<PAGE> 1
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
Commission File Number 0-3613
SOUTHTRUST CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 63-0574085
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
420 NORTH 20TH STREET, BIRMINGHAM, ALABAMA 35203
(Address of principal executive officers) (Zip Code)
(205) 254-5509
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the proceeding 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
--- ---
At June 30, 1998, 164,675,600 shares of the Registrant's Common Stock, $2.50 par
value were outstanding.
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<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement Description Page No.
- -----------------------------------------------------------------------------------
<S> <C>
Consolidated Condensed Statements of Condition
June 30, 1998, June 30, 1997, and December 31, 1997 3
Consolidated Condensed Statements of Income
Three months ended June 30, 1998 and 1997 4
Six months ended June 30, 1998 and 1997
Consolidated Condensed Statements of Stockholders' Equity
Six months ended June 30, 1998 and 1997 5
Consolidated Condensed Statements of Cash Flows
Six months ended June 30, 1998 and 1997 6
</TABLE>
The Consolidated Condensed Financial Statements were prepared by the
Company without an audit, but in the opinion of management, reflect all
adjustments necessary for the fair presentation of the Company's financial
position and results of operations for the six month periods ended June 30, 1998
and 1997. Results of operations for the interim 1998 period are not necessarily
indicative of results expected for the full year. While certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission, the Company believes that the disclosures herein are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the Consolidated Financial
Statements and the notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1997. The accounting policies employed are
the same as those shown in Note A to the Consolidated Financial Statements on
Form 10-K.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Management's Discussion and Analysis of the registrant is included on Pages
11-29.
2
<PAGE> 3
SOUTHTRUST CORPORATION
Consolidated Condensed Statements of Condition
(Unaudited)
<TABLE>
<CAPTION>
June 30 June 30 December 31
------------- ------------- -------------
(Dollars in thousands) 1998 1997 1997
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,145,076 $ 851,012 $ 877,885
Short-term investments:
Federal funds sold and securities purchased
under resale agreements 14,250 141,875 49,175
Interest-bearing deposits in other banks 444 19,301 228
Trading securities 72,711 29,808 58,750
Loans held for sale 656,497 289,396 403,837
------------- ------------- -------------
Total short-term investments 743,902 480,380 511,990
Available-for-sale securities 3,398,773 3,535,348 2,917,080
Held-to-maturity securities (1) 3,025,988 2,205,140 2,557,251
Loans 24,825,063 21,253,182 22,633,861
Less:
Unearned income 170,947 147,309 159,076
Allowance for loan losses 354,076 297,696 315,471
------------- ------------- -------------
Net loans 24,300,040 20,808,177 22,159,314
Premises and equipment, net 660,245 560,852 598,294
Due from customers on acceptances 11,125 20,847 8,561
Other assets 1,382,788 731,190 1,276,070
------------- ------------- -------------
Total assets $ 34,667,937 $ 29,192,946 $ 30,906,445
============= ============= =============
LIABILITIES
Deposits:
Interest-bearing $ 18,649,227 $ 16,571,692 $ 17,297,931
Other 2,501,619 2,107,716 2,288,653
------------- ------------- -------------
Total deposits 21,150,846 18,679,408 19,586,584
Federal funds purchased and securities sold
under agreements to repurchase 5,299,166 4,234,881 3,588,599
Other short-term borrowings 1,176,999 1,091,100 1,161,779
Bankers' acceptances outstanding 11,125 20,847 8,561
Federal Home Loan Bank advances 2,742,347 1,832,363 2,782,355
Long-term debt 1,205,366 982,358 1,106,443
Other liabilities 505,298 400,230 477,483
------------- ------------- -------------
Total liabilities 32,091,147 27,241,187 28,711,804
STOCKHOLDERS' EQUITY
Preferred Stock, par value $1.00 a share,
5,000,000 shares authorized; issued and outstanding - none 0 0 0
Common Stock, par value $2.50 a share,
500,000,000 shares authorized at June 30, 1998, 300,000,000 shares
authorized at June 30, 1997 and December 31, 1997 (2) 414,225 376,387 386,626
Capital surplus 714,493 364,235 486,166
Retained earnings 1,453,195 1,211,022 1,321,586
Accumulated other non-owner changes in equity 6,902 10,952 11,176
Treasury stock at cost (3) (12,025) (10,837) (10,913)
------------- ------------- -------------
Total stockholders' equity 2,576,790 1,951,759 2,194,641
------------- ------------- -------------
Total liabilities and stockholders' equity $ 34,667,937 $ 29,192,946 $ 30,906,445
============= ============= =============
(1) Held-to-maturity securities-fair value $ 3,056,936 $ 2,225,034 $ 2,593,259
(2) Common shares outstanding 165,689,840 150,554,706 154,650,747
(3) Treasury shares of common stock 1,014,240 984,753 986,940
</TABLE>
3
<PAGE> 4
SOUTHTRUST CORPORATION
Consolidated Condensed Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
(In thousands, except per share data) 1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 516,789 $ 454,568 $1,009,504 $ 878,238
Interest on available-for-sale securities 54,668 57,345 103,077 105,389
Interest on held-to-maturity securities:
Taxable 48,573 36,552 91,878 67,429
Non-taxable 2,611 3,319 5,347 6,785
---------- ---------- ---------- ----------
Total interest on held-to-maturity securities 51,184 39,871 97,225 74,214
Interest on short-term investments 13,303 6,402 23,600 10,995
---------- ---------- ---------- ----------
Total interest income 635,944 558,186 1,233,406 1,068,836
---------- ---------- ---------- ----------
Interest expense
Interest on deposits 208,228 181,386 412,439 352,427
Interest on short-term borrowings 82,022 76,325 145,129 135,378
Interest on Federal Home Loan Bank advances 36,537 23,482 73,180 44,996
Interest on long-term debt 19,087 14,968 39,238 29,454
---------- ---------- ---------- ----------
Total interest expense 345,874 296,161 669,986 562,255
---------- ---------- ---------- ----------
Net interest income 290,070 262,025 563,420 506,581
Provision for loan losses 25,481 26,502 43,336 48,877
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 264,589 235,523 520,084 457,704
Non-interest income
Service charges on deposit accounts 39,723 30,930 76,245 61,634
Mortgage banking operations 11,012 6,639 19,936 12,861
Bank card fees 6,760 5,958 12,976 11,607
Trust fees 6,910 5,912 13,765 11,733
Other fees 13,156 9,807 25,395 20,121
Securities gains, net 1,058 304 3,210 398
Other 14,526 4,496 29,736 7,670
---------- ---------- ---------- ----------
Total non-interest income 93,145 64,046 181,263 126,024
---------- ---------- ---------- ----------
Non-interest expense
Salaries and employee benefits 121,466 97,887 238,089 192,863
Net occupancy 17,894 14,217 33,703 28,378
Equipment 14,761 10,731 28,313 21,193
Professional services 15,024 11,619 27,857 23,382
Communications 11,548 8,731 22,413 17,287
Business development 9,038 7,221 17,130 14,099
Supplies 7,572 5,780 14,714 10,788
Other 25,610 25,972 53,200 48,209
---------- ---------- ---------- ----------
Total non-interest expense 222,913 182,158 435,419 356,199
---------- ---------- ---------- ----------
Income before income taxes 134,821 117,411 265,928 227,529
Income tax expense 45,329 42,044 89,984 81,262
---------- ---------- ---------- ----------
Net income $ 89,492 $ 75,367 $ 175,944 $ 146,267
========== ========== ========== ==========
Average shares outstanding - basic (in thousands) 161,180 149,496 159,785 148,008
Average shares outstanding - diluted (in thousands) 162,712 150,642 161,363 149,190
Net income per share - basic $ 0.56 $ 0.50 $ 1.10 $ 0.98
Net income per share - diluted 0.55 0.50 1.09 0.98
Dividends declared per share 0.1900 0.1667 0.3800 0.3333
</TABLE>
4
<PAGE> 5
SOUTHTRUST CORPORATION
Consolidated Condensed Statements of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Non- Non-Owner
Common Capital Retained Owner Changes Treasury Changes
(Dollars in thousands) Stock Surplus Earnings In Equity Stock Total In Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $362,936 $289,664 $ 1,100,170 $(7,520) $(10,358) $1,734,892
Net Income 0 0 146,267 0 0 146,267 $146,267
Unrealized gain on available-for-sale
securities, net of tax of $(2,036)* 0 0 0 18,472 0 18,472 18,472
---------
Comprehensive Income $164,739
=========
Dividends Declared ($.3333 per share) 0 0 (49,704) 0 0 (49,704)
Issuance of 201,327 shares of Common Stock
for stock options exercised 503 1,294 0 0 0 1,797
Issuance of 124,905 shares of Common Stock for
dividend reinvestment and stock purchase plan 312 2,722 0 0 0 3,034
Issuance of 27,759 shares of Common Stock
under employee discounted stock purchase plan 70 489 0 0 0 559
Issuance of 1,905,047 shares of Common Stock
for acquisitions accounted for as poolings-
of-interests 4,763 4,452 14,289 0 0 23,504
Issuance of 86,480 shares of Common Stock
under long-term incentive plan 216 1,199 0 0 0 1,415
Issuance of 3,034,518 shares of Common Stock
in secondary offering 7,587 64,415 0 0 0 72,002
Purchase of 18,291 shares of treasury stock 0 0 0 0 (479) (479)
- -----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 $376,387 $364,235 $1,211,022 $10,952 $(10,837) $1,951,759
=======================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1998 $386,626 $486,166 $1,321,586 $11,176 $(10,913) $2,194,641
Net Income 0 0 175,944 0 0 175,944 $175,944
Unrealized loss on available-for-sale
securities, net of tax of $2,664* 0 0 0 (4,274) 0 (4,274) (4,274)
---------
Comprehensive Income $171,670
=========
Dividends Declared ($.3800 per share) 0 0 (61,434) 0 0 (61,434)
Issuance of 394,445 shares of Common Stock
for stock options exercised 986 3,749 0 0 0 4,735
Issuance of 78,233 shares of Common Stock
for dividend reinvestment and stock
purchase plan 196 3,077 0 0 0 3,273
Issuance of 25,787 shares of Common Stock
under employee discounted stock
purchase plan 65 713 0 0 0 778
Issuance of 6,547,500 shares of Common Stock
in secondary offering 16,369 216,804 0 0 0 233,173
Issuance of 3,930,282 shares of Common Stock
for acquisitions accounted for as poolings-
of-interests 9,826 2,413 17,099 0 0 29,338
Issuance of 62,846 shares of Common Stock
under long-term incentive plan 157 1,571 0 0 0 1,728
Purchase of 27,300 shares of treasury stock 0 0 0 0 (1,112) (1,112)
- -----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $414,225 $714,493 $1,453,195 $ 6,902 $(12,025) $2,576,790
=======================================================================================================================
</TABLE>
*See disclosure of reclassification amount in Notes to Consolidated Financial
Statements
5
<PAGE> 6
SOUTHTRUST CORPORATION
Consolidated Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
-----------------------------
(In thousands) 1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 175,944 $ 146,267
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision (credit) for:
Loan losses 43,336 48,877
Depreciation of premises and equipment 23,793 18,162
Amortization of intangibles 17,852 13,153
Amortization of security premium 899 306
Accretion of security discount (2,622) (1,453)
Deferred income tax 749 640
Net gain on trading securities (7,912) (4,733)
Net gain on loans held for sale (11,785) (3,645)
Net securities gains (3,209) (398)
Origination and purchase of loans held for sale (1,735,998) (1,284,766)
Proceeds of loans held for sale 1,495,123 1,190,323
Net increase in trading securities (6,050) (7,225)
Net decrease in other assets 17,634 42,902
Net increase in other liabilities 13,766 15,888
------------ ------------
Net cash provided by operating activities 21,520 174,298
INVESTING ACTIVITIES
Proceeds from maturities of:
Held-to-maturity securities 1,012,852 410,309
Available-for-sale securities 510,217 92,331
Proceeds from sales of:
Held-to-maturity securities 0 0
Available-for-sale securities 128,341 107,420
Purchases of:
Held-to-maturity securities (1,226,777) (643,417)
Available-for-sale securities (1,000,279) (856,717)
Premises and equipment (53,323) (55,681)
Net (increase) decrease in:
Short-term investments 54,709 (125,615)
Loans (1,149,984) (1,533,962)
Purchase of subsidiaries, net of cash acquired (181,652) 820,019
------------ ------------
Net cash used in investing activities (1,905,896) (1,785,313)
FINANCING ACTIVITIES
Proceeds from issuance of:
Common Stock 243,686 78,866
Federal Home Loan Bank advances 200,000 1,706,750
Long-term debt 200,000 0
Payments for:
Repurchase of Common Stock (1,112) (479)
Federal Home Loan Bank advances (240,007) (1,619,545)
Long-term debt (101,077) (886)
Cash dividends (56,091) (31,733)
Net increase in:
Deposits 281,233 171,498
Short-term borrowings 1,624,935 1,254,422
------------ ------------
Net cash provided by financing activities 2,151,567 1,558,893
------------ ------------
INCREASE/(DECREASE) IN CASH AND DUE FROM BANKS 267,191 (52,122)
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 877,885 903,134
------------ ------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 1,145,076 $ 851,012
============ ============
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 646,245 $ 575,438
Income taxes 88,180 70,527
Noncash transactions:
Assets acquired in business combinations 1,580,974 1,230,314
Liabilities acquired in business combinations 1,395,152 1,206,789
Loans transferred to other real estate 18,655 18,135
Loans securitized into mortgage-backed securities 887,592 278,296
</TABLE>
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A -- Recent Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share
In February 1997 the Financial Accounting Standards Board (FASB) issued
SFAS No.128, Earnings per Share. This statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods and accordingly, the Company adopted its provisions for the period ended
December 31, 1997. All prior-period earnings per share (EPS) data as shown on
the consolidated condensed statements of income contained herein and in the
following Management's Discussion and Analysis have been restated to give effect
for this Statement.
SFAS No.128 simplifies the standards for computing EPS previously found in
APB Opinion No.15, Earnings per Share, and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with
the presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS is computed similarly to fully diluted EPS pursuant
to Opinion 15. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
SFAS No. 130, Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
Comprehensive income is the total of net income and all other non-owner changes
in equity. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. It requires that all items that are to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement is effective for fiscal years beginning
after December 15, 1997. The Company adopted the provisions of this Statement on
January 1, 1998.
In the calculation of comprehensive income, certain reclassification
adjustments are made to avoid double counting items that are displayed as part
of net income for a period that also had been displayed as part of other
comprehensive income in that period or earlier periods.
7
<PAGE> 8
The disclosure of the reclassification amount is as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30
1998 1997
---------- ----------
<S> <C> <C>
Unrealized holding gains/(losses)
arising during the period $ (1,064) $ 18,870
Less: Reclassification adjustment for
gains included in net income (3,210) (398)
---------- ----------
Net unrealized gain/ (loss) on securities $ (4,274) $ 18,472
========== ==========
</TABLE>
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. This Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. This Statement is effective for fiscal years
beginning after December 15, 1997. The Company adopted the provisions of this
Statement on January 1, 1998. Application to interim statements is not required
in the initial year of adoption. Based on the Company's current operating
activities, management does not believe that adoption of this Statement will
have a material impact on the presentation of the Company's financial position
or results of operations.
SFAS No. 132, Employers' Disclosures about Pension and Other Postretirement
Benefits
In February 1998, the FASB issued SFAS No.132, Employers' Disclosures about
Pension and Other Postretirement Benefits, an amendment of SFAS No. 87, 88, and
106. This Statement revises employers' disclosures about pension and other
postretirement benefit plans, but does not change the measurement or recognition
of those plans. It standardizes the disclosure requirements to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis and eliminates certain disclosures that are no longer as useful as they
were when Statements 87, 88, and 106 were issued. This Statement is effective
for fiscal years beginning after December 15, 1997. Based on the Company's
current operating activities, management does not believe that adoption of this
Statement will have a material impact on the presentation of the Company's
financial position or results of operations.
8
<PAGE> 9
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes accounting and
reporting standards for derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective as of the beginning of fiscal years
ending after June 15, 1999.
Note B- Stock Split
On January 27, 1998, the Company's Board of Directors announced a three
for two stock split effected in the form of a stock dividend payable to
shareholders of record on February 13, 1998. The additional shares were
distributed on February 26, 1998. All shares and per share information in this
report have been restated to give retroactive effect to this split.
Note C- Capital Securities
On December 18, 1997, the Company filed with the Securities and Exchange
Commission a shelf registration statement on Form S-3 registering up to
$600,000,000 of Debt securities, Preferred Stock, and/or Common Stock. The
Company's previous registration statement, which provided for the issuance of up
to $300,000,000 of Debt securities, Preferred Stock and/or Common Stock, was
replaced with the December 18, 1997 Form S-3.
Pursuant to the provisions of the December 18, 1997 Form S-3, on January
22, 1998, the Company issued 6,547,500 shares, as effected for the three for two
stock split of February 26, 1998, of common stock at $36.50 per share, less an
underwriting discount of $0.82 per share. The Company intends to use the net
proceeds from the sale primarily for general corporate and working capital
purposes, including funding investments in, or extensions of credit to, its
banking and non-banking subsidiaries. Also, depending on market conditions, the
type of acquisition opportunities presented to the Company and other factors,
some portion of the net proceeds may be used to fund the acquisition of other
financial institutions.
Note D- Merger-Related Activity
The Company completed the acquisition of First of America Bank-Florida, FSB
during the first quarter of 1998 for a purchase price of $160 million in cash.
In the second quarter of 1998, the Company acquired American National Bank of
Florida for 3,930,282 shares of SouthTrust Corporation common stock with a total
market value at the time of issuance of $160 million. These acquisitions added
approximately $1.6 billion of assets, $1.1 billion of loans, and $1.3 billion of
deposits.
On July 17, 1998, the Company assumed deposits and acquired certain assets
of Home Savings of America, FSB, a subsidiary of H.F. Ahmanson & Company, for a
premium of approximately $300 million in cash. The Company assumed $3.2 billion
in deposits and acquired cash of $2.9 billion, certain banking premises and a
limited amount of loans associated with the deposits.
9
<PAGE> 10
On July 31, 1998 the Company acquired Partners' Mortgage Services, LTD for
a premium of $3.3 million in cash.
On August 7, 1998, the Company completed the acquisition of Marine Bank for
477,200 shares of SouthTrust Corporation Common Stock with a total market value
at the time of issuance of approximately $19 million. This acquisition added
approximately $59 million of assets, $34 million of loans and $46 million of
deposits.
In addition, the Company has entered into three definitive agreements with
other financial institutions. They are with Georgia National Bank in Athens, GA;
First American Bank in Vero Beach, FL; and Security Bank Texas in Arlington, TX.
All of these transactions will be effected through the issuance of SouthTrust
Corporation common stock. They are expected to add assets of approximately $90
million, $44 million, and $83 million, respectively, and should close by the end
of 1998.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
BUSINESS
SouthTrust Corporation is a registered bank holding company incorporated
under the laws of Delaware in 1968. The Company is headquartered in Birmingham,
Alabama, engaging in a full range of banking services from over 585 banking
locations in Alabama, Florida, Georgia, Mississippi, North Carolina, South
Carolina and Tennessee. As of June 30, 1998, the Company had consolidated total
assets of $34.7 billion, which ranked it as the largest bank holding company
headquartered in Alabama, and one of the twenty-six largest bank holding
companies in the United States.
Commercial banking is SouthTrust's predominant business and SouthTrust
Bank, N.A., its subsidiary bank, contributes substantially all of the Company's
total operating revenues and total consolidated assets.
SouthTrust Bank, N.A. offers a broad range of banking services, either
directly or through other affiliated bank related subsidiaries. Services to
business customers include providing checking and time deposit accounts, cash
management services, various types of lending and credit services, and corporate
and other trust services. Services provided to individual customers directly or
through other affiliated corporations include checking accounts, money market
investment and money market checking accounts, personal money management
accounts, passbook savings accounts and various other time deposit savings
programs, loans (including business, personal, automobile, mortgage, home
improvement and educational loans), brokerage services, investment services and
a variety of trust services. SouthTrust Bank, N.A. also offers Visa and/or
MasterCard multi-purpose nationally recognized credit card services.
11
<PAGE> 12
SELECTED QUARTERLY FINANCIAL DATA TABLE 1
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------------------------------
1998 1997
--------------------------- ----------------------------------------------
Jun 30 Mar 31 Dec 31 Sept 30 Jun 30
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
EARNINGS SUMMARY:
Interest income $ 635.9 $ 597.5 $ 589.2 $ 574.2 $ 558.2
Interest expense 345.8 324.1 315.4 308.4 296.2
---------- ---------- ---------- ---------- ----------
Gross interest margin 290.1 273.4 273.8 265.8 262.0
Provision for loan losses 25.5 17.9 21.7 20.0 26.5
---------- ---------- ---------- ---------- ----------
Net interest margin 264.6 255.5 252.1 245.8 235.5
Non-interest income (excluding
securities transactions) 92.1 85.9 74.3 68.7 63.8
Securities transactions 1.0 2.2 0.3 1.1 0.3
Non-interest expense 222.9 212.5 199.0 193.0 182.2
---------- ---------- ---------- ---------- ----------
Income before income taxes 134.8 131.1 127.7 122.6 117.4
Income taxes 45.3 44.6 45.7 44.1 42.0
---------- ---------- ---------- ---------- ----------
Net income $ 89.5 $ 86.5 $ 82.0 $ 78.5 $ 75.4
========== ========== ========== ========== ==========
PER COMMON SHARE:
Net income - basic $ 0.56 $ 0.55 $ 0.54 $ 0.53 $ 0.50
Net income- diluted 0.55 0.54 0.53 0.52 0.50
Cash dividends declared 0.19 0.19 0.1667 0.1667 0.1667
Book value 15.65 15.49 14.28 13.46 13.05
Market value-high 45.000 45.125 42.833 34.458 28.250
Market value-low 39.250 35.750 30.667 25.750 23.583
ENDING BALANCES:
Assets $ 34,667.9 $ 32,697.6 $ 30,906.4 $ 29,764.2 $ 29,192.9
Loans, net of unearned income 24,654.1 23,548.9 22,474.8 21,667.8 21,105.9
Deposits 21,150.8 20,532.9 19,586.6 19,010.9 18,679.4
Federal Home Loan Bank advances 2,742.3 2,777.4 2,782.4 2,532.4 1,832.4
Long-term debt 1,205.4 1,205.9 1,106.4 981.9 982.3
Stockholders' equity 2,576.8 2,485.8 2,194.6 2,015.1 1,951.7
Common shares - basic (in thousands) 164,676 160,438 153,664 149,690 149,570
AVERAGE BALANCES:
Assets $ 33,493.3 $ 31,618.9 $ 29,927.9 $ 29,087.7 $ 28,385.6
Earning assets 31,053.7 29,230.3 28,115.2 27,408.7 26,712.1
Loans, net of unearned income 23,972.0 23,075.8 21,927.0 21,333.6 20,728.0
Deposits 20,532.2 19,991.9 19,025.5 18,636.1 17,825.7
Stockholders' equity 2,507.7 2,382.1 2,137.3 1,975.7 1,887.6
Common shares - basic (in thousands) 161,180 158,374 152,982 149,663 149,496
Common shares - diluted (in thousands) 162,712 159,998 154,541 151,038 150,642
SELECTED RATIOS:
Return on average total assets 1.07% 1.11% 1.09% 1.07% 1.06%
Return on average stockholders' equity 14.31 14.72 15.21 15.76 16.01
Net interest margin (FTE) 3.78 3.82 3.90 3.89 3.97
Efficiency ratio 57.99 58.79 56.78 57.26 55.49
</TABLE>
12
<PAGE> 13
AVERAGE BALANCES, INTEREST INCOME AND EXPENSE AND
AVERAGE YIELDS EARNED AND RATES PAID
(Dollars in millions; yields on taxable equivalent basis)
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------------------------------------
June 30, 1998 March 31, 1998
------------------------------- -------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net of unearned
income $23,972.0 $ 517.4 8.66% $23,075.8 $ 493.3 8.67%
Available-for-sale securities 3,411.8 54.9 6.49 3,054.8 48.6 6.41
Held-to-maturity securities:
Taxable 2,780.5 48.6 7.01 2,393.7 43.3 7.34
Non-taxable 153.4 3.9 10.36 157.9 4.1 10.64
Short-term investments 736.0 13.3 7.25 548.1 10.3 7.62
------------------------------- -------------------------------
Total interest-earning assets 31,053.7 $ 638.1 8.25 29,230.3 $ 599.6 8.31
Allowance for loan losses (342.8) (327.7)
Other assets 2,782.4 2,716.3
------------------------------- -------------------------------
Total assets $33,493.3 $31,618.9
=============================== ===============================
LIABILITIES
Interest-bearing deposits $18,296.5 $ 208.2 4.56% $17,882.1 $ 204.2 4.63%
Short-term borrowings 5,950.6 82.0 5.53 4,683.7 63.1 5.46
Federal Home Loan Bank advances 2,759.7 36.5 5.31 2,780.7 36.6 5.34
Long-term debt 1,205.7 19.1 6.35 1,259.5 20.2 6.49
------------------------------- -------------------------------
Total interest-bearing liabilities 28,212.5 345.8 4.92 26,606.0 324.1 4.94
Demand deposits non-interest bearing 2,235.7 2,109.8
Other liabilities 537.4 521.0
Total liabilities 30,985.6 29,236.8
STOCKHOLDERS' EQUITY 2,507.7 2,382.1
------------------------------- -------------------------------
Total liabilities and stockholders' equity $33,493.3 $31,618.9
=============================== ===============================
Net interest income $ 292.3 $ 275.5
=============================== ===============================
Net interest margin 3.78% 3.82%
=============================== ===============================
Net interest spread 3.33% 3.37%
=============================== ===============================
</TABLE>
(1) Yields were calculated using the average amortized cost of the underlying
assets.
(2) All yields and rates are presented on an annualized basis.
13
<PAGE> 14
TABLE 2
<TABLE>
<CAPTION>
Quarters Ended
- ------------------------------------------------------------------------------------------------------------
December 31, 1997 September 30, 1997 June 30, 1997
- -------------------------------- --------------------------------- ---------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -------------------------------- --------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$21,927.0 $ 482.9 8.74% $21,333.6 $ 471.1 8.76% $20,728.0 $ 455.2 8.81%
3,242.0 53.6 6.60 3,432.2 56.5 6.55 3,425.1 57.4 6.69
2,294.8 40.1 6.93 2,039.7 36.5 7.09 2,043.5 36.6 7.17
172.7 4.5 10.29 186.8 5.2 11.05 196.3 5.1 10.47
478.7 10.4 8.65 416.4 7.5 7.13 319.2 6.4 8.04
- -------------------------------- --------------------------------- ---------------------------------
28,115.2 $ 591.5 8.35 27,408.7 $ 576.8 8.35 26,712.1 $ 560.7 8.41
(315.9) (307.4) (292.2)
2,128.6 1,986.4 1,965.7
- -------------------------------- --------------------------------- ---------------------------------
$29,927.9 $29,087.7 $28,385.6
================================ ================================= =================================
$16,945.5 $ 198.1 4.64% $16,662.9 $ 194.6 4.63% $15,832.9 $ 181.4 4.60%
4,557.8 63.8 5.55 4,817.6 67.7 5.57 5,518.4 76.3 5.55
2,745.9 37.2 5.37 2,243.4 30.5 5.38 1,741.5 23.5 5.41
1,003.6 16.3 6.44 981.6 15.7 6.36 978.7 14.9 6.13
- -------------------------------- --------------------------------- ---------------------------------
25,252.8 315.4 4.95 24,705.5 308.5 4.95 24,071.5 296.1 4.93
2,080.0 1,973.2 1,992.8
457.8 433.3 433.7
27,790.6 27,112.0 26,498.0
2,137.3 1,975.7 1,887.6
- -------------------------------- --------------------------------- ---------------------------------
$29,927.9 $29,087.7 $28,385.6
================================ ================================= =================================
$ 276.1 $ 268.3 $ 264.6
================================ ================================= =================================
3.90% 3.89% 3.97%
================================ ================================= =================================
3.40% 3.40% 3.48%
================================ ================================= =================================
</TABLE>
14
<PAGE> 15
NET INTEREST INCOME / MARGIN.
The Company's net interest margin decreased 19 basis points from the second
quarter of 1997 to 3.78% for the 1998 second quarter period. This decrease is
reflective of the increase in the ratio of interest-bearing funds to earning
assets, which was 91% at June 30, 1998, up from the June 30, 1997 ratio of 90%.
In addition, the 1998 second quarter margin decreased due to the effect of
the Company's purchase of Bank Owned Life Insurance (BOLI), which is more fully
described in the non-interest income discussion in this report. BOLI is a
non-interest earning asset and changes in its carrying value flow through
non-interest income. The investment in BOLI, totaling $500 million, was made as
an alternative to investing in interest-earning assets. The resulting net
interest margin effect of the BOLI for the quarter ended June 30, 1998 was a
decrease of approximately $6.9 million or 8 basis points.
The quarter over quarter trend was also affected by the loan mix. The
Company is continuing to place emphasis on growing its commercial loan
portfolio. These loans are competitively priced in the marketplace, generally
having thinner margins than other lending opportunities. However, these loans
have shorter maturities than other loan types, reducing the Company's exposure
to interest rate and liquidity risk. Credit risk is also reduced, since
historical net credit losses on commercial loans have been lower than those on
loans to individuals. See Table 2 for detailed information concerning quarterly
average volumes, interest, yields earned and rates paid.
PROVISION FOR LOAN LOSSES.
The Company's provision for loan losses reflects management's assessment of
the ability of the allowance for loan losses to absorb loan losses inherent in
the loan portfolio. The provision for loan losses for the second quarter of 1998
was $25.5 million, reflecting a decrease of $1.0 million from the 1997 second
quarter level of $26.5 million. For the six months ended June 30, 1998, the
provision for loan losses was $43.3 million, a decrease of $5.5 million from
same period in 1997. The decrease in the provision reflects the low level of net
charge-offs, slower loan growth, and the reduction in the non-performing asset
level during the quarter. Net charge-offs for the quarter were $13.7 million,
compared to $13.3 million for the second quarter of 1997. On a year-to-date
basis, net charge-offs totaled $26.8 million in 1998 compared to $24.9 million
in 1997. The ratio of provision to net charge-offs for the second quarter of
1998 was 186.21%. Total net charge-offs of loans on an annualized basis amounted
to .23% of average net loans for the 1998 second quarter and six month periods,
compared to .26% and .25% for the second quarter and first six months of 1997,
respectively. For the year ended December 31, 1997 net charge-offs were $51.8
million or .25% of net loans.
15
<PAGE> 16
NON-INTEREST INCOME.
Total non-interest income for the quarter ended June 30, 1998 was $93.1
million, an increase of $29.0 million or 45.4% over the same period in 1997. For
the six month period ended June 30, 1998, non-interest income was up $55.2
million or 43.8% from the comparable period in 1997 to $181.3 million. Service
charges on deposit accounts, which represent the largest portion of non-interest
income, increased in the second quarter and first six months of 1998 by 28.4%
and 23.7%, respectively from the comparable year-ago periods. This reflects the
overall growth in the number of deposit accounts through both internal growth
and acquisitions. Mortgage banking operations income, which includes loan
origination and servicing fee income, increased $4.4 million or 65.9% from the
1997 second quarter. On a year-to-date basis, the increase was $7.1 million or
55%. Mortgage interest rates have remained favorable and loan production and
related income has increased accordingly. Fee income related to Bank Card and
Trust operations has also increased, 13.5% and 16.9%, respectively,
over the year-ago quarter. For the comparable six month periods, the increases
were 11.8% and 17.3%. Both were related to higher volume and various rate
increases. Other fee income, which includes investment, international, safe
deposit, collection and miscellaneous other fees, rose by $3.4 million or 34.2%
compared to the quarter ended June 30, 1997. For the six month period ended June
30, 1998, other fee income increased $5.3 million or 26.2% over the comparable
year-ago period.
Other non-interest income increased during the second quarter and first six
months of 1998 due to a $500 million funding in December 1997 of a Bank Owned
Life Insurance (BOLI) program which covers the lives of certain of the Company's
officers. These officers participate in the plan on a voluntary basis and have
no direct vested interest in the policies, either through payments for or
receipt of benefits from the plan. The Company is the sole beneficiary of the
BOLI and all increases in its cash surrender value and death proceeds are
credited to non-interest income. For the quarter ended June 30, 1998, increases
in the cash surrender value of the BOLI increased other non-interest income by
approximately $7.0 million, bringing the total increase for the six months to
$13.8 million.
For the year ended December 31, 1997, $10.3 million in gains on sales or
securitizations of loans were included in non-interest income. Sales of loans
during the quarter ended June 30, 1998 resulted in gains of approximately $4.9
million, bringing the total gain for the first six months of 1998 to $11.8
million. There were no other significant non-recurring non-interest income items
recorded in 1998 or 1997.
NON-INTEREST INCOME TABLE 3
(In millions)
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------------
1998 1997
---------------- --------------------------
Jun 30 Mar 31 Dec 31 Sept 30 Jun 30
------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 39.7 $ 36.5 $ 35.6 $ 32.7 $ 30.9
Mortgage banking operations 11.0 8.9 7.2 7.1 6.6
Bank card fees 6.8 6.2 5.8 5.5 6.0
Trust fees 6.9 6.9 6.6 6.2 5.9
Other fees 13.2 12.2 11.1 11.3 9.9
Securities gains 1.0 2.2 0.3 1.1 0.3
Other 14.5 15.2 8.1 5.9 4.5
------ ------ ------ ------ ------
Total $ 93.1 $ 88.1 $ 74.7 $ 69.8 $ 64.1
====== ====== ====== ====== ======
</TABLE>
16
<PAGE> 17
NON-INTEREST EXPENSE.
Total non-interest expense increased 22.4% in the second quarter of 1998 as
compared to the same period in 1997. On a year-to-date basis, the increase was
22.2% over the comparable 1997 period. This increase is reflective of the
overall growth the Company has experienced. Salaries and employee benefits
expense is the largest component of non-interest expense, accounting for $121.5
million or 54% of all non-interest expense for the quarter ended June 30, 1998
and $238.1 million or 55% for the first six months of 1998. The June 30, 1998
quarter over June 30, 1997 quarter increase in salary and employee benefits
expense was $23.6 million or 24.1%, due mainly to the increase in the number of
full time equivalent employees, which increased to approximately 11,800.
Occupancy and equipment expenses were also up in the second quarter and first
six months of 1998. Both of these items are affected by the number of banking
offices which increased by 9.6 % from the June 30, 1997 level to 585 at June 30,
1998.
The efficiency ratio, a measure of non-interest expense to net interest
income plus non-interest income, was 57.99% for the three month period ended
June 30, 1998, up from the year ago ratio of 55.49%. On a year-to-date basis,
the efficiency ratio was 58.38% in 1998, compared to 55.89% in 1997.
The Company uses a wide range of software and related technologies
throughout its business that will be affected by the date change in the year
2000. This date change will require modification of portions of its software so
that its computer systems will properly recognize dates beyond December 31,
1999. The Company believes that with the current and planned upgrades or
modifications to existing software and conversions to new software, the impact
of the Year 2000 issue can be mitigated.
The Company is using both internal and external resources to reprogram, or
replace, and test software for Year 2000 readiness. The Company has established
a Year 2000 program office staffed by five full-time employees which is headed
by a member of senior management. SouthTrust also has a related management
committee dedicated to Year 2000 issues. The total Year 2000 project cost is
estimated to be between $15 million and $20 million, $5.8 million of which has
been expensed in the year ended December 31, 1997 and $2.0 million was expensed
in the second quarter of 1998, bringing the year-to-date expense to $3.2
million. Critical computerized functions are expected to be Year 2000 ready by
December 31, 1998. The Company conducts business with many outside parties that
will also be affected by the Year 2000. The impact to SouthTrust of
noncompliance by these parties cannot be determined at this time.
There were no other significant non-recurring non-interest expense items
recorded in 1998 or 1997.
17
<PAGE> 18
NON-INTEREST EXPENSE TABLE 4
(In millions)
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------------
1998 1997
---------------- --------------------------
Jun 30 Mar 31 Dec 31 Sept 30 Jun 30
------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $121.5 $116.6 $106.8 $105.2 $ 97.9
Net occupancy 17.9 15.8 16.6 15.2 14.2
Equipment 14.8 13.6 12.7 11.8 10.7
Professional services 15.0 12.8 13.6 14.4 11.6
Communications 11.5 10.9 10.1 9.1 8.7
Business development 9.0 8.1 4.9 7.3 7.2
Supplies 7.6 7.1 6.7 5.7 5.8
Other 25.6 27.6 27.6 24.3 26.1
------ ------ ------ ------ ------
Total $222.9 $212.5 $199.0 $193.0 $182.2
====== ====== ====== ====== ======
</TABLE>
INCOME TAX EXPENSE.
Income tax expense for the second quarter of 1998 was $45.3 million for an
effective tax rate of 33.6% compared to $42.0 million or an effective rate of
35.8% in the second quarter of 1997. For the six months ended June 30, 1998,
income tax expense was $90.0 million for an effective tax rate of 33.8% compared
to tax expense of $81.3 million and an effective tax rate of 35.7% during the
first six months of 1997. The statutory federal income tax rate was 35% in 1998
and 1997.
18
<PAGE> 19
LOANS.
Loans, net of unearned income at June 30, 1998 were $24,654.1 million, an
increase of $2,179.3 million or 9.7% over the December 31, 1997 level. Of the
total loan increase, $1,071.7 million was obtained in the acquisition of other
financial institutions consummated during the first six months of 1998. Internal
growth accounted for the remaining $1,107.6 million of the increase.
Management has made a strategic decision to reduce the Company's amount of
indirect lending and to closely manage the required return expected on various
loan product types. This decision contributed to decreased loan growth in the
first six months of 1998.
The Company has participated in loan securitizations, which allow the
Company to actively manage its loan portfolio. Specifically, securitizations
allow the Company to manage credit concentrations, while continuing to extend
credit to customers. Loans securitized and sold, consisting mainly of 1-4 family
mortgages, amounted to approximately $1,033.8 million and $1,207.8 million
during the year ended December 31, 1997 and the six month period ended June 30,
1998, respectively.
LOAN PORTFOLIO TABLE 5
(In millions)
<TABLE>
<CAPTION>
Quarters Ended
-----------------------------------------------------------------
1998 1997
----------------------- -------------------------------------
Jun 30 Mar 31 Dec 31 Sept 30 Jun 30
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 8,219.4 $ 7,564.2 $ 7,548.4 $ 6,846.0 $ 7,035.9
Real estate construction 3,150.0 2,966.4 2,937.2 2,539.6 2,349.0
Commercial real estate mortgage 4,173.4 4,005.7 3,543.8 3,516.3 3,397.0
Residential real estate mortgage 5,977.2 5,769.7 5,277.1 5,593.2 5,201.8
Lease financing 930.1 855.7 869.0 809.9 809.9
Loans to individuals 2,374.9 2,543.8 2,458.4 2,511.7 2,459.6
--------- --------- --------- --------- ---------
24,825.0 23,705.5 22,633.9 21,816.7 21,253.2
Unearned income (170.9) (156.6) (159.1) (148.9) (147.3)
--------- --------- --------- --------- ---------
Loans, net of unearned income 24,654.1 23,548.9 22,474.8 21,667.8 21,105.9
Allowance for loan losses (354.1) (336.0) (315.5) (310.7) (297.7)
--------- --------- --------- --------- ---------
Net loans $24,300.0 $23,212.9 $22,159.3 $21,357.1 $20,808.2
========= ========= ========= ========= =========
</TABLE>
19
<PAGE> 20
ALLOWANCE FOR LOAN LOSSES.
The Company maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio. While deterioration of the economy or rising
interest rates could have a near-term effect on the Company's earnings,
Management has taken into consideration present economic conditions, the level
of risk in the portfolio, the level of non-performing assets, potential problem
loans, and delinquencies in assessing the allowance for loan losses and
considers the allowance for loan losses to be adequate. As asset quality and
economic conditions change, the allowance for loan losses will be increased or
decreased accordingly.
The allowance for loan losses at June 30, 1998 was $354.1 million or 1.44%
of net loans compared to $315.5 million or 1.40% at December 31, 1997. Net
charge-offs during the six months ended June 30, 1998 totaled $26.8 million or
0.23% of average net loans on an annualized basis. The provision for loan losses
during this same period added $43.4 million to the allowance for loan losses.
Also, the allowance for loan losses at acquisition date of acquired financial
institutions augmented the allowance by $22.0 million for 1998.
ALLOWANCE FOR LOAN LOSSES TABLE 6
(In thousands)
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------------------------
1998 1997
------------------------ ---------------------------------------
Jun 30 Mar 31 Dec 31 Sept 30 Jun 30
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance beginning of quarter $ 335,995 $ 315,471 $ 310,725 $ 297,696 $ 284,532
Loans charged-off:
Commercial, financial and agricultural 5,948 3,740 7,626 2,844 5,083
Real estate construction 5 0 91 (31) 38
Commercial real estate mortgage 152 22 54 460 437
Residential real estate mortgage 464 918 1,608 1,113 853
Lease financing 385 379 235 36 511
Loans to individuals 10,754 11,263 10,129 8,891 8,959
--------- --------- --------- --------- ---------
Total charge-offs 17,708 16,322 19,743 13,313 15,881
========= ========= ========= ========= =========
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 1,154 1,133 1,008 1,523 1,003
Real estate construction 34 7 0 0 0
Commercial real estate mortgage (8) 27 152 271 46
Residential real estate mortgage 162 78 48 85 57
Lease financing 16 0 7 36 4
Loans to individuals 2,666 2,008 1,537 1,534 1,432
--------- --------- --------- --------- ---------
Total recoveries 4,024 3,253 2,752 3,449 2,542
========= ========= ========= ========= =========
Net loans charged-off 13,684 13,069 16,991 9,864 13,339
Additions to allowance charged to expense 25,481 17,855 21,734 20,002 26,502
Subsidiaries' allowance at date of purchase 6,284 15,738 3 2,891 1
--------- --------- --------- --------- ---------
Balance at end of quarter $ 354,076 $ 335,995 $ 315,471 $ 310,725 $ 297,696
========= ========= ========= ========= =========
(In millions)
Loans outstanding at quarter end,
net of unearned income $24,654.1 $23,548.9 $22,474.8 $21,667.8 $21,105.9
Average loans outstanding,
net of unearned income $23,972.0 $23,075.8 $21,927.0 $21,333.6 $20,728.0
Ratios:
End-of-quarter allowance to net loans outstanding 1.44% 1.43% 1.40% 1.43% 1.41%
Net loans charged off to net average loans 0.23 0.23 0.31 0.18 0.26
Provision for loan losses to net charge-offs 186.21 136.62 127.90 202.76 198.68
Provision for loan losses to net average loans 0.43 0.31 0.39 0.37 0.51
</TABLE>
20
<PAGE> 21
NON-PERFORMING ASSETS.
Non-performing assets, which include non-accrual and restructured loans,
other real estate owned and other repossessed assets were $172.4 million at June
30, 1998, a decrease of $8.0 million from the December 31, 1997 level.
Non-performing assets obtained through acquisitions during the six month period
totaled $2.9 million. In the second quarter of 1998, several non-accrual loans
became current in their payments and were placed back on accruing status,
accounting for the decrease in non-performing assets from their December 31,
1997 level. The ratio of non-performing assets to total loans plus other real
estate owned was 0.70 % at June 30, 1998, while the allowance for loan losses to
non-performing loans ratio was 335.61% for the same period.
In addition to loans on non-performing status at June 30, 1998, the Company
had loans of approximately $14.4 million for which management has serious doubts
as to the ability of the borrowers to comply with the present repayment terms,
which may result in the loans' repayment terms being restructured and/or the
loans being placed on non-performing status. These potential problem loans are
current with respect to principal and interest payments and are not presently on
non-accrual status; however, they are continuously reviewed by management and
their classification may be changed if conditions warrant. At December 31, 1997,
potential problem loans totaled $23.3 million.
NON-PERFORMING ASSETS TABLE 7
(Dollars in millions)
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------------------------------------
1998 1997
---------------------- -------------------------------------
Jun 30 Mar 31 Dec 31 Sept 30 Jun 30
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Non-performing loans
Commercial, financial, and agricultural $ 53.5 $ 69.6 $ 61.1 $ 60.8 $ 58.3
Real estate construction 7.1 4.9 4.4 5.6 4.9
Commercial real estate mortgage 6.0 16.4 15.5 11.4 10.0
Residential real estate mortgage 32.9 33.7 31.5 27.2 23.7
Lease financing 0.5 0.6 0.3 0.3 0.5
Loans to individuals 5.5 7.2 7.1 10.5 7.0
------- ------- ------- ------- -------
Total non-performing loans 105.5 132.4 119.9 115.8 104.4
------- ------- ------- ------- -------
Other real estate owned 44.0 41.2 43.8 47.7 52.6
Other repossessed assets 22.9 22.0 16.7 12.4 12.0
------- ------- ------- ------- -------
Total non-performing assets $ 172.4 $ 195.6 $ 180.4 $ 175.9 $ 169.0
======= ======= ======= ======= =======
Accruing loans past due 90 days or more $ 65.4 $ 54.1 $ 54.0 $ 50.9 $ 45.3
Ratios:
Non-performing loans to total loans 0.43% 0.56% 0.53% 0.53% 0.49%
Non-performing assets to total loans
plus other real estate owned 0.70 0.83 0.80 0.81 0.80
Allowance to non-performing loans 335.61 253.74 263.16 268.38 285.08
</TABLE>
21
<PAGE> 22
HELD-TO-MATURITY AND AVAILABLE-FOR-SALE SECURITIES.
The investment portfolio is managed to maximize yield over an entire
interest rate cycle while providing liquidity and minimizing risk. Securities
classified as held-to-maturity are carried at amortized cost, as the Company has
the ability and management has the positive intent to hold these securities to
maturity. All securities not considered held-to-maturity or part of the trading
portfolio have been designated as available-for-sale and are carried at fair
value. Unrealized gains and losses on available-for-sale securities are excluded
from earnings and are reported net of deferred taxes as a component of
stockholders' equity. This caption includes securities that Management intends
to use as part of its asset/liability management strategy or that may be sold in
response to changes in interest rates, changes in prepayment risk, liquidity
needs, or for other purposes.
Total securities, including those designated as held-to-maturity and
available-for-sale, have increased $950.5 million since December 31, 1997. This
increase is largely the result of the purchase of callable U.S. Government
agency securities. The yield on these agencies was more favorable, as compared
to non-callable agencies, given the current rate environment. In addition,
$374.1 million in securities were obtained through the acquisition of other
financial institutions during the first six months of 1998.
The Company's investment in collateralized mortgage obligations presents
some degree of risk that the mortgages collateralizing the securities can
prepay, thereby affecting the yield of the securities and their carrying
amounts. Such an occurrence is most likely in periods of declining interest
rates when many borrowers refinance their mortgages, creating prepayments on
their existing mortgages. The Company doesn't consider this risk to be
significant in the current rate environment. The Company's investment in
structured notes and other derivative investment securities is nominal and would
not have a significant effect on the Company's net interest margin.
22
<PAGE> 23
HELD-TO-MATURITY AND AVAILABLE-FOR-SALE SECURITIES TABLE 8
<TABLE>
<CAPTION>
Held-to-maturity securities
-----------------------------------------------------
June 30, 1998 December 31, 1997
----------------------- ------------------------
Amortized Fair Amortized Fair
(Dollars in millions) Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 0.2 $ 0.2 $ 0.7 $ 0.7
U.S. Government agency securities 2,409.4 2,418.8 1,895.2 1,905.8
Collateralized mortgage obligations
and mortgage backed securities 431.1 442.6 464.1 476.2
Obligations of states and political
subdivisions 150.5 158.9 161.9 173.7
Other securities 34.8 36.4 35.3 36.9
--------- --------- --------- ---------
Total $ 3,026.0 $ 3,056.9 $ 2,557.2 $ 2,593.3
========= ========= ========= =========
<CAPTION>
Available-for-sale securities
-----------------------------------------------------
June 30, 1998 December 31, 1997
----------------------- ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 166.2 $ 166.9 $ 172.6 $ 173.4
U.S. Government agency securities 920.9 923.2 473.2 475.0
Collateralized mortgage obligations
and mortgage backed securities 2,034.5 2,043.1 2,044.0 2,056.5
Obligations of states and political
subdivisions 30.5 30.5 3.8 3.9
Other securities 235.7 235.1 205.6 208.3
--------- --------- --------- ---------
Total $ 3,387.8 $ 3,398.8 $ 2,899.2 $ 2,917.1
========= ========= ========= =========
</TABLE>
23
<PAGE> 24
SHORT-TERM INVESTMENTS.
Short-term investments at June 30, 1998 totaled $743.9 million, reflecting
an increase of $231.9 million from the December 31, 1997 level of $512.0
million. At June 30, 1998, short-term investments consisted of $14.3 million in
federal funds sold and securities purchased under resale agreements, $0.4
million in time deposits with other banks, $656.5 million in mortgage loans in
the process of being securitized and sold to third party investors and $72.7
million in securities held for trading purposes. Mortgage loans held for sale
are carried at the lower of cost or fair value. Trading account securities are
carried at fair value with unrealized gains and losses recognized in net income.
The Company's Treasury Management Committee monitors current and future
expected economic conditions, as well as the Company's liquidity position, in
determining desired balances of short-term investments and alternative uses of
such funds.
FUNDING.
The Company's overall funding level is governed by current and expected
asset demand and capital needs. Funding sources can be divided into four broad
categories: deposits, short-term borrowings, Federal Home Loan Bank (FHLB)
advances, and long-term debt. The mixture of these funding types depends upon
the Company's maturity and liquidity needs, the current rate environment, and
the availability of such funds.
The Company monitors certain ratios and liability concentrations to ensure
funding levels are maintained within established policies. These policies
include a maximum short-term liability to total asset ratio of 40% and a limit
on funding concentrations from any one source as a percent of total assets of
20%. Various maturity limits have also been established.
Deposits are the Company's primary source of funding. Total deposits at
June 30, 1998 were $21,150.8 million, up $1,564.2 million or 8.0% from the
December 31, 1997 level of $19,586.6 million. During the first six months of
1998, acquisitions of other financial institutions added $1,283.0 million of
deposits. At June 30, 1998, total deposits included interest-bearing deposits of
$18,649.2 million and other deposits of $2,501.6 million. Core deposits, defined
as demand deposits and time deposits less than $100,000, totaled $17,749.8
million or 83.9% of total deposits at June 30, 1998. This compares to core
deposits of $16,805.2 million or 85.8% at December 31, 1997.
Short-term borrowings at June 30, 1998 were $6,476.2 million and included
federal funds purchased of $3,886.7 million, securities sold under agreements to
repurchase of $1,412.4 million and other borrowed funds of $1,177.0 million. At
June 30, 1998, total short-term borrowings were 18.7% of total liabilities and
stockholders' equity. This compares to total short-term borrowings of $4,750.4
million or 15.4% of total liabilities and stockholders' equity at December 31,
1997.
FHLB advances totaled $2,742.3 million at June 30, 1998. The current
quarter end balance is down $40.0 million from the level outstanding at December
31, 1997. The Company uses FHLB advances as an alternative to wholesale
certificates of deposit or other deposit programs with similar maturities. These
advances generally offer more attractive rates when compared to other mid-term
financing options. They are also flexible, allowing the Company to quickly
obtain the necessary maturities and rates that best suit its overall asset /
liability strategy.
At June 30, 1998, total long-term debt was $1,205.4 million, representing a
net increase of $99.0 million from the December 31, 1997 level of $1,106.4
million. This increase in debt was due to the issuance of $200.0 million of
6.125% subordinated capital notes due in 2028, net of a $100.0 million variable
rate Bank Note maturity and $0.5 million in repayments on other debt. The $200.0
million issuance is allowable capital for risk based capital purposes.
Acquisitions completed during the first six months of 1998 had no effect on
long-term debt outstanding.
24
<PAGE> 25
CAPITAL.
The Company continually monitors current and projected capital adequacy
positions of both the Company and its subsidiaries. Maintaining adequate capital
levels is integral to providing stability to the Company, resources to achieve
the Company's growth objectives, and a return to stockholders in the form of
dividends.
The Company is subject to various regulatory capital requirements that
prescribe quantitative measures of the Company's assets, liabilities, and
certain off-balance sheet items. The Company's regulators have also imposed
qualitative guidelines for capital amounts and classifications such as risk
weighting, capital components, and other details. The quantitative measures to
ensure capital adequacy require that the Company maintain Tier 1 and Total
capital to risk-weighted assets of 4% and 8%, respectively, and Tier 1 capital
to adjusted quarter average total assets of 4%. Failure to meet minimum capital
requirements can initiate certain actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial statements. As of
the periods ended below, the Company meets all capital adequacy requirements
imposed by its regulators.
The Tier 1 and Total capital ratios increased from their December 31, 1997
totals. At June 30, 1998, Tier 1 and Total capital to risk weighted assets were
7.89% and 12.50%, respectively, compared to 7.72% and 12.07%, respectively, at
year end 1997. These increases were due mainly to a $233.4 million issuance of
common stock and a $200 million issuance of allowable long-term debt during the
first quarter of 1998.
CAPITAL RATIOS TABLE 9
(Dollars in millions)
<TABLE>
<CAPTION>
1998 1997
-------------------------- ------------------------------------------
Jun 30 Mar 31 Dec 31 Sept 30 Jun 30
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Tier 1 capital:
Stockholders' equity $ 2,576.8 $ 2,485.8 $ 2,194.6 $ 2,015.1 $ 1,951.7
Intangible assets other than
servicing rights (268.7) (278.9) (220.3) (225.1) (228.6)
Unrealized (gain)/loss on
available-for-sale securities (6.9) (9.3) (11.2) (18.3) (10.9)
---------- ---------- ---------- ---------- ----------
Total Tier 1 capital 2,301.2 2,197.6 1,963.1 1,771.7 1,712.2
---------- ---------- ---------- ---------- ----------
Tier 2 capital:
Allowable allowance for loan losses 354.1 336.0 315.5 300.4 288.1
Allowable long-term debt 990.0 990.0 790.0 665.0 665.0
---------- ---------- ---------- ---------- ----------
Total Tier 2 capital 1,344.1 1,326.0 1,105.5 965.4 953.1
---------- ---------- ---------- ---------- ----------
Total risk-based capital $ 3,645.3 $ 3,523.6 $ 3,068.6 $ 2,737.1 $ 2,665.3
========== ========== ========== ========== ==========
Risk-weighted assets $ 29,165.4 $ 26,978.3 $ 25,418.0 $ 24,026.6 $ 23,039.8
Risk-based ratios:
Tier 1 capital 7.89% 8.15% 7.72% 7.37% 7.43%
Total capital 12.50 13.06 12.07 11.39 11.57
Tier 1 leverage ratio 6.93 7.01 6.61 6.14 6.08
</TABLE>
25
<PAGE> 26
COMMITMENTS.
The Company's subsidiary bank had standby letters of credit outstanding of
approximately $590.2 million at June 30, 1998 and $621.6 million at December 31,
1997.
The Company's subsidiary bank had outstanding commitments to extend credit
of approximately $9,479.5 million at June 30, 1998 and $7,107.6 million at
December 31, 1997. Policies as to collateral and assumption of credit risk for
off-balance sheet commitments are essentially the same as those for extension of
credit to its customers.
Presently the Company has no commitments for significant capital
expenditures.
The Company's subsidiaries regularly originate and sell loans, consisting
primarily of mortgage loans sold to third party investors, which contain various
recourse provisions to the seller. Losses historically realized through the
repurchase or other satisfaction of these recourse provisions have been
insignificant. The total amount of loans outstanding subject to recourse was
$1,102.4 million at June 30, 1998 and $1,138.4 million at December 31, 1997.
Under terms of the recourse agreements, the Company would be required to
repurchase certain loans if they become non-performing. All such loans sold had
a loan-to-collateral ratio of 80% or less, or mortgage insurance to cover losses
up to 80% of the collateral value, at the times the various loans were
originated. The underlying collateral to these mortgages are generally 1-4
family residential properties. Potential losses under these recourse agreements
are affected by the collateral value of the particular loans involved. Estimates
of losses are recognized when the mortgages are sold and are adjusted
subsequently when estimated losses change.
26
<PAGE> 27
INTEREST RATE RISK MANAGEMENT.
The Company's primary market risk is its exposure to interest rate changes.
This risk has not changed materially since December 31, 1997. Interest rate risk
management strategies are designed to optimize net interest income while
minimizing fluctuations caused by changes in the interest rate environment. It
is through these strategies that the Company seeks to manage the maturity and
repricing characteristics of its balance sheet.
The modeling techniques used by SouthTrust simulate net interest income and
impact on fair values under various rate scenarios. Important elements of these
techniques include the mix of floating versus fixed rate assets and liabilities,
and the scheduled, as well as expected, repricing and maturing volumes and rates
of the existing balance sheet.
The Company uses derivatives in the form of interest rate swap contracts
("Swaps") to manage interest rate risk arising from certain of the Company's
fixed-rate funding sources, such as long-term debt and certain deposit
liabilities. Swaps employed by the Company must be effective at reducing the
risk associated with the exposure being hedged. All Swaps represent end-user
activities that are designed and designated at their inception as hedges, and
therefore, changes in fair values of such derivatives are not included in the
results of operations. Interest receivable or payable from such contracts is
accrued and recognized as an adjustment to the interest expense related to the
specific liability being hedged. Upon settlement or termination, the cumulative
change in the market value of such derivatives is recorded as an adjustment to
the carrying value of the underlying liability and is recognized in net interest
income over the expected remaining life of the related liability. In instances
where the underlying instrument is sold or otherwise settled, the cumulative
change in the value of the associated derivative is recognized immediately in
the component of earnings relating to the underlying instrument.
From time to time, the Company utilizes interest rate options to hedge
mortgage loans held for sale. During the first six months of 1998, the effect on
net income from use of options was insignificant.
INTEREST RATE SWAPS TABLE 10
June 30, 1998
(Dollars in millions)
<TABLE>
<CAPTION>
Average
Maturity In Average Rate Average Rate
Notional Value Fair Value Months Paid Received
-------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Gain position $ 820.0 $ 52.2 88.5 5.77% 6.92%
Loss position 125.0 (1.1) 37.4 5.65 5.85
-------------- ----------
Total $ 945.0 $ 51.1 81.8 5.76% 6.77%
============== ==========
</TABLE>
27
<PAGE> 28
CONTINGENCIES.
Certain of the Company's subsidiaries are defendants in various legal
proceedings arising in the normal course of business. These claims relate to the
lending and investment advisory services provided by the Company and include
alleged compensatory and punitive damages.
In addition, subsidiaries of the Company have been named as defendants in
suits that allege fraudulent, deceptive or collusive practices in connection
with certain financing activities. These suits are typical of complaints that
have been filed in recent years challenging financial transactions between
plaintiffs and various financial institutions. The complaints in such cases
frequently seek punitive damages in transactions involving fairly small amounts
of actual damages, and in recent years, have resulted in large punitive damage
awards to plaintiffs.
Although it is not possible to determine, with any certainty, the potential
exposure related to punitive damages in connection with these suits, Management,
based upon consultation with legal counsel, believes that the ultimate
resolutions of these proceedings will not have a material adverse effect on the
Company's financial statements.
28
<PAGE> 29
PART II-OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange Act of
1934, as amended, if a stockholder who intends to present a proposal at the 1999
annual meeting of stockholders does not notify the Company of such proposal on
or prior to January 25, 1999, then the Board of Director's proxies would be
allowed to use their discretionary voting authority to vote on the proposal when
the proposal is raised at the annual meeting, even though there is no discussion
of the proposal in the 1999 proxy statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
<TABLE>
<S> <C> <C>
* 3(a)- Composite restated certificate of incorporation which was filed as
Exhibit 3 to the Registration Statement on Form S-3 of SouthTrust
Corporation (Registration No. 333-34947)
* 3(b) Composite Restated Bylaws of SouthTrust Corporation which was
filed as Exhibit 4(e) to the Registration Statement on Form S-4 of
SouthTrust Corporation (Registration No. 33-61557).
* 4(a)- Articles FOURTH, SIXTH, SEVENTH, ELEVENTH of the Restated
Certificate of Incorporation of SouthTrust Corporation (included in
Registration Statement No.333-34947 incorporated at Exhibit 3)
* 4(b)- Certificate of Adoption of Resolutions designating Series A Junior
Participating Preferred Stock, adopted February 22, 1989, which was
filed as Exhibit 1 to SouthTrust Corporation's Registration
Statement on Form 8-A (File No.1-3613)
* 4(c)- Stockholders' Rights Agreement, dated as of February 22, 1989,
between SouthTrust Corporation and Mellon Bank, N.A., Rights Agent,
which was filed as Exhibit 1 to SouthTrust Corporation's
Registration Statement on Form 8-A (File No. 1-3613).
* 4(d)- Indenture, dated as of May 1, 1987, between SouthTrust Corporation
and National Westminster Bank USA, which was filed as Exhibit 4(a)
to SouthTrust Corporation's Registration Statement on Form S-3
(Registration No. 33-13637).
* 4(e)- Subordinated Indenture, dated as of May 1, 1992, between SouthTrust
Corporation and Chemical Bank, which was filed as Exhibit 4(b)(ii)
to the Registration Statement on Form S-3 of SouthTrust Corporation
(Registration No. 33-52717).
* 4(f)(I)- Form of Senior Indenture which was filed as Exhibit 4(b)(I) to the
Registration Statement on Form S-3 of SouthTrust Corporation
(Registration No. 33-44857).
</TABLE>
29
<PAGE> 30
<TABLE>
<S> <C> <C>
* 4(f)(ii)- Form of Subordinated Indenture which was filed as Exhibit 4(b)(ii)
to the Registration Statement on Form S-3 of SouthTrust Corporation
(Registration No. 33-52717).
11- Statement of Computation of Earnings Per Share.
27- Financial Data Schedule (for SEC use only)
</TABLE>
* Incorporated herein by reference
(b) Reports on Form 8-K
During the three months ended June 30, 1998, and through the
date of this report, the Company did not file a Form 8-K with
the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHTRUST CORPORATION
Date: August 14, 1998 /S/ Wallace D. Malone, Jr.
-----------------------------------
Wallace D. Malone, Jr.
Chairman and Chief
Executive Officer
Date: August 14, 1998 /S/ Aubrey D. Barnard
-----------------------------------
Aubrey D. Barnard
Secretary, Treasurer and
Controller
30
<PAGE> 1
EXHIBIT 11
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Six Month Ended June 30, 1998
-----------------------------------------------
(In thousands, except per share data)
Dilutive Effect
of Options
Basic Issued Diluted
-------- --------------- --------
<S> <C> <C> <C>
Net Income ........................ $175,944 -- $175,944
Shares available to common
shareholders .................... 159,785 1,578 161,363
-------- --------------- --------
Earnings per share ................ $ 1.10 $ 1.09
======== =============== ========
<CAPTION>
Six Months Ended June 30, 1997
-----------------------------------------------
(In thousands, except per share data)
Dilutive Effect
of Options
Basic Issued Diluted
-------- --------------- --------
<S> <C> <C> <C>
Net Income ........................ $146,267 -- $146,267
Shares available to common
shareholders .................... 148,008 1,182 149,190
-------- --------------- --------
Earnings per share ................ $ 0.98 $ 0.98
======== =============== ========
</TABLE>
32
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOUTHTRUST CORPORATION FOR THE SIX MONTHS ENDED JUNE 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,145,076
<INT-BEARING-DEPOSITS> 444
<FED-FUNDS-SOLD> 14,250
<TRADING-ASSETS> 729,208
<INVESTMENTS-HELD-FOR-SALE> 3,398,773
<INVESTMENTS-CARRYING> 3,025,988
<INVESTMENTS-MARKET> 3,056,936
<LOANS> 24,654,116
<ALLOWANCE> 354,076
<TOTAL-ASSETS> 34,667,937
<DEPOSITS> 21,150,846
<SHORT-TERM> 6,476,165
<LIABILITIES-OTHER> 505,298
<LONG-TERM> 1,205,366
0
0
<COMMON> 414,225
<OTHER-SE> 2,162,565
<TOTAL-LIABILITIES-AND-EQUITY> 34,667,937
<INTEREST-LOAN> 1,009,504
<INTEREST-INVEST> 200,302
<INTEREST-OTHER> 23,600
<INTEREST-TOTAL> 1,233,406
<INTEREST-DEPOSIT> 412,439
<INTEREST-EXPENSE> 669,986
<INTEREST-INCOME-NET> 563,420
<LOAN-LOSSES> 43,336
<SECURITIES-GAINS> 3,210
<EXPENSE-OTHER> 435,419
<INCOME-PRETAX> 265,928
<INCOME-PRE-EXTRAORDINARY> 175,944
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 175,944
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 8.28
<LOANS-NON> 104,530
<LOANS-PAST> 65,431
<LOANS-TROUBLED> 971
<LOANS-PROBLEM> 14,409
<ALLOWANCE-OPEN> 315,471
<CHARGE-OFFS> 34,030
<RECOVERIES> 7,277
<ALLOWANCE-CLOSE> 354,076
<ALLOWANCE-DOMESTIC> 354,076
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
