<PAGE> 1
===============================================================================
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 SEPTEMBER 30, 1999
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) 254-5530
(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 September 30, 1999, 167,803,184 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 Balance Sheets
September 30, 1999, December 31, 1998,
and September 30, 1998 3
Consolidated Condensed Statements of Income
Three months ended September 30, 1999 and 1998
Nine months ended September 30, 1999 and 1998 4
Consolidated Condensed Statements of Stockholders' Equity
Nine months ended September 30, 1999 and 1998 5
Consolidated Condensed Statements of Cash Flows
Nine months ended September 30, 1999 and 1998 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 three and nine month periods ended
September 30, 1999 and 1998. Results of operations for the interim 1999 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, 1998. 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
14-33.
2
<PAGE> 3
SOUTHTRUST CORPORATION
Consolidated Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31 September 30
------------- ------------- -------------
(Dollars in thousands) 1999 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,074,672 $ 970,778 $ 899,010
Short-term investments:
Federal funds sold and securities purchased
under resale agreements 86,891 76,275 40,650
Interest-bearing deposits in other banks 2,652 506 698
Trading securities 79,199 73,215 112,820
Loans held for sale 232,947 707,586 743,840
------------- ------------- -------------
Total short-term investments 401,689 857,582 898,008
Available-for-sale securities 5,102,715 3,802,718 3,413,147
Held-to-maturity securities (1) 3,001,531 2,988,428 2,558,476
Loans 30,874,301 27,526,597 25,839,252
Less:
Unearned income 260,308 209,091 181,993
Allowance for loan losses 434,771 377,525 364,362
------------- ------------- -------------
Net loans 30,179,222 26,939,981 25,292,897
Premises and equipment, net 717,707 690,852 676,471
Due from customers on acceptances 10,631 28,965 6,637
Goodwill and core deposit intangibles 593,938 549,689 557,026
Mortgage servicing rights and related intangibles 78,547 61,601 55,386
Bank owned life insurance 749,989 715,175 606,366
Other assets 563,602 528,005 581,740
------------- ------------- -------------
Total assets $ 42,474,243 $ 38,133,774 $ 35,545,164
============= ============= =============
LIABILITIES
Deposits:
Interest-bearing $ 24,594,552 $ 22,065,653 $ 21,727,790
Other 2,902,627 2,774,239 2,479,967
------------- ------------- -------------
Total deposits 27,497,179 24,839,892 24,207,757
Federal funds purchased and securities sold
under agreements to repurchase 5,538,093 5,200,026 3,138,221
Other short-term borrowings 1,277,756 913,002 1,047,952
Bank acceptances outstanding 10,631 28,965 6,637
Federal Home Loan Bank advances 3,480,328 2,780,340 2,787,344
Long-term debt 1,125,511 1,154,937 1,154,959
Other liabilities 659,204 478,346 542,197
------------- ------------- -------------
Total liabilities 39,588,702 35,395,508 32,885,067
STOCKHOLDERS' EQUITY
Common stock, par value $2.50 a share (2) 422,830 420,569 415,650
Capital surplus 748,437 733,577 721,804
Retained earnings 1,807,424 1,590,686 1,517,666
Accumulated other non-owner changes in equity (69,297) 5,530 17,002
Treasury stock, at cost (3) (23,853) (12,096) (12,025)
------------- ------------- -------------
Total stockholders' equity 2,885,541 2,738,266 2,660,097
------------- ------------- -------------
Total liabilities and stockholders' equity $ 42,474,243 $ 38,133,774 $ 35,545,164
============= ============= =============
(1) Held-to-maturity securities-fair value $ 2,926,445 $ 3,021,199 $ 2,605,091
(2) Common shares authorized 500,000,000 500,000,000 500,000,000
Common shares issued 169,131,903 168,227,453 166,260,127
(3) Treasury shares of common stock 1,328,719 1,016,159 1,014,240
</TABLE>
3
<PAGE> 4
SOUTHTRUST CORPORATION
Consolidated Condensed Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- --------------------------
(In thousands, except per share data) 1999 1998 1999 1998
-------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $613,064 $ 538,666 $1,740,759 $1,548,170
Available-for-sale securities 77,489 53,433 200,677 156,510
Held-to-maturity securities 51,242 48,983 144,982 146,208
Short-term investments 8,328 14,963 29,760 38,563
-------- --------- ---------- ----------
Total interest income 750,123 656,045 2,116,178 1,889,451
-------- --------- ---------- ----------
Interest expense
Deposits 248,225 244,146 694,508 656,585
Short-term borrowings 90,863 59,196 251,355 204,325
Federal Home Loan Bank advances 40,224 36,745 111,911 109,925
Long-term debt 15,069 19,109 49,363 58,347
-------- --------- ---------- ----------
Total interest expense 394,381 359,196 1,107,137 1,029,182
-------- --------- ---------- ----------
Net interest income 355,742 296,849 1,009,041 860,269
Provision for loan losses 42,757 22,040 104,895 65,376
-------- --------- ---------- ----------
Net interest income after
provision for loan losses 312,985 274,809 904,146 794,893
Non-interest income
Service charges on deposit accounts 52,303 44,499 147,946 120,744
Mortgage banking operations 9,177 10,949 35,846 30,885
Bank card fees 8,011 7,394 22,932 20,370
Trust fees 7,394 6,882 22,462 20,647
Other fees 13,271 9,491 38,389 26,974
Bank owned life insurance 12,469 10,147 31,739 24,032
Gains on trading securities, net 3,963 4,114 13,386 12,026
Gains on loans held-for-sale, net 4,490 3,305 12,565 15,089
Gains on available-for-sale securities, net 148 (399) 386 2,811
Other 2,221 2,987 5,850 7,054
-------- --------- ---------- ----------
Total non-interest income 113,447 99,369 331,501 280,632
-------- --------- ---------- ----------
Non-interest expense
Salaries and employee benefits 136,536 128,237 404,494 366,326
Net occupancy 20,914 19,241 60,396 52,944
Equipment 17,807 15,519 49,773 43,832
Professional services 16,976 14,985 49,707 42,842
Communications 12,704 12,352 38,067 34,765
Business development 7,397 8,550 22,748 25,680
Supplies 6,186 7,066 18,356 21,780
Other 40,292 30,848 106,800 84,048
-------- --------- ---------- ----------
Total non-interest expense 258,812 236,798 750,341 672,217
-------- --------- ---------- ----------
Income before income taxes 167,620 137,380 485,306 403,308
Income tax expense 54,563 42,719 158,039 132,703
-------- --------- ---------- ----------
Net income $113,057 $ 94,661 $ 327,267 $ 270,605
======== ========= ========== ==========
Average shares outstanding - basic (in thousands) 167,654 165,016 167,456 161,548
Average shares outstanding - diluted (in thousands) 168,742 166,366 168,692 163,049
Net income per share - basic $ 0.67 $ 0.57 $ 1.95 $ 1.68
Net income per share - diluted 0.67 0.57 1.94 1.66
Dividends declared per share 0.22 0.19 0.66 0.57
</TABLE>
4
<PAGE> 5
SOUTHTRUST CORPORATION
Consolidated Condensed Statements of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Non-
Common Capital Retained Owner Changes Treasury
(Dollars in thousands) Stock Surplus Earnings In Equity Stock Total
-------- -------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $386,626 $486,166 $ 1,321,586 $ 11,176 $(10,913) $ 2,194,641
Net Income 0 0 270,605 0 0 270,605
Unrealized gain on available-for-sale
securities, net of tax of $(3,180)* 0 0 0 5,826 0 5,826
-----------
Comprehensive Income $ 276,431
===========
Dividends Declared ($.57 per share) 0 0 (92,722) 0 0 (92,722)
Issuance of 440,455 shares of Common Stock
for stock options exercised 1,101 4,166 0 0 0 5,267
Issuance of 113,740 shares of Common Stock
for dividend reinvestment and stock purchase plans 284 4,489 0 0 0 4,773
Issuance of 37,413 shares of Common Stock
under employee discounted stock purchase plan 94 1,074 0 0 0 1,168
Issuance of 6,547,500 shares of Common Stock
in offering 16,369 216,804 0 0 0 233,173
Issuance of 4,407,426 shares of Common Stock
for acquisitions accounted for as poolings-of-interest 11,019 7,535 18,197 0 0 36,751
Issuance of 62,846 shares of Common Stock under
long-term incentive plan 157 1,570 0 0 0 1,727
Purchase of 27,300 shares of treasury stock 0 0 0 0 (1,112) (1,112)
for exercises of stock options
-------- -------- ----------- -------- -------- -----------
Balance at September 30, 1998 $415,650 $721,804 $ 1,517,666 $ 17,002 $(12,025) $ 2,660,097
======== ======== =========== ======== ======== ===========
Balance at January 1, 1999 $420,569 $733,577 $ 1,590,686 $ 5,530 $(12,096) $ 2,738,266
Net Income 0 0 327,267 0 0 327,267
Unrealized loss on available-for-sale
securities, net of tax of $44,061* 0 0 0 (74,827) 0 (74,827)
-----------
Comprehensive Income $252,440
===========
Dividends Declared ($.66 per share) 0 0 (110,595) 0 0 (110,595)
Issuance of 212,626 shares of Common Stock
for stock options exercised 532 3,010 0 0 0 3,542
Issuance of 128,094 shares of Common Stock
for dividend reinvestment and stock
purchase plans 320 4,403 0 0 0 4,723
Issuance of 34,720 shares of Common Stock
under employee discounted stock
purchase plan 87 978 0 0 0 1,065
Issuance of 47,251 shares of Common Stock under
long-term incentive plan 118 1,022 0 0 0 1,140
Issuance of 481,759 shares of Common Stock
for acquisitions accounted for as poolings-of-interest 1,204 5,447 66 0 0 6,717
Purchase of 3,142 shares of treasury stock
for exercises of stock options 0 0 0 0 (122) (122)
Purchase of 309,418 shares of treasury stock
for employee benefit plans 0 0 0 0 (11,635) (11,635)
-------- -------- ----------- -------- -------- -----------
Balance at September 30,1999 $422,830 $748,437 $ 1,807,424 $(69,297) $(23,853) $ 2,885,541
======== ======== =========== ======== ======== ===========
</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>
Nine Months Ended
September 30
---------------------------------
(In thousands) 1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 327,267 $ 270,605
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision (credit) for:
Loan losses 104,895 65,376
Depreciation of premises and equipment 41,294 36,739
Amortization of intangibles 38,654 27,123
Amortization of security premium 1,758 1,427
Accretion of security discount (3,877) (3,904)
Deferred income tax 11,991 6,769
Increase in value of bank owned life insurance (31,739) (24,032)
Net gain on trading securities (13,386) (12,026)
Net gain on loans held for sale (12,565) (15,089)
Net gain on available-for-sale securities (386) (2,811)
Origination and purchase of loans held for sale (2,305,452) (2,643,167)
Proceeds from loans held for sale 2,480,702 2,318,254
Net (increase) decrease in trading securities 7,402 (42,045)
Net increase in other assets (56,184) (66,267)
Net increase in other liabilities 150,253 23,742
----------- -----------
Net cash provided by (used in) operating activities 740,627 (59,306)
INVESTING ACTIVITIES
Proceeds from maturities of:
Held-to-maturity securities 1,297,983 1,610,912
Available-for-sale securities 576,247 682,372
Proceeds from sales of:
Available-for-sale securities 409,086 309,714
Purchases of:
Held-to-maturity securities (1,205,395) (1,350,059)
Available-for-sale securities (2,331,288) (1,348,307)
Premises and equipment (48,015) (59,475)
Purchases of bank owned life insurance 0 (75,000)
Net (increase) decrease in:
Short-term investments 99,232 33,264
Loans (2,629,029) (2,126,799)
Purchase of subsidiaries, net of cash acquired (77,353) 2,817,639
----------- -----------
Net cash provided by (used in) investing activities (3,908,532) 494,261
FINANCING ACTIVITIES
Proceeds from issuance of:
Common Stock 10,470 246,108
Federal Home Loan Bank advances 1,350,011 300,276
Long-term debt 50,145 200,000
Payments for:
Repurchase of Common Stock (11,757) (1,112)
Federal Home Loan Bank advances (650,022) (295,287)
Long-term debt (79,570) (151,484)
Cash dividends (105,045) (86,630)
Net increase (decrease) in:
Deposits 2,004,746 45,267
Short-term borrowings 702,821 (670,968)
----------- -----------
Net cash provided by (used in) financing activities 3,271,799 (413,830)
----------- -----------
INCREASE IN CASH AND DUE FROM BANKS 103,894 21,125
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 970,778 877,885
----------- -----------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 1,074,672 $ 899,010
=========== ===========
</TABLE>
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A - Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities and SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133
In June 1998, the Financial Accounting Standards Board ("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. Under certain conditions,
a derivative may be specifically designated as a hedge. Accounting for the
changes in fair values of derivatives will depend on their designation.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133. This Statement amends the effective date of SFAS No. 133,
which will now be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000.
SFAS No. 134, Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
In October 1998, the FASB issued SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. This Statement, an amendment to
SFAS No. 65, requires that after the securitization of mortgage loans held for
sale, an entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability to
sell or hold those investments. The Company adopted the provisions of this
Statement on January 1, 1999.
7
<PAGE> 8
Note B - Earnings per Share Reconciliation
Basic earnings per share ("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 reflects the potential
dilution that could occur if securities or other contracts to issue common
stock are exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the Company.
A reconciliation of the numerator and denominator of the basic EPS
computation to the diluted EPS computation is as follows:
<TABLE>
<CAPTION>
Three months ended September 30, 1999 Three months ended September 30, 1998
---------------------------------------- --------------------------------------
(In thousands, except per share data)
Dilutive Effect Dilutive Effect
of Options of Options
Basic Issued Diluted Basic Issued Diluted
-------- -------------- --------- -------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Income ............... $113,057 -- $113,057 $ 94,661 -- $ 94,661
Shares available to common
shareholders ........ 167,654 1,088 168,742 165,016 1,350 166,366
-------- -------- -------- -------- -------- --------
Earnings per share ....... $ 0.67 -- $ 0.67 $ 0.57 -- $ 0.57
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1999 Nine months ended September 30, 1998
---------------------------------------- --------------------------------------
(In thousands, except per share data)
Dilutive Effect Dilutive Effect
of Options of Options
Basic Issued Diluted Basic Issued Diluted
-------- --------------- -------- -------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Income ............... $327,267 -- $327,267 $270,605 -- $270,605
Shares available to common
shareholders ........ 167,456 1,236 168,692 161,548 1,501 163,049
-------- -------- -------- -------- -------- --------
Earnings per share ....... $ 1.95 -- $ 1.94 $ 1.68 -- $ 1.66
======== ======== ======== ======== ======== ========
</TABLE>
8
<PAGE> 9
Note C - Supplemental Cash Flow Information
The following is supplemental disclosure to the Consolidated Condensed
Statements of Cash Flows for the nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
Cash paid during period for:
Interest ........................................ $ 1,132,558 $ 1,002,323
Income taxes .................................... 130,417 131,015
Noncash transactions:
Assets acquired in business combinations ........ 706,099 4,919,944
Liabilities assumed in business combinations .... 659,261 4,725,062
Common Stock issued in business combinations .... 6,716 36,750
Loans transferred to other real estate .......... 18,269 27,206
Loans securitized into mortgage-backed securities 1,664,366 1,350,439
Financed sales of foreclosed property ........... 21,872 22,681
</TABLE>
Note D - Comprehensive Income
Comprehensive income is the total of net income and all other
non-owner changes in equity. Comprehensive income is displayed in the
Consolidated Condensed Statements of Stockholders' Equity.
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. Comprehensive income
for the three and nine month periods ending September 30, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income ................................. $ 113,057 $ 94,661 $ 327,267 $ 270,605
Unrealized holding gains (losses) arising
during the period, net of tax .............. (18,346) 9,853 (74,587) 7,569
Less: reclassification adjustment for gains
(losses) included in net income,
net of tax ................................. 92 (247) 240 1,743
--------- --------- --------- ---------
Unrealized gain (loss) on available-for-sale
securities, net of tax* ............... (18,438) 10,100 (74,827) 5,826
--------- --------- --------- ---------
Comprehensive income ....................... $ 94,619 $ 104,761 $ 252,440 $ 276,431
========= ========= ========= =========
* Tax effect ............................... $ 10,847 $ (5,844) $ 44,061 $ (3,180)
</TABLE>
9
<PAGE> 10
Note E - Business Segments
SFAS No.131, Disclosures about Segments of an Enterprise and Related
Information, requires disclosure of certain information about the reportable
operating segments of the Company. The Company segregates financial information
for use in assessing its performance which is ultimately used for allocating
resources to its operating segments. The Company has four reportable operating
segments which are primarily separated along customer base or asset/liability
management lines. Each segment is managed by one or more of the Company's
executives who, in conjunction with the Chief Executive Officer, make strategic
business decisions regarding that segment.
The four reportable operating segments are Commercial Banking,
Regional Banking, Funds Management, and Other. Commercial Banking derives its
revenues from commercial, industrial and commercial real estate customers
throughout all geographic areas covered by the Company. This reportable segment
also provides cash management, international and commercial leasing services.
Regional Banking generates its revenues from retail lending and depository
services, and regional commercial lending not underwritten by the Commercial
Banking division. Branch administration costs are also included in Regional
Banking. The Funds Management group is responsible for management of the
Company's securities portfolio as well as its wholesale and long-term funding
requirements. The category named Other encompasses operating segments that
qualify for aggregation as provided by SFAS No. 131 such as the Company's
non-bank subsidiaries which provide various services such as securities
brokerage and asset management to either external or internal customers. The
remaining Company divisions included within the Reconciliation grouping are
divisions that have no operating revenue. They contain costs not directly
associated with the other reportable segments such as executive administration,
finance, internal auditing, and risk management.
The Company's management accounting policies generally follow those
for the Company described in Note A to the Consolidated Financial Statements on
Form 10-K for the year ended December 31, 1998, except for the following items.
The Company uses a transfer pricing process to aid in assessing operating
segment performance. This process involves matched rate transfer pricing of
assets and liabilities to determine a contribution to the net interest margin
on a segment basis. The provision for loan losses is charged to each operating
segment primarily based on net charge-offs. Data processing costs are charged
in accordance with the relative operational cost of each segment.
10
<PAGE> 11
The following tables present the Company's business segment
information for the three and nine month periods ended September 30, 1999:
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
------------------------------------------------------------------
Commercial Regional Funds Reconciling Total
Banking Banking Management Other Items Company
---------- -------- ---------- ------- ----------- --------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Net Interest Margin (FTE) ............. $ 65.1 $ 257.9 $ 28.8 $ 1.1 $ 6.5 $ 359.4
Provision for Loan Losses ............. 10.2 16.3 0.0 0.0 16.2 42.7
Non-Interest Income ................... 6.9 81.4 0.0 14.9 10.2 113.4
Non-Interest Expense .................. 11.3 205.2 0.5 13.0 28.8 258.8
------- -------- ------- ------- ------- --------
Income before income
taxes .......................... 50.5 117.8 28.3 3.0 (28.3) 171.3
Income tax expense (FTE) .............. 0.0 0.0 0.0 0.0 58.2 58.2
------- -------- ------- ------- ------- --------
Net Income ....................... $ 50.5 $ 117.8 $ 28.3 $ 3.0 $ (86.5) $ 113.1
======= ======== ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
--------------------------------------------------------------------
Commercial Regional Funds Reconciling Total
Banking Banking Management Other Items Company
---------- --------- ----------- --------- ----------- ---------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Net Interest Margin (FTE) ............. $ 183.6 $ 745.8 $ 78.1 $ 5.7 $ 7.0 $ 1,020.2
Provision for Loan Losses ............. 16.5 45.9 0.0 0.0 42.5 104.9
Non-Interest Income ................... 14.3 244.7 0.3 43.7 28.5 331.5
Non-Interest Expense .................. 34.6 602.1 1.6 39.9 72.1 750.3
---------- --------- --------- --------- --------- ---------
Income before income
taxes .......................... 146.8 342.5 76.8 9.5 (79.1) 496.5
Income tax expense (FTE) .............. 0.0 0.0 0.0 0.0 169.2 169.2
---------- --------- --------- --------- --------- ---------
Net Income ....................... $ 146.8 $ 342.5 $ 76.8 $ 9.5 $ (248.3) $ 327.3
========== ========= ========= ========= ========= =========
Ending Assets ......................... $ 9,795.7 $22,437.1 $ 7,017.2 $ 1,471.9 $ 1,752.3 $42,474.2
========== ========= ========= ========= ========= =========
</TABLE>
11
<PAGE> 12
Following are reconciliations of reportable segment totals to the consolidated
Company totals:
Net interest margin for reportable segments totaled $352.9 million and
$1,013.2 million for the three and nine months ended September 30, 1999,
respectively. The amounts necessary to reconcile that total to the consolidated
net interest margin of $359.4 million and $1,020.2 million, respectively are
amounts attributable to transfer pricing.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1999
------------------ -----------------
<S> <C> <C>
Non-Interest Income:
Total Non-Interest Income for reportable segments ........ $ 103.2 $ 303.0
Bank owned life insurance ................................ 12.5 31.7
Affiliate service fees ................................... 3.3 9.7
Securities gains ......................................... 0.1 0.4
Other .................................................... 0.5 4.5
Eliminations ............................................. (6.2) (17.8)
----------- ---------
Consolidated Non-Interest Income ......................... $ 113.4 $ 331.5
=========== =========
Non-Interest Expense:
Total Non-Interest Expense for reportable segments $ 230.0 $ 678.2
Salaries and benefits .................................... 31.5 95.0
Premises and equipment ................................... 5.9 17.1
Communications ........................................... 5.7 17.2
Professional services .................................... 7.2 21.0
Allocated data processing ................................ (28.1) (82.4)
Other .................................................... 12.8 22.0
Eliminations ............................................. (6.2) (17.8)
----------- ---------
Consolidated Non-Interest Expense ........................ $ 258.8 $ 750.3
=========== =========
Total Assets:
Total Assets for reportable segments ..................... $40,721.9
Goodwill and core deposit intangibles .................... 593.9
Bank owned life insurance ................................ 750.0
Loans .................................................... 360.4
Other .................................................... 388.9
Eliminations ............................................. (340.9)
---------
Consolidated Total Assets ................................ $42,474.2
=========
</TABLE>
Comparable information related to the three and nine month periods ended
September 30, 1998 is not presented because it is not available.
12
<PAGE> 13
Note F - Business Combinations
During the first nine months of 1999, the Company completed the
following acquisitions:
<TABLE>
<CAPTION>
Institution Assets Loans Deposits Location
-------------------------------------- --------- --------- --------- --------------
<S> <C> <C> <C> <C>
LCNB Bancorporation, Inc. ("LCNB") $ 132.5 $ 94.9 $ 123.2 Houston, Texas
Navigation Bank ("Navigation") 79.9 54.4 72.9 Houston, Texas
First of Groves Corporation ("Groves") 493.7 248.4 456.4 Groves, Texas
--------- --------- ---------
$ 706.1 $ 397.7 $ 652.5
========= ========= =========
</TABLE>
Consideration for these acquisitions was approximately $113.5 million
in cash and 481,759 shares of SouthTrust Corporation common stock with a total
market value at the time of issuance of $17.7 million.
The acquisitions of LCNB and Groves were accounted for as purchases.
Under purchase accounting, the results of operations, subsequent to the
acquisition date, are included in the Consolidated Condensed Financial
Statements. The acquisition of Navigation was accounted for as a
pooling-of-interest; however, the Company's previously reported consolidated
financial results have not been restated to include the effect of the
acquisition prior to the acquisition date, since the effect is not material.
In addition, the Company has entered into a definitive agreement with
Brazo Bancshares, Inc. in Waxahachie, Texas. The transaction, which will be
accounted for as a purchase, will add approximately $171 million in assets and
is expected to close in the first quarter of 2000.
13
<PAGE> 14
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 618
banking locations in Alabama, Florida, Georgia, Mississippi, North Carolina,
South Carolina, Tennessee and Texas. As of September 30, 1999, the Company had
consolidated total assets of $42.5 billion which ranked it as the largest bank
holding company headquartered in Alabama, and one of the 20 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), and a variety of trust services.
SouthTrust Bank, N.A. also offers Visa and/or MasterCard multi-purpose
nationally recognized credit card services.
The Company also offers brokerage and other investment services
through its subsidiary SouthTrust Securities, Inc.
FORWARD-LOOKING STATEMENTS
In this report and in documents incorporated herein by reference, the
Company may communicate statements relating to the future results of the
Company that may be considered "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. The Company's actual
results may differ materially from those included in the forward-looking
statements. Forward-looking statements are typically identified by the words
"believe, expect, anticipate, intend, estimate" and similar expressions. These
statements may relate to, among other things, Year 2000 readiness and
unforeseen or unanticipated costs associated with Year 2000 compliance, loan
loss reserve adequacy, simulation of changes in interest rates and litigation
results. Actual results may differ materially from those expressed or implied
as a result of certain rate fluctuations, competitive product and pricing
pressures within the Company's markets, equity and fixed income market
fluctuations, personal and corporate customers' bankruptcies, inflation,
acquisitions and integrations of acquired businesses, technological change,
changes in law, changes in fiscal, monetary, regulatory and tax policies,
monetary fluctuations, success in gaining regulatory approvals when required as
well as other risks and uncertainties.
14
<PAGE> 15
SELECTED QUARTERLY FINANCIAL DATA TABLE 1
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------------------------
1999 1998
--------------------------------------- -------------------------
Sept 30 Jun 30 Mar 31 Dec 31 Sept 30
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
EARNINGS SUMMARY:
Interest income $ 750.1 $ 695.3 $ 670.8 $ 668.0 $ 656.0
Interest expense 394.4 358.5 354.3 357.1 359.2
---------- ---------- ---------- ---------- ----------
Net interest income 355.7 336.8 316.5 310.9 296.8
Provision for loan losses 42.7 31.8 30.4 29.4 22.0
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 313.0 305.0 286.1 281.5 274.8
Non-interest income (excluding
securities transactions) 104.8 99.6 100.8 96.0 92.4
Gains on trading securities, net 4.0 4.1 5.3 4.4 4.1
Gains on loans held for sale, net 4.5 3.6 4.5 3.3 3.3
Gains on available-for-sale securities, net 0.1 (0.3) 0.5 1.5 (0.4)
Non-interest expense 258.8 248.9 242.6 242.2 236.8
---------- ---------- ---------- ---------- ----------
Income before income taxes 167.6 163.1 154.6 144.5 137.4
Income taxes 54.5 53.4 50.1 46.5 42.7
---------- ---------- ---------- ---------- ----------
Net income $ 113.1 $ 109.7 $ 104.5 $ 98.0 $ 94.7
========== ========== ========== ========== ==========
PER COMMON SHARE:
Net income-basic $ 0.67 $ 0.66 $ 0.62 $ 0.59 $ 0.57
Net income-diluted 0.67 0.65 0.62 0.59 0.57
Cash dividends declared 0.22 0.22 0.22 0.19 0.19
Book value 17.20 16.90 16.72 16.38 16.10
Market value-high 38.938 42.875 42.375 39.000 45.375
Market value-low 32.750 36.000 35.375 24.875 30.688
ENDING BALANCES:
Loans, net of unearned income $ 30,614.0 $ 29,178.4 $ 28,261.8 $ 27,317.5 $ 25,657.3
Total assets 42,474.2 40,066.5 39,016.1 38,133.8 35,545.2
Deposits 27,497.2 26,296.7 24,552.5 24,839.9 24,207.8
Federal Home Loan Bank advances 3,480.3 2,855.3 2,830.3 2,780.3 2,787.3
Long-term debt 1,125.5 1,075.5 1,150.4 1,154.9 1,155.0
Stockholders' equity 2,885.5 2,829.5 2,797.4 2,738.3 2,660.1
Common shares-basic (in thousands) 167,803 167,476 167,325 167,211 165,246
AVERAGE BALANCES:
Loans, net of unearned income $ 29,823.5 $ 28,532.3 $ 27,762.0 $ 26,346.5 $ 25,001.3
Earning assets 37,919.9 35,849.4 35,051.4 33,310.8 31,984.1
Total assets 41,041.4 38,951.2 38,116.8 36,364.2 34,879.0
Deposits 26,599.7 24,995.9 24,139.9 24,244.6 23,457.8
Stockholders' equity 2,801.0 2,798.8 2,753.4 2,688.4 2,606.6
Common shares-basic (in thousands) 167,654 167,439 167,270 166,248 165,016
Common shares-diluted (in thousands) 168,742 168,746 168,587 167,409 166,366
SELECTED RATIOS:
Return on average total assets 1.09% 1.13% 1.11% 1.07% 1.08%
Return on average stockholders' equity 16.01 15.72 15.40 14.46 14.41
Net interest margin (FTE) 3.75 3.81 3.71 3.74 3.71
Average equity to average assets 6.82 7.19 7.22 7.39 7.47
Non-interest expense as a percent
of average total assets 2.50 2.56 2.58 2.64 2.69
Efficiency ratio 54.75 55.58 56.32 58.02 59.39
</TABLE>
15
<PAGE> 16
AVERAGE BALANCES, INTEREST INCOME AND EXPENSE AND TABLE 2
AVERAGE YIELDS EARNED AND RATES PAID
(Dollars in millions; yields on taxable equivalent basis)
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------------------------------
September 30, 1999 June 30, 1999
------------------------------------ -----------------------------------
(1) (1)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
--------- ---------- ------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net of unearned
income (2) $29,823.5 $ 613.7 8.16% $28,532.3 $ 575.1 8.09%
Available-for-sale securities:
Taxable 4,352.1 73.5 6.55 3,737.0 60.8 6.48
Non-taxable 322.9 6.3 7.51 329.3 6.3 7.60
Held-to-maturity securities:
Taxable 2,913.3 49.6 6.76 2,549.8 43.6 6.85
Non-taxable 95.5 2.4 9.88 101.7 2.6 10.45
Short-term investments 412.6 8.3 8.01 599.3 10.6 7.07
--------- --------- ------ --------- --------- ---------
Total interest-earning assets 37,919.9 $ 753.8 7.87 35,849.4 $ 699.0 7.81
Allowance for loan losses (415.2) (397.0)
Other assets 3,536.7 3,498.8
--------- --------- ------ --------- --------- ---------
Total assets $41,041.4 $38,951.2
========= ========= ====== ========= ========= =========
LIABILITIES
Interest-bearing deposits $23,839.6 $ 248.2 4.13% $22,322.6 $ 225.1 4.05%
Short-term borrowings 6,941.5 90.9 5.19 6,728.1 80.8 4.82
Federal Home Loan Bank advances 3,120.8 40.2 5.11 2,827.6 36.1 5.12
Long-term debt 1,084.2 15.1 5.51 1,118.4 16.5 5.91
--------- --------- ------ --------- --------- ---------
Total interest-bearing liabilities 34,986.1 394.4 4.47 32,996.7 358.5 4.36
Demand deposits non-interest bearing 2,760.1 2,673.3
Other liabilities 494.2 482.4
Total liabilities 38,240.4 36,152.4
STOCKHOLDERS' EQUITY 2,801.0 2,798.8
--------- --------- ------ --------- --------- ---------
Total liabilities and stockholders' equity $41,041.4 $38,951.2
========= ========= ====== ========= ========= =========
Net interest income $ 359.4 $ 340.5
========= ========= ====== ========= ========= =========
Net interest margin 3.75% 3.81%
========= ========= ====== ========= ========= =========
Net interest spread 3.40% 3.45%
========= ========= ====== ========= ========= =========
</TABLE>
(1) YIELDS WERE CALCULATED USING THE AVERAGE AMORTIZED COST OF THE UNDERLYING
ASSETS. ALL YIELDS AND RATES ARE PRESENTED ON AN ANNUALIZED BASIS.
(2) INCLUDED IN INTEREST ARE NET LOAN FEES OF $17.6 MILLION, $17.4 MILLION,
$16.4 MILLION, $18.9 MILLION, AND $15.9 MILLION FOR THE QUARTERS ENDED
SEPTEMBER 30, 1999, JUNE 30, 1999, MARCH 31, 1999, DECEMBER 31, 1998, AND
SEPTEMBER 30, 1998, RESPECTIVELY. THE AVERAGES INCLUDE LOANS ON WHICH THE
ACCRUAL OF INTEREST HAS BEEN DISCONTINUED. INCOME ON CERTAIN NON-ACCRUAL
LOANS IS RECOGNIZED ON A CASH-BASIS.
16
<PAGE> 17
TABLE 2
QUARTERS ENDED
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
March 31, 1999 December 31, 1998 September 30, 1998
- ----------------------------------- ----------------------------------- -----------------------------------
(1) (1) (1)
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ---------- -------- ------- ---------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 27,762.0 $ 553.8 8.09% $ 26,346.5 $ 555.2 8.36% $ 25,001.3 $ 539.2 8.56%
3,506.7 54.6 6.30 3,251.6 51.1 6.25 3,245.1 52.0 6.39
316.1 5.9 7.72 268.7 3.2 4.85 122.3 1.6 5.30
2,685.8 46.2 6.98 2,521.2 43.7 6.88 2,654.1 46.4 6.93
116.8 3.2 11.01 131.5 3.7 11.11 148.3 4.0 10.74
664.0 10.8 6.64 791.3 14.0 7.00 813.0 15.0 7.30
- ---------- -------- ----- ---------- -------- ----- ---------- -------- -----
35,051.4 $ 674.5 7.80 33,310.8 $ 670.9 7.99 31,984.1 $ 658.2 8.17
(378.1) (369.3) (359.8)
3,443.5 3,422.7 3,254.7
- ---------- -------- ----- ---------- -------- ----- ---------- -------- -----
$ 38,116.8 $ 36,364.2 $ 34,879.0
========== ======== ===== ========== ======== ===== ========== ======== =====
$ 21,515.2 $ 221.1 4.17% $ 21,703.6 $ 241.3 4.41% $ 21,058.1 $ 244.2 4.60%
6,775.9 79.7 4.77 4,964.4 60.7 4.85 4,310.1 59.2 5.45
2,783.7 35.6 5.19 2,781.1 36.8 5.25 2,748.9 36.7 5.30
1,158.9 17.8 6.24 1,154.9 18.3 6.29 1,197.5 19.1 6.33
- ---------- -------- ----- ---------- -------- ----- ---------- -------- -----
32,233.7 354.2 4.46 30,604.0 357.1 4.63 29,314.6 359.2 4.86
2,624.7 2,541.1 2,399.7
505.0 530.7 558.1
35,363.4 33,675.8 32,272.4
2,753.4 2,688.4 2,606.6
- ---------- -------- ----- ---------- -------- ----- ---------- -------- -----
$ 38,116.8 $ 36,364.2 $ 34,879.0
========== ======== ===== ========== ======== ===== ========== ======== =====
$ 320.3 $ 313.8 $ 299.0
========== ======== ===== ========== ======== ===== ========== ======== =====
3.71% 3.74% 3.71%
========== ======== ===== ========== ======== ===== ========== ======== =====
3.34% 3.36% 3.31%
========== ======== ===== ========== ======== ===== ========== ======== =====
</TABLE>
17
<PAGE> 18
NET INTEREST INCOME / MARGIN.
The Company's net interest margin increased 4 basis points from the
third quarter of 1998 to 3.75% for the 1999 third quarter period. However, the
net interest margin is down 6 basis points from the second quarter of 1999. The
factors that affected the net margin for these periods are discussed below.
The primary factor that caused the increase in the net interest margin
from the third quarter of 1998 was lower funding costs, as the net interest
spread increased 9 basis points to 3.40% in the third quarter of 1999. The net
interest spread is affected by the composition of interest-earning assets and
interest-bearing liabilities, competitive pressures, and Federal Reserve Bank
(the "Fed") monetary policies. The Fed lowered the fed funds rate a total of 75
basis points during the latter part of 1998. However, the Fed raised interest
rates a total of 50 basis points in the third quarter of 1999, causing in part
the decline in the net interest margin from the second quarter of 1999, as the
net interest spread declined 5 basis points during this period. In a rising rate
environment, the Company's net interest spread is initially somewhat compressed
until interest-earning assets have time to reprice like interest-bearing
liabilities. In a decreasing rate environment, the opposite is true. In most
cases, depending on the timing within the quarter, the effect on net interest
margin of either an upward or downward movement in rates will cross over
quarter-end reporting periods due to the repricing time lag described above.
The increase in the net interest margin from the third quarter of 1998
is somewhat offset by the Company's funding of bank owned life insurance
("BOLI") as of September 30, 1999, which increased $100 million over the
September 30, 1998 period. Since this investment was made as an alternative to
investing in interest-earning assets, the resulting net margin effect of the
BOLI for the quarter ended September 30, 1999 was a decrease of approximately
$1.3 million or 1 basis point.
See Table 2 for detailed information concerning quarterly average
volumes, interest, yields earned and rates paid.
PROVISION FOR LOAN LOSSES.
During the third quarter of 1999, the Company recorded a $42.8 million
provision for loan losses. This compares to a provision of $22.0 million for
the quarter ended September 30, 1998. On a year-to-date basis, the provision
for loan losses was $104.9 million in 1999 compared to $65.4 million in 1998.
Provisions for loan losses are charged to income to bring the allowance to a
level deemed appropriate by management based on the factors as described in
"Allowance for Loan Losses" later in Management's Discussion and Analysis of
Financial Condition and Results of Operations Earnings Summary.
18
<PAGE> 19
NON-INTEREST INCOME.
Total non-interest income for the quarter ended September 30, 1999 was
$113.4 million, an increase of $14.0 million or 14.2% over the same period in
1998. For the nine month period ended September 30, 1999, non-interest income
was up $50.9 million to $331.5 million, or 18.1% from the comparable period in
1998. Service charges on deposit accounts, which represent the largest portion
of non-interest income, increased in the third quarter and first nine months of
1999 by 17.5% and 22.5%, 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 decreased
16.2% compared to the 1998 third quarter. Mortgage interest rates have
continued to increase during the quarter, and loan production and related
income have declined accordingly. On a year-to-date basis, mortgage banking
operations income increased $5.0 million or 16.1%. Fee income related to Bank
Card and Trust operations has also increased, 8.3% and 7.4%, respectively, over
the year ago quarter. For the comparable nine month periods, the increases were
12.6% and 8.8%. 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 $3.8 million or 39.8%
compared to the quarter ended September 30, 1998. For the nine month period
ended September 30, 1999, other fee income increased $11.4 million or 42.3%
over the comparable year-ago-period. This increase was driven by the increase
in investment fees, especially income from sales of annuity products. Income
from bank owned life insurance for the third quarter of 1999 increased $2.3
million or 22.9% from the third quarter of 1998. On a year-to-date basis, bank
owned life insurance increased $7.7 million or 32.1% from the comparable
year-ago period. Funding of bank owned life insurance is $100 million higher as
of September 30, 1999 compared to September 30, 1998.
Gains on trading securities totaled $4.0 million and $13.4 million for
the third quarter and first nine months of 1999, respectively. Sales of loans
during the three and nine months ended September 30, 1999 resulted in gains of
approximately $4.5 million and $12.6 million, respectively. Gains on sales of
available-for-sale securities were $0.1 million in the third quarter of 1999,
totaling on a year-to-date basis to a net gain of $0.4 million.
There were no other significant non-recurring non-interest income
items recorded in 1999 or 1998.
19
<PAGE> 20
NON-INTEREST INCOME TABLE 3
(In millions)
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------
1999 1998
--------------------------------- -------------------
Sept 30 Jun 30 Mar 31 Dec 31 Sept 30
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 52.3 $ 49.2 $ 46.5 $ 47.0 $ 44.5
Mortgage banking operations 9.2 11.5 15.2 10.7 11.0
Bank card fees 8.0 7.3 7.6 7.4 7.4
Trust fees 7.4 7.5 7.6 7.0 6.9
Other fees 13.3 13.0 12.1 10.3 9.5
Bank owned life insurance 12.4 9.7 9.6 8.8 10.1
Gains on trading securities, net 4.0 4.1 5.3 4.4 4.1
Gains on loans held-for-sale, net 4.5 3.6 4.5 3.3 3.3
Gains (losses) on available-for-sale securities, net 0.1 (0.3) 0.5 1.5 (0.4)
Other 2.2 1.4 2.2 4.8 3.0
-------- -------- -------- -------- -------
Total $ 113.4 $ 107.0 $ 111.1 $ 105.2 $ 99.4
======== ======== ======== ======== =======
</TABLE>
NON-INTEREST EXPENSE.
Total non-interest expense increased 9.3% to $258.8 million in the
third quarter of 1999 as compared to the same period in 1998. On a year-to-date
basis, the increase was 11.6% over the comparable 1998 period, reflecting the
overall growth the Company has experienced this year. Salaries and employee
benefits expense is the largest component of non-interest expense, accounting
for $136.5 million or 52.8% of all non-interest expense for the quarter ended
September 30, 1999 and $404.5 or 53.9% for the nine months of 1999. The
September 30, 1999 quarter over September 30, 1998 quarter increase in salary
and employee benefits expense was $8.3 million or 6.5%, related mainly to annual
merit increases. Occupancy and equipment expenses were also up in the third
quarter and first nine months of 1999. Both of these items are affected by the
number of banking offices which increased from the September 30, 1998 level of
611 to 618 at September 30, 1999. The efficiency ratio, a measure of
non-interest expense to net interest income plus non-interest income, was
54.75% for the three month period ended September 30, 1999, an improvement from
the year ago ratio of 59.39%. On a year-to-date basis, the efficiency ratio was
55.53% in 1999, compared to 58.73% in 1998. The Company has continued to place
emphasis on controlling expenses across the board. In particular, the number of
full-time equivalent employees increased only 1.8% from September 30, 1998 to
September 30, 1999, while non-interest income has increased at a much greater
rate.
20
<PAGE> 21
NON-INTEREST EXPENSE TABLE 4
(In millions)
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------
1999 1998
--------------------------------- -------------------
Sept 30 Jun 30 Mar 31 Dec 31 Sept 30
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 136.5 $ 133.7 $ 134.2 $ 129.5 $ 128.2
Net occupancy 20.9 19.9 19.6 19.6 19.2
Equipment 17.8 16.5 15.5 17.1 15.5
Professional services 17.0 17.7 15.1 14.7 15.0
Communications 12.7 13.1 12.2 12.3 12.4
Business development 7.4 7.7 7.6 4.6 8.6
Supplies 6.2 5.9 6.3 7.3 7.1
Other 40.3 34.4 32.1 37.1 30.8
-------- -------- -------- -------- -------
Total $ 258.8 $ 248.9 $ 242.6 $ 242.2 $ 236.8
======== ======== ======== ======== =======
</TABLE>
YEAR 2000
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 has required modification of portions of the Company's
software so that its computer systems will properly recognize dates beyond
December 31, 1999. The Company believes that with the upgrades or modifications
to existing software and conversions to new software, the impact of the Year
2000 issue can be mitigated.
The Company established a Year 2000 Program Office in 1996 staffed by
six full-time employees and headed by a member of senior management. In
addition, there are 20 full-time equivalent employees from within the Company
and 5 full-time equivalent employees from outside sources working on the
project. SouthTrust also has a related management committee dedicated to Year
2000 issues. The Program Office has helped to establish and actively
participates in several peer groups that work together on the Year 2000 issue
and its resolution. The Year 2000 Program Office reports on the status of year
2000 readiness to the SouthTrust Corporation and SouthTrust Bank Boards of
Directors quarterly.
SouthTrust has established a four-phase methodology for use in
assessing the project's state of readiness. The first phase is Awareness. In
this phase both upper and executive management are made aware of the issues and
executive sponsorship is obtained. The second phase is Assessment and
Inventory, during which the extent of problems is assessed and inventory is
taken of systems and applications. The third phase, Remediation, includes
correcting of the code and unit testing of those corrections. The fourth phase
is Certification Testing and Implementation.
The majority of the Year 2000 issues facing the Company are
information technology ("IT") in nature. All IT systems, which include
mainframe and midrange computer systems, are complete in the four phases. All
of the Company's computerized systems that process checking accounts, savings
accounts, CDS, IRAs, payrolls, direct deposits, debit cards, credit cards,
ATMs, installment
21
<PAGE> 22
loans, commercial loans, and general ledger are ready for the Year 2000 and
have been in daily use since December 31, 1998. Non-IT systems, which include
embedded technology such as micro controllers, have also been completed.
SouthTrust's overall readiness testing plan calls for three complete parallels
of the century rollover. These three tests were completed on all mainframe
systems as of November 15, 1999.
The Company has established an extensive contingency plan for the
period of time that the Company is going through the century change and is
exposed to the Year 2000 issue. This plan is designed to address the most
likely risks facing the Company during that period. Some of these risks include
application system failures, power outages, security systems, and environmental
systems. As part of the contingency plan, the Company has completed a business
impact analysis for all of its core business units and has tested the
contingency plan related to each unit.
The Company relies on several third party service providers who are
also affected by the Year 2000 issue. The Company has worked closely with these
providers to monitor, to the extent possible, the progress of their Year 2000
efforts. The Program Office has interviewed or conducted on-site visits with
most of its critical service providers and in many cases has obtained written
or verbal verification of their status. Although the Company has obtained and
continues to obtain these verifications, there can be no assurance that the
potential impact of a major interruption or failure in the services provided by
these companies would not have a material adverse effect on the Company's
financial condition or results of operations.
The total Year 2000 project cost is expected to total approximately
$15.0 million. For the three months and nine months ended September 30, 1999,
the Company has expensed $1.0 million and $2.6 million, respectively. For the
years ended December 31, 1998 and 1997, the Company expensed $6.2 million and
$5.8 million, respectively.
There were no other significant non-recurring non-interest expense
items recorded in 1999 or 1998.
INCOME TAX EXPENSE.
Income tax expense for the third quarter of 1999 was $54.5 million for
an effective tax rate of 32.6% compared to $42.7 million or an effective rate
of 31.1% in the third quarter of 1998. For the nine months ended September 30,
1999, income tax expense was $158.0 million for an effective tax rate of 32.6%
compared to tax expense of $132.7 million and an effective rate of 32.9% during
the first nine months of 1998. The statutory federal income tax rate was 35% in
1999 and 1998.
22
<PAGE> 23
LOANS.
Loans, net of unearned income at September 30, 1999 were $30,614.0
million, an increase of $3,296.5 million or 12.1% over the December 31, 1998
level. Of the total loan increase, $397.7 million was obtained in acquisitions
of other financial institutions consummated during the first nine months of
1999. Internal growth accounted for the remaining $2,898.8 million of the
increase.
The Company has participated in loan sales in the secondary market,
which allow the Company to actively manage its loan portfolio. Specifically,
these sales allow the Company to manage credit concentrations, while continuing
to extend credit to customers. Loans sold, consisting mainly of 1-4 family
mortgages, amounted to approximately $1,664.4 million during the nine month
period ended September 30, 1999.
LOAN PORTFOLIO TABLE 5
(In millions)
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------------------------------
1999 1998
------------------------------------------- ---------------------------
Sept 30 Jun 30 Mar 31 Dec 31 Sept 30
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 10,734.5 $ 10,222.4 $ 10,102.5 $ 9,760.4 $ 8,829.5
Real estate construction 4,270.5 4,006.6 3,744.3 3,526.4 3,379.1
Commercial real estate mortgage 5,560.8 5,507.0 5,157.5 4,900.2 4,407.2
Residential real estate mortgage 6,716.7 6,359.4 6,279.0 6,243.7 6,116.6
Loans to individuals 3,591.8 3,316.8 3,194.2 3,095.9 3,106.9
----------- ----------- ----------- ----------- -----------
30,874.3 29,412.2 28,477.5 27,526.6 25,839.3
Unearned income (260.3) (233.8) (215.7) (209.1) (182.0)
----------- ----------- ----------- ----------- -----------
Loans, net of unearned income 30,614.0 29,178.4 28,261.8 27,317.5 25,657.3
Allowance for loan losses (434.8) (405.5) (394.1) (377.5) (364.4)
----------- ----------- ----------- ----------- -----------
Net loans $ 30,179.2 $ 28,772.9 $ 27,867.7 $ 26,940.0 $ 25,292.9
=========== =========== =========== =========== ===========
</TABLE>
23
<PAGE> 24
ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio. The allowance is based upon management's
estimated range of those losses. Actual losses for these loans can vary
significantly from this estimate. The Company's subsidiary bank is regulated by
the Office of the Comptroller of the Currency ("OCC"). Management also
considers recommendations from the OCC in concluding on the adequacy of the
allowance for loan losses. The methodology and assumptions used to calculate
the allowance are continually reviewed as to their appropriateness given the
most recent estimation of probable losses realized and other factors that
influence the estimation process. The model and resulting allowance level are
adjusted accordingly as these factors change. The historical and migration loss
rates described below which are used in determining the allowance also provide
a self-correcting feature to the methodology.
Loans are separated by internal risk ratings into two categories for
assessment of their estimated allowance level needs; Non-problem and Problem.
The allowance for Non-problem loans is calculated by applying historical
Non-problem loss factors to outstanding Non-problem loans within each loan
type. The loss factors represent either the average of the last four years'
losses or, in some cases, the most recent years' loss experience if in
management's judgement that loss rate is more representative of current trends
in a particular loan type. Problem loans include any loans that have an
internal credit review or regulatory rating of less than "good". The allowance
associated with Problem loans is calculated by applying loss factors determined
either through a migration analysis or an average of the last four years' loss
experience, both of which are specific to Problem loans. The migration analysis
is performed periodically and measures losses in relation to the internal risk
ratings assigned to loans. Additionally, certain Problem loans (generally large
commercial credits) are specifically reviewed. This specific review considers
estimates of future cash flows, fair values of collateral and other indicators
of the borrowers' ability to repay the loan.
In addition to the above, the Company considers other risk elements in
establishing its reserve for both Non-problem and Problem loans. These risk
elements are based on management's evaluation of various conditions that affect
inherent losses which are not directly measured by applying the historical or
migration loss rates. Also, in most cases, the impact of these risk elements
has not yet been reflected in the level of non-performing loans or in the
internal risk grading process. Evaluation of these elements involves a higher
degree of uncertainty since they are not directly associated with specific
problem credits. These elements are discussed below.
The Company's loan portfolio has experienced recent growth rates in
excess of our peers. While the Company strives to use prudent underwriting and
credit management standards, such growth and related underwriting risks could
lead to increased losses. Additionally, loans acquired through the various
business combinations carry additional credit risk due to uncertainties
associated with the underwriting process and deviations from the Company's
credit underwriting standards at the acquired institutions. The Company is also
subject to risk associated with certain industry concentrations. Commercial
real estate mortgage loans represent the Company's largest concentration and
although this segment of the portfolio has performed well in recent years,
management considers the associated risk within the commercial real estate
portfolio as part of the
24
<PAGE> 25
other risk elements. The Company has established a sound credit policy which
guides the manner in which loans are underwritten. Exceptions from this policy
may be necessary to facilitate the lending process. The associated exception
risk has also been considered in computing the allowance.
The allowance allocated to Problem loans at September 30, 1999 totaled
$119.6 million and represented an allowance percentage of 5.08% of Problem
loans. The allowance allocated to Non-problem loans totaled $315.2 million or
1.12% of Non-problem loans. The allocation of the allowance on Non-problem
loans is based on estimates of losses inherent in this portfolio which have not
yet been specifically identified in the Company's problem loan rating process.
Based on the methodology outlined above, the total allowance for loan
losses was $434.8 at September 30, 1999 and $377.5 at December 31, 1998. As a
percentage of outstanding loans, the allowance for loan losses was 1.42%,
compared to the December 31, 1998 level of 1.38%. Net charge-offs during the
three months ended September 30, 1999 totaled $21.7 million or .29% of average
net loans on an annualized basis. For the nine months ended September 30, 1999,
net charge-offs totaled $57.5 million or .27% of average net loans on an
annualized basis.
ALLOWANCE FOR LOAN LOSSES TABLE 6
(In thousands)
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------------------------------------
1999 1998
--------------------------------------- ----------------------
Sept 30 Jun 30 Mar 31 Dec 31 Sept 30
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance beginning of quarter $ 405,513 $ 394,135 $ 377,525 $ 364,362 $ 354,076
Loans charged-off:
Commercial, financial and agricultural 13,605 7,870 5,176 3,659 4,020
Real estate construction 59 331 30 13 0
Commercial real estate mortgage 78 90 100 671 49
Residential real estate mortgage 804 961 637 1,242 886
Loans to individuals 10,591 14,714 13,306 16,661 11,066
--------- --------- --------- --------- ---------
Total charge-offs 25,137 23,966 19,249 22,246 16,021
========= ========= ========= ========= =========
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 999 1,297 1,390 1,543 1,090
Real estate construction 0 0 0 0 0
Commercial real estate mortgage 3 6 3 16 15
Residential real estate mortgage 70 222 63 20 68
Loans to individuals 2,414 2,047 2,354 1,881 2,118
--------- --------- --------- --------- ---------
Total recoveries 3,486 3,572 3,810 3,460 3,291
========= ========= ========= ========= =========
Net loans charged-off 21,651 20,394 15,439 18,786 12,730
Additions to allowance charged to expense 42,757 31,776 30,362 29,420 22,040
Subsidiaries' allowance at date of purchase 8,152 (4) 1,687 2,529 976
--------- --------- --------- --------- ---------
Balance at end of quarter $ 434,771 $ 405,513 $ 394,135 $ 377,525 $ 364,362
========= ========= ========= ========= =========
(In millions)
Loans outstanding at quarter end,
net of unearned income $30,614.0 $29,178.4 $28,261.8 $27,317.5 $25,657.3
Average loans outstanding,
net of unearned income $29,823.5 $28,532.3 $27,762.0 $26,346.5 $25,001.3
Ratios:
End-of-quarter allowance to net loans outstanding 1.42% 1.39% 1.39% 1.38% 1.42%
Net loans charged off to net average loans 0.29 0.29 0.23 0.28 0.20
Provision for loan losses to net charge-offs 197.48 155.81 196.66 156.61 173.13
Provision for loan losses to net average loans 0.57 0.45 0.44 0.44 0.35
</TABLE>
25
<PAGE> 26
NON-PERFORMING ASSETS.
Non-performing assets, which include non-accrual and restructured
loans, other real estate owned and other repossessed assets were $159.3 million
at September 30, 1999, a decrease of $4.6 million from December 31, 1998. The
ratio of non-performing assets to total loans plus other non-performing assets
was .52 % at September 30, 1999, while the allowance for loan losses to
non-performing loans ratio was 400.20% for the same period.
In addition to loans on non-performing status at September 30, 1999,
the Company had loans of approximately $46.8 million for which management had
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, 1998, potential problem loans totaled $59.7
million.
NON-PERFORMING ASSETS TABLE 7
(Dollars in millions)
<TABLE>
<CAPTION>
Quarters Ended
------------------------------------------------------------------
1999 1998
-------------------------------------- ----------------------
Sept 30 Jun 30 Mar 31 Dec 31 Sept 30
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Non-performing loans
Commercial, financial, and agricultural $ 69.7 $ 67.6 $ 72.5 $ 49.6 $ 47.1
Real estate construction 4.2 7.0 9.8 7.5 7.2
Commercial real estate mortgage 10.1 10.6 23.9 13.8 11.4
Residential real estate mortgage 21.5 24.9 21.5 23.5 27.4
Loans to individuals 3.1 3.4 3.2 3.9 4.1
-------- --------- -------- -------- --------
Total non-performing loans 108.6 113.5 130.9 98.3 97.2
-------- --------- -------- -------- --------
Other real estate owned 39.6 42.8 44.6 46.5 47.7
Other repossessed assets 11.1 12.9 17.4 19.1 22.9
-------- --------- -------- -------- --------
Total non-performing assets $ 159.3 $ 169.2 $ 192.9 $ 163.9 $ 167.8
======== ========= ======== ======== ========
Accruing loans past due 90 days or more $ 72.5 $ 76.6 $ 70.3 $ 80.9 $ 71.2
Ratios:
Non-performing loans to total loans 0.35% 0.39% 0.46% 0.36% 0.38%
Non-performing assets to total loans
plus other non-performing assets 0.52 0.58 0.68 0.60 0.65
Non-performing assets and accruing loans
90 days or more past due to total loans
plus other non-performing assets 0.76 0.84 0.93 0.89 0.93
Allowance for loan losses to non-performing loans 400.20 357.43 300.99 383.98 375.05
</TABLE>
26
<PAGE> 27
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 $1,313.1 million since December 31, 1998.
The majority of the increase is in U.S. government agencies. The increase
includes $132.1 million in securities that were obtained through acquisitions
of other financial institutions during the first nine months of 1999.
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. 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.
27
<PAGE> 28
AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES TABLE 8
<TABLE>
<CAPTION>
Available-for-Sale Securities
----------------------------------------------------------------------
September 30, 1999 December 31, 1998
------------------------------ ------------------------------
Amortized Fair Amortized Fair
(DOLLARS IN MILLIONS) Cost Value Cost Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 49.1 $ 49.2 $ 170.2 $ 171.0
U.S. Government agency securities 2,356.1 2,275.3 1,402.9 1,404.8
Collateralized mortgage obligations
and mortgage backed securities 2,066.9 2,056.2 1,732.3 1,735.2
Obligations of states and political
subdivisions 289.7 275.9 249.2 253.6
Other securities 451.1 446.1 239.4 238.1
---------- ---------- ---------- ----------
Total $ 5,212.9 $ 5,102.7 $ 3,794.0 $ 3,802.7
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity Securities
----------------------------------------------------------------------
September 30, 1999 December 31, 1998
------------------------------ ------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 9.3 $ 9.4 $ 3.9 $ 4.0
U.S. Government agency securities 2,489.7 2,413.8 2,129.2 2,138.6
Collateralized mortgage obligations
and mortgage backed securities 292.5 293.4 374.4 384.2
Obligations of states and political
subdivisions 93.2 96.8 124.9 135.9
Other securities 116.8 113.0 356.0 358.5
---------- ---------- ---------- ----------
Total $ 3,001.5 $ 2,926.4 $ 2,988.4 $ 3,021.2
========== ========== ========== ==========
</TABLE>
28
<PAGE> 29
SHORT-TERM INVESTMENTS.
Short-term investments at September 30, 1999 totaled $401.7 million,
reflecting a decrease of $455.9 million from the December 31, 1998 level of
$857.6 million. At September 30, 1999, short-term investments consisted of
$86.9 million in federal funds sold and securities purchased under resale
agreements, $2.7 million in time deposits with other banks, $232.9 million in
mortgage loans in the process of being securitized and sold to third party
investors and $79.2 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 September 30, 1999 were $27,497.2 million, up $2,657.3 million or 10.7% from
the December 31, 1998 level of $24,839.9 million. Of the total increase in
deposits, $652.5 million were obtained in acquisitions of other financial
institutions. At September 30, 1999, total deposits included interest-bearing
deposits of $24,594.6 million and other deposits of $2,902.6 million. Core
deposits, defined as demand deposits and time deposits less than $100,000,
totaled $20,513.5 million or 74.6% of total deposits at September 30, 1999.
This compares to core deposits of $21,320.0 million or 85.8% at December 31,
1998. The decrease is due to higher growth in wholesale funding when compared
to growth in core deposits.
Short-term borrowings at September 30, 1999 were $6,815.8 million and
included federal funds purchased of $3,748.0 million, securities sold under
agreements to repurchase of $1,790.1 million and other borrowed funds of
$1,277.7 million. At September 30, 1999, total short-term borrowings were 16.0%
of total liabilities and stockholders' equity. This compares to total
short-term borrowings of $6,113.0 million or 16.0% of total liabilities and
stockholders' equity at December 31, 1998.
29
<PAGE> 30
FHLB advances totaled $3,480.3 million at September 30, 1999. The
current quarter end balance is up $700.0 million from the level outstanding at
December 31, 1998. 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 management strategy.
At September 30, 1999, total long-term debt was $1,125.5 million,
representing a net decrease of $29.4 million from the December 31, 1998 level
of $1,154.9 million. This decrease included the maturity of $75 million of
9.95% Subordinated Capital Notes, net of an issuance of $50 million of 8.00%
Subordinated Notes, due in 2014 and callable in 2003.
CAPITAL.
The Company continually monitors current and projected capital
adequacy positions of both the Company and its subsidiary bank. 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 September 30, 1999 Tier 1 and Total capital to risk weighted
assets were 6.49% and 10.28%, respectively, compared to the December 31, 1998
ratios of 6.58% and 10.60%.
30
<PAGE> 31
CAPITAL RATIOS TABLE 9
(Dollars in Millions)
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------- -----------------------------
Sept 30 Jun 30 Mar 31 Dec 31 Sept 30
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Tier 1 capital:
Stockholders' equity $ 2,885.5 $ 2,829.5 $ 2,797.4 $ 2,738.3 $ 2,660.1
Intangible assets other than
servicing rights (593.9) (544.5) (555.1) (549.7) (557.0)
Unrealized (gain)/loss on
available-for-sale securities 69.3 50.9 6.1 (5.5) (17.0)
--------- ------------ ------------ ------------ ----------
Total Tier 1 capital 2,360.9 2,335.9 2,248.4 2,183.1 2,086.1
--------- ------------ ------------ ------------ ----------
Tier 2 capital:
Allowable reserve for loan losses 434.8 405.5 394.1 377.5 364.4
Allowable long-term debt 945.0 895.0 955.0 955.0 955.0
--------- ------------ ------------ ------------ ----------
Total Tier 2 capital 1,379.8 1,300.5 1,349.1 1,332.5 1,319.4
--------- ------------ ------------ ------------ ----------
Total risk-based capital $ 3,740.7 $ 3,636.4 $ 3,597.5 $ 3,515.6 $ 3,405.5
========= ============ ============ ============ ============
Risk-weighted assets $36,382.4 $ 34,726.8 $ 33,722.3 $ 33,157.7 $ 30,785.1
Risk-based ratios:
Tier 1 capital 6.49% 6.73% 6.67% 6.58% 6.78%
Total capital 10.28 10.47 10.67 10.60 11.06
Leverage ratio 5.84 6.08 5.99 6.10 6.08
</TABLE>
Commitments.
The Company's subsidiary bank had standby letters of credit
outstanding of approximately $850.5 million at September 30, 1999 and $724.7
million at December 31, 1998.
The Company's subsidiary bank had outstanding commitments to extend
credit of approximately $11,826.2 million at September 30, 1999 and $10,897.0
million at December 31, 1998. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The Company's mortgage banking subsidiary had outstanding commitments
to sell mortgage loans and mortgage-backed securities of approximately $162.0
million at September 30, 1999 and $400.2 million at December 31, 1998.
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.
31
<PAGE> 32
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, 1998. 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 short-term borrowings, 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.
INTEREST RATE SWAPS TABLE 10
September 30, 1999
(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 $ 600.0 $14.2 56.9 5.16% 6.95%
Loss position 800.0 (6.5) 82.6 5.12 6.50
-------- ----- ---- ---- ----
Total $1,400.0 $ 7.7 70.1 5.14% 6.72%
======== ===== ==== ==== ====
</TABLE>
In addition, the Company uses forward contracts to hedge commercial
mortgage loans held for sale. Changes in fair value of these forward contracts
are not included in the results of operations until the underlying instrument
is sold. There were no forward contracts outstanding at September 30, 1999.
32
<PAGE> 33
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 and deposit-taking activities, including suits filed as
class actions. 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.
33
<PAGE> 34
PART II-OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Pursuant 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 2000 annual
meeting of stockholders does not notify the Company of such proposal on or
prior to January 29, 2000, then the Board of Directors' 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 2000 proxy statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
Exhibits
* 3(a)- Composite Restated Certificate of Incorporation of SouthTrust
Corporation which was filed as Exhibit 3 to SouthTrust Corporation's
Registration Statement on Form S-3 (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, and ELEVENTH of the
Restated Certificate of Incorporation of SouthTrust Corporation
(included at Exhibit 3).
* 4(b)- Certificate of Designation on Preferences and
Rights of Series 1999 Junior Participating Preferred
Stock, adopted December 16, 1998, which was filed as
Exhibit A to Exhibit 1 to SouthTrust Corporation's
Registration Statement on Form 8-A
(File No.1-3613).
* 4(c)- Stockholders' Rights Agreement, dated as of
January 12, 1999 and effective as of the close of
business on February 22, 1999, between SouthTrust
Corporation and Chase Mellon Shareholder Services,
L.L.C., 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).
</TABLE>
34
<PAGE> 35
<TABLE>
<S> <C>
* 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)- 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(g)(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).
* 4(g)(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).
27- Financial Data Schedule (for SEC use only)
</TABLE>
* Incorporated herein by reference
(b) Reports on Form 8-K filed in the third quarter of 1999: None.
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: November 12, 1999 /s/ WALLACE D. MALONE, JR.
---------------------------------- -------------------------------
Wallace D. Malone, Jr.
Chairman and Chief
Executive Officer
Date: November 12, 1999 /s/ ALTON E. YOTHER
---------------------------------- -------------------------------
Alton E. Yother
Secretary, Treasurer and
Controller
35
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOUTHTRUST CORPORATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,074,672
<INT-BEARING-DEPOSITS> 2,652
<FED-FUNDS-SOLD> 86,891
<TRADING-ASSETS> 312,146
<INVESTMENTS-HELD-FOR-SALE> 5,102,715
<INVESTMENTS-CARRYING> 3,001,531
<INVESTMENTS-MARKET> 2,926,445
<LOANS> 30,613,993
<ALLOWANCE> 434,771
<TOTAL-ASSETS> 42,474,243
<DEPOSITS> 27,497,179
<SHORT-TERM> 6,815,849
<LIABILITIES-OTHER> 659,204
<LONG-TERM> 1,125,511
0
0
<COMMON> 422,830
<OTHER-SE> 2,462,711
<TOTAL-LIABILITIES-AND-EQUITY> 42,474,243
<INTEREST-LOAN> 1,740,759
<INTEREST-INVEST> 375,419
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,116,178
<INTEREST-DEPOSIT> 694,508
<INTEREST-EXPENSE> 1,107,137
<INTEREST-INCOME-NET> 1,009,041
<LOAN-LOSSES> 104,895
<SECURITIES-GAINS> 386
<EXPENSE-OTHER> 750,341
<INCOME-PRETAX> 485,306
<INCOME-PRE-EXTRAORDINARY> 327,267
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 327,267
<EPS-BASIC> 1.95
<EPS-DILUTED> 1.94
<YIELD-ACTUAL> 7.83
<LOANS-NON> 108,639
<LOANS-PAST> 72,504
<LOANS-TROUBLED> 566
<LOANS-PROBLEM> 46,795
<ALLOWANCE-OPEN> 377,525
<CHARGE-OFFS> 68,352
<RECOVERIES> 10,868
<ALLOWANCE-CLOSE> 434,771
<ALLOWANCE-DOMESTIC> 434,771
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
