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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2002 Commission file number 1-7476
-----------------
AmSouth Bancorporation
(Exact Name of registrant as specified in its charter)
Delaware 63-0591257
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
Incorporation or
Organization)
AmSouth Center
1900 Fifth Avenue North
Birmingham, Alabama 35203
(Address of principal (Zip Code)
executive offices)
(205) 320-7151
(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 preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of April 22, 2002, AmSouth Bancorporation had 361,634,000 shares of
common stock outstanding.
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AMSOUTH BANCORPORATION
FORM 10-Q
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)............................................
Consolidated Statement of Condition--March 31, 2002, December 31, 2001, and
March 31, 2001............................................................ 3
Consolidated Statement of Earnings--Three months ended March 31, 2002 and
2001...................................................................... 4
Consolidated Statement of Shareholders' Equity--Three months ended March 31,
2002...................................................................... 5
Consolidated Statement of Cash Flows--Three months ended March 31, 2002 and
2001...................................................................... 6
Notes to Consolidated Financial Statements.................................. 7
Independent Accountants' Review Report...................................... 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Rate Risk............. 24
Part II. Other Information
Item 1. Legal Proceedings........................................................... 24
Item 6. Exhibits and Reports on Form 8-K............................................ 24
Signatures.................................................................................... 25
Exhibit Index................................................................................. 26
Forward-Looking Statements. Statements made in this report that are not
purely historical are forward-looking statements (as defined in the Private
Securities Litigation Reform Act of 1995), including any statements regarding
descriptions of management's plans, objectives or goals for future operations,
products or services, and forecasts of its revenues, earnings or other measures
of performance. Forward-looking statements are based on current management
expectations and, by their nature, are subject to risks and uncertainties. A
number of factors--many of which are beyond AmSouth's control--could cause
actual conditions, events or results to differ significantly from those
described in the forward-looking statements. Some of these factors which could
cause results to differ materially from current management expectations
include, but are not limited to: the execution of AmSouth's strategic
initiatives; legislation; general economic conditions, especially in the
Southeast; changes in interest rates, yield curves and interest rate spread
relationships; deposit flows; the cost of funds; cost of federal deposit
insurance premiums; demand for loan products; demand for financial services;
competition; changes in the quality or composition of AmSouth's loan and
investment portfolios including capital market inefficiencies that may affect
the marketability and valuation of available-for-sale securities; changes in
accounting and tax principles, policies or guidelines; other economic,
competitive, governmental, and regulatory factors affecting AmSouth's
operations, products, services, and prices; and the outcome of litigation,
which is inherently uncertain and depends on the findings of judges and juries.
The terrorist attacks of September 11, 2001 have had a negative impact on the
economy. It is impossible to predict what future effect these events or any
United States response may have. To the extent there is a prolonged negative
impact on the economy, the effects may include adverse changes in customers'
borrowing, investing or spending patterns; market disruptions; adverse effects
on the performance of the United States and foreign equity markets; currency
fluctuations; exchange controls; restriction of asset growth; negative effects
on credit quality; and other effects that could adversely impact the
performance, earnings, and revenue growth of the financial services industry,
including AmSouth. Forward-looking statements speak only as of the date they
are made. AmSouth does not undertake a duty to update forward-looking
statements to reflect circumstances or events that occur after the date the
forward-looking statements are made.
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
AMSOUTH BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CONDITION
(Unaudited)
March 31 December 31 March 31
2002 2001 2001
----------- ----------- -----------
(In thousands)
ASSETS
Cash and due from banks............................................................. $ 956,226 $ 1,441,561 $ 1,143,373
Federal funds sold and securities purchased under agreements to resell.............. 447,500 400,000 1,651,419
Trading securities.................................................................. 20,083 12,979 15,940
Available-for-sale securities....................................................... 4,625,994 4,829,512 4,425,716
Held-to-maturity securities (market value of $4,132,849, $4,071,008 and $4,686,230,
respectively)...................................................................... 4,089,645 4,002,474 4,595,735
Loans held for sale................................................................. 223,999 291,782 209,564
Loans............................................................................... 26,136,219 25,852,221 24,981,703
Less: Allowance for loan losses..................................................... 367,819 363,607 380,646
Unearned income............................................................... 723,810 727,728 453,759
----------- ----------- -----------
Net loans.................................................................. 25,044,590 24,760,886 24,147,298
Other interest-earning assets....................................................... 33,567 40,458 34,623
Premises and equipment, net......................................................... 752,178 729,383 635,888
Accrued interest receivable and other assets........................................ 2,029,725 2,091,379 1,966,255
----------- ----------- -----------
$38,223,507 $38,600,414 $38,825,811
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits and interest-bearing liabilities:
Deposits:
Noninterest-bearing demand.................................................... $ 4,850,399 $ 5,280,621 $ 4,649,832
Interest-bearing demand....................................................... 10,620,135 10,518,922 9,895,703
Savings....................................................................... 1,310,931 1,229,871 1,231,042
Time.......................................................................... 6,510,539 6,800,056 7,801,386
Foreign time.................................................................. 332,581 309,641 269,584
Certificates of deposit of $100,000 or more................................... 2,048,207 2,027,906 2,398,499
----------- ----------- -----------
Total deposits............................................................. 25,672,792 26,167,017 26,246,046
Federal funds purchased and securities sold under agreements to repurchase....... 2,107,844 2,080,296 2,235,688
Other borrowed funds............................................................. 75,227 79,454 233,963
Long-term Federal Home Loan Bank advances........................................ 5,086,796 5,093,834 5,189,381
Other long-term debt............................................................. 1,001,602 1,008,421 1,003,580
----------- ----------- -----------
Total deposits and interest-bearing liabilities............................ 33,944,261 34,429,022 34,908,658
Accrued expenses and other liabilities.............................................. 1,291,761 1,216,293 1,033,332
----------- ----------- -----------
Total liabilities.......................................................... 35,236,022 35,645,315 35,941,990
----------- ----------- -----------
Shareholders' equity:
Preferred stock--no par value:
Authorized--2,000,000 shares; Issued and outstanding--none.................... -0- -0- -0-
Common stock--par value $1 a share:
Authorized--750,000,000 shares; Issued--416,925,000, 416,931,000 and
416,940,000 shares, respectively............................................. 416,925 416,931 416,940
Capital surplus.................................................................. 699,831 699,863 692,032
Retained earnings................................................................ 2,737,021 2,677,933 2,509,653
Cost of common stock in treasury--54,778,000, 53,896,000 and 45,809,000 shares,
respectively.................................................................... (868,195) (848,005) (697,930)
Deferred compensation on restricted stock........................................ (17,295) (16,624) (17,494)
Accumulated other comprehensive income/(loss).................................... 19,198 25,001 (19,380)
----------- ----------- -----------
Total shareholders' equity................................................. 2,987,485 2,955,099 2,883,821
----------- ----------- -----------
$38,223,507 $38,600,414 $38,825,811
=========== =========== ===========
See notes to consolidated financial statements.
3
AMSOUTH BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
Three Months
Ended March 31
-----------------
2002 2001
-------- --------
(In thousands
except
per share data)
INTEREST INCOME
Loans..................................................................... $424,995 $525,454
Available-for-sale securities............................................. 85,308 72,422
Held-to-maturity securities............................................... 61,503 74,826
Trading securities........................................................ 67 8
Loans held for sale....................................................... 4,165 1,963
Federal funds sold and securities purchased under agreements to resell.... 745 24,445
Other interest-earning assets............................................. 310 699
-------- --------
Total interest income............................................... 577,093 699,817
-------- --------
INTEREST EXPENSE
Interest-bearing demand deposits.......................................... 28,921 83,607
Savings deposits.......................................................... 1,818 4,909
Time deposits............................................................. 64,286 116,585
Foreign time deposits..................................................... 1,102 3,797
Certificates of deposit of $100,000 or more............................... 18,637 38,467
Federal funds purchased and securities sold under agreements to repurchase 6,229 27,617
Other borrowed funds...................................................... 979 4,508
Long-term Federal Home Loan Bank advances................................. 67,144 74,355
Other long-term debt...................................................... 9,783 16,129
-------- --------
Total interest expense.............................................. 198,899 369,974
-------- --------
NET INTEREST INCOME....................................................... 378,194 329,843
Provision for loan losses................................................. 56,100 38,200
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES....................... 322,094 291,643
-------- --------
NONINTEREST REVENUES
Service charges on deposit accounts....................................... 65,130 59,871
Trust income.............................................................. 27,869 28,879
Consumer investment services income....................................... 20,911 23,672
Bank owned life insurance policies........................................ 16,637 14,081
Interchange income........................................................ 13,875 13,046
Mortgage income........................................................... 5,876 4,899
Portfolio income.......................................................... 3,567 2,943
Other noninterest revenues................................................ 23,798 34,910
-------- --------
Total noninterest revenues.......................................... 177,663 182,301
-------- --------
NONINTEREST EXPENSES
Salaries and employee benefits............................................ 156,803 141,732
Equipment expense......................................................... 29,429 30,296
Net occupancy expense..................................................... 28,533 27,813
Postage and office supplies............................................... 12,954 12,909
Communications expense.................................................... 8,902 10,278
Amortization of intangibles............................................... 1,362 8,517
Marketing expense......................................................... 9,046 8,507
Other noninterest expenses................................................ 46,638 48,015
-------- --------
Total noninterest expenses.......................................... 293,667 288,067
-------- --------
INCOME BEFORE INCOME TAXES................................................ 206,090 185,877
Income taxes.............................................................. 60,520 59,666
-------- --------
NET INCOME.......................................................... $145,570 $126,211
======== ========
Average common shares outstanding......................................... 361,656 372,246
Earnings per common share................................................. $ .40 $ .34
Diluted average common shares outstanding................................. 365,919 374,940
Diluted earnings per common share......................................... $ .40 $ .34
See notes to consolidated financial statements.
4
AMSOUTH BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Deferred
Compensation
Common Capital Retained Treasury on Restricted
Stock Surplus Earnings Stock Stock
-------- -------- ---------- --------- -------------
(In thousands)
BALANCE AT JANUARY 1, 2002.................................... $416,931 $699,863 $2,677,933 $(848,005) $(16,624)
Comprehensive income:
Net income................................................. -0- -0- 145,570 -0- -0-
Other comprehensive income, net of tax:
Change in unrealized gains on derivative instruments
(net of $2,472 tax benefit)............................ -0- -0- -0- -0- -0-
Changes in unrealized gains and losses on
available-for-sale securities (net of $8,168
tax benefit)........................................... -0- -0- -0- -0- -0-
Comprehensive income
Cash dividends declared....................................... -0- -0- (80,133) -0- -0-
Common stock transactions:....................................
Purchase of common stock................................... -0- -0- -0- (44,147) -0-
Employee stock plans....................................... (6) (81) (6,349) 21,405 (671)
Dividend reinvestment plan................................. -0- 49 -0- 2,552 -0-
-------- -------- ---------- --------- --------
BALANCE AT MARCH 31, 2002..................................... $416,925 $699,831 $2,737,021 $(868,195) $(17,295)
======== ======== ========== ========= ========
Disclosure of reclassification amount:
Unrealized holding gains on available-for-sale securities
arising during the period....................................
Less: Reclassification adjustment for gains realized in net
income.......................................................
Net changes in unrealized gains on available- for-sale
securities, net of tax.......................................
Unrealized holding gains on derivatives arising during the
period.......................................................
Less: Reclassification adjustment for gains realized in net
income.......................................................
Net changes in unrealized gains on derivatives, net of tax....
Accumulated
Other
Comprehensive
Income/(Loss) Total
------------- ----------
BALANCE AT JANUARY 1, 2002.................................... $25,001 $2,955,099
Comprehensive income:
Net income................................................. -0- 145,570
Other comprehensive income, net of tax:
Change in unrealized gains on derivative instruments
(net of $2,472 tax benefit)............................ (4,591) (4,591)
Changes in unrealized gains and losses on
available-for-sale securities (net of $8,168
tax benefit)........................................... (1,212) (1,212)
----------
Comprehensive income 139,767
Cash dividends declared....................................... -0- (80,133)
Common stock transactions:....................................
Purchase of common stock................................... -0- (44,147)
Employee stock plans....................................... -0- 14,298
Dividend reinvestment plan................................. -0- 2,601
------- ----------
BALANCE AT MARCH 31, 2002..................................... $19,198 $2,987,485
======= ==========
Disclosure of reclassification amount:
Unrealized holding gains on available-for-sale securities
arising during the period.................................... $ 471
Less: Reclassification adjustment for gains realized in net
income....................................................... 1,683
-------
Net changes in unrealized gains on available- for-sale
securities, net of tax....................................... $(1,212)
=======
Unrealized holding gains on derivatives arising during the
period....................................................... $ 448
Less: Reclassification adjustment for gains realized in net
income....................................................... 5,039
-------
Net changes in unrealized gains on derivatives, net of tax.... $(4,591)
=======
See notes to consolidated financial statements.
5
AMSOUTH BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
March 31
----------------------
2002 2001
---------- ----------
(In thousands)
OPERATING ACTIVITIES
Net income......................................................................................... $ 145,570 $ 126,211
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses...................................................................... 56,100 38,200
Depreciation and amortization of premises and equipment........................................ 22,310 21,607
Amortization of premiums and discounts on held-to-maturity securities and available-for-sale
securities.................................................................................... (12,807) (916)
Net decrease (increase) in loans held for sale................................................. 66,332 (116,753)
Net increase in trading securities............................................................. (7,068) (5,204)
Net gains on sales of available-for-sale securities............................................ (2,697) (2,488)
Net decrease (increase) in accrued interest receivable and other assets........................ 29,508 (48,977)
Net increase in accrued expenses and other liabilities......................................... 20,405 87,670
Provision for deferred income taxes............................................................ 40,638 50,828
Amortization of intangible assets.............................................................. 1,351 8,506
Other operating activities, net................................................................ 10,648 9,565
---------- ----------
Net cash provided by operating activities................................................... 370,290 168,249
---------- ----------
INVESTING ACTIVITIES
Proceeds from maturities and prepayments of available-for-sale securities.......................... 428,752 158,045
Proceeds from sales of available-for-sale securities............................................... 178,425 100,784
Purchases of available-for-sale securities......................................................... (314,922) (444,197)
Proceeds from maturities, prepayments and calls of held-to-maturity securities..................... 676,176 175,838
Purchases of held-to-maturity securities........................................................... (800,505) (204,683)
Net (increase) decrease in federal funds sold and securities purchased under agreements to resell.. (47,500) 504,246
Net decrease in other interest-earning assets...................................................... 6,891 34,047
Net (increase) decrease in loans................................................................... (358,082) 36,065
Net purchases of premises and equipment............................................................ (45,105) (23,294)
---------- ----------
Net cash (used) provided by investing activities............................................ (275,870) 336,851
---------- ----------
FINANCING ACTIVITIES
Net decrease in deposits........................................................................... (487,404) (398,953)
Net increase (decrease) in federal funds purchased and securities sold under agreements to
repurchase........................................................................................ 27,548 (84,576)
Net decrease in other borrowed funds............................................................... (4,227) (302,885)
Issuance of long-term Federal Home Loan Bank advances and other long-term debt..................... 534 500,000
Payments for maturing long-term debt............................................................... (7,621) (208,927)
Cash dividends paid................................................................................ (80,123) (79,065)
Proceeds from employee stock plans and dividend reinvestment plan.................................. 15,685 9,870
Purchase of common stock........................................................................... (44,147) (73,622)
---------- ----------
Net cash used for financing activities...................................................... (579,755) (638,158)
---------- ----------
Decrease in cash and cash equivalents.............................................................. (485,335) (133,058)
Cash and cash equivalents at beginning of period................................................... 1,441,561 1,276,431
---------- ----------
Cash and cash equivalents at end of period......................................................... $ 956,226 $1,143,373
========== ==========
See notes to consolidated financial statements.
6
AMSOUTH BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months ended March 31, 2002 and 2001
General--The consolidated financial statements conform to accounting
principles generally accepted in the United States. The accompanying interim
financial statements are unaudited; however, in the opinion of management, all
adjustments necessary for the fair presentation of the consolidated financial
statements have been included. All such adjustments are of a normal recurring
nature. Certain amounts in the prior year's financial statements have been
reclassified to conform with the 2002 presentation. These reclassifications had
no effect on net income. The notes included herein should be read in
conjunction with the notes to consolidated financial statements included in
AmSouth Bancorporation's (AmSouth) 2001 annual report on Form 10-K.
Accounting Changes--In July 2001, the FASB issued Statement No. 141,
"Business Combinations" (Statement 141), and Statement No. 142, "Goodwill and
Other Intangible Assets" (Statement 142). Statement 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Statement 141 also specifies the criteria for intangible
assets acquired in a purchase method business combination to be recognized and
reported apart from goodwill. Statement 142 requires companies to no longer
amortize goodwill and intangible assets with indefinite useful lives, but
instead test these assets for impairment at least annually in accordance with
the provisions of Statement 142. Under Statement 142, intangible assets with
definite useful lives continue to be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with the FASB's Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (Statement 144).
AmSouth adopted the provisions of Statement 142 effective January 1, 2002.
As of the date of adoption, AmSouth had unamortized goodwill in the amount of
$288.4 million, and unamortized identifiable intangible assets in the amount of
$18.7 million, all of which were subject to the transition provisions of
Statements 141 and 142. As part of its adoption of Statement 142, AmSouth has
performed a transitional impairment test on its goodwill assets, which
indicated that no impairment charge was required. AmSouth does not currently
have any other indefinite-lived intangible assets recorded in its statement of
financial condition. In addition, no material reclassifications or adjustments
to the useful lives of finite-lived intangible assets were made as a result of
adopting the new guidance. The full impact of adopting Statement 142 is
expected to result in an increase in net income of approximately $29.0 million
or approximately $.08 per share in 2002 as a result of AmSouth no longer having
to amortize goodwill against earnings. At March 31, 2002 and 2001, AmSouth had
$17.3 million and $19.9 million, respectively, in unamortized identifiable
intangible assets substantially all of which were core deposit intangibles.
Total amortization expense associated with these intangible assets in the first
quarter of 2002 and 2001 was $1.4 million and $1.2 million, respectively.
Assuming retroactive adoption of Statement 142, net income for the year ended
December 31, 2001 and the quarter ended March 31, 2001 would have been
$565.3 million and $133.5 million, respectively, and diluted earnings per share
would have been $1.52 and $.36 for the same periods, respectively.
7
The following table sets forth the reconcilement of net income and earnings
per share excluding goodwill amortization for the year ended December 31, 2001
and quarter ended March 31, 2001:
For the Year Ended For the Quarter Ended
December 31, 2001 March 31, 2001
------------------ ---------------------
Net Earnings Net Earnings
Income Per Share Income Per Share
-------- --------- -------- ---------
(In thousands except per share data)
Earnings per common share computation:
Net income/EPS as reported................. $536,346 $1.46 $126,211 $.34
Add back: Goodwill amortization............ 29,385 .08 7,367 .02
Less: Tax on deductible goodwill........... 442 .00 111 .00
-------- ----- -------- ----
Adjusted net income/EPS................ $565,289 $1.54 $133,467 $.36
Diluted earnings per common share computation:
Net income/diluted EPS as reported......... $536,346 $1.45 $126,211 $.34
Add back: Goodwill amortization............ 29,385 .07 7,367 .02
Less: Tax on deductible goodwill........... 442 .00 111 .00
-------- ----- -------- ----
Adjusted net income/diluted EPS........ $565,289 $1.52 $133,467 $.36
On January 1, 2002, AmSouth adopted Statement of Financial Accounting
Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". Statement 144 supersedes Statement 121 and provides a single
accounting model for long-lived assets to be disposed of. Although retaining
many of the fundamental recognition and measurement provisions of Statement
121, the new rules significantly change the criteria that would have to be met
to classify an asset as held-for-sale. Statement 144 also supersedes the
provisions of Accounting Principles Board (APB) Opinion 30 with regard to
reporting the effects of a disposal of a segment of a business and requires
expected future operating losses from discontinued operations to be displayed
in discontinued operations in the period(s) in which the losses are incurred
(rather than as of the measurement date as presently required by APB Opinion
30). In addition, more dispositions will qualify for discontinued operations
treatment in the income statement. The adoption of Statement 144 did not have a
material impact on AmSouth's financial conditions or results of operations.
Cash Flows--For the three months ended March 31, 2002 and 2001, AmSouth paid
interest of $202.1 million and $371.0 million, respectively. During the three
months ended March 31, 2002 and 2001, AmSouth paid income taxes of $190.1
thousand and received refunds of income taxes of $38.7 million, respectively.
Noncash transfers from loans to foreclosed properties for the three months
ended March 31, 2002 and 2001, were $10.0 million and $5.6 million,
respectively. There were no noncash transfers from foreclosed properties to
loans during the first quarter of 2002 compared to $85 thousand during the same
period last year. During the first quarter of 2001, AmSouth had noncash
transfers from held-to-maturity securities to available-for-sale securities of
$2.1 billion associated with its adoption of Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, (Statement 133), at the beginning of 2001.
Derivatives--In accordance with Statement 133, AmSouth recognizes all of its
derivative instruments as either assets or liabilities in the statement of
financial condition at fair value. For those derivative instruments that are
designated and qualify as hedging instruments, AmSouth designates the hedging
instrument, based upon the exposure being hedged, as either a fair value hedge
or a cash flow hedge. Derivative instruments designated in a hedge relationship
to mitigate exposure to changes in the fair value of an asset, liability or
firm commitment attributable to a particular risk, such as interest rate risks,
are considered fair value hedges under Statement 133. Derivative instruments
designated in a hedge relationship to mitigate exposure to variability in
expected future cash flows, or other types of forecasted transactions, are
considered cash flow hedges.
8
For derivative instruments that are designated and qualify as fair value
hedges, the gain or loss on the derivative instrument as well as the offsetting
loss or gain on the hedged item attributable to the hedged risk are recognized
in other noninterest revenue during the period of the change in fair values.
For derivative instruments that are designated and qualify as cash flow hedges,
the effective portion of the gain or loss on the derivative instrument is
reported as a component of other comprehensive income and reclassified into
earnings in the same period or periods during which the hedged transaction
affects earnings. The remaining gain or loss on the derivative instrument in
excess of the cumulative change in the present value of future cash flows of
the hedged item, if any, is recognized in other noninterest revenue during the
period of change. For derivative instruments not designated as hedging
instruments, the gain or loss is recognized in current earnings during the
period of change.
AmSouth, at the hedge's inception and at least quarterly thereafter,
performs a formal assessment to determine whether changes in the fair values or
cash flows of the derivative instruments have been highly effective in
offsetting changes in the fair values or cash flows of the hedged items and
whether they are expected to be highly effective in the future. If it is
determined a derivative instrument has not been or will not continue to be
highly effective as a hedge, hedge accounting is discontinued prospectively and
the derivative instrument continues to be carried at fair value with all
changes in fair value being recorded in noninterest revenue but with no
corresponding offset being recorded on the hedged item or in other
comprehensive income for cash flow hedges.
Fair Value Hedging Strategy--AmSouth has entered into interest rate swap
agreements for interest rate risk exposure management purposes. The interest
rate swap agreements utilized by AmSouth effectively modify AmSouth's exposure
to interest rate risk by converting a portion of AmSouth's fixed-rate
certificates of deposit to floating rate. AmSouth also has interest rate swap
agreements which effectively convert portions of its fixed-rate long-term debt
to floating rate. During the three months ended March 31, 2002 and 2001,
AmSouth recognized a net gain of $48 thousand and $50 thousand, respectively,
related to the ineffective portion of its hedging instruments.
Cash Flow Hedging Strategy--AmSouth has entered into interest rate swap
agreements that effectively convert a portion of its floating-rate loans to a
fixed-rate basis, thus reducing the impact of interest rate changes on future
interest income. Approximately $675 million and $925 million of AmSouth's loans
were designated as the hedged items to the interest rate swap agreements at
March 31, 2002 and 2001, respectively. During the three months ended March 31,
2002 and 2001, AmSouth recognized a net loss of $10 thousand and a net gain of
$138 thousand, respectively, related to the ineffective portion of its hedging
instruments.
Comprehensive Income--Total comprehensive income was $139.8 million and
$214.4 million for the three months ended March 31, 2002 and 2001,
respectively. Total comprehensive income consists of net income, the change in
the unrealized gains or losses on AmSouth's available-for-sale securities
portfolio arising during the period and the change in value of the effective
portion of cash flow hedges marked to market.
9
Earnings Per Common Share--The following table sets forth the computation of
earnings per common share and diluted earnings per common share:
Three Months Ended
March 31
------------------
2002 2001
-------- --------
Earnings per common share computation:
Numerator:
Net income................................. $145,570 $126,211
Denominator:
Average common shares outstanding.......... 361,656 372,246
Earnings per common share..................... $ .40 $ .34
Diluted earnings per common share computation:
Numerator:
Net income................................. $145,570 $126,211
Denominator:
Average common shares outstanding.......... 361,656 372,246
Dilutive shares contingently issuable...... 4,263 2,694
-------- --------
Average diluted common shares outstanding.. 365,919 374,940
Diluted earnings per common share............. $ .40 $ .34
Shareholders' Equity--On September 19, 2001, AmSouth's Board of Directors
approved the repurchase by AmSouth of up to 25.0 million shares of its
outstanding common stock over a two year period for the purpose of funding
employee benefit and dividend reinvestment plans and for general corporate
purposes. Through March 31, 2002, 4.4 million shares have been purchased under
this authorization at a cost of $85.3 million. Cash dividends of $.22 per
common share were declared in the first quarter of 2002. This represents a five
percent increase over the dividend declared during the first quarter of 2001.
10
Business Segment Information--AmSouth has three reportable segments:
Consumer Banking, Commercial Banking, and Wealth Management. Treasury & Other
is comprised of balance sheet management activities that include the investment
portfolio, non-deposit funding and off-balance sheet financial instruments.
Treasury & Other also includes income from bank owned life insurance policies,
ineffectiveness related to hedging strategies, net gains on sales of fixed
assets, taxable-equivalent adjustments associated with lease restructuring
transactions, merger-related costs, and corporate expenses such as corporate
overhead and goodwill amortization. The following is a summary of the segment
performance for the three months ended March 31, 2002 and 2001:
Consumer Commercial Wealth Treasury &
Banking Banking Management Other Total
-------- ---------- ---------- ---------- --------
(In thousands)
Three Months Ended March 31, 2002
Net interest income from external customers $186,724 $131,486 $ (92) $ 60,076 $378,194
Internal funding........................... 97,530 (36,748) 1,054 (61,836) -0-
-------- -------- ------- -------- --------
Net interest income........................ 284,254 94,738 962 (1,760) 378,194
Noninterest revenues....................... 83,092 30,081 48,798 15,692 177,663
-------- -------- ------- -------- --------
Total revenues............................. 367,346 124,819 49,760 13,932 555,857
Provision for loan losses.................. 38,802 11,335 -0- 5,963 56,100
Noninterest expenses....................... 186,659 44,417 39,330 23,261 293,667
-------- -------- ------- -------- --------
Income/(Loss) before income taxes.......... 141,885 69,067 10,430 (15,292) 206,090
Income taxes/(benefits).................... 53,375 25,953 3,916 (22,724) 60,520
-------- -------- ------- -------- --------
Segment net income......................... $ 88,510 $ 43,114 $ 6,514 $ 7,432 $145,570
======== ======== ======= ======== ========
Three Months Ended March 31, 2001
Net interest income from external customers $ 96,606 $176,833 $ (388) $ 56,792 $329,843
Internal funding........................... 135,514 (81,114) 1,197 (55,597) -0-
-------- -------- ------- -------- --------
Net interest income........................ 232,120 95,719 809 1,195 329,843
Noninterest revenues....................... 81,282 25,462 52,724 22,833 182,301
-------- -------- ------- -------- --------
Total revenues............................. 313,402 121,181 53,533 24,028 512,144
Provision for loan losses.................. 28,652 9,336 -0- 212 38,200
Noninterest expenses....................... 170,642 46,523 39,227 31,675 288,067
-------- -------- ------- -------- --------
Income/(Loss) before income taxes.......... 114,108 65,322 14,306 (7,859) 185,877
Income taxes/(benefits).................... 42,951 24,519 5,360 (13,164) 59,666
-------- -------- ------- -------- --------
Segment net income......................... $ 71,157 $ 40,803 $ 8,946 $ 5,305 $126,211
======== ======== ======= ======== ========
11
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
AmSouth Bancorporation
We have reviewed the accompanying consolidated statement of condition of
AmSouth Bancorporation and subsidiaries as of March 31, 2002 and 2001, and the
related consolidated statements of earnings and cash flows for the three-month
periods ended March 31, 2002 and 2001, and the consolidated statement of
shareholders' equity for the three-month period ended March 31, 2002. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated statement of condition of
AmSouth Bancorporation and subsidiaries as of December 31, 2001, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for the year then ended (not presented herein) and in our report dated
January 15, 2002, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated statement of condition as of December 31, 2001 is
fairly stated, in all material respects, in relation to the consolidated
statement of condition from which it has been derived.
/s/ ERNST & YOUNG LLP
Birmingham, Alabama
April 23, 2002
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
AmSouth Bancorporation (AmSouth) reported net income for the quarter ended
March 31, 2002 of $145.6 million, or $.40 per share versus $126.2 million, or
$.34 per share for the same period last year. For the three months ended March
31, 2002 and 2001, AmSouth's return on average assets (ROA) was 1.56 percent
and 1.33 percent, respectively. Return on average equity (ROE) was 19.83
percent for the first three months of 2002 compared to 18.08 percent for the
same quarter of 2001. The improved earnings reflected higher net interest
income, as AmSouth's net interest margin continued to expand, as well as a
decrease in noninterest expenses. The improvements were partially offset by
lower noninterest revenues and an increase in the provision for loan losses
during the quarter.
The improvement in net income reflected AmSouth's adoption, on January 1,
2002, of Statement of Financial Accounting Standard No. 142, "Goodwill and
Other Intangible Assets" (Statement 142). Statement 142 requires companies to
no longer amortize goodwill and intangible assets with indefinite useful lives,
but instead test these assets for impairment at least annually in accordance
with the provisions of Statement 142. The impact to first quarter earnings of
adopting Statement 142 and no longer amortizing goodwill against earnings was
an increase in net income of approximately $7.3 million or $.02 per share when
compared to the same period in 2001. The full impact of adopting Statement 142
is expected to result in an increase in net income of approximately $29.0
million or approximately $.08 per share in 2002.
Total assets at March 31, 2002 were $38.2 billion, down from $38.6 billion
at year end reflecting a decrease in available-for-sale (AFS) securities and
lower cash balances offset by increases in loans. Loans net of unearned income
at March 31, 2002 increased $287.9 million compared to year end. This increase
was attributable to $462.3 million of growth in consumer loans partially offset
by decreases in commercial and commercial real estate loans. The increase in
consumer loans was driven by increases in home equity loans and lines, dealer
indirect automobile lending and residential first mortgages. The increase in
home equity lending reflected AmSouth's continued efforts to attract these
loans due to their attractive spreads and historically low levels of losses.
Managed loans, which include securitized dealer loans and loans sold to
third-party conduits, increased by $55.0 million at March 31, 2002 from
year-end levels. This increase reflected the balance sheet loan growth
described above offset by the paydown of dealer indirect loans previously
securitized and the planned runoff in residential and dealer loans previously
sold to conduits.
On the liability side of the balance sheet, total deposits at March 31,
2002, decreased by $494.2 million compared to December 31, 2001. Decreases in
deposits occurred primarily in higher cost time deposits and
noninterest-bearing demand deposits. These decreases were partially offset by
increases in low cost interest-bearing checking, money market and savings
deposits. The decrease in noninterest-bearing deposits reflected the impact of
higher commercial demand deposits, which normally occurs at the end of the
year, while the increase in other low cost deposits reflected AmSouth's
emphasis on promoting sales of consumer and small business consumer checking
and money market accounts.
Net Interest Income
Net interest income (NII) on a fully taxable equivalent basis was $378.2
million for the first quarter of 2002, an increase of $48.4 million, or 14.7
percent, as compared to the first quarter of 2001. The increase in NII
reflected a higher net interest margin partially offset by lower average
interest-earning assets. Average interest-earning assets for the first quarter
of 2002 were $34.1 billion, a decrease of $1.0 billion from the same period in
2001. The net interest margin (NIM) was 4.65 percent for the first quarter of
2002 versus 3.93 percent for the same period last year. The increase in the NIM
reflected a favorable shift in the mix of both assets and liabilities. On the
balance sheet, AmSouth replaced lower yielding commercial loans and fixed-rate
investment securities with higher yielding consumer loans, while higher cost
time deposits and wholesale, short-term borrowings were partially replaced by
low cost and noninterest-bearing deposits. The funding side of the balance
sheet benefited from the maturity, during the third and fourth quarters of
2001, of $2.3 billion in higher cost time deposits which either repriced at a
time when renewal rates were lower or were shifted into other deposit products
at lower rates.
13
Mangement expects the NIM to remain above 4.50 percent for the remainder of
2002, provided the economy continues to recover, AmSouth achieves modest growth
in loans and deposits, and AmSouth's balance sheet and interest rate management
strategy continues to be successful. Conditions different from these could
cause the NIM to differ from management's expectations.
Asset/Liability Management
AmSouth maintains a formal asset and liability management process to
quantify, monitor and control interest rate risk and to assist management in
maintaining stability in the net interest margin under varying interest rate
environments. AmSouth accomplishes this process through the development and
implementation of lending, funding, pricing and hedging strategies designed to
maximize NII performance under varying interest rate environments subject to
specific liquidity and interest rate risk guidelines.
An earnings simulation model is the primary tool used to assess the
direction and magnitude of changes in NII resulting from changes in interest
rates. Key assumptions in the model include prepayment speeds on
mortgage-related assets; cash flows and maturities of derivatives and other
financial instruments held for purposes other than trading; changes in market
conditions, loan volumes and pricing; deposit volume, mix and rate sensitivity;
customer preferences; and management's financial and capital plans. These
assumptions are inherently uncertain, and, as a result, the model cannot
precisely estimate NII or precisely predict the impact of higher or lower
interest rates on NII. Actual results will differ from simulated results due to
timing, magnitude and frequency of interest rate changes, changes in market
conditions, volume differences and management's strategies, among other factors.
Based on the results of the simulation model as of March 31, 2002, AmSouth
would expect NII to increase $3.0 million or approximately .19 percent and
decrease $200 thousand or approximately .01 percent if interest rates gradually
increase or decrease, respectively, from current rates by 100 basis points over
a 12-month period. This level of interest rate risk is within AmSouth's policy
guidelines. Current policy states that NII should not fluctuate more than 2.5
percent in the event that interest rates gradually increase or decrease 100
basis points over a period of twelve months. As of March 31, 2001, the
simulation model indicated that NII would increase $8 million or approximately
..5 percent and decrease $10 million or approximately .7 percent if interest
rates gradually increased or decreased, respectively, from their then-current
rates by 100 basis points over a 12-month period.
AmSouth's neutral interest rate risk profile is the result of continued
actions taken over the last several quarters. These actions included the
continued increase in the level of variable-rate loans on the balance sheet
while reducing the level of fixed-rate loans and investment securities. In
addition, less rate sensitive, low cost deposits have increased while higher
cost and more rate sensitive time deposits have declined. AmSouth extended the
maturity of purchased funds and "receive fixed/pay floating" interest rate
swaps with notional amounts of $821 million either matured or have been called
since the first quarter of 2001. AmSouth plans to continue its neutral interest
rate risk position through 2002 by emphasizing variable-rate lending,
especially equity lines. In addition, there are approximately $685 million
notional amount of receive fixed/pay floating interest rate swaps expected to
mature during the remainder of 2002, which management does not currently
anticipate replacing. These actions should help protect AmSouth's interest rate
risk neutrality even as interest rates begin to rise.
As part of its activities to manage interest rate risk, AmSouth utilizes
various derivative instruments such as interest rate swaps. At March 31, 2002,
AmSouth had interest rate swaps in the notional amount of $1.8 billion, all of
which were receive fixed/pay floating rate swaps. Of these swaps, $675 million
of notional value was used to hedge the cash flow of variable-rate commercial
loans. The remaining $1.1 billion of notional value was used to hedge the fair
value of fixed-rate consumer certificates of deposit and corporate and bank
debt. There were maturities of interest rate swaps totaling $285 million during
the first three months of 2002.
AmSouth also enters into forward commitments to sell groups of residential
mortgage loans to protect against changes in the fair value of fixed-rate
mortgage loan commitments not yet funded. These forward
14
commitment transactions and unfunded loan commitments do not qualify for hedge
accounting and are recorded on the statement of condition at fair value with
changes in fair value during the period being recorded in mortgage income. At
March 31, 2002, AmSouth had $1.2 million recorded in other assets associated
with $143.0 million notional amount of open forward contracts to sell
residential mortgage loans.
In addition to using derivative instruments as an interest rate risk
management tool, AmSouth also acts as an intermediary for interest rate swaps,
caps, floors, and foreign exchange contracts on behalf of its customers.
AmSouth minimizes its market and liquidity risks by taking offsetting
positions. AmSouth manages its credit risk, or potential risk of loss from
default by counterparties, through credit limit approval and monitoring
procedures. Market value changes on intermediated swaps and other derivatives
are recognized in income in the period of change. The amounts of these other
derivative instruments were immaterial.
Liquidity Management
AmSouth's goal in liquidity management is to satisfy the cash flow
requirements of depositors and borrowers while at the same time meeting its
cash flow needs. This is accomplished through the active management of both the
asset and liability sides of the balance sheet. The liquidity position of
AmSouth is monitored on a daily basis by AmSouth's Treasury Division. In
addition, the Asset/Liability Committee, which consists of members of AmSouth's
senior management team, reviews liquidity on a regular basis and approves any
changes in strategy that are necessary as a result of balance sheet or
anticipated cash flow changes. Management also compares, on a monthly basis,
AmSouth's liquidity position to established corporate liquidity guidelines.
The primary sources of liquidity on the asset side of the balance sheet are
maturities and cash flows from loans and investments as well as the ability to
securitize or sell certain loans and investments. Liquidity on the liability
side is generated primarily through growth in core deposits and the ability to
obtain economical wholesale funding in national and regional markets through a
variety of sources.
At March 31, 2002, AmSouth had contractual obligations associated with
outstanding borrowings, time deposits and lease obligations of $17.5 billion of
which $9.3 billion is due within one year. In addition, AmSouth had loan
commitments and standby letters of credit of $21.7 billion of which $7.2
billion expires within one year.
As an additional source of liquidity, AmSouth periodically sells loans or
pools of loans to qualifying special purpose entities called conduits in
securitization transactions. The conduits are financed by the issuance of
securities to asset-backed commercial paper issuers and are accounted for as
sales. These transactions allow AmSouth to utilize its balance sheet capacity
and capital for higher yielding, interest-earning assets, while continuing to
manage the customer relationship. At March 31, 2002, the outstanding balance of
loans sold to conduits was approximately $3.59 billion, including $1.3 billion
of commercial loans, $1.9 billion of residential first mortgages and $394
million of dealer indirect automobile loans. Associated with these
transactions, AmSouth had approximately $151.4 million of letters of credit
supporting the conduit sales and approximately $3.6 billion of liquidity lines
of credit supporting the transactions.
Credit Quality
AmSouth maintains an allowance for loan losses which management believes is
adequate to absorb losses inherent in the loan portfolio. A formal review is
prepared quarterly to assess the risk in the portfolio and to determine the
adequacy of the allowance for loan losses. The review includes analyses of
historical performance, the level of nonperforming and adversely rated loans,
specific analyses of certain problem loans, loan activity since the previous
quarter, reports prepared by the Credit Review Department, consideration of
current economic conditions, and other pertinent information. The level of
allowance to net loans outstanding will vary depending on the overall results
of this quarterly review. The review is presented to and subsequently approved
by senior management and reviewed by the Audit and Community Responsibility
Committee of the Board of Directors.
Table 4 presents a five-quarter analysis of the allowance for loan losses.
At March 31, 2002, the allowance for loan losses was $367.8 million, or 1.45
percent of loans net of unearned income, compared to $380.6 million, or 1.55
percent, at March 31, 2001 and $363.6 million, or 1.45 percent at December 31,
2001. The coverage ratio of the allowance for loan losses to nonperforming
loans was 232 percent at March 31, 2002, an increase from the December 31, 2001
ratio of 228 percent.
15
Net charge-offs for the quarter ended March 31, 2002, were $51.9 million or
0.83 percent of average loans, on an annualized basis, an increase of $13.9
million from the $38.0 million or 0.63 percent of average loans reported a year
earlier and $1.2 million higher than the $50.7 million of net charge-offs or
0.81 percent of average loans reported in the fourth quarter of 2001. While
commercial net charge-offs were $19.2 million in the first quarter of 2002, an
increase of $4.1 million versus the first quarter of 2001, the level of
commercial net charge-offs declined $1.5 million versus $20.7 million in the
fourth quarter of 2001. On the consumer side, net charge-offs increased $9.9
million and $2.7 million versus the first quarter of 2001 and the fourth
quarter of 2001, respectively. The increase in consumer charge-offs was
primarily due to increased charge-offs in the dealer indirect, equity lending
and revolving credit portfolios. Dealer indirect charge-offs increased by $5.1
million versus the same period in 2001 and by approximately $2.0 million over
fourth quarter levels. The increase over fourth quarter levels reflected
seasonality coupled with the continued impact of the economy on consumer
employment. Home equity net charge-offs were up $3.8 million versus the first
quarter of 2001 and up approximately $1.0 million versus the prior quarter. The
trend in net charge-offs mirrored the trend across the entire consumer
portfolio. The increase in the unsecured revolving credit portfolio both year
over year and quarter over quarter reflected the impact of a soft economy and
rising bankruptcies. The provision for loan losses for the first quarter of
2002 was $56.1 million compared to $38.2 million in the first quarter of 2001
and $53.6 million in the fourth quarter of 2001.
Table 5 presents a five-quarter comparison of the components of
nonperforming assets. At March 31, 2002, nonperforming assets as a percentage
of loans net of unearned income, foreclosed properties and repossessions
remained flat at 0.76 percent, the same level as the end of the fourth quarter
of 2001. Compared to the first quarter of 2001, this percentage decreased 17
basis points from 0.93 percent.
Included in nonperforming assets at March 31, 2002 and 2001, were loans of
$102.5 million and $152.5 million, respectively, that were considered to be
impaired, substantially all of which were on a nonaccrual basis. At March 31,
2002 and 2001, there was $19.9 million and $59.3 million, respectively, in the
allowance for loan losses specifically allocated to $84.3 million and $141.9
million of impaired loans. No specific reserves were required for $18.2 million
and $10.6 million of impaired loans at March 31, 2002 and 2001, respectively.
The average recorded investment in impaired loans for the three months ended
March 31, 2002 and 2001, was $101.7 million and $128.5 million, respectively.
AmSouth recorded no material interest income on its impaired loans during the
three months ended March 31, 2002. At March 31, 2002, AmSouth had approximately
$70.6 million of potential problem commercial loans which were not included in
the nonaccrual loans or in the 90 days past due categories at quarter-end but
for which management had concerns as to the ability of such borrowers to comply
with their present loan repayment terms.
AmSouth expects nonperforming loans and net charge-offs to fluctuate for the
remainder of 2002, in a relatively narrow band around the levels of the last
few quarters. This expectation is based on improving economic conditions as the
year progresses. If economic conditions deteriorate further or fail to improve
in 2002, credit quality could deteriorate from management's expectations.
Noninterest Revenues and Noninterest Expenses
Noninterest revenue (NIR) was $177.7 million during the first quarter of
2002, a decrease of $4.6 million from the first quarter of 2001. The decrease
in NIR versus the prior year was primarily due to lower consumer investment
services income, trust income and other NIR partially offset by increases in
service charges on deposits, mortgage income and income from bank owned life
insurance (BOLI). The decrease in consumer investment services income was a
result of lower sales of variable annuity products, which followed a trend that
began last year and carried over into the first quarter of 2002. Fixed annuity
sales and low-cost deposits benefited from the trend. The decrease in trust
income was due to a decline in market values as reflected in a 10% decline in
the S&P 500 since the first quarter of 2001. The decrease also reflected the
outsourcing of Retirement Services
16
record-keeping plans. The decrease in other NIR reflected a steady decrease in
fee income from the auto securitization and the conduits as the loan balances
associated with these transactions declined. In addition, the decrease in other
NIR reflected an adjustment associated with an equity investment of $4.4
million recorded in the first quarter of 2001 as well as a $2.2 million fixed
asset impairment loss recorded in the current quarter. The increase in BOLI
income reflected the receipt of benefit payments in the first quarter of 2002.
The increase in service charge income was primarily the result of higher
treasury management fees as a result of higher sales to corporate customers.
The increase in service charge income also reflected higher revenue from
overdraft fees. Mortgage income in the first quarter of 2002 increased $976
thousand compared to the first quarter of 2001. The increase was driven by
higher gains on the bulk sale of mortgage loans and servicing in the secondary
market.
Noninterest expenses (NIE) increased from the prior year by $5.6 million or
1.9 percent for the three months ended March 31, 2002, when compared to the
same period in 2001. The increase primarily reflected higher salaries and
employee benefits offset by decreases in amortization expense and communication
expense. Salaries and employee benefits increased $15.1 million for the
quarter, compared to the same period a year ago. This increase reflected higher
base salaries due to merit increases, higher incentive accruals related to
improved performance and an increase in employee benefits due to higher payroll
taxes, insurance expenses and pension costs. Amortization expense declined $7.2
million or 84 percent as a result of AmSouth's adoption of Statement 142, on
January 1, 2002. Statement 142 no longer permits the amortization of goodwill
and intangible assets with indefinite useful lives but requires these assets to
be tested for impairment at least annually. For more information on the impact
of adopting Statement 142, see the Notes to Consolidated Financial Statements
section in Part I of this report. The $1.4 million decrease in communication
expense reflects the impact of lower expenses as a result of a change in vendor.
Capital Adequacy
At March 31, 2002, shareholders' equity totaled $3.0 billion or 7.82 percent
of total assets. Since December 31, 2001, shareholders' equity increased $32.4
million primarily as a result of net income for the three months of $145.6
million. The increase in shareholders' equity from net income for the quarter
was partially offset by the reduction of equity associated with the declaration
of dividends of $80.1 million and the purchase of 2.1 million shares of AmSouth
common stock for $44.1 million during the first three months of 2002. In
addition, shareholders' equity decreased $1.2 million as a result of a decrease
in the market value of the AFS portfolio, and $4.6 million of other
comprehensive losses associated with cash flow hedges.
Table 8 presents the capital amounts and risk-adjusted capital ratios for
AmSouth and AmSouth Bank at March 31, 2002 and 2001. At March 31, 2002, AmSouth
exceeded the regulatory minimum required risk-adjusted Tier 1 Capital Ratio of
4.00% and risk-adjusted Total Capital Ratio of 8.00%. In addition, the
risk-adjusted capital ratios for AmSouth Bank were above the regulatory
minimums, and the Bank was well capitalized at March 31, 2002.
17
Table 1--Financial Summary
March 31
----------------------- %
2002 2001 Change
----------- ----------- ------
(In thousands)
Balance sheet summary
End-of-period balances:
Loans net of unearned income. $25,412,409 $24,527,944 3.6%
Total assets................. 38,223,507 38,825,811 (1.6)
Total deposits............... 25,672,792 26,246,046 (2.2)
Shareholders' equity......... 2,987,485 2,883,821 3.6
Year-to-date average balances:
Loans net of unearned income. $25,272,649 $24,645,798 2.5%
Total assets................. 37,783,732 38,498,447 (1.9)
Total deposits............... 25,566,435 26,077,285 (2.0)
Shareholders' equity......... 2,976,874 2,831,229 5.1
Three Months Ended
March 31
------------------------- %
2002 2001 Change
-------- -------- ------
(In thousands except per share data)
Earnings summary
Net income................................................ $145,570 $126,211 15.3%
Earnings per common share................................. .40 .34 17.6
Diluted earnings per common share......................... .40 .34 17.6
Return on average assets (annualized)..................... 1.56% 1.33%
Return on average equity (annualized)..................... 19.83 18.08
Return on average equity (excluding goodwill, annualized). 19.83 19.12
Operating efficiency...................................... 51.60 55.12
Operating efficiency (excluding goodwill)................. 51.60 53.71
Selected ratios
Average equity to assets.................................. 7.88% 7.35%
End-of-period equity to assets............................ 7.82 7.43
End-of-period tangible equity to assets................... 7.07 6.63
Allowance for loan losses to loans net of unearned income. 1.45 1.55
Common stock data
Cash dividends declared................................... $ .22 $ .21
Book value at end of period............................... 8.25 7.77
Market value at end of period............................. 21.98 16.81
Average common shares outstanding......................... 361,656 372,246
Average common shares outstanding-diluted................. 365,919 374,940
18
Table 2--Quarterly Yields Earned on Average Interest-Earning Assets and Rates
Paid on Average Interest-Bearing Liabilities
2002
---------------------------
First Quarter
---------------------------
Average Revenue/ Yield/
Balance Expense Rate
----------- -------- ------
Assets
Interest-earning assets:
Loans net of unearned income......................... $25,272,649 $433,114 6.95%
Available-for-sale securities:
Taxable............................................ 4,328,728 85,133 7.98
Tax-free........................................... 74,076 1,466 8.03
----------- --------
Total available-for-sale securities................ 4,402,804 86,599 7.98
----------- --------
Held-to-maturity securities:
Taxable............................................ 3,606,201 58,964 6.63
Tax-free........................................... 341,999 6,436 7.63
----------- --------
Total held-to-maturity securities.................. 3,948,200 65,400 6.72
----------- --------
Total investment securities...................... 8,351,004 151,999 7.38
Other interest-earning assets........................ 486,064 5,287 4.41
----------- --------
Total interest-earning assets...................... 34,109,717 590,400 7.02
Cash and other assets................................... 3,908,544
Allowance for loan losses............................... (365,104)
Market valuation on available-for-sale securities....... 130,575
-----------
$37,783,732
===========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits..................... $10,503,137 28,921 1.12
Savings deposits..................................... 1,272,730 1,818 0.58
Time deposits........................................ 6,606,926 64,286 3.95
Foreign time deposits................................ 337,886 1,102 1.32
Certificates of deposit of $100,000 or more.......... 2,014,841 18,637 3.75
Federal funds purchased and securities sold under
agreements to repurchase............................ 1,986,166 6,229 1.27
Other interest-bearing liabilities................... 6,146,522 77,906 5.14
----------- --------
Total interest-bearing liabilities................. 28,868,208 198,899 2.79
-------- ----
Net interest spread..................................... 4.23%
====
Noninterest-bearing demand deposits..................... 4,830,915
Other liabilities....................................... 1,107,735
Shareholders' equity.................................... 2,976,874
-----------
$37,783,732
===========
Net interest income/margin on a taxable equivalent basis 391,501 4.65%
====
Taxable equivalent adjustment:
Loans................................................ 8,119
Available-for-sale securities........................ 1,291
Held-to-maturity securities.......................... 3,897
--------
Total taxable equivalent adjustment................ 13,307
--------
Net interest income.............................. $378,194
========
2001
-------------------------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter
--------------------------- --------------------------- ---------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue
Balance Expense Rate Balance Expense Rate Balance Expense
----------- -------- ------ ----------- -------- ------ ----------- --------
Assets
Interest-earning assets:
Loans net of unearned income...................$24,947,167 $463,816 7.38% $24,762,932 $494,161 7.92% $24,695,993 $512,895
Available-for-sale securities:
Taxable...................................... 4,404,328 84,852 7.64 4,341,632 84,445 7.72 4,163,800 82,981
Tax-free..................................... 79,009 1,580 7.93 81,699 1,590 7.72 89,578 1,725
----------- -------- ----------- -------- ----------- --------
Total available-for-sale securities.......... 4,483,337 86,432 7.65 4,423,331 86,035 7.72 4,253,378 84,706
----------- -------- ----------- -------- ----------- --------
Held-to-maturity securities:
Taxable...................................... 3,884,256 64,628 6.60 3,987,733 66,416 6.61 4,185,593 70,594
Tax-free..................................... 341,890 6,401 7.43 341,982 6,365 7.38 341,906 6,340
----------- -------- ----------- -------- ----------- --------
Total held-to-maturity securities............ 4,226,146 71,029 6.67 4,329,715 72,781 6.67 4,527,499 76,934
----------- -------- ----------- -------- ----------- --------
Total investment securities................ 8,709,483 157,461 7.17 8,753,046 158,816 7.20 8,780,877 161,640
Other interest-earning assets.................. 553,016 5,711 4.10 1,265,120 13,766 4.32 1,470,097 19,711
----------- -------- ----------- -------- ----------- --------
Total interest-earning assets................ 34,209,666 626,988 7.27 34,781,098 666,743 7.61 34,946,967 694,246
Cash and other assets............................. 3,841,728 3,678,731 3,726,748
Allowance for loan losses......................... (359,404) (382,177) (380,983)
Market valuation on available-for-sale
securities...................................... 185,967 127,813 86,153
----------- ----------- -----------
$37,877,957 $38,205,465 $38,378,885
=========== =========== ===========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits...............$10,298,075 36,367 1.40 $10,080,711 61,961 2.44 $ 9,902,714 72,061
Savings deposits............................... 1,227,991 2,347 0.76 1,213,940 3,817 1.25 1,219,045 4,641
Time deposits.................................. 6,991,178 78,340 4.45 7,511,350 101,607 5.37 7,716,673 110,539
Foreign time deposits.......................... 360,579 1,430 1.57 313,799 2,152 2.72 279,454 2,434
Certificates of deposit of $100,000 or more.... 2,051,701 23,334 4.51 2,214,303 30,036 5.38 2,323,449 34,082
Federal funds purchased and securities sold
under agreements to repurchase............... 2,035,112 8,239 1.61 2,162,744 15,664 2.87 2,243,192 21,368
Other interest-bearing liabilities............. 6,164,694 82,086 5.28 6,238,392 87,095 5.54 6,336,607 90,082
----------- -------- ----------- -------- ----------- --------
Total interest-bearing liabilities........... 29,129,330 232,143 3.16 29,735,239 302,332 4.03 30,021,134 335,207
-------- ---- -------- ---- --------
Net interest spread............................... 4.11% 3.58%
==== ====
Noninterest-bearing demand deposits............... 4,729,238 4,591,157 4,566,584
Other liabilities................................. 1,059,602 974,955 930,883
Shareholders' equity.............................. 2,959,787 2,904,114 2,860,284
----------- ----------- -----------
$37,877,957 $38,205,465 $38,378,885
=========== =========== ===========
Net interest income/margin on a taxable
equivalent basis 394,845 4.58% 364,411 4.16% 359,039
==== ====
Taxable equivalent adjustment:
Loans.......................................... 13,951 13,168 10,405
Available-for-sale securities.................. 1,277 1,241 1,224
Held-to-maturity securities.................... 3,987 3,965 4,036
-------- -------- --------
Total taxable equivalent adjustment.......... 19,215 18,374 15,665
-------- -------- --------
Net interest income........................ $375,630 $346,037 $343,374
======== ======== ========
First Quarter
---------------------------
Yield/ Average Revenue/ Yield/
Rate Balance Expense Rate
------ ----------- -------- ------
Assets
Interest-earning assets:
Loans net of unearned income......................... 8.33% $24,645,798 $530,572 8.73%
Available-for-sale securities:
Taxable............................................ 7.99 3,900,993 71,850 7.47
Tax-free........................................... 7.72 95,192 1,830 7.80
----------- --------
Total available-for-sale securities................ 7.99 3,996,185 73,680 7.48
----------- --------
Held-to-maturity securities:
Taxable............................................ 6.76 4,256,209 72,571 6.91
Tax-free........................................... 7.44 347,660 6,316 7.37
----------- --------
Total held-to-maturity securities.................. 6.82 4,603,869 78,887 6.95
----------- --------
Total investment securities...................... 7.38 8,600,054 152,567 7.19
Other interest-earning assets........................ 5.38 1,888,326 27,115 5.82
----------- --------
Total interest-earning assets...................... 7.97 35,134,178 710,254 8.20
Cash and other assets................................... 3,705,571
Allowance for loan losses............................... (381,223)
Market valuation on available-for-sale securities....... 39,921
-----------
$38,498,447
===========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits..................... 2.92 $ 9,707,570 83,607 3.49
Savings deposits..................................... 1.53 1,211,685 4,909 1.64
Time deposits........................................ 5.75 7,824,754 116,585 6.04
Foreign time deposits................................ 3.49 332,426 3,797 4.63
Certificates of deposit of $100,000 or more.......... 5.88 2,518,103 38,467 6.20
Federal funds purchased and securities sold under
agreements to repurchase............................ 3.82 2,341,302 27,617 4.78
Other interest-bearing liabilities................... 5.70 6,383,876 94,992 6.03
----------- --------
Total interest-bearing liabilities................. 4.48 30,319,716 369,974 4.95
---- -------- ----
Net interest spread..................................... 3.49% 3.25%
==== ====
Noninterest-bearing demand deposits..................... 4,482,747
Other liabilities....................................... 864,755
Shareholders' equity.................................... 2,831,229
-----------
$38,498,447
===========
Net interest income/margin on a taxable equivalent basis 4.12% 340,280 3.93%
==== ====
Taxable equivalent adjustment:
Loans................................................ 5,118
Available-for-sale securities........................ 1,257
Held-to-maturity securities.......................... 4,062
--------
Total taxable equivalent adjustment................ 10,437
--------
Net interest income.............................. $329,843
========
--------
NOTE: The taxable equivalent adjustment has been computed based on the
statutory federal income tax rate, adjusted for applicable state income
taxes net of the related federal tax benefit. Loans net of unearned
income includes nonaccrual loans for all periods presented.
Available-for-sale securities excludes certain noninterest-earning,
marketable equity securities. Statement 133 valuation adjustments related
to time deposits, certificates of deposit of $100,000 or more and other
interest-bearing liabilities are included in other liabilities.
19
Table 3--Loans and Credit Quality
Nonperforming Net Charge-offs
Loans* Loans** Three Months Ended
March 31 March 31 March 31
----------------------- ----------------- -----------------
2002 2001 2002 2001 2002 2001
----------- ----------- -------- -------- ------- -------
(In thousands)
Commercial:
Commercial & industrial.............. $ 6,775,951 $ 7,189,519 $ 81,187 $140,889 $19,364 $15,289
Commercial loans--secured by real
estate............................. 1,740,394 1,568,868 26,449 19,121 (134) (295)
----------- ----------- -------- -------- ------- -------
Total commercial................. 8,516,345 8,758,387 107,636 160,010 19,230 14,994
----------- ----------- -------- -------- ------- -------
Commercial real estate:
Commercial real estate mortgages..... 2,107,303 2,401,975 14,970 26,461 160 165
Real estate construction............. 2,277,023 2,422,491 16,711 5,011 19 289
----------- ----------- -------- -------- ------- -------
Total commercial real estate..... 4,384,326 4,824,466 31,681 31,472 179 454
----------- ----------- -------- -------- ------- -------
Consumer:
Residential first mortgages.......... 1,819,727 1,495,249 10,284 12,355 320 438
Equity loans and lines............... 5,649,781 4,712,525 7,822 4,613 6,045 2,257
Dealer indirect...................... 3,529,131 3,068,844 1 2 16,216 11,121
Revolving credit..................... 499,683 490,391 -0- -0- 6,318 5,056
Other consumer....................... 1,013,416 1,178,082 1,011 881 3,580 3,668
----------- ----------- -------- -------- ------- -------
Total consumer................... 12,511,738 10,945,091 19,118 17,851 32,479 22,540
----------- ----------- -------- -------- ------- -------
$25,412,409 $24,527,944 $158,435 $209,333 $51,888 $37,988
=========== =========== ======== ======== ======= =======
--------
* Net of unearned income.
** Exclusive of accruing loans 90 days past due.
20
Table 4--Allowance for Loan Losses
2002 2001
-------- --------------------------------------
1st 4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance at beginning of period.................... $363,607 $360,717 $380,663 $380,646 $380,434
Loans charged off................................. (62,806) (60,582) (81,320) (57,478) (50,506)
Recoveries of loans previously charged off........ 10,918 9,872 12,174 11,395 12,518
-------- -------- -------- -------- --------
Net charge-offs................................... (51,888) (50,710) (69,146) (46,083) (37,988)
Addition to allowance charged to expense.......... 56,100 53,600 49,200 46,100 38,200
-------- -------- -------- -------- --------
Balance at end of period.......................... $367,819 $363,607 $360,717 $380,663 $380,646
======== ======== ======== ======== ========
Allowance for loan losses to loans net of unearned
income.......................................... 1.45% 1.45% 1.45% 1.54% 1.55%
Allowance for loan losses to nonperforming loans*. 232.16% 228.29% 211.32% 193.11% 181.84%
Allowance for loan losses to nonperforming assets* 190.60% 190.29% 176.69% 170.18% 167.02%
Net charge-offs to average loans net of unearned
income (annualized)............................. 0.83% 0.81% 1.11% 0.75% 0.63%
--------
* Exclusive of accruing loans 90 days past due.
Table 5--Nonperforming Assets
2002 2001
-------- -------------------------------------------
March 31 December 31 September 30 June 30 March 31
-------- ----------- ------------ -------- --------
(Dollars in thousands)
Nonaccrual loans........................ $158,435 $159,274 $170,695 $197,120 $209,333
Foreclosed properties................... 29,462 27,443 28,006 20,380 13,688
Repossessions........................... 5,080 4,365 5,449 6,177 4,888
-------- -------- -------- -------- --------
Total nonperforming assets*.......... $192,977 $191,082 $204,150 $223,677 $227,909
======== ======== ======== ======== ========
Nonperforming assets* to loans net of
unearned income, foreclosed properties
and repossessions..................... 0.76% 0.76% 0.82% 0.90% 0.93%
Accruing loans 90 days past due......... $117,068 $116,576 $102,373 $ 88,747 $ 89,237
--------
* Exclusive of accruing loans 90 days past due.
21
Table 6--Investment Securities
March 31, 2002 March 31, 2001
--------------------- ---------------------
Carrying Market Carrying Market
Amount Value Amount Value
---------- ---------- ---------- ----------
(In thousands)
Held-to-maturity:
U.S. Treasury and federal agency securities. $2,585,514 $2,605,310 $2,945,415 $2,996,471
Other securities............................ 1,161,727 1,174,651 1,308,143 1,331,382
State, county and municipal securities...... 342,404 352,888 342,177 358,377
---------- ---------- ---------- ----------
$4,089,645 $4,132,849 $4,595,735 $4,686,230
========== ========== ========== ==========
Available-for-sale:
U.S. Treasury and federal agency securities. $3,760,683 $3,502,255
Other securities............................ 784,545 815,316
State, county and municipal securities...... 80,766 108,145
---------- ----------
$4,625,994 $4,425,716
========== ==========
--------
NOTES:
1. The weighted average remaining life, which reflects the amortization on
mortgage related and other asset-backed securities, and the weighted average
yield on the combined held-to-maturity and available-for-sale portfolios at
March 31, 2002, were approximately 4.8 years and 6.40%, respectively.
Included in the combined portfolios was $7.4 billion of mortgage-backed
securities. The weighted-average remaining life and the weighted-average
yield of mortgage-backed securities at March 31, 2002, were approximately
4.4 years and 6.39%, respectively. The duration of the combined portfolios,
which considers the repricing frequency of variable rate securities, is
approximately 3.5 years.
2. The available-for-sale portfolio included net unrealized gains of $81.1
million and $94.8 million at March 31, 2002 and 2001, respectively.
22
Table 7--Other Interest-Bearing Liabilities
March 31
---------------------
2002 2001
---------- ----------
(In thousands)
Other borrowed funds:
Short-term bank notes.................. $ -0- $ 150,000
Treasury, tax and loan notes........... 25,000 25,000
Commercial paper....................... 7,669 12,686
Other borrowings....................... 42,558 46,277
---------- ----------
Total other borrowed funds......... $ 75,227 $ 233,963
========== ==========
Other long-term debt:
6.45% Subordinated Notes Due 2018...... $ 302,901 $ 303,398
6.125% Subordinated Notes Due 2009..... 174,676 174,531
6.75% Subordinated Debentures Due 2025. 149,937 149,920
7.75% Subordinated Notes Due 2004...... 149,801 149,710
7.25% Senior Notes Due 2006............ 99,709 99,637
6.875% Subordinated Notes Due 2003..... 49,966 49,934
6.625% Subordinated Notes Due 2005..... 49,801 49,749
Other long-term debt................... 3,523 8,196
Statement 133 valuation adjustment..... 21,288 18,505
---------- ----------
Total other long-term debt......... $1,001,602 $1,003,580
========== ==========
Table 8--Capital Amounts and Ratios
March 31
-----------------------------------
2002 2001
----------------- ----------------
Amount Ratio Amount Ratio
---------- ------ ---------- -----
(Dollars in thousands)
Tier 1 capital:
AmSouth...... $2,661,908 7.86% $2,569,961 7.69%
AmSouth Bank. 3,288,943 9.73 3,256,881 9.74
Total capital:
AmSouth...... $3,763,186 11.11% $3,736,357 11.18%
AmSouth Bank. 3,965,813 11.74 3,949,227 11.81
Leverage:
AmSouth...... $2,661,908 7.09% $2,569,961 6.72%
AmSouth Bank. 3,288,943 8.77 3,256,881 8.53
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included on pages 14 and 15 of Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Several of AmSouth's subsidiaries are defendants in legal proceedings
arising in the ordinary course of business. Some of these proceedings seek
relief or damages that are substantial. The actions relate to AmSouth's
lending, collections, loan servicing, deposit taking, investment, trust, and
other activities.
Among the actions which are pending against AmSouth subsidiaries are actions
filed as class actions. The actions are similar to others that have been
brought in recent years against financial institutions in that they seek
punitive damage awards in transactions involving relatively small amounts of
actual damages. A disproportionately higher number of the more significant
lawsuits against AmSouth have been filed in Mississippi relative to the amount
of business done by AmSouth in Mississippi. In addition, lawsuits brought in
Alabama and Mississippi against AmSouth and other corporate defendants
typically demand higher damages than similar lawsuits brought elsewhere, and
often request punitive damages. Legislation has been enacted in Alabama that is
designed to limit the potential amount of punitive damages that can be
recovered in individual cases in the future. However, AmSouth cannot predict
the effect of the legislation at this time.
It may take a number of years to finally resolve some of these legal
proceedings pending against AmSouth subsidiaries, due to their complexity and
for other reasons. It is not possible to determine with any certainty at this
time the corporation's potential exposure from the proceedings. At times, class
actions are settled by defendants without admission or even an actual finding
of wrongdoing but with payment of some compensation to purported class members
and large attorney's fees to plaintiff class counsel. Nonetheless, based upon
the advice of legal counsel, AmSouth's management is of the opinion that the
ultimate resolution of these legal proceedings will not have a material adverse
effect on AmSouth's financial condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K
Item 6(a) -- Exhibits
The exhibits listed in the Exhibit Index at page 26 of this Form 10-Q are
filed herewith or are incorporated by reference herein.
Item 6(b) -- Reports on Form 8-K
No reports on Form 8-K were filed by AmSouth during the period January 1,
2002 to March 31, 2002.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, AmSouth
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
April 30, 2002 By: /s/ C. Dowd Ritter
-----------------------------------
C. Dowd Ritter
Chairman, President and
Chief Executive Officer
April 30, 2002 By: /s/ Donald R. Kimble
-----------------------------------
Donald R. Kimble
Executive Vice President,
Chief Accounting Officer and Controller
25
EXHIBIT INDEX
The following is a list of exhibits including items incorporated by
reference.
3-a Restated Certificate of Incorporation of AmSouth Bancorporation(1)
3-b By-Laws of AmSouth Bancorporation(2)
10-a First American Corporation Directors' Deferred Compensation Plan
10-b 1996 Long Term Incentive Compensation Plan, as amended(3)
10-c Executive Incentive Plan, as amended
15 Letter Re: Unaudited Interim Financial Information
NOTES TO EXHIBITS
(1) Filed as Exhibit 3.1 to AmSouth's Report on Form 8-K filed October 15,
1999, incorporated herein by reference.
(2) Filed as Exhibit 3-b to AmSouth's Form 10-Q Quarterly Report for the
quarter ended March 31, 2001, incorporated herein by reference.
(3) Filed as Appendix A to AmSouth's Proxy Statement dated March 11, 2002 for
the Annual Meeting of Shareholders held April 18, 2002, incorporated herein
by reference.
26