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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER 0-6159
REGIONS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 63-0589368
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
417 NORTH 20TH STREET, BIRMINGHAM, ALABAMA 35203
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (205) 326-7100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK -- PAR VALUE $.625
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
State the aggregate market value of the voting stock held by non-affiliates
of the registrant as of February 28, 1999.
COMMON STOCK, $.625 PAR VALUE -- $8,240,513,236*
* Excludes as shares held by affiliates only shares held by the registrant's
Employee Stock Purchase Plan, Employees' Stock Ownership Plan, Directors'
Stock Investment Plan and executive officers who are directors without
prejudice to a determination of control.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of February 28, 1999.
Common Stock, $.625 Par Value -- 222,521,023 shares issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual proxy statement to be dated April 7, 1999 are
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
(a) The Registrant, Regions Financial Corporation (the "Registrant" or
"Regions"), is a regional bank holding company headquartered in Birmingham,
Alabama, which operated 713 full-service banking offices in Alabama, Arkansas,
Florida, Georgia, Louisiana, South Carolina, Tennessee and Texas as of December
31, 1998. At that date, Regions had total consolidated assets of approximately
$36.8 billion, total consolidated deposits of approximately $28.4 billion, and
total consolidated stockholders' equity of approximately $3.0 billion.
Regions was organized under the laws of the state of Delaware and commenced
operations in 1971 under the name First Alabama Bancshares, Inc. On May 2, 1994,
the name of First Alabama Bancshares, Inc. was changed to Regions Financial
Corporation. Regions' principal executive offices are located at 417 North 20th
Street, Birmingham, Alabama 35203, and its telephone number at such address is
(205) 326-7100.
At December 31, 1998, Regions operated seven state-chartered commercial
bank subsidiaries and two nationally-chartered bank subsidiaries (collectively,
the "Subsidiary Banks") in Alabama, Arkansas, Florida, Georgia, Louisiana, South
Carolina, Tennessee and Texas and various banking-related subsidiaries engaged
in mortgage banking, credit life insurance, leasing, commercial accounts
receivable factoring, specialty mortgage financing and securities brokerage
activities with offices in various southeastern states. Through its
subsidiaries, Regions offers a broad range of banking and banking-related
services.
In Alabama, Regions operates through (i) Regions Bank and (ii) Jacobs Bank
which combined operate 199 banking offices throughout the state. At December 31,
1998, these offices had 36% of total consolidated assets and 32% of total
consolidated deposits.
In Arkansas, Regions operates through Regions Bank with 116 banking offices
throughout the state. At December 31, 1998, these offices had 19% of total
consolidated assets and 18% of total consolidated deposits.
In Florida, Regions operates through (i) Regions Bank, (ii) Regions Bank,
NA, and (iii) The Village Bank of Florida. These institutions operate through 65
banking offices in the northwest and central regions of the state. At December
31, 1998, these offices had 6% of total consolidated assets and 8% of total
consolidated deposits.
In Georgia, Regions operates through (i) Regions Bank, (ii) Fayette County
Bank, and (iii) Etowah Bank, which at December 31, 1998, had 20% of total
consolidated assets and 21% of total consolidated deposits. These institutions
operate 143 banking offices in Georgia.
In Louisiana, (i) Regions Bank, (ii) St. Mary Bank and Trust, and (iii) St.
James Bank and Trust operate 86 banking offices throughout the state. At
December 31, 1998, these offices had 8% of total consolidated assets and 10% of
total consolidated deposits.
In South Carolina, (i) Regions Bank and (ii) Greenville National Bank
operate 33 banking offices throughout the state. At December 31, 1998, these
offices had 4% of total consolidated assets and total consolidated deposits.
In Tennessee, Regions Bank operates 42 banking offices. At December 31,
1998, these offices had 4% of total consolidated assets and total consolidated
deposits.
In Texas, Regions Bank operates 29 banking offices throughout the eastern
portion of the state. At December 31, 1998, these offices had 3% of total
consolidated assets and total consolidated deposits.
In addition to the Subsidiary Banks, Regions provides additional banking
services through various banking-related subsidiaries, the most significant of
which provide mortgage banking, credit life insurance, securities brokerage
activities, commercial accounts receivable factoring, and specialty financing.
Regions Mortgage Inc. (RMI), a subsidiary of Regions Bank, is engaged in
mortgage banking with its primary business and source of income being the
origination and servicing of mortgage loans for long-term
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investors. RMI serviced approximately $22.3 billion in real estate mortgages at
December 31, 1998, and operates loan production offices in Alabama, Arkansas,
Florida, Georgia, Louisiana, South Carolina, and Tennessee.
Regions Agency, Inc., a subsidiary of Regions, acts as an insurance agent
or broker with respect to credit life and accident and health insurance and
other types of insurance relating to extensions of credit by the Subsidiary
Banks or banking-related subsidiaries.
Regions Life Insurance Company, a subsidiary of Regions, acts as a
re-insurer of credit life and accident and health insurance in connection with
the activities of certain affiliates of Regions.
Regions Investment Company, Inc., a subsidiary of Regions Bank, engages in
securities underwriting and brokerage activities and operates offices in
Alabama, Arkansas, Florida, Georgia, Louisiana, South Carolina, Tennessee and
Texas.
Regions Interstate Billing Service, Inc. (RIBS), a subsidiary of Regions,
factors commercial accounts receivable and performs billing and collection
services. RIBS primarily serves clients related to the automotive service
industry.
EquiFirst, a subsidiary of EFC Holdings Corporation (a wholly owned
subsidiary of Regions Bank), provides specialty mortgage financing to consumers.
A substantial portion of the growth of Regions since commencing operations
in 1971 has been through the acquisition of other financial institutions,
including commercial banks and thrift institutions, and the assets and deposits
thereof. Since it began operations as a bank holding company, Regions has
completed 85 acquisitions of other financial institutions representing in
aggregate (at the time the acquisitions were completed) approximately $23.5
billion in assets. As part of its ongoing strategic plan, Regions continually
evaluates business combination opportunities and frequently conducts due
diligence activities in connection with possible business combinations. As a
result, business combination discussions and, in some cases, negotiations
frequently take place, and future business combinations involving cash, debt, or
equity securities can be expected. Any future business combination or series of
business combinations that Regions might undertake may be material, in terms of
assets acquired or liabilities assumed, to Regions' financial condition. Recent
business combinations in the banking industry have typically involved the
payment of a premium over book and market values. This practice could result in
dilution of book value and net income per share for the acquirer.
Reference is made to Items 6 and 7 of this Annual Report on Form 10-K for
certain statistical (Guide 3) and other information.
This Annual Report on Form 10-K, other periodic reports filed by Regions
under the Securities Exchange Act of 1934, as amended, and any other written or
oral statements made by or on behalf of Regions may include forward looking
statements which reflect Regions' current views with respect to future events
and financial performance. Such forward looking statements are based on general
assumptions and are subject to various risks, uncertainties, and other factors
that may cause actual results to differ materially from the views, beliefs, and
projections expressed in such statements. These risks, uncertainties and other
factors include, but are not limited to:
(1) Possible changes in economic and business conditions that may
affect the prevailing interest rates, the prevailing rates of inflation, or
the amount of growth, stagnation, or recession in the global, U.S., and
southeastern U.S. economies, the value of investments, collectibility of
loans, and the profitability of business entities;
(2) Possible changes in monetary and fiscal policies, laws, and
regulations, and other activities of governments, agencies, and similar
organizations;
(3) The effects of easing of restrictions on participants in the
financial services industry, such as banks, securities brokers and dealers,
investment companies, and finance companies, and attendant changes in
patterns and effects of competition in the financial services industry;
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(4) The cost and other effects of legal and administrative cases and
proceedings, claims, settlements, and judgments;
(5) The ability of Regions to achieve the earnings expectations
related to the acquired operations of recently-completed and pending
acquisitions, which depends on a variety of factors, including (i) the
ability of Regions to achieve the anticipated cost savings and revenue
enhancements with respect to the acquired operations, (ii) the assimilation
of the acquired operations to Regions' corporate culture, including the
ability to instill Regions' credit practices and efficient approach to the
acquired operations, (iii) the continued growth of the markets in which
Regions operates consistent with recent historical experience, (iv) the
absence of material contingencies related to the acquired operations,
including asset quality and litigation contingencies, and (v) Regions'
ability to expand into new markets and to maintain profit margins in the
face of pricing pressures.
(6) Possible changes in the credit worthiness of customers and the
possible impairment of collectibility of loans to certain customers
resulting from the impact of Year 2000 issues on customers' operations and
cashflows needed to service indebtedness.
The words "believe", "expect", "anticipate", "project", and similar
expressions signify forward looking statements. Readers are cautioned not to
place undue reliance on any forward looking statements made by or on behalf of
Regions. Any such statement speaks only as of the date the statement was made.
Regions undertakes no obligation to update or revise any forward looking
statements.
(b) The primary business conducted by Registrant's banking affiliates, in
each geographic region, is banking, which includes provision of commercial and
retail banking services and, in some cases, trust services. Registrant's
bank-related subsidiaries perform services incidental to the business of
banking.
Reference is made to Note W. "Business Segment Information" to the
consolidated financial statements included under Item 8 of this Annual Report on
Form 10-K for information required by this item.
(c)(1) General. The Registrant is a bank holding company, registered with
the Board of Governors of the Federal Reserve System ("Federal Reserve") under
the Bank Holding Company Act of 1956, as amended ("BHC Act"). As such, the
Registrant and its subsidiaries are subject to the supervision, examination, and
reporting requirements of the BHC Act and the regulations of the Federal
Reserve. In addition, as a national chartered bank holding company, the
Registrant is also registered with the Office of the Comptroller of the Currency
(OCC) and is subject to the regulation, supervision, examination, and reporting
requirements of the OCC.
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before: (i) it may acquire direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, the bank holding company will directly or indirectly own or control
more than 5.0% of the voting shares of the bank; (ii) it or any of its
subsidiaries, other than a bank, may acquire all or substantially all of the
assets of any bank; or (iii) it may merge or consolidate with any other bank
holding company.
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would be in restraint of
trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. Consideration of financial resources generally focuses on capital
adequacy, and consideration of convenience and needs issues includes the
parties' performance under the Community Reinvestment Act of 1977 (the "CRA"),
both of which are discussed below.
The BHC Act, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"), which became effective on
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September 29, 1995, repealed the prior statutory restrictions on interstate
acquisitions of banks by bank holding companies, such that the Registrant, and
any other bank holding company located in Alabama may now acquire a bank located
in any other state, and any bank holding company located outside Alabama may
lawfully acquire any Alabama-based bank, regardless of state law to the
contrary, in either case subject to certain deposit-percentage, aging
requirements, and other restrictions. The Interstate Banking Act also generally
provided that, after June 1, 1997, national and state-chartered banks may branch
interstate through acquisitions of banks in other states.
The BHC Act generally prohibits the Registrant from engaging in activities
other than banking or managing or controlling banks or other permissible
subsidiaries and from acquiring or retaining direct or indirect control of any
company engaged in any activities other than those activities determined by the
Federal Reserve to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In determining whether a particular
activity is permissible, the Federal Reserve must consider whether the
performance of such an activity reasonably can be expected to produce benefits
to the public, such as greater convenience, increased competition, or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices. For example, factoring accounts receivable, acquiring or
servicing loans, leasing personal property, conducting discount securities
brokerage activities, performing certain data processing services, acting as
agent or broker in selling credit life insurance and certain other types of
insurance in connection with credit transactions, and performing certain
insurance underwriting activities all have been determined by the Federal
Reserve to be permissible activities of bank holding companies. The BHC Act does
not place territorial limitations on permissible nonbanking activities of bank
holding companies. Despite prior approval, the Federal Reserve has the power to
order a bank holding company or its subsidiaries to terminate any activity or to
terminate its ownership or control of any subsidiary when it has reasonable
cause to believe that continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness, or stability of
any bank subsidiary of that bank holding company.
Each of the Subsidiary Banks of the Registrant is a member of the Federal
Deposit Insurance Corporation ("FDIC"), and as such, its deposits are insured by
the FDIC to the extent provided by law. Each Subsidiary Bank is also subject to
numerous state and federal statutes and regulations that affect its business,
activities, and operations, and each is supervised and examined by one or more
state or federal bank regulatory agencies.
All of the Subsidiary Banks that are state-chartered banks and are not
members of the Federal Reserve System are subject to supervision and examination
by the FDIC and the state banking authorities of the states in which they are
located. The Subsidiary Banks that are nationally chartered are subject to
regulation, supervision, and examination by the OCC and the FDIC. The federal
banking regulator for each of the Subsidiary Banks, as well as the appropriate
state banking authority for each of the Subsidiary Banks that is a state
chartered bank, regularly examines the operations of the Subsidiary Banks and is
given authority to approve or disapprove mergers, consolidations, the
establishment of branches, and similar corporate actions. The federal and state
banking regulators also have the power to prevent the continuance or development
of unsafe or unsound banking practices or other violations of law.
The Subsidiary Banks are subject to the provisions of the CRA. Under the
terms of the CRA, the Subsidiary Banks have a continuing and affirmative
obligation consistent with their safe and sound operation to help meet the
credit needs of their entire communities, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires each appropriate federal bank regulatory agency, in connection with its
examination of a subsidiary depository institution, to assess such institution's
record in assessing and meeting the credit needs of the community served by that
institution, including low- and moderate-income neighborhoods. The regulatory
agency's assessment of the institution's record is made available to the public.
Further, such assessment is required of any institution which has applied to:
(i) charter a national bank; (ii) obtain deposit insurance coverage for a newly
chartered institution; (iii) establish a new branch office that will accept
deposits; (iv) relocate an office; or (v) merge or consolidate
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with, or acquire the assets or assume the liabilities of, a federally regulated
financial institution. In the case of a bank holding company applying for
approval to acquire a bank or other bank holding company, the Federal Reserve
will assess the records of each subsidiary depository institution of the
applicant bank holding company, and such records may be the basis for denying
the application. All of the Subsidiary Banks received at least a "satisfactory"
CRA rating in their most recent examinations.
In April 1995, the federal banking agencies adopted amendments revising
their CRA regulations, with a phase-in schedule applicable to various
provisions. Among other things, the amended CRA regulations, implemented on July
1, 1997, substitute for the prior process-based assessment factors a new
evaluation system that rates an institution based on its actual performance in
meeting community needs. In particular, the system focuses on three tests; (i) a
lending test, to evaluate the institution's record of making loans in its
service areas; (ii) an investment test, to evaluate the institution's record of
investing in community development projects; and (iii) a service test, to
evaluate the institution's delivery of services through its branches, ATM's and
other offices. The amended CRA regulations also clarify how an institution's CRA
performance will be considered in the application process.
Payment of Dividends. The Registrant is a legal entity separate and
distinct from its banking and other subsidiaries. The principal source of cash
flow of the Registrant, including cash flow to pay dividends to its
stockholders, is dividends from the Subsidiary Banks. There are statutory and
regulatory limitations on the payment of dividends by the Subsidiary Banks to
the Registrant as well as the Registrant to its stockholders.
As to the payment of dividends, all of the Subsidiary Banks that are state
nonmember banks are subject to the respective laws and regulations of the states
of Alabama, Florida, Georgia, and Louisiana and to the regulations of the FDIC.
If, in the opinion of a federal regulatory agency, an institution under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the institution, could
include the payment of dividends), such agency may require, after notice and
hearing, that such institution cease and desist from such practice. The federal
banking agencies have indicated that paying dividends that deplete an
institution's capital base to an inadequate level would be an unsafe and unsound
banking practice. Under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), an insured institution may not pay any dividend if
payment would cause it to become undercapitalized or if it already is
undercapitalized. See "Prompt Corrective Action." Moreover, the Federal Reserve
and the FDIC have issued policy statements which provide that bank holding
companies and insured banks should generally pay dividends only out of current
operating earnings.
At December 31, 1998, under dividend restrictions imposed under federal and
state laws, the Subsidiary Banks, without obtaining governmental approvals,
could declare aggregate dividends to the Registrant of approximately $266
million.
The payment of dividends by the Registrant and the Subsidiary Banks may
also be affected or limited by other factors, such as the requirement to
maintain adequate capital above regulatory guidelines.
Capital Adequacy. The Registrant and the Subsidiary Banks are required to
comply with the capital adequacy standards established by the Federal Reserve in
the case of the Registrant and the FDIC and the OCC in the case of the
Subsidiary Banks. There are two basic measures of capital adequacy for bank
holding companies that have been promulgated by the Federal Reserve: a
risk-based measure and a leverage measure. All applicable capital standards must
be satisfied for a bank holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items.
The minimum guideline for the ratio of total capital ("Total Capital") to
risk-weighted assets (including certain off-balance-sheet items, such as standby
letters of credit) is 8.0%. At least half of the Total Capital
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must be composed of common equity, undivided profits, minority interests in the
equity accounts of consolidated subsidiaries, noncumulative perpetual preferred
stock, and a limited amount of cumulative perpetual preferred stock, less
goodwill and certain other intangible assets ("Tier 1 Capital"). The remainder
may consist of subordinated debt, other preferred stock, and a limited amount of
loan loss reserves. The minimum guideline for Tier 1 Capital is 4.0%. At
December 31, 1998, the Registrant's consolidated Tier 1 Capital and Total
Capital ratios were 10.26% and 12.17%, respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets, less goodwill and certain other
intangible assets (the "Leverage Ratio"), of 3.0% for bank holding companies
that meet certain specified criteria, including having the highest regulatory
rating. All other bank holding companies generally are required to maintain a
Leverage Ratio of at least 3.0%, plus an additional cushion of 100 to 200 basis
points. The Registrant's Leverage Ratio at December 31, 1998, was 7.40%. The
guidelines also provide that bank holding companies experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Furthermore, the Federal Reserve has indicated that it
will consider a "tangible Tier 1 Capital leverage ratio" (deducting all
intangibles) and other indicators of capital strength in evaluating proposals
for expansion or new activities.
Each of the Registrant's Subsidiary Banks is subject to risk-based and
leverage capital requirements adopted by the FDIC or the OCC, which are
substantially similar to those adopted by the Federal Reserve. Each of the
Registrant's Subsidiary Banks was in compliance with applicable minimum capital
requirements as of December 31, 1998. Neither the Registrant nor any of the
Subsidiary Banks has been advised by any federal banking agency of any specific
minimum capital ratio requirement applicable to it.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business. See "Prompt Corrective
Action."
Support of Subsidiary Banks. Under Federal Reserve policy, the Registrant
is expected to act as a source of financial strength to, and to commit resources
to support, each of the Subsidiary Banks. This support may be required at times
when, absent such Federal Reserve policy, the Registrant may not be inclined to
provide it. In addition, any capital loans by a bank holding company to any of
the Subsidiary Banks are subordinate in right of payment to deposits and to
certain other indebtedness of such Subsidiary Bank. In the event of a bank
holding company's bankruptcy, any commitment by the bank holding company to a
federal bank regulatory agency to maintain the capital of a Subsidiary Bank will
be assumed by the bankruptcy trustee and entitled to a priority of payment.
Under the Federal Deposit Insurance Act (FDIA), a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989, in connection with
(i) the default of a commonly controlled FDIC-insured depository institution or
(ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured
depository institution "in danger of default." "Default" is defined generally as
the appointment of a conservator or receiver, and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. The FDIC's
claim for damages is superior to claims of stockholders of the insured
depository institution or its holding company, but is subordinate to claims of
depositors, secured creditors, and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institution. The
Subsidiary Banks are subject to these cross-guarantee provisions. As a result,
any loss suffered by the FDIC in respect of any of the Subsidiary Banks would
likely result in assertion of the cross-guarantee provisions, the assessment of
such estimated losses against the Registrant's other Subsidiary Banks, and a
potential loss of the Registrant's investment in such other Subsidiary Banks.
Prompt Corrective Action. FDICIA establishes a system of prompt corrective
action to resolve the problems of undercapitalized institutions. Under this
system, which became effective in December 1992, the federal banking regulators
are required to establish five capital categories ("well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized") and to
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take certain mandatory supervisory actions, and are authorized to take other
discretionary actions, with respect to institutions in the three
undercapitalized categories, the severity of which will depend upon the capital
category in which the institution is placed. Generally, subject to a narrow
exception, FDICIA requires the banking regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized. The federal
banking agencies have specified by regulation the relevant capital level for
each category.
Under the final agency rule implementing the prompt corrective action
provisions, an institution that (i) has a Total Capital ratio of 10% or greater,
a Tier 1 Capital ratio of 6.0% or greater, and a Leverage Ratio of 5.0% or
greater and (ii) is not subject to any written agreement, order, capital
directive, or prompt corrective action directive issued by the appropriate
federal banking agency is deemed to be "well capitalized." An institution with a
Total Capital ratio of 8.0% or greater, a Tier 1 Capital ratio of 4.0% or
greater, and a Leverage Ratio of 4.0% or greater is considered to be "adequately
capitalized." A depository institution that has a Total Capital ratio of less
than 8.0%, a Tier 1 Capital ratio of less than 4.0%, or a Leverage Ratio of less
than 4.0% is considered to be "undercapitalized." A depository institution that
has a Total Capital ratio of less than 6.0%, a Tier 1 Capital ratio of less than
3.0%, or a Leverage Ratio of less than 3.0% is considered to be "significantly
undercapitalized," and an institution that has a tangible equity capital to
assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." For purposes of the regulation, the term "tangible equity"
includes core capital elements counted as Tier 1 Capital for purposes of the
risk-based capital standards plus the amount of outstanding cumulative perpetual
preferred stock (including related surplus), minus all intangible assets with
certain exceptions. A depository institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
Under FDICIA, a bank holding company must guarantee that a subsidiary depository
institution meet its capital restoration plan, subject to certain limitations.
The obligation of a controlling bank holding company under FDICIA to fund a
capital restoration plan is limited to the lesser of 5.0% of an undercapitalized
subsidiary's assets and the amount required to meet regulatory capital
requirements. An undercapitalized institution is also generally prohibited from
increasing its average total assets, making acquisitions, establishing any
branches, or engaging in any new line of business, except in accordance with an
accepted capital restoration plan or with the approval of the FDIC. In addition,
the appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described below if it determines "that those actions are
necessary to carry out the purpose" of FDICIA.
For those institutions that are significantly undercapitalized or
undercapitalized and either fail to submit an acceptable capital restoration
plan or fail to implement an approved capital restoration plan, the appropriate
federal banking agency must require the institution to take one or more of the
following actions: (i) sell enough shares, including voting shares, to become
adequately capitalized; (ii) merge with (or be sold to) another institution (or
holding company), but only if grounds exist for appointing a conservator or
receiver; (iii) restrict certain transactions with banking affiliates as if the
"sister bank" exception to the requirements of Section 23A of the Federal
Reserve Act did not exist; (iv) otherwise restrict transactions with bank or
nonbank affiliates; (v) restrict interest rates that the institution pays on
deposits to "prevailing rates" in the institution's "region"; (vi) restrict
asset growth or reduce total assets; (vii) alter, reduce, or terminate
activities; (viii) hold a new election of directors; (ix) dismiss any director
or senior executive officer who held office for more than 180 days immediately
before the institution became undercapitalized, provided that in requiring
dismissal of a director or senior officer, the agency must comply with certain
procedural requirements, including the opportunity for an appeal in which the
director or officer will have the burden of proving his or her value to the
institution; (x) employ "qualified" senior executive officers; (xi) cease
accepting deposits from correspondent depository institutions; (xii) divest
certain nondepository affiliates which pose a danger to the institution; or
(xiii) be divested by a parent holding company. In addition, without the prior
approval of the appropriate federal banking agency, a significantly
undercapitalized institution may not pay
7
<PAGE> 9
any bonus to any senior executive officer or increase the rate of compensation
for such an officer without regulatory approval.
At December 31, 1998, all of the Registrant's Subsidiary Banks had the
requisite capital levels to qualify as well capitalized.
FDIC Insurance Assessments. Pursuant to FDICIA, the FDIC adopted a
risk-based assessment system for insured depository institutions that takes into
account the risks attributable to different categories and concentrations of
assets and liabilities. The risk-based system, which went into effect on January
1, 1994, assigns an institution to one of three capital categories: (i) well
capitalized; (ii) adequately capitalized; and (iii) undercapitalized. These
three categories are substantially similar to the prompt corrective action
categories described above, with the "undercapitalized" category including
institutions that are undercapitalized, significantly undercapitalized, and
critically undercapitalized for prompt corrective action purposes. An
institution is also assigned by the FDIC to one of three supervisory subgroups
within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator and information which the FDIC
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor). An institution's
insurance assessment rate is then determined based on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied.
Pursuant to the Deposit Insurance Funds Act of 1996, the FDIC implemented a
special one-time assessment of approximately 65.7 basis points (0.657%) on a
depository institution's deposits insured by the Savings Association Insurance
Fund ("SAIF") held as of March 31, 1995 (or approximately 52.6 basis points on
SAIF deposits acquired by banks in certain qualifying transactions), and adopted
revisions to the assessment rate schedules that would generally eliminate the
disparity between assessment rates applicable to the deposits insured by the
Bank Insurance Fund ("BIF") and the SAIF. The revisions in the assessment rate
schedules reduced assessment rates on SAIF-insured deposits and would generally
equalize BIF and SAIF assessment rates by January, 2000. Regions anticipates
that the net effect of the decrease in the premium assessment rate on SAIF
deposits will result in a reduction in its total deposit insurance premium
assessments through 1999 as compared to years prior to 1997, assuming no further
changes in announced premium assessment rates. Regions recorded a charge against
earnings for the special assessment in the quarter ended September 30, 1996 in
the pre-tax amount of approximately $25.0 million.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.
Safety and Soundness Standards. The FDIA, as amended by FDICIA and the
Riegle Community Development and Regulatory Improvement Act of 1994, requires
the federal bank regulatory agencies to prescribe standards, by regulations or
guidelines, relating to internal controls, information systems and internal
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, asset quality, earnings, stock valuation and
compensation, fees and benefits and such other operational and managerial
standards as the agencies deem appropriate. The federal bank regulatory agencies
have adopted, effective August 9, 1995, a set of guidelines prescribing safety
and soundness standards pursuant to FDICIA, as amended. The guidelines establish
general standards relating to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth and compensation, fees and benefits. In general, the
guidelines require, among other things, appropriate systems and practices to
identify and manage the risk and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director, or principal stockholder. In addition, the agencies adopted
regulations that authorize, but do not require, an agency to order an
institution that has been given notice by an agency that it is not satisfying
any of such safety and soundness standards to submit a compliance plan. If,
after being so notified, an
8
<PAGE> 10
institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an acceptable compliance plan, the agency must
issue an order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized institution is
subject under the "prompt corrective action" provisions of FDICIA. See "Prompt
Corrective Action." If an institution fails to comply with such an order, the
agency may seek to enforce such order in judicial proceedings and to impose
civil money penalties. The federal bank regulatory agencies also proposed
guidelines for asset quality and earnings standards.
Depositor Preference. The Omnibus Budget Reconciliation Act of 1993
provides that deposits and certain claims for administrative expenses and
employee compensation against an insured depository institution would be
afforded a priority over other general unsecured claims against such an
institution in the "liquidation or other resolution" of such an institution by
any receiver.
Other. Because of concerns relating to the competitiveness and the safety
and soundness of the industry, the United States Congress continues to consider
a number of wide-ranging proposals for altering the structure, regulation, and
competitive relationships of the nation's financial institutions. Among such
bills are proposals to prohibit depository institutions and bank holding
companies from conducting certain types of activities, to subject depository
institutions to increased disclosure and reporting requirements, to alter the
statutory separation of commercial and investment banking, to require federal
savings banks to convert to commercial bank charters and to further expand the
powers of depository institutions, bank holding companies, and competitors of
depository institutions. It cannot be predicted whether or in what form any of
these proposals will be adopted or the extent to which the business of the
Registrant may be affected thereby.
Registrant's broker/dealer subsidiary, Regions Investment Company, Inc., is
subject to regulation by the Securities and Exchange Commission, the National
Association of Securities Dealers, and certain state securities commissions.
(i) The following chart shows for the last three years the percentage
of total operating income contributed by each of the major categories of
income.
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Interest and fees on loans.................................. 67.4% 68.5% 67.6%
Interest on securities...................................... 14.9 14.9 15.9
Interest on mortgage loans held for sale.................... 1.5 0.8 0.7
Interest on federal funds sold.............................. 0.6 0.6 0.5
Other interest income....................................... 0.2 0.1 0.3
Trust department income..................................... 1.8 1.6 1.8
Service charges on deposit accounts......................... 5.6 5.6 5.4
Mortgage servicing and origination fees..................... 3.6 3.5 4.0
Other non-interest income................................... 4.4 4.4 3.8
----- ----- -----
Total Operating Income............................ 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
(ii) There has been no public announcement, and no information
otherwise has become public, about a material new product or line of
business.
(iii) The monetary policies of the Federal Reserve affect the
operations of Registrant's Subsidiary Banks. Through changes in the reserve
requirements against bank and thrift deposits, open market operations in
U.S. Government securities and changes in the discount rate on borrowings,
the Federal Reserve influences the cost and availability of funds obtained
for lending and investing.
The monetary policies of the Federal Reserve have had a significant
effect on the operating results of financial institutions in the past and
are expected to do so in the future. The impact of such policies on the
future business and earnings of the Registrant cannot be predicted.
(iv) The Registrant does not have any material patents, trademarks,
licenses, franchises, or concessions.
9
<PAGE> 11
(v) No material portion of the Registrant's business is of a seasonal
nature.
(vi) The primary sources of funds for the Subsidiary Banks are
deposits and borrowed funds. The Registrant's primary sources of operating
funds are service fees, dividends, and interest which it receives from bank
and bank-related subsidiaries.
(vii) No material part of the business of the Registrant is dependent
upon a single customer or a few customers. No single customer or affiliated
group of customers accounts for 10% or more of Registrant's consolidated
revenues.
(viii) Information concerning backlog orders is not relevant to an
understanding of the business of the Registrant.
(ix) No material portion of the business of the Registrant is subject
to renegotiation of profits or termination of contracts or subcontracts by
governmental authorities.
(x) All aspects of the Registrant's business are highly competitive.
The Registrant's subsidiaries compete with other financial institutions
located in Alabama, Arkansas, northwest and central Florida, Georgia,
Louisiana, South Carolina, Tennessee, east Texas and other adjoining
states, as well as large banks in major financial centers and other
financial intermediaries, such as savings and loan associations, credit
unions, consumer finance companies, brokerage firms, insurance companies,
investment companies, mutual funds, other mortgage companies and financial
service operations of major commercial and retail corporations.
As of December 31, 1998, the Registrant was the second largest bank
holding company headquartered in Alabama based on assets. For information
with respect to the Registrant's markets and the size of the Subsidiary
Banks operating in such markets, see the information provided under
subsection (a) of this Item 1.
Customers for banking services are generally influenced by
convenience, quality of service, personal contacts, price of services, and
availability of products. Although the ranking of Registrant's position
varies in different markets, Registrant believes that its affiliates
effectively compete with other banks and thrifts in their relevant market
areas.
Under the provisions of the Interstate Banking Act, the existing
restrictions on interstate acquisitions of banks by bank holding companies,
including the regional interstate banking legislation adopted in 1987 by
the state of Alabama permitting interstate acquisitions of banks and bank
holding companies generally in certain southeastern states, were repealed
effective September 29, 1995, such that the Registrant and any other bank
holding company located in Alabama are now able to acquire a bank located
in any other state, and a bank holding company located outside Alabama
could acquire any Alabama-based bank, in either case subject to certain
deposit percentage and other restrictions. The Interstate Banking Act also
generally provided that, after June 1, 1997, national and state-chartered
banks may branch interstate through acquisitions of banks in other states.
To the extent that large bank holding companies that previously were not
permitted to make acquisitions in the markets in which Regions operates do
effect acquisitions pursuant to the Interstate Banking Act, competition in
the Registrant's markets could further intensify.
(xi) There were no material expenditures during the last three fiscal
years on research and development activities by the Registrant.
(xii) Regulations of any governmental authority concerning the
discharge of materials into the environment are expected to have no
material effect on the Registrant or any of its subsidiaries.
(xiii) As of December 31, 1998, Registrant, its affiliate banks and
other subsidiaries had a total of 14,632 full-time-equivalent employees.
(d) Registrant neither engages in foreign operations nor derives a
significant portion of its business from customers in foreign countries.
10
<PAGE> 12
ITEM 2. PROPERTIES
The corporate headquarters of the Registrant occupy several floors of the
main Birmingham banking facility of Regions Bank (Alabama), located at 417 North
20th Street, Birmingham, Alabama 35203.
The Registrant and its subsidiaries, including the Subsidiary Banks,
operate through 853 office facilities, of which 633 are owned by the Registrant
or one of its subsidiaries and 220 are subject to building or ground leases. Of
the 713 branch office facilities operated by the Subsidiary Banks at December
31, 1998, 188 are subject to building or ground leases and 525 are wholly owned
by the Subsidiary Banks.
For offices in premises leased by the Registrant and its subsidiaries,
annual rentals totaled approximately $17,245,000 as of December 31, 1998. During
1998, the Registrant and its subsidiaries received approximately $9,334,000 in
rentals for space leased to others. At December 31, 1998, encumbrances on the
offices, equipment and other operational facilities owned by the Registrant and
its subsidiaries totaled approximately $3,208,000 with a weighted average
interest rate of 5.5%.
ITEM 3. LEGAL PROCEEDINGS
Reference is made to Note L. to the consolidated financial statements
included under Item 8 of this Annual Report on Form 10-K.
The Registrant continues to be concerned about the general trend in
litigation in Alabama state courts involving large damage awards against
financial service company defendants. Registrant directly or through its
subsidiaries is party to approximately 84 cases in Alabama in the ordinary
course of business, some of which seek class action treatment or punitive
damages. The damage exposure in Alabama in any case and in the aggregate is
difficult to estimate because the jury has broad discretion as to the amount of
damages awarded.
Several appellate court rulings since 1996 provide a basis for the courts
to exercise some control over excessive punitive damage awards. In 1996 the U.S.
Supreme Court overturned an Alabama case involving a large jury award, holding
that the punitive damage award was so grossly excessive as to violate due
process. Subsequently, the U.S. Supreme Court has returned several cases to the
Alabama courts for reconsideration in light of its ruling. In addition, the
Alabama Supreme Court has reduced several large damage awards against defendants
that were awarded by lower court juries. In March of 1997, the Alabama Supreme
Court reversed a precedent set in 1989 regarding reliance by plaintiffs on
verbal representations which are not in agreement with written contracts. The
1989 ruling had been the source of significant litigation losses in the state.
Regions views these appellate court rulings as having a positive influence on
the litigation climate in Alabama.
Registrant believes, based on consultation with legal counsel, that the
outcome of pending litigation will not have a material effect on Registrant's
consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for a vote during the fourth
quarter of 1998.
11
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
On November 30, 1998, 849,590 shares of common stock of the Registrant were
issued in connection with a business combination with EFC Holdings Corporation.
Such shares were not registered under the Securities Act of 1933, in reliance
upon the exemption from registration provided by section 4(2) of such act. Such
shares were issued to six recipients, each of which was an accredited investor
within the meaning of Regulation D and each of which had background and
experience such that the recipient was capable of evaluating the merits and
risks of an investment in the Registrant's common stock. The Registrant took
appropriate precautions to prevent the unregistered distribution of such
securities, consisting of securing the agreement of the recipients not to resell
the securities in the absence of registration or the availability of an
exemption. The shares have been registered for resale under the Securities Act
(Registration No. 333-70421.)
Common Stock Market Prices and Dividend information for the year ended
December 31, 1998, is included under Item 8 of this Annual Report filed on Form
10-K in Note Y. to the Consolidated Financial Statements.
12
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
REGIONAL FINANCIAL CORPORATION & SUBSIDIARIES
HISTORICAL FINANCIAL SUMMARY
<TABLE>
<CAPTION>
COMPOUND
ANNUAL GROWTH
CHANGE RATE
1998 1997 1996 1995 1994 1993 1997-1998 1997-1998
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT RATIOS, YIELDS, AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING
RESULTS
Interest income:
Interest and fees on
loans.................. $2,072,204 $1,837,392 $1,554,478 $1,394,937 $1,050,318 $ 818,970 12.78% 20.40%
Income on federal funds
sold................... 17,610 16,882 11,060 13,462 12,096 9,131 4.31 14.04
Taxable interest on
securities............. 417,121 355,591 331,895 292,459 265,060 216,831 17.30 13.98
Tax-free interest on
securities............. 39,981 42,836 34,536 36,421 34,900 31,676 -6.66 4.77
Other interest income.... 50,870 23,883 22,314 13,148 23,138 25,885 113.00 14.47
---------- ---------- ---------- ---------- ---------- ----------
Total interest
income........... 2,597,786 2,276,584 1,954,283 1,750,427 1,385,512 1,102,493 14.11 18.70
Interest expense:
Interest on deposits..... 1,065,054 954,782 826,844 740,033 521,817 411,535 11.55 20.95
Interest on short-term
borrowings............. 174,906 108,617 75,827 69,056 29,552 9,211 61.03 80.18
Interest on long-term
borrowings............. 33,008 33,977 39,788 52,153 46,791 25,453 -2.85 5.34
---------- ---------- ---------- ---------- ---------- ----------
Total interest
expense.......... 1,272,968 1,097,376 942,459 861,242 598,160 446,199 16.00 23.33
---------- ---------- ---------- ---------- ---------- ----------
Net interest
income........... 1,324,818 1,179,208 1,011,824 889,185 787,352 656,294 12.35 15.08
Provision for loan
losses................... 60,505 89,663 46,026 37,493 22,058 38,017 -32.52 9.74
---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan
losses................. 1,264,313 1,089,545 965,798 851,692 765,294 618,277 16.04 15.38
Non-interest income:
Trust department
income................. 55,218 44,227 41,660 38,328 34,016 32,102 24.85 11.46
Service charges on
deposit accounts....... 171,344 151,618 124,960 105,207 91,648 78,753 13.01 16.82
Mortgage servicing and
origination fees....... 111,555 93,327 92,757 65,920 65,511 66,591 19.53 10.87
Securities gains
(losses)............... 7,002 498 3,311 (697) 681 3,312 NM NM
Other.................... 129,578 117,312 82,415 71,379 60,662 64,880 10.46 14.84
---------- ---------- ---------- ---------- ---------- ----------
Total non-interest
income........... 474,697 406,982 345,103 280,137 252,518 245,638 16.64 14.08
Non-interest expense:
Salaries and employee
benefits............... 528,409 480,842 413,768 373,754 334,508 295,794 9.89 12.30
Net occupancy expense.... 62,887 61,933 55,163 48,724 45,088 38,583 1.54 10.26
Furniture and equipment
expense................ 68,595 56,304 49,971 41,719 38,891 33,328 21.83 15.53
Merger and consolidation
expense and SAIF
assessment............. 121,438 -0- 33,777 -0- -0- -0- NM NM
Other.................... 322,379 302,697 284,355 256,628 235,019 216,339 6.50 8.30
---------- ---------- ---------- ---------- ---------- ----------
Total non-interest
expense.......... 1,103,708 901,776 837,034 720,825 653,506 584,044 22.39 13.57
---------- ---------- ---------- ---------- ---------- ----------
Income before
income taxes..... 635,302 594,751 473,867 411,004 364,306 279,871 6.82 17.82
Applicable income taxes.... 213,590 197,222 156,008 134,529 115,853 88,225 8.30 19.34
---------- ---------- ---------- ---------- ---------- ----------
Net income......... $ 421,712 $ 397,529 $ 317,859 $ 276,475 $ 248,453 $ 191,646 6.08% 17.09%
========== ========== ========== ========== ========== ==========
Average number of shares
outstanding.............. 220,114 209,781 194,241 190,896 182,903 168,758 4.93% 5.46%
Average number of shares
outstanding -- diluted... 223,781 213,750 197,751 193,579 185,110 171,363 4.69 5.48
Per share:
Net income............. $ 1.92 $ 1.89 $ 1.64 $ 1.45 $ 1.36 $ 1.14 1.59% 10.99%
Net income, diluted.... 1.88 1.86 1.61 1.43 1.34 1.12 1.08 10.91
Cash dividends
declared............. 0.92 0.80 0.70 0.66 0.60 0.52 15.00 12.09
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
YIELDS AND COSTS (TAXABLE
EQUIVALENT BASIS)
Earning assets:
Taxable securities...... 6.42% 6.50% 6.37% 6.27% 5.86% 6.17%
Tax-free securities..... 8.26 8.42 8.07 8.64 9.25 9.67
Federal funds sold...... 5.45 5.99 5.19 6.01 4.03 3.00
Loans (net of unearned
income)............... 8.88 8.98 8.99 8.94 8.17 8.18
Other earning assets.... 6.59 7.32 8.10 7.23 6.33 6.31
Total earning
assets.......... 8.27 8.42 8.35 8.30 7.53 7.59
Interest-bearing
liabilities:
Interest-bearing
deposits.............. 4.61 4.63 4.58 4.55 3.61 3.50
Short-term borrowings... 5.16 5.67 5.46 6.31 5.10 3.52
Long-term borrowings.... 7.32 6.69 6.66 6.56 6.12 6.94
Total
interest-bearing
liabilities..... 4.73 4.76 4.70 4.74 3.79 3.60
Net yield on
interest earning
assets.......... 4.25 4.41 4.36 4.27 4.33 4.57
RATIOS
Net income to:
Average stockholders'
equity................ 14.62%** 15.38% 14.71%* 14.30% 14.88% 14.02%
Average total assets.... 1.24** 1.35 1.25* 1.19 1.23 1.19
Efficiency................ 60.82** 57.78 61.84* 61.61 62.89 63.84
Dividend payout........... 47.92 42.33 42.68 45.52 44.12 45.61
Average loans to average
deposits................ 86.93 84.94 82.42 82.23 75.90 72.36
Average stockholders'
equity to average total
assets.................. 8.47 8.75 8.50 8.36 8.23 8.49
Average interest-bearing
deposits to average
total deposits.......... 85.83 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%.
** Ratios for 1998 excluding $80.7 million in after-tax charges for merger and
consolidation expenses are as follows: Return on average stockholders' equity
17.42%, Return on average total assets 1.48%, and Efficiency 54.13%.
14
<PAGE> 16
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
HISTORICAL FINANCIAL SUMMARY -- CONTINUED
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
(AVERAGE DAILY BALANCES)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Taxable securities............... $ 6,473,392 $ 5,443,877 $ 5,151,154 $ 4,646,458 $ 4,549,170 $ 3,538,353
Tax-exempt securities............ 728,511 769,516 665,685 616,960 549,471 478,563
Federal funds sold............... 323,293 282,006 213,280 224,136 307,255 307,202
Loans, net of unearned Income.... 23,379,317 20,535,989 17,329,462 15,666,565 12,912,785 10,067,077
Other earning assets............. 773,077 327,265 276,257 181,890 361,025 408,969
----------- ----------- ----------- ----------- ----------- -----------
Total earning assets....... 31,677,590 27,358,653 23,635,838 21,336,009 18,679,706 14,800,164
Allowance for loan losses........ (313,521) (284,606) (244,012) (221,004) (207,166) (168,871)
Cash and due from banks.......... 981,930 1,003,864 811,790 918,010 835,364 739,869
Other non-earning assets......... 1,711,042 1,460,675 1,222,811 1,107,953 969,492 732,651
----------- ----------- ----------- ----------- ----------- -----------
Total assets............... $34,057,041 $29,538,586 $25,426,427 $23,140,968 $20,277,396 $16,103,813
=========== =========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits:
Non-interest-bearing............. $ 3,812,177 $ 3,565,848 $ 2,970,682 $ 2,781,575 $ 2,562,650 $ 2,153,016
Interest-bearing................. 23,081,727 20,611,654 18,056,076 16,271,457 14,449,888 11,759,364
----------- ----------- ----------- ----------- ----------- -----------
Total deposits............. 26,893,904 24,177,502 21,026,758 19,053,032 17,012,538 13,912,380
Borrowed funds:
Short-term....................... 3,386,392 1,917,127 1,389,922 1,095,129 577,526 256,356
Long-term........................ 450,808 507,775 597,034 794,576 766,281 369,095
----------- ----------- ----------- ----------- ----------- -----------
Total borrowed funds....... 3,837,200 2,424,902 1,986,956 1,889,705 1,343,807 625,451
Other liabilities................ 441,188 352,124 251,244 264,708 251,789 199,030
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities.......... 31,172,292 26,954,528 23,264,958 21,207,445 18,608,134 14,736,861
Stockholders' equity............. 2,884,749 2,584,058 2,161,469 1,933,523 1,669,262 1,366,952
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity..... $34,057,041 $29,538,586 $25,426,427 $23,140,968 $20,277,396 $16,103,813
=========== =========== =========== =========== =========== ===========
<CAPTION>
COMPOUND
ANNUAL GROWTH
CHANGE RATE
1997-1998 1993-1998
------------- -----------
(AVERAGE DAILY BALANCES)
<S> <C> <C> <C>
ASSETS
Earning assets:
Taxable securities............... 18.91% 12.84%
Tax-exempt securities............ -5.33 8.77
Federal funds sold............... 14.64 1.03
Loans, net of unearned Income.... 13.85 18.35
Other earning assets............. 136.22 13.58
Total earning assets....... 15.79 16.44
Allowance for loan losses........ 10.16 13.17
Cash and due from banks.......... -2.18 5.82
Other non-earning assets......... 17.14 18.49
Total assets............... 15.30% 16.16%
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits:
Non-interest-bearing............. 6.91% 12.11%
Interest-bearing................. 11.98 14.44
Total deposits............. 11.24 14.09
Borrowed funds:
Short-term....................... 76.64 67.56
Long-term........................ -11.22 4.08
Total borrowed funds....... 58.24 43.74
Other liabilities................ 25.29 17.26
Total liabilities.......... 15.65 16.16
Stockholders' equity............. 11.64 16.11
Total liabilities and
stockholders' equity..... 15.30% 16.16%
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
(AVERAGE DAILY BALANCES)
<S> <C> <C> <C> <C> <C> <C>
YEAR-END BALANCES
Assets........................... $36,831,940 $31,414,058 $26,993,344 $24,419,249 $22,184,508 $19,126,602
Securities....................... 7,969,137 6,315,923 5,742,375 5,618,839 5,143,226 4,861,438
Loans, net of unearned income.... 24,365,587 21,881,123 18,395,552 16,156,312 14,726,649 11,791,556
Non-interest-bearing deposits.... 4,577,125 3,744,198 3,143,968 3,086,166 2,765,390 2,391,459
Interest-bearing deposits........ 23,772,941 21,266,823 18,875,444 16,896,367 15,283,516 13,850,749
Total deposits............. 28,350,066 25,011,021 22,019,412 19,982,533 18,048,906 16,242,208
Long-term debt................... 571,040 445,529 570,545 762,521 766,774 683,171
Stockholders' equity............. 3,000,401 2,679,821 2,274,563 2,047,398 1,785,026 1,581,143
Stockholders' equity per share... $ 13.61 $ 12.75 $ 11.82 $ 10.74 $ 9.58 $ 8.89
Market price per share of common
stock.......................... $ 40.31 $ 42.19 $ 25.85 $ 21.50 $ 15.50 $ 16.19
<CAPTION>
COMPOUND
ANNUAL GROWTH
CHANGE RATE
1997-1998 1993-1998
------------- -----------
(AVERAGE DAILY BALANCES)
<S> <C> <C> <C>
YEAR-END BALANCES
Assets........................... 17.25% 14.00%
Securities....................... 26.18 10.39
Loans, net of unearned income.... 11.35 15.62
Non-interest-bearing deposits.... 22.25 13.86
Interest-bearing deposits........ 11.78 11.41
Total deposits............. 13.35 11.78
Long-term debt................... 28.17 -3.52
Stockholders' equity............. 11.96 13.67
Stockholders' equity per share... 6.75% 8.89%
Market price per share of common
stock.......................... -4.46% 20.01%
</TABLE>
- ---------------
Notes to Historical Financial Summary:
(1) Amounts in all periods have been restated to reflect significant business
combinations accounted for as poolings of interests.
(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 1998-1993.
(5) This summary should be read in conjunction with the related consolidated
financial statements and notes thereto under item 8 on pages 50 to 87 of
this Annual Report on Form 10-K.
16
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 1996, 1997 and 1998; however, financial information for prior years
will also be presented when appropriate.
On July 31, 1998, First Commercial Corporation of Little Rock, Arkansas,
(First Commercial) 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 1998, Regions' banking affiliates
contributed approximately $451 million to consolidated income. During 1997 and
1998, Regions' individual banking affiliates in each state (except for recently
acquired banks) were merged into one state-chartered (Alabama) bank. A
distribution of selected information as of December 31, 1998, on Regions'
banking operations, by state, is as follows:
<TABLE>
<CAPTION>
FULL-SERVICE
ASSETS LOANS DEPOSITS OFFICES
------ ----- -------- ------------
<S> <C> <C> <C> <C>
Alabama........................................ 36% 33% 32% 199
Arkansas....................................... 19 17 18 116
Georgia........................................ 20 23 21 143
Louisiana...................................... 8 9 10 86
Florida........................................ 6 7 8 65
Texas.......................................... 3 3 3 29
South Carolina................................. 4 4 4 33
Tennessee...................................... 4 4 4 42
--- --- --- ---
Totals............................... 100% 100% 100% 713
=== === === ===
</TABLE>
Supplementing the Company's banking operations are a mortgage banking
company, credit life insurance related companies, a registered broker/dealer
firm and a commercial accounts receivable financing, billing and collection
company. Regions has no foreign operations, although it maintains an
International Department to assist customers with their foreign transactions.
The mortgage banking company services approximately $22.3 billion in mortgage
loans and in 1998 contributed approximately $22.0 million to income.
The Company's principal market areas are all of Alabama and Arkansas, north
and southwest 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, Mississippi and South Carolina.
The acquisitions of other banks and related institutions have contributed
significantly to Regions' growth during the last three years. Regions has
expanded into new markets and strengthened its presence in existing markets.
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
17
<PAGE> 19
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.
During 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.
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, 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' 1998 acquisition activity expanded its presence in Alabama,
Georgia, Florida, Louisiana, South Carolina, and Tennessee through ten
acquisitions with combined assets of $2.1 billion, combined loans of $1.3
billion and combined deposits of $1.8 billion.
In Alabama, Regions acquired Jacobs Bank, located in Scottsboro. The Jacobs
transaction added $186 million in assets.
Regions' expansion in Georgia included the acquisition of Etowah Bank
located in Canton, First Community Banking Services, Inc. located in Peachtree
City and branches purchased from First Union National Bank in Valdosta, adding
assets of $409 million, $125 million and $109 million, respectively.
Regions' acquisition activity in Florida added $416 million in combined
assets from transactions with two institutions; Key Florida Bancorp, Inc. and
Village Bankshares, Inc. These institutions added to Regions' existing central
Florida presence.
18
<PAGE> 20
In Louisiana, Regions acquired two institutions: St. Mary Holding
Corporation in Franklin with assets of $111 million and St. James
Bancorporation, Inc. in Lutcher with assets of $172 million.
Also in 1998, Regions expanded its South Carolina market with the
acquisition of Greenville Financial Corporation. This transaction added $141
million in assets.
In Tennessee, First Commercial acquired Federal Savings Bank, a subsidiary
of Kemmons Wilson, Inc. This transaction added $396 million in assets.
Additionally, Regions expanded its line of businesses and market area by
acquiring EFC Holdings Corporation ("EFC"), a Charlotte, North Carolina,
specialty financing institution. EFC, with $63 million in assets, originates and
sells consumer mortgage loans.
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>
1998
February Greenville Financial Corporation Greenville, South $141,294 Pooling
Carolina
March St. Mary Holding Corporation Franklin, Louisiana 111,498 Pooling
March Key Florida Bancorp, Inc. Bradenton, Florida 204,435 Pooling
March Federal Savings Bank subsidiary Memphis, Tennessee 395,629 Purchase
of Kemmons Wilson, Inc.
August Village Bankshares, Inc. Tampa, Florida 211,469 Pooling
August Jacobs Bank Scottsboro, Alabama 185,939 Pooling
September Etowah Bank Canton, Georgia 409,139 Pooling
September First Community Banking Services, Peachtree City, 124,762 Pooling
Inc. Georgia
September Branches of First Union National Valdosta, Georgia 108,913 Purchase
Bank
November EFC Holdings Corporation Charlotte, North 63,147 Purchase
Carolina
December St. James Bancorporation, Inc. Lutcher, Louisiana 171,572 Purchase
1997
January Florida First Bancorp, Inc. Panama City, Florida 286,515 Purchase
January Allied Bankshares, Inc. Thomson, Georgia 559,815 Pooling
February W.B.T. Holding Company Memphis, Tennessee 267,131 Pooling
March West Carroll Bancshares, Inc. Oak Grove, Louisiana 127,145 Pooling
April Gulf South Bancshares, Inc. Gretna, Louisiana 55,363 Purchase
April City National Bank Whitehouse, Texas 38,706 Pooling
May First Mercantile National Bank Longwood, Florida 157,434 Purchase
May The New Iberia Bancorp, Inc. New Iberia, Louisiana 313,494 Pooling
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
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
TOTAL ASSETS ACCOUNTING
DATE COMPANY HEADQUARTERS LOCATION (IN THOUSANDS) TREATMENT
- ---- ------- --------------------- -------------- ----------
<S> <C> <C> <C> <C>
October First Charter Bancshares, Inc. Searcy, Arkansas $ 74,605 Pooling
December GF Bancshares, Inc. Griffin, Georgia 99,446 Purchase
1996
January Metro Financial Corporation Atlanta, Georgia 210,487 Purchase
February The Enterprise National Bank of Atlanta, Georgia 54,263 Purchase
Atlanta
February The Bank of Heard County Franklin, Georgia 41,872 Pooling
April First Federal Bank of Northwest Cedartown, Georgia 93,381 Pooling
Georgia, Federal Savings Bank
August First Gwinnett Bancshares, Inc. Norcross, Georgia 68,364 Purchase
August Rockdale Community Bank Conyers, Georgia 47,457 Purchase
August Delta Bank & Trust Company Belle Chasse, 190,547 Purchase
Louisiana
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
</TABLE>
As of December 31, 1998, Regions had four pending acquisitions, one in each
of the states of Arkansas and Tennessee and two in the state of Georgia. These
institutions have combined assets of approximately $629 million. See Note Q to
the 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, 1998, loans represented 72% of Regions' earning assets.
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>
DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, NET OF UNEARNED INCOME)
<S> <C> <C> <C> <C> <C>
Commercial...................... $ 7,119,093 $ 5,073,698 $ 3,951,766 $ 3,514,693 $ 3,175,292
Real estate -- construction..... 1,865,972 1,582,706 1,222,519 831,694 677,276
Real estate -- mortgage......... 9,608,147 10,072,195 8,496,603 7,869,988 7,375,198
Consumer........................ 5,772,375 5,152,524 4,724,664 3,939,757 3,498,883
----------- ----------- ----------- ----------- -----------
Total................. $24,365,587 $21,881,123 $18,395,552 $16,156,132 $14,726,649
=========== =========== =========== =========== ===========
</TABLE>
20
<PAGE> 22
The amounts of total gross loans (excluding residential mortgages on 1-4
family residences and consumer loans) outstanding at December 31, 1998, 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>
LOANS MATURING
---------------------------------------------------------
WITHIN AFTER ONE BUT AFTER
ONE YEAR WITHIN FIVE YEARS FIVE YEARS TOTAL
---------- ----------------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural..... $3,291,780 $2,869,770 $ 982,626 $ 7,144,176
Real estate -- construction................ 1,027,898 653,280 184,795 1,865,973
Real estate -- mortgage.................... 945,508 972,948 4,581,474 6,499,930
---------- ---------- ---------- -----------
Total............................ $5,265,186 $4,495,998 $5,748,895 $15,510,079
========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
SENSITIVITY OF LOANS TO
CHANGES IN INTEREST RATES
---------------------------
PREDETERMINED VARIABLE
RATE RATE
------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due after one year but within five years.................... $3,328,733 $1,167,265
Due after five years........................................ 4,556,163 1,192,732
---------- ----------
Total............................................. $7,884,896 $2,359,997
========== ==========
</TABLE>
Over the last four years loans increased a total of $9.6 billion, a
compound growth rate of 13%. Loans acquired in connection with acquisitions over
the last four years contributed $3.5 billion of this growth. The most
significant growth in the loan portfolio occurred in 1996, 1997 and 1998, with
loans increasing $2.2 billion, $3.5 billion and $2.5 billion, respectively. The
acquisition of nine banks in 1996 added $492 million in loans. In 1997 and 1998,
respectively, acquisitions added $1.3 billion in loans.
During 1998, Regions securitized $534 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 securitizations, loans would have increased $3.0 billion or 14% in
1998.
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
commercial and consumer loans. Over the last four years, commercial, financial
and agricultural loans increased $3.9 billion or 124%. Real estate construction
loans increased $1.2 billion or 176% over the same period. Real estate mortgage
loans increased $2.2 billion or 30%, and consumer loans increased $2.3 billion
or 65% over the last four years. The increase in real estate mortgage loans is
net of the $534 million securitization previously discussed.
Regions' real estate mortgage portfolio includes $3.6 billion of mortgage
loans secured by single-family residences that were originated by Regions'
mortgage subsidiary. The majority of these loans are secured by homes in
Alabama, Georgia and Florida. These loans increased approximately $424 million
in 1996, $655 million in 1997, and $815 million in 1998, accounting for
approximately 19%, 19%, and 33% respectively, of the growth in total loans in
1996, 1997, and 1998. The increase in 1998 is net of the securitization of the
$534 million in single-family residential mortgages. Eighty-three percent of the
overall balance consists of adjustable-rate mortgages (ARM's) that have rates
approximately 275 basis points above one of several money market indices when
fully priced.
Regions' real estate portfolio also includes $2.0 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 8.01% and a weighted average remaining term of 14.8
years comprise 51% of this portfolio. Single-family ARM's, which have rates
approximately 250 to 275 basis points above one
21
<PAGE> 23
of several money market indices when fully priced, comprise the remaining 49% 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 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.
Regions uses a systematic approach to determine the adequacy of allowance
for loan losses. Regions' systematic approach includes assigning loss factors,
based on historical data as adjusted for current business and economic
conditions, to portfolios of loans with similar characteristics for which
estimates of inherent probable losses can be made. The loss factors are applied
to the respective portfolios in order to determine the overall allowance
adequacy.
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 1.29% in 1998 to a high of 1.43% in
1995. 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
22
<PAGE> 24
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 from 0.98%
at December 31, 1994 to 0.81% at December 31, 1995. Generally improving economic
conditions in Regions' markets during this period, partially offset by the
effect of non-performing assets added by certain acquisitions, resulted in the
declining trend in this ratio. The 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, 1996, 0.91% in 1997, and 1.15% in
1998, 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 120% at December 31, 1998,
compared to 169% at December 31, 1997, and to 193% at December 31, 1996.
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 $66.4 million in
1998 to a low of $23.2 million in 1995. Net loan losses were $56.1 million in
1997, $30.4 million in 1996, and $23.7 million in 1994. Over the last five
years, net loan losses averaged 0.22% of average loans and were 0.28% of average
loans in 1998. Regions' relatively low level of net loan losses is due to
favorable economic conditions, quality control efforts in the underwriting and
monitoring of loans and a substantial amount of recoveries of previously
charged-off loans.
In order to assess the risk characteristics of the loan portfolio at
December 31, 1998, 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 33% of
the portfolio held by banking offices in the state of Alabama. Banking offices
in Georgia and Arkansas each hold 21% of the commercial loan portfolio, followed
by Louisiana with 11%, Tennessee with 5%, and Florida, South Carolina and Texas
with 3% each. 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 the 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.
In the southwestern area of Georgia, while agriculture is important, other
industries play an important role in the economy. Albany and Valdosta, Regions
primary market areas, are hubs for retail trade and health care for the entire
south Georgia market. These markets are also home to numerous Fortune 500
Company manufacturing and production facilities.
23
<PAGE> 25
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. A national retailing chain and large food processing company are
headquartered in Arkansas, which adds to the state's diversified 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, resulting in one of the highest per capita foreign investment
areas in the nation. South Carolina has the third highest growth rate in
personal income 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. A major
distribution center and a new telemarketing service center bode well for the
Tyler market while the Longview area benefits from manufacturing expansion and a
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 1994 to 1998, net losses on commercial loans ranged from a low of
0.03% in 1997 to a high of 0.25% in 1994. Commercial loan losses in 1998 were
0.19% due, in part, to losses on a small number of larger commercial credits.
Future losses are a function of many variables, of which general economic
conditions are the most important. A continuation of moderate economic growth
during 1999 in Regions' market areas could result in 1999 net commercial loan
losses at or above the 1998 level.
Regions' real estate loan portfolio consists of construction and land
development loans, loans to businesses for long-term financing of land and
buildings, loans on one-to-four family residential properties, loans to mortgage
banking companies (which are secured primarily by loans on one-to-four family
residential properties and are known as warehoused mortgage loans) and various
other loans secured by real estate.
Real estate construction loans increased $283 million in 1998 to $1.9
billion. At December 31, 1998, these loans represented 7.7% of Regions' total
loan portfolio, compared to 4.6% at the end of 1994. 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 $3.8 billion at December 31,
1998. 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
24
<PAGE> 26
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 70% 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 1994 to 1998, net losses on real estate loans ranged from a high of
0.12% of real estate loans in 1994, to a low of 0.01% of real estate loans in
1996. The 1998 real estate loan losses were 0.11% as a result of higher
commercial real estate charge offs. 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 expects 1999 net real estate
loan losses to be at or above the 1998 level.
Regions' consumer loan portfolio consists of $4.8 billion in consumer
loans, $627 million in personal lines of credit (including home equity loans)
and $301 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 $1.3 billion in
indirect installment loans at December 31, 1998, compared to $1.9 billion as of
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 and 1998. Net consumer loan losses
were 0.70% in 1998. Management expects net consumer loan losses in 1999 to be
near the 1998 level.
The following table presents information on non-performing loans and real
estate acquired in settlement of loans:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
NON-PERFORMING ASSETS 1998 1997 1996 1995 1994
- --------------------- -------- -------- -------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Loans accounted for on a non-accrual
basis.................................. $124,718 $138,149 $ 84,219 $ 73,990 $ 83,399
Loans contractually past due 90 days or
more as to principal or interest
payments (exclusive of non-accrual
loans)................................. 134,411 29,020 35,831 18,315 10,042
Loans whose terms have been renegotiated
to provide a reduction or deferral of
interest or principal because of a
deterioration in the financial position
of the borrower (exclusive of
non-accrual loans and loans past due 90
days or more).......................... 4,550 12,616 11,032 16,614 19,661
Real estate acquired in settlement of loans
("other real estate")..................... 17,273 20,511 21,099 21,421 30,794
-------- -------- -------- -------- --------
Total............................. $280,952 $200,296 $152,181 $130,340 $143,896
======== ======== ======== ======== ========
Non-performing assets as a percentage of
loans and other real estate............... 1.15% 0.91% 0.83% 0.81% 0.98%
</TABLE>
25
<PAGE> 27
The following analysis presents a five year history of the allowance for
loan losses and loan loss data:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of year.... $ 304,223 $ 253,248 $ 231,390 $ 207,272 $ 191,570
Loans charged off:
Commercial................. 24,214 15,534 9,561 12,790 13,849
Real estate................ 13,366 7,174 4,217 9,607 12,777
Installment................ 56,159 65,571 38,198 22,161 14,359
----------- ----------- ----------- ----------- -----------
Total................. 93,739 88,279 51,976 44,558 40,985
Recoveries:
Commercial.................... 10,473 14,265 8,121 9,418 6,938
Real estate................... 1,655 3,879 3,484 5,031 4,577
Installment................... 15,201 14,027 9,933 6,939 5,808
----------- ----------- ----------- ----------- -----------
Total................. 27,329 32,171 21,538 21,388 17,323
Net loans charged off
(recovered):
Commercial.................... 13,741 1,269 1,440 3,372 6,911
Real estate................... 11,711 3,295 733 4,576 8,200
Installment................... 40,958 51,544 28,265 15,222 8,551
----------- ----------- ----------- ----------- -----------
Total................. 66,410 56,108 30,438 23,170 23,662
Allowance of acquired banks..... 17,094 17,420 6,270 9,795 17,306
Provision charged to expense.... 60,505 89,663 46,026 37,493 22,058
----------- ----------- ----------- ----------- -----------
Balance at end of year.......... $ 315,412 $ 304,223 $ 253,248 $ 231,390 $ 207,272
=========== =========== =========== =========== ===========
Average loans outstanding:
Commercial.................... $ 7,060,917 $ 4,536,710 $ 3,583,628 $ 3,198,594 $ 2,805,511
Real estate................... 10,479,084 10,768,271 9,318,457 8,735,992 7,046,582
Installment................... 5,839,316 5,231,008 4,427,377 3,731,979 3,060,692
----------- ----------- ----------- ----------- -----------
Total................. $23,379,317 $20,535,989 $17,329,462 $15,666,565 $12,912,785
=========== =========== =========== =========== ===========
Net charge-offs as percent of
average loans outstanding:
Commercial.................... .19% .03% .04% .11% .25%
Real estate................... .11 .03 .01 .05 .12
Installment................... .70 .99 .64 .41 .28
Total................. .28 .27 .18 .15 .18
Net charge-offs as percent of:
Provision for loan losses..... 109.8% 62.6% 66.1% 61.8% 107.3%
Allowance for loan losses..... 21.1 18.4 12.0 10.0 11.4
Allowance as percentage of
loans, net of unearned
income........................ 1.29% 1.39% 1.38% 1.43% 1.41%
Provision for loan losses (net
of tax effect) as percentage
of net income................. 9.0% 14.1% 9.0% 8.5% 5.5%
</TABLE>
At December 31, 1998, non-accrual loans totaled $124.7 million or 0.51% of
loans, compared to $138.1 million or 0.63% of loans at December 31, 1997. The
decrease in the dollar amount of non-accrual loans at December 31, 1998, was
primarily due to a change in policy that conformed Regions' non-accrual consumer
loan policy with that of the industry, partially offset by certain commercial
credits included in the impaired loan amount as a part of Note D to the
consolidated financial statements. Commercial loans comprised $51.6 million of
the 1998 total, with real estate loans accounting for $73.0 million and consumer
loans $0.1 million.
26
<PAGE> 28
Loans contractually past due 90 days or more were 0.55% of total loans at
December 31, 1998, compared to 0.13% of total loans at December 31, 1997.
Increased levels of past due consumer loans, due primarily to the change in
policy mentioned above (to no longer transfer consumer loans past due ninety or
more days to non-accrual status as a matter of course), accounted for the
increase in total loans past due 90 days or more since December 31, 1997. Loans
past due 90 days or more at December 31, 1998, consisted of $61.8 million in
commercial and real estate loans and $72.6 million in consumer loans.
Renegotiated loans were 0.02% and 0.06% of loans at December 31, 1998 and
1997, respectively. 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 declined during the last four years and totaled $17.3
million at December 31, 1998, compared to $20.5 million at December 31, 1997.
Other real estate added by acquisitions in 1998, were offset by sales of other
real estate. From 1994 through 1996, 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 1998 on the $124.7 million of
non-accruing loans outstanding at year end was approximately $4.4 million. If
these loans had been current in accordance with their original terms,
approximately $12.0 million would have been earned on these loans in 1998.
Approximately $456,000 in interest income would have been earned in 1998 under
the original terms of the $4.5 million in renegotiated loans outstanding at
December 31, 1998. Approximately $239,000 in interest income was actually earned
in 1998 on these loans.
In the normal course of business, Regions makes commitments under various
terms to lend funds to its customers. These commitments include (among others)
revolving credit agreements, term loan agreements and short-term borrowing
arrangements, which are usually for working capital needs. Letters of credit are
also issued, which under certain conditions could result in loans. See Note L.
to the consolidated financial statements for additional information on
commitments.
The commercial, real estate and consumer loan portfolios are highly
diversified in terms of industry concentrations. The following table shows the
largest concentrations in terms of the customer's Standard Industrial
Classification (SIC) Code at December 31, 1998:
<TABLE>
<CAPTION>
1998
------------------------------
%
% OF NON-
SIC CLASSIFICATION AMOUNT TOTAL ACCRUAL
------------------ ---------- ------ --------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Individuals................................................. $12,575.1 51.5% 0.1%
Services:
Physicians................................................ 164.7 0.7 0.7
Business services......................................... 142.8 0.6 1.0
Religious organizations................................... 227.4 0.9 0.2
Legal services............................................ 86.9 0.4 0.9
All other services........................................ 1,572.8 6.4 1.1
--------- -----
Total services.................................... 2,194.6 9.0 0.9
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
1998
------------------------------
%
% OF NON-
SIC CLASSIFICATION AMOUNT TOTAL ACCRUAL
------------------ ---------- ------ --------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Manufacturing:
Electrical equipment...................................... $ 46.1 0.2% 2.9%
Food and kindred products................................. 60.9 0.3 1.4
Rubber and plastic products............................... 40.6 0.2 3.5
Lumber and wood products.................................. 158.0 0.7 0.7
Fabricated metal products................................. 65.6 0.3 7.8
All other manufacturing................................... 613.5 2.5 2.3
--------- -----
Total manufacturing............................... 984.7 4.2 2.4
Wholesale trade............................................. 520.8 2.1 0.9
Finance, insurance and real estate:
Real estate............................................... 1,771.9 7.3 0.9
Banks and credit agencies................................. 197.7 0.8 0.8
All other finance, insurance and real estate.............. 347.4 1.4 0.6
--------- -----
Total finance, insurance and real estate.......... 2,317.0 9.5 0.9
Construction:
Residential building construction......................... 391.8 1.6 0.5
General contractors and builders.......................... 545.4 2.2 0.3
All other construction.................................... 302.2 1.2 1.0
--------- -----
Total construction................................ 1,239.4 5.0 0.5
Retail trade:
Automobile dealers........................................ 548.8 2.2 0.2
All other retail trade.................................... 553.3 2.3 1.5
--------- -----
Total retail trade................................ 1,102.1 4.5 0.9
Agriculture, forestry and fishing........................... 474.4 1.9 1.4
Transportation, communication, electrical, gas and
sanitary.................................................. 406.6 1.7 0.5
Mining (including oil and gas extraction)................... 32.7 0.1 0.6
Public administration....................................... 1,109.2 4.5 1.7
Revolving credit loans...................................... 321.5 1.3 0.0
Other....................................................... 1,152.0 4.7 0.0
--------- -----
Total............................................. $24,430.1 100.0% 0.5%
========= ===== ===
</TABLE>
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 increased from $43.0 million at December 31, 1996 to $48.2
million at December 31, 1997 due to favorable rates. This category of earning
assets increased to $144.0 million at December 31, 1998, due to balances added
in connection with acquisition activity in 1998.
28
<PAGE> 30
SECURITIES
The following table shows the carrying values of securities as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Investment securities:
U.S. Treasury & Federal agency securities....... $2,371,412 $2,356,320 $1,616,912
Obligations of states and political
Subdivisions................................. 565,095 571,503 553,067
Mortgage-backed securities...................... 188,607 408,012 542,089
Other securities................................ -0- 2,444 4,533
---------- ---------- ----------
Total................................... $3,125,114 $3,338,279 $2,716,601
========== ========== ==========
Securities available for sale:
U.S. Treasury & Federal agency securities....... $ 956,162 $1,261,882 $1,285,029
Obligations of states and political
Subdivisions................................. 168,493 219,892 162,942
Mortgage-backed securities...................... 3,574,590 1,393,694 1,478,646
Other securities................................ 6,592 38,378 45,792
Equity securities............................... 138,186 63,798 53,365
---------- ---------- ----------
Total................................... $4,844,023 $2,977,644 $3,025,774
========== ========== ==========
</TABLE>
In 1998, total securities increased $1.7 billion or 26%. U. S. Treasury and
Federal agency securities decreased $291 million. Mortgage-backed securities
increased $2.0 billion due to acquisition activity and the $534 million
securitization of mortgage loans previously discussed. Obligations of states and
political subdivisions decreased $57.8 million in 1998.
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.
Regions' investment portfolio policy stresses quality and liquidity. At
December 31, 1998, the average maturity of U.S. Treasury and Federal agency
securities was 4.9 years and that of obligations of states and political
subdivisions was 8.0 years. The average expected maturity of mortgage-backed
securities was 3.8 years and other securities had an average contractual
maturity of 4.0 years. Overall, the average maturity of the portfolio was 14.1
years using contractual maturities and 4.5 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.
The estimated fair market value of Regions' investment securities portfolio
at December 31, 1998, was 1.3% ($41.3 million) above the amount carried on
Regions' books. Regions' securities available for sale portfolio at December 31,
1998, included net unrealized gains of $37.8 million. Regions' investment
securities and securities available for sale portfolios included gross
unrealized gains of $80 million and gross unrealized losses of $1 million at
December 31, 1998. 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.,
96% 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.
29
<PAGE> 31
The following table shows the maturities of securities (excluding equity
securities) at December 31, 1998, the weighted average yields and the taxable
equivalent adjustment used in calculating the yields:
<TABLE>
<CAPTION>
SECURITIES MATURING
-----------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
-------- ---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. Treasury and Federal agency
securities.................... $171,658 $ 534,452 $1,665,302 $ -0- $2,371,412
Obligations of states and
political Subdivisions........ 23,238 87,969 205,596 248,292 565,095
Mortgage-backed securities....... 109,835 78,772 -0- -0- 188,607
-------- ---------- ---------- -------- ----------
Total.................... $304,731 $ 701,193 $1,870,898 $248,292 $3,125,114
======== ========== ========== ======== ==========
Weighted average yield........... 6.39% 6.97% 6.62% 8.13% 6.85%
Securities available for sale:
U.S. Treasury and Federal agency
securities.................... $216,126 $ 333,206 $ 404,054 $ 2,776 $ 956,162
Obligations of states and
political subdivisions........ 29,620 67,361 44,811 26,701 168,493
Mortgage-backed securities....... 116,433 2,530,982 914,479 12,696 3,574,590
Other securities................. 4,683 1,338 230 341 6,592
-------- ---------- ---------- -------- ----------
Total.................... $366,862 $2,932,887 $1,363,574 $ 42,514 $4,705,837
======== ========== ========== ======== ==========
Weighted average yield........... 6.31% 6.46% 6.37% 6.91% 6.45%
Taxable equivalent adjustment for
calculation of yield............. $ 1,453 $ 4,269 $ 6,882 $ 7,558 $ 20,162
</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.
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, 1998, commercial loans, real estate construction
loans and commercial mortgage loans with an aggregate balance of $5.3 billion,
as well as securities of $672 million, were due to mature in one year or less.
Additional funds are provided from payments on consumer loans and one-to-four
family residential mortgage loans. Historically, the Company's high levels of
net operating earnings 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 83.54% at December 31, 1996, to
87.49% at December 31, 1997 but decreased to 85.95% at December 31, 1998, due to
the securitization and reclassification of mortgage loans to the securities
available for sale classification discussed previously.
30
<PAGE> 32
As shown in the Consolidated Statement of Cash Flows, operating activities
provided significant levels of funds in 1996 and 1997, due primarily to high
levels of net income. Operating activities were a net user of funds in 1998 as
net income, mortgage loans held for sale and other assets increased and other
liabilities decreased. 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 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
1998 due to more reliance on short-term borrowings and to increases in deposits.
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 1996, 1997 and 1998. Funds needed for the pending acquisitions as of
December 31, 1998, 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' 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.
DEPOSITS
Deposits are Regions' primary source of funds -- providing funding for 85%
of average earning assets in 1998 and 88% in 1997. During the last four years,
average total deposits grew at a compound annual rate of 12%. Average deposits
grew $2.0 billion or 10% in 1996, $3.2 billion or 15% in 1997 and $2.7 billion
or 11% in 1998. Acquisitions contributed average deposit growth of $667 million
in 1996, $948 million in 1997 and $1.5 billion in 1998.
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 11% since 1995. This category of
deposits grew 7% in 1996, 20% in 1997 and 7% in 1998. Non-interest
31
<PAGE> 33
bearing deposits are a significant funding source for Regions, accounting for
14%, 15% and 14% of average total deposits in 1996, 1997 and 1998 respectively.
During 1996, 1997 and 1998, 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 3% compound growth rate since 1995.
Savings increased 2% in 1996, 6% in 1997 and 3% in 1998. 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 1998,
savings accounts accounted for 6% of average total deposits.
During 1998, interest-bearing transaction accounts decreased 3%. In 1997,
the average balance of these types of deposits accounts increased 21%. During
1996, Regions reclassified a portion of interest-bearing transaction accounts to
money market savings accounts, resulting in a 58% decline in 1996. During 1998
and 1997, interest-bearing transaction accounts accounted for 3% and 4%,
respectively, of average total deposits.
Money market savings products continue to be Regions' fastest growing
deposits, increasing at a compound annual rate of 28% since 1995. 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 43% in 1996, 16% in 1997 and 28% in 1998. As mentioned above, a
reclassification from interest-bearing transaction accounts to money market
savings increased the 1996 money market savings growth rate. Money market
savings products are one of Regions' most significant funding sources,
accounting for 24% of average total deposits in 1996, 25% of average total
deposits in 1997 and 28% of average total deposits in 1998.
Certificates of deposit of $100,000 or more increased 22% in 1996, and
1997, due to their increased use as a funding source but increased only 2% in
1998 as customers turned to other investments due to rates. Since 1995,
certificates of deposit of $100,000 or more have increased at a compound annual
rate of 15%, and in 1998 accounted for 13% of average total deposits.
Other interest-bearing deposits (certificates of deposit of less than
$100,000 and time open accounts) increased 11% in 1997 and 8% in 1998. This
category of deposits continues to be Regions' primary funding source; it
accounted for 35% of average total deposits in 1998, down from 36% of average
total deposits in 1997. 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 1995 and continuing throughout the year, market interest rates began to
decline. During 1996 and 1997, market interest rates were relatively stable.
During 1998, 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 4.58% in
1996, to 4.63% in 1997 but decreased to 4.61% in 1998.
A detail of interest-bearing deposit balances at December 31, 1998 and
1997, and the interest expense on these deposits for the three years ended
December 31, 1998, is presented in Note H to the consolidated financial
statements.
32
<PAGE> 34
The following table presents the detail of interest-bearing deposits and
maturities of the larger time deposits:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Interest-bearing deposits of less than $100,000............. $20,054,861 $17,556,676
Time deposits of $100,000 or more, maturing in:
3 months or less.......................................... 92,900 1,480,970
over 3 through 6 months................................... 732,591 789,529
over 6 through 12 months.................................. 1,991,121 582,154
over 12 months............................................ 901,468 857,494
----------- -----------
Total.................................................. 3,718,080 3,710,147
----------- -----------
Total............................................. $23,772,941 $21,266,823
=========== ===========
</TABLE>
The following table presents the average amounts of deposits outstanding by
category for the three years ended December 31, 1998:
<TABLE>
<CAPTION>
AVERAGE AMOUNTS OUTSTANDING
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Non-interest-bearing demand deposits............ $ 3,812,177 $ 3,565,848 $ 2,970,682
Interest-bearing transaction accounts........... 890,911 916,689 757,250
Savings accounts................................ 1,546,737 1,506,753 1,427,167
Money market savings accounts................... 7,590,604 5,922,642 5,121,931
Certificates of deposit of $100,000 or more..... 3,524,889 3,453,465 2,830,101
Other interest-bearing deposits................. 9,528,586 8,812,105 7,919,627
----------- ----------- -----------
Total interest-bearing deposits....... 23,081,727 20,611,654 18,056,076
----------- ----------- -----------
Total deposits........................ $26,893,904 $24,177,502 $21,026,758
=========== =========== ===========
</TABLE>
The following table presents the average rates paid on deposits by category
for the three years ended December 31, 1998:
<TABLE>
<CAPTION>
AVERAGE RATES PAID
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest-bearing transaction accounts....................... 3.47% 2.93% 3.22%
Savings accounts............................................ 2.17 2.43 2.62
Money market savings accounts............................... 3.48 3.40 3.21
Certificates of deposit of $100,000 or more................. 5.70 5.71 5.74
Other interest-bearing deposits............................. 5.62 5.59 5.54
Total interest-bearing deposits................... 4.61% 4.63% 4.58%
</TABLE>
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 totaled $2.1 billion at
December 31, 1997 and 1998. 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 $366 million in 1997 but
decreased $276 million in 1998. The 1997 increase resulted from increased
reliance on purchased funds to support earning asset growth. The 1998 decrease
resulted from increased utilization of alternative short term funding due to
favorable rates.
33
<PAGE> 35
In December 1997 and throughout 1998, Regions utilized 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, 1998, $2.4 billion of structured notes were outstanding
compared to $500 million as of December 31, 1997.
At December 31, 1998, $56.8 million in commercial paper was outstanding,
compared to $52.8 million at December 31, 1997. 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 $3.1 million from December 31, 1997
to December 31, 1998, primarily due to a decline in short-term Federal Home Loan
Bank advances. The remaining balance in other short-term borrowings consists of
a Treasury tax and loan note 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 decreased $900,000 between
December 31, 1997 and 1998 due to a prepayment of subordinated notes acquired in
connection with a pooled company.
Federal Home Loan Bank borrowings increased $102.7 million in 1998 due to
notes assumed through acquisitions. 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.
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 financing,
notes payable to unaffiliated banks and miscellaneous notes payable. Other
long-term borrowings increased $26.3 million in 1998, due to loans to
unaffiliated banks assumed in connection with acquisitions in 1998.
STOCKHOLDERS' EQUITY
Over the past three years, stockholders' equity has increased at a compound
annual growth rate of 13.6%. Stockholders' equity has grown from $2.0 billion at
the beginning of 1996 to $3.0 billion at year-end 1998. Internally generated
retained earnings contributed $680 million of this growth, equity issued in
connection with acquisitions accounted for $200 million, $62 million was
attributable to the exercise of stock options and to the issuance of stock for
dividend reinvestment plans and employee incentive plans, and $11 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 8.0% in 1998, compared to 9.6% in 1997 and 9.3% in
1996.
Regions' ratio of stockholders' equity to total assets was 8.15% at
December 31, 1998, compared to 8.53% at December 31, 1997, and 8.43% at December
31, 1996. 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
34
<PAGE> 36
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.
The following chart summarizes the applicable bank regulatory capital
requirements. Regions' capital ratios at December 31, 1998, substantially
exceeded all regulatory requirements.
BANK REGULATORY CAPITAL REQUIREMENTS
<TABLE>
<CAPTION>
MINIMUM
REGULATORY REGIONS AT
REQUIREMENT DECEMBER 31, 1998
----------- -----------------
<S> <C> <C>
Tier 1 capital to risk-adjusted assets...................... 4.00% 10.26%
Total risk-based capital to risk-adjusted assets............ 8.00 12.17
Tier 1 leverage ratio....................................... 3.00 7.40
</TABLE>
At December 31, 1998, Tier 1 capital totaled $2.6 billion, total risk-based
capital totaled $3.1 billion, and risk-adjusted assets totaled $25.6 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, 1998, 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 1998, Regions returned 45% of earnings to its stockholders in
the form of dividends. Total dividends declared by Regions in 1998 were $191.6
million or $.92 per share, an increase of 15% from the $0.80 per share in 1997.
Also in 1997, Regions effected a two-for-one stock split.
In January 1999, the Board of Directors declared a 9% increase in the
quarterly cash dividend from $.23 to $.25 per share. This is the twenty-eighth
consecutive year that Regions has increased cash dividends.
35
<PAGE> 37
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, 1998:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Taxable securities................................... 19.0% 18.4% 20.3% 20.1% 22.4%
Non-taxable securities............................... 2.1 2.6 2.6 2.7 2.7
Federal funds sold................................... 0.9 1.0 0.8 1.0 1.5
Loans (net of unearned income):
Commercial........................................ 20.7 15.4 14.2 13.8 13.8
Real estate....................................... 30.8 36.5 36.6 37.7 34.8
Installment....................................... 17.1 17.7 17.4 16.1 15.1
----- ----- ----- ----- -----
Total loans.................................. 68.6 69.6 68.2 67.6 63.7
Allowance for loan losses......................... (0.9) (1.0) (1.0) (1.0) (1.0)
----- ----- ----- ----- -----
Net loans......................................... 67.7 68.6 67.2 66.6 62.7
Other earning assets................................. 2.3 1.1 1.1 0.8 1.8
----- ----- ----- ----- -----
Total earning assets......................... 92.0 91.7 92.0 91.2 91.1
Cash and due from banks................................ 3.0 3.4 3.2 4.0 4.1
Other non-earning assets............................... 5.0 4.9 4.8 4.8 4.8
----- ----- ----- ----- -----
Total assets................................. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing................................. 11.2% 12.1% 11.7% 12.0% 12.6%
Interest-bearing..................................... 67.8 69.8 71.0 70.3 71.3
----- ----- ----- ----- -----
Total deposits............................... 79.0 81.9 82.7 82.3 83.9
Borrowed funds:
Short-term........................................... 9.9 6.5 5.5 4.7 3.3
Long-term............................................ 1.3 1.7 2.3 3.5 3.3
----- ----- ----- ----- -----
Total borrowed funds......................... 11.2 8.2 7.8 8.2 6.6
Other liabilities...................................... 1.3 1.2 1.0 1.1 1.3
----- ----- ----- ----- -----
Total liabilities............................ 91.5 91.3 91.5 91.6 91.8
Stockholders' equity................................... 8.5 8.7 8.5 8.4 8.2
----- ----- ----- ----- -----
Total liabilities and stockholders' equity... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
36
<PAGE> 38
OPERATING RESULTS
Net income increased 6% in 1998 and 25% in 1997. Excluding the SAIF
assessment in 1996 and the merger and consolidation expenses incurred in 1996
and 1998 (see Note U to the consolidated financial statements) income increased
17% in 1997 and 26% in 1998. The accompanying table presents the dollar amount
and percentage change in the important components of income that occurred in
1998 and 1997.
SUMMARY OF CHANGES IN OPERATING RESULTS
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------------------
1998 COMPARED 1997 COMPARED
TO 1997 TO 1996
-------------- --------------
AMOUNT % AMOUNT %
-------- --- -------- ---
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net interest income......................................... $145,610 12% $167,384 17%
Provision for loan losses................................. (29,158) (33) 43,637 95
-------- --------
Net interest income after provision for loan losses......... 174,768 16 123,747 13
Non-interest income:
Trust department income................................... 10,991 25 2,567 6
Service charges on deposit accounts....................... 19,726 13 26,658 21
Mortgage servicing and origination fees................... 18,228 20 570 1
Securities transactions................................... 6,504 NM (2,813) NM
Other..................................................... 12,266 10 34,897 42
-------- --------
Total non-interest income......................... 67,715 17 61,879 18
Non-interest expense:
Salaries and employee benefits............................ 47,567 10 67,074 16
Net occupancy expense..................................... 954 2 6,770 12
Furniture and equipment expense........................... 12,291 22 6,333 13
FDIC insurance expense.................................... 684 13 (4,411) (46)
Merger and consolidation expenses and SAIF assessment..... 121,438 NM (33,777) NM
Other..................................................... 18,998 6 22,753 8
-------- --------
Total non-interest expense........................ 201,932 22 64,742 8
-------- --------
Income before income taxes........................ 40,551 7 120,884 26
Applicable income taxes................................... 16,368 8 41,214 26
-------- --------
Net income........................................ $ 24,183 6% $ 79,670 25%
======== ========
Income excluding merger and consolidation expenses
and SAIF assessment............................. $104,895 26% $ 58,559 17%
</TABLE>
NET INTEREST INCOME
Net interest income (interest income less interest expense) is Regions'
principal source of income. Net interest income increased 12% in 1998 and 17% in
1997. On a taxable equivalent basis, net interest income also increased 12% in
1998 and 17% in 1997. The table on page 41 provides additional information to
analyze the changes in net interest income.
In 1998 and 1997, growth in interest-earning assets and interest-bearing
liabilities contributed to the increase in net interest income. During 1998,
average interest-earning assets grew 16% and average interest-bearing
liabilities grew 17%. 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.
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 4.36% in 1996, to 4.41% in 1997 but declined to
4.25% in 1998. Changes in
37
<PAGE> 39
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 3.65% in 1996, 3.66% in 1997,
and 3.54% in 1998. 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 January 1996, the Federal Reserve (Fed) lowered the Federal Funds rate
to 5.25%. The Fed maintained the 5.25% Fed Funds rate throughout 1996. In March
1997 the Fed raised the Federal Funds rate to 5.50% where it remained for the
rest of 1997. In 1998, the Fed reduced the Federal Funds rate to 4.75% in a
series of rate reductions in the second half of the year.
As the Federal Funds rate declined during 1998, 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 lower in 1998
compared to 1997 -- reflecting the declining market interest rates experienced
in 1998. However, as market interest rates declined and as the yield curve
flattened, Regions' interest-earning asset yields decreased faster than did
interest-bearing liability rates. The interest rate spread contracted in 1998
because interest-earning asset yields decreased 12 basis points more than did
interest-bearing liability rates.
The mix of earning assets can also affect the interest rate spread. During
1998, loans, which are typically Regions' highest yielding earning asset,
decreased as a percentage of earning assets -- adding to the effects of changing
earning asset yields and interest-bearing liability rates. Average loans as a
percentage of earning assets were 75% in 1997 and 74% in 1998.
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 1996, 84% in
1997 and 85% in 1998. The changes in the percentage of earning assets funded by
interest-bearing liabilities had a positive effect on net interest income in
1997 but a negative effect in 1998. 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.
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, 1998,
approximately 47% of earning assets and 66% of the funding for these earning
assets were scheduled to be repriced to current market rates at least once
during 1999.
The accompanying table shows Regions' rate sensitive position at December
31, 1998, as measured by gap analysis (the difference between the earning asset
and interest-bearing liability amounts scheduled to be
38
<PAGE> 40
repriced to current market rates in subsequent periods). Over the next 12 months
approximately $6.3 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, 1998, was 0.72, 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 0.99 -- indicating a slight
"liability sensitive" position.
Regions uses additional tools to monitor and manage interest rate
sensitivity. One of the primary tools used is simulation analysis. Simulation
analysis is the primary method of estimating 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 aforementioned discussion,
management can estimate the effect shifts in interest rates may have upon the
Company's net interest income, Regions' principal source of income.
39
<PAGE> 41
The following table demonstrates the expected effect a given interest rate
shift would have on Regions net interest income.
<TABLE>
<CAPTION>
CHANGE IN INTEREST RATES $ CHANGE IN NET % CHANGE IN NET
(IN BASIS POINTS) INTEREST INCOME INTEREST INCOME
- ------------------------ --------------- ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
+200...................................................... $(23,702) (1.74)%
+100...................................................... (3,339) (0.25)
-100...................................................... 1,571 0.12
-200...................................................... 207 0.02
</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.
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
RATE SENSITIVE PERIOD
-----------------------------------------------------------------------------
1-3 4-6 7-12 OVER 1 YEAR OR
MONTHS MONTHS MONTHS TOTAL NON-SENSITIVE TOTAL
--------- --------- --------- --------- -------------- ---------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans, net of
unearned income... $ 8,582.8 $ 1,437.8 $ 1,784.2 $11,804.8 $12,560.8 $24,365.6
Investment
securities........ 407.6 185.5 463.9 1,057.0 2,068.1 3,125.1
Securities available
for sale.......... 629.5 290.6 726.4 1,646.5 3,197.5 4,844.0
Interest bearing
deposits in other
banks............. 144.0 -- -- 144.0 -- 144.0
Federal funds sold
and securities
purchased under
agreements to
resell............ 233.9 -- -- 233.9 -- 233.9
Mortgage loans held
for sale.......... 918.0 -- -- 918.0 9.7 927.7
Trading account
assets............ 49.4 -- -- 49.4 -- 49.4
--------- --------- --------- --------- --------- ---------
Total earning
assets..... $10,965.2 $ 1,913.9 $ 2,974.5 $15,853.6 $17,836.1 $33,689.7
========= ========= ========= ========= ========= =========
Percent of
total
earning
assets..... 32.6% 5.7% 8.8% 47.1% 52.9% 100.0%
Funding Sources:
Non-interest-bearing
deposits.......... -- -- -- -- $ 4,577.1 $ 4,577.1
Savings deposits..... $ 1,508.5 -- $ -- $ 1,508.5 -- 1,508.5
Other time
deposits.......... 13,115.0 $ 2,852.1 2,597.7 18,564.8 3,699.6 22,264.4
Short-term
borrowings........ 1,955.8 -- 90.9 2,046.7 2,450.0 4,496.7
Long-term
borrowings........ 1.4 5.9 .4 7.7 563.4 571.1
--------- --------- --------- --------- --------- ---------
Total
interest-
bearing
liabilities... 16,580.7 2,858.0 2,689.0 22,127.7 6,713.0 28,840.7
Stockholders'
equity............ -- -- -- -- 271.9 271.9
--------- --------- --------- --------- --------- ---------
Total funding
sources.... $16,580.7 $ 2,858.0 $ 2,689.0 $22,127.7 $11,562.0 $33,689.7
========= ========= ========= ========= ========= =========
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
DECEMBER 31, 1998
RATE SENSITIVE PERIOD
-----------------------------------------------------------------------------
1-3 4-6 7-12 OVER 1 YEAR OR
MONTHS MONTHS MONTHS TOTAL NON-SENSITIVE TOTAL
--------- --------- --------- --------- -------------- ---------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Percent of total
funding sources... 49.2% 8.5% 8.0% 65.7% 34.3% 100.0%
Interest sensitive
gap.................. $(5,615.5) $ (944.1) $ 285.5 $(6,274.1) $ 6,274.1 --
Cumulative interest
sensitive gap........ $(5,615.5) $(6,559.6) $(6,274.1) $(6,274.1) -- --
As percent of total
earning assets....... (16.7)% (19.5)% (18.6)% (18.6)% -- --
Ratio of earning assets
to funding sources... 0.66 0.67 1.11 0.72 1.54 1.00
Cumulative ratio....... 0.66 0.66 0.72 0.72 1.00 1.00
</TABLE>
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 OVER 1997 1997 OVER 1996
-------------------------------- --------------------------------
VOLUME YIELD/RATE TOTAL VOLUME YIELD/RATE TOTAL
-------- ---------- -------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Interest income on:
Loans........................ $252,167 $(17,355) $234,812 $286,904 $(3,990) $282,914
Federal funds sold........... 2,334 (1,606) 728 3,936 1,886 5,822
Taxable securities........... 66,399 (4,869) 61,530 19,070 4,626 23,696
Non-taxable securities....... (2,257) (598) (2,855) 5,655 2,645 8,300
Other earning assets......... 29,550 (2,563) 26,987 3,859 (2,290) 1,569
-------- -------- -------- -------- ------- --------
Total................... 348,193 (26,991) 321,202 319,424 2,877 322,301
Interest expense on:
Savings deposits............. 952 (4,109) (3,157) 2,023 (2,805) (782)
Other interest-bearing
deposits................... 116,412 (2,983) 113,429 118,876 9,844 128,720
Borrowed funds............... 77,299 (11,979) 65,320 25,741 1,238 26,979
-------- -------- -------- -------- ------- --------
Total................... 194,663 (19,071) 175,592 146,640 8,277 154,917
Increase (decrease) in net
interest income................. $153,530 $ (7,920) $145,610 $172,784 $(5,400) $167,384
======== ======== ======== ======== ======= ========
</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.
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 1996, the
provision for loan losses was increased to $46.0 million due to growth in the
loan portfolio and higher levels of consumer loan losses. In 1997, the provision
for loan losses was increased to $89.7 million due to internal growth in the
loan portfolio, growth in loans from acquisitions, higher levels of consumer
loan losses and provisions for loan losses made by a pooled company for several
specific problem commercial loans. Acquisitions added $17.4 million to the
allowance for loan losses in 1997. In 1998, the provision for loan losses
totaled $60.5 million and acquisition activity added $17.1 million to the
allowance for loan losses. The provision for loan losses declined $29.2 million
in 1998, even with higher net charge-offs,
41
<PAGE> 43
because a significant portion of the 1998 charge-offs had been identified and
provided for in the prior years. The resulting year end allowance for loan
losses increased $11.2 million to $315.4 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 could require
significantly higher provisions for loan losses in the future.
TRUST INCOME
Trust income increased 9% in 1996, 6% in 1997 and 25% in 1998. Regions has
in place an aggressive sales program as a means of increasing trust revenue.
Trust sales efforts are promoted throughout the company by strong sales goals
and cash incentives. 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.
SERVICE CHARGES ON DEPOSIT ACCOUNTS
Service charge income increased 19% in 1996, 21% in 1997, and 13% in 1998,
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 source of
income is the origination and servicing of mortgage loans for long-term
investors.
In 1998, mortgage servicing and origination fees increased 20%, from $93.3
million in 1997 to $111.6 million in 1998. Origination fees were significantly
higher due to an increase in the number of loans closed and the dollar amount of
loans closed. Servicing fees were also higher in 1998 than in 1997. At December
31, 1998, Regions' servicing portfolio totaled $22.3 billion and included
approximately 349,000 loans. At December 31, 1997, the servicing portfolio
totaled $20.4 billion, compared to $19.7 billion at December 31, 1996. 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.
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.
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.
RMI, through its retail and correspondent operations, produced mortgage
loans totaling $5.0 billion, $2.9 billion, and $2.2 billion in 1998, 1997 and
1996, respectively. RMI produces loans from 87 offices in Alabama, Arkansas,
Florida, Georgia, Louisiana, South Carolina, and Tennessee, and from other
correspondent offices located primarily in the Southeast.
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. The carrying values of mortgage servicing
rights are affected by various factors, including
42
<PAGE> 44
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>
MORTGAGE SERVICING RIGHTS
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year................................ $124,087 $118,075 $121,593
Net additions............................................... 49,671 31,935 30,132
Amortization................................................ (31,832) (25,923) (33,650)
-------- -------- --------
Balance at end of year...................................... $141,926 $124,087 $118,075
======== ======== ========
</TABLE>
SECURITIES GAINS (LOSSES)
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.
The $7.0 million in net gains recognized in 1998 from the sale of available
for sale securities were the result, primarily, of the sale of odd-lot high
coupon mortgage backed securities and odd-lot municipal securities obtained
through various acquisitions. These securities had characteristics which were
not consistent with Regions overall securities portfolio management strategy.
OTHER INCOME
Refer to Note O to the 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 1998, 1997, and 1996.
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 1998, 1997 and 1996.
Trading account income increased in 1998, 1997 and 1996 due to expanded
trading activities, increased underwriting fees, and larger profits from trading
in the portfolio.
In 1997, a pooled company recognized a gain related to the divestiture of
two banks. The divestiture was required by regulatory authorities in connection
with a business combination.
SALARIES AND EMPLOYEE BENEFITS
Total salaries and benefits increased 11% in 1996, 16% in 1997 and 10% in
1998. 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, 1998, Regions had 14,632 full-time equivalent employees,
compared to 13,294 at December 31, 1997 and 12,272 at December 31, 1996.
Employees added as a result of acquisitions accounted for most of these
increases.
Salaries, excluding benefits, totaled $295.1 million in 1996, compared to
$335.1 million in 1997 and $382.4 million in 1998. These increases resulted from
increased employment levels, due to acquisitions and increased business
activity, and normal merit and promotional adjustments.
43
<PAGE> 45
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 26% of salaries.
The contribution to the profit sharing plan was equal to approximately 7%
of after-tax income in 1996 and 1997 and 6% in 1998.
The contribution to the employee stock ownership plan (ESOP) equaled
approximately 1% of after-tax income in each of the last three years.
Commissions and incentives expense decreased to $47.0 million in 1998,
compared to $54.4 million in 1997 and $37.6 million in 1996. 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 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 decline in Regions stock price in 1998 contributed
to the lower commissions and incentives expense in 1998 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 10% in 1996, 17% in 1997 and 18% in 1998. Increases
in the Social Security tax base, combined with increased salary levels and
additional employees due to growth and acquisitions, were the primary reasons
for increased payroll taxes.
Group insurance expense increased 8% and 17% in 1996 and 1998,
respectively, due to increased employment levels associated with increased
business activity and acquisitions and higher claims cost. 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 13% in 1996, 12% in 1997, and 2% in 1998
due to new and acquired branch offices, rising price levels, and increased
business activity.
FURNITURE AND EQUIPMENT EXPENSE
Furniture and equipment expense increased 20% in 1996, 13% in 1997, and 22%
in 1998. These increases resulted from acquisitions, rising price levels,
expenses related to equipment for new branch offices, and increased depreciation
and service contract expenses associated with other new back office and branch
equipment.
FDIC INSURANCE EXPENSE
FDIC insurance expense decreased 67% in 1996, and 46% in 1997. In 1996, the
FDIC significantly reduced insurance premium rates on Bank Insurance Fund (BIF)
deposits, which resulted in lower FDIC insurance expense in 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 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
44
<PAGE> 46
$100 of BIF-assessable deposits. FDIC insurance expense increased 13% in 1998 as
a result of increased deposits from acquisitions and growth.
MERGER AND CONSOLIDATION EXPENSES AND SAIF ASSESSMENT
In 1998, Regions incurred a pre-tax, non-recurring merger and consolidation
charge of $121.4 million related primarily to the merger of First Commercial and
four other institutions with Regions. The charge, recognized in the third
($114.7 million) and fourth ($6.7 million) quarters, consisted primarily of
employee-related obligations ($33.6 million), elimination of duplicate
facilities, obsolete equipment and other assets ($47.6 million), contract
terminations ($6.0 million), cost to exit certain lines of business ($5.1
million), and professional fees and contractual payments associated with the
mergers ($29.1 million). During 1998, merger-and consolidation-related costs
incurred or charged against the accrual totaled $117.0 million, resulting in a
balance in the merger and consolidation accrual of $4.4 million at December 31,
1998, which is primarily associated with certain employee related obligations.
These employee related obligations were paid out in early 1999, resulting in the
merger and consolidation accrual being reduced to zero.
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,
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.
OTHER EXPENSES
Refer to Note O to the 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 1998 as well as in 1997 and 1996.
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 increased in 1998 and 1996, but
declined in 1997. 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 and 1998. However, mortgage servicing rights
amortization expense declined in 1997 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 consolidated
financial statements for additional information.)
The decrease in other miscellaneous expenses in 1998 resulted primarily
from decreases in sales and use taxes, equity asset line fees paid to third
parties and fewer losses on disposals and sales of fixed assets.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other
45
<PAGE> 47
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Based on past assessments, the Company determined that it would be required
to upgrade significant portions of its software and selected hardware so that
those systems would properly utilize dates beyond December 31, 1999. The Company
presently believes that with these upgrades of existing software and selected
hardware, the Year 2000 Issue can be mitigated.
The Company's plan to resolve the Year 2000 Issue involves the following
five steps: awareness of the potential problems Year 2000 can present, inventory
and assessment of where potential problems are within the company, renovation
and repair of noncompliant systems, testing and validation of solutions, and
implementation. Regions began planning its Year 2000 strategy in 1996 and has
since formed a project office composed of five people who manage the project on
a full-time basis. Additionally, a task force composed of individuals
representing all business units within the corporation, and a leadership
committee representing all areas of the company have been formed to support the
project office. The task force and leadership team provide reports to the Audit
Committee of the Board of Directors and to the Board of Directors on a regular
basis. Regions is utilizing both internal and external resources to reprogram,
replace, and test software and other components of its systems for Year 2000
modifications. Systems have been scheduled for modification based on a
risk-adjusted priority to ensure that mission-critical systems are completed in
time to allow for extended testing.
To date, Regions has completed its awareness, assessment, renovation and
testing steps. The Company has completed the installation of the Year 2000
releases provided by vendors on its core-business systems and has completed the
century date testing and validation of its core business systems. Regions will
continue to communicate with its vendors and install any additional code
releases through 1999.
Approximately ninety percent of Regions' software is supplied by outside
suppliers affecting most significant systems of the Company. Regions has
initiated formal communications with all of its significant suppliers and large
customers to determine the extent to which Regions is vulnerable to those third
parties' failure to remediate their own Year 2000 Issue. Regions is spending the
majority of its Year 2000 resource allocation installing and testing vendor
releases, and has hired consultants to ensure that communications are proceeding
properly with vendors. To date, Regions is not aware of any external agent with
a Year 2000 Issue that would materially impact Regions' results of operations,
liquidity or capital resources.
The projected total cost of the Year 2000 project is currently estimated at
approximately $20 million and is being funded through operating cash flows. The
projected total costs includes personnel costs and other operating expenses
related to the modification of systems and applications, as well as the cost to
purchase or lease certain hardware and software. Personnel costs and other
operating expenses associated with the Year 2000 project are being expensed in
the period incurred. The costs of hardware and software associated with the Year
2000 project are capitalized in accordance with normal policy. The costs of the
project and the date on which Regions plans to complete Year 2000 modifications
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no assurance that these estimates will be achieved and actual results could
differ materially from those plans. From initiation of the project through
December 31, 1998, a cumulative total of approximately $10.2 million had been
spent on the assessment of and efforts in connection with the Year 2000 project,
including the renovation and repair of noncompliant systems. This includes
approximately $1.7 million expended in 1997 (including $1 million for hardware
and software) and $8.5 million expended in 1998 (including $1 million for
hardware and software). The majority of the remaining cost will be spent on
personnel costs and consultant fees.
Management of Regions believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
completed the necessary phases of the Year 2000 program. The mission-critical
systems have been upgraded. However, disruptions in the economy that are beyond
the Company's control resulting from Year 2000 issues could materially adversely
affect the Company. Furthermore, the Company has no means of ensuring that
external agents will be Year 2000 ready. The inability of external agents to
complete their Year 2000 resolution process in a timely fashion could materially
impact the
46
<PAGE> 48
Company's operations, the estimated costs of the Year 2000 project, and the
target dates for completion. The effect of non-compliance by external agents is
not determinable. The Company could be subject to litigation for computer
systems product failure, for example, equipment shutdown or failure to properly
date business records. The amount of potential liability and lost revenue cannot
be reasonably estimated at this time.
Management is continuing to develop contingency plans in the event that
efforts to renovate Regions' systems are not fully successful or are not
completed in accordance with current expectations. The contingency plans
represent an enhancement of Regions' existing business resumption plans to
safeguard Regions under various Year 2000 scenarios. The contingency plans are
being designed to address failures of systems outside Regions. The contingency
plans include the use of third party service providers, alternative commercial
vendors, alternative data security and other contingency service suppliers.
APPLICABLE INCOME TAX
Regions' provision for income taxes increased 8% in 1998. This increase was
caused primarily by a 7% increase in income before taxes. The Company's
effective income tax rates for 1998, 1997 and 1996 were 33.6%, 33.2%, and 32.9%,
respectively. Note P to the 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 1995. 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. However, 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.
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.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to page 38 through 39 "Market Risk -- Interest Rate
Sensitivity" and pages 39 through 40 "Forward Looking Statements" included in
Management's Discussion and Analysis under Item 7 of this Annual Report on Form
10-K.
47
<PAGE> 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and report of independent auditors of
Regions Financial Corporation and subsidiaries are set forth in the pages listed
below.
<TABLE>
<S> <C>
Report of Independent Auditors.............................. 49
Consolidated Statements of Condition -- December 31, 1998
and 1997.................................................. 50
Consolidated Statements of Income -- Years ended December
31, 1998, 1997 and 1996................................... 51
Consolidated Statements of Cash Flows -- Years ended
December 31, 1998, 1997 and 1996.......................... 52
Consolidated Statements of Changes in Stockholders'
Equity -- Years ended December 31,
1998, 1997 and 1996....................................... 53
Notes to Consolidated Financial Statements -- December 31,
1998...................................................... 56
</TABLE>
Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable, and therefore have been omitted.
48
<PAGE> 50
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Regions Financial Corporation
We have audited the accompanying consolidated statements of condition of
Regions Financial Corporation and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Regions
Financial Corporation and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Birmingham, Alabama
March 11, 1999
49
<PAGE> 51
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
------------- -------------
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 1,619,006 $ 1,177,564
Interest-bearing deposits in other banks.................... 143,965 48,162
Investment securities (aggregate estimated market value of
$3,166,446 in 1998 and $3,372,494 in 1997)................ 3,125,114 3,338,279
Securities available for sale............................... 4,844,023 2,977,644
Trading account assets...................................... 49,387 50,825
Mortgage loans held for sale................................ 927,668 383,924
Federal funds sold and securities purchased under agreements
to resell................................................. 233,941 292,189
Loans....................................................... 24,430,113 21,952,280
Unearned income............................................. (64,526) (71,157)
----------- -----------
Loans, net of unearned income...................... 24,365,587 21,881,123
Allowance for loan losses................................... (315,412) (304,223)
----------- -----------
Net loans.......................................... 24,050,175 21,576,900
Premises and equipment...................................... 534,425 458,792
Interest receivable......................................... 292,036 231,947
Due from customers on acceptances........................... 57,046 157,262
Other assets................................................ 955,154 720,570
----------- -----------
$36,831,940 $31,414,058
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest-bearing...................................... $ 4,577,125 $ 3,744,198
Interest-bearing.......................................... 23,772,941 21,266,823
----------- -----------
Total deposits..................................... 28,350,066 25,011,021
Borrowed funds:
Short-term borrowings:
Federal funds purchased and securities sold under
agreements to repurchase............................... 2,067,278 2,128,826
Commercial paper........................................ 56,750 52,750
Other short-term borrowings............................. 2,372,700 525,775
----------- -----------
Total short-term borrowings........................ 4,496,728 2,707,351
Long-term borrowings...................................... 571,040 445,529
----------- -----------
Total borrowed funds............................... 5,067,768 3,152,880
Bank acceptances outstanding................................ 57,046 157,262
Other liabilities........................................... 356,659 413,074
----------- -----------
Total liabilities.................................. 33,831,539 28,734,237
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 221,305,715 shares
in 1998 and 210,596,519 shares in 1997................. 138,316 131,623
Surplus................................................... 1,147,357 1,089,089
Undivided profits......................................... 1,729,334 1,466,431
Treasury stock, at cost -- 851,588 shares in 1998 and
363,279 shares in 1997.................................. (32,603) (13,855)
Unearned restricted stock................................. (6,955) (9,410)
Accumulated other comprehensive income.................... 24,952 15,943
----------- -----------
Total stockholders' equity......................... 3,000,401 2,679,821
----------- -----------
$36,831,940 $31,414,058
=========== ===========
</TABLE>
- ---------------
( ) Indicates deduction.
See notes to consolidated financial statements.
50
<PAGE> 52
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans............................... $2,072,204 $1,837,392 $1,554,478
Interest on securities:
Taxable interest income............................... 417,121 355,591 331,895
Tax-exempt interest income............................ 39,981 42,836 34,536
---------- ---------- ----------
Total interest on securities..................... 457,102 398,427 366,431
Interest on mortgage loans held for sale................. 44,954 20,218 15,286
Income on federal funds sold and securities purchased
under agreements to resell............................ 17,610 16,882 11,060
Interest on time deposits in other banks................. 4,804 2,870 5,699
Interest on trading account assets....................... 1,112 795 1,329
---------- ---------- ----------
Total interest income............................ 2,597,786 2,276,584 1,954,283
Interest expense:
Interest on deposits..................................... 1,065,054 954,782 826,844
Interest on short-term borrowings........................ 174,906 108,617 75,827
Interest on long-term borrowings......................... 33,008 33,977 39,788
---------- ---------- ----------
Total interest expense........................... 1,272,968 1,097,376 942,459
---------- ---------- ----------
Net interest income.............................. 1,324,818 1,179,208 1,011,824
Provision for loan losses.................................. 60,505 89,663 46,026
---------- ---------- ----------
Net interest income after provision for loan
losses......................................... 1,264,313 1,089,545 965,798
Non-interest income:
Trust department income.................................. 55,218 44,227 41,660
Service charges on deposit accounts...................... 171,344 151,618 124,960
Mortgage servicing and origination fees.................. 111,555 93,327 92,757
Securities gains......................................... 7,002 498 3,311
Other.................................................... 129,578 117,312 82,415
---------- ---------- ----------
Total non-interest income........................ 474,697 406,982 345,103
Non-interest expense:
Salaries and employee benefits........................... 528,409 480,842 413,768
Net occupancy expense.................................... 62,887 61,933 55,163
Furniture and equipment expense.......................... 68,595 56,304 49,971
FDIC insurance expense................................... 5,806 5,122 9,533
Merger and consolidation expenses and SAIF assessment.... 121,438 -0- 33,777
Other.................................................... 316,573 297,575 274,822
---------- ---------- ----------
Total non-interest expense....................... 1,103,708 901,776 837,034
---------- ---------- ----------
Income before income taxes....................... 635,302 594,751 473,867
Applicable income taxes.................................... 213,590 197,222 156,008
---------- ---------- ----------
Net income....................................... $ 421,712 $ 397,529 $ 317,859
========== ========== ==========
Average number of shares outstanding....................... 220,114 209,781 194,241
Average number of shares outstanding, diluted.............. 223,781 213,750 197,751
Per share:
Net income............................................... $ 1.92 $ 1.89 $ 1.64
Net income, diluted...................................... 1.88 1.86 1.61
Cash dividends declared.................................. 0.92 0.80 0.70
</TABLE>
See notes to consolidated financial statements.
51
<PAGE> 53
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income................................................ $ 421,712 $ 397,529 $ 317,859
Adjustments to reconcile net cash provided by operating
activities:
Gain from required divestiture of banks................. -0- (25,084) -0>-
Depreciation and amortization of premises and
Equipment............................................. 78,514 67,925 67,662
Provision for loan losses............................... 60,505 89,663 46,026
Net amortization (accretion) of securities.............. 849 4,944 (1,677)
Amortization of loans and other assets.................. 58,646 31,582 27,269
Accretion (amortization) of deposits and borrowings..... 359 (1,642) (1,643)
Provision for losses on other real estate............... 2,865 5,343 1,322
Deferred income taxes................................... 27,556 (2,861) 153
(Gain) loss on sale of premises and equipment........... (521) 510 (868)
Realized security (gains)............................... (7,002) (498) (3,311)
Decrease in trading account assets...................... 1,438 26,991 27,616
(Increase) decrease in mortgages held for sale.......... (525,990) (196,344) 29,219
(Increase) in interest receivable....................... (42,350) (26,808) (18,526)
(Increase) in other assets.............................. (209,887) (83,811) (113,280)
(Decrease) increase in other liabilities................ (192,148) 140,791 (30,969)
Stock issued to employees under incentive plan.......... 14,717 10,122 3,058
Other................................................... 7,679 8,132 4,944
----------- ----------- -----------
Net cash (used) provided by operating activities... (303,058) 446,484 354,854
Investing activities:
Net (increase) in loans................................... (1,228,740) (2,457,048) (1,741,312)
Proceeds from sale of securities available for sale....... 628,212 71,113 337,448
Proceeds from maturity of investment securities........... 3,649,446 1,555,319 1,012,121
Proceeds from maturity of securities available for sale... 2,440,959 1,528,476 1,475,933
Purchase of investment securities......................... (3,361,586) (1,974,755) (1,063,419)
Purchase of securities available for sale................. (4,588,572) (1,229,219) (1,670,505)
Net (increase) decrease in interest-bearing deposits in
other banks............................................. (94,324) 37,452 39,447
Proceeds from sale of premises and equipment.............. 74,048 11,702 18,390
Purchase of premises and equipment........................ (177,378) (63,053) (67,985)
Net decrease (increase) in customers' acceptance
liability............................................... 100,216 (79,154) (26,822)
Net cash received in acquisitions......................... 333,606 191,410 197,431
----------- ----------- -----------
Net cash (used) by investing activities............ (2,224,113) (2,407,757) (1,489,273)
Financing activities:
Net increase in deposits.................................. 1,515,891 1,339,369 1,238,304
Net increase in short-term borrowings..................... 1,786,640 839,325 503,105
Proceeds from long-term borrowings........................ 159,044 121,535 209,703
Payments on long-term borrowings.......................... (86,116) (279,582) (406,988)
Net (decrease) increase in bank acceptance liability...... (100,216) 79,154 26,822
Cash dividends............................................ (191,643) (149,447) (116,493)
Purchase of treasury stock................................ (181,651) (45,224) (111,225)
Sale of treasury stock by pooled company.................. -0- -0- 526
Issuance of common stock by pooled company................ -0- 43 1,368
Proceeds from exercise of stock options................... 8,416 5,536 6,152
----------- ----------- -----------
Net cash provided by financing activities.......... 2,910,365 1,910,709 1,351,274
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents... 383,194 (50,564) 216,855
Cash and cash equivalents at beginning of year............ 1,469,753 1,520,317 1,303,462
----------- ----------- -----------
Cash and cash equivalents at end of year.................. $ 1,852,947 $ 1,469,753 $ 1,520,317
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
52
<PAGE> 54
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TREASURY UNEARNED
COMMON UNDIVIDED COMPREHENSIVE STOCK, RESTRICTED
STOCK SURPLUS PROFITS INCOME AT COST STOCK TOTAL
-------- ---------- ---------- ------------- --------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1996.................... $ 78,785 $ 854,532 $1,137,969 $16,460 ($ 38,766) ($ 1,582) $2,047,398
Comprehensive income:
Net income.............. 317,859 317,859
Other comprehensive
income, net of tax
Unrealized (losses) on
available for sale
securities, net of
reclassification
adjustment............ (12,299) (12,299)
---------- ------- ----------
Comprehensive income.... 317,859 (12,299) 305,560
Equity from immaterial
poolings of
interests............. 575 (167) 13,898 (12) 14,294
Cash dividends declared:
Regions-$.70 per
share............... (87,466) (87,466)
Pooled companies...... (29,027) (29,027)
Stock dividend of pooled
company............... 1,347 41,841 (49,337) 6,099 (50)
Three-for-two stock
split of pooled
company............... 800 (800) (1) (1)
Purchase of treasury
stock................. (111,225) (111,225)
Treasury stock reissued
relating to
acquisitions accounted
for as purchases...... (384) (26,867) 117,017 89,766
Sale of treasury stock
by pooled company..... 526 526
Retirement of treasury
stock by pooled
company............... (810) (13,137) 13,947 0
Stock issued for
acquisitions.......... 476 31,922 32,398
Stock issued to
employees under
incentive plan........ 111 7,332 (4,385) 3,058
Stock options
exercised............. 302 5,844 6 6,152
Issuance of common stock
by pooled company..... 42 1,286 40 1,368
Amortization of unearned
restricted stock...... 94 1,718 1,812
-------- ---------- ---------- ------- --------- -------- ----------
BALANCE AT DECEMBER 31,
1996.................... 81,244 901,880 1,303,895 4,149 (12,356) (4,249) 2,274,563
Comprehensive income:
Net income.............. 397,529 397,529
Other comprehensive
income, net of tax
</TABLE>
53
<PAGE> 55
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TREASURY UNEARNED
COMMON UNDIVIDED COMPREHENSIVE STOCK, RESTRICTED
STOCK SURPLUS PROFITS INCOME AT COST STOCK TOTAL
-------- ---------- ---------- ------------- --------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Unrealized gains on
available for sale
securities, net of
reclassification
adjustment............ $11,580 $ 11,580
------- ----------
Comprehensive income.... $ 397,529 11,580 409,109
Equity from immaterial
poolings of interest.... $ 5,250 $ 81,625 55,524 214 142,613
Cash dividends declared:
Regions-$.80 per
share................. (108,980) (108,980)
Pooled companies........ (40,467) (40,467)
Stock dividend of pooled
company................. 1,899 97,991 (99,976) (86)
Two-for-one stock
split................. 42,699 (42,699) 0
Purchase of treasury
stock................. $ (45,224) (45,224)
Treasury stock retired
and reissued relating
to acquisitions
accounted for as
purchases............. (626) (43,097) 43,722 (1)
Stock issued for
acquisitions.......... 414 29,195 29,609
Stock issued to
employees under
incentive plan........ 220 16,442 1,605 $ (8,145) 10,122
Stock options
exercised............. 522 5,014 5,536
Issuance of common stock
by pooled company..... 1 39 3 43
Amortization of unearned
restricted stock...... 2,984 2,984
-------- ---------- ---------- ------- --------- -------- ----------
BALANCE AT DECEMBER 31,
1997.................... 131,623 1,089,089 1,466,431 15,943 (13,855) (9,410) 2,679,821
Comprehensive Income:
Net Income.............. 421,712 421,712
Other comprehensive
income, net of tax
Unrealized gains on
available for sale
securities, net of
reclassification
adjustment............ 9,009 9,009
---------- ------- ----------
Comprehensive income.... 421,712 9,009 430,721
Equity from immaterial
poolings of interests... 6,050 69,005 32,834 107,889
Cash dividends declared:
Regions-$.92 per
share................. (170,059) (170,059)
Pooled companies........ (21,584) (21,584)
Purchase of treasury
stock................... (181,651) (181,651)
</TABLE>
54
<PAGE> 56
REGIONS FINANCIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TREASURY UNEARNED
COMMON UNDIVIDED COMPREHENSIVE STOCK, RESTRICTED
STOCK SURPLUS PROFITS INCOME AT COST STOCK TOTAL
-------- ---------- ---------- ------------- --------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Treasury stock retired
and reissued relating
to acquisitions
accounted for as
purchases............. $ (1,422) $ (114,987) $ 160,832 $ 44,423
Retirement of treasury
stock of pooled
company............... (10) (595) 2,071 1,466
Buyout of minority
interest of pooled
company............... (320) (320)
Stock issued for
acquisitions.......... 1,221 76,211 77,432
Stock issued to
employees under
incentive plan........ 337 21,055 $ (412) 20,980
Stock options
exercised............. 517 7,899 8,416
Amortization of unearned
restricted stock...... 2,867 2,867
-------- ---------- ---------- ------- --------- -------- ----------
BALANCE AT DECEMBER 31,
1998.................... $138,316 $1,147,357 $1,729,334 $24,952 $ (32,603) $ (6,955) $3,000,401
======== ========== ========== ======= ========= ======== ==========
DISCLOSURE OF 1998
RECLASSIFICATION AMOUNT:
Unrealized holding gains
on available for sale
securities
arising during the period................................... $13,560
Less: Reclassification
adjustment, net of tax,
for net gains realized
in net
income...................................................... 4,551
-------
Net unrealized gains on
available for sale
securities,
net of taxes of $2,839...................................... $ 9,009
=======
</TABLE>
- ---------------
( ) Indicates deduction
See notes to consolidated financial statements
55
<PAGE> 57
NOTES TO 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
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 the transactions had been in effect for all periods
presented. Further details of these transactions are presented in Note Q
Business Combinations.
FASB No. 130, "Reporting Comprehensive Income," was adopted for 1998. The
statement requires additional reporting of items that are recorded directly to
shareholders' equity, but not reported in net income, such as unrealized gains
and losses on available-for-sale securities. Regions elected to present the
required disclosures in the Consolidated Statements of Changes in Stockholders'
Equity. The adoption of this standard did not affect Regions' financial results,
as it relates to disclosure requirements only.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The 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 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.
56
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are generally treated as collaterized financing
transactions and are recorded at market value plus accrued interest. It is
Regions' policy to take possession of securities purchased under resell
agreements.
LOANS
Interest on loans is generally accrued based upon the principal amount
outstanding.
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. The method used to determine the amount of loss inherent in the
loan portfolio and thereby assess the adequacy of the recorded balance of the
allowance for loan losses involves identifying portfolios of loans with similar
characteristics for which estimates of inherent future probable losses can be
made. The estimates are based on historical loss factors as adjusted for current
business and economic conditions. The loss factors are applied to the respective
portfolios in order to determine the overall allowance adequacy.
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:
<TABLE>
<S> <C>
Premises and leasehold improvements......................... 10-40 years
Furniture and equipment..................................... 3-12 years
</TABLE>
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 $354,501,000
at
57
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998, and $250,167,000 at December 31, 1997, 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 $141,926,000 at December 31, 1998 and $124,087,000 at December 31, 1997,
are being amortized over the estimated remaining servicing life of the loans,
considering appropriate prepayment assumptions. The estimated fair values of
capitalized mortgage servicing rights were $169 million and $198 million at
December 31, 1998 and 1997, 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 1998, 1997 and 1996, Regions capitalized $49.7 million,
$31.9 million and $30.1 million in mortgage servicing rights, respectively. In
1998, 1997 and 1996, Regions' amortization of mortgage servicing rights was
$31.8 million, $25.9 million and $33.7 million, respectively. Intangible assets
are evaluated periodically for impairment. 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.
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.
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.
58
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $1.3 billion in
1998, $1.1 billion in 1997, and $934 million in 1996 for interest on deposits
and borrowings. Income tax payments totaled $187 million for 1998, $147 million
for 1997, and $166 million for 1996. Loans transferred to other real estate
totaled $19 million in 1998, $26 million in 1997, and $22 million in 1996. The
securitization of loans during 1998 resulted in the transfer of $533.7 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.
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, 1998 and 1997 was approximately $110,884,000 and
$96,109,000, respectively.
NOTE C. SECURITIES
The amortized cost and estimated fair value of investment securities and
securities available for sale at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------
GAINS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES:
U.S. Treasury and Federal agency
securities............................... $2,371,412 $12,023 $(121) $2,383,314
Obligations of states and political
subdivisions............................. 565,095 28,205 -0- 593,300
Mortgage backed securities................. 188,607 1,299 (74) 189,832
---------- ------- ----- ----------
Total............................ $3,125,114 $41,527 $(195) $3,166,446
========== ======= ===== ==========
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury and Federal agency
securities................................. $ 948,592 $ 7,683 $(113) $ 956,162
Obligations of states and political
subdivisions............................. 162,577 5,916 -0- 168,493
Mortgage backed securities................. 3,550,476 24,736 (622) 3,574,590
Other securities........................... 6,415 219 (42) 6,592
Equity securities.......................... 138,157 29 -0- 138,186
---------- ------- ----- ----------
Total............................ $4,806,217 $38,583 $(777) $4,844,023
========== ======= ===== ==========
</TABLE>
59
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The cost and estimated fair value of investment securities and securities
available for sale at December 31, 1998 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------
ESTIMATED
FAIR
COST VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
INVESTMENT SECURITIES:
Due in one year or less..................................... $ 194,896 $ 196,390
Due after one year through five years....................... 622,421 630,574
Due after five years through ten years...................... 1,870,898 1,888,777
Due after ten years......................................... 248,292 260,873
Mortgage backed securities.................................. 188,607 189,832
---------- ----------
Total............................................. $3,125,114 $3,166,446
========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------
ESTIMATED
FAIR
COST VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
SECURITIES AVAILABLE FOR SALE:
Due in one year or less..................................... $ 249,435 $ 250,429
Due after one year through five years....................... 394,944 401,905
Due after five years through ten years...................... 444,925 449,095
Due after ten years......................................... 28,280 29,818
Mortgage backed securities.................................. 3,550,476 3,574,590
Equity securities........................................... 138,157 138,186
---------- ----------
Total............................................. $4,806,217 $4,844,023
========== ==========
</TABLE>
Proceeds from sales of securities available for sale in 1998, were $628.2
million. Gross realized gains and losses were $9.5 million and $2.5 million,
respectively. Proceeds from sales of securities available for sale in 1997 were
$71.1 million, with gross realized gains and losses of $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.
The amortized cost and estimated fair value of investment securities and
securities available for sale at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<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
========== ======= ======= ==========
</TABLE>
60
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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>
Securities with carrying values of $3,606,804,000 and $3,334,555,000 at
December 31, 1998, and 1997, respectively, were pledged to secure public funds,
trust deposits and certain borrowing arrangements.
NOTE D. LOANS
The loan portfolio at December 31, 1998 and 1997, consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Commercial.................................................. $ 7,144,176 $ 5,096,776
Real estate-construction.................................... 1,865,973 1,585,118
Real estate-mortgage........................................ 9,623,401 10,107,094
Consumer.................................................... 5,796,563 5,163,292
----------- -----------
24,430,113 21,952,280
Unearned income............................................. (64,526) (71,157)
----------- -----------
Total............................................. $24,365,587 $21,881,123
=========== ===========
</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, 1998,
and 1997, were approximately $113 million and $294 million respectively. During
1998, $518 million of new loans were made, repayments totaled $521 million and
decreases for changes in the composition of related parties totaled $178
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 $506.5 million and $641.0 million at
December 31, 1998, and 1997, 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 $175 million at December 31,
1998, and $57 million at December 31, 1997. The increase is due primarily to
certain commercial credits, added in 1998, which have been written down to
estimated fair value of the underlying collateral. The average amount of
impaired loans during 1998 was $167 million.
61
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E. ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year........................... $304,223 $253,248 $231,390
Allowance of purchased institutions at acquisition
date................................................. 17,094 17,420 6,270
Provision charged to operating expense................. 60,505 89,663 46,026
Loan losses:
Charge-offs.......................................... (93,739) (88,279) (51,976)
Recoveries........................................... 27,329 32,171 21,538
-------- -------- --------
Net loan losses...................................... (66,410) (56,108) (30,438)
-------- -------- --------
Balance at end of year................................. $315,412 $304,223 $253,248
======== ======== ========
</TABLE>
NOTE F. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 106,845 $ 88,710
Premises.................................................... 518,538 446,566
Furniture and equipment..................................... 370,992 348,844
Leasehold improvements...................................... 45,942 46,760
---------- ---------
1,042,317 930,880
Allowances for depreciation and amortization................ (507,892) (472,088)
---------- ---------
Total............................................. $ 534,425 $ 458,792
========== =========
</TABLE>
Net occupancy expense is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross occupancy expense................................... $72,221 $65,117 $58,644
Less rental income........................................ 9,334 3,184 3,481
------- ------- -------
Net occupancy expense..................................... $62,887 $61,933 $55,163
======= ======= =======
</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 $17,273,000 at December 31, 1998, and $20,511,000 at December 31, 1997.
Gain or loss on the sale of other real estate is included in other expense.
62
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H. DEPOSITS
The following schedule presents the detail of interest-bearing deposits:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Interest-bearing transaction accounts....................... $ 672,168 $ 1,333,955
Interest-bearing accounts in foreign office................. 1,219,713 713,944
Savings accounts............................................ 1,508,510 1,499,042
Money market savings accounts............................... 6,999,452 5,235,921
Certificates of deposit ($100,000 or more).................. 3,471,203 3,425,259
Time deposits ($100,000 or more)............................ 246,877 284,888
Other interest-bearing deposits............................. 9,655,018 8,773,814
----------- -----------
Total............................................. $23,772,941 $21,266,823
=========== ===========
</TABLE>
The following schedule details interest expense on deposits:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest-bearing transaction accounts................. $ 30,888 $ 26,878 $ 24,345
Interest-bearing accounts in foreign office........... 42,319 30,888 22,145
Savings accounts...................................... 33,518 36,675 37,457
Money market savings accounts......................... 221,774 170,667 142,133
Certificates of deposit ($100,000 or more)............ 200,819 197,165 161,230
Other interest-bearing deposits....................... 535,736 492,509 439,534
---------- -------- --------
Total....................................... $1,065,054 $954,782 $826,844
========== ======== ========
</TABLE>
The aggregate amount of maturities of all time deposits in each of the next
five years is as follows: 1999 -- $8.8 billion; 2000 -- $2.9 billion;
2001 -- $444 million; 2002 -- $410 million; and 2003 -- $170 million.
NOTE I. BORROWED FUNDS
Following is a summary of short-term borrowings:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal funds purchased............................ $1,929,202 $1,686,094 $1,334,896
Securities sold under agreements to repurchase..... 138,076 442,732 367,560
Federal Home Loan Bank structured notes............ 2,350,000 500,000 -0-
Commercial paper................................... 56,750 52,750 40,367
Notes payable to unaffiliated banks................ -0- -0- 53,350
Treasury tax and loan note......................... 15,988 14,657 18,027
Short sale liability............................... 1,711 2,834 231
Federal Home Loan Bank advances.................... 5,001 8,284 9,375
---------- ---------- ----------
Total.................................... $4,496,728 $2,707,351 $1,823,806
========== ========== ==========
</TABLE>
63
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Maximum amount outstanding at any month-end:
Federal funds purchased and securities sold under
agreements to repurchase...................... $2,067,278 $2,231,387 $1,746,014
Aggregate short-term borrowings............. 4,496,728 2,709,309 1,867,364
Average amount outstanding (based on average of
daily balances).................................. 3,386,392 1,876,871 1,340,288
Weighted average interest rate at year end......... 5.1% 4.8% 6.0%
Weighted average interest rate on amounts
outstanding during the year (based on average of
daily balances).................................. 5.2% 5.7% 5.4%
</TABLE>
Federal funds purchased and securities sold under agreements to repurchase
had weighted average maturities of six, seven and ten days at December 31, 1998,
1997 and 1996, respectively. Weighted average rates on these dates were 5.4%,
4.8%, and 6.0%, respectively.
Federal Home Loan Bank structured notes have a stated ten year maturity,
but are callable within three months. The structured notes had weighted average
rates of 4.8% and 4.9% at December 31, 1998 and 1997, respectively.
Commercial paper maturities ranged from 53 to 1,054 days at December 31,
1998, from 257 to 581 days at December 31, 1997 and from 3 to 715 days at
December 31, 1996. Weighted average maturities were 811, 329 and 372 days at
December 31, 1998, 1997 and 1996, respectively. The weighted average interest
rates on these dates were 5.8%, 6.3% and 5.8%, respectively.
Regions has an unsecured short-term credit agreement with an unaffiliated
bank that provides for maximum borrowings of $100 million. No borrowings were
outstanding under this agreement at December 31, 1998 or 1997. No compensating
balances or commitment fees are required by this agreement. In addition to this
short-term credit agreement, a subsidiary of Regions has, as of December 31,
1998, a $50 million revolving credit line with an unaffiliated bank that
requires a $10,000 compensating balance. As of December 31, 1998 and 1997, no
borrowings were outstanding under this agreement. On December 31, 1996, $53.4
million was outstanding.
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 5.0%, 6.3% and 6.5% at
December 31, 1998, 1997 and 1996, respectively.
The Federal Home Loan Bank advances represent borrowings with original
stated maturities of less than one year. These notes had weighted average
interest rates on December 31, 1998, 1997, and 1996, of 6.1%, 5.8%, and 5.5%,
respectively.
64
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<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.................................... -0- 900
Federal Home Loan Bank notes................................ 306,337 203,637
Mortgage notes payable...................................... 6 2,617
Industrial development revenue bonds........................ 3,000 3,200
Notes payable to unaffiliated banks......................... 10,250 10,050
Other notes payable......................................... 51,447 25,125
-------- --------
Total............................................. $571,040 $445,529
======== ========
</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. Regions prepaid $900,000 of subordinated notes originally
issued by pooled companies during 1998.
Federal Home Loan Bank notes represent borrowings from Federal Home Loan
Banks. Interest on these borrowings is at fixed rates ranging from 5.0% to 8.1%,
with maturities of one to nineteen years. These borrowings, as well as the
short-term borrowings from the Federal Home Loan Bank, are secured by Federal
Home Loan Bank stock (carried at cost of $139.3 million) and by first mortgage
loans on one-to-four family dwellings held by certain banking subsidiaries
(approximately $4.4 billion at December 31, 1998). The maximum amount that could
be borrowed from Federal Home Loan Banks under the current borrowing agreements
and without further investment in Federal Home Loan Bank stock is approximately
$3.3 billion.
The mortgage notes payable at December 31, 1998, had a weighted average
interest rate of 8.23% and were collateralized by premises and equipment carried
at $7,659,000.
The industrial development revenue bonds mature on July 1, 2008, with
principal of $200,000 payable annually and interest at a tax effected prime rate
payable monthly.
Notes payable to unaffiliated banks represents revolving credit agreements
with unaffiliated banks. These agreements have interest rates that range from
5.3% to 9.2% and mature in 1999.
Other notes payable at December 31, 1998, had a weighted average interest
rate of 5.8% and a weighted average maturity of 5.4 years.
The aggregate amount of maturities of all long-term debt in each of the
next five years is as follows: 1999 -- $44,118,506; 2000 -- $218,188,571;
2001 -- $61,895,177; 2002 -- $91,312,476; 2003 -- $1,653,574.
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
65
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
authorities require the maintenance of minimum capital to asset ratios at
banking subsidiaries. At December 31, 1998, the banking subsidiaries could pay
approximately $266 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.
NOTE J. EMPLOYEE BENEFIT PLANS
In 1998, Regions adopted FASB 132 "Employers Disclosures about Pensions and
Other Postretirement Benefits," (Statement 132) and accordingly the 1997
disclosures have been restated to reflect the requirements of Statement 132.
Regions has a defined benefit pension plan covering substantially all
employees. 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 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.
The following table sets forth the plans' funded status and amounts
recognized in the consolidated statement of condition:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Projected benefit obligation, beginning of year............. $186,927 $163,826
Service cost................................................ 8,861 7,866
Interest cost............................................... 13,058 11,906
Actuarial losses............................................ 6,960 9,933
Benefit payments............................................ (6,254) (6,604)
-------- --------
Projected benefit obligation, end of year................... $209,552 $186,927
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year................ $211,196 $180,387
Actual return on plan assets................................ 10,753 35,771
Company contributions....................................... 11,128 1,642
Benefit payments............................................ (6,254) (6,604)
-------- --------
Fair value of plan assets, end of year...................... $226,823 $211,196
Funded status of plan....................................... $ 17,271 $ 24,269
Unrecognized net actuarial loss............................. 15,908 (811)
Unamortized prior service cost.............................. (2,870) (3,095)
-------- --------
Prepaid pension cost........................................ $ 30,309 $ 20,363
======== ========
</TABLE>
66
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net pension cost included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period......... $ 8,861 $ 7,866 $ 6,746
Interest cost on projected benefit obligation.......... 13,058 11,906 10,426
Expected (return) on plan assets....................... (17,455) (31,384) (21,292)
Net (deferral) amortization............................ (844) 15,183 5,644
-------- -------- --------
Net periodic pension expense........................... $ 3,620 $ 3,571 $ 1,524
======== ======== ========
</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 7.00% and 4.50%, respectively, at December 31,
1998; 7.50% and 4.50%, respectively, at December 31, 1997; and 7.75% and 4.50%,
respectively, at December 31, 1996. The expected long-term rate of return on
plan assets was 9% in all years.
Contributions to employee profit sharing plans totaled $23,764,000,
$21,016,000 and $16,202,000 for 1998, 1997 and 1996, respectively.
The 1998 contribution to the employee stock ownership plan totaled
$2,650,000, compared to $2,950,000 in 1997, and $1,863,000 in 1996.
Contributions are used to purchase Regions common stock for the benefit of
participating employees.
Contributions to the employee stock purchase plan in 1998, 1997 and 1996
were $1,838,000, $1,516,000 and $1,479,000, 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.
67
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the plan's funded status and amounts
recognized in the consolidated statement of condition:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Projected benefit obligation, beginning of year............. $ 9,803 $11,949
Service cost................................................ 892 381
Interest cost............................................... 962 681
Actuarial losses (gains).................................... 5,764 (2,688)
Benefit payments............................................ (477) (520)
-------- -------
Projected benefit obligation, end of year................... $ 16,944 $ 9,803
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year................ $ -0- $ -0-
Actual return on plan assets................................ -0- -0-
Company contributions....................................... 636 520
Benefit payments............................................ (477) (520)
-------- -------
Fair value of plan assets, end of year...................... $ 159 $ -0-
Funded status of plan....................................... $(16,785) $(9,803)
Recognized net actuarial loss............................... 8,645 3,357
-------- -------
Accrued postretirement benefit cost......................... $ (8,140) $(6,446)
======== =======
</TABLE>
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period.............. $ 892 $ 381 $ 544
Interest cost on benefit obligation......................... 962 681 833
Net amortization............................................ 590 590 605
Recognized (gain)........................................... (114) (324) (158)
------ ------ ------
Net periodic postretirement benefit cost.................... $2,330 $1,328 $1,824
====== ====== ======
</TABLE>
The assumed health care cost trend rate was 9.1% for 1999 and is assumed to
decrease gradually to 5.1% 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, 1998, by $1,774,327 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for 1998 by
$241,127. Decreasing the assumed health care cost trend rates by one percentage
in each year would decrease the accumulated postretirement benefit obligation at
December 31, 1998, by $1,555,949 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for 1998 by
$207,472. The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.00% at December 31, 1998, and 7.50% at
December 31, 1997.
68
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K. LEASES
Rental expense for all leases amounted to approximately $19,537,000,
$14,828,000 and $12,718,000 for 1998, 1997 and 1996, respectively. The
approximate future minimum rental commitments as of December 31, 1998, 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>
EQUIPMENT PREMISES TOTAL
--------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
1999........................................................ $ 530 $11,207 $11,737
2000........................................................ 345 10,168 10,513
2001........................................................ 175 8,906 9,081
2002........................................................ 105 6,809 6,914
2003........................................................ 78 7,946 8,024
2004-2008................................................... 6 18,277 18,283
2009-2013................................................... -0- 10,771 10,771
2014-2018................................................... -0- 4,215 4,215
2019-End.................................................... -0- 2,009 2,009
------ ------- -------
Total............................................. $1,239 $80,308 $81,547
====== ======= =======
</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 $5.9 billion at December 31, 1998, and $4.9
billion at December 31, 1997. Standby letters of credit were $492.3 million at
December 31, 1998, and $498.3 million at December 31, 1997. Commitments under
commercial letters of credit used to facilitate customers' trade transactions
were $21.0 million at December 31, 1998, and $24.0 million at December 31, 1997.
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 losses deferred,
which is reflected in gains and losses on mortgage loans held for sale as
realized, was not material to
69
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the results of operations for the years ended December 31, 1998, 1997 or 1996.
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 $265 million and $126 million at December 31, 1998, and 1997,
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, 1998 or December 31, 1997. 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 $75 million and $31 million at
December 31, 1998 and 1997, 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 consolidated
statements of condition and cash flows approximates the estimated fair value.
Interest-bearing deposits in other banks: The carrying amount reported in
the 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 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 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 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
flow analyses, based on interest rates currently offered on loans with similar
terms to borrowers of similar
70
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
credit quality. The carrying amount of accrued interest reported in the
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 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>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------- -------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents......... $ 1,852,947 $ 1,852,947 $ 1,469,753 $ 1,469,753
Interest-bearing deposits in other
banks.......................... 143,965 143,965 48,162 48,162
Investment securities............. 3,125,114 3,166,446 3,338,279 3,372,494
Securities available for sale..... 4,844,023 4,844,023 2,977,644 2,977,644
Trading account assets............ 49,387 49,387 50,825 50,825
Mortgage loans held for sale...... 927,668 927,668 383,924 383,924
Loans, net (excluding leases)..... 23,835,842 24,503,246 21,358,956 21,734,678
Financial liabilities:
Deposits.......................... 28,350,066 28,435,116 25,011,021 25,149,732
Short-term borrowings............. 4,496,728 4,496,728 2,707,351 2,707,351
Long-term borrowings.............. 571,040 572,753 445,529 460,570
Off-balance-sheet instruments:
Loan commitments.................. -0- (53,884) -0- (33,019)
Standby letters of credit......... -0- (7,385) -0- (6,666)
Commercial letters of credit...... -0- (53) -0- (52)
</TABLE>
71
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE O. OTHER INCOME AND EXPENSE
Other income consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Fees and commissions.................................... $ 52,073 $ 48,722 $41,232
Insurance premiums and commissions...................... 10,231 6,533 6,514
Trading account income.................................. 21,915 14,069 10,890
Gain on divestiture of banks............................ -0- 25,084 -0-
Other miscellaneous income.............................. 45,359 22,904 23,779
-------- -------- -------
Total......................................... $129,578 $117,312 $82,415
======== ======== =======
</TABLE>
Other expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Stationery, printing and supplies...................... $ 20,625 $ 15,581 $ 13,559
Advertising and business development................... 20,084 18,247 13,593
Postage and freight.................................... 18,727 19,228 13,848
Telephone.............................................. 24,480 16,870 12,918
Legal and other professional fees...................... 20,423 18,943 16,026
Other non-credit losses................................ 34,426 14,905 10,653
Outside computer services.............................. 17,433 16,787 14,708
Amortization of mortgage servicing rights.............. 31,832 25,923 33,650
Amortization of excess purchase price.................. 19,776 17,859 13,698
Loss on sale of mortgages by affiliate mortgage
companies............................................ 13,981 2,892 5,592
Other miscellaneous expenses........................... 94,786 130,340 126,577
-------- -------- --------
Total........................................ $316,573 $297,575 $274,822
======== ======== ========
</TABLE>
NOTE P. INCOME TAXES
At December 31, 1998, Regions has net operating loss carryforwards for
federal tax purposes of $23.1 million that expire in years 2003 through 2011.
These carryforwards resulted from various acquired financial institutions. For
financial reporting purposes, a valuation allowance of approximately $2.8
million has been recognized to offset a portion of the deferred tax assets
related to those carryforwards and certain temporary differences.
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.
72
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of Regions' deferred tax assets and liabilities as of
December 31, 1998 and 1997 are listed below.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Loan loss allowance....................................... $ 94,982 $ 96,588
Net operating loss carryforwards.......................... 8,686 9,390
Other..................................................... 103,333 54,711
-------- --------
Total deferred tax assets......................... 207,001 160,689
Deferred tax liabilities:
Tax over book depreciation................................ 3,028 4,948
Accretion of bond discount................................ 8,562 4,123
Direct lease financing.................................... 23,515 23,796
Pension................................................... 12,887 10,154
Originated mortgage servicing rights...................... 13,783 8,094
Other..................................................... 43,255 34,447
-------- --------
Total deferred tax liabilities.................... 105,030 85,562
-------- --------
Net deferred tax assets before valuation allowance.......... 101,971 75,127
Valuation allowance......................................... (2,802) (11,224)
-------- --------
Net deferred tax asset...................................... $ 99,169 $ 63,903
======== ========
</TABLE>
The valuation allowance for net deferred tax assets decreased by $8.4
million in 1998. 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>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax on income computed at statutory federal income
tax rate......................................... $222,356 $208,163 $165,853
Increases (decreases) in taxes resulting from:
Obligations of states and political subdivisions:
Tax exempt income............................. (15,571) (17,007) (14,690)
Tax on preference item........................ 2,777 2,295 1,859
State income tax, net of federal tax benefit..... 11,520 7,662 3,395
Other, net....................................... (7,492) (3,891) (409)
-------- -------- --------
Total.................................... $213,590 $197,222 $156,008
Effective Tax Rate................................. 33.6% 33.2% 32.9%
</TABLE>
73
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provisions for income taxes in the consolidated statements of income
are summarized below. Included in these amounts are income taxes of $2,644,000,
$187,000, and $1,159,000 in 1998, 1997 and 1996, respectively, related to
securities transactions.
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
1998
Federal................................................... $176,646 $24,917 $201,563
State..................................................... 9,388 2,639 12,027
-------- ------- --------
Total........................................... $186,034 $27,556 $213,590
======== ======= ========
1997
Federal................................................... $186,587 $(1,983) $184,604
State..................................................... 13,496 (878) 12,618
-------- ------- --------
Total........................................... $200,083 $(2,861) $197,222
======== ======= ========
1996
Federal................................................... $149,323 $ 1,174 $150,497
State..................................................... 6,532 (1,021) 5,511
-------- ------- --------
Total........................................... $155,855 $ 153 $156,008
======== ======= ========
</TABLE>
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.
74
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1998, prior to consummation of First Commercial and the other pooled
companies, First Commercial contributed $171.8 in net interest income and $72.3
million to net income and the other pooled companies contributed $11.9 million
in net interest income and $3.8 million to net income.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net interest income:
Regions................................................... $ 828,881 $ 700,443
First Commercial.......................................... 282,968 251,906
Other pooled companies.................................... 67,359 59,452
First National............................................ -0- 23
---------- ----------
Combined.................................................. $1,179,208 $1,011,824
========== ==========
Net income:
Regions................................................... $ 299,692 $ 229,678
First Commercial.......................................... 100,059 78,554
Other pooled companies.................................... (2,222) 9,619
First National............................................ -0- 8
---------- ----------
Combined.................................................. $ 397,529 $ 317,859
========== ==========
Net income per common share:
Regions................................................... $ 2.20 $ 1.85
Combined.................................................. 1.89 1.64
Net income per common share -- diluted:
Regions................................................... $ 2.15 $ 1.81
Combined.................................................. 1.86 1.61
</TABLE>
The following table presents recent acquisitions of the pooled companies:
<TABLE>
<CAPTION>
HEADQUARTERS TOTAL ASSETS ACCOUNTING
DATE COMPANY LOCATION (IN THOUSANDS) TREATMENT
---- ------- ------------ -------------- ----------
<S> <C> <C> <C> <C>
March 1998 Federal Savings Bank subsidiary of Memphis, Tennessee $395,629 Purchase
Kemmons Wilson, Inc.
October 1997 First Charter Bancshares, Inc. Searcy, Arkansas 74,605 Pooling
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.
</TABLE>
75
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1998 Regions completed the following additional business
combinations:
<TABLE>
<CAPTION>
HEADQUARTERS TOTAL ASSETS ACCOUNTING
DATE COMPANY LOCATION (IN THOUSANDS) TREATMENT
---- ------- ------------ -------------- ----------
<S> <C> <C> <C> <C>
February Greenville Financial Corporation Greenville, South $141,294 Pooling
Carolina
March St. Mary Holding Corporation Franklin, 111,498 Pooling
Louisiana
March Key Florida Bancorp, Inc. Bradenton, Florida 204,435 Pooling
August Village Bankshares, Inc. Tampa, Florida 211,469 Pooling
August Jacobs Bank Scottsboro, 185,939 Pooling
Alabama
September Etowah Bank Canton, Georgia 409,139 Pooling
September First Community Banking Services, Peachtree City, 124,762 Pooling
Inc. Georgia
September Branches of First Union National Valdosta, Georgia 108,913 Purchase
Bank
November EFC Holdings Corporation Charlotte, North 63,147 Purchase
Carolina
December St. James Bancorporation, Inc. Lutcher, Louisiana 171,572 Purchase
</TABLE>
The total consideration paid for these business combinations was
approximately $14.6 million in cash and 13.2 million shares of Regions' common
stock (including treasury stock reissued) valued at $493 million. Total
intangible assets recorded in connection with the purchase transactions totaled
approximately $114 million.
During 1997 Regions completed the following business combinations:
<TABLE>
<CAPTION>
HEADQUARTERS ACCOUNTING
DATE COMPANY LOCATION TOTAL ASSETS TREATMENT
- ---- ---------------------------- --------------------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
January Florida First Bancorp, Inc. Panama City, Florida $286,515 Purchase
January Allied Bankshares, Inc. Thomson, Georgia 559,815 Pooling
March West Carroll Bancshares, Oak Grove, Louisiana 127,145 Pooling
Inc.
April Gulf South Bancshares, Inc. Gretna, Louisiana 55,363 Purchase
May First Mercantile National Longwood, Florida 157,434 Purchase
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>
76
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Because certain of the 1998 and 1997 business combinations were accounted
for as purchases, Regions' 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, 1997. 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>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
------------------------
<S> <C> <C>
Interest income............................................. $2,616,110 $2,431,941
Interest expense............................................ 1,285,008 1,178,274
---------- ----------
Net interest income....................................... 1,331,102 1,253,667
Provision for loan losses................................... 61,714 98,049
Non-interest income......................................... 497,117 452,051
Non-interest expense........................................ 1,130,846 999,476
---------- ----------
Income before income taxes................................ 635,659 608,193
Applicable income taxes..................................... 214,879 203,403
---------- ----------
Net income.................................................. $ 420,780 $ 404,790
========== ==========
Net income per share........................................ $1.91 $1.85
Net income per share, diluted............................... 1.88 1.81
</TABLE>
The following chart summarizes the assets acquired and liabilities assumed
in connection with business combinations, excluding the First Commercial and
other pooled companies business combinations, in 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash and due from banks..................................... $ 245,610 $ 206,330
Investment securities....................................... 72,514 254,308
Securities available for sale............................... 331,158 335,494
Loans, net.................................................. 1,304,507 1,269,222
Other assets................................................ 86,741 187,089
Deposits.................................................... 1,822,795 1,896,144
Borrowings.................................................. 55,320 94,684
Other liabilities........................................... 101,872 43,427
</TABLE>
77
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Regions' business combinations pending as of December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
APPROXIMATE
---------------- ANTICIPATED
ASSET ACCOUNTING
INSTITUTION SIZE VALUE(1) CONSIDERATION TREATMENT
- ----------- ----- -------- ------------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
VB&T Bancshares Corporation,
located in Valdosta, Georgia............... $ 75 $18 Regions Common Stock Pooling
Meigs County Bancshares, Inc.,
located in Decatur, Tennessee.............. 103 19 Regions Common Stock Pooling
Bullsboro BancShares, Inc.,
located in Newnan, Georgia................. 108 35 Regions Common Stock Pooling
Arkansas Banking Company,
located in Jonesboro, Arkansas............. 343 63 Regions Common Stock Purchase
</TABLE>
- ---------------
(1) Computed as of the date of announcement of each transaction.
In early 1999, the Company consummated the VB&T, Meigs County, and
Bullsboro transactions, with the issuance of approximately 1.7 million shares of
common stock.
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 116,713; 134,956 and 180,228 of the shares under option at
December 31, 1998, 1997 and 1996, 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 1998 and 1997, Regions granted 199,506
and 236,469 shares, respectively, as restricted stock and during 1998, 1997, and
1996, granted 311,393; 211,350 and 277,600 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 1998, 1997, and 1996, 99,013; 179,314 and 11,552 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 1998, 1997 and 1996, 264,540, 629,150 and
491,280 performance shares, respectively, were issued. Total expense for
restricted stock was $2,693,000 in 1998, $2,969,000 in 1997, and $1,507,000 in
1996. Total expense for performance shares was $18,424,000 in 1998, $20,927,000
in 1997, and $9,264,000 in 1996.
In connection with the business combinations with First Community Banking
Services, Inc. and Greenville Financial Corporation in 1998, 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
78
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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, 1996........................ 6,542,249 $ 3.02 -- $18.00 $12.82
Granted......................................... 1,575,558 4.35 -- 22.44 19.64
Exercised....................................... (1,308,913) 3.02 -- 16.35 10.86
Canceled........................................ (84,146) 6.21 -- 20.85 12.81
----------
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
Options assumed through acquisitions............ 281,891 5.50 -- 33.72 11.77
Granted......................................... 1,150,257 39.47 -- 41.38 41.17
Exercised....................................... (1,166,575) 3.39 -- 36.42 12.17
Canceled........................................ (64,797) 9.03 -- 41.34 28.82
----------
Outstanding at December 31, 1998.................. 6,783,452 $ 3.39 -- $41.38 $22.05
==========
Exercisable at December 31, 1998................ 5,492,792 $ 3.39 -- $38.75 $18.25
</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>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Pro forma net income ($000's)............................... $412,701 $395,171 $313,719
Pro forma net income per share.............................. $1.87 $1.88 $1.62
Pro forma net income per share, diluted..................... 1.84 1.85 1.59
</TABLE>
Regions' options outstanding have a weighted average contractual life of
6.6 years. The weighted average fair value of options granted was $8.77 in 1998,
$7.82 in 1997 and $4.78 in 1996. 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 1998: expected dividend yield of 2.3%;
expected option life of 5 years; expected volatility of 19.3%; and a risk free
interest rate of 4.5%. The 1997 assumptions used in the model included: 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 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.
79
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE S. PARENT COMPANY ONLY FINANCIAL STATEMENTS
Presented below are condensed financial statements of Regions Financial
Corporation:
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash due from banks......................................... $ 15,490 $ 18,302
Loans to subsidiaries....................................... 61,100 59,997
Investment securities....................................... 3,929 38,448
Premises and equipment...................................... 10,778 17,320
Investment in subsidiaries:
Banks..................................................... 2,995,219 2,756,301
Non-banks................................................. 196,120 109,896
---------- ----------
3,191,339 2,866,197
Other assets................................................ 47,938 42,281
---------- ----------
$3,330,574 $3,042,545
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper............................................ $ 56,750 $ 52,750
Long-term borrowings........................................ 220,173 225,793
Other liabilities........................................... 53,250 84,181
---------- ----------
Total liabilities........................................... 330,173 362,724
Stockholders' equity:
Common stock.............................................. 138,316 131,623
Surplus................................................... 1,147,357 1,089,089
Undivided profits......................................... 1,754,286 1,482,374
Treasury stock............................................ (32,603) (13,855)
Unearned restricted stock................................. (6,955) (9,410)
---------- ----------
Total stockholders' equity........................ 3,000,401 2,679,821
---------- ----------
$3,330,574 $3,042,545
========== ==========
</TABLE>
80
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Dividends received from subsidiaries:
Banks.................................................. $246,164 $290,902 $283,764
Non-banks.............................................. -0- 3,000 -0-
-------- -------- --------
246,164 293,902 283,764
Service fees from subsidiaries............................ 91,647 46,847 31,661
Interest from subsidiaries................................ 3,622 5,158 3,891
Other..................................................... 7,161 25,646 4,953
-------- -------- --------
348,594 371,553 324,269
Expenses:
Salaries and employee benefits............................ 54,794 34,706 26,099
Interest.................................................. 20,783 23,829 24,492
Net occupancy expense..................................... 1,946 857 1,012
Furniture and equipment expense........................... 4,111 654 972
Legal and other professional fees......................... 8,979 3,526 5,855
Amortization of excess purchase price..................... 11,412 10,892 8,375
Other expenses............................................ 7,286 27,372 25,804
-------- -------- --------
109,311 101,836 92,609
Income before income taxes and equity in undistributed
earnings of subsidiaries.................................. 239,283 269,717 231,660
Applicable income taxes (credit)............................ (1,804) (3,153) (15,616)
-------- -------- --------
Income before equity in undistributed earnings of
subsidiaries.............................................. 241,087 272,870 247,276
Equity in undistributed earnings of subsidiaries:
Banks..................................................... 169,689 119,141 77,008
Non-banks................................................. 10,936 5,518 (6,425)
-------- -------- --------
180,625 124,659 70,583
-------- -------- --------
Net Income........................................ $421,712 $397,529 $317,859
======== ======== ========
</TABLE>
Aggregate maturities of long-term borrowings in each of the next five years
for the parent company only are as follows: $770,000 in 1999; $730,000 in 2000;
$25,760,000 in 2001; $75,790,000 in 2002; and $810,000 in 2003. Standby letters
of credit issued by the parent company totaled $8.1 million at December 31,
1998. This amount is included in total standby letters of credit disclosed in
Note L.
81
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income................................................ $ 421,712 $ 397,529 $ 317,859
Adjustments to reconcile net cash provided by operating
activities:
Equity in undistributed earnings of subsidiaries....... (180,625) (124,659) (70,583)
Provision for depreciation and amortization............ 17,409 16,551 13,882
(Decrease) increase in other liabilities............... (32,424) 5,944 12,267
Decrease in dividends receivable from subsidiaries..... -0- -0- 30,000
Loss on sale of premises and equipment................. 44 -0- -0-
(Increase) in other assets............................. (17,069) (18,842) (3,393)
Stock issued to employees under incentive plan......... 14,717 10,971 4,333
Other.................................................. -0- 588 (1,324)
--------- --------- ---------
Net cash provided by operating activities.............. 223,764 288,082 303,041
Investing activities:
Investment in subsidiaries................................ 103,138 (72,480) (41,041)
Principal (advances) payments on loans to subsidiaries.... (1,103) 508 (27,003)
Sale of subsidiaries...................................... -0- 26,127 3,610
Sale and purchases of premises and equipment.............. 3,368 (3,437) (8,450)
Maturity (purchase) of investment securities.............. 34,519 (30,802) (2,234)
--------- --------- ---------
Net cash provided (used) by investing activities.......... 139,922 (80,084) (75,118)
Financing activities:
Increase in commercial paper borrowings................... 4,000 12,383 19,267
Cash dividends............................................ (191,643) (149,533) (116,544)
Purchase of treasury stock................................ (181,651) (45,224) (111,225)
Proceeds from long-term borrowings........................ 4,500 8,743 50,098
Principal payments on long-term borrowings................ (10,120) (16,491) (50,032)
Net (decrease) in short-term borrowings................... -0- (31,850) (17,481)
Proceeds from issuance of common stock.................... -0- 2,417 285
Exercise of stock options................................. 8,416 3,150 5,974
--------- --------- ---------
Net cash (used) by financing activities................... (366,498) (216,405) (219,658)
--------- --------- ---------
(Decrease) increase in cash and cash equivalents.......... (2,812) (8,407) 8,265
Cash and cash equivalents at beginning of year............ 18,302 26,709 18,444
--------- --------- ---------
Cash and cash equivalents at end of year.................. $ 15,490 $ 18,302 $ 26,709
========= ========= =========
</TABLE>
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,
1998, 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
82
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998 and 1997, exceeded the "well capitalized" levels, as shown below:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 TO BE
------------------ WELL
AMOUNT RATIO CAPITALIZED
---------- ----- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Tier I Capital:
Regions Financial Corporation............................. $2,625,312 10.26% 6.00%
Regions Bank (Alabama).................................... 2,580,689 10.73 6.00
Total Capital:
Regions Financial Corporation............................. $3,115,724 12.17% 10.00%
Regions Bank (Alabama).................................... 2,877,925 11.97 10.00
Leverage:
Regions Financial Corporation............................. $2,625,312 7.40% 5.00%
Regions Bank (Alabama).................................... 2,580,689 7.37 5.00
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 TO BE
------------------ WELL
AMOUNT RATIO CAPITALIZED
---------- ----- -----------
(IN THOUSANDS)
<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
</TABLE>
NOTE U. MERGER AND CONSOLIDATION EXPENSES AND SAIF ASSESSMENT
In 1998, Regions incurred a pre-tax, non-recurring merger and consolidation
charge of $121.4 million related primarily to the merger of First Commercial and
four other institutions with Regions. The charge, recognized in the third
($114.7 million) and fourth ($6.7 million) quarters, consisted primarily of
employee-related obligations ($33.6 million), elimination of duplicate
facilities, obsolete equipment and other assets ($47.6 million), contract
terminations ($6.0 million), costs to exit certain lines of business ($5.1
million), and professional fees and contractual payments associated with the
mergers ($29.1 million). During 1998, merger-and consolidation-related costs
incurred or charged against the accrual totaled $117.0 million, resulting in a
balance in merger and consolidation accrual of $4.4 million at December 31,
1998, which is primarily associated with certain employee related obligations.
These employee related obligations were paid out in early 1999, resulting in the
merger and consolidation accrual being reduced to zero.
83
<PAGE> 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The employee-related obligations primarily relates to termination payments
and payments under change of control provisions. The termination payments
related to the elimination of back office and administrative personnel. Excess
personnel were terminated during 1998 and all employee obligations were paid
during 1998, with the exception of the $4.4 million referred to above.
Regions recorded $47.6 million of write-downs related to facilities,
equipment and other assets that were impaired as a result of Regions'
consolidation of bank charters, consolidations of back office and certain branch
operations, and instituting efficiencies through alteration and elimination of
activities of the combining enterprises.
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.
NOTE V. EARNINGS PER SHARE
The following table sets forth the computation of basic net income per
share and diluted net income per share.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
------------------------------
<S> <C> <C> <C>
Numerator:
For basic net income per share
and diluted net income per share, net income.............. $421,712 $397,529 $317,859
======== ======== ========
Denominator:
For basic net income per share -- weighted shares
outstanding............................................ 220,114 209,781 194,241
Effect of dilutive securities:
Stock options............................................. 2,951 3,023 2,299
Performance shares........................................ 716 946 1,211
-------- -------- --------
3,667 3,969 3,510
-------- -------- --------
For diluted net income per share............................ 223,781 213,750 197,751
======== ======== ========
Basic net income per share.................................. $ 1.92 $ 1.89 $ 1.64
======== ======== ========
Diluted net income per share................................ 1.88 1.86 1.61
======== ======== ========
</TABLE>
NOTE W. BUSINESS SEGMENT INFORMATION
In 1998, Regions adopted FASB No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement requires additional
financial disclosure of segment information in the manner in which management
organizes the segments within the enterprise for making operating decisions and
assessing performance. The new disclosures are as follows.
Regions segment information is presented geographically, based on Regions
six operating regions in the Southeastern United States. Each region is a
strategic business unit that serves a particular group of customers in a
specified area. The company's six reportable regions are Central, North,
Northeast, South, Southwest, and West. These regions have separate managements
that are responsible for the operation of each business
84
<PAGE> 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unit. The Central region mainly consists of central Alabama and all of South
Carolina. The Northern region is made up of north Alabama and middle Tennessee.
Regions' Georgia franchise comprises the Northeast region. The South region
consists primarily of south Alabama and the Florida panhandle. The Southwest
region is made up of west Alabama, all of Louisiana and central Florida. The
West region consists of Arkansas, east Texas and west Tennessee. The other
reportable segments include activity of Regions' mortgage banking, broker dealer
and insurance subsidiaries, the indirect lending division, and the parent
company (including the merger and consolidation charge).
The accounting policies used by each reportable segment are the same as
those discussed in Note A (summary of significant accounting policies). The
following table presents financial information for each reportable segment.
<TABLE>
<CAPTION>
TOTAL
CENTRAL NORTH NORTHEAST SOUTH SOUTHWEST WEST OTHER COMPANY
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998
Net interest income...... $ 193,851 $ 102,153 $ 205,005 $ 170,141 $ 182,042 $ 246,457 $ 225,169 $ 1,324,818
Provision for loan
loss................... 9,074 3,934 8,877 6,877 7,715 10,207 13,821 60,505
Non-interest income...... 50,057 27,088 46,742 50,989 42,988 57,505 199,328 474,697
Non-interest expense..... 106,891 55,333 118,837 89,585 104,131 143,314 485,617 1,103,708
Income taxes............. 48,067 26,798 48,059 45,102 43,562 57,255 (55,253) 213,590
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Net income (loss)...... $ 79,876 $ 43,176 $ 75,974 $ 79,566 $ 69,622 $ 93,186 $ (19,688) $ 421,712
========== ========== ========== ========== ========== ========== ========== ===========
Average assets........... $4,376,828 $2,617,033 $4,122,938 $4,159,863 $4,506,002 $6,154,208 $8,120,169 $34,057,041
1997
Net interest income...... $ 174,559 $ 86,469 $ 162,324 $ 141,100 $ 149,054 $ 231,700 $ 234,002 $ 1,179,208
Provision for loan
loss................... 14,828 5,951 12,329 10,517 9,858 23,321 12,859 89,663
Non-interest income...... 47,073 22,162 38,322 45,472 33,618 46,831 173,504 406,982
Non-interest expense..... 110,985 49,942 102,674 88,592 85,379 146,324 317,880 901,776
Income taxes............. 38,611 21,284 34,783 33,208 34,763 49,463 (14,890) 197,222
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Net income............. $ 57,208 $ 31,454 $ 50,860 $ 54,255 $ 52,672 $ 59,423 $ 91,657 $ 397,529
========== ========== ========== ========== ========== ========== ========== ===========
Average assets........... $3,950,675 $2,224,756 $3,217,231 $3,560,545 $3,726,562 $5,705,377 $7,153,440 $29,538,586
1996
Net interest income...... $ 148,917 $ 76,107 $ 147,927 $ 125,508 $ 133,465 $ 193,521 $ 186,379 $ 1,011,824
Provision for loan
loss................... 7,257 3,024 6,541 5,315 5,464 9,868 8,557 46,026
Non-interest income...... 38,154 19,243 33,238 37,814 29,879 40,758 146,017 345,103
Non-interest expense..... 92,041 44,160 92,713 75,086 79,110 122,253 331,671 837,034
Income taxes............. 32,825 18,205 31,309 29,606 29,658 40,473 (26,068) 156,008
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Net income............. $ 54,948 $ 29,961 $ 50,602 $ 53,315 $ 49,112 $ 61,685 $ 18,236 $ 317,859
========== ========== ========== ========== ========== ========== ========== ===========
Average assets........... $3,333,405 $1,934,951 $2,924,039 $3,084,226 $3,287,637 $4,752,199 $6,109,970 $25,426,427
</TABLE>
NOTE X. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
(Statement 133). Statement 133 requires all derivatives to be recorded on the
balance sheet at fair value and establishes "special accounting" for the
following three different types of hedges: hedges of changes in the fair value
of assets, liabilities or firm commitments (referred to as fair value hedges);
hedges of the variable cash flows of forecasted transactions (cash flow hedges);
and hedges of foreign currency exposures of net investments in foreign
operations. Statement 133 is effective for fiscal years beginning after June 15,
1999. Regions is currently evaluating the impact of Statement 133 on its
financial position and results of operations.
85
<PAGE> 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Entity,"
(Statement 134). Statement 134 amends Financial Accounting Standards No. 65,
"Accounting for Certain Mortgage Banking Activities," and requires an entity
engaged in mortgage banking activities to classify securitized mortgage loans
held for sale based on its ability and intent to sell or hold those investments.
Statement 134 is effective for fiscal quarters beginning after December 15,
1998. Regions is currently evaluating the impact of Statement 134 on its
financial position and results of operations.
NOTE Y. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS, COMMON STOCK MARKET PRICES
AND DIVIDENDS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1998
Total interest income................................. $628,097 $647,103 $657,306 $665,280
Total interest expense................................ 301,777 314,952 331,518 324,721
-------- -------- -------- --------
Net interest income................................. 326,320 332,151 325,788 340,559
Provision for loan losses........................... 14,419 14,516 12,547 19,023
-------- -------- -------- --------
Net interest income after provision for loan losses... 311,901 317,635 313,241 321,536
Total non-interest income, excluding securities
gains............................................... 108,253 118,405 114,177 126,860
Securities gains...................................... 104 2,938 85 3,875
Total non-interest expense, excluding merger and
consolidation expenses.............................. 242,022 248,497 234,692 257,059
Merger and consolidation expenses..................... -0- -0- 114,728 6,710
Income taxes.......................................... 61,172 64,124 26,799 61,495
-------- -------- -------- --------
Net income............................................ $117,064 $126,357 $ 51,284 $127,007
======== ======== ======== ========
Per share:
Net income.......................................... $ .53 $ .57 $ .23 $ .58
Net income, diluted................................. .52 .56 .23 .57
Cash dividends declared............................. .23 .23 .23 .23
Market price:
Low.............................................. 37 3/4 38 7/16 32 5/8 28 7/8
High............................................. 43 1/2 45 5/8 42 13/16 40 11/16
</TABLE>
86
<PAGE> 88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997
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 93,160 123,352 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 55,404 39,870
-------- -------- -------- --------
Net income............................................ $ 96,857 $101,149 $107,611 $ 91,912
======== ======== ======== ========
Per share:
Net income.......................................... $ .46 $ .48 $ .51 $ .44
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>
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, 1998, there were 54,434 shareholders of record of Regions Financial
Corporation Common Stock.
87
<PAGE> 89
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements on accounting and financial disclosure
between Registrant and Ernst & Young LLP.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Information On Directors" from pages 4 to 6 and "Section 16 Transaction"
on page 7 of the Registrant's proxy statement dated April 7, 1999, are
incorporated by reference
Executive officers of the Registrant as of December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
POSITION AND
OFFICES HELD WITH OFFICER
EXECUTIVE OFFICER AGE REGISTRANT AND SUBSIDIARIES SINCE
- ----------------- --- --------------------------- -------
<S> <C> <C> <C>
J. Stanley Mackin......................... 66 Chairman and Director, Registrant and Regions 1983*
Bank; Director Regions Mortgage, Inc., Regions
Agency, and Regions Life Insurance Company.
Carl E. Jones, Jr......................... 58 Director, President and Chief Executive Officer, 1983*
Registrant and Regions Bank. Director Regions
Mortgage, Inc., Regions Interstate Billing
Service, Inc., and EFC Holdings Corporation.
Richard D. Horsley........................ 56 Vice Chairman, Director and Executive Financial 1972
Officer, Registrant and Regions Bank; Director
and Vice President, Regions Agency, Inc.,
Regions Asset Management Company, and
RAMCO -- FL Holding, Inc.; Director, Regions
Life Insurance Company, Regions Financial
Building Corp., Regions Mortgage, Inc., and EFC
Holdings Corporation.
Barnett Grace............................. 54 President/West Region; Director, Registrant and 1998*
Regions Bank.
Sam P. Faucett............................ 64 President/Southwest Region; Director, Regions Bank 1983*
and Regions Mortgage, Inc.
Joe M. Hinds, Jr.......................... 61 President/North Region; Director, Regions Bank. 1983*
Wilbur B. Hufham.......................... 61 President/South Region; Director, Regions Bank. 1983*
Director Regions Mortgage, Inc.
William E. Jordan......................... 64 President/Central Region; Director, Regions Bank. 1990*
Peter D. Miller........................... 52 President/Northeast Region; Director, Regions 1996*
Bank.
William E. Askew.......................... 49 Executive Vice President -- Retail Banking 1987
Division, Registrant and Regions Bank.
</TABLE>
88
<PAGE> 90
<TABLE>
<CAPTION>
POSITION AND
OFFICES HELD WITH OFFICER
EXECUTIVE OFFICER AGE REGISTRANT AND SUBSIDIARIES SINCE
- ----------------- --- --------------------------- -------
<S> <C> <C> <C>
Robert P. Houston......................... 54 Executive Vice President and Comptroller, 1974
Registrant and Regions Bank; Director and
Treasurer, Regions Financial Building Corp.;
Director, Secretary and Treasurer, Regions Life
Insurance Company and Regions Agency, Inc.;
Director and Vice President, Regions Asset
Management Company, RAMCO -- FL Holding, Inc.,
Regions Assets Holding Company, Inc., Regions
Investment Management Holding Company, Inc.,
Regions Assets Company, Inc., Regions Licensing
Company, Inc., and Regions Investment Management
Company, Inc.
E. Cris Stone............................. 56 Executive Vice President -- Corporate Banking, 1988
Registrant and Regions Bank; Director and Vice
President, Regions Financial Leasing, Inc.;
Director Regions Interstate Billing Services,
Inc.
Richard E. Wambsganss..................... 58 Executive Vice President -- Trust Group, 1987
Registrant and Regions Bank.
Samuel E. Upchurch Jr..................... 47 Executive Vice President, General Counsel and 1994
Corporate Secretary, Registrant and Regions
Bank; Director Regions Investment Company, Inc.,
Regions Interstate Billing Services, Inc., and
EFC Holdings Corporation; Director and
Secretary, Regions Assets Holding Company, Inc.,
Regions Investment Management Holding Company,
Inc., Regions Assets Company, Inc., Regions
Licensing Company, Inc., and Regions Investment
Management Company, Inc.
</TABLE>
- ---------------
* The years indicated are those in which the individual was first deemed to be
an executive officer of Registrant, although in every case the individual had
been an executive officer of a subsidiary of Registrant for a number of years.
ITEM 11. EXECUTIVE COMPENSATION
"Executive Compensation and Other Transaction" on pages 7 through 11,
excluding the information on page 11 under the subheading "Compensation
Committee Executive Compensation Report" of the Registrant's proxy statement
dated April 7, 1999, are incorporated herein by reference. "Executive
Compensation Report" on pages 11 through 13, of the Registrant's proxy statement
dated April 7, 1999, are specifically not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Voting Securities and Principal Holders Thereof" on pages 3 through 4 and
"Information on Directors" on pages 4 through 6 of the Registrant's proxy
statement dated April 7, 1999, are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Other Transactions", on page 14 of the Registrant's proxy statement dated
April 7, 1999, are incorporated herein by reference.
89
<PAGE> 91
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14(a)(1) and (2) Financial Statement Schedules.
The following consolidated financial statements and report of independent
auditors of Regions Financial Corporation and subsidiaries are included in Item
8 of this Annual Report on Form 10-K:
Report of Independent Auditors
Consolidated Statements of Condition -- December 31, 1998 and 1997
Consolidated Statements of Income -- Years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Cash Flows -- Years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity -- Years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements -- December 31, 1998
Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable, and therefore have been omitted.
14(a)(3) Listing of Exhibits:
<TABLE>
<CAPTION>
SEC ASSIGNED
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<C> <C> <S>
3. -- a. Bylaws as last amended on March 17, 1999.
-- b. Certificate of Incorporation as last amended on August
17, 1998, incorporated herein by reference from the Exhibits
to the Registration Statement filed with the Commission
and assigned file number 333-67153.
4. -- a. Subordinated Notes Indenture Agreement dated as of
December 1, 1992, incorporated by reference from the
Exhibits to the Registration Statement filed with the
Commission and assigned registration number 33-45714.
10. -- *a. Regions Amended and Restated 1991 Long-Term Incentive
Plan incorporated by reference from Exhibit B to the
Registrant's proxy statement filed with the Commission
and dated March 16, 1995.
*b. Regions Management Incentive Plan Amended and Restated
as of January 1, 1995, incorporated by reference from
Appendix A to the Registrant's proxy statement filed
with the Commission and dated March 16, 1995.
21. -- List of Subsidiaries of the Registrant.
23. -- Consent of Independent Auditors.
24.1 -- Power of attorney.
27. -- Financial Data Schedule (for SEC use only).
</TABLE>
- ---------------
* Represents a compensatory plan agreement that is required to be filed under
this item.
90
<PAGE> 92
14(b) Reports on Form 8-K filed in the fourth quarter of 1998:
No reports on Form 8-K were filed in the fourth quarter of 1998.
14(c) The Exhibits not incorporated herein by reference are submitted as a
separate part of this report.
Note: Copies of the aforementioned exhibits are available to stockholders upon
request to:
Stockholder Assistance
417 North 20th Street
P. O. Box 10247
Birmingham, Alabama 35202-10247
14(d) Financial statement schedules:
None.
91
<PAGE> 93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized. Date March 17, 1999.
REGIONS FINANCIAL CORPORATION
By: /s/ Samuel E. Upchurch, Jr.
------------------------------------
Samuel E. Upchurch, Jr.
Executive Vice President, General
Counsel
and Corporate Secretary
By: /s/ Robert P. Houston
------------------------------------
Robert P. Houston
Executive Vice President and
Comptroller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------------- --------------------------------- -------
<C> <S> <C>
* J. Stanley Mackin Chairman and Director 3/17/99
- -----------------------------------------------------
J. Stanley Mackin
* Carl E. Jones, Jr. Chief Executive Officer, 3/17/99
- ----------------------------------------------------- President and Director
Carl E. Jones, Jr.
* Richard D. Horsley Vice Chairman, Executive 3/17/99
- ----------------------------------------------------- Financial Officer and Director
Richard D. Horsley
* Barnett Grace President West Region and 3/17/99
- ----------------------------------------------------- Director
Barnett Grace
* Sheila S. Blair Director 3/17/99
- -----------------------------------------------------
Sheila S. Blair
* James B. Boone, Jr. Director 3/17/99
- -----------------------------------------------------
James B. Boone, Jr.
* Albert P. Brewer Director 3/17/99
- -----------------------------------------------------
Albert P. Brewer
* James S. M. French Director 3/17/99
- -----------------------------------------------------
James S. M. French
* Frank D. Hickingbotham Director 3/17/99
- -----------------------------------------------------
Frank D. Hickingbotham
* Olin B. King Director 3/17/99
- -----------------------------------------------------
Olin B. King
* Michael W. Murphy Director 3/17/99
- -----------------------------------------------------
Michael W. Murphy
</TABLE>
92
<PAGE> 94
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------------- --------------------------------- -------
<C> <S> <C>
* Henry E. Simpson Director 3/17/99
- -----------------------------------------------------
Henry E. Simpson
* W. Woodrow Stewart Director 3/17/99
- -----------------------------------------------------
W. Woodrow Stewart
* Lee J. Styslinger, Jr. Director 3/17/99
- -----------------------------------------------------
Lee J. Styslinger, Jr.
* John H. Watson Director 3/17/99
- -----------------------------------------------------
John H. Watson
* Robert J. Williams Director 3/17/99
- -----------------------------------------------------
Robert J. Williams
* C. Kemmons Wilson, Jr. Director 3/17/99
- -----------------------------------------------------
C. Kemmons Wilson, Jr.
*By: /s/ Samuel E. Upchurch, Jr. 3/17/99
-------------------------------------------------
Samuel E. Upchurch, Jr.
</TABLE>
as attorney-in-fact pursuant to a power of attorney
93
<PAGE> 95
ANNUAL REPORT ON FORM 10-K
ITEM 14(C)
EXHIBITS
<PAGE> 96
EXHIBITS INDEX
<TABLE>
<CAPTION>
SEC ASSIGNED
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<C> <C> <S>
3. -- a. Bylaws as last amended on March 17, 1999.
-- b. Certificate of Incorporation as last amended on August
17, 1998, incorporated herein by reference from the Exhibits
to the Registration Statement filed with the Commission
and assigned file number 333-67153.
4. -- a. Subordinated Notes Indenture Agreement dated as of
December 1, 1992, incorporated by reference from the
Exhibits to the Registration Statement filed with the
Commission and assigned registration number 33-45714.
10. -- a. Regions Amended and Restated 1991 Long-Term Incentive
Plan incorporated by reference from Exhibit B to the
Registrant's proxy statement filed with the Commission
and dated March 16, 1995.
b. Regions Management Incentive Plan Amended and Restated as
of January 1, 1995, incorporated by reference from Appendix
A to the Registrant's proxy statement filed with the
Commission and dated March 16, 1995.
21. -- List of Subsidiaries of the Registrant.
23. -- Consent of Independent Auditors.
24.1 -- Power of attorney.
27 -- Financial Data Schedule (for SEC use only).
</TABLE>
<PAGE> 1
EXHIBIT 3(a)
BY-LAWS
OF
REGIONS FINANCIAL CORPORATION
---------------------
ARTICLE I. OFFICES
Section 1. Registered Office:
The registered office shall be established and maintained at the office
of the Corporation Trust Company, in the City of Wilmington, in the County of
New Castle, in the State of Delaware, and said corporation shall be the
registered agent of this Corporation in charge thereof.
Section 2. Other Offices:
The Corporation may have other offices, either within or without the
State of Delaware, at such place or places as the Board of Directors may from
time to time appoint or the business of the Corporation may require. The
principal place of business of the Corporation shall be in Birmingham, Alabama.
ARTICLE II. MEETINGS OF STOCKHOLDERS
Section 1. Annual Meetings:
Annual meetings of stockholders for the election of Directors and for
such other business as may be stated in the notice of the meeting, shall be held
at such place, either within or without the State of Delaware, and at such time
and date as the Board of Directors, by resolution, shall determine and as set
forth in the notice of the meeting. In the event the Board of Directors fails to
so determine the time, date and place of meeting, the annual meeting of
stockholders shall be held at the principal executive offices of the Corporation
in Alabama on the third Wednesday of May.
If the date of the annual meeting shall fall upon a legal holiday, the
meeting shall be held on the next succeeding business day. At each annual
meeting, the stockholders entitled to vote shall elect Directors, and they may
transact such other corporate business as may properly come before the meeting.
Section 2. Other Meetings:
Meetings of stockholders for any purpose other than the election of
Directors may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting.
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<PAGE> 2
Section 3. Voting:
Each stockholder entitled to vote in accordance with the terms of the
Certificate of Incorporation and in accordance with the provisions of these
By-Laws shall be entitled to one vote, in person or by proxy, for each share of
stock entitled to vote held by such stockholder, but no proxy shall be voted
after eleven (11) months from its date unless such proxy provides for a longer
period. Such proxy shall be filed with the secretary of the Corporation before
or at the time of the meeting. All elections for Directors shall be decided by a
plurality vote; all other questions shall be decided by a majority vote except
as otherwise provided by the Certificate of Incorporation or the laws of the
State of Delaware.
The vote of a majority of the shares voted on any matter at a meeting
of shareholders at which a quorum is present shall be the act of the
shareholders on that matter, except as otherwise provided by the Certificate of
Incorporation or the laws of the State of Delaware. Voting on all matters shall
be by voice vote or by a show of hands unless the holders of ten percent (10%)
of the shares represented at the meeting shall, prior to the voting on any
matter, demand a ballot vote on that particular matter. Without limiting the
foregoing, more specifically provided in Article VII, paragraph 7 of the
Certificate of Incorporation of this Corporation, (1) any merger or
consolidation with or into any other corporation, or (2) any sale or lease of
all or a substantial part of the assets of the Corporation to any other
corporation, person or entity, must be approved by the affirmative vote of the
holders of at least 75% of the outstanding shares of the Corporation entitled to
vote, provided, however, that approval by 75% of the outstanding shares shall
not be required if any proposed merger, consolidation, or similar transaction
shall have been previously approved by the affirmative vote of at least 75% of
the entire Board of Directors; or if any proposed merger, consolidation or sale
or lease of the assets of the Corporation is with a corporation, the majority of
the outstanding stock of which is owned by this Corporation.
A complete list of the stockholders entitled to vote at the ensuing
election, arranged in alphabetical order, with the address of each, and the
number of shares held by each, shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
at the notice of the meeting, or if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
Section 4. Quorum:
A majority of the outstanding shares of the Corporation entitled to
vote, represented in person or by proxy, shall constitute a quorum at meetings
of stockholders. In determining whether a quorum is present, shares held by a
subsidiary corporation owned by this Corporation, and treasury shares, shall not
be counted. If less than a majority of the outstanding shares are represented, a
majority of the shares so represented may adjourn the meeting from time to time
without further notice, but until a quorum is secured no other business may be
transacted. The shareholders present at a duly organized meeting may continue to
transact business until an adjournment notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
2
<PAGE> 3
At any duly organized meeting, a vote of a majority of the stock represented
thereat shall decide any question brought before the meeting.
Section 5. No Shareholder Action by Consent:
No action required to be taken at a meeting of stockholders may be
taken without a meeting. The stockholders shall not have the power to consent in
writing, without a meeting, to the taking of any such action.
Section 6. Special Meetings:
Special meetings of the stockholders for any purpose or purposes may be
called by the Chief Executive Officer, the President, the Secretary, or by
resolution of the Directors.
Section 7. Notice of Meetings:
Written notice, stating the place, date and time of the meeting, and
the general nature of the business to be considered, shall be given to each
stockholder entitled to vote thereat at his address as it appears on the records
of the Corporation, not less than ten nor more than fifty days before the date
of the meeting. No business other than that stated in the notice shall be
transacted at any meeting without the unanimous consent of all the stockholders
entitled to vote thereat.
Section 8. Notice of Stockholder Business and Nominations:
(A) Annual Meetings of Stockholders. (1) Nominations of persons for
election to the Board of Directors of the Corporation and the proposal of
business to be considered by the stockholders may be made at an annual meeting
of stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or
at the direction of the Board of Directors or (c) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of notice
provided for in this By-Law, who is entitled to vote at the meeting and who
complied with the notice procedures set forth in this By-Law.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of paragraph
(A)(1) of this By-Law, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and such other business must be a
proper matter for stockholder action. To be timely, a stockholder's notice shall
be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the 90th day nor earlier
than the close of business on the 120th day prior to the first anniversary of
the preceding year's annual meeting; provided, however, that in the event that
the date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the 120th day prior to such
annual meeting and not later than the close of business on the later of the 90th
day prior to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made. In no event shall
the public announcement of an adjournment of an annual
3
<PAGE> 4
meeting commence a new time period for the giving of a stockholder's notice as
described above. Such stockholder's notice shall set forth (a) as to each person
whom the stockholder proposes to nominate for election or reelection as a
Director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of Directors in an election
contest, or is otherwise required, in each case pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule
14a-11 thereunder (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a Director if elected; (b) as to
any other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (ii) the class and number
of shares of the Corporation which are owned beneficially and of record by such
stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of
paragraph (A)(2) of this By-Law to the contrary, in the event that the number of
Directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement naming all of the nominees for
Director or specifying the size of the increased Board of Directors made by the
Corporation at least 100 days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by this By-Law shall also
be considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the 10th day following the day on which such public announcement is
first made by the Corporation.
(B) Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which Directors are to be elected pursuant to the
Corporation's notice of meeting (a) by or at the direction of the Board of
Directors or (b) by any stockholder of the Corporation who is a stockholder of
record at the time of giving of notice provided for in this By-Law, who shall be
entitled to vote at the meeting and who complies with the notice procedures set
forth in this By-Law. In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more Directors to the Board of
Directors, any such stockholder may nominate a person or persons (as the case
may be), for election to such position(s) as specified in the Corporation's
notice of meeting, if the stockholder's notice required by paragraph (A)(2) of
this By-Law shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the close of business on the 120th
day prior to such special meeting and not later than the close of business on
the later of the 90th day prior to such special meeting or the 10th day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. In no event shall the public
4
<PAGE> 5
announcement of an adjournment of a special meeting commence a new time period
for the giving of a stockholder's notice as described above.
(C) General. (1) Only such persons who are nominated in accordance with
the procedures set forth in this By-Law shall be eligible to serve as Directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this By-Law. Except as otherwise provided by Delaware law, the Chairman of
the meeting shall have the power and duty to determine whether a nomination or
any business proposed to be brought before the meeting was made, or proposed, as
the case may be, in accordance with the procedures set forth in this By-Law and,
if any proposed nomination or business is not in compliance with this By-Law, to
declare that such defective proposal or nomination shall be disregarded.
(2) For purposes of this By-Law, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-Law, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this By-Law. Nothing in this By-Law shall be deemed to affect any
rights of (i) stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(ii) the holders of any series of Preferred Stock to elect Directors under
specified circumstances.
ARTICLE III. DIRECTORS
Section 1. Number and Term:
The number of Directors which shall constitute the whole Board shall be
fixed, from time to time, by resolutions adopted by the Board of Directors, but
shall not be less than three persons. The Directors shall be of three classes,
so that approximately one-third in number of the Directors shall be elected at
each annual meeting of stockholders and, except as hereinafter provided, each
Director shall hold office for three years, or until his successor is elected
and qualified, or until his earlier retirement, death, resignation or removal.
Directors need not be residents of Delaware.
5
<PAGE> 6
Section 2. Resignations:
Any Director or other officer may resign at any time. Such resignation
shall be made in writing, and shall take effect at the time of its receipt by
the Chief Executive Officer, the President, or the Secretary or at such other
time as may be specified therein. The acceptance of a resignation shall not be
necessary to make it effective.
Section 3. Vacancies:
If the office of any Director or other officer becomes vacant, the
remaining Directors in office, though less than a quorum, by a majority vote,
may appoint any qualified person to fill such vacancy, who shall hold office for
the unexpired term and until his successor shall be duly chosen.
Section 4. Removal:
Except as hereinafter provided, any Director or Directors may be
removed either for or without cause at any time by the affirmative vote of the
holders of a majority of all the shares of stock outstanding and entitled to
vote, at a special meeting of the stockholders called for that purpose and the
vacancies thus created may be filled, at the meeting held for the purpose of
removal, by the affirmative vote of holders of a majority of all the shares of
stock outstanding and entitled to vote.
Section 5. Powers:
The Board of Directors shall exercise all the powers of the Corporation
except such as are by law, or by the Certificate of Incorporation of the
Corporation or by these By-Laws conferred upon or reserved to the stockholders.
Section 6. Meetings:
A regular meeting of the Board of Directors shall be held immediately
before or after the Annual Meeting of Stockholders. Additional meetings of the
Directors may be held without notice at such places and times as shall be
determined from time to time by resolution of the Directors.
Special meetings of the Board of Directors may be called by the Chief
Executive Officer, the President, or by the Secretary on the written request of
a majority of the Board of Directors on at least two days' notice to each
Director and shall be held at such place or places as may be determined by the
Directors, or as shall be stated in the call of the meeting.
Unless otherwise restricted by the Certificate of Incorporation or
these By-Laws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in
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<PAGE> 7
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
Section 7. Quorum:
A majority of the Directors shall constitute a quorum for the
transaction of business. If at any meeting of the Board of Directors there shall
be less than a quorum present, a majority of those present may adjourn the
meeting from time to time until a quorum is obtained, and no further notice
thereof need be given other than by announcement at the meeting which shall be
so adjourned.
Section 8. Compensation:
Directors shall not receive any stated salary for their services as
Directors or as members of committees, except that by resolution of the Board of
Directors, retainer fees, meeting fees, and expenses of attendance at meetings
may be authorized. Nothing herein contained shall be construed to preclude any
Director from serving the Corporation in any other capacity as an officer, agent
or otherwise, and receiving compensation therefor.
Section 9. Action Without Meeting:
Any action required or permitted to be taken at any meeting of the
Board of Directors or of any committee thereof, may be taken without a meeting,
if prior to such action a written consent thereto is signed by all members of
the Board of Directors, or of such committee as the case may be, and such
written consent is filed with the minutes of proceedings of the Board of
Directors or committee.
ARTICLE IV. OFFICERS
Section 1. Officers:
The officers of the Corporation shall be a President, such
Vice-Presidents as shall from time to time be deemed necessary, a Secretary, a
Comptroller, and such other officers as may be deemed appropriate. A Chairman of
the Board may also be elected. All such officers shall be elected by the Board
of Directors and shall hold office until their successors are elected and
qualified. None of the officers of the Corporation need be Directors. More than
one office may be held by the same person.
Section 2. Chairman of the Board:
In the event that there is a Chairman of the Board, he shall preside at
all meetings of the Board of Directors and stockholders. He shall have and
perform such duties as usually devolve upon his office and such other duties as
are prescribed by the By-Laws and by the Board of Directors.
7
<PAGE> 8
Section 3. Chief Executive Officer:
The Chairman of the Board or the President, as may be designated by the
Board of Directors, shall serve as the chief executive officer of the
Corporation. Subject to the control of the Board of Directors, he shall be
vested with authority to act for the Corporation, and shall have general and
active management of the business of the Corporation and such other general
powers and duties of supervision and management as usually devolve upon such
office and as may be prescribed from time to time by the Board of Directors.
Section 4. Vice-Chairman:
In the event there is a Vice-Chairman of the Board, he shall preside at
all meetings of the Board of Directors in the absence of the Chairman. He shall
have and perform such duties as are prescribed from time to time by the Board of
Directors.
Section 5. President:
The President shall be the chief operating officer of the Corporation
and shall perform such duties as usually devolve upon his office and such other
duties as are prescribed by the By-Laws, by the Board of Directors, and by the
Chairman. In the absence or inability to act of the Chairman of the Board, the
President shall have and exercise all the powers and duties of such office. If
the Chairman of the Board, the Vice-Chairman of the Board, or the President is
absent from any meeting of the Board of Directors or shareholders where either
was to have presided, the other Directors shall elect one of their number to
preside at the meeting.
Section 6. Vice Presidents:
The Vice Presidents shall perform such duties as may be assigned to
them from time to time by the By-Laws, the Board of Directors, the Chairman of
the Board, or the President.
Section 7. Comptroller:
The Comptroller shall have custody of all funds of the Corporation. He
shall have and perform such duties as are incident to the office of Comptroller
and such other duties as may from time to time be assigned to him by the Board
of Directors, the Chairman, or the President.
Section 8. Secretary:
The Secretary shall keep minutes of all meetings of the stockholders
and the Board of Directors unless otherwise directed by those bodies. He shall
have custody of the corporate seal, and the Secretary or any Assistant Secretary
shall affix the same to all instruments or papers requiring the seal of the
Corporation. The Secretary, or in his absence, any Assistant Secretary, shall
attend to the giving and serving of all notices of the Corporation. He shall
perform all the duties incident to the office of Secretary, subject to the
control of the Board of Directors, and shall do and perform such other duties as
may from time to time be assigned by the Board of Directors, the Chairman, or
the President.
8
<PAGE> 9
Section 9. Other Officers and Agents:
The Board of Directors may appoint such other officers and agents as it
may deem advisable, who shall exercise such powers and perform such duties as
shall be determined from time to time by the Board of Directors.
Section 10. Election and Term:
The officers of the Corporation shall be elected annually by the Board
of Directors. Each officer shall hold office at the pleasure of the Board of
Directors until his death, resignation, retirement, or removal.
ARTICLE V. MISCELLANEOUS
Section 1. Certificates of Stock:
A certificate of stock or certificates of stock, signed by the Chairman
of the Board, the President or Vice-President, the Comptroller or an Assistant
Comptroller, or the Secretary or an Assistant Secretary, shall be adopted by the
Board of Directors and shall be issued to each stockholder certifying the number
of shares owned by him in the Corporation. Any or all of the signatures may be
facsimiles.
Section 2. Lost Certificates:
The Board of Directors may order a new certificate or certificates of
stock to be issued in the place of any certificate or certificates of the
Corporation alleged to have been lost or destroyed, but in every such case the
owner of the lost certificate or certificates shall first cause to be given to
the Corporation or its authorized agent a bond in such sum as said Board may
direct, as indemnity against any loss that the Corporation may incur by reason
of such replacement of the lost certificate or certificates; but the Board of
Directors may, at their discretion refuse to replace any lost certificate of
stock save upon the order of some court having jurisdiction in such matter and
may cause such legend to be inscribed on the new certificate or certificates as
in the Board's discretion may be necessary to prevent loss to the Corporation.
Section 3. Transfer of Shares:
The shares of stock of the Corporation shall be transferable only upon
its books by the holders thereof in person or by their duly authorized attorneys
or legal representatives, and upon such transfer the old certificates shall be
surrendered to the Corporation by the delivery thereof to the person in charge
of the stock and transfer books, and ledgers, or to the authorized agent of the
Corporation, by whom they shall be canceled, and new certificates shall
thereupon be issued. A record shall be made of each transfer and whenever a
transfer shall be made for collateral security, and not absolutely, it shall be
expressed in the entry of the transfer.
The Corporation may decline to register on its stock books transfers of
stock standing in the name of infants, unless (a) the law of the state of which
the infant is a resident relieves the Corporation of all liability therefor in
case the infant or anyone acting for him thereafter elects to
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<PAGE> 10
rescind such transfer, or (b) a court having jurisdiction of the infant and the
subject matter enters a valid decree authorizing such transfer.
Section 4. Fractional Shares:
No fractional part of a share of stock shall ever be issued by this
Corporation.
Section 5. Stockholders Record Date:
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty nor less than ten days before the date of such meeting,
nor more than sixty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to adjournment of the meeting; provided, however, that
the Board of Directors may fix a new record date for the adjourned meeting.
Section 6. Dividends:
Subject to the provisions of the Certificate of Incorporation, the
Board of Directors may, out of funds legally available therefore at any regular
or special meeting, declare dividends upon the capital stock of the Corporation
as and when they deem expedient. Before declaring any dividend there may be set
apart out of any fund of the Corporation available for dividends, such sum or
sums as the Directors from time to time in their discretion deem proper for
working capital or as a reserve fund to meet contingencies or for equalizing
dividends or for such other purposes as the Directors shall deem conducive to
the interests of the Corporation.
The Corporation may decline to pay cash dividends to infant
stockholders except where full and valid release may be granted by the infant or
under a decree of court of competent jurisdiction.
Section 7. Seal:
The corporate seal shall consist of two concentric circles between
which shall be "REGIONS FINANCIAL CORPORATION DELAWARE" with a representation of
the Corporate Logogram in the center.
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<PAGE> 11
Section 8. Fiscal Year:
The fiscal year of the Corporation shall be determined by resolution of
the Board of Directors.
Section 9. Checks:
All checks, drafts or other orders for the payment of money, notes or
other evidences of indebtedness issued in the name of the Corporation shall be
signed by such officer or officers, agent or agents of the Corporation, and in
such manner as shall be determined from time to time by resolution of the Board
of Directors.
Section 10. Notice and Waiver of Notice:
Whenever any notice is required by these By-Laws to be given, personal
notice is not meant unless expressly so stated, and any notice so required shall
be deemed to be sufficient if given by depositing the same in the United States
mail, postage prepaid, addressed to the person entitled thereto at his address
as it appears on the records of the Corporation, and such notice shall be deemed
to have been given on the date of such mailing. Stockholders not entitled to
vote shall not be entitled to receive notice of any meetings except as otherwise
provided by statute.
Whenever any notice whatever is required to be given under the
provisions of any law, or under the provisions of the Certificate of
Incorporation of the Corporation or these By-Laws, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether before or after
the time stated therein, shall be deemed equivalent thereto.
Section 11. Indemnification of Officers, Directors, Employees, Agents and
Fiduciaries; Insurance:
(A) The Corporation may indemnify, in accordance with and to the full
extent permitted by the laws of the State of Delaware as in effect at
the time of the adoption of these By-Laws or as such laws may be
amended from time to time, any person made or threatened to be made a
party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that such person is or was a Director, Advisory
Director, officer, employee, agent or fiduciary of the Corporation or
any constituent corporation absorbed in a consolidation or merger, or
serves as such with another corporation, or with a partnership, joint
venture, trust or other enterprise at the request of the Corporation or
any such constituent corporation.
(B) The indemnification provided by this Section shall not be deemed
exclusive of and shall be in addition to any other rights (whether
created prior or subsequent to the adoption of these By-Laws) to which
those indemnified may be entitled under any statute, rule of law,
articles of incorporation, by-law, agreement, vote of stockholders or
disinterested Directors or otherwise, both as to action in their
official capacity and as to action in another capacity and as to action
in another capacity while holding such office, and shall
11
<PAGE> 12
continue as to a person who has ceased to be a Director, employee or
agent of the Corporation, and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(C) By action of the Board of Directors notwithstanding any interest of the
Directors in such action, the Corporation may purchase and maintain
insurance in such amounts as the Board of Directors deems appropriate
on behalf of any person who is or was a Director, officer, employee,
agent or fiduciary of the Corporation, or is or was serving at the
request of the Corporation as a Director, officer, employee, agent or
fiduciary of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation shall have the power to indemnify
him against such liability under the provisions of this Section.
ARTICLE VI. AMENDMENTS
These By-Laws may be amended, altered or repealed and By-Laws may be
adopted at any annual meeting of the stockholders, or at any special meeting
thereof if notice of the proposed alteration or repeal or By-Law or By-Laws to
be adopted is contained in the notice of such special meeting, by the
affirmative vote of seventy-five percent (75%) of the stock issued and
outstanding and entitled to vote thereat, or by the affirmative vote of a
majority of the Board of Directors, at any regular meeting of the Board of
Directors, or at a special meeting of the Board of Directors, if notice of the
proposed alteration or repeal, or By-Law or By-Laws to be adopted, is contained
in the notice of such special meeting.
12
<PAGE> 1
EXHIBIT 21
List of Subsidiaries at December 31, 1998:
Regions Bank (Alabama) (1)
Jacobs Bank (1)
Fayette County Bank (2)
Etowah Bank of Canton (2)
The Village Bank of Florida (3)
St. Mary Bank & Trust (4)
St. James Bank & Trust Company (4)
Regions Bank NA (5)
Greenville National Bank (5)
Regions Financial Leasing, Inc. (6)
Regions Agency, Inc. (6)
Regions Financial Building Corporation (6)
Regions Financial (DE), Inc. (11)
Regions Investment Company, Inc. (6)
Regions Mortgage, Inc. (6)
Regions Life Insurance Company (7)
Regions Agency, Inc. (Georgia) (8)
Regions Agency, Inc. (Louisiana) (10)
Knox Mortgage Company (8)
Regions Title Company, Inc. (9)
Regions Credit Corporation (6)
Regions Interstate Billing Service, Inc. (6)
Regions Asset Management Company (6)
RAMCO -- FL Holding, Inc. (6)
Regions Asset Holding Company (6)
Regions Asset Company (11)
Regions Licensing Company (11)
Regions Investment Management Holding Company (11)
Regions Investment Management Company (11)
Financial Fleet Services, Inc. (12)
Commercial Capital Funding, Inc. (12)
Palmetto Services Corporation (13)
Palmetto Investment Services, Inc. (13)
Quick Credit Corporation (13)
EFC Holdings Corporation (14)
EqiFirst, Inc. (14)
EquiFirst Mortgage Inc. (14)
Money America, Inc. (14)
KWB Holdings, Inc. (15)
- ---------------
(1) Affiliate state bank in Alabama chartered under the banking laws of
Alabama.
(2) Affiliate state bank in Georgia chartered under the banking laws of
Georgia.
(3) Affiliate state bank in Florida chartered under the banking laws of
Florida.
(4) Affiliate state bank in Louisiana chartered under the banking laws of
Louisiana.
(5) Nationally chartered bank incorporated under the laws of the United States.
(6) Bank-related subsidiary organized under the Business Corporation Act of the
state of Alabama.
(7) Bank-related subsidiary incorporated under the laws of the state of Arizona
and doing business principally in the state of Alabama.
(8) Bank-related subsidiary incorporated under the laws of the state of
Georgia.
(9) Bank-related subsidiary incorporated under the laws of the state of
Tennessee.
<PAGE> 2
(10) Bank-related subsidiary incorporated under the laws of the state of
Louisiana.
(11) Bank-related subsidiary incorporated under the laws of the state of
Delaware.
(12) Bank-related subsidiary incorporated under the laws of the state of
Arkansas.
(13) Bank-related subsidiary incorporated under the laws of the state of South
Carolina.
(14) Bank-related subsidiary incorporated under the laws of the state of North
Carolina.
(15) Second-tier holding company subsidiary incorporated under the laws of the
state of Tennessee.
<PAGE> 1
EXHIBIT 23-CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated March 11, 1999,
with respect to the consolidated financial statements of Regions Financial
Corporation and subsidiaries included in the Annual Report (Form 10-K) for the
year ended December 31, 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. 333-10683 pertaining to the Stock Options Assumed in Acquisition
of Rockdale Community Bank;
Form S-8 No. 333-10701 pertaining to the Stock Options Assumed in Acquisition
of First Gwinnett Bancshares, Inc.;
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. 333-28089 pertaining to the Stock Options Assumed in Acquisition
of West Carroll Bancshares, Inc.;
Form S-8 No. 333-28091 pertaining to the Stock Options Assumed in Acquisition
of First Mercantile National Bank;
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; and
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
<PAGE> 2
Form S-8 No. 333-53021 pertaining to the Stock Options Assumed in Acquisition
of First United Bancorporation
Form S-8 No. 333-60497 pertaining to the Stock Options Assumed in Acquisition
of First Commercial Corporation
Form S-8 No. 333-69759 pertaining to the Stock Options Assumed in Acquisition
of First Community Banking Services, Inc.
Form S-3 No. 333-70421 pertaining to Shares Issued in Acquisition of EFC
Holdings Corporation
Form S-8 No. 333-72161 pertaining to the Stock Options Assumed in Acquisition
of Bullsboro BancShares, Inc.
Form S-8 No. 333-72165 pertaining to the Stock Options Assumed in Acquisition
of Meigs County Bancshares, Inc.
Form S-8 No. 333-72389 pertaining to the Stock Options and Warrants Assumed
in the Acquisition of VB&T Bancshares Corp.
/s/ Ernst & Young LLP
Birmingham, Alabama
March 26, 1999
<PAGE> 1
EXHIBIT 24.1
REGIONS FINANCIAL CORPORATION
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned directors and officers
of REGIONS FINANCIAL CORPORATION (the "Corporation") hereby constitute and
appoint Richard D. Horsley and Samuel E. Upchurch, Jr., and each of them, the
true and lawful agent and attorney-in-fact of the undersigned, with full power
of substitution and resubstitution, and with full power and authority in said
agents and attorneys-in-fact, and in any one of them, to sign for the
undersigned and in their respective names as directors and officers of the
Corporation, for 1998 Form 10-K.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ----------------------------- --------------
<S> <C> <C>
/s/ Carl E. Jones, Jr. President and Chief Executive March 17, 1999
- ---------------------------- Officer and Director
Carl E. Jones, Jr. (principal executive officer)
/s/ Richard D. Horsley Vice Chairman of the Board and March 17, 1999
- ---------------------------- Executive Financial Officer
Richard D. Horsley and Director
(principal financial officer)
/s/ Sheila S. Blair Director March 17, 1999
- ----------------------------
Sheila S. Blair
/s/ James B. Boone, Jr. Director March 17, 1999
- ----------------------------
James B. Boone, Jr.
/s/ Albert P. Brewer Director March 17, 1999
- ----------------------------
Albert P. Brewer
/s/ James S.M. French Director March 17, 1999
- ----------------------------
James S.M. French
/s/ Barnett Grace Director March 17, 1999
- ----------------------------
Barnett Grace
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
/s/ Frank D. Hickingbotham Director March 17, 1999
- ------------------------------
Frank D. Hickingbotham
/s/ Olin B. King Director March 17, 1999
- ------------------------------
Olin B. King
/s/ J. Stanley Mackin Chairman of the Board March 17, 1999
- ------------------------------ and Director
J. Stanley Mackin
/s/ Michael W. Murphy Director March 17, 1999
- ------------------------------
Michael W. Murphy
/s/ Henry E. Simpson Director March 17, 1999
- ------------------------------
Henry E. Simpson
/s/ Lee J. Styslinger, Jr. Director March 17, 1999
- ------------------------------
Lee J. Styslinger, Jr.
/s/ W. Woodrow Stewart Director March 17, 1999
- ------------------------------
W. Woodrow Stewart
/s/ John H. Watson Director March 17, 1999
- ------------------------------
John H. Watson
/s/ Robert J. Williams Director March 17, 1999
- ------------------------------
Robert J. Williams
/s/ C. Kemmons Wilson, Jr. Director March 17, 1999
- ------------------------------
C. Kemmons Wilson, Jr.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF REGIONS FINANCIAL CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,619,006,000
<INT-BEARING-DEPOSITS> 143,965,000
<FED-FUNDS-SOLD> 233,941,000
<TRADING-ASSETS> 49,387,000
<INVESTMENTS-HELD-FOR-SALE> 4,844,023,000
<INVESTMENTS-CARRYING> 3,125,114,000
<INVESTMENTS-MARKET> 3,166,446,000
<LOANS> 24,365,587,000
<ALLOWANCE> 315,412,000
<TOTAL-ASSETS> 36,831,940,000
<DEPOSITS> 28,350,066,000
<SHORT-TERM> 4,496,728,000
<LIABILITIES-OTHER> 413,705,000
<LONG-TERM> 571,040,000
0
0
<COMMON> 138,316,000
<OTHER-SE> 2,862,085,000
<TOTAL-LIABILITIES-AND-EQUITY> 36,831,940,000
<INTEREST-LOAN> 2,072,204,000
<INTEREST-INVEST> 457,102,000
<INTEREST-OTHER> 68,480,000
<INTEREST-TOTAL> 2,597,786,000
<INTEREST-DEPOSIT> 1,065,054,000
<INTEREST-EXPENSE> 1,272,968,000
<INTEREST-INCOME-NET> 1,324,818,000
<LOAN-LOSSES> 60,505,000
<SECURITIES-GAINS> 7,002,000
<EXPENSE-OTHER> 1,103,708,000
<INCOME-PRETAX> 635,302,000
<INCOME-PRE-EXTRAORDINARY> 421,712,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 421,712,000
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.88
<YIELD-ACTUAL> 4.25
<LOANS-NON> 124,718,000
<LOANS-PAST> 134,411,000
<LOANS-TROUBLED> 4,550,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 304,223,000
<CHARGE-OFFS> 93,739,000
<RECOVERIES> 27,329,000
<ALLOWANCE-CLOSE> 315,412,000
<ALLOWANCE-DOMESTIC> 315,412,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 315,412,000
</TABLE>
