,656
Other securities 2,444 4,533 5,685
TOTAL $3,338,279 $2,716,601 $2,198,399
Securities available for sale:
U.S. Treasury & Federal agency securities $1,261,882 $1,285,029 $1,557,106
Obligations of states and political
subdivisions 219,892 162,942 144,472
Mortgage-backed securities 1,393,694 1,478,646 1,645,900
Other securities 38,378 45,792 41,673
Equity securities 63,798 53,365 33,910
TOTAL $2,977,644 $3,025,774 $3,423,061
</TABLE>
Total securities increased $574 million in 1997. U. S. Treasury and
Federal agency securities increased $716 million or 25% due primarily to
acquisitions. Obligations of states and political subdivisions increased $75
million or 11%. Mortgage-backed securities decreased $219 million or 11% in
1997.
In 1996, total securities increased $121 million. U. S. Treasury and
Federal agency securities increased $129 million, with mortgage-backed
securities decreasing $52 million. Obligations of states and political
subdivisions increased $21 million or 3% in 1996.
Regions' investment portfolio policy stresses quality and liquidity. At
December 31, 1997, 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 6.7 years. The average expected maturity of mortgage-backed
securities was 2.9 years and other securities had an average contractual
maturity of 1.2 years. Overall, the average maturity of the portfolio was 7.5
years using contractual maturities and 3.2 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 consisted of
primarily short- to intermediate-term maturities.
The estimated fair market value of Regions' investment securities
portfolio at December 31, 1997, was 1.0% ($34.2 million) above the amount
carried on Regions' books. Regions' securities available for sale portfolio at
December 31, 1997, included net unrealized gains of $26.0 million. Regions'
investment securities and securities available for sale portfolios included
gross unrealized gains of $73 million and gross unrealized losses of $13 million
at December 31, 1997. 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., 95% are rated "A" or better. 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.
13
<PAGE> 14
The following table shows the maturities of securities (excluding equity
securities) at December 31, 1997, 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 $535,590 $1,139,188 $681,542 $ -0- $2,356,320
Obligations of states and political
subdivisions 59,644 185,943 224,208 101,708 571,503
Mortgage-backed securities 40,847 354,071 3,265 9,829 408,012
Other securities 810 1,634 0 0 2,444
TOTAL $637,026 $1,680,607 $909,053 $111,593 $3,338,279
Weighted average yield 6.46% 6.77% 7.39% 8.41% 6.94%
Securities available for sale:
U.S. Treasury and Federal agency securities $715,284 $ 516,092 $ 26,199 $ 4,307 $1,261,882
Obligations of states and political
subdivisions 27,546 106,811 65,774 19,761 219,892
Mortgage-backed securities 54,654 1,082,120 154,299 102,621 1,393,694
Other securities 8,045 18,336 2,594 9,403 38,378
TOTAL $805,529 $1,723,359 $248,866 $136,092 $2,913,846
Weighted average yield 5.68% 6.75% 7.32% 7.00% 6.51%
Taxable equivalent adjustment for calculation
of yield $ 3,888 $ 10,788 $ 7,163 $ 1,227 $ 23,066
</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.
14
<PAGE> 15
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 previous table on Securities Maturing). Maturities
in the loan portfolio also provide a steady flow of funds (see previous table on
Loans Maturing). At December 31, 1997, commercial loans, real estate
construction loans and commercial mortgage loans with an aggregate balance of
$4.7 billion, as well as securities of $1.4 billion, 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 have also contributed 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 81.62% at December 31, 1995,
to 83.54% at December 31, 1996 and to 87.49% at December 31, 1997, as earning
asset growth outpaced the growth in deposits, generating the need to increase
purchased funds and other short-term 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. 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 1996 and 1997, 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 1997 due to more reliance on
short-term borrowings and to increases in deposits. In 1996, increases in
deposits and short-term borrowings provided significant amounts of funding. 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 1995, 1996 and 1997. Funds needed for the pending acquisitions as of December
31, 1997, are expected to be provided by working capital or short-term
borrowings.
Standard & Poor's Corporation has assigned high quality ratings to
Regions Bank's certificates of deposit. Regions Bank's short-term certificates
of deposit are rated "A-1" by Standard & Poor's Corporation and long-term
certificates of deposit are rated "A+".
Moody's Investors Service has also given similar quality ratings to
Regions 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, Regions Financial Corporation (the parent company)
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 Regions Financial
Corporation and to Regions Bank (Alabama).
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 Bank has 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,
1996, $40 million in senior bank notes were outstanding. At December 31, 1997,
no senior bank notes were outstanding.
Regions Bank's notes were rated "A-1/A+" by Standard & Poor's
Corporation and "P-1/Aa2" by Moody's Investors Service.
Regions' and its banking subsidiary's 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.
15
<PAGE> 16
DEPOSITS
Deposits are Regions' primary source of funds -- providing funding for 88%
of average earning assets in 1997 and 89% in 1996. During the last four years,
average total deposits grew at a compound annual rate of 15%. Average deposits
grew $2.0 billion or 12% in 1995, $2.0 billion or 10% in 1996 and $3.2 billion
or 15% in 1997. Acquisitions, net of branch sales, contributed average deposit
growth of $823 million in 1995, $667 million in 1996 and $948 million in 1997.
As money flows between the banking system and other financial markets,
Regions faces stiff competition from other banking and financial services
companies for a share of the deposit market. Regions' ability to compete in the
deposit market depends heavily on how effectively the company meets customers'
needs. Regions employs both traditional and non-traditional means to meet
customers' needs and enhance competitiveness. The traditional means include:
providing well-designed products, providing a high level of customer service,
providing attractive pricing and expanding the traditional branch network to
provide convenient branch locations for customers throughout the Southeastern
United States. Recently, Regions has also begun to employ non-traditional
approaches to enhance its competitiveness. These include: providing
centralized, high quality telephone banking services and providing alternative
product delivery channels like PC banking. Regions' success at
competing for deposits is discussed below.
Average non-interest bearing deposits have grown at a steady pace,
increasing at a compound growth rate of 12% since 1994. This category of
deposits grew 9% in 1995, 7% in 1996 and 20% in 1997. Non-interest bearing
deposits are a significant funding source for Regions, accounting for 15%, 14%,
and 15% of average total deposits in 1995, 1996 and 1997 respectively.
During 1995, 1996 and 1997, the rate paid on savings accounts was less
attractive to customers, relative to other investment alternatives. As a
result, savings accounts have increased at only a 2% compound growth rate since
1994. Savings declined less than 1% in 1995, but increased 2% in 1996 and
increased 6% in 1997. Management expects savings accounts to continue to be a
stable funding source, but does not expect any significant growth in the
current interest rate environment. In 1997, savings accounts accounted for 6%
of average total deposits compared to 7% of average total deposits in 1996.
During 1997, interest-bearing transaction accounts increased 31%. During
1995 and 1996, Regions reclassified a portion of interest-bearing transaction
accounts to money market savings accounts, resulting in a 18% decline in 1995
and a 58% decline in 1996. Although they declined as a source of funds in 1995
and 1996, interest-bearing transaction accounts increased in 1997, reflecting
their importance as a funding source to Regions. During 1996 and 1997,
interest-bearing transaction accounts accounted for 4% of average total
deposits.
Money market savings products continue to be Regions' fastest growing
deposits, increasing at a compound annual rate of 31%
16
<PAGE> 17
since 1994. Customers have responded to Regions' innovative, competitive money
market savings products by continuing to invest in these accounts. The results
are increases in average balances of 33% in 1995, 43% in 1996 and 17% in 1997.
As mentioned above, a reclassification from interest-bearing transaction
accounts to money market savings increased the 1995 and 1996 money market
savings growth rate. Money market savings products are one of Regions' most
significant funding sources, accounting for 19% of average total deposits in
1995, 24% of average total deposits in 1996 and 25% of average total deposits
in 1997.
Certificates of deposit of $100,000 or more increased 30% in 1995, 22% in
1996 and in 1997, due to their increased use as a funding source. Since 1994,
certificates of deposit of $100,000 or more have increased at a compound annual
rate of 25%, and in 1997 accounted for 14% of average total deposits, up from a
four year low of 10% in 1994.
Other interest-bearing deposits (certificates of deposit of less than
$100,000 and time open accounts) increased 10% in 1996 and 11% in 1997. This
category of deposits continues to be Regions' primary funding source; it
accounted for 36% of average total deposits in 1997, down from 38% of average
total deposits in 1996. Wider pricing spreads over the last two years have made
this category of deposits attractive relative to other investment alternatives.
Innovative deposit products in this category have helped Regions continue to
increase deposits and maintain market share in the Company's major markets.
The sensitivity of Regions' deposit rates 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).
Beginning in early 1994 and continuing throughout the year, market interest
rates rose. Beginning in early 1995 and continuing throughout the year, market
interest rates began to decline. During 1996, market interest rates were
relatively stable. During 1997, market interest rates generally declined. While
Regions' average interest rate paid on interest-bearing deposits follows these
trends, a lag period exists between the change in market rates and the
repricing of the deposits. The rate paid on interest-bearing deposits increased
from 3.61% in 1994 to 4.55% in 1995, increased slightly to 4.58% in 1996 and
increased to 4.63% in 1997.
A detail of interest-bearing deposit balances at December 31, 1997, and
1996, and the interest expense on these deposits for the three years ended
December 31, 1997, is presented in Note H to the supplemental consolidated
financial statements.
17
<PAGE> 18
The following table presents the detail of interest-bearing deposits and
maturities of the larger time deposits:
<TABLE>
<CAPTION>
(in thousands) December 31
1997 1996
<S> <C> <C>
Interest-bearing deposits of less than $100,000 $17,556,676 $15,530,222
Time deposits of $100,000 or more, maturing in:
3 months or less 1,480,970 1,416,690
over 3 through 6 months 789,529 692,076
over 6 through 12 months 582,154 603,036
over 12 months 857,494 633,420
---------- ----------
Total 3,710,147 3,345,222
Total $21,266,823 $18,875,444
</TABLE>
The following table presents the average amounts of deposits outstanding by
category for the three years ended December 31, 1997:
<TABLE>
<CAPTION>
(in thousands) Average Amounts Outstanding
1997 1996 1995
<S> <C> <C> <C>
Non-interest-bearing demand deposits $ 3,565,848 $ 2,970,682 $ 2,781,575
Interest-bearing transaction accounts 916,689 757,250 1,800,637
Savings accounts 1,506,753 1,427,167 1,403,071
Money market savings accounts 5,922,642 5,121,931 3,582,412
Certificates of deposit of $100,000 or more 3,453,465 2,830,101 2,315,506
Other interest-bearing deposits 8,812,105 7,919,627 7,169,831
Total interest-bearing deposits 20,611,654 18,056,076 16,271,457
Total deposits $24,177,502 $21,026,758 $19,053,032
</TABLE>
18
<PAGE> 19
The following table presents the average rates paid on deposits by category for
the three years ended December 31, 1997:
<TABLE>
<CAPTION>
Average Rates Paid
1997 1996 1995
<S> <C> <C> <C>
Interest-bearing transaction accounts 2.93% 3.22% 3.00%
Savings accounts 2.43 2.62 2.73
Money market savings accounts 3.40 3.21 3.48
Certificates of deposit of $100,000 or more 5.71 5.74 5.11
Other interest-bearing deposits 5.59 5.54 5.65
Total interest-bearing deposits 4.63% 4.58% 4.55%
</TABLE>
19
<PAGE> 20
BORROWED FUNDS
Regions' short-term borrowings consist of federal funds purchased and
security repurchase agreements, commercial paper, Federal Home Loan Bank
structured notes 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 increased from $1.7 billion
at December 31, 1996, to $2.1 billion at December 31, 1997. 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 $248
million in 1996 and $366 million in 1997. These increases resulted from
increased reliance on purchased funds to support earning asset growth. A higher
level of net purchased funds is expected to continue unless additional
alternative funding sources are utilized or unless earning assets grow slower
than interest-bearing liabilities.
In December 1997, Regions began to utilize Federal Home Loan Bank
structured notes as a short term funding source, primarily due to their
favorable interest rate. These structured notes have a stated ten year maturity
but are callable, at the option of the Federal Home Loan Bank, every three
months. Because of the call feature, the structured notes are considered short
term. As of December 31, 1997, $500 million of structured notes were
outstanding.
At December 31, 1997, $52.8 million in commercial paper was outstanding,
compared to $40.4 million at December 31, 1996. The Company issues commercial
paper through its private placement commercial paper program. 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 decreased $55.2 million from December 31, 1996
to December 31, 1997, primarily due to a decline in borrowings under a
short-term borrowing arrangement with an unaffiliated bank. The remaining
balance in other short-term borrowings consists of short-term Federal Home Loan
Bank advances and a short sale liability, which is frequently used by Regions'
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 and other long-term notes payable.
The amount outstanding on subordinated notes increased $100,000 between
December 31, 1996 and 1997 due to a new issue by a pooled company in 1997.
Federal Home Loan Bank borrowings decreased $75.9 million in 1997 due to
scheduled payments and maturities. 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.
The Company's bank note program provides Regions with another source of
funding and offers flexibility in structuring the term of the notes. Currently
up to $250 million of unsecured senior bank notes can be issued through Regions'
banking subsidiary, Regions Bank. The $40 million in senior bank notes
outstanding at December 31, 1996, matured in 1997 and no new notes have been
issued.
Other long-term notes payable consist of mortgage notes payable on certain
of the Company's buildings and low-income housing partnership investments,
notes issued to former stockholders of acquired banks, notes for equipment
20
<PAGE> 21
financing, notes payable to unaffiliate banks and miscellaneous notes payable.
Other long-term borrowings decreased $9.2 million in 1997, due to repayment of
loans to unaffiliated banks during 1997.
STOCKHOLDERS' EQUITY
Over the past three years, stockholders' equity has increased at a compound
annual growth rate of 14.6%. Stockholders' equity has grown from $1.8 billion
at the beginning of 1995 to $2.7 billion at year-end 1997. Internally generated
retained earnings contributed $625 million of this growth, equity issued in
connection with acquisitions accounted for $171 million, $45 million was
attributable to the exercise of stock options and to the issuance of stock for
dividend reinvestment plans and employee incentive plans, and $54 million was
attributable to increases in other components of equity. The internal capital
generation rate (net income less dividends as a percentage of average
stockholders' equity) was 9.6% in 1997, compared to 9.3% in 1996 and 9.1% in
1995.
Regions' ratio of stockholders' equity to total assets was 8.53% at
December 31, 1997, compared to 8.43% at December 31, 1996, and 8.38% at
December 31, 1995. 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 interest
rate risk, 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. Banking organizations that are considered to have excessive interest
rate risk exposure are required to hold additional capital.
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
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.
21
<PAGE> 22
The following chart summarizes the applicable bank regulatory capital
requirements. Regions' capital ratios at December 31, 1997, substantially
exceeded all regulatory requirements.
BANK REGULATORY CAPITAL REQUIREMENTS
<TABLE>
<CAPTION>
MINIMUM
REGULATORY REGIONS AT
REQUIREMENT DECEMBER 31, 1997
<S> <C> <C>
Tier 1 capital to risk-adjusted assets 4.00% 11.08%
Total risk-based capital to risk-adjusted assets 8.00 13.13
Tier 1 leverage ratio 3.00 7.86
</TABLE>
At December 31, 1997, Tier 1 capital totaled $2.4 billion, total risk-based
capital totaled $2.9 billion, and risk-adjusted assets totaled $21.7 billion.
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, 1997, all of Regions' banking affiliates 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 1997, excluding the effects of pooled companies, Regions
returned 36% of earnings to its stockholders in the form of dividends. Total
dividends declared by Regions in 1997 were $109.0 million or $.80 per share, an
increase of 14% from the $0.70 per share in 1996. Also in 1997, Regions
effected a two-for-one stock split.
In January 1998, the Board of Directors declared a 15% increase in the
quarterly cash dividend from $.20 to $.23 per share. This is the twenty-seventh
consecutive year that Regions has increased cash dividends.
\
22
<PAGE> 23
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, 1997:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Taxable securities 18.4% 20.3% 20.1% 22.4% 28.8%
Non-taxable securities 2.6 2.6 2.7 2.7 2.9
Federal funds sold 1.0 0.8 1.0 1.5 2.8
Loans (net of unearned
income):
Commercial 15.4 14.2 13.8 13.8 10.3
Real estate 36.5 36.6 37.7 34.8 34.6
Installment 17.7 17.4 16.1 15.1 11.4
Total loans 69.6 68.2 67.6 63.7 56.3
Allowance for loan losses (1.0) (1.0) (1.0) (1.0) (1.1)
Net loans 68.6 67.2 66.6 62.7 55.2
Other earning assets 1.1 1.1 0.8 1.8 0.4
Total earning assets 91.7 92.0 91.2 91.1 90.1
Cash and due from banks 3.4 3.2 4.0 4.1 4.9
Other non-earning assets 4.9 4.8 4.8 4.8 5.0
Total assets 100.0% 100.0% 100.0% 100.0% 100.0%
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing 12.1% 11.7% 12.0% 12.6% 14.8%
Interest-bearing 69.8 71.0 70.3 71.3 72.3
Total deposits 81.9 82.7 82.3 83.9 87.1
Borrowed funds:
Short-term 6.5 5.5 4.7 3.3 2.4
Long-term 1.7 2.3 3.5 3.3 1.7
Total borrowed funds 8.2 7.8 8.2 6.6 4.1
Other liabilities 1.2 1.0 1.1 1.3 0.8
Total liabilities 91.3 91.5 91.6 91.8 92.0
Stockholders' equity 8.7 8.5 8.4 8.2 8.0
Total liabilities and
stockholders' equity 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
23
<PAGE> 24
OPERATING RESULTS
Net income increased 25% in 1997 and 15% in 1996. Excluding the SAIF
assessment and the merger expenses incurred in 1996 and the extraordinary gain
incurred in 1997 (see Notes U and V to the supplemental consolidated financial
statements) income increased 13% in 1997. The accompanying table presents the
dollar amount and percentage change in the important components of income that
occurred in 1997 and 1996.
SUMMARY OF CHANGES IN OPERATING RESULTS
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Increase (Decrease)
1997 Compared 1996 Compared
to 1996 to 1995
Amount % Amount %
<S> <C> <C> <C> <C>
NET INTEREST INCOME $167,384 17% $122,639 14%
Provision for loan losses 43,637 95 8,533 23
Net interest income
after provision for
loan losses 123,747 13 114,106 13
NON-INTEREST INCOME:
Trust department income 2,567 6 3,332 9
Service charges on
deposit accounts 26,658 21 19,753 19
Mortgage servicing
and origination fees 570 1 26,837 41
Securities transactions (2,813) NM 4,008 NM
Other 9,813 12 11,036 15
Total non-interest
income 36,795 11 64,966 23
NON-INTEREST EXPENSE:
Salaries and
employee benefits 67,074 16 40,014 11
Net occupancy
expense 6,770 12 6,439 13
Furniture and equip-
ment expense 6,333 13 8,252 20
FDIC insurance
expense (4,411) (46) (18,951) (67)
SAIF assessment and merger
expenses (33,777) NM 33,777 NM
Other 22,753 8 46,678 20
Total non-interest
expense 64,742 8 116,209 16
Income before
income taxes 95,800 20 62,863 15
Applicable income
taxes 31,555 20 21,479 16
Income before extraordinary
item 64,245 20 41,384 15
Extraordinary item 15,425 NM 0 NM
NET INCOME $79,670 25% $ 41,384 15%
INCOME BEFORE SAIF ASSESSMENT,
MERGER EXPENSES AND
EXTRAORDINARY ITEM $43,134 13% $ 62,495 23%
</TABLE>
24
<PAGE> 25
NET INTEREST INCOME
Net interest income (interest income less interest expense) is Regions'
principal source of income. Net interest income increased 17% in 1997 and 14% in
1996. On a taxable equivalent basis, net interest income increased 17% in 1997
and 13% in 1996. The table on page 30 provides additional information to analyze
the changes in net interest income.
In 1997, growth in interest-earning assets and interest-bearing liabilities
contributed to the increase in net interest income. During 1997, average
interest-earning assets grew 16% and average interest-bearing liabilities grew
15%. Growth in earning assets typically increases net interest income due to the
positive spread between earning asset yields and interest-bearing liability
rates. However, unfavorable changes in interest-bearing liability rates
partially offset the increase in net interest income attributable to growth.
In 1996, growth in interest-earning assets and interest-bearing liabilities
also contributed to the increase in net interest income. During 1996, average
earning assets increased 11% and average interest-bearing liabilities increased
10%. Favorable changes in interest earning asset yields and interest-bearing
liability rates also contributed to the increase in net interest income.
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 average earning assets. The
interest margin increased from 4.27% in 1995, to 4.36% in 1996 and 4.41% in
1997. Changes in the interest margin occur primarily due to two factors: (1)
the interest rate spread (the difference between the taxable equivalent yield
on earning assets and the rate on interest-bearing liabilities) and (2) the
percentage of earning assets funded by interest-bearing liabilities.
The first factor affecting Regions' interest margin is the interest rate
spread. Regions' average interest rate spread was 3.56% in 1995, 3.65% in 1996
and 3.66% in 1997. 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),
affect the interest rate spread by influencing the pricing on most categories
of Regions' interest-earning assets and interest-bearing liabilities.
In July 1995, the Federal Reserve (Fed) began lowering the Federal Funds
rate. In three separate moves, the Fed lowered the Federal Funds rate from
6.00% to 5.25%. The final move came on January 31, 1996. The Fed maintained the
5.25% Fed Funds rate throughout the remainder of 1996. In March 1997 the Fed
raised the Federal Funds rate to 5.50% where it remained for the rest of the
year. As can be seen above, Regions managed through this period with only minor
changes in the interest rate spread.
Although the Federal Funds rate was fairly stable during 1997, yields on
intermediate to long-term government securities dropped considerably. This drop
in government interest rates created a relatively flat yield curve. Regions'
interest-earning asset yields and interest-bearing liability rates were both
higher in 1997 compared to 1996 -- reflecting the higher market interest rates
experienced in late 1996 and early 1997. However, as market interest rates
declined and as the yield curve flattened, Regions' interest-earning asset
yields increased faster than did interest-bearing liability rates. The interest
rate spread widened in 1997 because interest-bearing asset yields increased 1
basis points more than did interest-bearing liability rates.
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<PAGE> 26
The interest rate spread increased in 1996 because interest-bearing
liability rates decreased 4 basis points while interest-earning asset yields
increased 5 basis points. During 1996, with market interest rates down slightly
from 1995, the yield on interest-earning assets rose slightly. Interest-bearing
liability rates continued to move lower during 1996 reflecting a lag between
declines in market interest rates and the repricing of the company's
certificate of deposit (CD) portfolio.
The mix of earning assets can also affect the interest rate spread. During
1997, loans, which are typically Regions' highest yielding earning asset,
increased as a percentage of earning assets -- partially offsetting the effects
of changing earning asset yields and interest-bearing liability rates. Average
loans as a percentage of earning assets were 73% in 1996 and 75% in 1997.
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 was 85% in
both 1995 and 1996, but dropped to 84% in 1997. The changes in the percentage
of earning assets funded by interest-bearing liabilities had a positive effect
on net interest income in 1997. Since there was no change in the percentage of
earning assets funded by interest-bearing liabilities during 1996, this factor
did not affect the net interest margin. 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.
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<PAGE> 27
MARKET RISK - INTEREST RATE SENSITIVITY
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to a change in interest rates, exchange rates
and equity prices. Regions' primary risk is interest rate risk.
The primary objective of Asset/Liability Management at Regions is to manage
interest rate risk and 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 projecting 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 the entire life of these
instruments, but places particular emphasis on the first year. At December 31,
1997, approximately 52% of earning assets and 60% of the funding for these
earning assets were scheduled to be repriced to current market rates at least
once during 1998.
The accompanying table shows Regions' rate sensitive position at December
31, 1997, 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 $2.4
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, 1997, was 0.86, 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 deposits 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. However, the rates paid are typically not directly
related to market interest rates, since management exercises some discretion in
adjusting these rates as market rates change.
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 deposit accounts that are not sensitive to market interest rate
changes were redistributed based on expected cash flows and probable repricing
intervals, Regions' one-year cumulative gap ratio would be 1.08 -- indicating
an "asset sensitive" position.
Regions uses additional tools to monitor and manage interest rate
sensitivity. One of the primary tools used is simulation analysis. Simulation
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<PAGE> 28
analysis is the primary method of estimating earnings at risk and capital at
risk under varying interest rate conditions. Simulation analysis is used to
test the sensitivity of Regions' net interest income and stockholders' equity
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 and adds 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 indicates that Regions is slightly
"liability sensitive."
FORWARD-LOOKING STATEMENTS
The section that follows, "Exposure to Interest Rate Shifts", contains
certain forward-looking statements (as defined in the Private Securities
Litigation Reform Act of 1995). These forward-looking statements may involve
significant risk and uncertainties. Although Regions believes that the
expectations reflected in such forward-looking statements are reasonable, actual
results may differ materially from the results discussed in these
forward-looking statements.
EXPOSURE TO INTEREST RATE SHIFTS. Based on the afore mentioned discussion,
management can estimate the effect shifts in interest rates may have upon the
Company's net interest income, Regions' principal source of income.
The following table demontrates the expected effect a given interest rate
shift would have on Regions net interest income.
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
CHANGE IN INTEREST RATES (IN $ CHANGE IN NET % CHANGE IN NET
BASIS POINTS) INTEREST INCOME INTEREST INCOME
<S> <C> <C>
+200 $(4,987) (.43)%
+100 215 .02
-100 19,571 1.70
-200 39,511 3.42
</TABLE>
In the event of a shift in interest rates, management would attempt to take
certain actions to mitigate the negative impact to net interest income. These
actions include but are not limited to, restructuring of interest-earning
assets, seeking alternative funding sources and entering into interest rate
swap agreements.
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<PAGE> 29
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS
December 31, 1997
(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 $ 7,775.4 $ 929.6 $ 2,461.8 $11,166.8 $10,714.3 $21,881.1
Investment securities 799.5 314.0 793.5 1,907.0 1,431.3 3,338.3
Securities available for sale 625.9 69.8 434.4 1,130.1 1,847.5 2,977.6
Interest bearing deposits
in other banks 48.0 0.1 - 48.1 - 48.1
Federal funds sold and securities
purchased under agreements
to resell 292.2 - - 292.2 - 292.2
Mortgage loans held for sale 383.9 - - 383.9 - 383.9
Trading account assets 50.8 - - 50.8 - 50.8
Total earning assets $ 9,975.7 $ 1,313.5 $ 3,689.7 $14,978.9 $13,993.1 $28,972.0
Percent of total earning assets 34.5% 4.5% 12.7% 51.7% 48.3% 100.0%
FUNDING SOURCES:
Non-interest-bearing deposits -- - - - $ 3,744.2 $ 3,744.2
Savings deposits $ 1,057.1 - $ 83.5 $ 1,140.6 358.4 1,499.0
Other time deposits 9,007.5 $ 1,806.1 2,636.6 13,450.2 6,317.6 19,767.8
Short-term borrowings 2,600.1 - 107.3 2,707.4 - 2,707.4
Long-term borrowings 29.3 48.6 15.9 93.8 351.7 445.5
Total interest-bearing liabilities 12,694.0 1,854.7 2,843.3 17,392.0 7,027.7 24,419.7
Stockholders' equity - - - - 808.1 808.1
Total funding sources $12,694.0 $ 1,854.7 $ 2,843.3 $17,392.0 $11,580.0 $28,972.0
Percent of total funding sources 43.8% 6.4% 9.8% 60.0% 40.0% 100.0%
Interest sensitive gap $(2,718.3) $ (541.2) $ 846.4 $(2,413.1) $ 2,413.1 -
Cumulative interest sensitive gap $(2,718.3) $(3,259.5) $(2,413.1) $(2,413.1) - -
As percent of total earning assets (9.4)% (11.3)% (8.3)% (8.3)% - -
Ratio of earning assets
to funding sources 0.79 0.71 1.30 0.86 1.21 1.00
Cumulative ratio 0.79 0.78 0.86 0.86 1.00 1.00
</TABLE>
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<PAGE> 30
<TABLE>
<CAPTION>
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(in thousands) Year Ended December 31
1997 over 1996 1996 over 1995
Volume Yield/Rate Total Volume Yield/Rate Total
INCREASE (DECREASE) IN:
<S> <C> <C> <C> <C> <C> <C>
Interest income on:
Loans $286,904 $(3,990) $282,914 $149,092 $ 10,449 $159,541
Federal funds sold 3,936 1,886 5,822 (629) (1,773) (2,402)
Taxable securities 19,070 4,626 23,696 32,384 7,052 39,436
Non-taxable securities 5,655 2,645 8,300 2,739 (4,624) (1,885)
Other earning assets 3,859 (2,290) 1,569 7,474 1,692 9,166
Total 319,424 2,877 322,301 191,060 12,796 203,856
Interest expense on:
Savings deposits 2,023 (2,805) (782) 650 (1,522) (872)
Other interest-bearing
deposits 118,876 9,844 128,720 83,550 4,133 87,683
Borrowed funds 25,741 1,238 26,979 6,031 (11,625) (5,594)
Total 146,640 8,277 154,917 90,231 (9,014) 81,217
INCREASE (DECREASE) IN NET
INTEREST INCOME $172,784 $(5,400) $167,384 $100,829 $21,810 $122,639
</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.
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<PAGE> 31
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 1995, the
provision for loan losses was increased to $37.5 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. In 1996, the provision for
loan losses totaled $46.0 million. Higher levels of consumer loan losses, a
portion of which was provided for in the prior year, were partially offset by
higher levels of commercial and real estate loan recoveries in 1996. In 1997,
the provision for loan losses was increased to $89.7 million due to internal
growth in the loan portfolio, higher levels of consumer loan losses and
management's judgment about several specific problem commercial loans.
Acquisitions added $17.4 million to the allowance for loan losses in 1997. The
resulting year end allowance for loan losses increased $51.0 million to $304.2
million. Unfavorable changes in the previously discussed factors considered by
management in determining the amount of the provision for loan losses and the
resulting allowance, particularly higher consumer loan losses, could require
significantly higher provisions for loans losses in the future.
TRUST INCOME
Trust income increased 13% in 1995, 9% in 1996 and 6% in 1997. Regions has in
place an aggressive sales program as a means of increasing trust revenue. Sales
goals have been established and employee incentive plans have been instituted in
order to promote sales efforts. In addition to increased sales efforts, trust
income is also affected by the securities markets, because most trust fees are
calculated as a percentage of trust asset values. The strength of the securities
markets during the last three years has had a favorable impact on trust income.
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 15% in 1995, 19% in 1996, and 21% in 1997,
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). RMI's primary business and
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<PAGE> 32
source of income is the origination and servicing of mortgage loans for
long-term investors.
In 1997, mortgage servicing and origination fees increased 1%, from $92.8
million in 1996 to $93.3 million in 1997. Origination fees were higher due to
an increase in the number of loans closed and the dollar amount of loans
closed. Servicing fees increased slightly in 1997. At December 31, 1997,
Regions' servicing portfolio totaled $20.4 billion and included approximately
332,000 loans. At December 31, 1996, the servicing portfolio totaled $19.7
billion, compared to $18.6 billion at December 31, 1995. 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.
In 1996, mortgage servicing and origination fees increased 41%, from $65.9
million in 1995 to $92.8 million in 1996. Origination fees were up
significantly due to an increase in the number of loans closed and the dollar
amount of loans closed. Servicing fees also increased in 1996.
In 1995, mortgage servicing and origination fees increased 1%, from $65.5
million in 1994 to $65.9 million in 1995. Origination fees increased in 1995
due to an increase in the number and dollar amount of loans closed. Higher
servicing fees also contributed to the increase.
RMI, through its retail and wholesale operations, produced mortgage loans
totaling $2.2 billion, $1.7 billion, and $954 million in 1997, 1996 and 1995,
respectively. RMI produces loans from 33 offices in Alabama, Georgia, Florida,
Louisiana, Tennessee and South Carolina, and from other correspondent offices
located primarily in the Southeast.
Regions' pooled companies produced mortgage loans totaling $690 million,
$539 million, and $302 million in 1997, 1996 and 1995, respectively.
In 1996, Regions adopted 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. Prior to the adoption of
Statement 122, only mortgage servicing rights that were purchased from other
parties were capitalized and recorded as an asset. Therefore, Statement 122
eliminated the accounting inconsistencies that existed between mortgage
servicing rights that were 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.
An analysis of mortgage servicing rights, which are included in other
assets in the consolidated statement of condition, is presented as follows. The
balances shown represent the original amounts capitalized, less accumulated
amortization and valuation adjustments, for the right to service mortgage loans
that are owned by other investors. Amounts for 1995 are not restated for the
adoption of Statement 122. The
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<PAGE> 33
carrying values of mortgage servicing rights are affected by various factors,
including prepayments of the underlying mortgages. A significant increase in
prepayments of mortgages in the servicing portfolio in the future could result
in significant increases in the valuation adjustments.
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $118,075 $121,593 $ 75,120
Net additions 31,935 30,132 65,965
Amortization (25,923) (33,650) (19,172)
Valuation adjustments -- -- (320)
Balance at end of year $124,087 $118,075 $121,593
</TABLE>
SECURITIES GAINS (LOSSES)
The $697,000 in net losses recognized in 1995 from the sale of available
for sale securities 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.
In 1996, net gains from the sale of available for sale securities were
$3,311,000, resulting primarily from the sale of Freddie Mac stock that was
acquired in an acquisition.
In 1997, net gains of $498,000 were reported from sale of available for
sale securities. These gains resulted primarily from the sale of U.S. agency
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, credit card fees and other customer charges
contributed to growth in fees and commissions over the last three years.
Insurance premium and commission income increased in 1997, 1996, and 1995.
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 1995, 1996 and 1997.
Trading account income increased in 1997, 1996 and 1995 due to expanded
trading activities, increased underwriting fees, and larger profits from
trading in the portfolio.
Gains on the sale of mortgage servicing rights totaled $150,000 in 1995. No
sales of mortgage servicing rights occurred in 1996 or 1997.
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<PAGE> 34
SALARIES AND EMPLOYEE BENEFITS
Total salaries and benefits increased 14% in 1995, 11% in 1996 and 16% in
1997. 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, 1997, Regions had 13,294 full-time equivalent employees,
compared to 12,272 at December 31, 1996 and 11,731 at December 31, 1995.
Employees added as a result of acquisitions accounted for most of these
increases.
Salaries, excluding benefits, totaled $272.7 million in 1995, compared to
$295.1 million in 1996 and $335.1 million in 1997. 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 pension, profit sharing, stock purchase,
and medical, life and disability insurance plans. The total cost to Regions for
fringe benefits, including payroll taxes, equals approximately 28% of salaries.
The contribution to the profit sharing plan was equal to approximately 9%
of after-tax income in 1995 and 7% in 1996 and 1997, net of the effects of the
pooled companies.
The contribution to the employee stock ownership plan (ESOP) equaled
approximately 1% of after-tax income in each of the last three years, net of
the effects of the pooled companies.
Commissions and incentives expense increased to $54.4 million in 1997,
compared to $37.6 million in 1996 and $29.2 million in 1995. Incentives are
being used increasingly to reward employees for selling products and services,
for productivity improvements and for achievement of other corporate goals.
Regions' long-term incentive plan provides for the granting of stock options,
stock appreciation rights, restricted stock and performance shares (see Note R
to the supplemental consolidated financial statements). 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. The 63% increase in Regions stock price in 1997
contributed to the higher commissions and incentives expense in 1997 because
expense recognition for a portion of Regions' equity incentive awards is
related to Regions stock price performance. Regions also uses cash incentive
plans to reward employees for achievement of various goals.
Payroll taxes increased 27% in 1995, 10% in 1996 and 17% in 1997. Increases
in the Social Security tax base, combined with increased
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<PAGE> 35
salary levels and additional employees due to growth and acquisitions, were the
primary reasons for increased payroll taxes.
Group insurance expense increased 38% in 1995, due to increased employment
levels associated with increased business activity and acquisitions. In 1996,
the dollar amount of medical claims stabilized resulting in an 8% increase in
expense. In 1997, as a result of reduced claims costs, group insurance expense
decreased 1%.
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, Arkansas and parts of Texas, Louisiana, Florida, Georgia, Tennessee and
South Carolina.
Net occupancy expense increased 8% in 1995, 13% in 1996, and 12% in 1997 due
to new and acquired branch offices, rising price levels, and increased business
activity.
FURNITURE AND EQUIPMENT EXPENSE
Furniture and equipment expense increased 7% in 1995, 20% in 1996, and 13%
in 1997. These increases resulted from acquisitions (particularly during 1996
and 1997) 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 46% in 1997, 67% in 1996, and 23% in 1995.
Beginning in mid-1995 and continuing in 1996, the FDIC significantly reduced
insurance premium rates on Bank Insurance Fund (BIF) deposits, which resulted
in lower FDIC insurance expense in 1995 and 1996. Deposit insurance premium
rates for Savings Association Insurance Fund (SAIF) deposits, which were
approximately 25% of Regions' assessable deposits, remained at $0.23 per $100
of insured deposits during 1995 and 1996. In 1997, deposit insurance premium
rates for BIF and SAIF deposits were further reduced; however, these reductions
were partially offset by the Financing Corporation (FICO) assessments, which
are approximately $.065 per $100 of SAIF-assessable deposits and $.013 per $100
of BIF-assessable deposits.
SAIF ASSESSMENT AND MERGER EXPENSES
On September 30, 1996, legislation to recapitalize the SAIF became effective.
This legislation required Regions, and all other depository institutions having
SAIF-insured deposits, to pay a one-time, special assessment. This resulted in
a pre-tax expense of $25.0 million for Regions and the pooled companies, which
was recognized primarily in the third quarter of 1996.
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<PAGE> 36
In the first quarter of 1996, Regions incurred a pre-tax, non-recurring
merger charge of $8.8 million related to the merger of First National Bancorp
with Regions. This charge consisted primarily of investment banking and other
professional fees, severance costs, data processing contract buyouts and
obsolete equipment write-downs.
Subsequent to year end and in the third quarter of 1998, Regions incurred a
pre-tax, non-recurring merger and restructuring charge of $114.7 million
related to the merger of First Commercial and four other institutions with
Regions. The charge consisted primarily of employee-related obligations,
elimination of duplicate facilities, contract terminations, conversion expenses
and professional fees associated with the mergers.
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.
Other non-credit losses increased in 1997 as well as in 1996 and 1995. Other
non-credit losses primarily include charges for items unrelated to the extension
of credit such as fraud losses, litigation losses, write-downs of other real
estate and insurance claims.
Amortization of mortgage servicing rights declined in 1997 and 1995, but
increased in 1996. Statement 122, which was adopted beginning in 1996, results
in the capitalization, and subsequent amortization thereof, of more mortgage
servicing rights than under previous standards. This resulted in additional
amortization expense in 1996. However, mortgage servicing rights amortization
expense declined in 1997 and 1995 due to slower prepayment activity on the
underlying mortgages than in other years.
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, courier service, sales and
use taxes, and travel expenses.
YEAR 2000
Regions is in the process of preparing its computer systems and applications
for the Year 2000. This process involves modifying or replacing certain hardware
and software maintained by Regions as well as communicating with external
service providers to ensure that they are taking appropriate action to remedy
any Year 2000 issues. The majority of applications used by Regions are products
of established national vendors. Management expects to have substantially all of
the system and application changes completed by December 31, 1998, and believes
that its level of preparedness is appropriate. However, there can be no
guarantee that the systems of other companies on which Regions' systems rely
will be timely converted and would not have an adverse impact on the Company's
systems.
Regions estimates that the cumulative cost of the project will be
approximately $20 million. This cost includes personnel cost related to
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<PAGE> 37
the modification of systems and applications as well as the cost to purchase or
lease certain hardware and software. In 1997, approximately $1.0 million of
this expense was incurred. The purchase of hardware and software will be
capitalized according to normal policy. Costs associated with personnel will be
expensed in the period incurred.
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<PAGE> 38
APPLICABLE INCOME TAX
Regions' provision for income taxes increased 20% in 1997. This increase
was caused primarily by a 20% increase in income before taxes. Note P to the
supplemental consolidated financial statements provides additional information
about the provision for income taxes.
Examinations of Regions' consolidated federal income tax returns have been
completed for years through 1994. The Company believes adequate provisions for
income tax have been recorded for all years open for review.
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 periodically evaluates the
realizability of the deferred tax asset and, if necessary, adjusts the
valuation allowance accordingly.
EXTRAORDINARY ITEM
The extraordinary item in 1997 resulted from the divestiture of two banks by
one of the pooled companies, First Commercial. The divestiture was required by
regulatory authorities in connection with First Commercial's business
combination with Southwest Bancshares, Inc.
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.
38
<PAGE> 39
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
1997
<S> <C> <C> <C> <C>
TOTAL INTEREST INCOME $540,927 $563,358 $580,145 $592,154
TOTAL INTEREST EXPENSE 259,067 269,660 279,641 289,008
NET INTEREST INCOME 281,860 293,698 300,504 303,146
PROVISION FOR LOAN LOSSES 14,036 14,165 30,765 30,697
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 267,824 279,533 269,739 272,449
TOTAL NON-INTEREST INCOME, EXCLUDING
SECURITIES GAINS (LOSSES) 91,946 93,160 98,268 98,026
SECURITIES GAINS (LOSSES) 474 40 (60) 44
TOTAL NON-INTEREST EXPENSE 213,359 219,664 230,016 238,737
INCOME TAXES 50,028 51,920 45,745 39,870
INCOME BEFORE EXTRAORDINARY ITEM 96,857 101,149 92,186 91,912
EXTRAORDINARY ITEM, NET OF TAX - - 15,425 -
NET INCOME $ 96,857 $101,149 $107,611 $91,912
PER SHARE:
INCOME BEFORE EXTRAORDINARY ITEM $.46 $.48 $.44 $.44
NET INCOME .46 .48 .51 .44
INCOME BEFORE EXTRAORDINARY ITEM, DILUTED .45 .47 .43 .43
NET INCOME, DILUTED .45 .47 .50 .43
CASH DIVIDENDS DECLARED .20 .20 .20 .20
MARKET PRICE:
LOW 25 11/16 27 1/16 31 1/8 35 5/8
HIGH 31 1/16 33 3/8 39 1/2 45
</TABLE>
<TABLE>
<CAPTION>
(in thousands, except per share amounts) Three Months Ended
Mar. 31 June 30 Sept. 30 Dec. 31
1996
<S> <C> <C> <C> <C>
Total interest income $466,333 $488,893 $494,776 $504,281
Total interest expense 228,532 231,823 238,596 243,508
Net interest income 237,801 257,070 256,180 260,773
Provision for loan losses 9,546 10,396 10,914 15,170
Net interest income after
provision for loan losses 228,255 246,674 245,266 245,603
Total non-interest income, excluding
securities gains 86,500 83,149 85,300 86,843
Securities gains 315 103 52 2,841
Total non-interest expense 203,322 200,193 222,448 211,071
Income taxes 36,581 44,926 35,422 39,079
Net income $ 75,167 $ 84,807 $ 72,748 $ 85,137
Per share:
Net income $.39 $.43 $.38 $.44
Net income, diluted .38 .42 .37 .43
Cash dividends declared .175 .175 .175 .175
Market price:
Low 20 1/4 21 21 11/16 24
High 24 24 1/2 24 1/2 27
</TABLE>
Regions Common Stock trades on the Nasdaq National Market tier of The Nasdaq
Stock Market under the symbol RGBK. Market prices shown represent sales prices
as reported in the Nasdaq Monthly Summary of Activity Report. At December 31,
1997, there were 46,790 shareholders of record of Regions Financial Corporation
Common Stock.
39
<PAGE> 1
EXHIBIT 99.3
SUPPLEMENTAL HISTORICAL FINANCIAL SUMMARY
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
<TABLE>
<CAPTION>
(in thousands-except ratios, yields, and per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATING RESULTS 1997 1996 1995 1994 1993 Annual Compound
Change Growth Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income: 1996-1997 1993-1997
Interest and fees on loans $1,837,392 $1,554,478 $ 1,394,937 $1,050,318 $ 818,970 18.20% 22.39%
Income on federal funds sold 16,882 11,060 13,462 12,096 9,131 52.64 16.61
Taxable interest on securities 355,591 331,895 292,459 265,060 216,831 7.14 13.16
Tax-free interest on securities 42,836 34,536 36,421 34,900 31,676 24.03 7.84
Other interest income 23,883 22,314 13,148 23,138 25,885 7.03 -1.99
Total interest income 2,276,584 1,954,283 1,750,427 1,385,512 1,102,493 16.49 19.87
Interest expense:
Interest on deposits 954,782 826,844 740,033 521,817 411,535 15.47 23.42
Interest on short-term borrowings 108,617 75,827 69,056 29,552 9,211 43.24 85.31
Interest on long-term borrowings 33,977 39,788 52,153 46,791 25,453 -14.60 7.49
Total interest expense 1,097,376 942,459 861,242 598,160 446,199 16.44 25.23
Net interest income 1,179,208 1,011,824 889,185 787,352 656,294 16.54 15.78
Provision for loan losses 89,663 46,026 37,493 22,058 38,017 94.81 23.92
Net interest income after
provision for loan losses 1,089,545 965,798 851,692 765,294 618,277 12.81 15.22
Non-interest income:
Trust department income 44,227 41,660 38,328 34,016 32,102 6.16 8.34
Service charges on deposit
accounts 151,618 124,960 105,207 91,648 78,753 21.33 17.79
Mortgage servicing and
origination fees 93,327 92,757 65,920 65,511 66,591 0.61 8.80
Securities gains (losses) 498 3,311 (697) 681 3,312 -84.96 -37.73
Other 92,228 82,415 71,379 60,662 64,880 11.91 9.19
Total non-interest income 381,898 345,103 280,137 252,518 245,638 10.66 11.66
Non-interest expense:
Salaries and employee benefits 480,842 413,768 373,754 334,508 295,794 16.21 12.92
Net occupancy expense 61,933 55,163 48,724 45,088 38,583 12.27 12.56
Furniture and equipment expense 56,304 49,971 41,719 38,891 33,328 12.67 14.01
Other 302,697 318,132 256,628 235,019 216,339 -4.85 8.76
Total non-interest expense 901,776 837,034 720,825 653,506 584,044 7.73 11.47
Income before income taxes
and extraordinary item 569,667 473,867 411,004 364,306 279,871 20.22 19.44
Applicable income taxes 187,563 156,008 134,529 115,853 88,225 20.23 20.75
Income before extraordinary items 382,104 317,859 276,475 248,453 191,646 20.21 18.83
Extraordinary gain, net of $9,659 tax 15,425 0 0 0 0 -- --
Net income $ 397,529 $ 317,859 $ 276,475 $ 248,453 $ 191,646 25.06% 20.01%
Average number of shares outstanding 209,781 194,241 190,896 182,903 168,758 8.00% 5.59%
Average number of shares outstanding
--diluted 213,750 197,751 193,579 185,110 171,363 8.09 5.68
Per share:
Income, before extraordinary
item $ 1.82 $ 1.64 $ 1.45 $ 1.36 $ 1.14 10.98% 12.41%
Net income 1.89 1.64 1.45 1.36 1.14 15.24 13.47
Income, before extraordinary
item, diluted 1.79 1.61 1.43 1.34 1.12 11.18 12.44
Net income, diluted 1.86 1.61 1.43 1.34 1.12 15.53 13.52
Cash dividends declared 0.80 0.70 0.66 0.60 0.52 14.29 11.37
YIELDS AND COSTS (TAXABLE
EQUIVALENT BASIS)
Earning assets:
Taxable securities 6.50% 6.37% 6.27% 5.86% 6.17%
Tax-free securities 8.42 8.07 8.64 9.25 9.67
Federal funds sold 5.99 5.19 6.01 4.03 3.00
Loans (net of unearned income) 8.98 8.99 8.94 8.17 8.18
Other earning assets 7.32 8.10 7.23 6.33 6.31
Total earning assets 8.42 8.35 8.30 7.53 7.59
Interest-bearing liabilities:
Interest-bearing deposits 4.63 4.58 4.55 3.61 3.50
Short-term borrowings 5.67 5.46 6.31 5.10 3.52
Long-term borrowings 6.69 6.66 6.56 6.12 6.94
Total interest-bearing liabilities 4.76 4.70 4.74 3.79 3.60
Net yield on interest earning assets 4.41 4.36 4.27 4.33 4.57
RATIOS
Net income to:
Average stockholders' equity 15.38% 14.71%* 14.30% 14.88% 14.02%
Average total assets 1.35 1.25* 1.19 1.23 1.19
Efficiency 57.78 61.84* 61.61 62.89 63.84
Dividend payout 42.33 42.68 45.52 44.12 45.61
Average loans to average deposits 84.94 82.42 82.23 75.90 72.36
Average stockholders' equity to
average total assets 8.75 8.50 8.36 8.23 8.49
Average interest-bearing deposits
to average total deposits 85.25 85.87 85.40 84.94 84.52
</TABLE>
* Ratios for 1996 excluding $20.2 million in after-tax charges for SAIF
Assessment and Merger Expenses are as follows: return on average
stockholders' equity 15.64%, return on average total assets 1.33%, and
efficiency 60.93%.
1
<PAGE> 2
Supplemental Historical Financial Summary--Continued
Regions Financial Corporation & Subsidiaries
<TABLE>
(average daily balances)
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Compound
Annual Growth Rate
Change 1993-1997
1997 1996 1995 1994 1993 1996-1997
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Taxable securities $ 5,443,877 $ 5,151,154 $ 4,646,458 $ 4,549,170 $ 3,538,353 5.68% 11.37%
Tax-exempt securities 769,516 665,685 616,960 549,471 478,563 15.60 12.61
Federal funds sold 282,006 213,280 224,136 307,255 307,202 32.22 -2.12
Loans, net of unearned 20,535,989 17,329,462 15,666,565 12,912,785 10,067,077 18.50 19.51
income
Other earning assets 327,265 276,257 181,890 361,025 408,969 18.46 -5.42
Total earning assets 27,358,653 23,635,838 21,336,009 18,679,706 14,800,164 15.75 16.60
Allowance for loan losses (284,606) (244,012) (221,004) (207,166) (168,871) 16.64 13.94
Cash and due from banks 1,003,864 811,790 918,010 835,364 739,869 23.66 7.93
Other non-earning assets 1,460,675 1,222,811 1,107,953 969,492 732,651 19.45 18.83
Total assets $29,538,586 $25,426,427 $23,140,968 $20,277,396 $16,103,813 16.17% 16.38%
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 3,565,848 $ 2,970,682 $ 2,781,575 $ 2,562,650 $ 2,153,016 20.03% 13.44%
Interest-bearing 20,611,654 18,056,076 16,271,457 14,449,888 11,759,364 14.15 15.06
Total deposits 24,177,502 21,026,758 19,053,032 17,012,538 13,912,380 14.98 14.82
Borrowed funds:
Short-term 1,917,127 1,389,922 1,095,129 577,526 256,356 37.93 65.37
Long-term 507,775 597,034 794,576 766,281 369,095 -14.95 8.30
Total borrowed funds 2,424,902 1,986,956 1,889,705 1,343,807 625,451 22.04 40.32
Other liabilities 352,124 251,244 264,708 251,789 199,030 40.15 15.33
Total liabilities 26,954,528 23,264,958 21,207,445 18,608,134 14,736,861 15.86 16.29
Stockholders' equity 2,584,058 2,161,469 1,933,523 1,669,262 1,366,952 19.55 17.26
Total liabilities and
stockholders' equity $29,538,586 $25,426,427 $23,140,968 $ 20,277,396 $16,103,813 16.17% 16.38%
YEAR-END BALANCES
Assets $31,414,058 $26,993,344 $24,419,249 $22,184,508 $19,126,602 16.38% 13.21%
Securities 6,315,923 5,742,375 5,618,839 5,143,226 4,861,438 9.99 6.76
Loans, net of unearned income 21,881,123 18,395,552 16,156,132 14,726,649 11,791,556 18.95 16.71
Non-interest-bearing 3,744,198 3,143,968 3,086,166 2,765,390 2,391,459 19.09 11.86
deposits
Interest-bearing deposits 21,266,823 18,875,444 16,896,367 15,283,516 13,850,749 12.67 11.32
Total deposits 25,011,021 22,019,412 19,982,422 18,048,906 16,242,208 13.59 11.40
Long-term debt 445,529 570,545 762,521 766,774 683,171 -21.91 -10.14
Stockholders' equity 2,679,821 2,274,563 2,047,398 1,785,026 1,581,143 17.82 14.10
Stockholders' equity per $12.75 $11.82 $10.74 $9.58 $8.89 7.87% 9.43%
share
Market price per share of 42.19 25.85 21.50 15.50 16.19 63.21 27.05
common stock
</TABLE>
Notes to Supplemental Historical Financial Summary:
(1) Amounts in all periods have been restated to reflect certain
transactions accounted for as poolings of interests, including
significant combinations through quarter ended September 30, 1998.
(2) All per share amounts give retroactive recognition to the effect of
stock dividends and stock splits.
(3) Non-accruing loans, of an immaterial amount, are included in earning
assets. No adjustment has been made for these loans in the calculation
of yields.
(4) Yields are computed on a taxable equivalent basis, net of interest
disallowance, using marginal federal income tax rates of 35% for
1997-1993.
(5) This summary should be read in conjunction with the related
supplemental consolidated financial statements and notes thereto
on pages 2 to 41 of Exhibit 99.1.
2
